10-Q 1 form10q.htm FORM 10-Q TurboSonic Technologies Inc.: Form 10-Q - Filed by newsfilecorp.com

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

________________

FORM 10-Q

________________

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2012

Commission File Number: 0-21832

TurboSonic Technologies, Inc.
(Exact name of Registrant as specified in its charter)

Delaware 13-1949528
(State of incorporation) (I.R.S. Employer
  Identification Number)

550 Parkside Drive, Suite A-14
Waterloo, Ontario, Canada N2L 5V4
(Address of principal executive offices)

(519) 885-5513
(Registrant’s telephone number)

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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.

[X] Yes      [_] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

[X] Yes      [_] No

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

[_] Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [X] Smaller reporting company

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

[_] Yes      [X] No

As of May 11, 2012, there were 18,554,112 shares of common stock outstanding.



TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2012
TABLE OF CONTENTS

PART I  
FINANCIAL INFORMATION PAGE
   
Item 1. Financial Statements          3
     Consolidated Condensed Statements of (Loss) and Comprehensive (Loss) (unaudited) for the Three and Nine Month Periods Ended March 31, 2012 and 2011
     Consolidated Condensed Balance Sheets (unaudited) at March 31, 2012 and June 30, 2011          4
     Consolidated Condensed Statements of Cash Flows (unaudited) for the Nine Month Periods Ended March 31, 2012 and 2011 5
     Notes to Consolidated Condensed Financial Statements (unaudited)          6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations          11
Item 3. Quantitative and Qualitative Disclosures about Market Risk          17
Item 4. Controls and Procedures          17
   
PART II  
OTHER INFORMATION  
   
Item 1. Legal Proceedings          18
Item 1A. Risk Factors          18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds          18
Item 3. Defaults upon Senior Securities          18
Item 4. Mine Safety Disclosures          18
Item 5. Other Information          18
Item 6. Exhibits          18

All dollar amounts set forth in this report are in United States dollars, except where otherwise indicated.

Forward-Looking Statements

Forward-looking statements in this report, including without limitation, statements relating to our plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Readers are cautioned that such forward-looking statements involve risks and uncertainties, such as: our dependence on environmental regulation to drive sales; the concentration of our revenues among a small group of customers who may vary from year to year; our ability to secure additional financing; and economic downturns and other factors that may negatively affect our customers’ demands for our products. These risks and uncertainties could cause actual results to differ materially from historical results or those we anticipate. In evaluating these statements, you should specifically consider the risks discussed in this report, our Annual Report on Form 10-K for the fiscal year ended June 30, 2011 and other reports or documents that we have filed from time to time with the SEC. Our statements are based upon information known to us as of the date this report is filed with the SEC, and we assume no obligation to update or alter our forward-looking statements within this report, whether as a result of new information, future events or otherwise, except when required by applicable federal securities laws.

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TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES Form 10-Q

PART I: FINANCIAL INFORMATION ITEM 1

CONSOLIDATED CONDENSED STATEMENTS OF (LOSS)
AND COMPREHENSIVE (LOSS) (UNAUDITED)

    For the Three     For the Three     For the Nine     For the Nine  
    Months Ended     Months Ended     Months Ended     Months Ended  
    March 31, 2012     March 31, 2011     March 31, 2012     March 31, 2011  
  $   $   $   $  
CONTRACT REVENUE AND SALES                        
OEM systems revenue   2,018,728     3,199,741     8,771,738     5,721,206  
Aftermarket revenue   1,109,110     832,206     2,606,744     2,575,510  
    3,127,838     4,031,947     11,378,482     8,296,716  
                         
                         
CONTRACT COSTS AND COST OF SALES                        
OEM systems contract costs and costs of sales   1,551,568     2,398,853     7,422,831     4,738,965  
Aftermarket contract costs and costs of sales   701,815     485,064     1,593,338     1,642,452  
    2,253,383     2,883,917     9,016,169     6,381,417  
Gross profit   874,455     1,148,030     2,362,313     1,915,299  
                         
EXPENSES                        
Selling, general and administrative   1,205,413     1,164,587     3,697,024     3,613,041  
Research and development   6,596     36,119     60,628     62,481  
Depreciation and amortization   16,782     43,995     50,418     126,311  
    1,228,791     1,244,701     3,808,070     3,801,833  
                         
                         
(Loss) from operations   (354,336 )   (96,671 )   (1,445,757 )   (1,886,534 )
Interest (expense)   (545 )   (1,656 )   (4,374 )   (2,367 )
(Loss) before income taxes   (354,881 )   (98,327 )   (1,450,131 )   (1,888,901 )
(Recovery of) provision for income taxes [Note 4]   (28,179 )   (63,228 )   764,533     (475,651 )
Net (loss)   (326,702 )   (35,099 )   (2,214,664 )   (1,413,250 )
                         
                         
Other comprehensive income (loss):                        
                   Foreign currency translation adjustment   50,059     36,868     (81,636 )   240,304  
Comprehensive (loss) income   (276,643 )   1,769     (2,296,300 )   (1,172,946 )
                         
                         
Weighted average number of shares   18,554,112     18,554,112     18,554,112     16,533,873  
Diluted weighted average number of shares [Note 6]   18,554,112     18,554,112     18,554,112     16,533,873  
                         
Basic (loss) per share [Note 6]   (0.02 )   (0.00 )   (0.12 )   (0.09 )
Diluted (loss) per share [Note 6]   (0.02 )   (0.00 )   (0.12 )   (0.09 )

See accompanying notes

3



TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES Form 10-Q

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

    March 31, 2012     June 30, 2011  
  $   $  
ASSETS            
Current assets:            
Cash and cash equivalents   1,331,230     1,674,204  
Accounts receivable, net of allowance for doubtful accounts of nil and $1,708   2,617,699     2,755,570  
Retentions receivable   941,379     244,974  
Deferred contract costs and unbilled revenue [Note 3]   209,651     1,492,747  
Inventories   133,176     96,625  
Income taxes receivable   12,542     24,538  
Other current assets   4,800     87,575  
Total current assets   5,250,477     6,376,233  
             
Property and equipment, less accumulated depreciation and amortization   68,320     123,262  
Goodwill   398,897     398,897  
Deferred income taxes [Note 4]   309,255     1,070,592  
Other assets   13,811     13,915  
    790,283     1,606,666  
Total assets   6,040,760     7,982,899  
             
