UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2008
For the transition period from , 200 , to , 200 .
Commission File Number
333-109118
Turbine Truck Engines, Inc.
(Exact Name of Registrant as Specified in Charter)
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification Number)
1301 International Speedway Boulevard, Deland, Florida 32724
(Address of Principal Executive Offices)
(386) 943-8358
(Registrant’s Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer, large accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Transitional Small Business Disclosure Format (check one): Yes ¨ No x
There were 20,421,096 shares of the Registrant’s $.001 par value common stock outstanding as of September 30, 2008.
(A Development Stage Company)
Contents
PART I—FINANCIAL INFORMATION
Statements in this Form 10Q Quarterly Report may be “forward-looking statements.” Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on our current expectations, estimates and projections about our business based, in part, on assumptions made by our management. These assumptions are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors, including those risks discussed in this Form 10Q Quarterly Report, under “Management’s Discussion and Analysis of Financial Condition or Plan of Operation and in other documents which we file with the Securities and Exchange Commission.
In addition, such statements could be affected by risks and uncertainties related to our financial condition, factors that affect our industry, market and customer acceptance, changes in technology, fluctuations in our quarterly results, our ability to continue and manage our growth, liquidity and other capital resource issues, competition, fulfillment of contractual obligations by other parties and general economic conditions. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10Q Quarterly Report, except as required by law.
(A Development Stage Enterprise)
Financial Statements
As of September 30, 2008 (unaudited) and December 31, 2007 and
for the three and nine months ended September 30, 2008 and 2007 (unaudited)
and the Period November 27, 2000 (Date of Inception)
through September 30, 2008 (unaudited)
Financial Statements:
Balance Sheets
Statements of Operations
Statements of Changes in Stockholders’ Deficit
Statements of Cash Flows
Notes to Financial Statements
Assets
Current assets:
Cash
Prepaid expenses
Loan costs net of accumulated amortization
Total current assets
Furniture and equipment, net of accumulated depreciation of $31,208 (2008) and $17,665 (2007)
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable
Accrued expenses
Accrued interest
Accrued payroll
Accrued royalty fees
Due to related party
Note payable
Total current liabilities
Accrued payroll – long term
Convertible notes payable net of unamortized beneficial conversion feature of $23,059
Note payable to related party
Total liabilities
Stockholders’ deficit:
Preferred stock; $.001 par value; 1,000,000 shares authorized; 0 shares issued and outstanding
Common stock; $.001 par value; 99,000,000 shares authorized; 20,421,096 (2008) and 17,349,346 (2007) shares issued and outstanding
Additional paid in capital
Deficit accumulated during development stage
Prepaid consulting services paid with common stock
Receivable for common stock
Total stockholders’ deficit
The accompanying notes are an integral part of the financial statements.
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(unaudited)
Research and development costs
Operating costs
Interest (income) expense
Net loss
Net loss per share
Weighted average number of common shares outstanding
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Statement of Changes in Stockholders’ Deficit
For the Nine Months Ended September 30, 2008 and
For Each of the Years from November 27, 2000 (Date of Inception) through September 30, 2008
Issuance of common stock for option to acquire license and stock subscription receivable, December 2000
Net loss for the period
Balance, December 31, 2000
Issuance of common stock for cash, February 2001*
Issuance of common stock for cash, March 2001*
Issuance of common stock for cash, August 2001*
Issuance of common stock for cash, September 2001*
Payment for common stock issued under subscription receivable
Balance, December 31, 2001
Issuance of common stock for cash, January 2002*
Issuance of common stock for cash, February 2002*
Issuance of common stock for cash, April 2002*
Issuance of common stock for cash, May 2002*
Issuance of common stock for cash, June 2002*
Issuance of common stock for cash, August 2002*
Issuance of common stock for cash, October 2002*
Issuance of common stock to acquire licensing agreement, July 2002*
Shares returned to treasury by founding stockholder, July 2002
Balance, December 31, 2002
Issuance of common stock for cash, February 2003*
Issuance of common stock for cash, September 2003*
Issuance of common stock for services, September 2003*
Payment for common stock issued under subscription agreement
Offering costs for private placement offering
Balance, December 31, 2003
Issuance of notes payable with beneficial conversion feature
Issuance of common stock for services, September 2004 ($2.00 per share)
Conversion of notes payable, August 2004 ($2.00 per share)
Issuance of common stock for cash, September 2004 ($2.00 per share)
Issuance of common stock for cash, October 2004 ($2.00 per share)
Issuance of common stock for cash, November 2004 ($2.00 per share)
Issuance of common stock for cash, December 2004 ($2.00 per share)
Amortization of offering costs related to Form SB-2 filing
Amortization of stock for services related to Form SB-2 offering
Contribution from shareholder
Balance, December 31, 2004
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Issuance of common stock for services, January 2005 ($2.00 per share)
Issuance of common stock in satisfaction of a note payable, February 2005 ($2.00 per share)
Issuance of common stock for cash, February 2005 ($2.00 per share)
Issuance of common stock for cash, March 2005 ($2.00 per share)
Issuance of common stock for services, April 2005 ($2.00 per share)
Capital contribution from stockholder, May 2005
Issuance of common stock for cash, May 2005 ($2.00 per share)
Write off of stock for services related to Form SB-2 filing
Issuance of common stock for cash, June 2005 ($2.00 per share)
Issuance of common stock for services, June 2005 ($1.70 per share)
Capital contribution from stockholder, June 2005
Issuance of common stock for cash, August 2005 ($1.00 per share)
