Novo Integrated Sciences - 10-Q quarterly report FY2013 Q3

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 o

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 x No o

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 o No x

There were 253,470,861 shares of the Registrant’s $0.001 par value common stock outstanding as of November 13, 2013.

Turbine Truck Engines, Inc. (the “Company”) is a development stage enterprise that was incorporated in the state of Delaware on November 27, 2000, and converted to a Nevada corporation in 2008. 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 Paisley, Florida.

We are currently working on the development of three (3) separate revolutionary technologies: (a) Hydrogen Production Burner System (HPBS); (b) Detonation Cycle Gas Turbine Engine (DCGT); and (c) the Gas To Methanol Technology (GTM)

Effective August 20, 2013, the Company amended its Articles of Incorporation filed with the Nevada Secretary of State, to reflect the Board of Directors adoption of a resolution, consented to by those holding a majority of the common shareholder votes, which increased the authorized common stock of the company to 499,000,000 shares of common stock, having a par value of $.001.

 

In the opinion of management, all adjustments consisting only of normal recurring adjustments necessary for a fair statement of (a) the results of operations for the three and nine month periods ended September 30, 2013 and 2012 and the period November 27, 2000 (Date of Inception) through September 30, 2013, (b) the financial position at September 30, 2013 and December 31, 2012, and (c) cash flows for the nine month periods ended September 30, 2013 and 2012, and the period November 27, 2000 (Date of Inception) through September 30, 2013, 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, 2012. The results of operations for the nine month period ended September 30, 2013 are not necessarily indicative of those to be expected for the entire year.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. For the three and nine months ended September 30, 2013 and since November 27, 2000 (date of inception) through September 30, 2013, the Company had a net loss of $169,483, $695,319 and $18,226,726, respectively. As of September 30, 2013, 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 and issuance of debt. 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.

The Company leased its corporate headquarters on a month-to-month basis. For each of the three month periods ended September 30, 2013 and 2012, rent expense was approximately $6,250. For each of the nine months periods ended September 30, 2013 and 2012, rent expense was $18,750.

In October 2011, the Company entered into employment agreements with terms that commence on October 1, 2011 and run through a range of dates with the latest being September 2014. These agreements have a cumulative annual salary of approximately $156,000 annually and cumulative grants of fully vested stock issuances of 850,000 shares of stock. Upon signing the employment agreements, all unearned stock compensation from the previous employment agreements was recognized in full, as the employees were not required to forfeit their previous granted shares of common stock. At the October 1, 2011 grant date, the Company recognized approximately $279,000 in stock-based compensation related to the above grants of common stock, and grants made during 2010. Additionally, the employees were granted 850,000 fully vested common stock options, with an exercise price of $0.25 per share, and expire five years from the date of grant. The grants of common stock and common stock options were essentially sign-on bonuses, and accordingly, the grant-date fair values were recognized as compensation expense at the October 1, 2011 grant date.

In January 2013, the Company entered into employment agreements with terms that commence on January 1, 2013 and run through December 31, 2013. These agreements have a cumulative annual salary of approximately $104,000 annually and cumulative grants of fully vested stock issuances of 450,000 shares of stock. At the January 1, 2013 grant date, the Company recognized approximately $1,350 in stock-based compensation related to the above grants of common stock made during 2013. Additionally, the employees were entitled to receive a bonus of 1,250,000 common stock options, with an exercise price of $0.05 per share, and expire five years from the date of grant. The grants of common stock and common stock options were essentially sign-on bonuses, and accordingly, the grant-date fair values were recognized as compensation expense at the January 1, 2013.

On January 23, 2013 the Company entered into a Letter of Intent with BluGen, Inc., a California corporation (“BluGen”) for the purpose of setting the basis for the joint development of a natural gas to Methanol technology (“GTM Technology”). Under the terms of the Agreement, BluGen will work with TTE, and the inventor, Robert Scragg to recreate and expand upon the original designs created by Mr. Scragg and to re-develop a lab version and control system, among other things. These items are to be completed under a timetable that has been agreed upon by the parties. The Parties have agreed to establish at a later date, a joint venture, wherein the Company will have a 15% interest and BluGen will have a 49% interest, and into which the commercial application of the technology will be developed. There has been no activity at the date of this filing.