             
LIABILITIES AND STOCKHOLDERS’ EQUITY            
Current liabilities:            
Accounts payable   1,044,095     1,249,391  
Accrued compensation   605,334     444,374  
Accrued charges   365,628     295,199  
Accrued warranty provision [Note 2]   57,992     60,000  
Unearned revenue and contract advances [Note 3]   1,449,124     1,152,869  
Total current liabilities   3,522,173     3,201,833  
Commitments and contingencies [Note 8]            
Stockholders’ equity            
Authorized share capital            
30,000,000   common shares, par value $0.10 per share            
1,500   preferred shares, no par value            
Issued share capital                
18,435,773   common shares [18,435,773 at June 30, 2011]   2,900,434     2,900,434  
118,339   common shares reserved for the conversion of the subsidiary’s Class B exchangeable shares [118,339 at June 30, 2011]        
Additional paid – in capital [Note 5]   4,241,779     4,207,958  
    7,142,213     7,108,392  
Accumulated other comprehensive income   914,371     996,007  
Accumulated deficit   (5,537,997 )   (3,323,333 )
             
Total stockholders’ equity   2,518,587     4,781,066  
             
Total liabilities and stockholders’ equity   6,040,760     7,982,899  
             
See accompanying notes            

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TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES Form 10-Q

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)

    For the Nine     For the Nine  
    Months Ended     Months Ended  
    March 31, 2012     March 31, 2011  
  $   $  
             
CASH FLOWS FROM OPERATING ACTIVITIES            
Net (loss)   (2,214,664 )   (1,413,250 )
Add charges to operations not requiring a current cash payment:            
                   Stock-based compensation   33,822     29,329  
                   Depreciation and amortization   50,418     126,311  
                   Deferred income tax [Note 4]   751,012     (476,271 )
Changes in non-cash assets and liabilities related to operations:            
                   Decrease in accounts receivable   29,931     528,813  
                   (Increase) decrease in retentions receivable   (712,731 )   342,341  
                   (Increase) in inventories   (39,618 )   (30,839 )
                   Decrease (increase) in deferred contract costs and unbilled revenue   1,211,213     (881,766 )
                   Decrease in income taxes receivable   9,953     116,414  
                   Decrease (increase) in other current assets   80,843     (16,183 )
                   (Decrease) increase in accounts payable   (155,261 )   513,905  
                   Increase in accrued compensation   188,550     135,038  
                   (Decrease) in accrued warranty provision   (940 )   --  
                   Increase (decrease) in accrued charges   76,212     (39,813 )
                   Increase in unearned revenue and contract advances   317,450     484,769  
             
Cash (applied to) operating activities   (373,810 )   (581,202 )
             
             
CASH FLOWS FROM INVESTING ACTIVITIES            
Purchase of property and equipment   --     (34,135 )
Cash (applied to) investing activities   --     (34,135 )
             
             
CASH FLOWS FROM FINANCING ACTIVITIES            
Repayment of obligations under long-term debt and capital lease obligations   --     (61,766 )
Net proceeds from issuance of common shares under 2010 rights offering [Note 5]   --     853,086  
Cash provided by financing activities   --     791,320  
             
             
Effect of exchange rate changes on cash and cash equivalents   30,836     141,787  
             
             
Cash (applied) provided during the period   (342,974 )   317,770  
Cash and cash equivalents – beginning of period   1,674,204     2,036,529  
Cash and cash equivalents – end of period   1,331,230     2,354,299  
             
Supplemental cash flow information:            
Interest paid   (4,907 )   (5,395 )
Interest received   533     3,028  
Income taxes paid   3,140     620  

See accompanying notes

5



TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES Form 10-Q

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1: GENERAL

TurboSonic Technologies, Inc., directly and through subsidiaries, designs and markets integrated air pollution control and liquid atomization technology, including industrial gas cooling/conditioning systems, to ameliorate or abate industrial environmental problems. We currently have two reportable business segments – OEM systems and Aftermarket.

The unaudited interim consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations promulgated by the Securities and Exchange Commission. Accordingly, these financial statements do not include all of the information and footnotes required in the audited consolidated financial statements. The unaudited interim consolidated condensed financial statements reflect all adjustments which are, in the opinion of management, necessary to report a fair statement of the results for the interim periods presented. Operating results for the three and nine month periods ended March 31, 2012 are not necessarily indicative of the results that may be expected for the full year ending June 30, 2012. These unaudited interim consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended June 30, 2011.

These unaudited interim consolidated condensed financial statements have been prepared on a going concern basis, which presumes that assets will be realized and liabilities discharged in the normal course of business over the foreseeable future. We have incurred significant losses during the current fiscal period and previous two fiscal years, which have reduced our cash and stockholders’ equity. These conditions raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on achieving a profitable level of operations, and our ability to secure additional sources of financing. We are actively pursuing additional financing, although there can be no certainty with respect to the timing and receipt of such financing.

These unaudited interim consolidated condensed financial statements do not include any of the adjustments to the amounts or classification of assets and liabilities that may be required should we be unable to continue as a going concern.

Future Accounting Changes:

In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-08 (“ASU 2011-08”), Testing Goodwill for Impairment. ASU 2011-08 provides an entity the option to first assess qualitative factors in determining whether the existence of certain events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the performance of the two-step impairment test is unnecessary. If, however, an entity determines that is it more likely than not that the fair value is less than the carrying amount, the first step of the impairment test (calculation of the reporting unit’s fair value) is required. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal periods beginning after December 15, 2011. Early adoption is permitted, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. We perform our annual goodwill impairment test as of April 1 and will early adopt the provisions of ASU 2011-08 as of that date. The adoption of this amendment is not expected to have a material impact on our results of operations.

Changes in Accounting Policies:

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity and requires the presentation of the statement of income and other comprehensive income consecutively. ASU 2011-05 is effective for interim and annual periods beginning after December 15, 2011 and early adoption is permitted. In December 2011, the FASB issued ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income” (“ASU 2011-12”). ASU 2011-12 defers changes in ASU 2011-05 that relate to the presentation of reclassification adjustments. The effective dates of ASU 2011-12 are consistent with the effective dates of ASU 2011-05, which is effective for fiscal years and interim periods beginning after December 15, 2011 and early adoption is permitted. We adopted standards ASU 2011-05 and ASU 2011-12 on July 1, 2011 and they have not had a material impact on our results of operations or disclosures.

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRSs” (“ASU 2011-04”). ASU 2011-04 amends the wording used to describe many of the requirements in US GAAP for measuring fair value and for disclosing information about fair value measures. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011, which is our interim period beginning January 1, 2012. We adopted this standard on January 1, 2012 and it has not had a material impact on our results of operations or disclosures.

In January 2010, the FASB issued ASU 2010-06 Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 amends ASC Topic 820 to add new requirements for disclosures about transfers into and out of Level 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. The ASU also

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TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES Form 10-Q

NOTE 1: GENERAL CONTD

clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. ASU 2010-06 is effective for the first reporting period beginning after December 15, 2009, which was our reporting period ended March 31, 2010, except for the requirement to provide the Level 3 activity of purchases, sales issuances, and settlements on a gross basis, which is effective for fiscal years beginning after December 15, 2010, which is our fiscal year beginning July 1, 2011. The adoption of ASU 2010-06 and the revised Level 3 disclosures has not had a material impact on our company.