Issuance of common stock for services, July 2005 ($1.00 per share)
Amortization of prepaid services paid for with common stock
Write off prepaid services paid for with common stock due to terminated Agreement
Issuance of common stock for cash, October ($1.00 per share)
Issuance of common stock for cash, November ($1.00 per share)
Issuance of common stock for cash, December ($1.00 per share)
Balance, December 31, 2005
Issuance of common stock for cash, January ($1.00 per share)
Issuance of common stock for cash, February ($1.00 per share)
Issuance of common stock for cash, March ($1.00 per share)
Issuance of common stock for cash, April ($1.00 per share)
Issuance of common stock for services, May ($1.00 per share)
Issuance of common stock for services, May ($1.15 per share)
Issuance of common stock for cash, June ($.80 per share)
Issuance of common stock and warrants for cash, June ($.50 per share)
Issuance of common stock for services, June ($1.15 per share)
Issuance of common stock for services, July ($1.10 per share)
Issuance of common stock for services, July ($.50 per share)
Issuance of common stock for settlement of debt, August ($.85 per share)
Issuance of common stock for services, August ($.81 per share)
Issuance of common stock and warrants for cash, September ($.50 per share)
Issuance of common stock for services, September ($.50 per share)
Issuance of common stock for services, September ($.74 per share)
Issuance of common stock in settlement of a payable, September ($4.16 per share)
Issuance of options to employees, directors and consultants, September
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Write off prepaid services paid for with common stock due to terminated agreement
7
Common Stock
Issuance of common stock for services, October ($0.50, per shares)
Issuance of options to employees, directors and consultants, October
Issuance of common stock for cash, October ($0.50 per share)
Issuance of common stock for services, October ($0.67, per shares)
Issuance of common stock for services, November ($0.50, per shares)
Issuance of common stock for cash, November ($0.50 per share)
Issuance of common stock for cash, November ($0.60 per share)
Balance December 31, 2006
Issuance of options to consultants, January
Issuance of common stock for cash, January ($0.50 per share)
Issuance of common stock for exercise of options, January ($0.50 per share)
Issuance of common stock for services, January ($0.66, per shares)
Issuance of common stock for services, January ($0.51, per shares)
Issuance of common stock for exercise of options, February ($0.50 per share)
Issuance of common stock for exercise of options, February ($0.60 per share)
Issuance of common stock for cash, February ($0.23 per share)
Issuance of common stock for services, February ($0.87, per shares)
Issuance of common stock for services, February ($0.72, per shares)
Issuance of common stock for services, March ($0.65, per shares)
Issuance of common stock for services, March ($0.70, per shares)
Issuance of common stock for exchange of fixed assets, April ($0.50, per share)
Issuance of common stock for cash, May ($0.25, per share)
Issuance of common stock for cash, June ($0.25, per share)
Issuance of common stock for services, June ($0.43, per share)
Issuance of common stock for exchange of fixed assets, June ($0.50 per share)
Issuance of common stock for services, June ($0.44, per share)
Issuance of common stock and warrants for cash, July ($0.25, per share)
Issuance of common stock for services, August ($0.55, per share)
Issuance of common stock for services, August ($0.50, per share)
Issuance of common stock for services, August ($0.38, per share)
Issuance of common stock and warrants for cash, August ($0.25, per share)
Issuance of common stock for services, September ($0.50, per share)
Issuance of common stock for cash, September ($0.25, per share)
Issuance of common stock for cash, September ($0.30, per share)
Issuance of common stock for cash, September ($0.37, per share)
Issuance of options & warrants to employees & consultants, September
Issuance of common stock for services, October ($0.25, per share)
Issuance of common stock for services, October ($0.56, per share)
Issuance of common stock for cash, October ($0.50, per share)
Issuance of common stock for cash, October ($0.53, per share)
Issuance of common stock for cash, November ($0.28, per share)
Issuance of common stock for cash, November ($0.32, per share)
Issuance of common stock for cash, November ($0.37, per share)
Issuance of common stock for cash, November ($0.68, per share)
Issuance of common stock for cash, December ($0.25, per share)
Balance December 31, 2007
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Issuance of common stock for services, February ($0.87, per share)
Issuance of common stock for services, February ($0.72, per share)
Issuance of common stock for cash, November ($0.25, per share)
Payment on receivable for common stock
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Issuance of common stock and warrants for cash, January ($0.15, per shares) (unaudited)
Issuance of common stock for services, February ($0.38, per shares) (unaudited)
Issuance of common stock for services, February ($0.26, per shares) (unaudited)
Issuance of common stock for services, April ($0.12, per share) (unaudited)
Issuance of common stock for services, May ($0.20, per share) (unaudited)
Issuance of common stock for cash, May ($0.10, per share) (unaudited)
Issuance of common stock for cash, June ($0.10, per share) (unaudited)
Issuance of common stock for cash, June ($0.085, per share) (unaudited)
Issuance of common stock for cash, June ($0.08, per share) (unaudited)
Issuance of common stock for services, June ($0.16, per share) (unaudited)
Amortization of prepaid services paid for with common stock (unaudited)
Value of the beneficial conversion feature for the issuance of convertible debt (unaudited)
Issuance of common stock for cash, July ($0.10, per share) (unaudited)
Issuance of common stock for services, July ($0.15, per share) (unaudited)
Issuance of common stock for cash, August ($0.10, per share) (unaudited)
Issuance of common stock for cash, September ($0.10, per share) (unaudited)
Issuance of common stock for cash, September ($0.08, per share) (unaudited)
Net loss for the nine months ended September 30, 2008 (unaudited)
Balance September 30, 2008 (unaudited)
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Operating activities
Adjustments to reconcile net loss to net cash used by operating activities:
