UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
For the quarterly period ended March 31, 2009
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)
917 Biscayne Boulevard Suite 6, 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ 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 24,757,873 shares of the Registrant’s $0.001 par value common stock outstanding as of March 31, 2009.
(A Development Stage Company)
Contents
PART I – FINANCIAL INFORMATION
Statements in this Form 10-Q 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 10-Q 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 10-Q Quarterly Report, except as required by law.
(A Development Stage Enterprise)
Financial Statements
As of March 31, 2009 (unaudited) and December 31, 2008 and
for the three months ended March 31, 2009 and 2008 (unaudited)
and the Period November 27, 2000 (Date of Inception)
through March 31, 2009 (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 $39,310 (2009) and $35,721 (2008)
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable
Accrued expenses
Accrued interest
Accrued royalty fees
Due to related party
Note payable
Total current liabilities
Accrued payroll – long term
Convertible note payable net of unamortized discount of $127,455 and $13,544, respectively
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; 24,757,873 (2009) and 21,859,764 (2008) 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.
2
(unaudited)
Research and development costs
Operating costs
Interest expense
Net loss
Net loss per share
Weighted average number of common shares
3
Statement of Changes in Stockholders’ Deficit
For the Three Months Ended March 31, 2009 and
For Each of the Years From November 27, 2000 (Date of Inception) through March 31, 2009
Common Stock
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
4
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
5
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
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
6
Issuance of common stock and warrants for cash, January ($0.15, per shares)
Issuance of common stock for services, February ($0.38, per shares)
Issuance of common stock for services, February ($0.26, per shares)
Issuance of common stock for services, April ($0.12, per share)
Issuance of common stock for services, May ($0.20, per share)
Issuance of common stock for cash, May ($0.10, per share)
Issuance of common stock for cash, June ($0.10, per share)
Issuance of common stock for cash, June ($0.085, per share)
Issuance of common stock for cash, June ($0.08, per share)
Issuance of common stock for services, June ($0.16, per share)
Value of the beneficial conversion feature for the issuance of convertible debt
Issuance of common stock for cash, July ($0.10, per share)
Issuance of common stock for services, July ($0.15, per share)
Issuance of common stock for cash, August ($0.10, per share)
Issuance of common stock for cash, September ($0.10, per share)
Issuance of common stock for cash, September ($0.08, per share)
Issuance of common stock for cash, October ($0.08, per share)
Issuance of common stock for cash, October ($0.09, per share)
Issuance of common stock for cash, October ($0.10, per share)
Issuance of common stock for cash, November ($0.08, per share)
Issuance of common stock for cash, November ($0.10, per share)
Issuance of common stock for services, December ($0.071, per share)
Issuance of common stock for cash, December ($0.08, per share)
Issuance of common stock for cash, December ($0.10, per share)
Issuance of common stock for services, December ($0.09, per share)
Issuance of common stock for services, December ($0.13, per share)
Issuance of common stock for services, December ($0.17, per share)
Issuance of common stock for services, December ($0.1954, per share)
Issuance of common stock for conversion of notes, December ($0.08, per share)
Issuance of common stock for conversion of notes, December ($0.07, per share)
Issuance of common stock for conversion of notes, December ($0.10, per share)
Issuance of warrants for services, December
Balance December 31, 2008
Amortization of prepaid services paid for with common stock (unaudited)
Issuance of common stock for conversion of notes, January ($0.06, per share) (unaudited)
Issuance of common stock for cash, January ($0.50, per share) (unaudited)
Issuance of common stock for cash, January ($0.07, per share) (unaudited)
Issuance of common stock for cash, January ($0.08, per share) (unaudited)
Issuance of common stock for cash, January ($0.10, per share) (unaudited)
Issuance of common stock for conversion of notes, February ($0.06, per share) (unaudited)
Issuance of common stock for conversion of notes, February ($0.09, per share) (unaudited)
Issuance of common stock for cash, February ($0.07, per share) (unaudited)
Issuance of common stock for cash, February ($0.10, per share) (unaudited)
Issuance of common stock for services, March ($0.11, per share) (unaudited)
Issuance of common stock for conversion of notes, March ($0.07, per share) (unaudited)
Issuance of common stock for conversion of notes, March ($0.08, per share) (unaudited)
Issuance of common stock for cash, March ($0.07, per share) (unaudited)
Issuance of common stock for cash, March ($0.10, per share) (unaudited)
Value of the beneficial conversion feature for the issuance of convertible debt (unaudited)
Issuance of warrants for services, January (unaudited)
