PINX:TRKP Quarterly Report 10-Q Filing - 2/29/2012

Effective Date 2/29/2012



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
 
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 29, 2012

o TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE EXCHANGE ACT
 
For the transition period from ___________ to _____________
 
Commission file number 000- 52630

TURKPOWER CORPORATION
 (Exact name of registrant as specified in its charter)

Nevada
 
26-2524571
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 
100 Park Avenue Suite 1600
New York, New York 10017
(Address of principal executive offices)
 
(212) 984-0628
(Issuer's telephone number)

Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer.  See definition of “accelerated filer” and “large accelerated filer” 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 Securities Exchange Act of 1934) (check one): Yes o  No x
 
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 162,300,414 shares of common stock, par value $0.001 per share, as of April 23, 2012.
 


 
 

 
 
 

 
TurkPower Corporation
Consolidated Balance Sheets
Unaudited
 
   
February 29,
2012
   
May 31,
2011
 
ASSETS
           
Current assets:
           
Cash
  $ 275,958     $ 217,312  
Loan receivable
    400,000       -  
Prepaid expenses
    13,332       10,000  
Assets of discontinued operations
    -       238,189  
Total current assets
    689,290       465,501  
                 
Assets of discontinued operations
    20,493       1,228,909  
                 
TOTAL ASSETS
  $ 709,783     $ 1,694,410  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Current liabilities:
               
Accounts payable and accrued expenses
  $ 223,715     $ 142,722  
Accrued interest
    664,430       214,630  
Related party payable
    90,165       -  
Derivative liabilities – short-term
    47,160       -  
Convertible debt – related party, net of unamortized discount of $- and $24,178 as of February 29, 2012 and May 31, 2011, respectively
    393,159       398,981  
Convertible debt, net of unamortized discount of $533,407 and $680,014 as of February 29, 2012, and May 31, 2011, respectively
    2,966,593       694,986  
Liabilities of discontinued operations
    2,311,309       1,340,539  
Total current liabilities
    6,696,531       2,791,858  
                 
Derivative liability – long-term
    369,368       -  
                 
Total liabilities
    7,065,899       2,791,858  
1                
Stockholders' Deficit:
               
                 
Preferred stock: $0.0001 par value; 10,000,000 shares authorized; no shares issued or outstanding
    -       -  
Common stock: $0.0001 par value; 300,000,000 shares authorized; 157,800,414 and 99,993,158 shares issued as of February 29, 2012 and May 31, 2011, respectively; 147,800,414 and 99,993,158 shares outstanding as of February 29, 2012 and May 31, 2011, respectively
    14,780       9,999  
Additional paid-in capital
    19,338,558       5,362,610  
Subscription receivable
    -       (70,000 )
Accumulated other comprehensive loss
    56,918       40,400  
Accumulated deficit
    (25,733,513 )     (6,437,477 )
Total stockholder’s deficit of TurkPower Corporation
    (6,323,257 )     (1,094,468 )
Non-controlling interest
    (32,859 )     (2,980 )
Total stockholders’ deficit
    (6,356,116 )     (1,097,448 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
  $ 709,783     $ 1,694,410  
 
See accompanying notes to the unaudited consolidated financial statements.
 
 
TurkPower Corporation
Unaudited
 
   
Three Months Ended
   
Nine Months Ended
 
 
 
February 29,
2012
   
February 28,
2011
   
February 29,
2012
   
February 28,
2011
 
 
 
 
   
 
   
 
   
 
 
Professional fees
    115,302       46,092       594,854       143,644  
Selling, general and administrative expenses
    147,756       89,089       1,034,215       115,330  
Total operating expenses
    263, 058       135,181       1,629,069       258,974  
                                 
Loss from operations
    (263, 058 )     (135,181 )     (1,629,069 )     (258,974 )
Other expenses (income):
                               
Derivatives loss (gain)
    (17,354 )     -       36,996       -  
Interest expense
    635,394       109,482       1,601,941       343,479  
Loss on extinguishment of debt
    751,843               751,843       -  
Total other expense
    1,369,883       109,482       2,390,780       343,479  
                                 
Loss from continuing operations
  $ 1,632,941     $ 244,663     $ 4,019,849     $ 602,453  
Loss from discontinued operations
  $ 12,025,723     $ 301,310     $ 15,306,066     $ 841,419  
Net loss
  $ 13,658,664     $ 545,973     $ 19,325,915     $ 1,443,872  
                                 
Net loss attributable to non-controlling interest
  $ 23,879     $ 603     $ 29,879     $ 1,683  
Net loss attributable to TurkPower Corporation
  $ 13,634,785     $ 545,370     $ 19,296,036     $ 1,442,189  
                                 
Basic and diluted loss per share:
                               
Loss from continuing operations
  $ (0.01 )   $ (0.002 )   $ (0.03 )   $ (0.005 )
Loss from discontinued operations
  $ (0.08 )   $ (0.003 )   $ (0.11 )   $ (0.007 )
Net loss per share
  $ (0.09 )   $ (0.005 )   $ (0.14 )   $ (0.012 )
                                 
Weighted average number of common shares outstanding – basic and diluted
    143,659,723       112,575,000       134,050,259       112,575,000  

See accompanying notes to the unaudited consolidated financial statements.
 
