UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
For the quarterly period ended March 31, 2010
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
There were 42,697,709 shares of the Registrant’s $0.001 par value common stock outstanding as of May 17, 2010.
(A Development Stage Company)
Contents
Part I – Financial Information
Item 1.
Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operation
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4T.
Controls and Procedures
Part II – Other Information
Legal Proceedings
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Item 4.
Submission of Matters to a Vote of Security Holders
Item 5.
Other Information
Item 6.
Exhibits
Signatures
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)
As of March 31, 2010 (unaudited) and December 31, 2009 and
for the three months ended March 31, 2010 and 2009 (unaudited)
and the Period November 27, 2000 (Date of Inception)
through March 31, 2010 (unaudited)
Financial Statements:
Balance Sheets
Statements of Operations
Statements of Changes in Stockholders’ Deficit
Statements of Cash Flows
Notes to Financial Statements
1
Assets
Current assets:
Cash
Prepaid expenses
Total current assets
Furniture and equipment, net of accumulated depreciation of $42,986 (2010) and $42,271 (2009)
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable
Accrued expenses
Accrued interest
Accrued payroll
Note payable
Total current liabilities
Accrued expenses – long term
Accrued payroll – long term
Accrued royalty fees
Convertible note payable net of unamortized discount of $241,994 and $2,914, 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; 42,697,709 (2010) and 39,693,484 (2009) 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 outstanding
3
Statement of Changes in Stockholders’ Deficit
For the Three Months Ended March 31, 2010 and
For Each of the Years From November 27, 2000 (Date of Inception) through March 31, 2010
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
5
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
6
7
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
8
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
9
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
Issuance of common stock for conversion of notes, January ($0.06, per share)
Issuance of common stock for cash, January ($0.50, per share)
Issuance of common stock for cash, January ($0.07, per share)
Issuance of common stock for cash, January ($0.08, per share)
Issuance of common stock for cash, January ($0.10, per share)
Issuance of common stock for conversion of notes, February ($0.06, per share)
Issuance of common stock for conversion of notes, February ($0.09, per share)
Issuance of common stock for cash, February ($0.07, per share)
Issuance of common stock for cash, February ($0.10, per share)
Issuance of common stock for services, March ($0.11, per share)
Issuance of common stock for conversion of notes, March ($0.07, per share)
Issuance of common stock for conversion of notes, March ($0.08, per share)
Issuance of common stock for cash, March ($0.07, per share)
Issuance of common stock for cash, March ($0.10, per share)
Issuance of warrants for services, January
Issuance of common stock for services, April ($0.09, per share)
Issuance of common stock for services, April ($0.10, per share)
Issuance of common stock for cash, April ($0.07, per share)
Issuance of common stock for cash, April ($0.10, per share)
Issuance of common stock for conversion of notes, April ($0.07, per share)
Issuance of common stock for conversion of notes, April ($0.06, per share)
Issuance of common stock for conversion of notes, May ($0.06, per share)
Issuance of common stock for services, May ($0.09, per share)
Issuance of common stock for cash, May ($0.07, per share)
Issuance of common stock for conversion of notes, June ($0.06, per share)
Issuance of common stock for conversion of notes, June ($0.07, per share)
Issuance of common stock and warrants for cash, June ($0.07, per share)
Issuance of common stock for cash, July ($0.07, per share)
Issuance of common stock for cash, July ($0.065, per share)
Issuance of common stock for cash, July ($0.26, per share)
Issuance of common stock for conversion of notes, July ($0.065, per share)
Issuance of common stock for cash, August ($0.07, per share)
Issuance of common stock for cash, August ($0.085, per share)
Issuance of common stock and warrants for cash, August ($0.10, per share)
Issuance of common stock for cash, August ($0.11, per share)
Issuance of common stock for cash, August ($0.12, per share)
Issuance of common stock for cash, August ($0.24, per share)