NOTE 2: WARRANTY

As part of the normal sale of OEM systems, we have provided our customers with performance guarantees and product warranties. Most of our OEM system sales contain a performance guarantee to ensure our custom-engineered equipment provided to our clients meets the level of performance anticipated. Performance tests for projects are completed and resolved to the client’s satisfaction prior to final acceptance and closure of the contract. Expenses incurred to that time are treated as project costs.

The warranties generally extend for twelve months from the date of start-up or eighteen months after shipment to the customer. Commensurate warranties are provided by engineered product suppliers, such as those of pumps, fans and valves, whose products are incorporated into our systems. Warranty accruals are established on the basis of anticipated future expenditures based on historical warranty claims experience. As specific warranty obligations are identified, they are charged to the accrual account. The following summarizes the accrual of product warranties that is recorded in the accompanying consolidated condensed balance sheets:

    For the Nine  
    Months Ended  
    March 31, 2012  
  $  
       
Opening balance   60,000  
Payments made during the period   (51,922 )
Warranty provision made during the period   50,961  
Foreign exchange adjustments   (1,047 )
Closing balance   57,992  

NOTE 3: COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

    March 31, 2012     June 30, 2011  
  $   $  
             
Costs incurred on uncompleted contracts   20,651,424     23,205,796  
Estimated earnings   6,939,125     8,961,009  
    27,590,549     32,166,805  
Less: Billings to date   (28,830,022 )   (31,826,927 )
    (1,239,473 )   339,878  

Included in accompanying consolidated condensed balance sheets under the following captions:

Deferred contract costs and unbilled revenue   209,651     1,492,747  
Unearned revenue and contract advances   (1,449,124 )   (1,152,869 )
    (1,239,473 )   339,878  

7



TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES Form 10-Q

NOTE 4: INCOME TAXES

Details of the provision for (recovery of) income taxes are as follows:

    For the Three     For the Three     For the Nine     For the Nine  
    Months Ended     Months Ended     Months Ended     Months Ended  
    March 31, 2012     March 31, 2011     March 31, 2012     March 31, 2011  
  $   $   $   $  
Current:                        
- U.S.   140     120     3,140     620  
- International subsidiaries   397     --     10,381     --  
Total current taxes   537     120     13,521     620  
Deferred:                        
- U.S   (92,045 )   142,280     (500,146 )   (273,507 )
- U.S valuation allowance   92,045     --     1,250,146     --  
- International subsidiaries   (28,716 )   (205,628 )   1,012     (202,764 )
Total deferred taxes   (28,716 )   (63,348 )   751,012     (476,271 )
Income tax (recovery) provision   (28,179 )   (63,228 )   764,533     (475,651 )

The cumulative tax loss carryforward for the U.S. is $1,972,980 at March 31, 2012. After two consecutive years of substantial losses and continuing uncertainty surrounding the U.S. and global economies, we reassessed the valuation of deferred tax assets during the fourth quarter of fiscal 2011 and recorded a valuation reserve totaling $722,834. Due to our recent history of losses in the U.S., lower than expected order activity year to date, and continuing uncertainty surrounding the U.S. & global economies, an additional valuation allowance was recognized during the quarter ended December 31, 2011 for $1,158,101 bringing the net deferred tax asset to zero. An additional valuation allowance of $92,045 was recorded during the quarter ended March 31, 2012 to offset the losses recognized for the quarter ended March 31, 2012.

Details of the deferred tax asset are as follows:

    For the Nine Months Ended March 31, 2012  
          U.S. Valuation              
    U.S.     Allowance     International     Total  
  $   $   $   $  
                         
Opening balance, July 1, 2011   1,472,834     (722,834 )   320,592     1,070,592  
Deferred tax asset increase   500,146     --     1,012     501,158  
Increase in U.S. valuation allowance   --     (1,250,146 )   --     (1,250,146 )
Foreign exchange adjustments   --     --     (12,349 )   (12,349 )
Closing balance, March 31, 2012   1,972,980     (1,972,980 )   309,255     309,255  

This adjustment, by means of an increase to our valuation allowance, does not reduce the total U.S. tax loss carryforward of $1,972,980 available to offset future taxes.

NOTE 5: SHARE CAPITAL

On December 10, 2010 we completed a registered rights offering, which offered stockholders of record as of November 8, 2010 the right to acquire one share of our common stock for each two shares then held by such persons at a price of $0.34 per share. Stockholders exercised subscription rights to acquire 1,601,611 shares and oversubscription rights to acquire an additional 1,814,447 shares, resulting in our sale of an aggregate of 3,416,058 shares of common stock and our receipt of gross proceeds of $1,161,460 (final net proceeds of $853,086, due to issuance costs). Such proceeds were added to our working capital for marketing opportunities stemming from both recent and anticipated enactments by the U.S. EPA (EPA) of more stringent emission standards and rules for certain hazardous air pollutants.

Pursuant to the terms of the 2008 Stock Plan, options to purchase 20,000 shares of common stock were granted to each of the five independent directors of our company (100,000 in total) who were elected to serve at the December 8, 2011 annual meeting of stockholders. Such options have an exercise price equal to the market value of our common stock at the close of business on December 8, 2011 ($0.27 per share [Black-Scholes fair value $0.22]), vest immediately and expire eight years from the date of grant.

Pursuant to the terms of the 2003 Stock Plan, options to purchase 25,000 shares of common stock were granted to each of our Chief Executive Officer, President and Chief Financial Officer (75,000 in total) at the December 8, 2011 board meeting. Such options have an exercise price equal to the market value of our common stock at the close of business on December 8, 2011 ($0.27 per share [Black-Scholes fair value $0.23]), vest in five years from the date of grant with respect to our Chief Executive Officer and to our President and three years from the date of grant with respect to our Chief Financial Officer and expire eight years from the date of grant.

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TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES Form 10-Q

NOTE 5: SHARE CAPITAL CONTD

Stock-based compensation expenses of $4,533 for the three months ended March 31, 2012 and $33,822 for the nine months ended March 31, 2012 [$3,502 for the three months ended March 31, 2011 and $29,329 for the nine months ended March 31, 2011] are included as selling, general and administrative expenses in our financial statements.

