The number of shares
outstanding of the registrant’s common stock as of July 27, 2017 is 1,753,246,329
Part
I
Item
1. Business
Summary
Cyclone
Power Technologies, a Florida corporation (OTCQB: CYPW) (the “Company,” “Cyclone,” or “we,”
“our” is a clean-tech innovation company based in Pompano Beach, Florida. We were incorporated on July 5, 2007. Our
mission is to develop power technologies that lead to more efficient and diverse utilization of energy resources,
less dependence on fossil fuels, and a cleaner environment.
Since
2006, we have completed multiple prototype stages and received 33 patents on the
Cyclone Engine
, an external heat engine
that generates mechanical power by expanding super-heated steam rapidly inside its cylinders. This steam expansion pushes pistons
and turns a shaft. Hot water is then expelled into a condenser to cool and return to the external heat source to repeat the process
in a closed loop. This is a
Rankine cycle
, which is how nuclear and coal-fired power plants produce electricity.
What
makes the Cyclone Engine different from power plants is size
.
Cyclone Engines are compact systems that can be used
for distributed power generation (i.e., a small electric home generator that also co-generates hot water and space heating) and
transportation applications. Unlike power plants that use turbines which are difficult to build cost-effectively and run efficiently
in small sizes, we are designing our engines to be easy to manufacture, high performance, compact piston engines.
What
makes the Cyclone Engine different from piston steam engines of the past is efficiency
. Based on current testing, we are
able to convert up to approximately 33% of the energy content of fuel into usable power. This is approximately a 400% improvement
over historical steam engines and on par with today’s small diesel engines. We are able to achieve such high thermal efficiencies
because we have figured out how to run our engines without using lubricating oil which carbonizes at high temperatures. Without
that limitation we are able to utilize steam heated to the same temperature and pressures as used by large power plants.
High
temperature = high efficiency; and high pressure = high power density
.
What
makes the Cyclone Engine more useful than diesel engines is fuel diversity
. As an external heat engine that uses steam
to create mechanical power, how that steam is created is of little consequence. We can use traditional fossil or bio-fuels in
our patented, clean-burning combustion chamber. We can integrate our engine with gasifiers that dispose biomass and bio-waste.
We can capture exhaust heat from furnaces or other engines. We can even use solar thermal collectors to harness the energy of
the sun.
The
market opportunities for Cyclone Engines are vast
. We estimate that our technology addresses a market potential of roughly
$100+ billion, and touches virtually all areas of power generation and transportation, as well as the production of U.S bio-fuels,
natural gas and coal.
We
currently have three engines in development addressing markets that present what we believe to be the best and most immediate
opportunities:
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Our
Mark 1 and Mark 3 model engines address the alternative energy markets to provide an external combustion engine able to burn
various fuels providing power for usable mechanical and/or electric power. Our business model is to subcontract the manufacturing
of these models and sell them to commercial customers and vertical partners starting in 2017.
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Transportation
and Equipment:
Our Mark 5 model engine is a powerful, multi-fuel and clean burning demonstrator for the automotive,
marine and off-road equipment markets. Our business model is to secure strong development partners in these sectors to provide
program funding and support to allow us to complete a heavy equipment and vehicle integration in 2017.
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Portable
/ Mobile Power
:
Our S-2 model engine was developed and accepted under a contract with the U.S. Army as
a portable, multi-fuel power generator for vehicles and forward operating bases. We have licensed this technology to Falck
Schmidt Defense Systems (“FSDS”) of Denmark, a worldwide military supplier. They will take the unit to a trial
for military compliance.
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The
advantages of our technology have been widely recognized.
We first caught the public eye as
Popular Science Magazine’s
Invention of the Year in 2008, and since then, we have secured engine development contracts with Raytheon, the U.S. Army,
Phoenix Power Group (waste-to-energy), Combilift (European equipment manufacturer). FSDS (military supplier) and Integrated Biomass
Energy System, FZ-LLC (“IBES”), a United Arab Emirates corporation. We have formed working relationships with other
major defense and industrial groups, and teaming agreements with multiple “vertical” development partners that manufacture
and distribute furnaces, gasifiers, electric generators and other synergistic technologies.
Business
Objectives
Our
business objective is to design and develop engines that we can manufacture through sub-contracted parties for direct sale to
customers, which include Original Equipment Manufacturers (OEMs) of different clean combustion / heat technologies (such as biomass
gasifiers and pyrolysis, methane and natural gas, wood pellet furnaces, solar collectors and similar items), and OEM’s in
the equipment / transportation sectors. We also license our technology to manufacturers and other producers of specialized applications.
Based on our business model, our revenue
will come from:
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Development
and engineering fees from customers, partners and licensees;
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Direct
sales revenue from engines we manufacture through sub contractors;
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Up-front
license fees and on-going royalties based on sales by our licensees.
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Direct
sales of Cyclone powered generators to distributors.
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Development
Status of Technology
Our
products are in development, however, prototypes of several different models and sizes are near completion. The following lists
each of the Cyclone Engines and products that we have in development:
Model
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Size
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Uses
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Stage
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Mark
1
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5
HP
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Power
generation –all fuels and heat sources
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Preproduction
units (10) in field testing
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Mark
3
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25
HP
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Auxiliary
power for military, biomass to power, portable power
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Preproduction
units (15) at OEM’s
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Mark
5
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100
HP
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Transportation,
commercial power, military
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Beta
Prototype (2)
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Combustion
Chamber
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Waste
fuels, biomass to power, for :transportation, commercial power, military
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Preproduction
units (25)
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(1)
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“Pre
Production Unit” refers to an engine in the process of being engineered for manufacturing at OEM’s
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(2)
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Beta
Prototype” refers to a second generation prototype engine, which has undergone significant testing at Cyclone’s
facility.
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Our
engines are currently in customer field testing, and there is no guarantee that they will successfully meet customer expectations
when completed.
Research
and Development Activities
As
a technology research and development company, much of our annual expenses are dedicated towards R&D, including labor costs,
material costs, tooling and equipment and other expenses required to run our business. Our R&D expenditures for 2016 and 2015
were $604,199 and $467,610, respectively.
We
actively pursue development agreements with customers, whereby we will develop an engine, design plans or other products to spec
at the customer’s full or partial expense. Sometimes these arrangements are part of a more expansive license agreement.