Issuance of common stock for cash, August ($0.26, per share)
Issuance of common stock for cash, August ($0.28, per share)
Issuance of common stock for cash, August ($0.30, per share)
Issuance of common stock for cash, August ($0.33, per share)
Issuance of common stock for services, August ($0.09, per share)
Issuance of common stock for services, August ($0.25, per share)
Issuance of common stock for services, August ($0.10, per share)
Issuance of common stock for services, August ($0.16, per share)
Issuance of common stock for cash, September ($0.20, per share)
Issuance of common stock for cash, September ($0.22, per share)
Issuance of common stock for cash, September ($0.23, per share)
Issuance of common stock for cash, September ($0.235, per share)
Issuance of common stock for cash, September ($0.26, per share)
Issuance of common stock for cash, September ($0.325, per share)
Issuance of common stock for cash, September ($0.33, per share)
Issuance of common stock for cash, September ($0.375, per share)
Issuance of common stock for services, September ($0.47, per share)
Issuance of common stock for services, September ($0.61, per share)
Issuance of common stock and exercise of warrants for a reduction in a payable, September ($0.10, per share)
Issuance of common stock options, July
Issuance of common stock for cash, October ($0.22, per share)
Issuance of common stock for cash, October ($0.18, per share)
Issuance of common stock for cash, October ($0.17, per share)
Issuance of common stock for cash, November ($0.18, per share)
Issuance of common stock for cash, November ($0.20, per share)
Issuance of common stock for cash, December ($0.19 per share)
Issuance of common stock for cash, December ($0.16, per share)
Issuance of common stock for cash, December ($0.17, per share)
Issuance of common stock for cash, December ($0.18, per share)
Issuance of common stock for cash, December ($0.20, per share)
Issuance of common stock for cash, December ($0.30, per share)
Issuance of common stock for services, October ($0.42, per share)
Issuance of common stock for services, December ($0.38, per share)
Issuance of common stock for conversion of notes, December ($0.1284, per share)
Issuance of warrants
Payment on stock subscription receivable
Balance December 31, 2009
Payment on stock subscription receivables (unaudited)
Amortization of prepaid services paid for with common stock (unaudited)
Issuance of common stock for cash, February ($0.15, per share) (unaudited)
Issuance of common stock for cash, February ($0.16, per share) (unaudited)
Issuance of common stock for cash, February ($0.17, per share) (unaudited)
Issuance of common stock for cash, February ($0.18, per share) (unaudited)
Issuance of common stock for cash, February ($0.23, per share) (unaudited)
Issuance of common stock for settlement of accounts payable, February ($0.261, per share) (unaudited)
Issuance of common stock for cash, February ($0.30, per share) (unaudited)
Issuance of common stock for cash, February ($0.333, per share) (unaudited)
Issuance of common stock for cash, February ($0.42, per share) (unaudited)
Issuance of common stock for services, February ($0.475, per share) (unaudited)
Issuance of common stock for services, February ($0.575, per share) (unaudited)
Issuance of common stock for cash, March ($0.18, per share) (unaudited)
Issuance of common stock for cash, March ($0.21, per share) (unaudited)
Issuance of common stock for cash, March ($0.28, per share) (unaudited)
Issuance of common stock for cash, March ($0.294, per share) (unaudited)
Issuance of common stock for cash, March ($0.30, per share) (unaudited)
Issuance of common stock for cash, March ($0.35, per share) (unaudited)
Issuance of common stock for cash, March ($0.37, per share) (unaudited)
Issuance of common stock for cash, March ($0.38, per share) (unaudited)
Issuance of common stock for cash, March ($0.39, per share) (unaudited)
Issuance of common stock for cash, March ($0.40, per share) (unaudited)
Issuance of common stock for settlement of accounts payable, March ($0.269 per share) (unaudited)
Issuance of common stock for settlement of accounts payable, March ($0.53, per share) (unaudited)
Issuance of common stock for services, March ($0.485, per share) (unaudited)
Issuance of common stock for services, March ($0.49, per share) (unaudited)
Write off uncollectible stock subscription receivable, March (unaudited)
Value of the beneficial conversion feature for the issuance of convertible debt (unaudited)
Net loss for the three months ended March 31, 2010 (unaudited)
Balance March 31, 2010 (unaudited)
10
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