On May 28, 2013, the Company entered into Lease Agreement dated with Fujian Xinchang Leather Company Limited, a Chinese company (“Fujian”), whose address is Jinjiang City, Fujian, China Ying Lin Zhenxin Chang Industrial Park (the “Plant”) for the lease of a Hydrogen boiler combustion equipment system (the “Equipment”) to be installed at their Plant. The Unit price for the Equipment is RMB 4,800,000 Yuan (approximately $800,000 US). The term of the Lease is seven (7) years, and renews on an annual basis if not terminated. Once installation and proven energy efficiency are established, Fujian will post the performance bond of RMB 1 million Yuan and rental payments shall commence, and be paid monthly thereafter. Any termination of the Lease within the first six (6) years will entitle the Company to take possession of the entire performance bond. As of September 30, 2013, there has not been any payments made on this lease.

On July 30, 2013, the Company signed an Agreement with 2367416 Ontario, Inc., a Canadian company (“236”), whereby 236 agrees to provide financing to the Company in the initial sum of CAN $450,000 and a maximum of CAN $10,000,000 in accordance with the terms of the Agreement. The financing to be provided is to be funded in tranches, and will have terms between three (3) and five (5) years, with each tranche being separately negotiated. As a part of the loan costs, 236 shall be issued restricted common stock equal to the issued and outstanding common shares of the Company at the time of the initial advance, with such shares being subject to a Lock Up/Leak Out Agreement to be negotiated between the parties. These shares are considered an additional cost in obtaining the financing and the value of these shares at the commitment date is recorded as a contra equity and amortized over five years.

The initial advance of CAN $450,000 is covered by a Loan Agreement dated June 19, 2013, and was signed on July 30, 2013 (the “Loan Agreement”), which provides that (a) the interest rate shall be 20% per annum; and (b) CAN $90,000 shall be withheld by lender in interest rate reserve account for the payment of the first years interest. The total of CAN $300,000 under the Loan Agreement was received during the three months ended September 30, 2013 and delivered to Energy Technology Services Co., Ltd., (ETS) as the initial payment on the first machine to be delivered under a purchase order agreement. As of September 30, 2013, the Company has recorded $374,636 as a note payable and $285,799 as construction in progress.

During the nine months ended September 30, 2013, the Company, as part of the above agreement, is required to issue 124,000,000 shares of restricted common stock to 236. These shares are valued at $0.008 which was the share price at commitment date. As of September 30, 2013, the Company has issued 82,666,666 shares to 236 and recorded $661,333 in deferred non-cash debt issuance costs which are amortized over five years. The balance of these deferred non-cash debt issuance costs at September 30, 2013 was $638,866. The remaining 41,333,334 shares will be issued at a later date when the initial advance is fully funded. The Company recorded a common stock payable of $330,667 related to these shares at September 30, 2013.

On August 1, 2013, the Company entered into a note agreement with 2367416 Ontario, Inc., a Canadian company (“236”), whereby 236 agrees to provide financing to the Company in the amount of CAN $25,000 for working capital needs. The agreement provides for interest rate at 20% per annum, with interest payable monthly and principle is due five years from the date of advance. As part of the above agreement, the Company is required to issue 5,000,000 shares of restricted common stock to 236. These shares are valued at $0.02 which was the share price at commitment date. As of September 30, 2013, the Company recorded a note payable in the amount of $23,225 and $100,000 in deferred non-cash debt issuance costs which are amortized over five years. The balance of these deferred non-cash debt issuance costs at September 30, 2013 was $96,712.

On August 22, 2013, the Company entered into a note agreement with 2367416 Ontario, Inc., a Canadian company (“236”), whereby 236 agrees to provide financing to the Company in the amount of CAN $50,000 to pay off a convertible note the Company owed. The agreement provides for interest rate at 20% per annum, with interest payable monthly and principle is due five years from the date of advance. As part of the above agreement, the Company is required to issue 13,157,895 shares of restricted common stock to 236. These shares are valued at $0.01 which was the share price at commitment date. As of September 30, 2013, the Company recorded a note payable in the amount of $48,385 and $131,579 in deferred non-cash debt issuance costs which are amortized over five years. The balance of these deferred non-cash debt issuance costs at September 30, 2013 was $128,767.