 
TurkPower Corporation
Consolidated Statement of Stockholders’ Deficit
For the nine months ended February 29, 2012
Unaudited

 
 
 
Number
 of
 Shares
   
Amount
   
Paid-in
Capital
   
Accumulated
Other
Comprehensive
Loss
   
Deficit
Accumulated
   
Subscription
Receivable
   
Non-
controlling
Interest
   
Total
 
Balance, May 31, 2011
    99,993,158     $ 9,999     $ 5,362,610     $ 40,400     $ (6,437,477 )   $ (70,000 )   $ (2,980 )   $ (1,097,448 )
Issuance of common stock for purchase of Mining Company
    40,000,000       4,000       11,221,000       -       -       -       -       11,225,000  
Issuance of warrants for purchase of Mining Company
            -       587,173       -       -       -       -       587,173  
Subscription receivable
    -       -       -       -       -       70,000       -       70,000  
Issuance of common stock with convertible debt
    3,021,363       302       439,696       -       -       -       -       439,998  
Beneficial conversion feature
    -       -       409,731       -       -       -       -       409,731  
Stock issued in conversion and extinguishment of  debt
    3,725,893       373       668,766                                       669,139  
Stock-based compensation
    1,060,000       106       649,582                                       649,688  
Translation adjustments
    -       -       -       16,518       -       -       -       16,518  
Net loss for the nine months ended February 29, 2012
    -       -       -       -       (19,296,036 )     -       (29,879 )     (19,325,915 )
Balance, February 29 , 2012
    147,800,414     $ 14,780     $ 19,338,558     $ 56,918     $ (25,733,513 )   $ -     $ (32,859 )   $ (6,356,116 )
 
See accompanying notes to the unaudited consolidated financial statements.
 
 
TurkPower Corporation
Consolidated Statements of Cash Flows
Unaudited
 
    Nine Months Ended  
 
 
February 29,
2012
   
February 28,
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss from continuing operations
  $ (4,019,849 )   $ (602,453 )
Adjustments to reconcile net loss to net cash provided by (used in) in operating activities:
               
Loss on derivatives
    36,996       -  
Amortization of deferred financing costs
    6,668       -  
Stock-based compensation
    759,688       28,534  
Amortization of debt discount
    1,197,496       234,552  
Loss on debt extinguishment
    751,843       -  
Changes in operating assets and liabilities:
               
Prepaid expenses
    10,000       -  
Accounts payable and accrued expenses
    640,804       286,108  
Cash used in continuing operations
    (616,354 )     (53,259 )
Cash used in discontinued operations
    (114,752 )     (392,205 )
CASH USED IN OPERATIONS
    (731,106 )     (445,464 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Loan receivable
    (400,000 )     -  
Cash used in discontinued operations
    (920,247 )     (625,574 )
CASH USED IN INVESTING ACTIVITIES:
    (1,320,247 )     (625,574 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Payment of deferred financing costs
    (20,000 )     -  
Proceeds from issuance of convertible debt
    2,135,000       -  
Payments on related party convertible debt
    (50,000 )     -  
Proceeds from issuance of related party debt
    -       50,000  
Payments on related party debt
    -       (12,500 )
Proceeds from sale of common stock
    70,000          
Cash provided by continuing operations
    2,135,000       37,500  
Cash provided by discontinued operations
    -       872,684  
CASH PROVIDED BY FINANCING ACTIVITIES
    2,135,000       910,184  
                 
EFFECT OF EXCHANGE RATES ON CASH
    (25,001 )     97,586  
                 
NET CHANGE IN CASH
    58,646       (63,268 )
CASH AT BEGINNING OF PERIOD
    217,312       64,974  
CASH AT END OF PERIOD
  $ 275,958     $ 1,706  
                 
SUPPLEMENTAL CASH FLOW INFORMATION
               
Cash paid for:
               
Interest
  $ 7,612     $ 78,755  
Income taxes
  $ -     $ -  
                 
NONCASH INVESTING AND FINANCING ACTIVITIES
               
Debt discount due to common stock issued with debt and beneficial conversion feature
  $ 849,729     $ -  
Debt discount due to derivative liabilities issued with convertible debt
  $ 176,983     $ -  
Conversion of convertible debt to equity
  $ 119,845          
Fair value of common stock issued to Sellers of the Mining Company
  $ 11,225,000     $ -  
Fair value of warrants issued to Sellers of the Mining Company
  $ 587,173     $ -  
 
See accompanying notes to the consolidated financial statements.
 
 
TurkPower Corporation
Notes to Consolidated Financial Statements
February 29, 2012
(Unaudited)
 
NOTE 1 –  ORGANIZATION AND OPERATIONS

TurkPower Corporation (“we”, “our”, “TurkPower” or the “Company”) is a Turkish-American consulting and service operations firm and junior mining company. TurkPower offers its domestic and international clients consulting services and plans to act as a full service operator for wind, hydro, solar, coal and geothermal energy parks in Turkey. In addition to its energy business, TurkPower aims to increase its involvement in the Turkish mining industry by acquiring and consolidating operational mines with proven reserves of iron ore, utilizing economies of scale to increase returns. TurkPower's strategy is to identify and evaluate properties with promising mineral potential, add further value through exploration, and then develop such properties either on its own or through collaborative agreements with industry partners having substantial experience and financial strength.

In November of 2011, the Company determined that it would cease all operations in Turkey and sell its Turkish subsidiary. During the quarter ended February 29, 2012, the Company impaired the entire Investment in the Mining Company.