Common stock and long-term debt issued for acquisition of license agreement
Common stock issued for services and amortization of common stock issued for services
Write off deferred offering costs
Write off of deferred non cash offering costs
Depreciation
Amortization of discount on notes payable
Amortization of beneficial conversion feature
Amortization of deferred loan costs
Options issued to employees, directors and consultants
(Increase) in prepaid expenses
(Decrease) increase in:
Net cash used by operating activities
Investing activities
Issuance of notes receivable from stockholders
Repayment of notes receivable from stockholders
Advances to related party
Purchase of fixed assets
Net cash used by investing activities
Financing activities
Repayment of stockholder advances
Advances from stockholders
Increase in deferred offering costs
Proceeds from issuance of common stock
Proceeds from exercise of options
Proceeds from issuance of subscription
Proceeds from issuance of convertible notes payable
Net cash provided by financing activities
Net increase in cash
Cash at beginning of year/period
Cash at end of year/period
The accompanying notes are an integral part of the financial statements
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Supplemental disclosures of cash flow information and noncash investing and financing activities:
Cash paid for interest
Subscription receivable for issuance of common stock
Option to acquire license for issuance of common stock
Deferred offering costs netted against issuance of common stock under private placement
Deferred offering costs netted against issuance of common stock
Value of beneficial conversion feature of notes payable
Deferred non-cash offering costs in connection with private placement
Application of amount due from shareholder against related party debt
Amortization of offering costs related to stock for services
Settlement of notes payable in exchange for common stock
Common stock issued in exchanged for prepaid services
Common stock issued in exchange for accrued royalties
Receivable issued for exercise of common stock options
Common stock issued in exchange for fixed assets
Beneficial conversion feature on convertible notes payable
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For the Three and Nine Months Ended September 30, 2008 and 2007 (unaudited)
1. Background Information
Turbine Truck Engines, Inc. (the “Company”) is a development stage enterprise that was incorporated in the state of Delaware on November 27, 2000. On February 20, 2008, the Company was redomiciled to the State of Nevada. To date, the Company’s activities have been limited to raising capital, organizational matters, and the structuring of its business plan. The corporate headquarters is located in DeLand, Florida. The Company’s planned line of business will be the design, development, and testing of turbine truck engine technology licensed through Alpha Engines Corporation (“Alpha”). Alpha owns the patents to a new gas turbine engine system called Detonation Cycle Gas Turbine Engine. Upon the successful demonstration of a highway truck engine using the technology, the Company may form a joint venture with a major heavy duty highway truck manufacturer to manufacture, market, and sell turbine truck engines for use in heavy duty highway trucks throughout the United States.
2. Financial Statements
In the opinion of management, all adjustments consisting only of normal recurring adjustments necessary for a fair statement of (a) the results of operations for the three and nine month periods ended September 30, 2008 and 2007 and the Period November 27, 2000 (Date of Inception) through September 30, 2008, (b) the financial position at September 30, 2008 and December 31, 2007, and (c) cash flows for the nine month periods ended September 30, 2008 and 2007, and the Period November 27, 2000 (Date of Inception) through September 30, 2008, have been made.
The unaudited financial statements and notes are presented as permitted by Form 10-Q. Accordingly, certain information and note disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The accompanying financial statements and notes should be read in conjunction with the audited financial statements and notes of the Company for the fiscal year ended December 31, 2007. The results of operations for the three and nine month periods ended September 30, 2008 and 2007 are not necessarily indicative of those to be expected for the entire year.
3. Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and all interim periods within those fiscal years. In February 2008, the FASB released FASB Staff Position (FSP FAS 157-2 – Effective Date of FASB Statement No. 157) which delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The implementation of SFAS No. 157 for financial assets and liabilities, effective January 1, 2008, did not have an impact on the Company’s financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure, on an item-by-item basis, specified financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are required to be reported in earnings at
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each reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, the provisions of which are required to be applied prospectively. The Company adopted this Statement as of January 1, 2008 and has elected not to apply the fair value option to any of its financial instruments.
In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007), Business Combinations, which replaces SFAS No 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of SFAS No. 141R is not expect to have a material effect on the Company’s financial position, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 160. “Noncontrolling Interests in Consolidated Financial Statements-and Amendment of ARB No. 51.” SFAS 160 establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. This statement also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. The adoption of SFAS 160 is not currently expected to have a material effect on the Company’s financial position, results of operations, or cash flows.
In March 2008, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The company is currently evaluating the impact of adopting SFAS. No. 161 on its financial statements.
Other recent accounting pronouncements issued by the FASB (including its EITF), the AICPA, and the SEC did not or are not believed by management to have a material impact on the Company’s present or future financial statements.
4. Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. For the nine months ended September 30, 2008 and since November 27, 2000 (date of inception) through September 30, 2008, the Company has had a net loss of $631,816 and $8,941,145, respectively. As of September 30, 2008, the Company has not emerged from the development stage. In view of these matters, the Company’s ability to continue as a going concern is dependent upon the Company’s ability to begin operations and to achieve a level of profitability. Since inception, the Company has financed its activities principally from the sale of public equity securities. The Company intends on financing its future development activities and its working capital needs largely from the sale of public equity securities with some additional funding from other traditional financing sources, including term notes and proceeds from sub-licensing agreements until such time that funds provided by operations are sufficient to fund working capital requirements. The financial statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
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5. Contingencies
Once the Company becomes operational it will be obligated to pay production royalties to Alpha at the rate of eight percent of net sales of the Detonation Cycle Gas Turbine Engine. The minimum royalty amount is $250,000 per year, and the Company began accruing for the fee in February 2005. The royalty fee will be reduced by production royalties paid. Unpaid royalty fees amounted to $500,000 as of September 30, 2008.
On September 25, 2001, the Company entered into a consulting agreement with Vladan Ivankovic whereby Mr. Ivankovic would act as intermediary on the European Union market, with interested manufacturers of trucks and truck engines, as well as manufacturers of other engines for all possible purposes, in order to locate partners interested in buying the Detonation Cycle Gas Turbine Engine license for production and distribution. Mr. Ivankovic will receive compensation in the amount of six percent of all equities raised by Mr. Ivankovic. In addition, for all mergers and acquisitions introduced to the Company, Mr. Ivankovic would receive payment based on a sliding scale starting at six percent of the first $25,000,000; five percent of the next $25,000,000; four percent of the next $25,000,000; and three percent of the remaining enterprise value. Mr. Ivankovic has been authorized to choose potential partners and to conduct negotiations on behalf of the Company. As of September 30, 2008, Mr. Ivankovic has not raised any funds nor has he located any partners or merger or acquisition targets for the Company.
On July 1, 2002, the Company entered into a consulting agreement with the inventor of the Detonation Cycle Gas Turbine Engine and majority stockholder of Alpha. In connection with the consulting agreement, a $2,500 retainer per month is due for consulting services rendered. This agreement was cancelled as of April 2005, however, the Company has accrued $62,500 for unpaid retainer fees as of September 30, 2008. In addition, the Company agreed to pay the inventor $1,000 per day plus all out-of-pocket expenses for design and engineering services rendered. The inventor has not provided any design or engineering services through September 30, 2008.
On February 1, 2006, the Company entered into an agreement with Embry-Riddle Aeronautical University to complete a 3D model and certain modifications to the original Detonation Gas Turbine Engine in exchange for a fixed price amount. The Company has expensed $10,670 related to this agreement which expired on June 30, 2007. On August 31, 2007, the Company extended the original agreement through December 31, 2009 with a total additional amount not to exceed approximately $297,000. There were no additional costs incurred during the three and nine months ended September 30, 2008 and 2007.
On August 22, 2006, the Company entered into an agreement with Renmark Financial Communications Financiers for consulting services in exchange for a monthly fee of 6,000 Canadian dollars. Currently, the Company is in the process of renegotiating the terms, therefore, no additional payments have been made during the three and nine months ended September 30, 2008 and 2007.
On August 2, 2006, the Company entered into an agreement with Standart Capital SA, Inc. to raise at least $1 million and not more than $5 million through the sale of the Company’s common stock and to assist in locating a merger candidate. In exchange for these services, the Company shall pay a $50,000 retainer fee, 8% commission of the gross proceeds from the Regulation D offering, 8% fee for any cash paid for a merger candidate and 8% of the securities resulting from the merger that will be issued and outstanding following the merger. Also, the Company will pay $5,000 per month for general business development consulting, strategic planning and other consulting work. The Company issued 25,000 shares of common stock related to the agreement during the year ended December 31, 2007.
The Company leases its corporate headquarters on a month-to-month basis. For the three and nine months ended September 30, 2008 and 2007, rent expense was $7,985, $25,639, $12,032 and $29,495, respectively.
During 2007, the Company entered into a lease agreement with Air Papa Bravo, Corporation to lease an airplane hanger for the development of the prototype. The lease agreement is for a two year period with an option to extend the lease for a second two year term. The base rent is $2,000 per month and the lease agreement contains an option to purchase the facility for $310,000 at the expiration of the lease.
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Future minimum lease payments are as follows:
2008
2009
During April 2008, the Company entered into a consulting agreement for public relations services in exchange for 380,000 shares of common stock valued at $61,600 to be provided through October 2008. As of September 30, 2008, the Company has included $10,267 in prepaid consulting services paid with common stock. For the three and nine months ended September 30, 2008, the Company recognized $30,800 and $51,333, respectively, in consulting expense related to these agreements.
During May 2008, the Company entered into a consulting agreement for consulting services in exchange for 100,000 shares of common stock valued at $20,000 to be provided through May 27, 2009. As of September 30, 2008, the Company has included $13,333 in prepaid consulting services paid with common stock. For the three and nine months ended September 30, 2008, the Company recognized $5,000 and $6,667, respectively, in consulting expense related to this agreement.
During June 2008, the Company entered into a consulting agreement for various consulting services in exchange for 300,000 shares of common stock valued at $48,000. As of September 30, 2008, the Company has included $40,000 in prepaid consulting services paid with common stock. For the three and nine months ended September 30, 2008, the Company recognized $8,000 in consulting expense related to this agreements.
6. Related Party Transactions
During the year ended December 31, 2003, the Company signed a note payable with a related party in the amount of $15,000. The balance at September 30, 2008 is $1,901. This note payable was unsecured, non-interest bearing and has no specific repayment terms, however, payment is not expected prior to March 31, 2009.
The due to related party account of $32,844, is made up of advances from the majority shareholder to assist the Company with its financial obligations. These advances are non-interest bearing, unsecured and due on demand.