On June 28, 2012, the Company entered into a joint venture with Energy Technology Services Co., Ltd., ("ETS"), a Taiwan corporation, for the manufacture, distribution, leasing/sale, installation and maintenance of ETS’s Hydrogen Generator Burning Systems. Under the final structure of the joint venture, the Company is the managing partner and ETS is the operational partner and managing agent in Asia for all business conducted on behalf of the joint venture. All revenue and contracts from the joint venture will be booked by Turbine Truck Engines with a 50/50 sharing of net profit between the Company and ETS after “reasonable expenses”. The Company will purchase and own all assets, leases and contracts generated by the joint venture. There has been no activity.

The Company has entered into various other agreements that have been disclosed in previous 10K and 10Q filings. These agreements have been put on hold but will be further pursued as adequate funding is generated.

 

During the year ended December 31, 2003, the Company signed a note payable with a related party in the amount of $15,000. The balance at September 30, 2013 and December 31, 2012 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, 2013.

As of September 30, 2013 and December 31, 2012, accounts payable included $12,220 for various accounting services, due to the Company’s Chief Accounting Officer who is also a director of the Company.

On March 15, 2012, the Board of Directors resolved to issue 500,000 shares of Series A Convertible Preferred shares to Michael Rouse, the Company’s President and CEO, in exchange for $335,285 of unpaid and accrued salary.

During the year ended December 31, 2012, the Company’s CEO advanced the Company $1,430 with no specific terms of repayment and no stated interest rate.

The Company entered into a Debt Settlement Agreement (the “Agreement”) dated April 27, 2012 with Alpha Engines Corporation (“Alpha”). The Company and Alpha entered into a License Agreement dated December 31, 2001, pursuant to which the Company has accrued royalties and other payables to Alpha in the amount of $1,508,250 as of the date of the Agreement. Pursuant to the terms of the Agreement, Alpha agreed to accept 250,000 shares of the company common stock in full settlement of the above royalties and other payables and further agreed to reduce the annual license royalty payable under the License Agreement from $250,000 per year to $25,000 per year, retroactive to January 1, 2012, with the first payment being due January 1, 2013. On April 27, 2012, the Company recorded the difference between the fair value of the common stock issued to Alpha and the settlement of the accrued royalties and other payables as a capital contribution from Alpha to the Company, which is included in additional paid-in capital at December 31, 2012. As of September 30, 2013, the Company has not made a payment under this license agreement and has recorded total accrued royalty fees of $43,750.

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.

 

In April 2012, the Company issued a convertible promissory note for $42,500. The note pays interest at 8% per annum, and principal and accrued interest is due on the maturity date of January 18, 2013. The conversion option price associated with the note has a 41 percent discount to the market price of the stock. The market price is based on the average of the three lowest trading prices during a ten day period prior to conversion. The note is convertible at any time. As a result of the variable feature associated with the conversion option, pursuant to ASC Topic 815, the Company bifurcated the conversion option, and utilized the black Scholes model to determine the fair value of the conversion option. At the issuance date, the Company recorded a debt discount and derivative liability of $42,500 and $62,225, respectively. The debt discount will be amortized over the life of the note, and the Company recognized approximately $6,900 of interest expense related to amortization during 2013. As of September 30, 2013, the Company has converted $42,500 of debt into 5,538,855 shares of common stock. As of September 30, 2013 the discount related to the note was fully amortized. The derivative liability has been adjusted to fair value each reporting period with unrealized gain (loss) reflected in other income and expense.

In July 2012, the Company issued a convertible promissory note for $42,500. The note pays interest at 8% per annum, and principal and accrued interest is due on the maturity date of January 18, 2013. The conversion option price associated with the note has a 41 percent discount to the market price of the stock. The market price is based on the average of the three lowest trading prices during a ten day period prior to conversion. The note is convertible at any time. As a result of the variable feature associated with the conversion option, pursuant to ASC Topic 815, the Company bifurcated the conversion option, and utilized the black Scholes model to determine the fair value of the conversion option. At the issuance date, the Company recorded a debt discount and derivative liability of $42,500 and $48,384, respectively. As of September 30, 2013, the Company has converted $42,500 of debt into 12,880,124 shares of common stock and $1,300 of accrued interest into 565,217 shares of common stock. As of September 30, 2013 the discount related to the note was fully amortized. The derivative liability has been adjusted to fair value each reporting period with unrealized gain (loss) reflected in other income and expense.