NOTE 2 –  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying interim consolidated financial statements for the nine months ended February 29, 2012 and February 28, 2011 are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations realized during an interim period are not necessarily indicative of results to be expected for a full year. These financial statements should be read in conjunction with the information filed as part of the Company’s Annual Report on Form 10-K, which was filed on August 29, 2011.

Use of estimates

The preparation of financial statements 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 as well as the reported amount of revenues and expenses during the reporting period. Actual results could differ from these estimates.
 
Discontinued Operations
 
In accordance with ASC 205-20, Presentation of Financial Statements-Discontinued Operations (“ASC 205-20”), we reported the results of our Turkey operations as a discontinued operation. The application of ASC 205-20 is discussed in Note 4 “Discontinued Operations”.

Fair value of financial instruments

The carrying value of cash and cash equivalents, receivables, accounts payable and accrued expenses, and debt approximate their fair values because of the short-term nature of these instruments. Management believes the Company is not exposed to significant interest or credit risks arising from these financial instruments.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company utilizes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable.
 
 ●
Level 1 —
Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets.
 ●
Level 2 —
Quoted prices for similar assets and liabilities in active markets; quoted prices included for identical or similar assets and liabilities that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. These are typically obtained from readily-available pricing sources for comparable instruments.
 ●
Level 3 —
Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s own beliefs about the assumptions that market participants would use in pricing the asset or liability, based on the best information available in the circumstances.
 
 
The following table presents the derivative financial instruments, the Company’s only financial liabilities measured and recorded at fair value on the Company’s consolidated balance sheets on a recurring basis, and their level within the fair value hierarchy as of February 29, 2012:

 
 
 
 Amount
   
 
Level 1
   
Level 2
   
Level 3
 
Embedded conversion derivative liability
  $ 47,160     $ -     $ -     $ 47,160  
Warrant derivative liabilities
    369,368       -       -       369,368  
Total
  $ 416,528     $ -     $ -     $ 416,528  

The following table provides a summary of the changes in fair value, including net transfers in and/or out, of the derivative financial instruments, measured at fair value on a recurring basis using significant unobservable inputs:

 
 
 
 
Balance at May 31, 2011
 
$
-
 
Fair value of embedded conversion derivative liability at issuance
   
65,616
 
Fair value of warrant derivative liabilities at issuance
   
371,559
 
Change in fair value of warrant derivative liabilities included in loss on debt extinguishment
   
66,250
 
Unrealized derivative gains included in other income (expense)
   
(86,897)
 
Balance at February 29, 2012
 
$
416,528
 

The fair value of the derivative liabilities are calculated at the time of issuance and the Company records a derivative liability for the calculated value. Changes in the fair value of the derivative liabilities are recorded in other income (expense) in the consolidated statements of operations.

As at February 29, 2012, the derivatives were valued using the Black-Scholes option pricing model with the following assumptions: stock price on the measurement date of $0.17, term of 0.31 years – 2.48 years, expected volatility of 164%-184%, and discount rates of 0.09% and 0.24%. The Company has considered the provisions of ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in each debenture could result in the note principal being converted to a variable number of the Company’s common shares.
 
Reclassification

Certain accounts in the prior period were reclassified to conform to the current period financial statements presentation.

NOTE 3 –  GOING CONCERN

As shown in the accompanying consolidated financial statements, the Company had net losses of $19,325,915 for the nine months ended February 29, 2012 and had a working capital deficit as of February 29, 2012 of $6,007,241. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

The Company intends to raise additional working capital either through debt or equity financing. The consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

NOTE 4 –  DISCONTINUED OPERATIONS
 
In November of 2011, the Company determined that it would cease all operations in Turkey and sell its Turkish subsidiary, including the Investment in the Mining Company. As a result, the Company has identified the assets and liabilities of the Turkish subsidiary as assets of discontinued operations at February 29, 2012 and has segregated its operating results and presented them separately as a discontinued operation for all periods presented.
 
 
A summarized operating result for discontinued operations is as follows:
 
   
Three Months Ended
   
Nine Months Ended
 
 
 
February 29,
2012
   
February 28,
2011
   
February 29,
2012
   
February 28,
2011
 
 
 
 
   
 
   
 
   
 
 
Revenues
  $ -     $ 13,755     $ 9,988     $ 47,692  
Selling, general and administrative expenses
    (71,364 )     (103,145 )     (1,057,907 )     (532,900 )
Impairment of Investment in Mining Company
    (11,898,041 )     -       (13,859,231 )     -  
Total operating expenses
    (11,969,405 )     (103,145 )     (14,917,138 )     (532,900 )
Loss from operations
    (11,969,405 )     (89,390 )     (14,907,150 )     (485,208 )
Other income (expense)
                               
Interest expense, net
    (58,939 )     (114,625 )     (252,063 )     (260,667 )
Gain on extinguishment of debt
    -       -       115,930       -  
Foreign currency gain (loss)
    2,621       (97,295 )     (262,783 )     (95,544 )
Total other expense
    (56,318 )     (211,920 )     (398,916 )     (356,211 )
Loss from discontinued operations
  $ (12,025,723 )   $ (301,310 )   $ (15,306,066 )   $ (841,419 )
 
The losses from discontinued operations above do not include any income tax effect as the Company was not in a taxable position due to its continued losses and a full valuation allowance

Summary of assets and liabilities of discontinued operations is as follows:
 
 
 