Options 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:
Net cash used by operating activities
INVESTING ACTIVITIES:
Issuance of notes receivable from stockholders
Advances to related party
Repayment of notes receivable from stockholders
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
Debt issuance costs
Repayment of convertible notes payable
Proceeds from issuance of convertible notes payable
Net cash provided by financing activities
NET INCREASE IN CASH
CASH, BEGINNING OF PERIOD
CASH, END OF PERIOD
The accompanying notes are an integral part of the financial statements
11
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 (5,633,540 shares since inception)
Write off uncollectible stock subscription receivable
Common stock issued for accounts payable
12
For the Three Months Ended March 31, 2010 and 2009 (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. 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 Cooperative Agreement (the “Agreement”) dated April 27, 2010 with Beijing Royal Aerospace Facilities Co., Ltd., a PRC corporation (“Beijing Royal”), 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 (“DGCT”) specifically for application to heavy duty trucks, with Beijing Royal to be the Company’s exclusive development partner with respect to 300 – 600 HP DCGT in the People’s Republic of China. The terms of the agreement replace the terms of the agreement dated January 21, 2009 with Aerospace Machinery and Electric Co., Ltd. The terms of the agreement call for the Company to complete the design plan for the 540 HP DCGT engine with three (3) months and submit it to Beijing Royal for further submission to PRC regulatory authorities for review and approval. The parties have agreed to execute a more detailed joint development contract upon the approval of the DCGT project by PRC regulatory authorities to specify the details of their cooperation on the development of the DCGT.
The Agreement further provides that all documentation provided by the Company to Beijing Royal at this stage shall be solely for the purpose of making a funding application, and that any further use shall be by agreement of the parties. The intellectual properties jointly developed under the Agreement would be owned by both parties equally.
During August 2009, the Company entered into a strategic alliance with Tianjin Out Sky Technology Co., Ltd. (Tianjin), a leading Chinese bicycle parts manufacturer. Details of the agreement specify that the Company and Tianjin will collaborate on the engineering and technical development of the DCGT engine for motorcycle engine applications. The agreement also stipulates the establishment of a joint venture to manufacture, market and sell the DCGT in China once the engine has been shown to have commercial potential. Other details include Tianjin’s agreement to commit up to ten million U.S. dollars in development funding over the next eighteen months with a further commitment to purchase up to five percent of the Company’s common stock via the public markets. As of March 31, 2010, no funds have been received. As of March 31, 2010 TIANJIN and their engineering team have been working at their own expense and have submitted Phase One design drawings for a motorcycle DCGT engine. The Company is currently reviewing the designs.
During September 2009, the Company entered into a letter of intent to form a joint venture with Genes Guohao Technology Co., Ltd. (“Guohao”), a Chinese corporation. The agreement stipulates that the companies will collaborate on modifying the Company’s DCGT engine for coal fired power generation applications utilizing Dry Coal Slurry Fuel. The agreement specifies that Guohao will fully fund the project and commit its industrial, engineering, and technical development resources to its success. Guohao has committed $300,000 U.S. dollars to initially fund the project. The agreement also stipulates that the Company and Guohao will form a joint venture whereby Guohao will be licensed to manufacture, market and sell the DCGT coal fired engines in Mongolia. The Joint Venture Letter of Intent further specifies that Guohao, as part of the Joint Venture Agreement, will form a new corporation, and that the Company will license the DCGT to the new entity for a 49% stake in the newly formed corporation. As of March 31, 2010 Abm engineering has been conducting research into the use of coal slurries as a fuel source for the DCGT, under our agreements scope of work. Upon completion Abm intends to conduct preliminary testing to demonstrate its viability. As of March 31, 2010, a joint venture agreement has not been entered into.