In October 2012, the Company issued a convertible promissory note for $27,500. The note pays interest at 8% per annum, and principal and accrued interest is due on the maturity date of July 18, 2013. The conversion option price associated with the note has a 41 percent discount to the market price of the stock. The market price is based on the average of the three lowest trading prices during a ten day period prior to conversion. The note is convertible at any time. As a result of the variable feature associated with the conversion option, pursuant to ASC Topic 815, the Company bifurcated the conversion option, and utilized the black Scholes model to determine the fair value of the conversion option. At the issuance date, the Company recorded a debt discount and derivative liability of $27,500 and $28,950, respectively. As of September 30, 2013, the Company has converted $27,500 of debt into 10,200,000 shares of common stock. As of September 30, 2013 the discount related to the note was fully amortized. The derivative liability has been adjusted to fair value each reporting period with unrealized gain (loss) reflected in other income and expense.

On April 24 2012 (the “Closing date”), the Company issued a convertible promissory note for $278,000. The lender funded $75,000 to the Company, and the lender at their discretion may fund additional amounts to the Company. The note matures one year from the closing date. If the Company pays the note within 90 days of the closing date, the interest rate is 0%. If the note is not paid within 90 days of the closing date, a one-time interest charge of 5% will be applied to the unpaid principal amount. The conversion option price associated with the note is the lesser of $0.10 or 70% of the lowest trade price in the 25 trading days previous to any conversion. The note is convertible at any time. As a result of the variable feature associated with the conversion option, pursuant to ASC Topic 815, the Company bifurcated the conversion option, and utilized the black Scholes model to determine the fair value of the conversion option. At the issuance date, the Company recorded a debt discount and derivative liability of $75,000 and $100,415, respectively. The debt discount will be amortized over the life of the note, and the Company recognized $59,657 of interest expense related to amortization through 2013. The derivative liability has been adjusted to fair value each reporting period with unrealized gain (loss) reflected in other income and expense.

In February 2013, the Company issued a convertible promissory note for $32,500. The note pays interest at 8% per annum, and principal and accrued interest is due in November 2013. The conversion option price associated with the note has a 41 percent discount to the market price of the stock. The market price is based on the average of the three lowest trading prices during a ten day period prior to conversion. The note is convertible at any time. As a result of the variable feature associated with the conversion option, pursuant to ASC Topic 815, the Company bifurcated the conversion option, and utilized the black Scholes model to determine the fair value of the conversion option. At the issuance date, the Company recorded a debt discount and derivative liability of approximately $32,500 and $53,900, respectively. The debt discount was amortized over the life of the note, and the Company recognized $32,500 of interest expense related to amortization during 2013 and approximately $15,000 of interest expenses as a pre-payment penalty. This note was fully repaid as of September 30, 2013. The derivative liability has been adjusted to fair value each reporting period, with unrealized gain (loss) reflected in other income and expense.

For the nine months ended September 30, 2013, the unrealized loss on the above derivatives was $120,000.

Liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of September 30, 2013 and December 31, 2012 related to the above derivative liability are as follows:

The Company’s derivative liabilities are classified within Level 2 of the fair value hierarchy. The Company utilizes the Black-Scholes Option Pricing Model to value the derivative liabilities utilizing observable inputs such as the Company’s common stock price, the exercise price of the warrants, and expected volatility, which is based on historical volatility. The Black-Scholes model employs the market approach in determining fair value.

 

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 and nine month periods ended September 30, 2013 and 2012 and for the period from November 27, 2000 (Date of Inception) through September 30, 2013, the Company had 6,665,413, 5,405,413, 6,665,413, 5,405,413 and 6,665,413 potentially dilutive common stock options and warrants, respectively, which were not included in the computation of loss per share. Additionally, convertible notes with a face amount of $27,223 can convert into approximately 2,991,538 shares of common stock at September 30, 2013.

On October 20, 2013, the Company entered into a note agreement with 2367416 Ontario, Inc., a Canadian company (“236”), whereby 236 agrees to provide financing to the Company in the amount of CAN $25,000 for working capital needs. The agreement provides for interest rate at 20% per annum, with interest payable monthly and principle is due five years from the date of advance. As part of the above agreement, the Company is required to issue shares of restricted common stock to 236. These shares are valued at $0.008 which was the share price at commitment date. The Company will record a note payable to 236 and deferred non-cash debt issuance costs which are amortized over five years.

 

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.

Turbine Truck Engines, Inc. is an American clean-air technology company dedicated to identifying, developing and commercializing important scientific innovations designed to dramatically enhance both environmental conservation and cost savings in how the world consumes energy.

