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EX-32.1 - EXHIBIT 32.1 - TURBINE TRUCK ENGINES INCex32-1.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
For the quarterly period ended September 30, 2012
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
For the transition period from , 200 , to , 200 .
 
Commission File Number 333-109118
 
Turbine Truck Engines, Inc.
(Exact Name of Registrant as Specified in its Charter)
     
Nevada
 
59-3691650
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)
 
46600 Deep Woods Road, Paisley Florida 32767
(Address of Principal Executive Offices)
(386) 943-8358
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(g) of the Act:
             
$.001 par value preferred stock
     
Over the Counter Bulletin Board
   
$.001 par value common stock
     
Over the Counter Bulletin Board
   
 
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):
             
Large accelerated filer
 
o
 
Accelerated filer
 
o
       
Non-accelerated filer
 
o
 
Smaller reporting company
 
x
  
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 67,091,966 shares of the Registrant’s $0.001 par value common stock outstanding as of September 30, 2012.
 
Documents incorporated by reference: none
 
 

 
 
Turbine Truck Engines, Inc.
(A Development Stage Company)
Contents
 
 
 

 
 
 
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.
 
 

 
 
Turbine Truck Engines, Inc.
(A Development Stage Enterprise)
 
Financial Statements
 
As of September 30, 2012 (unaudited) and December 31, 2011 and
for the three and nine months ended September 30, 2012 and 2011 (unaudited)
and the Period November 27, 2000 (Date of Inception)
through September 30, 2012 (unaudited)
 
Contents
 
Financial Statements:
 
 
 

 
 
 TURBINE TRUCK ENGINES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
           
             
   
September 30,
   
December 31,
 
   
2012
   
2011
 
ASSETS
 
(unaudited)
       
             
CURRENT ASSETS:
           
Cash
  $ 23,648     $ 11,638  
Prepaid expenses
    34,996       7,118  
Total Current Assets
    58,644       18,756  
                 
Furniture and equipment, net of accumulated depreciation of $51,133 (2012) and $47,863 (2011)
    18,786       7,056  
                 
Deposit for Global Hydrogen Energy Corp.
    197,500       -  
Total Other Assets
    197,500       -  
                 
                 
TOTAL ASSETS
  $ 274,930     $ 25,812  
                 
LIABILITIES AND STOCKHOLDERS DEFICIT
               
                 
CURRENT LIABILITIES:
               
Accounts payable, including related party payables of $12,220 (2012) and $12,220 (2011)
  $ 124,277     $ 116,290  
Accrued interest
    17,567       14,955  
Accrued payroll
    5,512       1,029  
Convertible notes, net
    66,166       8,315  
Note payable
    500       500  
Total Current Liabilities
    214,022       141,089  
                 
LONG-TERM LIABILITIES:
               
Derivative liability
    157,777       40,756  
Accrued expenses - long term
    71,100       277,850  
Accrued payroll - long term
    331,941       585,827  
Accrued royalty fees
    18,750       1,301,500  
Note payable to related party
    3,331       6,901  
Total Long-Term Liabilities
    582,899       2,212,834  
                 
STOCKHOLDERS DEFICIT
               
Series A Convertible Preferred Stock; $0.001 par value; 1,000,000 shares authorized; 500,000 (2012) and 0 (2011) shares issued and outstanding
    500       -  
Common stock; $0.001 par value; 99,000,000 shares authorized; 67,091,966 (2012) and 56,503,946 (2011) shares issued and outstanding
    67,091       56,503  
Additional paid in capital
    16,815,620       14,277,622  
Common stock payable
    245,000       3,650  
Prepaid consulting services paid with common stock
    (72,040 )     (82,728 )
Receivable for common stock
    (212,000 )     (212,000 )
Deficit accumulated during development stage
    (17,366,162 )     (16,371,158 )
Total Stockholders Deficit
    (521,991 )     (2,328,111 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT
  $ 274,930     $ 25,812  
 
The accompanying notes are an integral part of these financial statements.
 
 
 
2

 
 
TURBINE TRUCK ENGINES, INC.
                         