A summary of the significant assumptions used in calculating the fair value of our stock option grants is as follows:

    Fiscal 2012 Grants     Fiscal 2011 Grants  
    Independent     Executive     Independent     Executive  
    Directors     Officers     Directors     Officers  
    Dec 8, 2011     Dec 8, 2011     Dec 9, 2010     Dec 9, 2010  
Expected dividends   0.00%     0.00%     0.00%     0.00%  
Expected volatility   132.40%     115.79%     94.63%     111.04%  
Risk-free interest rate   0.39%     0.91%     1.35%     1.35%  
Expected term (years)   4.00     6.00     4.00     6.00  
Forfeiture rate   0.00%     0.00%     0.00%     0.00%  
Stock price on date of grant $ 0.27   $ 0.27   $ 0.31   $ 0.31  
Number of stock options granted   100,000     75,000     100,000     75,000  
Fair value per option on date of grant $ 0.22   $ 0.23   $ 0.21   $ 0.26  

The following table summarizes activity of stock options granted under our 2003 and 2008 Stock Plans for the nine months ended March 31, 2012:

          Weighted     Weighted     Remaining     Aggregate  
    Stock     Average     Average Grant     Contractual     Intrinsic  
    Options     Exercise Price     Date Fair Value     Life (In Years)     Value  
Stock options outstanding at June 30, 2011   835,000   $ 0.7139   $ 0.4792     4.5   $ 29,750  
Stock options expired   (255,000 ) $ 1.1196   $ 0.7114              
Stock options granted   175,000   $ 0.2700   $ 0.2243              
Stock options exercised   0   $ 0.0000   $ 0.0000              
Stock options outstanding at March 31, 2012   755,000   $ 0.4740   $ 0.3417     5.9   $ 8,400  
Stock options exerciseable at March 31, 2012   540,000   $ 0.4870   $ 0.3330     5.6   $ 5,400  

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value or the aggregate difference between the closing price of our common stock on March 31, 2012 of $0.31 and the exercise price for in-the-money options that would have been received by option holders if all options had been exercised on March 31, 2012.

NOTE 6: EARNINGS PER SHARE

The following table sets forth the computation of (loss) per share. The effect of dilutive securities is included only when dilutive.

    For the Three     For the Three     For the Nine     For the Nine  
    Months Ended     Months Ended     Months Ended     Months Ended  
    March 31, 2012     March 31, 2011     March 31, 2012     March 31, 2011  
Numerator                        
Net (loss) $ (326,702 ) $ (35,099 ) $ (2,214,664 ) $ (1,413,250 )
Denominator                        
Denominator for earnings per share - weighted average shares outstanding   18,554,112     18,554,112     18,554,112     16,533,873  
Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions   18,554,112     18,554,112     18,554,112     16,533,873  
Basic (loss) per share $ (0.02 ) $ (0.00 ) $ (0.12 ) $ (0.09 )
Diluted (loss) per share $ (0.02 ) $ (0.00 ) $ (0.12 ) $ (0.09 )

For the three and nine month periods ended March 31, 2012 and 2011, we incurred net losses; therefore, the diluted loss per common share excludes the effects of all options outstanding, since their inclusion would be anti-dilutive.

9



TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES Form 10-Q

NOTE 7: SEGMENT INFORMATION

    March 31, 2012     June 30, 2011  
  $   $  
- OEM systems   3,574,323     5,000,234  
- Aftermarket   1,135,207     1,308,461  
- Other1   1,331,230     1,674,204  
Total   6,040,760     7,982,899  

1 – Cash and cash equivalents are not allocated between business segments.

    For the Three     For the Three     For the Nine     For the Nine  
    Months Ended     Months Ended     Months Ended     Months Ended  
    March 31, 2012     March 31, 2011     March 31, 2012     March 31, 2011  
  $   $   $   $  
                         
(Loss) earnings before income taxes:                
- OEM systems   (560,801 )   (249,166 )   (1,837,075 )   (2,206,248 )
- Aftermarket   205,920     150,839     386,944     317,347  
Total   (354,881 )   (98,327 )   (1,450,131 )   (1,888,901 )

NOTE 8: CONTINGENT LIABILITIES

In the normal course of operations, we are party to a number of lawsuits, claims and contingencies. Accruals are made in instances where it is probable that liabilities have been incurred and where such liabilities can be reasonably estimated. Although it is possible that liabilities may be incurred in instances for which no accruals have been made, we do not believe that the ultimate outcome of these matters will have a material impact on our consolidated financial position.

On October 6, 2005, a statement of claim was filed against our company in the Ontario Superior Court of Justice (Canada) by Abuma Manufacturing Limited, one of our vendors, in which it claimed additional charges for work performed and refuted our claim for back charges on a specific project. Its claims were for CAD $95,647 in respect of unpaid accounts, CAD $50,000 for aggravated, punitive and/or exemplary damages, interest on the past due accounts and costs of the action. The claim was settled during pre-trial conference in late October 2011. The settlement was not material to our company.

NOTE 9: CREDIT FACILITY

In May 2011, we entered into an agreement with HSBC Bank Canada, which agreement provides for a credit facility for standby letters of credit for CAD $4.25 million that is secured by a general security interest in, and lien upon, our assets and guarantees provided by Export Development Canada (“EDC”) on a fee-for-service basis. Currently the guarantees provided by EDC are being approved on a case-by-case basis. This credit facility became operational in August 2011, at which time our prior credit facilities were terminated by mutual consent.

At March 31, 2012, we had standby letters of credit for approximately $0.8 million ($1.4 million at June 30, 2011) in place with various customers in order to receive cash proceeds ahead of delivery or end-of-warranty milestones. EDC has provided guarantees for these letters of credit to HSBC Bank Canada and another Canadian bank with whom we had an agreement for previously issued letters of credit.

On October 28, 2011, we entered into an Investment Agreement with Dutchess Opportunity Fund, II, LP for the sale, from time to time, at our discretion, of up to $3.0 million of our common stock during a three-year period at a price equal to 95% of the recent average market price at the time of sale, provided that in no event shall such price be lower than $0.33 per share. At March 31, 2012, our shares were trading at $0.31 per share and accordingly, this financing was not accessible. The extent to which we will need to access any portion or all of the proceeds available under the Investment Agreement will depend in substantial part upon the availability and adequacy of our cash flows from operations so as to enable us to address timing differences that may arise from time to time in our need to pay vendors and suppliers in advance of our receipt of contractual progress payments from our customers. As a registration statement registering such common stock was declared effective by the SEC, we are now able, at our discretion, to sell common stock to Dutchess pursuant to the terms and conditions of the Investment Agreement. As of March 31, 2012, no common stock had been sold to Dutchess under this arrangement.

–10–



TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES Form 10-Q

NOTE 10: FAIR VALUE MEASUREMENT

Fair value disclosure

We did not have any financial instruments carried at fair value for which the fair value hierarchy disclosure is required.

Credit risk

Trade accounts receivable potentially subject us to credit risk. Sales are made to accredited end users of all sizes located primarily in North America and Europe. We provide an allowance for doubtful accounts equal to the estimated losses expected to be incurred in the collection of accounts receivable.

Our cash balances are maintained in two United States chartered banks, which are AA rated (deposit and senior debt) financial institutions, in two Canadian chartered banks, which are AA rated financial institutions and in one Italian chartered bank, which is a BBB rated financial institution.

Currency Risk

Currency risk is the risk to our earnings that arises from fluctuations of foreign exchange rates and the degree of volatility of these rates. We may use forward contracts to reduce our exposure to foreign currency risk. There are no outstanding instruments at this time. Our actual currency risks relate to appreciation of the Euro and Canadian dollar relative to the US dollar.