February 29, 2012
   
May 31, 2011
 
Cash
  $ -     $ 129,739  
Receivables
    -       64,465  
Prepaid expenses and other current assets
    -       43,985  
Total current assets of discontinued operations
    -       238,189  
Investment in Mining Company, at cost
    -       1,206,869  
Property and equipment, net
    20,493       22,040  
Total assets of discontinued operations
  $ 20,493     $ 1,467,098  
                 
                 
Accounts payable and accrued expenses
  $ 1,338,546     $ 393,231  
Accrued interest
    150,607       304,542  
Short-term debt, net
    822,156       642,766  
Total current liabilities of discontinued operations
  $ 2,311,309     $ 1,340,539  

Investment in Mining Company, at cost

On April 29, 2010, the Company entered into a nonbinding share transfer and shareholders agreement with Endeks Holding and Avrasya Yapi for the purchase of 50% of their ownership in Exxaro Madencilik Sanayi ve Ticaret A.S. Company (“Exxaro”). Exxaro’s principal asset is an iron ore mine.

On June 30, 2011, the Company entered into a Share Purchase Agreement (the “Mine Purchase Agreement”) with Avrasya Yapi Yaturum Hizmetleri A.S. (the “Seller”). Pursuant to the Mine Purchase Agreement, the Company agreed to acquire from the Seller 50% of the Seller’s shares (“Shares”) in Maksor Madencilik Sanayi Ve Ticaret Anonim Sirketi (the “Mining Company”, previously known as Exxaro Madencilik Sanayi ve Ticaret A.S. prior to its name change on May 17, 2011) for cash, and the issuance of certain TurkPower common shares and warrants in accordance with the Mine Purchase Agreement.

In accordance with the Mine Purchase Agreement, the Company issued the shareholders of the Seller (the “25,000,000 common shares on July 12, 2011 which were valued at $0.32 per share, the closing price on that day for a total value of $8,000,000. Also, in accordance with the Mine Purchase Agreement, on September 16, 2011, the Company issued the Holders 15,000,000 common shares which were valued at $0.215, the closing price on that day for a total value of $3,225,000.

In accordance with the Mine Purchase Agreement, the Company issued the Holders 3,400,000 warrants to purchase common shares on September 14, 2011 which were valued at $587,173.  The warrants were valued using the Black-Scholes option pricing model on the issuance date with the following assumptions: stock price on the measurement date of $0.18; term of 3 years; expected volatility of 171% and discount rate of .35%.
 
 
The Company reviews its investment in the Mining Company for impairment on an annual basis, or as events or circumstances might indicate that the carrying value of the investment may not be recoverable. As at February 29, 2012, the Company determined that its investment in the Mining Company was fully impaired.  As a result, the Company recorded an impairment of $13,859,231on the investment in Mining Company.

Short-term debt

On April 27, 2010, the Company’s Turkish subsidiary borrowed €450,000 ($555,692) from a third party. The loan is unsecured, bears annual interest at 25.0% and was payable in full on October 27, 2010. The annual interest rate increased to 60% on October 28, 2010, when the loan became in default. On August 2, 2011, the Turkish subsidiary and the lender cancelled the previous loan agreement and agreed to terms for the repayment of the €450,000 short-term debt and related interest under which the Turkish subsidiary agreed to pay the lender €200,000 on August 15, 2011, and €100,000 each month thereafter through December 15, 2011 after which the Turkish subsidiary would have paid the lender €600,000 in aggregate. In addition the Company agreed to issue the lender 300,000 common shares. The Turkish subsidiary did not make any of the scheduled payments to the lender. While delinquent, the Turkish subsidiary is required to pay 2.5% interest per month on the €600,000 loan to the lender.

The Company evaluated this debt modification under the Financial Accounting Standards Board Accounting Standards Codification 470-50 and determined that the modification was substantial and the revised terms constituted a debt extinguishment. As a result, the Turkish subsidiary recognized a gain on debt extinguishment of $115,930 representing the difference in the carrying value of the debt immediately prior to the modification of $1,016,915, consisting of $645,660 (€450,000) and $371,255 of accrued interest, and the fair value of the note immediately after the extinguishment determined to be $821,485 (€600,000) less the fair value of the shares which are owed to the lender of $79,500. The Turkish subsidiary also recognized a discount on the debt of $39,395 for imputed interest on the new note. The Turkish subsidiary is amortizing the note discount through the December 15, 2011 term of the note, and recorded amortization expense of $7,879 and $39,395 during the three and nine months ended February 28, 2012.
 
NOTE 5 –  CONVERTIBLE DEBT

Six-Month Secured Convertible Debenture issued with warrants

On August 22, 2011, the Company issued a $250,000 secured convertible debenture to a third party together with 1,136,363 common shares  and 1,850,000 warrants  to other entities controlled by the noteholder. As security, the Company granted the third party a first priority lien on all of the assets of the Company. The secured debenture bears annual interest at 18%, matures at the earlier of 1) six months and 2) upon the Company’s receipt of $500,000 of debt or equity proceeds and, together with any unpaid interest, are convertible into common shares at a conversion rate of $0.25 per share.