We are a development-stage company and not yet generating any revenues. We are currently working on the development of three (3) separate revolutionary technologies: (a) Hyrdrogen Production Burner System (HPBS); (b) Detonation Cycle Gas Turbine Engine (DCGT); and (c) the Gas To Methanol Technology (GTM).

The Company is currently concentrating its focus on the development of its Hydrogen Production Burner Systems, as this technology is commercialized and ready for market. The HPBS is an efficient methanol to hydrogen production technology which utilizes a steam reformation process, employs a proprietary chemical catalyst and a unique low temperature pyrolytic reaction to convert common methanol into clean-burning hydrogen gas on-demand for immediate on-site use – no storage of hydrogen required.

 

This hydrogen generator system is applicable to a wide array of industrial boilers and steam generators as well as other various residential and commercial applications. The efficiency of the Hydrogen Generator and burner unit could save the end user 30-60% on their energy costs as compared to the current sources of energy such as electricity, heavy oils or natural gas. The hydrogen generator also eliminates the cost and need for high pressure storage tanks as it generates the hydrogen on demand.

 

On May 28, 2013, the Company entered into Lease Agreement dated with Fujian Xinchang Leather Company Limited, a Chinese company (“Fujian”), whose address is Jinjiang City, Fujian, China Ying Lin Zhenxin Chang Industrial Park (the “Plant”) for the lease of a Hydrogen boiler combustion equipment system (the “Equipment”) to be installed at their Plant. The Unit price for the Equipment is RMB 4,800,000 Yuan (approximately $800,000 US). The term of the Lease is seven (7) years, and renews on an annual basis if not terminated. Once installation and proven energy efficiency are established, Fujian will post the performance bond of RMB 1 million Yuan and rental payments shall commence, and be paid monthly thereafter. Any termination of the Lease within the first six (6) years will entitle TTE to confiscate the entire performance bond.

 

On June 28, 2012, the Company entered into a joint venture with Energy Technology Services Co., Ltd., ("ETS"), a Taiwan corporation, for the manufacture, distribution, leasing/sale, installation and maintenance of ETS’s Hydrogen Generator Burning Systems. Under the final structure of the joint venture, the Company is the managing partner and ETS is the operational partner and managing agent in Asia for all business conducted on behalf of the joint venture. All revenue and contracts from the joint venture will be booked by Turbine Truck Engines with a 50/50 sharing of net profit between the Company and ETS after “reasonable expenses”. The Company will purchase and own all assets, leases and contracts generated by the joint venture.

 

On July 30, 2013, the Company signed an Agreement with 2367416 Ontario, Inc., a Canadian company (“236”), whereby 236 agrees to provide financing to the Company in the initial sum of CAN $450,000 and a maximum of CAN $10,000,000 in accordance with the terms of the Agreement. The financing to be provided is to be funded in tranches, and will have terms between three (3) and five (5) years, with each tranche being separately negotiated. As a part of the loan costs, 236 shall be issued restricted common stock equal to the issued and outstanding common shares of the Company at the time of the initial advance, with such shares being subject to a Lock Up/Leak Out Agreement to be negotiated between the parties. These shares are considered an additional cost in obtaining the financing and the value of these shares at the commitment date is recorded as a contra equity and amortized over five years.

 

During the nine months ended September 30, 2013, the Company, as part of the above agreement, is required to issue 124,000,000 shares of restricted common stock to 236. These shares are valued at $0.008 which was the share price at commitment date. As of September 30, 2013, the Company has issued 82,666,666 shares to 236 and recorded $661,333 in deferred non-cash debt issuance costs which are amortized over five years. The balance of these deferred non-cash debt issuance costs at September 30, 2013 was $638,866. The remaining 41,333,334 shares will be issued at a later date when the initial advance is fully funded. The Company recorded a common stock payable of $330,667 related to these shares at September 30, 2013.

On August 1, 2013, the Company entered into a note agreement with 2367416 Ontario, Inc., a Canadian company (“236”), whereby 236 agrees to provide financing to the Company in the amount of CAN $25,000 for working capital needs. The agreement provides for interest rate at 20% per annum, with interest payable monthly and principle is due five years from the date of advance. As part of the above agreement, the Company is required to issue 5,000,000 shares of restricted common stock to 236. These shares are valued at $0.02 which was the share price at commitment date. As of September 30, 2013, the Company recorded a note payable in the amount of $23,225 and $100,000 in deferred non-cash debt issuance costs which are amortized over five years. The balance of these deferred non-cash debt issuance costs at September 30, 2013 was $96,712.