11


ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Our Business

TurboSonic Technologies, Inc. designs and supplies air pollution control technologies to industrial customers worldwide. We believe our products and systems, which are designed to meet the strictest emission regulations for gaseous and particulate emissions, afford economic and technical advantages over competitive air pollution equipment. We currently have two reportable business segments – OEM systems and Aftermarket.

Sales are frequently attained through the recommendation of engineering firms who are often engaged in complete plant installations or upgrades. Other sales opportunities are sourced directly with the end user by our independent sales representatives or by our internal sales team.

Our leading edge technology and strong project management performance contribute significantly to our strategy of building long-term loyalty and growth through customer satisfaction. This allows us to meet the demanding requirements of multinational firms that we believe can provide a series of sales opportunities over many years.

We perform all process engineering and provide the detailed design and specifications for all applicable electrical, mechanical and chemical components of our systems. We subcontract the manufacturing of equipment and when customer contracts include installation we subcontract the service. Our project managers and quality assurance personnel supervise and manage all aspects of our contracts in order for us to meet the performance criteria agreed with our customers.

We conduct business in Canadian, US and European currencies to accommodate customers and mitigate our exchange risk through matching the sales currency with the supplier currency where practical. Environmental awareness, government regulations and our sales efforts drive the demand for our technologies. Geographic diversification and industry diversification contribute to market scope and strategies for growth. We are committed to developing innovative product offerings and forming technology partnerships, in response to new and existing regulations to better address demands for a greener industry and a reduction in consumption of non-renewable resources.

Our mission is two-fold: to increase shareholder value and to achieve customer satisfaction through delivery of high quality clean-air solutions to our customers. We believe that the trend toward a cleaner environment will continue through a confluence of government regulations and public pressure, driving the demand for our products and enabling growth.

We believe that economic recovery will increase demand for our products in our established markets. A significant part of our business has relied historically on environmental regulation to drive demand for our products and systems. To complement this, and to potentially reduce our exposure to cyclical changes in regulatory enactments and enforcement, we have focused on several new developments that offer our customers pollution control products with an economic payback and a competitive advantage to traditional equipment solutions. The Catalytic Gas Treatment (CGT) ™ technology is expected to contribute to revenue growth commencing in the current fiscal year and significantly in fiscal 2013 and the foreseeable future.

Q3 Operating Results

Revenue decreased by 22% to $3.1 million in the three months ended March 31, 2012 over the same period ended March 31, 2011. A loss before income taxes of $354,881 was recorded for the three months ended March 31, 2012 compared to a loss before income taxes of $98,327 in the same period ended March 31, 2011. Our third quarter of fiscal year 2012 began with a backlog of $11.4 million ($8.2 million in 2011), with $2.2 million in order bookings in the third quarter of fiscal 2012 ($4.7 million in the third quarter of fiscal 2011). Our backlog of orders at March 31, 2012 was $10.4 million ($8.9 million at March 31, 2011).

Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the tax law. After two consecutive years of substantial losses and continuing uncertainty surrounding the U.S. and global economies, we reassessed the valuation of deferred tax assets during the fourth quarter of fiscal 2011 and recorded a valuation reserve totaling $722,834, and capped the deferred tax amount for the US at $750,000. Due to our recent history of losses in the US, lower than expected order activity year to date, and continuing uncertainty surrounding the US & global economies, a valuation allowance was recognized during the quarter ended December 31, 2011 for the remaining $1,158,101 of deferred tax assets. An additional US tax recovery and offsetting valuation allowance of $92,045 was established for the quarter ended March 31, 2012. The cumulative tax loss carryforward for the US is $1,972,980 at March 31, 2012, of which none is recognized as a deferred tax asset.

International deferred tax amounts ($309,255 at March 31, 2012) are more likely than not recoverable and no valuation adjustment has been recorded.

The consolidated operating result for the nine months ended March 31, 2012 is a tax provision of $764,533 compared to a recovery of taxes for the comparable period in fiscal 2011 of $475,651 (see note 4 to the Unaudited Interim Consolidated Condensed Financial Statements).

–12–


Markets

Orders of $2.2 million in the third quarter of fiscal 2012 and a total of $9.7 million for the first three quarters of fiscal 2012 have contributed to our backlog of $10.4 million at March 31, 2012, despite continuing economic challenges. With our focus on cost control, new product introductions and target markets, we expect a stronger fourth quarter in both orders and revenue recognition, contributing to improved operating results.

Environmental Regulation

Government initiatives taken to mitigate effects of air pollution are the primary driver for the traditional air pollution control technology market. Several new rules that are expected to be issued by the U.S. Environmental Protection Agency (EPA) could have significant impact on emissions from the power and manufacturing sectors, among others.

Mercury and Air Toxics Standards (MATS, also known as Utility MACT), is expected to impose further control requirements on mercury, metallic toxins, acid gases and particulate matter from coal and oil-fired power plants. MATS would allow facilities three years to come into compliance. If and when fully implemented, these MATS rules are expected to impact the need for further air control technologies from the power sector.

In addition, EPA is working on other rules that could impact emissions from power plants and manufacturing for toxic emissions from industrial, commercial and institutional boilers. Boiler MACT rules are currently due to become law May 2012. EPA also announced it would propose new fine particulate matter standards in 2013.

While we believe that these and other recently issued and anticipated regulations will affect industries in our markets, it is possible that further actions by the EPA, legal challenges or legislative developments could potentially modify the stringency of their provisions or delay their effective dates. It is because of these potential delays that we are continuing to pursue the development of current and new technologies, which do not depend on new regulation and can augment our suite of environmental technologies.

New Technology

During the second quarter of fiscal 2012, we commenced our first contract incorporating our patent-pending SonicCharge™ Conductive Composite Material (CCM) for Wet electrostatic Precipitators (“WESP”). SonicCharge™ CCM can displace high cost alloy construction, providing a significant benefit over conventional alloys. Its electrical properties are proven to be at least equal to stainless steels while offering superior spark erosion resistance and corrosion resistance, which can make it ideal for use in coal-fired utility and metallurgical acid plant WESP applications.

With the third Catalytic Gas Treatment (“CGT™”) installation in the U.S. having been successfully completed, a new alternative to thermal oxidation is now available to our client base. CGT™ technology controls emissions of regulated volatile organic compounds such as formaldehyde and methanol from process gas streams and has been demonstrated to reduce regulated emissions of aldehydes and alcohols by over 95%. Plans are currently in progress to expand the CGT product beyond the wood products industry.