The relative fair value of the 1,136,363 shares of $73,017 and the fair value of the warrant liabilities and embedded conversion derivative liabilities of $300,876 was recognized as a discount to the full amount of the debt with the difference of $123,893 being recognized as a “day 1” derivative loss. The debt discount is accreted to interest expense over the life of the Secured Debenture

1,100,000 of the warrants have a one year term, 750,000 of the warrants have a three year term, and all 1,850,000 warrants are exercisable at $0.25 per share. In the event the Company raises equity at less than $0.25 per share or convertible debt which may be converted into common shares at a conversion rate of less than $0.25 per share, the Holder and the Holder Entities shall receive the same terms as the terms of the new financing arrangement (which could decrease the conversion rate of the convertible debt and could decrease the exercise price of the warrants). As a result, the Company determined that the conversion feature of the Secured Debenture and related warrants are derivative liabilities (see Note 2).

Debt Modification

On February 29, 2012, the Company entered into an agreement with the holder to extend the maturity date of the secured debenture to June 22, 2012 in exchange for 3,250,258 common shares.  Additionally, the 1,100,000 1-year warrants issued in connection with the secured debenture were modified by (i) extending its expiration date for another twelve months to September 1, 2013 (ii) lowering the exercise price from $0.25 to $0.1275 per warrant share and (iii) increasing the number of common shares convertible from 1,100,000 shares to 2,200,000 shares.

The Company evaluated the modification and determined that it was substantial and was therefore accounted as an extinguishment of debt.  Consequently, the fair value of the common shares of $549,294, the fair value of the additional warrants and the incremental fair value of the modified warrants of $202,549 was recorded as loss on debt extinguishment during the nine months ended February 29, 2012.  Simultaneously, the Holder converted $6,816 of the interest owed into 24,742 common shares.
 
 
Fiscal year 2012 One Year Term Debentures
 
On various dates from June 1, 2011 to February 29, 2012, the Company issued convertible debentures totaling $1,995,000 to third party and related party investors together with 1,995,000 common shares ($20,000 of these convertible debentures were issued to a related party – See Note 6). The convertible debentures bear annual interest at 18%, mature in one year and, together with any unpaid interest, are convertible into common shares at a conversion rate of $0.25 per share.

The Company issued $60,000 of the convertible notes along with 60,000 common shares for services and recorded stock compensation expense of $119,500 (of which $39,500 was related party – see Note 6) based on the fair value of the common stock into which it could be converted. The Company also issued $50,000 of convertible notes for services to a third party and recorded $50,000 of expense based on the fair value of the services provided, and recorded stock-based compensation of $8,750 for the 50,000 common shares issued to the third party.  The relative fair value of the remaining 1,885,000 common shares at the time of issuance was $366,980 and was recorded as a debt discount with a corresponding increase in equity. The discount is amortized to interest expense over the terms of the debentures using the effective interest method.

The convertible debentures were analyzed for a beneficial conversion feature at which time it was concluded that a beneficial conversion feature existed for all of the convertible debentures. The beneficial conversion feature was measured using the commitment-date stock price and was determined to be $409,731. This amount was recorded as a debt discount and is being amortized to interest expense over the terms of the debentures.

The Company analyzed the convertible debentures for derivative accounting consideration and determined that derivative accounting does not apply to these instruments.

Fiscal year 2011 One Year Term Debentures

On various dates from March 7, 2011 to May 31, 2011, the Company issued convertible debentures totaling $1,018,159 to third party and related party investors together with 1,018,159 common shares ($143,159 of these convertible debentures were issued to a related party, of which $50,000 was paid on November 3, 2011). (See Note 6.) The convertible debentures bear annual interest at 18%, mature in one year and, together with any unpaid interest, are convertible into common shares at a conversion rate of $0.25 per share. The relative fair value of the 1,018,159 common shares at the time of issuance was $255,814 and was recorded as a debt discount with a corresponding increase in equity. The discount is amortized to interest expense over the terms of the debentures using the effective interest method.

The convertible debentures were analyzed for a beneficial conversion feature at which time it was concluded that a beneficial conversion feature existed for all of the convertible debentures. The beneficial conversion feature was measured using the commitment-date stock price and was determined to be $509,114. This amount was recorded as a debt discount and is being amortized to interest expense over the terms of the debentures.

The Company analyzed the convertible debentures for derivative accounting consideration and determined that derivative accounting does not apply to these instruments

On January 6, 2012, an investor converted $100,000 into 450,893 of the Company’s common shares. The unamortized discount of $38,483 was expensed in the current period as interest expense.

Fiscal year 2010 One Year Term Debentures

On various dates from December 1, 2009 to May 31, 2010, the Company issued convertible debentures totaling $800,000 to third party and related party investors together with 800,000 common shares ($300,000 of these convertible debentures were issued to a related party). The Company repaid $20,000 of these convertible notes during fiscal year 2011. The convertible debentures bear annual interest at 18%, mature in one year and, together with any unpaid interest, are convertible into common shares at a conversion rate of $0.25 per share. The relative fair value of the 800,000 common shares at the time of issuance was $130,662 and was recorded as a debt discount with a corresponding increase in equity. The discount was amortized to interest expense over the terms of the debentures using the effective interest method and was fully amortized during fiscal year 2011.

The convertible debentures were analyzed for a beneficial conversion feature at which time it was concluded that a beneficial conversion feature existed for convertible debentures totaling $275,000. The beneficial conversion feature was measured using the commitment-date stock price and was determined to be $192,065. This amount was recorded as a debt discount and amortized to interest expense over the terms of the debentures, and was fully amortized during fiscal year 2011.

The Company analyzed the convertible debentures for derivative accounting consideration and determined that derivative accounting does not apply to these instruments.