Net loss for the three months ended March 31, 2009 (unaudited)
Balance March 31, 2009 (unaudited)
Balance, March 31, 2009 (unaudited)
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Period November 27,2000 (Date of
Inception) through
OPERATING ACTIVITIES:
Adjustments to reconcile net loss to net cash used in 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
Option s and warrants issued to employees, directors and consultants
Amortization of beneficial conversion feature
Amortization of deferred loan costs
Write off of deferred offering costs
Write off of deferred non cash offering costs
Depreciation
Amortization of discount on notes payable
Decrease (increase) in prepaid expenses
Increase (decrease) in:
Accrued payroll
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
Debt issuance costs
Proceeds from issuance of notes payable
Net cash provided by financing activities
NET INCREASE (DECREASE) IN CASH
CASH, BEGINNING OF PERIOD
CASH, END OF PERIOD
The accompanying notes are an integral part of the financial statements
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 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 exchange 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
Conversion of convertible debt to equity (1,098,697 shares)
8
For the Three Months Ended March 31, 2009 and 2008 (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. If the Company can successfully demonstrate a highway truck engine using the technology, the Company intends to 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.
The Company entered into a Strategic Alliance Agreement (the “Agreement”) dated January 21, 2009 with Aerospace Machinery & Electric Co. Ltd., a Chinese corporation (“AMEC”) for the purpose of providing a framework for the collaboration between the two companies on the development and commercialization of the Detonation Cycle Gas Turbine Engine (“DCGT”) specifically for application opportunities in the Peoples Republic of China. The terms of the Agreement call for AMEC and TTE to collaborate on modifying and applying the DCGT engine technology to, among other things, create two new engine sizes: a 150hp engine for automobiles and a 400hp engine for buses. The Agreement also provides that the parties anticipate that, pursuant to AMEC’s participation and performance under this Agreement, that they will enter into a Joint Venture agreement in the future whereby TTE will grant AMEC the exclusive rights to manufacture, market and sell the DCGT engines in China.
The Agreement provides that each Company will work independently and collectively, at their own expense, in a friendly competitive manner towards the modification of the DCGT to see who can make the best design or give the best innovative ideas to the DCGT engines, with Michael Rouse, the Company’s CEO being the final decision maker on the ultimate design questions. Robert L Scragg, the inventor and patent holder has filed for patent protection in China under the PCT (Patent Cooperation Treaty). In conjunction with the Agreement, the parties also executed a Confidentiality Agreement of even date with the Agreement.
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 month periods ended March 31, 2009 and 2008 and the Period November 27, 2000 (Date of Inception) through March 31, 2009, (b) the financial position at March 31, 2009 and December 31, 2008, and (c) cash flows for the three month periods ended March 31, 2009 and 2008, and the Period November 27, 2000 (Date of Inception) through March 31, 2009, 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, 2008. The results of operations for the three month periods ended March 31, 2009 and 2008 are not necessarily indicative of those to be expected for the entire year.
9
3. Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. For the three months ended March 31, 2009 and since November 27, 2000 (date of inception) through March 31, 2009, the Company has had a net loss of $333,706 and $9,625,712, respectively. As of March 31, 2009, 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.
4. Commitments and 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 $625,000 as of March 31, 2009.
On February 1, 1006, the Company entered into an agreement with Embry-Riddle Aeronautical University to complete a 3D model and certain modifications to the orginal Detonation Gas Turbine Engine in exchange for a fixed price amount. The Company 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 months ended March 31, 2009 and 2008.
The Company leases its corporate headquarters on a month-to-month basis. For the three months ended March 31, 2009 and 2008, rent expense was $7,985 and $9,990, respectively.
During the year ended December 31, 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 was for a two year period expiring March 31, 2009 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 contained an option to purchase the facility for $310,000 at the expiration of the lease. The Company has negotiated month to month terms at the end of this lease until a new lease can be negotiated.
5. 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 March 31, 2009 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, 2010.
The due to related party account 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 March 31, 2009 and December 31, 2008, accounts payable included $20,150 and $25,150, respectively, 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.