13
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, 2010 and 2009 and the period November 27, 2000 (Date of Inception) through March 31, 2010, (b) the financial position at March 31, 2010 and December 31, 2009, and (c) cash flows for the three month periods ended March 31, 2010 and 2009, and the period November 27, 2000 (Date of Inception) through March 31, 2010, 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, 2009. The results of operations for the three month period ended March 31, 2010 are not necessarily indicative of those to be expected for the entire year.
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, 2010 and since November 27, 2000 (date of inception) through March 31, 2010, the Company has had net losses of $662,979 and $12,226,902, respectively. As of March 31, 2010, 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, joint venture agreements 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. 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 $864,000 and $801,500 as of March 31, 2010 and December 31, 2009, respectively. During the three months ended March 31, 2010, the Company determined that it is probable that accrued royalty fees will be satisfied through the issuance of common stock, accordingly, the liability was classified as a long-term liability as of March 31,2010.
The Company leases its corporate headquarters on a month-to-month basis. For the three months ended March 31, 2010 and 2009, rent expense was $7,985 and $7,985, 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.
In February 2010, the Company issued 20,000 shares of common stock, valued at $11,500, to a consultant for various services to be performed through August 31, 2010. As of March 31, 2010, $4,792 is recorded in the Company’s balance sheet as prepaid consulting services paid for with common stock. For the three months ended March 31, 2010, the Company amortized $6,708 into expense related to these services.
14
In March 2010, the Company issued 600,000 shares of common stock, valued at $294,000, to a consultant for various services to be performed through April 30, 2010. As of March 31, 2010, $245,000 is recorded in the Company’s balance sheet as prepaid consulting services paid for with common stock. For the three months ended March 31, 2010, the Company amortized $49,000 into expense related to these services.
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, 2010 is $1,901. This note payable was unsecured, non-interest bearing and has no specific repayment terms, however, payment is not expected prior to December 31, 2010.
As of March 31, 2010 and December 31, 2009, accounts payable included $5,925 and $42,550, respectively, for various accounting services, due to the Company’s Chief Accounting Officer who is also a director of the Company.
As of March 31, 2010 and December 31, 2009, the Company has $80,500 and $0 of prepaid services to a Vice President of the Company.
The above terms and amounts are not necessarily indicative of the terms and amounts that would have been incurred had comparable transactions been entered into with independent parties.
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. 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. Originally, the Debenture Holder was 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.
During 2010 and since inception, the Company has drawn $250,000 and $745,000 in proceeds related to the note, respectively. During 2010 and since inception, the Holder has converted $0 and $469,000 in convertible notes into 0 and 5,633,540 common shares, respectively.
In December 2009, the convertible debenture agreement was amended. As a result of the amendment, effective January 15, 2010, the conversion price has a $0.15 fixed floor price that limits the number of common shares upon conversion to an amount that is substantially below the Company’s authorized common shares that can be issued. Additionally, the penalty associated with the default provision to maintain timely filings of all reports required by the Securities and Exchange Commission was removed. Lastly, the default provision related to the interest rate adjustment indexed to changes in the Company’s common stock was removed. In the event of certain defaults, the Company would pay a default fixed interest rate of 9.75% per annum.
Based on the amended agreement, the Company determined that all potential derivative features associated with the original debenture agreement were removed.
The following table presents the activity during 2010 related to the debenture:
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 March 31, 2010
Carrying value at March 31, 2010
15
7. Stock Options and Warrants
The Company issues common stock to consultants for various 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 three month periods ended March 31, 2010 and 2009 the Company recognized $93,033 and $77,857, respectively, in consulting expenses related to stock issued for these services.
Stock-based compensation cost recognized during the three months ended March 31, 2010 and 2009 includes compensation cost for all share-based payments granted prior to, but not yet vested, as of January 1, 2006 and compensation cost for all share-based payments granted subsequent to January 1, 2006, based on their respective grant date fair values estimated in accordance with U.S. GAAP. The Company recognizes compensation expense on a straight-line basis over the requisite service period.