On August 22, 2013, the Company entered into a note agreement with 2367416 Ontario, Inc., a Canadian company (“236”), whereby 236 agrees to provide financing to the Company in the amount of CAN $50,000 to pay off a convertible note the Company owed. The agreement provides for interest rate at 20% per annum, with interest payable monthly and principle is due five years from the date of advance. As part of the above agreement, the Company is required to issue 13,157,895 shares of restricted common stock to 236. These shares are valued at $0.01 which was the share price at commitment date. As of September 30, 2013, the Company recorded a note payable in the amount of $48,385 and $131,579 in deferred non-cash debt issuance costs which are amortized over five years. The balance of these deferred non-cash debt issuance costs at September 30, 2013 was $128,767.

We are continuing to work on 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. In July 2002, we acquired the license for the DCGT technology for the manufacture and marketing of heavy-duty highway truck 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.

On January 23, 2013 the Company entered into a Letter of Intent with BluGen, Inc., a California corporation (“BluGen”) for the purpose of setting the basis for the joint development of a natural gas to Methanol technology (“GTM Technology”). Under the terms of the Agreement, BluGen will work with the Company, and the inventor, Robert Scragg to recreate and expand upon the original designs created by Mr. Scragg and to re-develop a lab version and control system, among other things. These items are to be completed under a timetable that has been agreed upon by the parties.

Under this Process, the methane gas contained in natural gas is conveyed into an electromagnetic combustion and condensing chamber and combined with oxygen which has been passed through an electromagnetic field and pre-atomized. The atomized oxygen combines stoichiometrically with the methane gas in an exothermic reaction to produce Methanol gas. The Methanol gas is then condensed in the reactor to form liquid Methanol. We are currently working with Scragg to finalize the licensing for this process.

The parties have agreed to establish, at later date, a Joint Venture, wherein TTE will have 51% interest and BluGen will have a 49% interest, and into which the commercial application of the technology will be developed.

The financing for our development activities to date has come from the sale of common stock. The Company is looking to the credit facility provided by 236 for financing the HPBS Equipment development. The financing for the development of the GTM technology is to be provided by Blue Gen. The continued development of the DCGT engine and the Company’s working capital needs will continue to be funded largely from the sale of public equity securities with additional funding from a private placement or secondary offering and other traditional financing sources, including term notes and proceeds from sub-licensing agreements until such time that funds provided by operations are sufficient to fund working capital requirements.

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 ours.

Research and Development Costs – During the three months ended September 30, 2013 and 2012, research and development costs totaled $0 and $0, respectively.

Operating Costs – During the three months ended September 30, 2013 and 2012, operating costs totaled $102,993 and $168,118, respectively. The decrease of $65,152 was mainly attributable to an approximately $72,600 decrease in consulting expenses offset by an increase of $6,500 in payroll expenses.

Interest (Income) Expense - Net - During the years three months ended September 30, 2013 and 2012, net interest expense totaled $99,045 and $50,310, respectively. The increase of $48,735 was due to the Company amortizing the discount on convertible debt to interest expense during 2013 and issuing a note payable during 2013 with bears interest at 20% and approximately $15,000 of pre-payment penalty in connection with paying off a convertible note prior to its maturity.

The net loss for the three months ended September 30, 2013 and 2012 was $169,483 and $198,900, respectively. The decrease of $29,417 was mainly attributable to the decrease in operating expenses offset by the increase in interest expense as discussed above.

Research and Development Costs – During the nine months ended September 30, 2013 and 2012, research and development costs totaled $0 and $0, respectively.

Operating Costs – During the nine months ended September 30, 2013 and 2012, operating costs totaled $371,020 and $927,066, respectively. The decrease of $556,046 was mainly attributable to an approximately $531,200 decrease in consulting expenses and a decrease of approximately $8,200 decrease in travel expenses and $8,500 decrease in professional fees.

Interest (Income) Expense - Net - During the nine months ended September 30, 2013 and 2012, net interest expense totaled $204,299 and $103,264, respectively. The increase of $101,035 was primarily due to the Company amortizing the discount on convertible debt to interest expense during 2013 and issuing a note payable during 2013 with bears interest at 20% and approximately $15,000 of pre-payment penalty in connection with paying off a convertible note prior to its maturity.