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6. Convertible Notes 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. During the three months ended March 31, 2009, Golden Gate advanced the Company an additional $200,000 cash, thereby reducing the Secured Promissory Note to $700,000. 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.
During the three months ended March 31, 2009, related to the convertible note payable, the holders converted $80,000 of convertible notes to 1,098,697 shares of common stock at conversion prices ranging from $0.06 to $0.09 per share.
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 March 31, 2009, the derivative liability was determined to have no value.
11
The following table presents the activity during 2008 and the period ended March 31, 2009 related to the debenture:
Original Principal balance of the debenture
Less reduction for:
Intrinsic value of beneficial conversion feature
Recorded at closing
Amounts converted into common stock
Amortization of beneficial conversion feature (interest expense) through December 31, 2008
Carrying value at December 31, 2008
Addition to the principal balance of the debenture
Amortization of beneficial conversion feature (interest expense) through March 31, 2009
Carrying value at March 31, 2009
7. 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.
Description
Liabilities
Convertible debenture embedded derivative related to timely filing (see note 6)
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 March 31, 2009.
Event triggering interest rate adjustment has not occurred, therefore no value assigned as of March 31, 2009.
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8. Stock Options and Warrants
The Company issues stock options and warrants 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 periods ended March 31, 2009 and 2008 the Company recognized $77,857 and $63,920, respectively, in consulting expenses 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. 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 aggregate intrinsic value of options outstanding and exercisable at March 31, 2009, based on the Company’s closing stock price of $0.10 was $0. The aggregate intrinsic value of options outstanding and exercisable at March 31, 2008, based on the Company’s closing stock price of $0.15 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 three months ended March 31, 2009 and 2008, the Company issued 0 and 100,000 warrants, respectively, in conjunction with the issuance of common stock. The warrants entitle the holder to purchase 0 and 100,000 shares of the Company’s common stock, respectively, at any time, at an exercise price of $0.00 and $0.30 per share, respectively and expire in 2010.
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. The Company granted 400,000 and 0 common stock options to consultants and directors and recognized $36,644 and $0 in compensation expense for the three month periods ended March 31, 2009 and 2008, respectively.
The Company’s 2008 Incentive Compensation Plan authorizes up to 5,000,000 shares of common stock to 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 March 31, 2009, no shares have been issued under this plan.
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The following table represents our stock option and warrant activity for the three months ended March 31, 2009:
Outstanding and Exercisable
Outstanding at December 31, 2008
Options and warrants granted
Options and warrants exercised
Options and warrants cancelled or expired
Outstanding at March 31, 2009
Exercisable at March 31, 2009
The following table summarizes information about options and warrants outstanding and exercisable as of March 31, 2009:
Range of Exercise Price
$0.10 – $2.00
Net cash proceeds from the exercise of options and warrants were $0 and $0 for the three months ended March 31, 2009 and 2008, respectively. The intrinsic value of options and warrants exercised was $0 and $0, respectively, for the three months ended March 31, 2009 and 2008.
9. 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 23,033,752, 17,588,687 and 12,877,205 for the three months ended March 31, 2009 and 2008 and the period from November 27, 2000 (Date of Inception) through March 31, 2009, respectively.
Common stock equivalents for the three months ended March 31, 2009 and 2008 and the period from November 27, 2000 (Date of Inception) through March 31, 2009 were anti-dilutive due to the net losses sustained by the Company during these periods. Accordingly, 1,389,500, 2,458,413 and 1,389,500 options and warrants were excluded from the earnings per share calculation for the three months ended March 31, 2009, 2008 and the period November 27, 2000 (date of inception) through March 31, 2009, respectively.
10. Subsequent Events
In April 2009, the Company issued 500,000 shares of common stock to a consultant for various services to be performed at the discretion of the consultant.
In April 2009, in connection with the convertible notes discussed in Note 6, the holders converted $25,000 of convertible notes into 361,136 shares of common stock at a conversion price of $0.07 per share.
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11. Recent Accounting Pronouncements
Recent accounting pronouncements issued by 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.
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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.