13


Three Months ended March 31, 2012 Compared with Three Months ended March 31, 2011

3 MONTH COMPARATIVE INCOME STATEMENTS AT MARCH 31, 2012 AND 2011

    Fiscal 2012     % to     Fiscal 2011     % to     Increase (Decrease)  
          Total           Total              
  $     Revenue   $     Revenue   $     %  
Contract revenue & sales                                    
                 OEM Systems   2,018,728     65%     3,199,741     79%     (1,181,013 )   (37% )
                 Aftermarket parts & retrofits   1,109,110     35%     832,206     21%     276,904     33%  
    3,127,838     100%     4,031,947     100%     (904,109 )   (22% )
Contract costs & cost of sales                                    
                 OEM Systems   1,551,568     50%     2,398,853     59%     (847,285 )   (35% )
                 Aftermarket parts & retrofits   701,815     22%     485,064     12%     216,751     45%  
    2,253,383     72%     2,883,917     71%     (630,534 )   (22% )
Gross profit                                    
                 OEM Systems   467,160     15%     800,888     20%     (333,728 )   (42% )
                 Aftermarket parts & retrofits   407,295     13%     347,142     9%     60,153     17%  
    874,455     28%     1,148,030     29%     (273,575 )   (24% )
Gross profit %                                    
                 OEM Systems   23%           25%                    
                 Aftermarket parts & retrofits   37%           42%                    
Expenses                                    
                 Selling, general & administrative   1,205,413     39%     1,164,587     29%     40,826     4%  
                 Research & development costs   6,596     0%     36,119     1%     (29,523 )   (82% )
                 Depreciation   16,782     0%     43,995     1%     (27,213 )   (62% )
    1,228,791     39%     1,244,701     31%     (15,910 )   (1% )
(Loss) from operations   (354,336 )   (11% )   (96,671 )   (2% )   (257,665 )   267%  
Other (expense)                                    
                 Interest, net   (545 )   0%     (1,656 )   0%     1,111     (67% )
                                     
(Loss) before income taxes   (354,881 )   (11% )   (98,327 )   (2% )   (256,554 )   261%  
                 (Recovery of) income taxes   (28,179 )   (1% )   (63,228 )   (1% )   35,049     (55% )
Net (loss)   (326,702 )   (10% )   (35,099 )   (1% )   (291,603 )   831%  
                 Foreign currency translation adjustment   50,059     1%     36,868     1%     13,191     36%  
Comprehensive (loss) income   (276,643 )   (9% )   1,769     (0% )   (278,412 )   (15,738% )

The opening backlog of OEM orders for the third quarter of fiscal year 2012 was $11.0 million ($7.8 million for the third quarter of fiscal year 2011) and OEM orders received in the third quarter were $0.8 million ($3.9 million in the same period in the prior year). Revenue recognition for these orders is determined on the percentage of completion method, with completion typically ranging over a production period of 6 to 12 months depending on the scope and terms of the individual contracts.

OEM systems revenue for the three month period ended March 31, 2012 decreased 37% over the comparable period ended March 31, 2011 as the result of wet scrubber and DeNOx system projects not repeated from the same period in fiscal 2011. The balance of OEM backlog at March 31, 2012 was $9.6 million ($8.5 million at March 31, 2011), which will contribute to revenues over the next several quarters.

The cost of sales for OEM systems decreased 35% for the three month period ended March 31, 2012 over the comparable period in the prior year, which reflects the decreased revenue volume in the third quarter of fiscal 2012.

As a result, gross profit on OEM systems in the third quarter of fiscal 2012 was 23% and in the same comparable period in fiscal 2011 was 25%. OEM systems contributed a gross profit of $467,160 (15% of total revenue) in the third quarter of fiscal 2012 compared to a gross profit of $800,888 (20% of total revenue) for the same period in fiscal 2011.

The opening backlog of Aftermarket orders for the third quarter of fiscal 2012 was $0.4 million ($0.4 million for fiscal 2011) and Aftermarket orders received in the quarter were $1.4 million ($0.8 million in the same period in the prior year). Revenue recognition for these orders is determined on a billing basis, which approximates actual performance and usually occurs in the first or second month following the order.

Aftermarket revenues increased 33% for the three-month period ended March 31, 2012 over the same period in the prior fiscal year primarily because of increased evaporative cooling and semi-dry scrubber parts orders in the current quarter over the same period in fiscal 2011. The balance of Aftermarket backlog at March 31, 2012 is $0.8 million ($0.4 million at March 31, 2011) which will contribute to revenues in the next three months.

The cost of sales for Aftermarket products increased 45% for the three-month period ended March 31, 2012 over the same period in fiscal 2011. Gross profit on Aftermarket products increased 17% between the comparable periods in fiscal 2012 and 2011, which reflects a higher revenue volume and lower gross profit (37%) earned in the quarter ended March 31, 2012 over

–14–


gross profit (42%) earned in the quarter ended March 31, 2011. The decreased gross profit is the result of increased costs on certain spare parts items in the current fiscal year.

Selling, general and administrative expenses increased $40,826 (4%) for the three-month period ended March 31, 2012 over the same period in the prior year. This increase was the result of the addition of a new employee ($16,000), increased travel expenses ($12,000) and additional patent fees ($13,000) in fiscal 2012. As a percentage of total revenue, selling, general and administrative expenses were 39% for the three-month period ended March 31, 2012 compared to 29% of total revenue in the comparable period in fiscal 2011. Research and development costs decreased $29,523 (82%) for the three-month period ended March 31, 2012 compared to the same period in fiscal 2011, due to completion of activity on certain projects. Depreciation of $16,782 was recorded in the three months ended March 31, 2012 compared to $43,995 for the same period in the prior year . This decrease is the result of the full depreciation of certain office-related equipment in fiscal 2011; thereby reducing depreciation expense in the current fiscal quarter.

Loss before income taxes of $354,881 for the three-month period ended March 31, 2012 was higher than the loss of $98,327 in the comparable period in the prior fiscal year. The increased loss reflects lower revenue and gross profit in OEM systems for the third quarter of fiscal 2012 compared to those recorded in the third quarter of fiscal 2011.

Operating results for the third quarter of fiscal 2012 include a net recovery of income taxes of $28,319 for international subsidiaries and a net provision for income taxes of $140 for the U.S. company compared to a net recovery of income taxes of $63,228 for the comparable period in fiscal 2011(combined international subsidiaries and the US company). This includes a tax provision for U.S. company operations in fiscal 2012 consisting of a recovery of income taxes of $92,045 offset by a deferred tax valuation allowance of $92,045 for the quarter. Our decision to record this deferred tax valuation allowance was based on two years of continued losses and a third year of projected losses to fully offset the U.S. deferred tax asset. This follows our decision in December 2011 to fully offset U.S. tax losses with a valuation allowance, until such point that we return to profitability in the U.S. company.

The foreign currency translation adjustment reflects the exchange values for our Canadian dollar and Euro accounts converted to US dollars. The statement of comprehensive income reflects an increase in the carrying value of these accounts of $50,059 during the third quarter of fiscal 2012.

Nine Months ended March 31, 2012 Compared with Nine Months ended March 31, 2011

9 MONTH COMPARATIVE INCOME STATEMENTS AT MARCH 31, 2012 AND 2011

    Fiscal 2012     % to     Fiscal 2011     % to     Increase (Decrease)  
          Total           Total              
  $     Revenue   $     Revenue   $     %  
Contract revenue & sales                                    
                 OEM Systems   8,771,738     77%     5,721,206     69%     3,050,532     53%  
                 Aftermarket parts & retrofits   2,606,744     23%     2,575,510     31%     31,234     1%  
    11,378,482     100%     8,296,716     100%     3,081,766     37%  
Contract costs & cost of sales                                    
                 OEM Systems   7,422,831     65%     4,738,965     57%     2,683,866     57%  
                 Aftermarket parts & retrofits   1,593,338     14%     1,642,452     20%     (49,114 )   (3% )
    9,016,169     79%     6,381,417     77%     2,634,752     41%  
Gross profit                                    
                 OEM Systems   1,348,907     12%     982,241     12%     366,666     37%  
                 Aftermarket parts & retrofits   1,013,406     9%     933,058     11%     80,348     9%  
    2,362,313     21%     1,915,299     23%     447,014     23%  
Gross profit %                                    
                 OEM Systems   15%           17%                    
                 Aftermarket parts & retrofits   39%           36%                    
Expenses                                    
                 Selling, general & administrative   3,697,024     32%     3,613,041     43%     83,983     2%  
                 Research & development costs   60,628     1%     62,481     1%     (1,853 )   (3% )
                 Depreciation   50,418     0%     126,311     2%     (75,893 )   (60% )
    3,808,070     33%     3,801,833     46%     6,237     --%  
(Loss) from operations   (1,445,757 )   (13% )   (1,886,534 )   (23% )   440,777     (23% )
Other (expense)                                    
                 Interest, net   (4,374 )   0%     (2,367 )   0%     (2,007 )   84%  
                                     
(Loss) before income taxes   (1,450,131 )   (13% )   (1,888,901 )   (23% )   438,770     (23% )
                 Provision for (recovery of) income taxes   764,533     6%     (475,651 )   (6% )   1,240,184     (261% )
Net (loss)   (2,214,664 )   (19% )   (1,413,250 )   (17% )   (801,414 )   57%  
                 Foreign currency translation adjustment   (81,636 )   (1% )   240,304     3%     (321,940 )   (134% )
Comprehensive (loss)   (2,296,300 )   (20% )   (1,172,946 )   (14% )   (1,123,354 )   96%  

15


The opening backlog of OEM orders for fiscal year 2012 was $11.7 million ($2.4 million for fiscal year 2011) and OEM orders received in the first nine months of fiscal 2012 were $6.7 million ($11.9 million in the same period in the prior year). Revenue recognition for these orders is determined on the percentage of completion method, with completion typically ranging over a production period of 6 to 12 months depending on the scope and terms of the individual contracts.

OEM systems revenue for the nine month period ended March 31, 2012 increased 53% over the comparable period ended March 31, 2011 primarily as the result of progress on two large turnkey projects and a number of smaller supply-only projects. The balance of OEM backlog at March 31, 2012 was $9.6 million ($8.5 million at March 31, 2011) which will contribute to revenues over the next several quarters.

The cost of sales for OEM systems increased 57% for the nine month period ended March 31, 2012 over the comparable period in the prior year, which reflects the increased revenue volume in the first nine months of fiscal 2012.

As a result, gross profit on OEM systems in the first nine months of fiscal 2012 was 15% and in the comparable period in fiscal 2011 was 17%. OEM systems contributed a gross profit of $1,348,907 (12% of total revenue) in the first nine months of fiscal 2012 compared to a gross profit of $982,241 (12% of total revenue) for the same period in fiscal 2011.

The opening backlog of Aftermarket orders for the first nine months of fiscal 2012 was $0.3 million ($0.6 million for fiscal 2011) and Aftermarket orders received in the first nine months were $3.1 million ($2.4 million in the same period in the prior year). Revenue recognition for these orders is determined on a billing basis, which approximates actual performance and usually occurs in the first or second month following the order.

Aftermarket revenues increased 1% for the nine month period ended March 31, 2012 over the same period in the prior fiscal year primarily because of increased evaporative gas cooling and semi-dry scrubber parts orders in fiscal 2012. The balance of Aftermarket backlog at March 31, 2012 is $0.8 million ($0.4 million at March 31, 2011) which will contribute to revenues in the next three months.

The cost of sales for Aftermarket products decreased 3% for the nine month period ended March 31, 2012 over the same period in fiscal 2011. Gross profit on Aftermarket products increased 9% between the comparable periods in fiscal 2012 and 2011, which reflects a higher revenue volume and higher gross profit (39%) earned in the nine month period ended March 31, 2012 over gross profit (36%) earned in the nine months ended March 31, 2011. The increased gross profit is the result of increased prices and decreased costs on certain spare parts items.

Selling, general and administrative expenses increased $83,983 (2%) for the nine month period ended March 31, 2012 over the same period in the prior year. This increase was the result of the addition of a new employee ($44,000), professional expenses relating to the S-1 filing for the Dutchess Investment Agreement ($22,000) and additional patent fees ($28,000), partially offset by reduced directors fees ($10,000), in fiscal 2012,. As a percentage of total revenue, selling, general and administrative expenses were 32% for the nine month period ended March 31, 2012 compared to 43% of total revenue in the comparable period in fiscal 2011. Research and development costs decreased $1,853 (3%) for the nine month period ended March 31, 2012 compared to the same period in fiscal 2011, due to completion of activity on certain projects. Depreciation of $50,418 was recorded for the nine month period ended March 31, 2012 compared to $126,311 for the same period in the prior year. This decrease is the result of the full depreciation of certain office-related equipment in fiscal 2011; thereby reducing depreciation expense in the current fiscal year.

Loss before income taxes of $1,450,131 for the nine month period ended March 31, 2012 was significantly lower than the loss of $1,888,901 in the comparable period in the prior fiscal year. The reduced loss reflects higher revenue and gross profit in OEM systems for the first nine months of fiscal 2012 compared to those recorded in the first nine months of fiscal 2011. Operating results for the first nine months of fiscal 2012 include a provision for income taxes for $11,393 for international subsidiaries and a net provision of $753,140 for the US company compared to a net recovery of income taxes of $475,651 for the comparable period in fiscal 2011(combined international subsidiaries and the US company). This results from a $750,000 tax provision for US company operations in fiscal 2012 consisting of a recovery of income taxes of $500,146 offset by a deferred tax valuation allowance of $1,250,146 for the current nine month period. Our decision to record this deferred tax valuation allowance to fully offset the US deferred tax asset was based on two years of continued losses and a third year of projected losses.

The foreign currency translation adjustment reflects the exchange values for our Canadian dollar and Euro accounts converted to US dollars. The statement of comprehensive income reflects a decrease in the carrying value of these accounts of $81,636 during the first nine months of fiscal 2012.

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Liquidity and Capital Resources

    For the Nine Months Ended     For the Nine Months Ended  
Cash Summary   March 31, 2012     March 31, 2011  
             
Cash provided by (applied to): $   $  
                 Operations   (373,810 )   (581,202 )
                 Purchase of equipment   --     (34,135 )
                 Repayment of capital leases and long-term debt   --     (61,766 )
                 Effect of exchange rate changes on cash and cash equivalents   30,836     141,787  
                 Net proceeds from issue of shares   --     853,086  
Net cash (applied) provided during the period   (342,974 )   317,770  
Cash and cash equivalents - beginning of period   1,674,204     2,036,529  
Cash and cash equivalents - end of period   1,331,230     2,354,299  

Working Capital Summary   At March 31, 2012     At March 31, 2011  
Current assets   5,250,477     6,334,165  
Current liabilities   3,522,173     3,462,252  
                 Net working capital   1,728,304     2,871,913  
                 Current ratio   1.49     1.83  

Summary of Contracts in Progress   At March 31, 2012     At March 31, 2011  
Contract value completed and to be invoiced   209,651     1,423,824  
Contract advances invoiced   (1,449,124 )   (888,392 )
                 Net contracts in progress   (1,239,473 )   535,432  

Contract Backlog   At March 31, 2012     At March 31, 2011  
Contract value yet to be recognized as revenue   10,400,000     8,900,000  

During the nine month period ended March 31, 2012, cash of $373,810 was applied to operations while, during the same nine months in fiscal 2011, cash of $581,202 was applied to operations. The net change in cash flows applied to operations was due primarily to the decreased deferred contract costs and unbilled revenue partially offset by increased retentions receivable in the current fiscal period.

Our working capital position decreased to $1.7 million at March 31, 2012 from $2.9 million at March 31, 2011, with the current ratio decreasing from 1.83:1 as at March 31, 2011 to 1.49:1 at March 31, 2012.

Our contract payment terms provide for periodic progress payments by our customers based on our attainment of agreed milestones to the point of delivery. A final holdback amount is often dependent on commissioning, specified performance criteria or a fixed time of operations. At any point in time, the contracts in process with costs that exceed invoicing may be greater than the contracts that have been invoiced in advance of performance. At March 31, 2012, the net position of contracts in progress was a liability of $1,239,473. At March 31, 2011 the net position of contracts in progress was an investment of $535,432.

In May 2011, we entered into an agreement with HSBC Bank Canada, which agreement provides for a credit facility for standby letters of credit for CAD $4.25 million that is secured by a general security interest in, and lien upon, our assets and guarantees provided by Export Development Canada (“EDC”) on a fee-for-service basis. Currently the guarantees provided by EDC are being approved on a case-by-case basis. This credit facility became operational in August 2011, at which time our prior credit facilities were terminated by mutual consent.

At March 31, 2012, we had standby letters of credit for approximately $0.8 million ($1.4 million at June 30, 2011) in place with various customers in order to receive cash proceeds ahead of delivery or end-of-warranty milestones. EDC has provided guarantees for these letters of credit to HSBC Bank Canada and another Canadian bank with whom we had a prior agreement for previously issued letters of credit.

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On October 28, 2011, we entered into an Investment Agreement with Dutchess Opportunity Fund, II, LP for the sale, from time to time, at our discretion, of up to $3.0 million of our common stock during a three-year period at a price equal to 95% of the recent average market price at the time of sale, provided that in no event shall such price be lower than $0.33 per share. The extent to which we will need to access any portion or all of the proceeds available under the Investment Agreement will depend in substantial part upon the availability and adequacy of our cash flows from operations so as to enable us to address timing differences that may arise from time to time in our need to pay vendors and suppliers in advance of our receipt of contractual progress payments from our customers. We refer you to our Current Report on Form 8-K, dated October 31, 2011, for further information regarding the Investment Agreement. As a registration statement registering such common stock was declared effective by the SEC, we are now able, at our discretion, to sell common stock to Dutchess pursuant to the terms and conditions of the Investment Agreement. At March 31, 2012, our shares were trading at $0.31 per share and thus, this financing was not accessible.

As was the case with our previous bank operating line of credit that was never utilized, the Dutchess Investment Agreement for an equity line of credit has been established to provide back-up capabilities should the timing of our contractual progress payments prove temporarily insufficient to enable us to pay our vendors and suppliers on agreed terms. As of March 31, 2012, no common stock had been sold to Dutchess under this agreement.

Our backlog as at March 31, 2012 was approximately $10.4 million, compared to the March 31, 2011 backlog of $8.9 million, with approximately 39% expected to convert to revenue by June 30, 2012. We can offer no assurances that backlog will be replicated, increased or converted at current value into revenues in the future.

Based on our cash position and working capital at March 31, 2012, our credit agreements with HSBC Bank Canada and Export Development Canada, our access to an equity line of credit with Dutchess (which was not accessible at March 31, 2012 as the market price of $0.31 was below the floor price of $0.33), and our backlog of orders and anticipated sales orders through fiscal 2012 and 2013, we have substantial doubt that we will have sufficient capital resources to support operations through the next twelve months. We are actively pursuing additional financing, although there can be no certainty with respect to the timing and receipt of such financing.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Foreign transactions are conducted in Canadian dollars, US dollars or Euro to accommodate customers and all reporting is prepared in US dollars. As a result, fluctuations in currency exchange rates may affect operating results. To mitigate currency exposure, we attempt to contract outsourcing, where practical, in the same currency as the sales contract or with fabricators where the all-in costs, including currency, are most favorable. We do not engage in trading market risk sensitive instruments that are likely to expose us to market risk, whether interest rate, foreign currency exchange, commodity price or equity price risk, other than as noted.

ITEM 4: CONTROLS AND PROCEDURES

Our management has carried out an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of March 31, 2012. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2012.

There has not been any change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II: OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS

Not applicable.

ITEM 1A: RISK FACTORS

There have been no material changes in the risk factors from those disclosed in Item 1A of our annual report on Form 10-K for the year ended June 30, 2011.

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

Not applicable

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5: OTHER INFORMATION

Not applicable

ITEM 6: EXHIBITS

Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certifications
Exhibit 32.1 Section 1350 Certifications

Exhibit 101

The following financial information from TurboSonic Technologies, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Condensed Statements of (Loss) and Comprehensive (Loss) for the three months ended March 31, 2012 and 2011, (ii) Consolidated Condensed Balance Sheets at March 31, 2012 and June 30, 2011, (iii) Consolidated Condensed Statements of Cash Flows for the three months and nine months ended March 31, 2012 and 2011, (iv) Notes to Consolidated Condensed Financial Statements

SIGNATURE

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.

Dated: May 15, 2012

TURBOSONIC TECHNOLOGIES, INC.

By: /s/ Carl A. Young                                  
Carl A. Young
Chief Financial Officer

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