As of September 30, 2008, accounts payable included $12,250 due to a director of the Company for various accounting services.
The above amounts are not necessarily indicative of the amounts that would have been incurred had comparable transactions been entered into with independent parties.
7. Stock Options and Warrants
The Company issues common stock and common stock options to consultants for various services. For these transactions the Company follows the guidance in EITF 96-18 “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring or in Conjunction with Selling Goods or Services”. Costs for these transactions are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The value of the common stock is measured at the earlier of (i) the date at which a firm commitment for performance by the counterparty to earn the equity instruments is reached or (i) the date at which the counterparty’s performance is complete. For the nine month periods ended September 30, 2008 and 2007 the Company recognized $165,520 and $603,962, respectively, in consulting expenses and a corresponding increase to additional paid-in-capital related to stock issued for these services.
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (Revised 2004), “Share-Based Payment” (SFAS 123R). SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense in the consolidated financial statements based on their fair values.
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That expense will be recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). We adopted SFAS 123R effective beginning January 1, 2006. Prior to the adoption of SFAS 123(R) we did not issue any stock options. The Company amortizes compensation expense on a straight line basis over the requisite service period.
The Company estimates forfeitures, both at the grant date as well as throughout the requisite service period, based on the Company’s historical experience and future expectations. As of September 30, 2008, there was $413,834 of unrecognized stock-based compensation expense related to nonvested stock options. This amount will be recognized as certain performance criteria, as stated in the option agreements, are met. However, as of September 30, 2008, the Company does not believe this remaining unrecognized compensation will be awarded.
The following table represents our nonvested stock options and warrant activity for the nine months ended September 30, 2008:
Nonvested options - December 31, 2007
Granted
Vested
Forfeited
Nonvested options - September 30, 2008
The aggregate intrinsic value of options outstanding and exercisable at September 30, 2008, based on the Company’s closing stock price of $0.18 was $0. The aggregate intrinsic value of options outstanding and exercisable at September 30, 2007, based on the Company’s closing stock price of $0.40 was $0. Intrinsic value is the amount by which the fair value of the underlying stock exceeds the exercise price of the options.
During the nine months ended September 30, 2008 and 2007, the Company issued 100,000 and 520,913 warrants, respectively, in conjunction with the issuance of common stock. The warrants entitle the holder to purchase 100,000 and 520,913 shares of the Company’s common stock, respectively, at any time, at an exercise price of $0.30 and $0.43—$0.50 per share, respectively and expire in 2010 and 2009, respectively.
The Company’s 2006 Incentive Compensation Plan authorizes up to 2,000,000 shares of common stock to any employee or Consultant during any one calendar year for grants of both incentive stock options and non-qualified stock options to key employees, officers, directors, and consultants. Options granted under the Plan must be exercised within a term determined by the Board of Directors. The Option Price payable for the shares of Common Stock covered by any Option shall be determined by the Board of Directors, provided that such exercise price shall not be less than 100% of the Fair Market Value of a Share on the date of grant of the Option and shall not, in any event, be less than the par value of a Share on the date of grant of the Option. During the nine months ended September 30, 2008 and 2007, the Company did not issue any options and accordingly, no compensation expense was recognized.
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The following table represents our stock option and warrant activity for the nine months ended September 30, 2008:
Outstanding and Exercisable
Outstanding at December 31, 2007
Options and warrants granted
Options and warrants exercised
Options and warrants cancelled or expired
Outstanding at September 30, 2008
Exercisable at September 30, 2008
The following table summarizes information about options and warrants outstanding and exercisable as of September 30, 2008:
Range of Exercise Price
$0.30 - $2.00
Net cash proceeds from the exercise of options and warrants were $0 and $35,000 for the nine months ended September 30, 2008 and 2007, respectively. The intrinsic value of options and warrants exercised was $0 and $0, respectively, for the nine months ended September 30, 2008 and 2007.
8. Earnings per Share
Earnings per common share are computed in accordance with SFAS No. 128, “Earnings per Share,” which requires companies to present basic earnings per share and diluted earnings per share. Basic earnings per share are computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share are computed by dividing net income by the weighted average number of shares of common stock outstanding and dilutive options outstanding during the year. The basic and diluted weighted average number of shares was 19,642,082, 18,465,049, 15,632,563, 14,801,571 and 12,338,188 for the three and nine months ended September 30, 2008 and 2007 and the period from November 27, 2000 (Date of Inception) through September 30, 2008, respectively.
Common stock equivalents for the three and nine months ended September 30, 2008 and 2007 and the period from November 27, 2000 (Date of Inception) through September 30, 2008 were anti-dilutive due to the net losses sustained by the Company during these periods. Accordingly, 2,198,413, 2,340,913 and 2,198,413 options and warrants were excluded from the earnings per share calculation for the three and nine months ended September 30, 2008, 2007 and the period November 27, 2000 (date of inception) through September 30, 2008, respectively.
9. Merger
The Company entered into a Merger and Exchange Agreement (the Agreement) dated February 6, 2008 with High Point Acquisition, Inc. a Florida corporation. The Agreement provided that the Company would redomicile from Delaware to Nevada and would complete a reverse split of its common stock shares on a 1:11.3486 basis. After a two pronged merger process, the shareholders of the Company would own 9.09% of the new parent company, High Point Transport, Inc., a Nevada corporation and a new corporation, Turbine Truck Engines NV, Inc. would become a wholly owned subsidiary, into which all of the assets and business of Turbine Truck Engines would be transferred. All of our officers and directors would resign and be replaced, with the exception of our CEO Michael Rouse, who would remain as a director of the parent company.