The Company entered into a Strategic Alliance Agreement (the “Agreement”) dated January 21, 2009 with Aerospace Machinery & Electric Co. Ltd., a Chinese corporation (“AMEC”) for the purpose of providing a framework for the collaboration between the two companies on the development and commercialization of the Detonation Cycle Gas Turbine Engine (“DCGT”) specifically for application opportunities in the Peoples Republic of China. The terms of the
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Agreement call for AMEC and TTE to collaborate on modifying and applying the DCGT engine technology to, among other things, create two new engine sizes: a 150hp engine for automobiles and a 400hp engine for buses. The Agreement also provides that the parties anticipate that, pursuant to AMEC’s participation and performance under this Agreement, that they will enter into a Joint Venture agreement in the future whereby TTE will grant AMEC the exclusive rights to manufacture, market and sell the DCGT engines in China.
Alpha has completed the design and prototype of a 540 hp engine for use in highway trucks. The Company entered into a contractual agreement (the “Agreement”) dated July 1, 2008 with AbM Engineering, LLC (AbM) for the purpose of the continued development and testing of the current 540 horsepower DCGT engine and a 70 horsepower/50kw generator combination. AbM is currently working in a collaborative effort with AMEC’s engineers to modify and test other DCGT engine applications.
Under our Agreement with Alpha, they will continue to consult and advise with AbM Engineering on future developments of this 540 horsepower DCGT highway truck engine prototype at AbM’s facilities in Daytona Beach, Florida. We 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.
Detonation refers to an instant burning of a fuel-air mixture producing an explosion. Cycle refers to the explosion happening in one chamber and then in another chamber, repeating over and over again. Gas is the fuel which is in a gaseous state. Turbine is a rotating wheel or disk connected to a shaft spinning in one direction. This combined process along with the EIC process creates the high efficiency, low emission engine that we intend to bring to market.
OUR BUSINESS PLAN
We are a development-stage company and not yet generating any revenues. We expect to continue the commercialization of our Detonation Cycle Gas Turbine Engine (“DCGT”) technology. The licensor of the acquired technology has passed the research and development phase and has designed a working prototype. We need to redesign an engine for our application based on this proven Core Technology. We are relying on AbM Engineering in collaboration with AMEC to design, construct and test a 540 horsepower engine prototype for our licnesed application (see “Business of the Company”, “Our Product.”).
The financing for our development activities to date has come from the sale of common stock. We intend 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 of up to $10 million 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.
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Since we have had a limited history of operations, we anticipate that our quarterly results of operations will fluctuate significantly for the foreseeable future. We believe that period-to-period comparisons of our operating results should not be relied upon as predictive of future performance. Our prospects must be considered in light of the risks, expenses and difficulties encountered by companies at an early stage of development, particularly companies commercializing new and evolving technologies such as the DCGT. In July 2002, we acquired the license for the DCGT technology for the manufacture and marketing of heavy-duty highway truck engine.
The following steps have been or are being taken by the Company to demonstrate the viability of a final prototype engine:
In Step 3, we will rely on AbM and AMEC to test the prototype engine at their facilities. AbM & AMEC will conduct test demonstrations to show the viability and function of the engine. The cost of the on-going testing is expected to be funded from the proceeds of a private placement offering.
For the three months ended March 31, 2009 compared to the three months ended March 31, 2008:
Operating Costs – During the three months ended March 31, 2009 and 2008, operating costs totaled $293,137 and $178,128, respectively. The increase of $115,009 was mainly attributable to an increase in consulting expense of approximately $52,500 due to additional accounting services and the new contract in China in 2009. The increase is also due to an approximate $21,000 increase in payroll expenses due to increases in salaries for two of the Company’s officer’s, as they had taken a reduction in the prior year to conserve operating capital, the Company also had an approximate $12,000 increase in accounting fees in 2008. Finally, the Company increased its travel expenses for the additional travel to China by approximately $18,000.
Interest (Income) Expense—Net—During the three months ended March 31, 2009 and 2008 net interest expense totaled $40,569 and $722, respectively. The increase of $39,847 was due to the Company issuing a convertible debenture to Golden Gate Investors, Inc. and the amortization of the beneficial conversion feature associated with the debentures during 2009.
The net loss for the three months ended March 31, 2009 and 2008 was $333,706 and $178,850, respectively. The increase of $154,856 was mainly attributable to the increase in operating costs and net interest expenses.
LIQUIDITY AND CAPITAL RESOURCES
As shown in the accompanying financial statements, for the three months ended March 31, 2009
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and 2008 and since November 27, 2000 (date of inception) through March 31, 2009, the Company has had net losses of $333,706, $178,850 and $9,625,712, respectively. As of March 31, 2009, 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.