The aggregate intrinsic value of options outstanding and exercisable at March 31, 2010, based on the Company’s closing stock price of $0.48 was $397,196. 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. Intrinsic value is the amount by which the fair value of the underlying stock exceeds the exercise price of the options.
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 0 and 400,000 common stock options to consultants and directors and recognized $0 and $36,644 in compensation expense for the three month periods ended March 31, 2010 and 2009, 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, 2010, no shares have been issued under this plan.
The fair value of each option under the 2006 Incentive Compensation Plan was estimated on the date of grant using the Black Scholes model that uses assumptions noted in the following table. Expected volatility is based on the Company’s historical market price at consistent points in periods equal to the expected life of the options. The expected term of options granted is based on the Company’s historical experience. The risk-free interest rate for the periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The Company estimates forfeitures; both at the date of grant as well as throughout the requisite service period, based on the Company’s historical experience and future expectations.
The following table represents our stock option and warrant activity for the three months ended March 31, 2010:
Outstanding and Exercisable
Outstanding at December 31, 2009
Options and warrants granted
Options and warrants exercised
Options and warrants cancelled or expired
Outstanding at March 31, 2010
Exercisable at March 31, 2010
16
The following table summarizes information about options and warrants outstanding and exercisable as of March 31, 2010:
Net cash proceeds from the exercise of options and warrants were $0 for each of the three months ended March 31, 2010 and 2009, respectively. The cash proceeds of options and warrants exercised was $0 for the each of the three months ended March 31, 2010 and 2009.
8. Earnings per Share
Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted average common shares outstanding for the period. Diluted loss per share is computed giving effect to all potentially dilutive common shares. Potentially dilutive common shares may consist of incremental shares issuable upon the exercise of stock options and warrants and the conversion of notes payable to common stock. In periods in which a net loss has been incurred, all potentially dilutive common shares are considered antidilutive and thus are excluded from the calculation. For the three month periods ended March 31, 2010 and 2009 and for the period from November 27, 2000 (Date of Inception) through March 31, 2010, the Company had 1,907,413, 1,389,500 and 1,907,413 potentially dilutive common stock options and warrants, respectively, which were not included in the computation of loss per share.
9. Subsequent Events
The Company entered into a Share Purchase Agreement (the “Agreement”) dated May 10, 2010 with HUA TEC ENTERPRISE CO. LTD, an international company incorporated in the Independent State of Samoa (“HUA TEC”) and MING-CHIH HUANG, MING-KUN HUANG, SHU-CHIH LEE, AND WEI-HAN HUANG (individually and collectively the “Sellers”). The Agreement was executed with Disclosure Schedules in lieu of the Exhibits which are still in process of being finalized between the parties. The Exhibits when complete will be filed in a subsequent Form 8K. HUA TEC owns all of the issued and outstanding shares of GUANGDONG KINGTEC ELECTRICAL CO., LTD (the “Target”), a wholly foreign owned enterprise established under the laws of the People’s Republic of China. The Seller has represented that the Target is the sole subsidiary and asset of HUA TEC. The Target is primarily engaged in the business of manufacturing and selling automobile starters, generators and other accessories in the People’s Republic of China.
17
The Agreement outlines the terms under which the Sellers agreed to sell and the Company agreed to purchase eighty percent (80%) of the issued and outstanding shares of HUA TEC. The Sellers, consisting of all of the shareholders of HUA TEC, will be issued new shares of the Company’s common stock (the “Shares”), based upon a formula that is based upon the average closing stock price of the Company’s common stock for the twenty (20) trading days prior to the Closing (the “AASP”). The number of Shares will be between 7,000,000 and 14,000,000 depending upon the AASP. The Company will hold back twenty-five percent (25%) of the Shares (the “Holdback Shares”), which Shares will be released on the second (2nd) anniversary date of the Closing Date. In addition, all Shares received by the Seller will be subject to restrictions on transfer, under which one-third (1/3) of each Seller’s Shares shall, subject to relevant securities laws, become fully transferable on each of the first three (3) anniversaries of the Closing Date, so long as such Seller remains employed by or a consultant to HUA TEC or the Target, as the case may be. The Sellers have piggy-back registration rights for their Shares. The Agreement also calls for certain key employees to enter into Employment or Consulting Agreements with HUA TEC or the Target, prior to Closing and to enter into a covenant not to compete for a five (5) year period. The Agreement may be terminated by mutual agreement should the Closing fail to occur within three (3) months or four (4) months if so extended by either the Seller or the Company).