As material consideration, High Point Transport, Inc. would use its best efforts to fund the Turbine Truck subsidiary in the amount of $1 million over the next 12 month period. In the event that such funding was not received, High Point Transport, Inc. would, at its expense, complete and file a registration statement to register a distribution of shares back to our original shareholders. If partial funding was provided (less than
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$1 million), the 9.99% of the shares to be left with the parent would be reduced pro-rata based upon the actual funds received. In the event no funding was received, then the Turbine Truck subsidiary would be subject to the registration statement and no shares would remain with the parent and our shareholders would retain their 9.09% interest in the parent.
The proposed merger was cancelled by mutual agreement of the parties on May 9, 2008.
10. Convertible Note Payable
In June 2008, the Company issued a Convertible Debenture to Golden Gate Investors, Inc. (the “holder”) in the principal amount of $1,000,000, dated June 6, 2008, pursuant to Rule 506 promulgated by the Securities and Exchange Commission, for the purpose of accessing necessary funding to continue operations.
Pursuant to the terms of the Debenture, the related Securities Purchase Agreement, Secured Promissory Note and Stock Pledge Agreement, each executed in connection therewith, the Company has issued its $1,000,000 Convertible Debenture (the “Debenture”) for the payment by Golden Gate of $100,000 in cash and the execution and delivery by Golden Gate of a $900,000 Secured Promissory Note of even date (the “Note”), bearing interest at 8% per annum. For financial statement purposes, these items have been netted, as the Company has the legal right of offset.
The Debenture bears interest at 7.75% per annum, payable monthly, maturing June 30, 2012, and was secured by a Continuing Personal Guaranty, whereby the Company’s Chief Executive Officer and majority shareholder guaranteed the Company’s obligations for a period of eight months. The Debenture Holder shall be entitled to convert into common stock of the company at the conversion price equal to the lesser of (i) $0.50, or (ii) 80% of the average of the 3 lowest Volume Weighted Average Prices during the 20 Trading Days prior to Holder’s election to convert, as such terms are defined in the Debenture. The Holder can only convert that amount of the Debenture that has actually been paid for by either cash at closing or principal pre-payments made on the Promissory Note.
Golden Gate’s Promissory Note is payable at the rate of 8% per annum, payable monthly and provides that for the prepayment of the Note in an amount not less than $200,000 monthly upon the triggering of certain events. It matures on June 30, 2012.
Related to the variability associated with the conversion price on the debenture, the Company considered the guidance in SFAS No. 133, and Emerging Issues Task Force 00-19, “Accounting for Derivative Financial Instructions Indexed To, and Potentially Settled In, a Company’s Own Stock.” The Company’s Chief Executive Officer and majority shareholder has the ability to increase the authorized shares of common stock of the Company to a level that would maintain the net share settlement of any potential conversion within the Company’s control. As a result, the embedded conversion option was determined to be a component of equity. Accordingly, the Company recorded a beneficial conversion feature (BCF) based on the intrinsic value of the Company’s common stock at the commitment date of the debenture. The debt discount associated with the BCF is being amortized over the life of the debt.
The agreement also calls for the Company to maintain timely filing of all reports required by the Securities and Exchange Commission (“SEC”). In the event the Company does not maintain timely filings, the note calls for a default payment of 150% of the outstanding principle balance. Per the guidance in EITF 00-19, if the note holder’s require cash payments in the event the Company fails to make timely filings with the SEC, then the contract must be classified as an asset or a liability. The Company has not historically been late on its filings with the SEC, so the probability of the Company filing late is so remote as to make the fair value of the embedded derivative de minimus, therefore, the Company has not recorded an underlying asset or liability associated with this feature.
The debenture also has an interest rate adjustment indexed to changes in the Company’s common stock. In the event that the Company’s common stock trades at $0.049 or lower, at any time during the six month period from the date of the agreement, and ending on the six month anniversary date of the agreement, the interest rate increases to 9.75% for the remaining life of the debenture. The Company has determined that feature was a derivative liability. However, as of September 30, 2008, the derivative liability was determined to have no value.
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The following table presents the allocation of proceeds of the debenture:
Principal balance of the debenture
Less reduction for:
Intrinsic value of beneficial conversion feature
Recorded at closing
Amortization of beneficial conversion feature (interest expense) through September 30, 2008
Carrying value at September 30, 2008
11. Fair Value Measurements
Effective January 1, 2008, we adopted SFAS 157, Fair Value Measurements (SFAS 157). SFAS 157 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.
Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.
The adoption of SFAS No. 157 did not have a material impact on our fair value measurements.
The following tables present our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value.
Description
Liabilities
Convertible debenture embedded derivative related to timely filing (see note 10)
Convertible debenture embedded derivative related to interest rate adjustment
Total Liabilities
1
Due to low probability of late filing, value was determined to be de minimus as of September 30, 2008.
Event triggering interest rate adjustment has not occurred, therefore no value assigned as of September 30, 2008.
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12. 2008 Incentive Compensation Plan
The Company’s 2008 Incentive Compensation Plan authorizes up to 3,000,000 shares of common stock to any employees, officers, directors, and consultants, as approved by the Board of Directors. There are no restrictions on resale upon the purchasers of the Stock from the employees or the consultants, unless contained in the written award approved by the Board of Directors. As of September 30, 2008, no shares have been issued under this plan.