As previously mentioned, since inception, we have financed our operations largely from the sale of common stock. From inception through March 31, 2009 we raised cash of $1,402,442 net of issuance costs, through private placements of common stock financings and $362,500 through the issuance of convertible notes payable.
Since our inception through March 31, 2009 we have incurred $3,418,192 of research and development costs and operating expenses. These expenses were principally related to the acquisition of a license agreement in July 2002 in the amount of $2,735,649, which was expensed to research and development costs for the DCGT technology and general and administrative expenses.
We have incurred significant net losses and negative cash flows from operations since our inception. As of March 31, 2009, we had an accumulated deficit of $9,625,712 and a working capital deficit of $896,086.
We anticipate that cash used in product development and operations, especially in the marketing, production and sale of our products, will increase significantly in the future.
On June 6, 2008, the Company issued a 7 3/4 Convertible Debenture to Golden Gate Investors, Inc. in the principal amount of $1,000,000, 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. During the three months ended March 31, 2009, Golden Gate advanced the Company an additional $200,000 cash, thereby reducing the Secured Promissory Note to $700,000.
The Debenture bears interest at 7.75% per annum, payable monthly, maturing June 30, 2012, and is secured by a Continuing Personal Guaranty. by, Michael H. Rouse, the Company’s CEO. The 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.
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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, Golden Gate or its assigns has the right to enter into 4 additional Debentures with the Company upon similar terms. The Company incurred no additional expenses in this matter and the Company is utilizing the proceeds for its on-going working capital needs.
We will be dependent upon our existing cash, together with anticipated net proceeds from a public offering and future debt issuances and private placements of common stock and potential license fees, to finance our planned operations through the next 12 months. We will continue to proceed in the design and testing phase of the DCGT engine during the next 12 months and will require additional funding to continue operations. Based on our anticipated growth, we plan to add several employees to our staff.
Additional capital may not be available when required or on favorable terms. If adequate funds are not available, we may be required to significantly reduce or refocus our operations or to obtain funds through arrangements that may require us to relinquish rights to certain or potential markets, either of which could have a material adverse effect on our business, financial condition and results of operations. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities would result in ownership dilution to our existing stockholders.
The Company may receive proceeds in the future from the exercise of warrants and options outstanding as of March 31, 2009 in accordance with the following schedule:
Non-Plan Options and Warrants
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During the coming year, based on our anticipated growth, we plan to add several employees to our staff.
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 three month period ending March 31, 2009 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 March 31, 2009.
Changes in Internal Control Over Financial Reporting
No change in the Company’s internal control over financial reporting occurred during the quarter ended March 31, 2009, 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 three month period ended March 31, 2009, 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 2009, the Company issued 255,965 shares of common stock for the conversion of notes payable at a price of $0.06 per share.
During January 2009, the Company issued 200 shares of common stock for cash at a price of $0.50 per share.
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During January 2009, the Company issued 294,999 shares of common stock for cash at a price of $0.07 per share.
During January 2009, the Company issued 12,500 shares of common stock for cash at a price of $0.08 per share.
During January 2009, the Company issued 255,000 shares of common stock for cash at a price of $0.10 per share.
During February 2009, the Company issued 221,984 shares of common stock for the conversion of notes payable at a price of $0.09 per share.
During February 2009, the Company issued 166,739 shares of common stock for the conversion of notes payable at a price of $0.06 per share.
During February 2009, the Company issued 526,927 shares of common stock for cash at a price of $0.07 per share.
During February 2009, the Company issued 110,500 shares of common stock for cash at a price of $0.10 per share.
During the March 2009, the Company issued 300,000 shares of common stock for services valued at a price of $0.11 per share.
During the March 2009, the Company issued 137,768 shares of common stock for the conversion of notes payable at a price of $0.07 per share.
During the March 2009, the Company issued 316,241 shares of common stock for the conversion of notes payable at a price of $0.08 per share.
During March 2009, the Company issued 289,286 shares of common stock for cash at a price of $0.07 per share.
During March 2009, the Company issued 10,000 shares of common stock for cash at a price of $0.10 per share.
There have been no defaults in any material payments during the covered period.
During the three month period ended March 31, 2009, 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 March 31, 2009.
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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
/s/ Rebecca A. McDonald
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