Prototyping
and Manufacturing
We
currently contract with multiple suppliers for the production of many of our prototype parts, which we design and then assemble
and test at our facility. In 2014, we acquired the machinery to produce in-house a greater portion of this prototype manufacturing
work, which we believe has saved us considerable time and money. For production of prototypes we have contracted with one or more
manufacturers that have the expertise, machinery, tooling and other capital assets required to commercialize and manufacture in
mass production our engines.
Competitive
Business Conditions
We
believe that our technology, which is a small-scale heat-regenerative, Rankine cycle external combustion engine, has little direct
competition. However, depending on the industry in which these engines are applied, indirect competitors utilizing different technologies
do exist.
Currently,
there are several companies which have developed and commercialized other types of external heat engines, such as Stirling engines.
Stirling engines are similar to our technology and are used in overlapping applications (such as solar thermal power generation),
however; the two engine technologies have several major differences, including size, power-density, and adaptability to fluctuations
in heat and load. Based on preliminary testing and analysis, we believe that our engine technology may be superior to the Stirling
engines in these aspects; and thus, has more applications in waste heat and mobile uses (i.e., cars, trucks and ships). We have
not yet commercialized our engine technology, and these claims are still to be proven. Also, several Stirling engine companies
such as Infinia Corp. have greater capital resources than we do, which could help establish their technology in the marketplace
quicker than we can.
Other
technologies that may be indirectly competitive with our engines are lithium-ion batteries and hydrogen fuel cells. Batteries
are useful for some applications where limited sustained power (torque) and operating time is needed, however, they are just “fuel
tanks” which allow for power that is generated elsewhere (i.e., a coal-fired power plant) to be saved and transported. The
100hp Cyclone engine we are currently developing, which would produce approximately 50kW of electric output, weighs just 125lbs,
is 2 ft in diameter and height, and is expected to cost 10 times less to produce. Once again, these claims are based on our current
beliefs and developmental testing, as we have not yet produced commercial products.
Patents
and IP Protection
We
currently have the following patents issued or allowed on our engine technology:
Active
U.S. Patents
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U.S.
No. 7,080,512 B2
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Heat
Regenerative Engine
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U.S.
No. 7,407,382 B2
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Steam
Generator in a Heat Regenerative Engine
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U.S.
No. 7,856,822 B2
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Heat
Regenerative Engine
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U.S.
No. 7,856,823 B2
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Pre-Heater
Coil in a Heat Regenerative Engine
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Active
Foreign Patents/Applications -
Heat Regenerative Engine
European
Patent No. 1809865
Australian
Patent No. 2005284864
Brazilian
Application No. P10515305-0
Canadian
Patent No. 2577585
Chinese
Patent No. ZL200580030436.4
Japanese
Patent No. 4880605
Mexican
Patent No. 285078
Russian
Patent No. 2357091
South
African Patent No. 2007/02947
Indonesian
Patent No. IDP0024346*
Indian
Patent Application No. 1949/DELNP/2007
Pursuant
to new US Patent Office regulations, upon approval, expired patents can be reestablished from inception. We have also taken advantage
of reissues to include changes and broaden the patents. We pursue a rigorous patent strategy, pursuant to which (and subject to
our available cash resources) we file patents in the U.S. for our engines, their individual components, and other innovations
and inventions we develop. We also pursue patents internationally in countries where we believe we may have manufacturing or sales
opportunities and/or competition. Despite these efforts, we cannot make assurances that our patents will not infringe on other
patents throughout the world, that other groups will not try to infringe on our patents, and if either of these were to occur,
that we would have the resources to defend our rights. If this were to occur, it could have a material adverse effect on our business.
We
require all customers, suppliers and other partners to execute Non-Disclosure Agreements. We also require our employees and certain
contractors to sign agreements that assign to us any innovations or discoveries they develop while working for us or working with
our technology. Our license agreements contain similar assignment provisions. We feel that these efforts are satisfactory in protecting
our technology with respect to people and companies with which we have direct business relationships.
Sources
and availability of raw material
We
purchase raw materials and components from multiple sources, none of which may be considered a principal or material supplier.
If necessary we could replace these suppliers with minimal effect on our business operations.
Dependence
on a few major customers
We
have contracts for development and licensing of our engine technology: Combi-Lift LTD. (a global materials handling and lift equipment
manufacturer based in Ireland), Falck Schmidt Defense Systems of Denmark (“FSDS”) (a global military products manufacturing
and supplier), IBES (a producer of biomass furnace electric systems) and G2E (a solar engineering company for Mexico and South
America). We have formed working relationships with other major industrial groups, and teaming agreements with manufacturers.
Our licensee for waste heat to power, Q2 Power Inc., is currently in breach of their licensing agreement and has been formally
notified to cure contract breaches.
Because
of the diversification of applications, uses and business models, and the current stage of our development / product sales cycle,
we do not believe that the loss of the licensee or development partner would have a material adverse impact on our current or
future operations. Additionally, we are actively pursuing other licensees and development partners in other product categories.
Governmental
regulation
Our
Products
. Power systems are subject to extensive statutory and regulatory requirements that directly or indirectly impose
standards governing emissions and noise. Our engines, when they will ultimately be installed in power systems, will be subject
to compliance with all current emissions standards imposed by the EPA, state regulatory agencies in the United States, including
the California Air Resources Board (CARB), and other regulatory agencies around the world and established for power systems utilized
in applications such as electric generators or off-highway industrial equipment. EPA and CARB regulations imposed on engines utilized
in industrial off-highway equipment generally serve to restrict emissions, with a primary focus on oxides of nitrogen, particulate
matter and hydrocarbons. Emission regulations for engines utilized in off-highway industrial equipment vary based upon the use
of the equipment into which the engine is incorporated (such as stationary power generation or mobile off-highway industrial equipment),
and the type of fuel used to drive the power system. Further, applicable emission thresholds differ based upon the gross power
of an engine utilized in industrial off-highway equipment. Additionally, most emissions thresholds are designed for gasoline and
diesel-powered “spark-ignited” internal combustion engines, and not external combustion engines like Cyclone’s
engines. In 2015, Cyclone received EPA and CARB certifications for all fuels 25HP and below for power generation.
Our
markets can be positively or negatively impacted by the effects of governmental and regulatory matters. We are affected not only
by energy policy, laws, regulations and incentives of governments in the markets into which we sell, but also by rules, regulations
and costs imposed by utilities. Utility companies or governmental entities could place barriers on the installation of our product
or the interconnection of the product with the electric grid. Further, utility companies may charge additional fees to customers
who install on-site power generation, thereby reducing the electricity they take from the utility, or for having the capacity
to use power from the grid for back-up or standby purposes. These types of restrictions, fees or charges could hamper the ability
to install or effectively use our products or increase the cost to our potential customers for using our systems in the future.