The closing date is set for the 5th business day following satisfaction of the closing conditions outlined in the Agreement, but in no event shall it be later than three (3) months from the Effective Date of the Agreement (or four (4) months if either party requests). By way of example, and not as a complete list, among the conditions precedent to the Closing, the Company is to receive (a) proof that HUA TEC nor the Target own any of the Excluded properties on Schedule 2.2(i): (b) evidence that HUA TEC and Target have a replacement working capital loan facility in place that is acceptable to the Company; (c) auditable statements for HUA TEC and Target have been received; (d) clean Phase I environmental reports on all Target sites other than the Excluded Properties; (e) Proxy from Sellers to the Company’s Chairman, for all voting rights for the Shares until they are legally disposed of pursuant to the terms of the Agreement; and (f) Company is satisfied with all legal, business, accounting and financial due diligence. The Sellers must also deliver all necessary governmental approvals, and assist the Company in obtaining any required governmental approvals that it may need relative to the transactions contemplated by the Agreement.
The Agreement provides for the possibility of a Purchase Price Adjustment. If net working capital is negative, the Purchase Price would be reduced by a set formula contained in the Agreement (the “Adjustment”). The Adjustment is to be determined, if at all, by the Closing Balance Sheet of HUA TEC and an Adjustment Certificate that the Company is to provide to the Sellers within forty-five (45) days of Closing. If the parties dispute the Adjustment Certificate calculations, the Agreement provides for an independent accounting firm to provide the final say.
Following the Closing, HUA TEC will issue to Sellers collectively, redeemable preference shares of no par value, entitling Sellers to priority distributions on an annual basis equal to thirty percent (30%) of the net profits of the Target distributable to HUA TEC for any fiscal year so long as Messrs Ming-Chih Huang and Ming-Kun Huang remain employed or in a consulting position. Any such Priority payments are subject to availability of funds. Preference shares shall be redeemed and Sellers right to priority payments shall terminate in the event of a sale of HUA TEC or Target or if Sellers collective common shareholdings fall below five percent (5%) for any reason. The Preference shares have no voting or other rights.
18
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
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 licensed 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.
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.
19
The Company entered into a LOI Joint Venture Agreement dated September 7, 2009 with GENES GUOHAO TECHNOLOGY, Co., Ltd., a Chinese corporation (“GUOHAO”) for the purpose of providing a framework for the collaboration between the two companies on the modification of the DCGT engine for coal fired power generation engine applications. The terms of the Agreement call for GUOHAO to fully fund the project and devote all available resources towards the development of the new fuel source and to work in collaboration with all of the Company’s development partners in the design modifications, construction, and testing for a dry coal slurry fuel for the DCGT. Upon completion, GUOHAO will form a new corporation to Joint Venture with TURBINE. TURBINE, in return will then license the DCGT to the new entity for a 49% ownership interest. The Joint Venture, the terms of which are to be determined at a later date, will license the entity to manufacture and sell the DCGT coal fired engines in Mongolia. As of March 31, 2010 Abm engineering has been conducting research into the use of coal slurries as a fuel source for the DCGT, under our agreements scope of work. Upon completion Abm intends to conduct preliminary testing to demonstrate its viability.
The Company entered into a Strategic Alliance Agreement dated August 10, 2009 with Tianjin Out Sky Technology, Co. Ltd., a Chinese corporation (“TIANJIN”). The Company entered into the Agreement for the purpose of collaborating on the engineering, technical development and commercialization of the DCGTE for motorcycle engine applications; and for the subsequent manufacturing, marketing and sale of the DCGT engines in China once commercial market potential has been achieved.
The Agreement provides in material part that the Company will (a) provide TIANJIN with milestones and get them up to speed on the current status of the development; (b) file for patent protection in China under Patent Cooperation Treaty; and (c) file for new engine application with World Intellectual Property Organization. In addition, the Company and TIANJIN intend to form a joint venture whereby TIANJIN will be licensed to manufacture, market and sell DCGT motorcycle engine in China.
TIANJIN and the Company have agreed to work in good faith towards modifying the engine for motorcycle engine applications. TIANJIN has committed to fund up to 10 million US dollars over the next 18 months for project development costs and will work with the Company’s development partners to aid in the development of a viable motorcycle application for the DCGT. TIANJIN will also purchase up to 5% of the Company’s common stock on the open market.
As of March 31, 2010 TIANJIN and their engineering team have been working at their own expense and have submitted Phase One design drawings for a motorcycle DCGT engine. The Company is currently reviewing the designs.
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.
20
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 was our initial intention to target 18 wheel class 8 vehicles commonly used for transporting goods throughout the United States for distribution of our engine, however, the Company now intends to license other applications of the DCGT engine technology as deemed necessary and appropriate to further the development and commercialization of the engines.
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, AMEC, TIANJIN, GUOHAO and potentially other foreign or domestic partners to develop and test the prototype engine at their facilities. AbM, AMEC, and the others 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, 2010 compared to the three months ended March 31, 2009:
Research and development costs for the three months ended March 31, 2010 and 2009, totaled $58,514 and $0, respectively. The increase of $58,514 was primarily attributable to additional costs incurred for the testing of the DCGT engine in 2010.
Operating Costs – During the three months ended March 31, 2010 and 2009, operating costs totaled $595,901 and $293,137, respectively. The increase of $302,764 was mainly attributable to a $66,761 increase in consulting expenses due to several new consulting contracts, the Company also had an approximate $128,000 increase in professional fees, an increase of approximately $40,000 in payroll costs due to additional employees, an increase of $72,750 in stock based compensation and an additional $25,554 increase in travel expenses related to the AMEC agreement.
Interest (Income) Expense - Net - During the three months ended March 31, 2010 and 2009 net interest expense totaled $8,564 and $40,569, respectively. The decrease of $32,005 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. In 2010, the Company is amortizing the beneficial conversion feature over the life of the debt and the note holder has not yet elected to convert the convertible debenture.
The net loss for the three months ended March 31, 2010 and 2009 was $662,979 and $333,706, respectively. The increase of $329,273 was mainly attributable to the increase in operating costs and research and development expenses.
LIQUIDITY AND CAPITAL RESOURCES
As shown in the accompanying financial statements, for the three months ended March 31, 2010 and since November 27, 2000 (date of inception) through March 31, 2010, the Company has had net losses of $662,979 and $12,226,902, respectively. As of March 31, 2010, 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
21
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, 2010 we raised cash of approximately $2,923,180 net of issuance costs, through private placements of common stock financings and $802,250 through the issuance of convertible notes payable. Additionally, we have raised net proceeds from stockholder advances of approximately $109,000.
Since our inception through March 31, 2010 we have incurred $3,585,664 of research and development costs. 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, 2010, we had an accumulated deficit of $12,226,902 and working capital of $781,871.
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 issued $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 is secured by a Continuing Personal Guaranty by Michael H. Rouse, the Company’s CEO. Originally, the Holder was 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. Effective January 15, 2010 the agreement was amended with the Holder and the conversion price having a $0.15 fixed floor price that limits the number of common shares upon conversion of a fixed amount. 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 secured 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. During 2010 and since inception, the Company has drawn $250,000 and $745,000, respectively, in proceeds related to the note. During 2010 and since inception, the Holder has converted $0 and $469,000 in convertible notes into 0 and 5,633,540 common shares, respectively.