PART I – FINANCIAL INFORMATION
THIS FILING CONTAINS FORWARD-LOOKING STATEMENTS. THE WORDS “ANTICIPATED,” “BELIEVE,” “EXPECT,” “PLAN,” “INTEND,” “SEEK,” “ESTIMATE,” “PROJECT,” “WILL,” “COULD,” “MAY,” AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE STATEMENTS INCLUDE, AMONG OTHERS, INFORMATION REGARDING FUTURE OPERATIONS, FUTURE CAPITAL EXPENDITURES, AND FUTURE NET CASH FLOW. SUCH STATEMENTS REFLECT THE COMPANY’S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, GENERAL ECONOMIC AND BUSINESS CONDITIONS, CHANGES IN FOREIGN, POLITICAL, SOCIAL, AND ECONOMIC CONDITIONS, REGULATORY INITIATIVES AND COMPLIANCE WITH GOVERNMENTAL REGULATIONS, THE ABILITY TO ACHIEVE FURTHER MARKET PENETRATION AND ADDITIONAL CUSTOMERS, AND VARIOUS OTHER MATTERS, MANY OF WHICH ARE BEYOND THE COMPANY’S CONTROL. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES OCCUR, OR SHOULD UNDERLYING ASSUMPTIONS PROVE TO BE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY AND ADVERSELY FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, OR OTHERWISE INDICATED. CONSEQUENTLY, ALL OF THE FORWARD-LOOKING STATEMENTS MADE IN THIS FILING ARE QUALIFIED BY THESE CAUTIONARY STATEMENTS AND THERE CAN BE NO ASSURANCE OF THE ACTUAL RESULTS OR DEVELOPMENTS.
The following discussion and analysis of our financial condition and plan of operations should be read in conjunction with our financial statements and related notes appearing elsewhere herein. This discussion and analysis contains forward-looking statements including information about possible or assumed results of our financial conditions, operations, plans, objectives and performance that involve risk, uncertainties and assumptions. The actual results may differ materially from those anticipated in such forward-looking statements. For example, when we indicate that we expect to increase our product sales and potentially establish additional license relationships, these are forward-looking statements. The words expect, anticipate, estimate or similar expressions are also used to indicate forward-looking statements.
OVERVIEW OF THE COMPANY
Turbine Truck Engines, Inc. was incorporated in Delaware on November 27, 2000. On February 20, 2008, the Company was redomiciled to the State of Nevada. On December 15, 2000, we acquired the option rights for an exclusive License from Alpha Engines Corporation (“Alpha”) for manufacturing and marketing heavy duty highway truck engines utilizing Alpha’s “Detonation Cycle Gas Turbine Engine” (“DCGT”) technology embodied in U.S. Patent No. 6,000,214 and other proprietary technology and rights owned by Alpha including Marketing Survey Data in the highway trucking industry. We exercised our option and acquired the licensing rights on July 22, 2002.
Alpha has completed the design and prototype of a 540 hp engine for use in highway trucks. Under our Agreement with Alpha, they will continue to develop and test this 540 horsepower DCGT highway truck engine prototype at their facilities in Deland, Florida. We
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receive ongoing status reports of their progress but do not participate in the design, construction and/or testing of the engine. This new energy efficient detonation cycle gas turbine can be designed and manufactured as a new or replacement engine for all heavy duty trucks that utilize engines ranging from 300 to 1,000 horsepower. It is our intention to target 18 wheel class 8 vehicles commonly used for transporting goods throughout the United States for distribution of our engine.
To date, we have no marketable product and have completed initial testing of the 540 horsepower prototype. The Company has started demonstrating the engine to investors, and has begun demonstrating it to potential joint venture partners. The contract with Alpha has been completed and comprehensive testing and development of the 540 horsepower prototype is now moving forward.
OUR BUSINESS PLAN
During the 2008 fiscal year, the Company, with the assistance of Embry Riddle Aeronautical University, intends to focus on the continued development of the 540 horsepower engine, making improvements and modifications as the testing proceeds. The Company is anticipating finalizing the comprehensive testing on the engine by the end of 2008.
The Company is continuing to search for a Joint Venture partner to manufacture and produce the final engine for sale. To date the Company has not entered into any agreements with any manufactures, but is looking to develop such a relationship before the end of the 2008 fiscal year. The Company’s ideal Joint Venture partner will provide the engineering support and manufacturing facilities to take the engine from prototype, through vehicle testing, government testing and into the market.
On February 6, 2008, the Company entered into a Merger and Exchange Agreement with High Point Acquisition, Inc., and High Point Transport, Inc., (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, it was cancelled on May 9, 2008.
Since our inception, we have continued to raise capital to bring this patented technology closer to where it can be utilized in a common market. As we have no marketable product yet, we do not anticipate generating any revenues over the next year. Thereafore, we anticipate the need to raise additional capital over the next twelve months. The financing for our development activities to date has come from the sale of common stock.
The Company has signed a 2-year Lease Agreement for 3600 square foot space located at 917 Biscayne Boulevard Unit 6, DeLand Florida 32724 for the purpose of demonstrating the Engine. The Company also acquired an option to purchase the space in the future should they choose to do so. The complex is located next to the airport and allows for private aircraft to taxi up to the location. The Company began demonstrating the engine at this facility in April, 2007.