This could make our systems less desirable, thereby adversely affecting our revenue and profitability potential. In addition,
utility rate reductions can make our products less competitive which would have a material adverse effect on our future operations.
These costs, incentives and rules are not always the same as those faced by technologies with which we compete. However, rules,
regulations, laws and incentives could also provide an advantage to our distributed generation solutions as compared with competing
technologies if we can achieve required compliance at a lower cost when our engines are commercialized. Additionally, reduced
emissions and higher fuel efficiency could help our future customers combat the effects of global warming. Accordingly, we may
benefit from increased government regulations that impose tighter emission and fuel efficiency standards. Cyclone has already
received EPA and CARB emissions certification for generators any fuel 25 horsepower and under.
Our
Operations
. Our operations are also subject to numerous federal, state and local laws relating to such matters as safe
working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially
hazardous substances. We may be required to incur significant costs to comply with such laws and regulations in the future, and
any failure to comply with such laws or regulations could have a material adverse effect upon our ability to do business.
Because
of our work with the military, we have registered with the U.S. Department of State under its International Trafficking in Arms
Regulations (ITAR). We do not believe we develop, sell or export any covered munitions under these Regulations, but have registered
the company in an abundance of precaution.
Employees.
As of December 31, 2016, we had 6 full-time employees including management, and one part-time employee. We consider our relations
with our employees to be good. None of our employees are covered under any labor union or collective bargaining agreement. As
needed, we contract with specialized labor and consultants to control costs.
Item
1A. Risk Factors
Not
required for smaller reporting companies.
Item
1B. Unresolved Staff Comments
None.
Item
2. Properties
We
currently operate in a 6,000 sf leased warehouse facility at a monthly rate of $5,661. Our address is 601 NE 26th Ct., Pompano
Beach, FL 33064. The lease expired Dec 2016, and we are currently on a monthly basis. We believe these facilities are in good
condition, but we still may need to expand our operating space further as our research and development efforts expand.
Item
3. Legal Proceedings
Effective
May 8, 2015, the Company is subject to a default judgment in Dallas Texas of approximately $175,000 plus interest for non-payment
of convertible debt and interest, attorney fees and court costs. The Company is negotiating a reduced settlement. A Judgment was
entered in 160
th
District Court of Dallas county, Texas, Case No: DC-15-00829, on April 3, 2015, between the Company
and JSJ Investments Inc. for default of convertible note. We entered into a settlement agreement for conversion of judgment based
on value and conversions of original note on January 9, 2017.
In
August 2015, the Company is subject to a default judgment $166,000 plus interest for
non- payment of a convertible warrant true up. The Company is seeking to arrange a reduced
settlement. A judgment was entered in United States District Court of Utah, Central Division,
case No: 215-cv-00536-PMW, on May 17, 2016, between the Company and Tonaquint Inc. for
default of true up on a convertible warrant.
Item
4. Mine Safety Disclosures
None.
PART
II
Item
5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our
common stock is currently traded on the OTC Pink sheets. The following table represents the high and low bid information for our
common stock for each quarterly period within the two most recent fiscal years, as regularly quoted on the OTCPK. Such over-the-counter
market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not necessarily represent
actual transactions.
According
to the records of our transfer agent and NOBO listing, as of March 31, 2017, there were approximately 4,700 shareholders of record
of our common stock, and two shareholders of record of our Series B Preferred Stock.
Year
Ended December 31, 2016
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High
Bid
Price
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Low
Bid
Price
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First
Quarter
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$
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0.0030
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$
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0.0010
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Second
Quarter
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0.0230
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0.0010
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Third
Quarter
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0.0028
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0.0011
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Fourth
Quarter
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0.0028
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0.0016
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Year
ended December 31, 2015
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High
Bid
Price
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Low
Bid
Price
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First
Quarter
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$
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0.0021
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$
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0.0002
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Second
Quarter
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0.0090
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0.0002
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Third
Quarter
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0.0023
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0.0005
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Fourth
Quarter
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0.0030
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0.0007
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Dividend
Policy
.
We
have not paid any dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. We intend
to retain any earnings to finance the growth of our business. We cannot assure you that we will ever pay cash dividends. Whether
we pay cash dividends in the future will be at the discretion of our Board of Directors and will depend upon our financial condition,
results of operations, capital requirements and any other factors that the Board of Directors decides are relevant. See
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
.
Item
6. Selected Financial Data
Not
required for smaller reporting companies.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward
Looking Statements
This
report contains forward-looking statements. We have based these forward-looking statements largely on our current expectations
and projections about future events and financial trends affecting the financial condition of our business. These forward-looking
statements are subject to a number of risks, uncertainties and assumptions, including, among other things:
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the
ability to successfully complete commercialization of our technology;
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changes
in existing and potential relationships with customers and collaborative partners;
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the
ability to retain certain members of management;
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our
expectations regarding general and administrative expenses;
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our
expectations regarding cash availability and balances, capital requirements, anticipated revenue and expenses, including infrastructure
and patent expenditures;
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other
factors detailed from time to time in filings with the SEC.
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In
addition, in this filing, we use words such as “anticipate,” “believe,” “plan,” “expect,”
“future,” “intend,” and similar expressions to identify forward-looking statements. We undertake no obligation
to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise
after the date of this filing. In light of these risks and uncertainties, the forward-looking events and circumstances discussed
in this filing may not occur and actual results could differ materially from those anticipated or implied in the forward-looking
statement.
Overview
We
are engaged in the research and development of all-fuel, eco-friendly engine technologies. Several prototypes of these engines
are current beta tested, pre-production tested or nearing completion with 2 models currently in limited production. While we
started to generate revenue from its operations as early as 2008, it has not had material or consistent revenue in each of the
last two fiscal years. For us to maintain and expand our operations through the next 12 months, we will seek the completion of
our manufactured products by our two manufacturers of the engines and the integration of the engines into a generator package
to be sold to distributors. We will also continue license agreements and development agreements that provide up-front or progress
payment funds to us. We also will continue to pursue raising capital by means of equity or debt offerings.
In
2015, the TARDAC (S2) engine was delivered, on time, and accepted, by the U.S. Army. This contract was for approximately $1.4
million. We have licensed this S2 technology to FSDS, to take it to TRL9 for military compliance. We have received $150,000 with
another $75,000 due on delivery for 2 S2 systems. We have completed 80% of the testing and anticipate delivery and final payments
within the next 1-2 months. We have also signed a long term license agreement with FSDS which also brings Cyclone into their
organization as an R&D arm.