At February 29, 2012, all $780,000 of the convertible debentures remain unpaid and are incurring annual interest of 20%. These debentures are currently in default.
 
 
For the nine months ended February 29, 2012 and February 28, 2011, amortization expense recorded to interest amounted to $1,197,496 and $234,552, respectively.
 
NOTE 6 –  RELATED PARTY TRANSACTIONS

On July 8, 2011, the Company issued a shareholder $20,000 of convertible debt and 20,000 shares of common stock for services and recorded stock compensation expense of $39,500 based on the fair value of the common stock which could be converted. See Note 5.

On November 3, 2011, the Company paid $50,000 of convertible debt owed to a related party. See Note 5.

The Turkish subsidiary of the Company received certain advances during fiscal year 2012 and 2011 from a shareholder.  As of February 29, 2012 and May 31, 2011, the amounts owed to this shareholder were $0 and $41,206, respectively and are recorded as liabilities in discontinued operations.

NOTE 7 –  STOCKHOLDERS’ EQUITY

In June 2011, the Company received $70,000 for the sale of 700,000 common shares of stock, which were issued during the year ended May 31, 2011.

On various dates beginning after June 1, 2011, the Company issued 950,000 fully vested common shares to consultants and an employee for services provided to the Company and recorded the stock-based compensation of $188,250 which is equivalent to the fair value of the shares at the date of grant.

On April 13, 2011 the Company granted a Director of the Company 2,000,000 common shares which will vest after 18 months of continuous service for the Company as a Director. The fair value of these shares amounted to $710,000 of which $354,351 was recognized as stock-based compensation during the nine months ended February 29, 2012. The unamortized stock-based compensation for these shares is $355,649.

NOTE 8 –  STOCK OPTIONS AND WARRANTS

Stock options

On August 29, 2011, the Company issued 10,500,000 options to purchase shares of its common stock to a member of management and two directors of the Company. The options have a ten year term and are not exercisable until the earliest of the Company’s achieving a market capitalization of at least $150 million or the date the Company’s annual earnings before interest, taxes and depreciation is at least $7,500,000 in accordance with the stock option award agreements. The option grant date fair value was determined to be $2,291,253. The Company has determined that these performance criteria are not probable at February 29, 2012, therefore the Company has not recorded compensation expense related to these stock options during the nine months ended February 29, 2012. In the event there is a change of control, the stock options shall immediately vest.

Stock option activity is presented in the table below:

   
Number of
Shares
   
Weighted-
average
Exercise
Price
   
Weighted-
average
Remaining
Contractual
Term (years)
   
Aggregate
Intrinsic
Value
 
Outstanding at May 31, 2010
   
-
   
$
-
     
-
   
$
-
 
Granted
   
7,416,667
   
$
0.35
     
3.00
   
$
445,000
 
Outstanding at May 31, 2011
   
7,416,667
   
$
0.35
     
3.00
   
$
445,000
 
Granted
   
13,900,000
   
$
0.35
     
7.80
   
$
-
 
Forfeited
   
(250,000)
     
0.35
     
-
     
-
 
Outstanding at February 29, 2012
   
21,066,667
   
$
0.35
     
5.92
   
$
-
 
Exercisable at February 29, 2012
   
10,166,667
   
$
0.35
     
2.27
   
$
-
 

During the nine months ended February 29, 2012, the Company recorded stock option expense of $38,837.  As of February 29, 2012, there was approximately $2,395,518 of total unrecognized compensation cost related to non-vested stock options which is expected to be recognized in accordance with the performance based criteria of the options.
 
 
The fair value of the options granted during the nine months ended February 29, 2012 was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:
 
Market value of stock on grant date
  $ 0.21- $0.24  
Risk-free interest rate
  $ 0.35%- 0.99 %
Dividend yield
    0 %
Volatility factor
    158%-171 %
Weighted average expected life
 
3-5 years
 
Expected forfeiture rate
    0 %

Warrants

Warrant activity is presented in the table below:

   
Number of
Shares
   
Weighted-
average
Exercise
Price
   
Weighted-
average
Remaining
Contractual
Term (years)
   
Aggregate
Intrinsic
Value
 
Outstanding at May 31, 2011
   
-
   
$
-
     
-
   
$
-
 
Granted
   
2,950,000
   
$
0.16
     
1.75
   
$
-
 
Outstanding at February 29, 2012
   
2,950,000
   
$
0.16
     
1.75
   
$
91,300
 
Exercisable at  February 29, 2012
   
2,950,000
   
$
0.16
     
1.75
   
$
91,300
 

NOTE 9 –  COMMITMENT AND CONTINGENCIES

Lawsuit

In accordance with the Mine Purchase Agreement, on December 1, 2011, the Sellers were required to deliver to the Company 6% of the Sellers Shares in the Mining Company.  However the Shares were not delivered.  As a result, on December 26, 2011, the Company filed a lawsuit against the Holders in the United States District Court, Southern District of New York seeking to cancel the 40,000,000 shares issued to the Holders and the 3,400,000 warrants issued to the Holders.  The Company is also seeking monetary damages from the Holders for breach of contract.