(A DEVELOPMENT STAGE ENTERPRISE)
                   
                   
 
                             
Period
 
                           
November 27,
 
   
For the Three Months Ended September 30,
   
For the Nine Months Ended September 30,
   
2000 (Date of Inception)
 
                           
through September 30,
 
   
2012
   
2011
   
2012
   
2011
   
2012
 
                               
Research and development costs
  $ -     $ -     $ -     $ 103,432     $ 3,882,494  
Operating costs
    168,118       501,402       927,066       1,710,529       12,709,157  
      168,118       501,402       927,066       1,813,961       16,681,651  
                                         
OTHER EXPENSE (INCOME)
                                       
Change in fair value of derivative liability
    (19,528 )     -       (35,326 )     -       (37,070 )
Interest expense
    50,310       -       103,264       6,988       721,581  
TOTAL OTHER EXPENSE (INCOME)
    30,782       -       67,938       6,988       684,511  
                                         
NET INCOME (LOSS)
  $ (198,900 )   $ (501,402 )   $ (995,004 )   $ (1,820,949 )   $ (17,366,162 )
                                         
                                         
NET INCOME (LOSS) PER COMMON SHARE, BASIC
  $ (0.00 )   $ (0.01 )   $ (0.02 )   $ (0.04 )   $ (0.75 )
                                         
WEIGHTED AVERAGE NUMBER OF
                                 
COMMON  SHARES OUTSTANDING, BASIC
    67,091,966       53,036,748       65,066,098       50,660,640       23,302,479  
 
The accompanying notes are an integral part of these financial statements.
 
 
3

 
 
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
               
Period
 
               
November 27,
 
   
For the Nine Months Ended September 30,
   
2000 (Date of
 
               
Inception) through
 
   
2012
   
2011
   
September 30, 2012
 
                   
CASH FLOWS FROM OPERATING ACTIVITIES:
                 
Net loss
  $ (995,004 )   $ (1,820,949 )   $ (17,366,162 )
Adjustments to reconcile net loss to net cash used in operating activites:
                 
Common stock and long-term debt issued for acquisition of license agreement
    -       -       2,735,649  
Common stock issued for services and amortization of common stock issued for services
    533,537       834,532       5,574,327  
      -       -          
Contribution from shareholder
    -       -       188,706  
Unrealized gain on derivative liability
    (35,326 )             (37,070 )
Amortization of beneficial conversion feature
    -       7,000       539,876  
Amortization of deferred loan costs
    -       -       24,750  
Write off of deferred offering costs
            -       119,383  
Write off of deferred non cash offering costs
            -       49,120  
Gain on disposal of fixed assets
            -       (1,965 )
Depreciation
    3,271       3,056       54,217  
Amortization of agency fee
            42,632       100,000  
Amortization of discount on notes payable
    100,899       -       134,757  
Decrease (increase) in prepaid expenses
    (27,878 )     4,227       (34,996 )
Increase (decrease) in:
                       
Accounts payable
    7,987       47,354       333,115  
Accrued expenses
    2,612       34,000       307,250  
Accrued payroll
    85,882       296,622       687,738  
Accrued royalty fees
    18,750       187,500       1,736,917  
Accrued interest
            -       17,567  
Net cash used by operating activities
    (305,270 )     (364,026 )     (4,836,821 )
                         
CASH FLOWS FROM INVESTING ACTIVITIES:
                       
Payment of agency fee rights
    -       -       (100,000 )
Issuance of notes receivable from stockholders
    -       -       (23,000 )
Deposit for Global Hydrogen Energy Corp.
    (197,500 )             (197,500 )
Repayment of notes receivable from stockholders
            -       22,095  
Advances to related party
            -       805  
Proceeds from sale of fixed assets
            -       2,500  
Purchase of fixed assets
    (15,000 )     (46,954 )     (68,538 )
Net cash used by investing activities
    (212,500 )     (46,954 )     (363,638 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES:
                       
Repayment of stockholder advances
    (5,000 )     -       (162,084 )
Advances from stockholders
    1,430       5,000       272,582  
Increase in deferred offering cossts
            -       (194,534 )
Proceeds from issuance of common stock
    373,350       236,320       4,251,143  
Proceeds from exercise of options
            -       45,000  
Debt issuance costs
            -       (19,750 )
Repayment of convertible notes payable
            -       (23,000 )
Proceeds from issuance of convertible notes payable
    160,000       50,000       1,054,750  
Net cash provided by financing activities
    529,780       291,320       5,224,107  
                         
Net (decrease) increase in cash
    12,010       (119,660 )     23,648  
                         
Cash, beginning of period
    11,638       128,264       -  
                         
Cash, end of period
  $ 23,648     $ 8,604     $ 23,648  
                         
SUPPLEMENTAL CASH FLOW INFORMATION:
                       
Cash paid for interest
  $ -     $ -     $ 21,477  
NON-CASH FINANCING AND INVESTING ACTIVITIES:
                       
Subscription receivable for issuance of common stock
  $ -     $ -     $ 29,090  
Option to acquire license for issuance of common stock
  $ -     $ -     $ 10,000  
Deferred offering costs netted against issuance of common stock under private placement
  $ -     $ -     $ 33,774  
Deferred offering costs netted against issuance of common stock
  $ -     $ -     $ 41,735  
Value of beneficial conversion feature of notes payable
  $ -     $ -     $ 19,507  
Deferred non-cash offering costs in connection with private placement
  $ -     $ -     $ 74,850  
Application of amount due from shareholder against related party debt
  $ -     $ -     $ 8,099  
Amortization of offering costs related to stock for services
  $ -     $ -     $ 25,730  
Settlement of notes payable in exchange for prepaid services
  $ -     $ -     $ 356,466  
Common stock issued in exchange for prepaid services
  $ 110,500     $ -     $ 2,454,664  
Common stock issued in exchange for accrued royalties
  $ 1,301,500     $ -     $ 1,718,167  
Common stock issued for accruals
    206,750               206,750  
Receivable issued for exercise of common stock options
  $ -     $ 200,000     $ 367,000  
Common stock issued in exchange for fixed assets
  $ -     $ -     $ 5,000  
Acquisition of agency fee intangible through accrued expenses
  $ -     $ -     $ 900,000  
Beneficial conversion fetaure on convertible notes
  $ -     $ 7,000     $ 531,561  
Conversion of convertible debt to equity (7,340,152 shares since inception)
  $ -     $ 50,000     $ 772,000  
Conversion of convertible debt to equity (1,326,292 shares since inception)
    44,201               44,201  
Common stock issued for accounts payable
  $ -     $ 90,313     $ 208,838  
Common stock issued for accrued payroll
  $ -     $ 15,000     $ 15,000  
Preferred stock issued for accrued payroll
    335,285               335,285  
Common stock payable for prepaid services
    245,000               245,000  
Issuance of common stock to employees
                    274,000  
Common stock issued for accrued expenses
                    29,400  
Derivative liability and debt discount
    160,000               160,000  
Write off uncollectible stock subscription receivable
  $ -     $ -     $ 155,000  
Write off of intangible asset and agency fee payable
  $ -     $ 900,000     $ 900,000  
 
The accompanying notes are an integral part of these financial statements.
 
 
4

 
 
Turbine Truck Engines, Inc.
(A Development Stage Enterprise)
 
 
For the Three and Nine Months Ended September 30, 2012 and 2011,
and the Period November 27, 2000 (Date of Inception)
through September 30, 2012 (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, 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.

The Company’s planned lines of business are 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.

Effective July 12, 2012, 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 299,000,000 shares of common stock, having a par value of $.001.

2. Financial Statements
 
In the opinion of management, all adjustments consisting only of normal recurring adjustments necessary for a fair statement of (a) the results of operations for the three and nine month periods ended September 30, 2012 and 2011 and the period November 27, 2000 (Date of Inception) through September 30, 2012, (b) the financial position at September 30, 2012 and December 31, 2011, and (c) cash flows for the nine month periods ended September 30, 2012 and 2011, and the period November 27, 2000 (Date of Inception) through September 30, 2012, 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, 2011. The results of operations for the three and nine month periods ended September 30, 2012 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 and nine months ended September 30, 2012 and since November 27, 2000 (date of inception) through September 30, 2012, the Company has had a net loss of $198,900, $995,004 and $17,366,162, respectively. These factors raise doubt about the Company’s ability to continue as a going concern. As of September 30, 2012, the Company has not emerged from the development stage. In view of these matters, the Company’s ability to continue as a going concern is dependent upon the Company’s ability to begin operations and to achieve a level of profitability. Since inception, the Company has financed its activities principally from the sale of public equity securities. The Company intends on financing its future development activities and its working capital needs largely from the sale of public equity securities with some additional funding from other traditional financing sources, including term notes and proceeds from sub-licensing agreements until such time that funds provided by operations are sufficient to fund working capital requirements. The financial statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
 
 
5

 
 
4. Commitments and Contingencies
 
The Company leased its corporate headquarters on a month-to-month basis. For the nine months ended September 2012 and 2011, rent expense was approximately $18,750 and $12,500, respectively.

The Company entered into a Cooperation Agreement (the “Agreement”) with Hydrogen Union Energy Co., Ltd. (“HUE”) for the purpose of the joint development of the hydrogen generator. Under the terms of the Agreement, HUE will provide hydrogen generators at cost to the Company for demonstration purposes. Once the Company purchases the first H2 generator and pays 90% of the purchase price, the Company will be given first refusal to act as agent for any future business relating to hydrogen generators with HUE’s technology in North America. The Company was to pay the cost of production of a 200 cubic meter H2 generator at 10,000,000 TWD ($338,000 USD as of September 30, 2012) for up to two machines. As previously disclosed, the Company is continuing negotiations with payment terms and accordingly no equipment has been received and no liability has been recorded as of September 30, 2012. At period end the Company was in negotiations with HUE’s parent corporation Energy Technology Services Co., Ltd. (“ETS”) and all agreements with ETS may potentially impact or supersede the agreement with HUE.

On January 12, 2012, the Company entered into an “Investment Intent” agreement with Energy Technology Services Company, Ltd. Pursuant to the agreement, both parties agreed to form a company, Global Hydrogen Energy (“GHE”). The Company has the option to purchase ten percent of the shares of GHE for $450,000, and another option to purchase up to 20% of all shares of GHE. As of September 30, 2012, GHE has not been formed, and the Company has made a good faith cash deposit of $197,500, which is included as a non-current asset at September 30, 2012. The Company does not have a firm commitment to fund the remaining option amount, and accordingly, a commitment liability was not recorded as of September 30, 2012 related to this agreement.

The Company (“TTE”) entered into a Joint Venture Agreement (the “Agreement”) dated July 11, 2012 with Energy Technology Services Co Ltd (“ETS”) for the purpose of the engaging both parties in the manufacture, leasing and /or sale of ETS’s hydrogen generator burning systems (the “Equipment”) in Asia.

The Agreement has a term of one (1) year and renews automatically if not otherwise terminated, provided however, all contracts signed through the joint venture will remain effective regardless of whether the joint venture is still in force. TTE will purchase and own all Equipment to be leased and will review and approve all lease contracts prior to the manufacture of the Equipment. TTE will be the employer of record for all employees of the Joint Venture and will be the sole signatory of all Joint Venture bank accounts. TTE will make monthly payments to the parties, if applicable. Under the Agreement, ETS is granted the right to market, sell, lease, and distribute the Equipment via Sale or Lease agreements in Asia. ETS will arrange for the manufacturing and on-time delivery and installation of the Equipment to order, and will be responsible for providing maintenance, training and services for all the Equipment. All lease and sales revenue is to be deposited into the TTE maintained JV account, and each party is to submit monthly invoices for their reasonable operating expenses. Net Profit of the JV is to be split 50/50 on a monthly basis, after payment of all reasonable operating expenses, taxes and interest. Each party retains the right to audit the other party’s books and records as related to the Joint Venture.

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 September 30, 2012 and December 31, 2011 is $1,901. This note payable was unsecured, non-interest bearing and has no specific repayment terms, however, payment is not expected prior to March 31, 2013.

As of September 30, 2012 and December 31, 2011, accounts payable included $12,220 due to a director of the Company for various accounting services.

During the year end December 31, 2011, the Company’s President advanced the Company $5,000 with no specific repayment terms or stated interest, as of September 30, 2012 $1,430 remains unpaid.

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.

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 September 30, 2012.

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

 
 
6. 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 nine month periods ended September 30, 2012 and 2011 and for the period from November 27, 2000 (Date of Inception) through September 30, 2012, the Company had 5,405,413, 4,555,413 and 5,405,413 potentially dilutive common stock options and warrants, respectively, which were not included in the computation of loss per share. Additionally, four convertible notes with face amounts totaling $160,000 can convert into approximately 7,779,349 shares of common stock at September 30, 2012.

7. Common stock for services
 
During the nine months ended September 30, 2012, the Company issued 2,150,000 shares of common stock to consultants and employees for various services. The Company recorded the stock issuances for services based on the fair value of the common stock at the respective commitment dates, and amortized the grant-date fair value of the shares over the estimated requisite service period. For the three and nine months ended September 30, 2012 and 2011, the Company recognized approximately $77,000 and $534,000 and $245,000 and $835,000 in compensation expense related to these issuances, respectively.
 
 
7

 
 
Additionally, as of September 30, 2012, included in common stock payable, are commitments to issue 1,500,000 shares of common stock. The amortization expense related to these commitments are included in the above compensation expense.

8. Series A Convertible Preferred Stock
 
On March 16, 2012, the Company created the Series A Convertible Preferred Stock (“Series A”). The Series A has the following features:
 
Par value is $.001.
 
1,000,000 shares authorized.
 
Voting rights on each matter submitted to common shareholders; 306 votes per each share of preferred stock held.
 
Convertible after 6 months from the above date on a ratio of one-to-one into common shares at the option of the preferred share holder.
 
9. Derivative liability
 
In November 2011, 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 August 9, 2012. 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$42,000 and $49,000, respectively. The debt discount was amortized over the life of the note, and the Company recognized approximately $34,000 of interest expense related to amortization during 2012. As of September 30, 2012 the discount related to the note was fully amortized. In June 2012, the convertible note converted into approximately 1,326,000 shares of common stock. At the conversion date, the amortized discount was fully recognized as interest expense. The derivative liability has been adjusted to fair value each reporting period, including the conversion date, with unrealized gain (loss) reflected in other income and expense.

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 approximately$42,000 and $62,000, respectively. The debt discount will be amortized over the life of the note, and the Company recognized approximately $25,600 of interest expense related to amortization during 2012. 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 approximately$42,500 and $48,000, respectively. The debt discount will be amortized over the life of the note, and the Company recognized approximately $12,700 of interest expense related to amortization during 2012. 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 approximately$75,000 and $100,000, respectively. The debt discount will be amortized over the life of the note, and the Company recognized approximately $27,800 of interest expense related to amortization during 2012. The derivative liability has been adjusted to fair value each reporting period with unrealized gain (loss) reflected in other income and expense.
 
 
8

 
 
As of September 30, 2012, the unrealized gain on the above derivatives was approximately $35,000.

Liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of September 30, 2012 and 2011 related to the above derivative liability are as follows:
 
   
Fair Value
Measurements at
September 30, 2012 (1)
   
Fair Value
Measurements
at December 31, 2011(1)
 
   
Using Level 2
   
Total
   
Using Level 2
   
Total
 
Liabilities:
                       
                                 
Derivative liabilities
 
$
(157,777
)
 
$
(157,777
)
 
$
(40,756
)
 
$
(40,756
)
Total liabilities
 
$
(157,777
)
 
$
(157,777
)
 
$
(40,756
)
 
$
(40,756
)
 
 
(1)
The Company did not have any assets or liabilities measured at fair value using Level 1 or Level 3 of the fair value hierarchy as of September 30, 2012 or 2011.
 
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.
 
10. Subsequent event
 
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 approximately$27,500 and $26,800, respectively.

In October 2012, $12,000 of convertible debt converted into 845,070 shares of common stock.
 
 
9

 
 

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.

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.

For the three months ended September 30, 2012 compared to the three months ended September 30, 2011

Operating Costs – During the three months ended September 30, 2012 and 2011, operating costs totaled $168,118 and $501,402, respectively. The decrease of $333,284 was mainly attributable to decreases in payroll expenses related to reduction of executive salaries pursuant to employment agreements, a reduction of stock compensation related to vested common stock issued pursuant to the above employment agreements and a reduction in royalty expense associated with the debt settlement agreement discussed in Note 5. These decreases were offset by an increase in consulting expenses related to common stock issued to consultants for various services.
 
 
10

 
 
Interest (Income) Expense - Net - During the three months ended September 30, 2012 and 2011, net interest expense totaled $50,310 and $0, respectively. The increase of $50,310 was primarily due to the Company amortizing the discount on convertible debt issued in the fourth quarter of 2011 and during 2012.

The net loss for the three months ended September 30, 2012 and 2011 was $198,900 and $501,402, respectively. The decrease of $302,502 was mainly attributable to the decrease in operating expenses offset by an increase in interest expense.

The trend in our operating expenses will depend on our ability to raise capital and fund our operations. We do expect the trend in consulting expenses to increase as we issue additional stock in-lieu of cash to fund operations. Salary expense should remain stable with employment agreements in place for our executives. Royalty expense will continue to decrease relative to comparable periods as a result of the debt settlement agreement discussed above.  Other income and expense could fluctuate significantly due to the increase or decrease in the market value of the derivative liability.  The change in value is driven by changes in the Company’s stock price.

For the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011

Research and Development Costs – During the nine months ended September 30, 2012 and 2011, research and development costs totaled $0 and $103,432, respectively. The decrease of $103,432 was mainly attributable to additional costs incurred for the testing of the DCGT engine in 2011.

Operating Costs – During the nine months ended September 30, 2012 and 2011, operating costs totaled $927,066 and $1,710,529, respectively. The decrease of $783,463 was mainly attributable to decreases in payroll expense, stock compensation, amortization expense, professional fees, and royalty expense, offset by an increase in consulting expenses.

Interest (Income) Expense - Net - During the nine months ended September 30, 2012 and 2011, net interest expense totaled $103,264 and $6,988, respectively. The increase of $96,276 was primarily due to the Company amortizing the discount on convertible debt to interest expense during 2012, as discussed above.

The net loss for the nine months ended September 30, 2012 and 2011 was $995,004 and $1,820,949, respectively. The decrease of $825,945 was mainly attributable to the decrease in operating expenses, and research and development expense, offset by increases in interest expense.

The trend in our operating expenses will depend on our ability to raise capital and fund our operations. We do expect the trend in consulting expenses to increase as we issue additional stock in-lieu of cash to fund operations. Salary expense should remain stable with employment agreements in place for our executives.

Liquidity and capital resources

As shown in the accompanying financial statements, for the three and nine months ended September 30, 2012 and 2011 and since November 27, 2000 (date of inception) through September 30, 2012, the Company has had net losses of $198,900, $995,004 and $17,366,162, respectively. As of September 30, 2012, 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. 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 September 30, 2012 we raised cash of approximately $4,057,000 net of issuance costs, through private placements of common stock financings and approximately $1,055,000 through the issuance of convertible notes payable.
 
 
11

 
 
Additionally, we have raised net proceeds from stockholder advances of approximately $111,000.

Since our inception through September 30, 2012 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, 2012, we had an accumulated deficit of $17,366,162 and working capital deficit of ($155,378).

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. However, product development will be contingent upon our ability to raise capital as needed.

We will be dependent upon our existing cash, together with anticipated net proceeds from a public offering and future debt issuances and private placements of common stock and potential license fees, to finance our planned operations through the next 12 months. We will continue to proceed in the design and testing phase of the DCGT engine during the next 12 months and will require additional funding to continue operations. Based on our anticipated growth, we plan to add several employees to our staff.

Additional capital may not be available when required or on favorable terms. If adequate funds are not available, we may be required to significantly reduce or refocus our operations or to obtain funds through arrangements that may require us to relinquish rights to certain or potential markets, either of which could have a material adverse effect on our business, financial condition and results of operations. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities would result in ownership dilution to our existing stockholders.

The Company may receive proceeds in the future from the exercise of warrants and options outstanding as of September 30, 2012 in accordance with the following schedule:
                 
   
Approximate
Number of
Shares
   
Approximate
Proceeds*
 
Non-Plan Options and Warrants
   
5,405,413
   
$
1,567,570
 

*
Based on weighted average exercise price.

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.

Critical Accounting Policies and Estimates

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.
 
 
12

 
 
We account for stock option grants in accordance with US GAAP. Stock-based compensation cost recognized during the periods ended September 30, 2012 and 2011 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.

We issue convertible debentures with features that are derivative liabilities. We follow the guidance pursuant to ASC Topic 815, which requires judgment in terms of bifurcating embedded features from the host contract. Additional judgment is required in terms of valuing the embedded features.

New Accounting Pronouncements

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.

Changes in Internal Control Over Financial Reporting
 
No change in the Company’s internal control over financial reporting occurred during the three months ended September 30, 2012, 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.

 
None.
 
13

 
 
 
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, 2012.

 
(a) Exhibits included herewith are:
     
31.1
 
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
   
31.2
 
Certification of the Principal Accounting Officer (This certification required as Exhibit 31 under Item 601(a) of Regulation S-K
   
32.1
 
Written Statements of the Chief Executive Officer, This certification required as Exhibit 32 under Item 601(a) of Regulation S-K is furnished in accordance with Item 601(b)(32)(iii) of Regulation S-K
   
32.2
 
Written Statements of the Chief Financial Officer and Principal Accounting Officer (This certification required as Exhibit 32 under Item 601(a) of Regulation S-K is furnished in accordance with Item 601(b)(32)(iii) of Regulation S-K
 
 
14

 
 
 
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:
             
   
TURBINE TRUCK ENGINES, INC.
   
       
Dated: November 21, 2012
 
By:
 
/S/ Michael Rouse
   
       
Chief Executive Officer and Chairman of the
Board (Principal Executive Officer and
Principal Financial Officer)
   
       
Dated: November 21, 2012
 
By:
 
/S/ Rebecca A. McDonald
   
       
Principal Accounting Officer
   
 
15