In
2017, with additional resources, our R&D team will also move towards completion of the Mark 5 project. This engine is to be
delivered to Combilift for its clean-burning material lift equipment.. With respect to the Combilift contract, we are forecasting
an additional $300,000 in revenue from the delivery of two Mark 5 engines to this customer. We are also pursuing other R&D
contracts that both support and build-off of these two engine programs, inclusive of marine power applications.
Financing
Transactions
In
2016, we financed our operations through funds generated from $94,725 in notes payable and an increase in trade accounts payables,
accrued liabilities and payables and debt to related parties of approximately $962,000.
Corporate
Structural Actions.
We will continue to take decisive steps to mature our structure and operations to attract funding from
investors with long range horizons and strategic partners who can add value from multiple directions. This type of funding is
different from the convertible notes we used to finance us over the last few years.
Stock
for Services and Contracts.
During the year ended December 31, 2016, we issued 3 million shares of common stock for $6,000
of services. We also amortized (based on vesting) $2,526 of common stock options for employee services.
Stock
for Liabilities.
During the year ended December 31, 2016, we issued approximately 125.7 million shares of common stock in
payment of approximately $241,000 of liabilities.
Research
& Development.
We invest considerably in the development of our technology. Over the years, these investments have led
to over 30 patents and substantial progress towards the commercialization of our engine technology. For 2016 our R&D expenses
were $604,199. and for 2015, our R&D expenses were $467,610.
Commitments
for Capital and Operational Expenditures.
Should additional funding be secured, we could increase the number of skilled and
unskilled employees on payroll, including the recruitment of high level executive management and additional engineers and mechanical
staff.
Critical
Accounting Policies.
Our financial statements are prepared in accordance with accounting principles generally accepted in
the United States (“GAAP”), which requires management to make estimates, assumptions and related expectations. Management
believes that these estimates, assumptions and related expectations upon which we depend at the time are reasonable based upon
information then available. These estimates, assumptions and related expectations affect the reported amounts of the balance sheet
and income statement for the timeframe of the financial statements presented. To the degree that there are significant variances
between these estimates and assumptions and actual results, there would be an effect on the financial statements. GAAP mandates
specific accounting treatment in numerous situations and does not require management’s estimates and judgment in its application.
Alternative accounting treatments, where available, based on management’s estimates and judgments would not produce a materially
different result. The following should be read in conjunction with our consolidated financial statements and related notes.
Intangible
assets, consisting primarily of patents, are deemed to be critical for the furtherance of our business objectives and our engine
products. Impairment is not currently reflective, as we are developing our products and obtaining new contracts based on these
engine and associated technology patents.
We
review inventory for engine development on an ongoing basis for obsolescence as engine designs are revised, with resultant charges
to R&D.
For
purposes of valuing stock based compensation, we use market prices of our common stock as of the time of issuance. We use the
Black Scholes valuation method for valuing our stock based compensation from common stock options. This method requires us to
make estimates and assumptions regarding stock prices, stock volatility, dividend yields, expected exercise term and risk-free
interest rates.
Our
audited consolidated financial statements include our accounts and our 95% owned subsidiary, Cyclone Performance. We have eliminated
all material inter-company transactions and balances in our consolidated financial statements. The accompanying audited consolidated
financial statements have been prepared in accordance with GAAP in the United States for financial information. In our management’s
opinion, all adjustments considered necessary for a fair presentation of financial statements have been included and such adjustments
are of a normal recurring nature.
Off-Balance
Sheet Arrangements
We
do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured
finance or special purpose entities, that would have been established for facilitating off-balance sheet arrangements (as that
term is defined in Item 303(a)(4)(ii) of Regulation S-K) or other contractually narrow or limited purposes. As such, we are not
exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships.
New
Accounting Pronouncements
From
time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard
setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact
of recently issued standards that are not yet effective will not have a material impact on our financial position or results of
operations upon adoption.
Results
of Operations –
Year
Ended December 31, 2016 Compared to Year Ended December 31, 2015
Revenues
and Gross Profit
There
were no revenues or gross profit for the years ended December 31, 2016 and December 31, 2015.
Operating
Expenses
Our
operating expenses increased $451,924, or 40%, to $1,580,071 for the year ended December 31, 2016 compared to $1,128,147 for the
comparable period in 2015. The majority of the increase was due to higher research and development expenses of $202,689 (74%)
that were attributable to the complete expensing of engine developmental labor and overhead, and an increase in general and administrative
expenses of $273,351 or 44%, (primarily consulting and timing of patent maintenance fees) and a charge of $41,252 for patent retirements.
This was partially offset by a net $66,100 reduction in the inventory reserve provision.
Operating
Loss
Our
operating losses increase $451,924, or 40%, to $1,580,071 for the year ended December 31, 2016 compared to $1,128,147 for the
comparable period in 2015.
Other
Income (Expense)
Net
other expense for the year ended December 31, 2016 was ($520,852) primarily attributable to non cash derivative expense of $370,519
and $141,450 of interest expense. Net other expense for the year ended December 31 2015 of $(342,156) was inclusive of interest
expense of $348,858, and to derivative liability income of $56,702.
Net
Income and Earnings per Share
Our
net loss increased $630,620 or 43% to $2,100,923 for the year ended December 31, 2016 compared to a net loss of $1,470,303 for
the comparable period in 2015. The decrease is due to the factors set forth above. The resulting net loss per weighted average
share for 2016 and 2015 was ($0.00) and ($0.00), respectively.
Year
Ended December 31, 2015 Compared to Year Ended December 31, 2014
Revenues
Our
revenues declined $329,027, or 100%, to $0 for the year ended December 31, 2015 compared to $329,027 for the comparable period
in 2014. The lack of revenues was due to current contracts on a completed contract basis versus prior milestone basis. Our 2014
revenues included $140,527 from the successful fulfillment of the final milestone under the U.S. Army contract, and $175,000 from
the income recognition of the license agreement with Q2 Power.
Gross
Profit
Our
gross profit declined $240,220, or 100%, to $0 for the year ended December 31, 2015 compared to $240,220 for the comparable period
in 2014. The decrease is due to no sales in 2015. Our 2014 Cost of Goods Sold included approximately $88,000 related to the U.S.
Army contract.