The net loss for the nine months ended September 30, 2013 and 2012 was $695,319 and $995,004, respectively. The decrease of $299,685 was mainly attributable to the decrease in operating expenses offset by the increase in interest expense as discussed above.

As shown in the accompanying financial statements, for the nine months ended September 30, 2013 and 2012 and since November 27, 2000 (date of inception) through September 30, 2013, the Company has had net losses of $695,319, $995,004 and $18,226,726, respectively. As of September 30, 2013, 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. However, there can be no assurance that the Company will be able to raise capital or begin operations to achieve a level of profitability to continue as a going concern.

As previously mentioned, since inception, we have financed our operations largely from the sale of common stock. From inception through September 30, 2013 we raised cash of approximately $4,197,208 net of issuance costs, through private placements of common stock financings and $1,188,135 through the issuance of notes payable or convertible notes payable. Additionally, we have raised net proceeds from stockholder advances of $110,498.

Since our inception through September 30, 2013 we have incurred $3,882,494 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 September 30, 2013, we had an accumulated deficit of $18,226,726.

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.

We will be dependent upon the 236 Loan Agreement, our existing cash, together with anticipated net proceeds from any 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. 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 September 30, 2013 in accordance with the following schedule:

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.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

We believe that the following critical policies affect our more significant judgments and estimates used in preparation of our financial statements.

We account for stock option grants in accordance with US GAAP. Stock-based compensation cost recognized during the periods ended September 30, 2013 and 2012 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 relative grant date fair values estimated in accordance with US GAAP. The Company recognizes compensation expenses on a straight-line basis over the requisite service period.

Determination of the fair values of stock option grants at the grant date requires judgment, including estimating the expected term of the relevant grants and the expected volatility of the Company’s stock. Additionally, management must estimate the amount of stock option grants that are expected to be forfeited. The expected term of options granted represents the period of time that the options are expected outstanding and is based on historical experience of similar grants, giving consideration to the contractual terms of the grants, vesting schedules and expectations of future employee behavior. The expected volatility is based upon our historical market price at consistent points in a period equal to the expected life of the options. Expected forfeitures are based on historical experience and expectations of future employee behavior.

Furniture and equipment are recorded at cost and depreciated on a declining balance and straight-line basis over their estimated useful lives, principally two to seven years. Accelerated methods are used for tax depreciation. Maintenance and repairs are charged to operations when incurred. Betterments and renewals are capitalized. When furniture and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations.

The Company has incurred deferred offering costs in connection with raising additional capital through the sale of its common stock. These costs are capitalized and charged against additional paid-in capital when common stock is issued. If there is no issuance of common stock, the costs incurred are charged to operations.

The Company incurred deferred loan issuance costs in connection with entering into note agreements with its lender. These costs are paid with the Company’s restricted common shares and are valued at the commitment dates. They are recorded as a contra-equity and are amortized as interest expense over the life of the notes, which is five years.

Research and development costs are charged to operations when incurred and are included in operating expenses.

Other recent accounting standards issued by the FASB (including EIFTs), the AICPA and the Securities and Exchange Commission did and are not believed by management to have a material impact on the Company’s present or future financial statements.

 

 

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.

No change in the Company’s internal control over financial reporting occurred during the three months ended September 30, 2013, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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 September 30, 2013, 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 July 2013, the Company issued 11,357,144 shares of common stock for cash at prices ranging from $0.03 to $0.05 per share.

During July 2013, the Company issued 4,200,000 shares of common stock for conversion of notes payable at a price of $0.00189 per share.

During July 2013, the Company issued 200,000 shares of common stock for cash at a price of $0.01 per share.

During August 2013, the Company issued 30,000 shares of common stock for cash at a price of $0.01 per share.

During August 2013, the Company issued 4,448,276 shares of common stock for cash at prices ranging from $0.03 to $0.05 per share.

During August 2013, the Company issued 8,000,000 shares of common stock for conversion of notes payable at a price of $0.0021 per share.

During August 2013, the Company issued 41,333,333 shares of common stock for loan costs at a price of $0.008 per share.

During September 2013, the Company issued 59,491,228 shares of common stock for loan costs at a price ranging from $0.008 to $0.02.

The Company issued the common stock described above without registration pursuant to Section 4(2) of the Securities Act and Rule 506 promulgated thereunder.

 

There have been no defaults in any material payments during the covered period.

The Company does not have any other material information to report with respect to the three month period ended September 30, 2013.

** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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: