NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 – ORGANIZATIONAL AND SIGNIFICANT ACCOUNTING POLICIES
A.
ORGANIZATION AND OPERATIONS
Cyclone
Power Technologies, Inc. (the “Company”, “our,” “Cyclone”) is the successor entity to the
business of Cyclone Technologies LLLP (the “LLLP”), a limited liability limited partnership formed in Florida in September
2004. The LLLP was the original developer and intellectual property holder of the Cyclone engine technology. The Company is primarily
a research and development engineering company whose main purpose is to develop, commercialize, market and license its Cyclone
engine technology.
In
2012, the Company established Cyclone Performance LLC (“Cyclone Performance”) f/k/a Cyclone-TeamSteam USA, LLC. The
purpose of Cyclone Performance is to build, test and run a vehicle utilizing the Company’s engine. As of December 31, 2014,
through September 30, 2016 the company had a 95% controlling interest in Cyclone
Performance.
B.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The
condensed consolidated financial statements include the accounts of the Company and its 95% owned subsidiary Cyclone Performance.
All material inter-company transactions and balances have been eliminated in the condensed consolidated financial statements
The
Company prepares its consolidated financial statements in conformity with account principles generally accepted in the United
States (“U.S. GAAP”). The accounting principles utilized by the Company require the Company to make judgments, estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the condensed consolidated financial statements, the reported amounts of revenues and expenses, cash flows and
the related footnote disclosures during the periods. On an on-going basis, the Company reviews and evaluates its estimates and
assumptions, including, but not limited to, those that relate to the realizable value of inventory, identifiable intangible assets
and other long-lived assets, contracts, income taxes, derivative liabilities, and contingencies. Actual results could differ from
these estimates.
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting
principles applicable to interim financial information and the requirements of Form 10-Q and Article 10 of Regulation S-X of the
SEC. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted
in the United States for complete consolidated financial statements. Interim results are not necessarily indicative of results
for a full year. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial position
and the results of operations and cash flows for the interim periods have been included. Complete financial statements should
be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2015,
as filed with the Securities and Exchange Commission as part of the Company’s Form 10-K.
The
financial statements presented for the nine and three months ended September 30, 2016 and 2015 are unaudited.
C.
CASH
Cash
includes cash on hand and cash in banks. At September 30, 2016 and December 31, 2015, the Company maintained cash balances at
one financial institution.
D.
COMPUTATION OF INCOME (LOSS) PER SHARE
Net
income (loss) per share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding
during the period. Diluted net income (loss) per share is not presented as the conversion of the preferred stock and exercise
of outstanding stock options and warrants would have an anti-dilutive effect. As of September 30, 2016 and 2015, total anti-dilutive
shares amounted to approximately 14.7 million and 13.5 million shares, respectively.
E.
INCOME TAXES
Income
taxes are accounted for under the asset and liability method as stipulated by Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 740, “
Income Taxes
” (“ASC 740”). Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities
or a change in tax rate is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced
to estimated amounts to be realized by the use of a valuation allowance. A valuation allowance is applied when in management’s
view it is more likely than not (50%) that such deferred tax will not be utilized.
In
the unlikely event that an uncertain tax position exists in which the Company could incur income taxes, the Company would evaluate
whether there is a probability that the uncertain tax position taken would be sustained upon examination by the taxing authorities.
Reserves for uncertain tax positions would be recorded if the Company determined it is probable that a position would not be sustained
upon examination or if payment would have to be made to a taxing authority and the amount is reasonably estimated. As of December
31, 2015, the Company does not believe it has any uncertain tax positions that would result in the Company having a liability
to the taxing authorities. Interest related to the unrecognized tax benefits is recognized in the consolidated financial statements
as a component of income taxes. The Company’s tax returns are subject to examination by the federal and state tax authorities
for the years ended 2013 through 2015.
F.
REVENUE RECOGNITION
The
Company’s revenue recognition policies are in compliance with ASC 605, “
Revenue Recognition – Multiple Element
Arrangements
”, and Staff Accounting Bulletin (“SAB”) 104,
Revenue Recognition
. Revenue is recognized
at the date of shipment of engines and systems, engine prototypes, engine designs or other deliverables to customers when a formal
arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company
exist and collectability is reasonably assured. Revenue from contracts for multiple deliverables and milestone method recognition
are evaluated and allocated as appropriate. Payments received before all of the relevant criteria for revenue recognition are
satisfied are recorded as deferred revenue on the consolidated balance sheets. The Company does not allow its customers to return
prototype products. Current contracts do not require the Company to provide any warranty assistance after the “deliverable”
has been accepted.
It
is the Company’s intention when it has royalty revenue from its contracts to record royalty revenue periodically when earned,
as reported in sales statements from customers. The Company does not have any royalty revenue to date.
G.
WARRANTY PROVISIONS
Current
contracts do not require warranty assistance subsequent to acceptance of the “deliverable R&D prototype” by the
customer. For products that the Company will sell in the future, warranty costs are anticipated to be borne by the manufacturing
vendor.
H.
INVENTORY
Inventory
is recorded at the lower of cost or market. Costs include material, labor and allocated overhead to manufacture a completed engine.
These costs are periodically evaluated to determine if they have a net realizable value. If the net realizable value is lower
than the carrying amount, a reserve is provided.
I.
FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC
820, “
Fair Value Measurements and Disclosures
” requires disclosures of information about the fair value of
certain financial instruments for which it is practicable to estimate the value. The carrying amounts reported in the balance
sheet for cash, accounts payable and accrued expenses, and loans payable approximate their fair market value based on the short-term
maturity of these instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date. Inputs refer broadly to the assumptions
that market participants would use in pricing the asset or liability, including assumptions about risk. Inputs may be observable
or unobservable. Observable inputs are based on market data obtained from sources independent of the Company. Unobservable inputs
reflect the Company’s own assumptions based on the best information available in the circumstances. The fair value hierarchy
prioritizes the inputs used to measure fair value into three broad levels. The three levels of the fair value hierarchy are defined
as follows:
Level
1
|
—
|
Inputs
are quoted prices in active markets for identical assets or liabilities as of the reporting date.
|
|
|
|
Level
2
|
—
|
Inputs
other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly,
as of the reporting date.
|
|
|
|
Level
3
|
—
|
Unobservable
inputs for the asset or liability that reflect management’s own assumptions about the assumptions that market participants
would use in pricing the asset or liability as of the reporting date.
|
The
summary of fair values and changing values of financial instruments as of January 1, 2016 (beginning of period) and September
30, 2016 (end of period) is as follows:
Instrument
|
|
Beginning
of Period
|
|
|
Change
|
|
|
End of
Period
|
|
|
Level
|
|
|
Valuation
Methodology
|
Derivative liabilities
|
|
$
|
383,482
|
|
|
$
|
(3,320
|
)
|
|
$
|
380,162
|
|
|
|
3
|
|
|
Stochastic Process
Forecasting Model
|
Please
refer to Note 16 for disclosure and assumptions used to calculate the fair value of the derivative liabilities.
J.
RESEARCH AND DEVELOPMENT
Research
and development activities for product development are expensed as incurred. Costs for the nine months ended September 30, 2016
and 2015 were $131,827 and $291,769
K.
STOCK BASED COMPENSATION
The
Company applies the fair value method of ASC 718, “
Share Based Payment
”, in accounting for its stock based
compensation. This standard states that compensation cost is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period. The Company values stock based compensation at the market
price for the Company’s common stock as of the date in which the obligation for payment of services is incurred.
L.
COMMON STOCK OPTIONS AND PURCHASE WARRANTS
The
Company accounts for common stock options and purchase warrants at fair value in accordance with ASC 815-40, “
Derivatives
and Hedging”.
The Black-Scholes option pricing valuation method (“BSM option pricing model”) is used to
determine fair value of these warrants consistent with ASC 718, “
Share Based Payment”.
Use of this method requires
that the Company make assumptions regarding stock volatility, dividend yields, expected term of the warrants and risk-free interest
rates.
The
Company accounts for transactions in which services are received from non-employees in exchange for equity instruments based on
the fair value of the equity instruments exchanged, in accordance with ASC 505-50, “
Equity Based payments to Non-employees”
.
M.
ORIGINAL ISSUE DEBT DISCOUNT
The
original issue discount (OID) related to notes payable is amortized by the effective interest method over the repayment period
of the notes. The unamortized OID is represented as a reduction of the amount of the notes payable.
N.
PROPERTY AND EQUIPMENT
Property
and equipment are recorded at cost. Depreciation is computed on the straight-line method, based on the estimated useful lives
of the assets as follows:
|
|
Years
|
Display equipment for trade shows
|
|
3
|
Leasehold improvements and furniture and fixtures
|
|
10 - 15
|
Shop equipment
|
|
7
|
Computers
|
|
3
|
Expenditures
for maintenance and repairs are charged to operations as incurred.
O.
IMPAIRMENT OF LONG LIVED ASSETS
The
Company continually evaluates the carrying value of intangible assets and other long lived assets to determine whether there are
any impairment losses. If indicators of impairment are present and future cash flows are not expected to be sufficient to recover
the assets’ carrying amount, an impairment loss would be charged to expense in the period identified. To date, the Company
has not recognized any impairment charges.
P.
RECENT ACCOUNTING PRONOUNCEMENTS
In
April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-05,
Customer’s
Accounting for Fees Paid in a Cloud Computing Arrangement.
This provides guidance for companies to evaluate the accounting
for fees paid by a customer in a cloud computing arrangement. The adoption has no impact on the financial reporting of the Company.
In
April 2015, the FASB issued ASU No. 2015-03, “
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation
of Debt Issuance Costs
”, or ASU 2015-03. ASU 2015-03 amends current presentation guidance by requiring that debt issuance
costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount
of that debt liability, consistent with debt discounts. We adopted the provisions of ASU 2015-03 effective January 1, 2016. The
adoption of ASU 2015-03 did not have a material impact our consolidated financial position, results of operations or cash flows.
In
February 2016, the FASB issued ASU 2016-02,
Leases.
This was provide guidance to increase transparency and comparability
among companies by requiring most leases be included on the balance sheet and by expanding disclosure requirements.. We are still
in the process of evaluating the effect of adoption on our financial statements.
In
March 2016, the FASB issued ASU 2016-09,
Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting.
This addresses the accounting for share-based payment transactions and includes the recognition of the income tax effects
of awards that vest or settle as income tax expense and clarification of the presentation of certain components of share-based
awards in the statement of cash flows. We are still in the process of evaluating the effect of adoption on our financial statements
and the effective date of application is 2018.
Q.
CONCENTRATION OF RISK
The
Company does not have any off-balance sheet concentrations of credit risk. The Company expects cash and accounts receivable to
be the two assets most likely to subject the Company to concentrations of credit risk. The Company’s policy is to maintain
its cash with high credit quality financial institutions to limit its risk of loss exposure.
As
of September 30, 2016, the Company maintained its cash in one quality financial institution. The Company has not experienced any
losses in its bank accounts through September 30, 2016. The Company purchases raw material and components from multiple sources,
none of which may be considered a principal or material supplier. If necessary, the Company could replace these suppliers with
minimal effect on its business operations.
R.
DERIVATIVE FINANCIAL INSTRUMENTS
Accounting
and reporting standards for derivative instruments and for hedging activities were codified by ASC Topic 815,
Derivatives and
Hedging
(“ASC Topic 815”). It requires that all derivatives be recognized in the balance sheet and measured at
fair value. Gains or losses resulting from changes in the fair value of derivatives are recognized in earnings or recorded in
other comprehensive income (loss) depending on the purpose of the derivatives and whether they qualify and have been designated
for hedge accounting treatment. The Company has derivative liabilities pursuant to convertible debt and common stock warrants,
and has recognized net expenses on the condensed consolidated statements of operations. The Company does not have any derivative
instruments for which it has applied hedge accounting treatment.
NOTE
2 - GOING CONCERN
As
shown in the accompanying consolidated financial statements, the Company incurred substantial operating and other losses and expenses
of approximately $.9 million for the nine months ended September 30, 2016 and $1.5 million for the year ended December 31, 2015,
The cumulative deficit since inception is approximately $ 59.6 million, which is comprised of $27.3 million attributable to actual
operating losses (which were paid in cash, stock for services and other equity instruments) and net other expenses, and $32.3
million in non-cash derivative liability accounting which was a result of the conversion of the Company’s Series A Convertible
Preferred Stock in 2011, the retirement of a common stock purchase warrant in 2012, and the change in fair value of derivatives
associated with notes payable funded in the years ended December 31, 2013 and 2014. The Company has a working capital deficit
at September 30, 2016 of approximately $2.9 million. There is no guarantee whether the Company will be able to generate enough
revenue and/or raise capital to support its operations. This raises substantial doubt about the Company’s ability to continue
as a going concern. The ability of the Company to continue as a going concern is dependent on management’s plans which include
implementation of its business model to generate revenue from development contracts, licenses and product sales, and continuing
to raise funds through debt or equity raises. The Company will also likely continue to rely upon related-party debt or equity
financing.
The
consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. The
Company is currently raising working capital to fund its operations via private placements of common stock and debt, advance contract
payments (deferred revenue), and advances from and deferred payments to related parties.
NOTE
3 – INVENTORY, NET
Inventory
principally consists of raw material engine parts, work in process engines, labor and overhead, net of
realization,
valuation and obsolescence reserves. In the aggregate it is stated at the lower of cost or market.
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Raw material
|
|
$
|
323,224
|
|
|
$
|
323,508
|
|
Work in process
|
|
|
84,291
|
|
|
|
0
|
|
Total
|
|
$
|
407,515
|
|
|
$
|
323,508
|
|
We
provide estimated provisions for the realization, valuation and obsolescence of our inventories, including adjustments to market,
based on various factors, including the age of such inventory and our management’s assessment of the need for such provisions.
We look at historical inventory aging and usage reports and margin analyses in determining our provision
NOTE
4 – PROPERTY AND EQUIPMENT, NET
Property
and equipment consists of the following:
|
|
September 30, 2016
|
|
|
December
31,
2015
|
|
Display
equipment for trade shows
|
|
$
|
6,270
|
|
|
$
|
6,270
|
|
Leasehold
improvements and furniture and fixtures
|
|
|
93,922
|
|
|
|
93,922
|
|
Equipment
and computers
|
|
|
202,578
|
|
|
|
204,377
|
|
Total
|
|
|
302,770
|
|
|
|
304,569
|
|
Accumulated
depreciation
|
|
|
(202,153
|
)
|
|
|
(178,049
|
)
|
Net
property and equipment
|
|
$
|
100,617
|
|
|
$
|
126,520
|
|
Depreciation
expense for the nine months ended September 30, 2016 and 2015 was $25,924 and $27,567, respectively.
NOTE
5 – PATENTS, TRADEMARKS AND COPYRIGHTS
Patents,
trademarks and copyrights consist of legal fees paid to file and perfect these claims. The net balances as of September 30, 2016
and December 31, 2015 were $257,032 and $283,368, respectively. For the nine months ended September 30, 2016 and for the year
ended December 31, 2015 the Company capitalized $0 and $0, respectively, of expenditures related to these assets. As of September
30, 2016, the Company had 33 patents issued on its technology both in the U.S. and internationally, and six trademarks in the
U.S.
Patents,
trademarks and copyrights are amortized over the life of the intellectual property which is 15 years. Amortization expenses for
the nine months ended September 30, 2016 and 2015 were $26,316 and $29,243, respectively.
NOTE
6 – NOTES AND OTHER LOANS PAYABLE
A
summary of non-related party notes and other loans payable is as follows:
|
|
Sept. 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
12% convertible notes payable, maturing at various dates from November 2013 through April 2016 (A)
|
|
$
|
42,951
|
|
|
$
|
34,558
|
|
|
|
|
|
|
|
|
|
|
10% convertible note payable, monthly payments commencing in December 2013 through July 2014 (B)
|
|
|
19,963
|
|
|
|
19,963
|
|
|
|
|
|
|
|
|
|
|
10% convertible notes payable maturing at various dates from May 2015 through February 2016 (C)
|
|
|
76,000
|
|
|
|
72,793
|
|
|
|
|
|
|
|
|
|
|
10% convertible notes payable, maturing at various dates from December 2015 through January 2016 (D)
|
|
|
29,303
|
|
|
|
29,223
|
|
|
|
|
|
|
|
|
|
|
10% convertible notes payable maturing at various dates from February 2015 through August 2015 ( F )
|
|
|
116,200
|
|
|
|
116,200
|
|
|
|
|
|
|
|
|
|
|
12% convertible notes payable, maturing at various dates from April 2015 through May 2015 ( G )
|
|
|
85,000
|
|
|
|
85,000
|
|
|
|
|
|
|
|
|
|
|
10% note payable, maturing Feb 3, 2017
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Various notes payable, maturing 2016
|
|
|
5,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable, maturing Oct 14 2016, interest of $3,000 to be paid in 1,500,000 shares of restricted company common stock
|
|
|
27,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% Note payable, maturing January 26, 2017
|
|
|
46,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4% Note payable maturing Sept 6 2016
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand Note, (H)
|
|
|
6,725
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total non related party notes –net of discount
|
|
|
508,642
|
|
|
|
407,737
|
|
|
|
|
|
|
|
|
|
|
Less-Current Portion
|
|
|
508,642
|
|
|
|
357,737
|
|
|
|
|
|
|
|
|
|
|
Total non-current non related party
|
|
$
|
-
|
|
|
$
|
50,000
|
|
|
(A)
|
Notes issued net of 10% original discount (fully amortized) This note is in default.
|
|
|
|
|
(B)
|
Note issued net of original discount (fully amortized). Effective May 8, 2015, the Company is subject to a default judgment of approximately $175,000, plus subsequent penalty interest for non-payment of convertible debt and interest. The Company is negotiating a reduced settlement. Unpaid interest, default penalties and default interest is included in accounts payable and accrued liabilities.
|
|
|
|
|
(C)
|
Notes issued net of discount from derivative liabilities (fully amortized). At September 30, 2016, the Company held approximately 97 million shares in reserve to cover the potential conversion of this note into common stock pursuant to debt covenants. This note is in default.
|
|
|
|
|
(D)
|
Notes issued net of discount (fully amortized) This note is in default.
|
|
|
|
|
(F)
|
Notes issued net of discount from derivative liabilities (fully amortized). At September 30, 2016, the Company held 233.3 million shares in reserve to cover the potential conversion of this note into common stock pursuant to debt covenants. This note is in default.
|
|
|
|
|
(G)
|
Notes issued net of discount from derivative liabilities (fully amortized). The Company is subject to litigation judgment of approximately $150,000, plus subsequent penalty interest for non–payment. Company is seeking to arrange a settlement. Unpaid interest, default penalties and default interest is included in accounts payable and accrued liabilities.
|
|
|
|
|
(H)
|
Note convertible into common stock at a 40% discount to 20 day market average.
|
A
summary of related party notes and other loans payable is as follows:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
6% demand loans per Operations Agreement with Schoell Marine Inc., a company owned by Cyclone’s Chairman and controlling shareholder (A)
|
|
$
|
166,751
|
|
|
$
|
117,734
|
|
6% non-collateralized loans from officer and shareholder, payable on demand.
|
|
|
110,624
|
|
|
|
103,328
|
|
12% non-collateralized loans from officer and shareholder, payable on demand.
|
|
|
20,379
|
|
|
|
20,178
|
|
Accrued Interest
|
|
|
93,378
|
|
|
|
80,094
|
|
Total current related party notes, inclusive of accrued interest
|
|
$
|
391,132
|
|
|
$
|
321,334
|
|
|
(A)
|
This
note arose from rent, services and salaries incurred by Schoell Marine on behalf of the Company. The Schoell Marine note bears
an interest rate of 6% and repayments occur as cash flow of the Company permits. For the nine months ended September 30, 2016
and for the year ended December 31, 2015 $5,665 and $0 of principal was paid on the note balance, respectively.
|
In
June 2015 Schoell Marine forgave $710,272 of principle and accrued interest on the note and it was recorded as additional paid
in capital.
NOTE
7 – RELATED PARTY TRANSACTIONS- DEFERRED COMPENSATION
Included
in accounts payable and accrued expenses - related parties as of September 30, 2016 and December 31, 2015 are $343,750 and $137,500,
respectively, of accrued and deferred officers’ salaries compensation which may be paid as funds are available. These are
non-interest bearing and are due on demand.
In
September 2015, the principle officers of the company forgave $612,500 of deferred compensation which was recorded as additional
paid in capital.
NOTE
8 – PREFERRED STOCK
The
Series B Preferred Stock is majority voting stock and is held by the two co-founders of the Company. Ownership of the Series B
Preferred Stock shares assures the holders thereof a 51% voting control over the common stock of the Company. The 1,000 Series
B Preferred Stock shares are convertible on a one-for-one basis with the common stock in the instance the Company is merged, sold
or otherwise dissolved.
NOTE
9 – STOCK TRANSACTIONS
During
the nine months ended September 30, 2016, the Company:
|
a-
|
Issued
125,730,741 shares of restricted common stock valued at $298,315 for payment of liabilities
|
|
|
|
|
b-
|
Amortized
(based on vesting) $1,693 of common stock options for employee services.
|
|
|
|
|
c-
|
Issued
3,000,000 shares of common stock valued at $6,000 for services.
|
|
|
|
|
d-
|
Effective
September 1, 2016, the company raised the authorized common stock to 4,000,000,000 shares.
|
NOTE
10 – STOCK OPTIONS AND WARRANTS
A.
COMMON STOCK OPTIONS
Per
the employment contracts with certain officers, for the nine months ended September 30, 2016, the company issued 1,125,000 common
stock options, valued at $2,610 ( pursuant to the Black Scholes valuation model) that are exercisable into shares of common stock
at an average exercise price of $.0019 and with a maturity life of 10 years. For the nine months year ended September 31, 2016,
the amortization of stock options was $1,693 and the unamortized balance was $2,149.
A
summary of the common stock options for the period from December 31, 2015 through September 30, 2016 follows
|
|
Number Outstanding
|
|
|
Weighted
Avg.
Exercise
Price
|
|
|
Weighted
Avg.
Remaining Contractual
Life
(Years)
|
|
Balance, December 31, 2015
|
|
|
12,380,000
|
|
|
$
|
0.123
|
|
|
|
6.0
|
|
Options issued
|
|
|
1,350,000
|
|
|
|
0.0019
|
|
|
|
9.8
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Expired
|
|
|
(150,000
|
)
|
|
|
(.098
|
)
|
|
|
-
|
|
Balance, September 30, 2016
|
|
|
13,580,000
|
|
|
$
|
0.099
|
|
|
|
5.4
|
|
The
vested and exercisable options at period end follows:
|
|
Exercisable/
Vested
Options
Outstanding
|
|
|
Weighted
Avg.
Exercise Price
|
|
|
Weighted
Avg.
Remaining
Contractual
Life (Years)
|
|
Balance September 30, 2016
|
|
|
12,230,000
|
|
|
$
|
.113
|
|
|
|
4.9
|
|
Additional vesting by Sept. 30, 2016
|
|
|
450,000
|
|
|
|
.0016
|
|
|
|
8.25
|
|
The
fair value of new stock options granted using the Black-Scholes option pricing model was calculated using the following assumptions:
|
|
Nine Months
Ended
September 30, 2016
|
|
Risk free interest rate
|
|
|
.71 % -.88
|
%
|
Expected volatility
|
|
|
136% - 139
|
%
|
Expected term
|
|
|
3
|
|
Expected dividend yield
|
|
|
0
|
%
|
Average value per options and warrants
|
|
$
|
.0019 -$ .0020
|
|
Expected
volatility is based on historical volatility of the Company’s common stock price. Short Term U.S. Treasury rates were utilized
at the risk free interest rate. The expected term of the options and warrants was calculated using the alternative simplified
method newly codified as ASC 718 “
Accounting for Stock Based Compensation,
” which defined the expected life
as the average of the contractual term of the options and warrants and the weighted average vesting period for all issuances.
B.
COMMON STOCK WARRANTS
A
summary of outstanding vested warrant activity for the period from December 31, 2015 to September 30, 2016 follows:
|
|
Number Outstanding
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
Common Stock Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Dec 31, 2015
|
|
|
1,125,000
|
|
|
$
|
0042
|
|
|
|
2.05
|
|
Warrants exercised-cashless
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance, September 30, 2016
|
|
|
1,125,000
|
|
|
$
|
0042
|
|
|
|
.41
|
|
NOTE
11 – INCOME TAXES
A
reconciliation of the differences between the effective income tax rates and the statutory federal tax rates for the nine months
ended September 30, 2016 and 2015 are as follows:
|
|
Nine Months ended
Sept.
30,
2016
|
|
|
Amount
|
|
|
Nine Months ended
Sept.
30
2015
|
|
|
Amount
|
|
Tax benefit at U.S. statutory rate
|
|
|
34
|
%
|
|
$
|
233,075
|
|
|
|
34
|
%
|
|
$
|
272,106
|
|
State taxes, net of federal benefit
|
|
|
4
|
|
|
|
27,421
|
|
|
|
4
|
|
|
|
32,012
|
|
Change in valuation allowance
|
|
|
(38
|
)
|
|
$
|
(260,496
|
)
|
|
|
(38
|
)%
|
|
$
|
(304,118
|
)
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
The
tax effect of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at September
30, 2016 and December 31, 2015 consisted of the following:
Deferred
Tax Assets
|
|
September 30, 2016
|
|
|
December
31, 2015
|
|
Net
Operating Loss Carry-forward
|
|
$
|
10,263,363
|
|
|
$
|
9,924,492
|
|
Deferred
Tax Liabilities
|
|
|
(874,181
|
)
|
|
|
(795,805
|
)
|
Net
Deferred Tax Assets
|
|
|
9,389,182
|
|
|
|
9,128,687
|
|
Valuation
Allowance
|
|
|
(9,389,182
|
)
|
|
|
(9,128,687
|
)
|
Total
Net Deferred Tax Assets
|
|
$
|
-
|
|
|
$
|
-
|
|
As
of September 30, 2016, the Company had a net operating loss carry forward for income tax reporting purposes of approximately $22
million that may be offset against future taxable income through 2030. Current tax laws limit the amount of loss available to
be offset against future taxable income when a substantial change in ownership occurs. Therefore, the amount available to offset
future taxable income may be limited. No tax asset has been reported in the financial statements because the Company believes
there is a 50% or greater chance the carry forwards will expire unused. Accordingly, the potential tax benefits of the loss carry
forwards are offset by a valuation allowance of the same amount.
NOTE
12 –LEASE OBLIGATIONS
A.
CAPITALIZED LEASE OBLIGATIONS
Total
capitalized lease payments made for the nine months ended September 30, 2016 were $7,754. The balance of capitalized lease obligations
payable at September 30, 2016 and December 31, 2015 were $40,961 and $49,889 respectively. Future lease payments are:
2016
|
|
|
$
|
4,022
|
|
2017
|
|
|
|
14,382
|
|
2018
|
|
|
|
11,984
|
|
2019
|
|
|
|
8,551
|
|
2020
|
|
|
|
2,022
|
|
|
|
|
$
|
40,961
|
|
B.
LEASE ON FACILITIES
The
Company leases a 6,000 square foot warehouse and office facility located at 601 NE 26th Court in Pompano Beach, Florida. The original
lease provides for the Company to pay an annual rent of $63,600. The original lease period ends December 2016 with a 1 year renewal
at the company’s option and a 2% rate increase. Occupancy costs for the nine months ended September 30, 2016 and 2015 were
$48,200 and $45,000, respectively.
NOTE
13 – COMMITMENTS AND CONTINGENCIES
The
Company has employment agreements with Harry Schoell, Chairman and CTO (previously, CEO), at $150,000 per year and Frankie Fruge,
President, at $120,000 per year; (collectively, the “Executives”). These agreements provide for a term of three (3)
years from their Effective Date (July 2007 with automatically renewing successive one year periods starting on the end of the
second anniversary of the Effective Date. If the Executive is terminated “without cause” or pursuant to a “change
in control” of the Company, as both defined in the respective agreements, the Executive shall be entitled to (i) any unpaid
Base Salary accrued through the effective date of termination, (ii) the Executive’s Base Salary at the rate prevailing at
such termination through 12 months from the date of termination or the end of his Term then in effect, whichever is longer, and
(iii) any performance bonus that would otherwise be payable to the Executive were he/she not terminated, during the 12 months
following his or her termination.
NOTE
14 –CONSOLIDATED SUBSIDIARY
In
2012, the Company established a 100% owned subsidiary (renamed) Cyclone Performance LLC. The purpose of Cyclone Performance is
to build, test and run a vehicle utilizing the Company’s engine. In the last quarter of 2012, the Company sold a 5% equity
investment to an unrelated investor for $30,000. Subsequent to December 31, 2012, this 5% equity investment was acquired by a
corporate officer of the Company. Losses of the subsidiary are currently fully borne by the Company, as there is no guarantee
of future profits or positive cash flow of the subsidiary. As of September 30, 2016, the cumulative unallocated losses to the
non-controlling interests of this subsidiary of $961 are to be recovered by the parent from future subsidiary profits if they
materialize.
NOTE
15 – RECEIVABLES, DEFERRED REVENUE AND BACKLOG
As
of September 30, 2016, total backlog for prototype engines to be delivered was $400,000 from the Combilift agreement, of which
$100,000 has been paid and has been recorded as deferred revenue. Another customer advanced $25,000 as a deposit towards progress
payments on a $225,000 contract for engines to be delivered in 2017 and other customers advanced $ 15,700 on engine contracts.
NOTE
16 – DERIVATIVE FINANCIAL INSTRUMENTS
Pursuant
to additional financing, in the year ended December 31, 2015 and for the nine months ended September 30, 2016 the Company entered
into no convertible note agreements. Prior convertible notes had conversion prices into common stock that ranged from a discount
of 30% to 45% of the lowest closing prices in the 10 to 20 trading days prior to the conversion. Under provisions of ASC Topic
815-40, this conversion feature triggered derivative accounting treatment because the convertible note was convertible into an
indeterminable number of shares of common stock. The fair value of the embedded conversion option was required to be presented
as a derivative liability and adjusted to fair value at each reporting date, with changes in fair value reported in the condensed
consolidated statements of operation.
In
the nine months ended September 30, 2016, the Company recorded a $11,680 non-cash charge to interest expense (reflective of debt
discount amortization), and $3,320 of derivative gains related to adjusting the derivative liability to fair value. At September
30, 2016, the derivative related fair value of debt was $380,162.
The
Company calculates the estimated fair values of the liabilities for derivative instruments at each quarter-end using the BSM option
pricing model and Stochastic Process Forecasting models (Monte Carlo simulations). Volatility, expected term and risk free interest
rates used to estimate the fair value of derivative liabilities are indicated in the table below. The volatility was based on
historical volatility, the expected term is equal to the remaining term of the debt and the risk free rate is based upon rates
for treasury securities with the same term.
NOTE
17 – LlTIGATION
Effective
May 8, 2015, the Company is subject to a default judgment of approximately $175,000 plus interest for non-payment of convertible
debt and interest. The Company is negotiating a reduced settlement.
In
August 2015, the Company is subject to litigation of approximately $150,000 plus interest for non- payment of a liability. The
Company is seeking to arrange a settlement.
NOTE
18 – SUBSEQUENT EVENTS
In
the last quarter of 2016, the Company engaged in the following transactions:
|
a.
|
Placed
purchase orders for the pre production manufacturing of 10 Mark 1 engines to test application and integration with customers’
systems
|
|
|
|
|
b.
|
The
company entered into a consulting agreement on October 1, 2016 to assist in Investment
Banking services in the amount of $10,000 per month for a period of 12 months.
|
|
|
|
|
c.
|
The
Company entered into a consulting contract on October 24, 2016 to oversee and complete
the process of its 2014 and 2015 audit in the amount of 10,000,000 shares for a period
of three months.
|