Operating
Expenses
Our
operating expenses decreased $1,890,075, or 63%, to $1,128,147 for the year ended December 31, 2015 compared to $3,018,222 for
the comparable period in 2014. The majority of the decrease was due to lower research and development expenses of $550,942 (54%)
that were attributable the spin off in 2014 of the WHE engine as well as a reduction in staff and the 2014 loss on retirement
of R&D equipment. This was partially offset by a $112,000 2015 inventory reserve. General and administrative expenses were
lower by $1,237,049 (65%) due to reduced staffing and related expenses, lower stock based payments for services and cost controls
reflective of funding considerations. Advertising and promotion expenses were $102,084 or 93% lower reflective of the 2014 $85,583
loss on the retirement of demonstration equipment.
Operating
Loss
Our
operating losses decreased $1,649,855, or 59%, to $1,128,147 for the year ended December 31, 2015 compared to $2,778,002 for the
comparable period in 2014.
Other
Income (Expense)
Net
other expense for the year ended December 31, 2015 was ($342,156) primarily attributable to interest expense. Net other expense
for the year ended December 31 2014 of $(2,176,423) was inclusive of interest expense of $1,327,102, losses related to derivative
liability of $147,680 and realization loss provisions on the valuation of WHE Gen investment and note receivable of $706,756.
Net
Income and Earnings per Share
Our
net loss decreased $3,484,122, or 70%, to $1,470,303 for the year ended December 31, 2015 compared to $4,954,425 for the comparable
period in 2014. The decrease is due to the factors set forth above. The resulting net loss per weighted average share for 2015
and 2014 was ($0.00) and ($0.01), respectively.
Liquidity
and Capital Resources
Our
working capital deficiency increased by $1.7 million or 76%, to $4.0 million for the year ended December 31, 2016 compared $2.3
million for the comparable period in 2015. The variance is primarily due to the manufacturing material and WIP inventory reductions
and higher: payables and accruals, notes and loans payable, derivative fair value liabilities and deferred revenue deposits.
For
the year ended December 31, 2016, funds were provided by a $554,744 increase in accounts payable and accruals, a $407,426 increase
in related party accounts payable, accruals and notes payable, a $170,941 reduction in inventory and a $175,700 increase in deferred
revenue deposits. Funds were used by the net loss of $2,100,923. Included in the net loss is a net non-cash charge of $370,518
attributable to inclusion, (besides the underlying debt) in the fair value of derivative liabilities of note default judgments,
default interest and related debt interest.
For
the year ended December 31, 2015, funds were primarily used by the net loss of ($1,470,303) and an increase of $46,465 in inventory.
Funds were provided by debt proceeds of $50,000, an increase in accounts payable and accrued liabilities of $483,129, and an increase
in related party payables and debt of $457,564. Non cash charges were $174,043 for amortization of derivative debt discounts,
an $192,000 inventory reserve provision and $75,574 of depreciation and intangible amortization.
Cash
Flow Management Plan
Through
2016, we collected contract progress payments and contract deposits of $175,000, and collected approximately $100,000 in traditional,
non derivative related debt. In the second quarter of 2016, in recognition of the declining market value and low market volume,
we sold all of our investment in Q 2 Power Technologies for $44,000.
In
2016, we have submitted approximately $3 million in grant (or grant-type) applications and proposals with various government offices,
which could provide non-dilutive funding for our development.
Our
auditors have issued a going concern opinion for the years ended December 31, 2015 and 2016. Management is optimistic, however,
that revenue can be generated and funding can be secured to maintain operations and development at the current pace.
Recent
Accounting Pronouncements
Our
significant accounting policies are described in Note 1 to the accompanying financial statements, and above in “Critical
Accounting Policies”.
Off
Balance Sheet Arrangements
We
do not have any off-balance sheet arrangements at this time.
Item
7A. Quantitative and Qualitative Disclosures about Market Risk
Not
required for smaller reporting companies.
Item
8. Financial Statements and Supplementary Data
Financial
statements required by this Item 8 are included at the end of this report as listed on Item 15.
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
(a)
Engagement of New Independent Registered Accounting Firm and Dismissal of Independent Accounting Firms
On
March 22, 2017, we appointed Soles, Heyn & Company LLP (SH) as our new independent registered accounting firm with respect
to the fiscal year ended December 31, 2016. In addition, we engaged SH to review the quarterly financial statements of March 31,
2016, June 30, 2016, and September 30, 2016.
On
July 25, 2016,we had appointed Anton & Chia,, LLP (A&C) as our new independent registered accounting firm with respect
to the fiscal years ended December 31, 2015 and 2014. In addition, we had engaged A&C to review the quarterly financial statements
of March 31, 2015, June 30, 2015, and September 30, 2015.
In
March 2017, we terminated the engagement of Anton & Chia,, LLP (A&C) as our independent registered accounting firm. This
action effectively dismissed A&C as our independent registered accounting firm. A&Cs reports on our consolidated financial
statements for the fiscal years ended December 31, 2014 and 2015 did not contain an adverse opinion or a disclaimer of opinion
and were not qualified or modified as to uncertainty, audit scope or accounting principles, except that the report included an
explanatory paragraph relating to an uncertainty as to our ability to continue as a going concern. Furthermore, since March, 2017,
there have been no disagreements with A&C on any matter of accounting principles or practices, financial statement disclosure
or auditing scope or procedure, which disagreements, if not resolved to A&C’s satisfaction, would have caused MF to
make reference to the subject matter of the disagreement in connection with its reports on our consolidated financial statements
for such periods.
On
July 26, 2016, we terminated the engagement of Mallah Furman & Company, P.A.(“MF”) as our independent registered
accounting firm. This action effectively dismissed MF as our independent registered accounting firm for the fiscal year ending
December 31, 2014 and 2015. MF’s reports on our consolidated financial statements for the fiscal year ended December 31,
2013 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit
scope or accounting principles, except that the report included an explanatory paragraph relating to an uncertainty as to our
ability to continue as a going concern. Furthermore, since December 31, 2013, there have been no disagreements with MF on any
matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements,
if not resolved to MF’s satisfaction, would have caused MF to make reference to the subject matter of the disagreement in
connection with its reports on our consolidated financial statements for such periods.
Except
as noted in this paragraph, since January 1, 2014, there were no “reportable events” as that term is described in
Item 304(a)(1)(v) of Regulation SK.
Since
July, 2016, neither us nor anyone acting on our behalf consulted SH or A&C, with respect to any of the matters or reportable
events set forth in Item 304(a)(2)(i) and (ii) of Regulation SK.
Item
9A. Controls and Procedures
Disclosure
Controls
None.
Item
9A. Controls and Procedures
Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures
We
carried out an evaluation as required by paragraph (b) of Rule 13a-15 and 15d-15 of the Exchange Act, under the supervision and
with the participation of our management, including our President (Chief Executive Officer) and Chief Financial Officer, of the
effectiveness of our financial disclosures, controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act, as of December 31, 2016.
A
material weakness can be defined as an insufficiency of internal controls that may result in a more than remote likelihood that
a material misstatement will not be prevented, detected or corrected in a company’s financial statements.
Based
upon that evaluation, our President (Chief Executive Officer) and Chief Financial Officer concluded that our disclosure controls
and procedures were not effective, based on the following deficiencies:
|
●
|
Weaknesses
in Accounting and Finance Personnel: We have a small accounting staff and we do not have the robust employee resources and
expertise needed to meet complex and intricate GAAP and SEC reporting requirements of a U.S. public company. Additionally,
numerous adjustments and proposed adjustments have been noted by our auditors. This is deemed by management to be a material
weakness in preparing financial statements.
|
|
|
|
|
●
|
We
have written accounting policies and control procedures, but we do not have sufficient staff to implement the related controls.
Management had determined that this lack of the implantation of segregation of duties, as required by our written procedures,
represents a material weakness in our internal controls.
|
|
|
|
|
●
|
Internal
control has as its core a basic tenant of segregation of duties. Due to our limited size and economic constraints, we are
not able to segregate for control purposes various asset control and recording duties and functions to different employees.
This lack of segregation of duties had been evaluated by management, and has been deemed to be a material control deficiency.
|
We
have determined that the above internal control weaknesses and deficiencies could result in a reasonable possibility for interim
financial statements that material misstatements will not be prevented or detected on a timely basis by our internal controls.
Changes
in Internal Control Over Financial Reporting and Procedures.
Management
is currently evaluating what steps can be taken to address these material weaknesses. As a growing small business, we continuously
devote resources to the improvement of our internal control over financial reporting. Due to budget constraints, the staffing
size, proficiency and specific expertise in the accounting department is below requirements for the operation. We are anticipating
correcting deficiencies as funds become available.
Item
9B. Other Information
None.
Part
III
Item
10. Directors, Executive Officers and Corporate Governance
The
names, ages, positions and dates appointed of our current directors and executive officers are set forth in the table below:
Name
|
|
Age
|
|
Position
|
|
Date
of Appointment
|
|
|
|
|
|
|
|
Harry
Schoell
|
|
74
|
|
Chairman
and Chief Technology Officer
|
|
June
2004*
|
|
|
|
|
|
|
|
Frankie
Fruge
|
|
72
|
|
Director
and President
|
|
June
2004
|
|
|
|
|
|
|
|
Bruce
Schames
|
|
70
|
|
Chief
Financial Officer
|
|
April
2010
|
|
|
|
|
|
|
|
James
Hasson
|
|
76
|
|
Director
|
|
June
2014
|
|
|
|
|
|
|
|
Dennis
Dudzik
|
|
65
|
|
Director
|
|
June
2014
|
*
Mr. Schoell originally served as our Chairman and Chief Executive Officer. In October 2012, he transitioned from CEO to our Chief
Technology Officer (CTO).
Harry
Schoell
, Chairman and Chief Technology Officer, is a life-long entrepreneur and inventor. He is a native Floridian, born in
Miami, and a third generation inventor and engineer. Mr. Schoell has worked for years to realize his dream to create an environmentally-friendly
engine, and has 30 patents issued and allowed to date on the Schoell Cycle heat regenerative external combustion engine, now called
the Cyclone Engine.
Mr.
Schoell is well versed in all facets of manufacturing procedures, including, appropriate foundry protocol, castings, machining,
production design and manufacturing, and plastic and fiberglass laminates. He also has experience in designing, inventing and
building unique boat hull designs and patented marine propulsion systems, through Schoell Marine, a company he founded in 1966
and still exists today.
Mr.
Schoell built Schoell Marine and its reputation based on his original ideas, trained engineers, and prototype and production specialists
– the same as he is doing now for Cyclone. Over these 40+ years, his efforts resulted in over 40 specialized patents and
patent applications, including a Jet Drive System, a trimmable surface drive, a “Ground Effect Craft”, and a lightweight
internal engine that he designed and built in 1990. Mr. Schoell belongs to SAE (Society of Automotive Engineers), the ASME (American
Society of Marine Engineers), and The Society of Naval Architects and Marine Engineers.
Mr.
Schoell’s qualifications to be a director of the Company, in addition to his business background (as described above), include
his intimate involvement in the development of the Cyclone Engine as well as the business plan for its commercialization. Mr.
Schoell has no other Board of Directors affiliations with public companies other than with the Company. He is a director of Schoell
Marine, Inc.
Frankie
Fruge
serves as our President and Director. She has been with us since our inception in 2004 in the role of General Partner
and Director of Administration. Ms. Fruge oversees our daily operations and financial matters.
Ms.
Fruge has been working with Mr. Schoell since 1995, serving in multiple administrative, operational and financial positions with
Schoell Marine. Between 1999 and 2003, Ms. Fruge was President of Propulsion Systems, Inc., a company that developed and sold
marine surface drives, and then CFO of Pulse Drive Inc., between 2003 and 2005, a company also in the marine propulsion field.
Prior
to her career in marine-based engine technology, Ms. Fruge spent over 10 years as an operating engineer for several oil refinery
companies in Louisiana, including Conoco, and eight years as an auditor for Ernst & Ernst (the predecessor company to Ernst&
Young). Ms. Fruge is also a certified industrial firefighter, is Chairman of the Board of the International Association for Advancement
of Steam Power, Corp. (a 501c3) and is a former board member of the Steam Automobile Club of America. on the Board of the Steam
Automobile Club of America.
Ms.
Fruge’s qualification to be a director of us, in addition to her general business background (as described above), include
her extensive hands-on engineering experience. Ms. Fruge has no other Board of Directors affiliations.
Bruce
Schames
serves as our CFO. He has been a CPA since 1971, representing both public and private clients in his own practice
since 2001. Prior to that, Mr. Schames served as CFO of East Coast Beverage Corp. (OTCBB: ECBV), Medcom USA (NASDAQ: EMED), Financial
Reporting Manager for Dole Fresh Fruit Co., and in various accounting and reporting capacities of NYSE companies. Mr. Schames
received his BBA from Baruch College of the City University of N.Y., and an MBA from the University of Southern California.
James
Hasson
Since 1994 he has been President and owner of Hypex, Inc., a company that designs and builds machinery for the pharmaceutical,
medical device, aerospace, food and other specialized industries. and has additionally presided over three acquisitions and three
start-ups. Previously, Mr. Hasson was President and CEO of Citisteel USA, Inc., where he managed over 300 people and led the company
to over $100 million in annual revenue; President and CEO of Magnetic Metals Corp., a$50 million manufacturing business; and Vice
President and General Manager of the manufacturing division of LaSalle Steel Company, with over $200 million in sales. Mr. Hasson
holds a BS in Mechanical Engineering from Drexel University, an AS in Mechanical Engineering from Pennsylvania State University.
Dennis
Dudzik
is the founder and President of the International Association for the Advancement of Steam Power (IAASP), a leading
global non-profit organization dedicated to the advancement and commercialization of modern steam power. In his professional capacity
for URS Corporation, Mr. Dudzik is the Program and Contract Manager for Integrated Resource Plan services to Los Angeles Department
of Water and Power (LADWP), and Program and Contract Manager for major power project environmental and engineering services contracts
for the Sacramento Municipal Utility District (SMUD). He has held key management roles in over a dozen major electric generation,
transmission, and substation projects over the last 12 years. Mr. Dudzik served as the Contract Manager for the construction contracts
for the 30 MW Ormesa Geothermal Power Project, the 125 MW NCPA Combustion Turbine Project, and provided permitting services for
the 47 MW COLMAC Power Project, as well as numerous other California power projects. He also is a Professional Engineer.
Board
Leadership Structure and Role in Risk Oversight
We
have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined.
Mr. Schoell served as our Chief Executive Officer and Chairman since inception in 2004 until 2012 when he was appointed as our
Chief Technology Officer. No one currently serves as our CEO.
Our
Board of Directors is primarily responsible for overseeing our risk management processes. The Board of Directors receives and
reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our assessment
of risks. The Board of Directors focuses on the most significant risks facing us and our general risk management strategy, and
also ensures that risks undertaken by us are consistent with the Board’s appetite for risk. While the Board oversees our
risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities
is the most effective approach for addressing the risks we face and that our board leadership structure supports this approach.
We
do not have an Audit Committee, however, we have hired a CPA consultant to assist with our SEC filings. We expect to add members
to this committee in the near future. The Audit Committee is responsible for monitoring and reviewing our financial statements
and internal controls over financial reporting. In addition, they recommend the selection of the independent auditors and consult
with management and our independent auditors prior to the presentation of financial statements to shareholders and the filing
of our forms 10-Q and 10-K. Our Board will choose new committee members who qualify as “audit committee financial experts”
as defined under the federal securities laws. The Audit Committee’s responsibilities are set forth in our Charter of Corporate
Governance, a copy of which is currently available from us and is posted on our website.
We
do not have a Compensation Committee, Nominating Committee or other committees at this time. We expect to create such committees
in the future.
Director
Independence
Our
Board of Directors has adopted the definition of “independence” as described under the Sarbanes Oxley Act of 2002
(Sarbanes-Oxley) Section 301, Rule 10A-3 under the Securities Exchange Act of 1934 (the Exchange Act) and NASDAQ Rules 4200 and
4350. Our Board of Directors has determined that Messer’s Hasson and Dudzik currently meet the independence requirements.
Board
of Advisors
From
time to time, we add members to our Board of Advisors. These individuals are comprised of distinguished scientists, engineers
and businessmen whose experience, knowledge and counsel help in the development of us and our technology. These Board of Advisor
members may be compensated for their time in restricted shares of common stock. Advisors do not have voting or observatory powers
over the Board of Directors or management. Our CTO interacts with these advisors from time to time on matters related to our technological
development. There are no formalized Board of Advisor meetings, and members have no other special powers or functions. Each individual
on the Board works part-time with us as requested. Currently, the Board of Advisors is comprised of:
George
Nutz
is technology consultant with almost 50 years of experience working with external combustion and steam engines. He is
the founder of Millennium Engineering Systems and Millennium Energy Systems, through which he has provided engineering guidance
and expertise to multiple external combustion engine projects over the last twenty years.
Prior
to consulting, Mr. Nutz was a staff research engineer at MIT Instrumentation Laboratory, part of the Department of Aeronautics
and Astronautics. While in residence, he designed hardware and control systems, as well as steam cycles and applications. He represented
MIT-IL at the Department of Transportation Clean Air / External Combustion hearings, and wrote several proposal papers outlining
a working steam system. During this time he also became involved with steam automobile and steamboat groups and worked on boiler
and engine designs/modifications, including being part of the MIT team designing and building a steam powered automobile for Saab
for the MIT-Caltech “Clean Air Car Race”.
Prior
to his time at MIT, Mr. Nutz spent nine years at Bendix Aerospace designing gyro and guidance equipment and test platforms, and
working with optics and sensors. He served in the U.S. Air Force and received his mechanical engineering degree from the New Jersey
Institute of Technology in 1959.
Other
Key, Non-Executive Personnel
Lawrence
A. Bornstein, CPA
, currently consults for us and advises on accounting matters and filings with the SEC. Mr. Bornstein has
been a senior executive with over 29 years of experience in auditing, accounting, finance, operations, acquisitions/mergers and
international licensing. Mr. Bornstein started his career at Arthur Anderson, where he rose to the position of Senior Manager,
in their West Palm Beach office. He managed a diverse client base ranging from closely held small businesses to large international
public corporations and non-profit entities. During his tenure at Arthur Andersen Mr. Bornstein was responsible for uncovering
several major corporate frauds and leading subsequent investigations. He has testified at numerous depositions and has assisted
counsel with interpretations of accounting principles, review and analysis of business records, assistance with discovery and
preparation of analyses and reports.
He
then transitioned to American Media, Inc. as V.P. Finance and Chief Accounting Officer, where he managed day to day oversight
of accounting and various corporate acquisitions. Over the last decade Mr. Bornstein’s has held various positions at American
Media, including Senior V.P General Manager & Administration/M&A, as well as General Manager of International Licensing
and Syndication. Mr. Bornstein supervised an annual budget of over $400M in revenues, implemented various forecasting systems,
procedures and controls, participated in acquisitions, managed several departments, prepared business plans and oversaw 43 licensed
magazine editions in 58 Countries.
In
addition, Mr. Bornstein has acted as an Independent Business Consultant, with engagements focusing on financial, accounting, operational
and funding strategies for several organizations in the U.S.A. and Canada. Customers included companies in the environmental,
emerging technology and food industries. Mr. Bornstein also has worked with several major private equity firms and investment
banks on Wall Street.Mr. Bornstein graduated Cum Laude from UMass Amherst, where he earned a Bachelor of Business Administration
degree in Accounting and a minor in Economics.