NOTE 10 –SUBSEQUENT EVENTS

Acquisition of BEST, LLC

In connection with its planned acquisition of a 100% equity interest in BEST, LLC, a company organized under the laws of the Russian Federation, the Company issued 4.5 million common shares and 425 shares of the Company’s Series A Preferred Stock on March 30, 2012. BEST, LLC owns a 49-year lease to develop and operate a coal mine in Novosibirsk, Russia and approximately 180,000 metric tons of coking coal. Upon closing of this planned acquisition, the Company expects to issue an additional 115.5 million common shares, 575 Series A Preferred Stock and 1,000 Series B Preferred Stock pursuant to its purchase agreement with the equity holders of BEST, LLC.
 
Loan receivable

On March 1, 2012, the Company agreed to loan up to $1.4 million to Seacrest Trading, Ltd, a stockholder of BEST, LLC.  The loan has a term of 120 days and is subject to a monthly interest of 2%.  An initial advance on the loan of $400,000 was made as of February 29, 2012 and is reported as loan receivable in the consolidated balance sheets.

 
ITEM 2. 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

This Report contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act) and the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Various matters discussed in this document and in documents incorporated by reference herein, including matters discussed under the caption “Plan of Operation,” may constitute forward-looking statements for purposes of the Securities Act and the Exchange Act. These statements are based on many assumptions and estimates and are not guarantees of future performance and may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. The words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” and similar expressions are intended to identify such forward-looking statements. The Company’s actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation, the Company’s lack of historically profitable operations, dependence on key personnel, the success of the Company’s business, ability to manage anticipated growth and other factors identified in the Company's filings with the Securities and Exchange Commission, press releases and/or other public communications.

(a) Overview

TurkPower is a Turkish-American consulting and service operations firm and junior mining company. TurkPower offers its domestic and international clients consulting services and acts as a full service operator for wind, hydro, solar, coal and geothermal energy parks in Turkey. In addition to its energy business, TurkPower aims to increase its involvement in the mining industry by acquiring and consolidating operational mines with proven reserves utilizing economies of scale to increase returns. TurkPower's strategy is to identify and evaluate properties with promising mineral potential, add further value through exploration, and then develop such properties either on its own or through collaborative agreements with industry partners having substantial experience and financial strength.

In November of 2011, the Company ceased all operation in Turkey and will sell its Turkish subsidiary, including the Investment in the Mining Company.

The Company has entered into an Agreement and Plan of Share Exchange with BEST, LLC (“BEST”) and the equityholders of BEST to acquire all of the capitalization of BEST in a subsidiary to be formed for such purpose, in exchange for an aggregate of (i) 120,000,000 newly issued shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”), (ii) 1,000 shares of a newly-created Series A Convertible Preferred Stock, par value $0.0001 per share which are convertible into and vote 260,000,000 shares of Common Stock (the “Series A”) and (iii) 1,000 shares of a newly created Series B Perpetual, Convertible Preferred Stock, par value $0.0001 per share which are Convertible into and vote as 100,000,000 shares of Common Stock, have a liquidation preference of $25,000 per share (the "Series B") (collectively, the “Exchange Shares”). In connection with the planned acquisition, the Company issued on March 30, 2012, 4,500,000 shares of Common Stock and 425 Series A shares.

BEST is a company organized under the laws of the Russian Federation and is the holder of a forty-nine (49) year lease to develop operate and mine Zavyalov Square, Part 1 at the Toguchina Coal Filed, located in Novosibirsk, Russia with a minimum forecasted extractable quantity of coal of 100,000,000 metric tons of coal and the owner of saleable coking coal stock of at least $20,000,000.

(b) Going Concern

As shown in the accompanying consolidated financial statements, the Company had net losses of $19,325,915 for the nine months ended February 29, 2012 and had a working capital deficit as of February 29, 2012 of $6,007,241. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

The Company intends to raise additional working capital either through debt or equity financing. The consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

(c) Management’s Discussion and Analysis of Financial Condition and Results of Operation.

For the Nine Months Ended February 29, 2012

For the nine months ended February 29, 2012 and 2011 our professional fees were $594,854 and $143,644, respectively. The increase in professional fees was due to legal and accounting expenses, due diligence, and investor relations expenses.

For the nine months ended February 29, 2012 and 2011, our selling, general and administrative expenses were $1,034,215 and $115,330, respectively. The increase in selling, general and administrative expenses was largely due to stock compensation, payroll related expenses, and consulting expenses.
 
 
For the nine months ended February 29, 2012 and 2011, we recorded other expense of $2,390,780 and $343,479, respectively. The increase in other expense was due to interest expense incurred in connection with our convertible debt and change in fair value of the derivative liabilities.

For the nine months ended February 29, 2012 and 2011, we recorded a loss from discontinued operations of $15,306,066 compared to $841,419.  The increase in the loss from discontinued operations was due to an impairment of our Investment in Mining Company of $13,859,231 during the nine months ended February 29, 2012.  Also, the Company recorded severance expense during the nine months ended February 29, 2012 as a result of the Company’s decision to cease operations in Turkey and terminate all employees.

For the Three Months Ended February 29, 2012

For the three months ended February 29, 2012 and 2011, our professional fees were $115,302 and $46,092, respectively. The increase in professional fees was due to legal and accounting expenses, due diligence, and investor relations expenses.

For the three months ended February 29, 2012 and 2011, our selling, general and administrative expenses were $147,756 and $89,089, respectively. The increase in selling, general and administrative expenses was largely due to stock compensation, payroll related expenses, and consulting expenses.

For the three months ended February 29, 2012 and 2011, we recorded other expense of $1,369,883 and $109,482, respectively. The increase in other expense was due to interest expense incurred in connection with our convertible debt and change in fair value of the derivative liabilities.