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.
22
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, 2010 in accordance with the following schedule:
2006 Non-Plan Options and Warrants
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 have 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 and for the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective. The controls were determined to be ineffective due to the lack of segregation of duties. Currently, management contracts with an outside CPA to perform the duties of the Chief Financial Officer and Principle Accounting Officer and an outside consultant to assist with the preparation of the filings. However, until the Company has received additional funding, they are unable to remediate the weakness.
Changes in Internal Control Over Financial Reporting
No change in the Company’s internal control over financial reporting occurred during the three months ended March 31, 2010, 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, 2010, 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 February 2010, the Company issued 135,000 shares of common stock for cash at a price of $0.15 per share.
During February 2010, the Company issued 318,420 shares of common stock for cash at a price of $0.16 per share.
23
During February 2010, the Company issued 159,647 shares of common stock for cash at a price of $0.17 per share.
During February 2010, the Company issued 10,000 shares of common stock for cash at a price of $0.18 per share.
During February 2010, the Company issued 553,261 shares of common stock for cash at a price of $0.23 per share.
During February 2010, the Company issued 121,212 shares of common stock in settlement of accounts payable at a price of $0.261 per share.
During February 2010, the Company issued 101,000 shares of common stock for cash at a price of $0.30 per share.
During February 2010, the Company issued 100,000 shares of common stock for cash at a price of $0.333 per share.
During February 2010, the Company issued 33,000 shares of common stock for cash at a price of $0.42 per share.
During February 2010, the Company issued 14,000 shares of common stock for services at a price of $0.475 per share.
During February 2010, the Company issued 20,000 shares of common stock for services at a price of $0.575 per share.
During March 2010, the Company issued 10,000 shares of common stock for cash at a price of $0.18 per share.
During March 2010, the Company issued 4,761 shares of common stock for cash at a price of $0.21 per share.
During March 2010, the Company issued 357,142 shares of common stock for cash at a price of $0.28 per share.
During March 2010, the Company issued 6,803 shares of common stock for cash at a price of $0.294 per share.
During March 2010, the Company issued 152,666 shares of common stock for cash at a price of $0.30 per share.
During March 2010, the Company issued 6,000 shares of common stock for cash at a price of $0.35 per share.
During March 2010, the Company issued 13,514 shares of common stock for cash at a price of $0.37 per share.
During March 2010, the Company issued 50,000 shares of common stock for cash at a price of $0.38 per share.
During March 2010, the Company issued 1,025 shares of common stock for cash at a price of $0.39 per share.
During March 2010, the Company issued 3,000 shares of common stock for cash at a price of $0.40 per share.
During March 2010, the Company issued 80,000 shares of common stock in settlement of accounts payable at a price of $0.269 per share.
During March 2010, the Company issued 3,774 shares of common stock in settlement of accounts payable at a price of $0.53 per share.
During March 2010, the Company issued 150,000 shares of common stock for services at a price of $0.485 per share.
During March 2010, the Company issued 600,000 shares of common stock for services at a price of $0.49 per share.
There have been no defaults in any material payments during the covered period.
During the three month period ended March 31, 2010, the Company did not submit any matters to a vote of its security holders.
24
The Company does not have any other material information to report with respect to the three month period ended March 31, 2010.
(a) Exhibits included herewith are:
Certification of the Chairman of the Board, Chief Executive Officer, and Principal Financial Officer
(This certification required as Exhibit 31 under Item 601(a) of Regulation S-K is filed as Exhibit 99.1 pursuant to SEC interim filing guidance.) (2)
Certification of the Principal Accounting Officer
(This certification required as Exhibit 31 under Item 601(a) of Regulation S-K is filed as Exhibit 99.2 pursuant to SEC interim filing guidance.) (2)
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
25