LIQUIDITY AND CAPITAL RESOURCES
In order to achieve our business plan goals, the Company anticipates needing to raise additional capital from the sale of restricted shares over the coming 12 month period. The Company’s agreement with Dutchess Private Equities Fund, L.P. entered into in 2006 was never finalized by the Company nor does the Company intend to do so in the future. A term sheet for a $5,000,000 line of credit with Wertpapier und handelskasse von 1857 was executed but was never consumated.
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The Company intends to finance our future development activities and working capital needs largely from the sale of public equity securities with additional funding from a private placement or secondary offering and other traditional financing sources, including term notes and proceeds from sub-licensing agreements until such time that funds provided by operations are sufficient to fund working capital requirements.
In June 2008, the Company issued a 7 3/4% Convertible Debenture to Golden Gate Investors, Inc. in the principal amount of $1,000,000, dated June 6, 2008, pursuant to Rule 506 promulgated by the Securities and Exchange Commission, for the purpose of accessing necessary funding to continue operations.
Pursuant to the terms of the Debenture, the related Securities Purchase Agreement, Secured Promissory Note and Stock Pledge Agreement, each executed in connection therewith, the Company has issued its $1,000,000 Convertible Debenture (the “Debenture”) for the payment by Golden Gate of $100,000 in cash and the execution and delivery by Golden Gate of a $900,000 Secured Promissory Note of even date (the “Note”), bearing interest at 8% per annum.
The Debenture bears interest at 7.75% per annum, payable monthly, maturing June 30, 2012, and was secured by a Continuing Personal Guaranty, whereby Mr. Michael Rouse guaranteed the Company’s obligations for a period of eight months. The Debenture Holder shall be entitled to convert into common stock of the company at the conversion price equal to the lesser of (i) $0.50, or (ii) 80% of the average of the 3 lowest Volume Weighted Average Prices during the 20 Trading Days prior to Holder’s election to convert, as such terms are defined in the Debenture. The Holder can only convert that amount of the Debenture that has actually been paid for by either cash at closing or principal pre-payments made on the Promissory Note.
Golden Gate’s Promissory Note is payable at the rate of 8% per annum, payable monthly and provides that for the prepayment of the Note in an amount not less than $200,000 monthly upon the happening of certain events. It matures on June 30, 2012.
Provided certain conditions are met, pursuant to the terms of the Securities Purchase Agreement executed between the parties of even date, Golden Gate or its assigns has the right to enter into 4 additional Debentures with the Company upon similar terms.
The Company may receive proceeds in the future from the exercise of warrants and options outstanding as of September 30, 2008 in accordance with the following schedule:
Non-Plan Options and Warrants
During the coming year, based on our anticipated growth, we plan to add several employees to our staff.
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OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Not applicable.
The Company’s Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the nine month period ending September 30, 2008 covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer has concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective as required under Rules 13a-15(e) and 15d-15(e) under the Exchange Act. This conclusion by the Company’s Chief Executive Officer and Chief Financial Officer does not relate to reporting periods after September 30, 2008.
Changes in Internal Control Over Financial Reporting
No change in the Company’s internal control over financial reporting occurred during the quarter ended September 30, 2008, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II—OTHER INFORMATION
As of the date of this Quarterly Report, neither we nor any of our officers or directors is involved in any litigation either as plaintiffs or defendants. As of this date, there is not any threatened or pending litigation against us or any of our officers or directors.
During the nine month period ended September 30, 2008, there was no modification of any instruments defining the rights of holders of the Company’s common stock and no limitation or qualification of the rights evidenced by the Company’s common stock as a result of the issuance of any other class of securities or the modification thereof.
During January 2008, the Company issued 200,000 shares of common stock for cash to qualified investors at price of $0.15 per share.
During February 2008, the Company issued 160,000 shares of common stock for services valued at a price of $0.38 per share.
During February 2008, the Company issued 12,000 shares of common stock for services valued at a price of $0.26 per share.
During April 2008, the Company issued 210,000 shares of common stock for services valued at a price of $0.12 per share.
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During May 2008, the Company issued 350,000 shares of common stock for services valued at $0.20 per share.
During May 2008, the Company issued 145,000 shares of common stock for cash valued at $0.10 per share.
During June 2008, the Company issued 334,000 shares of common stock for cash valued at $0.10 per share.
During June 2008, the Company issued 150,000 shares of common stock for cash valued at $0.085 per share.
During June 2008, the Company issued 25,000 shares of common stock for cash valued at $0.08 per share.
During June 2008, the Company issued 300,000 shares of common stock for services valued at $0.16 per share.
During July 2008, the Company issued 379,500 shares of common stock for cash valued at $0.10 per share.
During July 2008, the Company issued 30,000 shares of common stock for services valued at $0.15 per share.
During August 2008, the Company issued 101,000 shares of common stock for cash valued at $0.10 per share.
During September 2008, the Company issued 369,000 shares of common stock for cash valued at $0.10 per share.
During September 2008, the Company issued 306,250 shares of common stock for cash valued at $0.08 per share.
There have been no defaults in any material payments during the covered period.
During the three month period ended September 30, 2008, the Company did not submit any matters to a vote of its security holders.
The Company does not have any other material information to report with respect to the three month period ended September 30, 2008.
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June 10, 2008 – The Company executed an agreement with Golden Gate Investors, Inc. in the principle amount of $1,000,000 to sell unregistered securities.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereto duly authorized:
/s/ Michael Rouse
Chief Executive Officer and Chairman of the
Board (Principal Executive Officer and
Principal Financial Officer)
/s/ Rebecca A. McDonald
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