For the three months ended February 29, 2012 and 2011, we recorded a loss from discontinued operations of $12,025,723 compared to $301,310.  The increase in the loss from discontinued operations was due to an impairment of our Investment in Mining Company of $11,898,041 during the three months ended February 29, 2012.  Also, the Company recorded severance expense during the nine months ended February 29, 2012 as a result of the Company’s decision to cease operations in Turkey and terminate all employees.

(d) Liquidity and Capital Resources

At February 29, 2012, we had cash of $275,958, as compared to $217,312 at May 31, 2011. This decrease was a result of cash used in operating activities of $731,106 and cash used in investing activities of $1,320,247, effect of exchange rates $25,001, partially offset by cash provided by financing activities of $2,135,000.

During the next 12 months we anticipate incurring costs related to filing of Exchange Act reports, and consummation of the acquisition of BEST.

We believe we will be able to meet these costs through use of funds in our treasury and additional amounts, as necessary, to be loaned by or invested in us by our stockholders, management or other investors.

Off-Balance Sheet Arrangements

As of the date of this Quarterly Report, the Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term "off-balance sheet arrangement" generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with the Company is a party, under which the Company has (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.

Critical Accounting Policies

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP 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 as well as the reported amount of revenues and expenses during the reporting period. Actual results could differ from these estimates.
 
 
Fair value of financial instruments
 
The carrying value of cash and cash equivalents, receivables, accounts payable and accrued expenses deferred revenue, and debt approximate their fair values because of the short-term nature of these instruments. Management believes the Company is not exposed to significant interest or credit risks arising from these financial instruments.

Seasonality

To date, we have not noted any significant seasonal impacts.

ITEM 3. 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable for smaller reporting companies.

ITEM 4. 
CONTROLS AND PROCEDURES.

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

As of the end of the period covered by this Quarterly Report, Management has concluded that our disclosure controls and procedures are not effective because of the identification of a material weakness in our internal control over financial reporting, which we view as an integral part of our disclosure controls and procedures. The material weakness relates to the Company not having personnel with knowledge of generally accepted accounting principles. Our executive management does not possess accounting expertise and our Company does not have an audit committee. This weakness was due to our lack of working capital to hire additional staff during the period covered by this report. We intend to obtain this knowledge of generally accepted accounting principles by hiring a contractor and/or hiring additional accounting personnel.

Changes in Internal Controls over Financial Reporting

There were no changes in the Company’s internal controls over financial reporting, known to executive management that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.


PART II — OTHER INFORMATION
  
ITEM 1. 
LEGAL PROCEEDINGS.
 
On December 26, 2011, the Company commenced a lawsuit against Nalan Oral and Seluck Oral, the shareholders of Avrasya Yapı Yatırım Hizmetleri A.Ş., in the United States District Court for the Southern District of New York alleging the defendants breached the Mine Purchase Agreement and seeking to cancel the 40,000,000 shares of Common Stock and 3,400,000 warrants issued to the defendants in connection with the Mine Purchase Agreement.  The Company is also seeking damages of $6,000,000 from the defendants for breach of contract.

The Company is not a party and its property is not subject to any other material pending legal proceedings nor is the Company aware of any threatened or contemplated proceeding by any governmental authority against the Company.

ITEM 1A. 
RISK FACTORS.

Not required for smaller reporting companies.

ITEM 2. 
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.
 
ITEM 3. 
DEFAULTS UPON SENIOR SECURITIES.

On April 27, 2010, the Company’s Turkish subsidiary borrowed €450,000 ($555,692) from a third party. The loan is unsecured, bears annual interest at 25.0% and was payable in full on October 27, 2010. The interest rate increased to 60% on October 28, 2010, when the loan became in default. On August 2, 2011, the Turkish subsidiary and the lender cancelled the previous loan agreement and agreed to terms for the repayment of the €450,000 short-term debt and related interest by which the Turkish subsidiary agreed to pay the lender €200,000 on August 15, 2011, and €100,000 monthly thereafter through December 15, 2011 after which the Turkish subsidiary will have paid the lender €600,000 in aggregate. In addition the Company agreed to issue the lender 300,000 common shares no later than August 15, 2011. The Turkish subsidiary did not make the scheduled payments and the Company did not issue 300,000 shares to the lender. While delinquent, the Company is required to pay a 2.5% interest per month on the €600,000 loan to the lender.
 
ITEM 4. 
MINE SAFETY DISCLOSURES.
 
Not applicable.
 
ITEM 5.
OTHER INFORMATION.

None

EXHIBITS

(a) Exhibit index

Exhibit Number
 
Description
 
Section 302 Certification Of Chief Executive Officer and Chief Financial Officer
 
 
 
 
Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 – Chief Executive Officer and Chief Financial Officer

101.INS*
 
XBRL Instance Document*
101.SCH*
 
XBRL Taxonomy Extension Schema Document*
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase Document*
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase Document*

 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Date: April 23, 2012    
     
 
TURKPOWER CORPORATION
 
  (Registrant)  
       
 
By:
/s/Ryan Hart  
  Name 
Ryan Hart
 
  Title 
Chief Executive Officer and Chief Financial Officer
 
    (Principal Executive Officer and Principal Financial Officer)
 
 
17

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PINX:TRKP Quarterly Report 10-Q Filing - 2/29/2012
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