Karl
Petersen,
currently consults for us and was our Vice President of Engineering through March 2014. He has over 45 years of
experience in product development, engineering, manufacturing, and quality systems. He currently works directly with our engineering
team to assist in the commercialization of its external combustion engine technology. Previously, Mr. Petersen ran Petersen Product
Development in Boise, ID, which provided mechanical, chemical and manufacturing process development for clients that include Caterpillar
and John Deere. Prior to that Mr. Petersen spent over 25 years in various engineering and management positions at Preco (purchased
by Vansco Electronics in 2005), which provided critical product development for Caterpillar and AGCO. He also served several Lockheed
divisions as a Senior Mechanical Engineer. Having worked on steam systems since the 1960’s, Mr. Petersen has built numerous
engines throughout his career and has vast knowledge of their mechanical and thermodynamic operations.
Allen
Brown,
currently consults for us and was our Senior Engineering Fellow through March 2014. He is an engineer whose experience
spans over 56 years in the marine industry where he has developed propulsion, hydraulic, electrical and exhaust systems for some
of the best known names in the business. Over the years, Mr. Brown has served as: Director of Product Development for Cigarette
Racing Team, President and CEO of Cougar Marine, which built powerboats that won 33 consecutive offshore races including 12 World
and National Championships, Director of Product Development for Stainless Marine, Project Engineer for Gentry Transatlantic on
the “Gentry Eagle,” a 113’ mega-yacht that held the transatlantic speed crossing record, Product Development
Consultant for Teleflex Marine, and General Manager of Donzi Marine.
Compensation
to Advisors
We
have compensated our Board of Advisors’ members with shares of restricted common stock and stock options for their past
services rendered on behalf of us, and reserve the right to issue additional shares, stock options or cash in the future. Both
Allen Brown and Karl Petersen received salaries for their services which are performed at our facility.
Family
Relationships
There
are no family relationships among our directors and executive officers.
Code
of Conduct and Ethics
We
have adopted a code of business conduct and ethics that applies to our directors, officers and all employees. The code of business
conduct and ethics may be obtained free of charge on our website, or by writing to us, Attn: Chief Financial Officer, 601 NE 26th
Ct., Pompano Beach, FL 33064.
Compliance
with Section 16(a) of the Exchange Act
Based
solely upon a review of Forms 3 and 4 and amendments thereto furnished to us under Rule 16a-3(d) of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”) during twelve months ended December 31, 2016, we are not aware of any person
that failed to file on a timely basis, as disclosed in the aforementioned Forms, reports required by Section 16(a) of the Exchange
Act during the years ended December 31, 2016.
Item
11. Executive Compensation
Summary
Compensation Table
The
following table sets forth certain information concerning the annual and long-term compensation of our Chief Executive Officer
and our other executive officers during the last two fiscal years.
Current
Officers
Name
&
Principal
Position
|
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards (S)
|
|
|
All
Other Compensation ($)
|
|
|
Option
Awards ($)
|
|
|
Total
($)
|
|
Harry
Schoell
|
|
|
2016
|
|
|
$
|
150,000
|
(1)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
1,230
|
|
|
$
|
150,525
|
|
Chairman
& CTO
|
|
|
2015
|
|
|
|
150,000
|
(1)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
525
|
|
|
|
150,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frankie
Fruge
|
|
|
2016
|
|
|
$
|
125,000
|
(2)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
1,230
|
|
|
$
|
125,525
|
|
Director
& President
|
|
|
2015
|
|
|
|
125,000
|
(2)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
525
|
|
|
|
125,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bruce
Schames
|
|
|
2016
|
|
|
$
|
72,000
|
(3)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
1,230
|
|
|
$
|
72,525
|
|
CFO
|
|
|
2015
|
|
|
|
72,000
|
(3)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
525
|
|
|
|
72,525
|
|
|
(1)
|
All
of Mr. Schoell’s salary in 2016 and 2015 has been deferred until determined by the Board of Directors that we can afford
to pay such salary. In 2015 Mr. Schoell forgave $325,000 of accrued salary.
|
|
|
|
|
(2)
|
All
of Ms. Fruge’s salary in 2016 and 2015 has been deferred until determined by the Board of Directors that we can afford
to pay such salary. In 2015 Ms. Fruge forgave $287,500 of accrued salary.
|
|
|
|
|
(3)
|
As
of December 31, 2016, Mr. Schames had $132,725 of deferred salary, which will be paid when determined by the Board of Directors
that we can afford to pay such salary. In 2015 Mr. Schames forgave $42,725 of accrued salary.
|
Employment
Agreements
Harry
Schoell.
Mr. Schoell has an employment agreement with us providing for a base salary of $150,000 per year plus standard
benefits. This compensation is currently being deferred until we have sufficient revenue to support its payment, and to date,
he has not received any cash compensation under his agreement. Mr. Schoell converted $20,000 of deferred salary to common stock
in 2010, and $24,000 to common stock in 2013 at current market prices. Mr. Schoell also converted 1.5 million shares of our common
stock to a 2.5% equity interest in Cyclone Performance LLC in 2012. In 2014 Mr. Schoell converted $844,844 of unpaid deferred
salary into 10,560,550 shares of common stock, and in 2015 Mr. Schoell forgave $325,000 of accrued salary. As of December 31,
2016, Mr. Schoell had $225,000 in unpaid, deferred salary due to him.
Mr.
Schoell’s employment agreement commenced June 30, 2007, and was amended on January 1, 2011. Mr. Schoell received 500,000
common stock options in 2007 pursuant to the original agreement, and is to receive 600,000 options per year pursuant to the amendment.
If Mr. Schoell is terminated for “cause,” he shall receive any unpaid base salary due to him as of the date of termination.
If he is terminated without “cause” or upon a change in control, he shall receive (i) any unpaid base salary accrued
through the effective date of termination, (ii) his 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 him were he not terminated, during the 12 months following his, termination. Upon termination without
cause, all of his stock options shall vest immediately.
Frankie
Fruge.
Ms. Fruge has an Employment Agreement with us providing for a base salary of $125,000 per year plus standard benefits.
This compensation is currently being deferred, and to date, she has not received any cash compensation under her agreement. Ms.
Fruge converted $6,000 of deferred salary to common stock in 2010, and $24,000 salary to common stock in 2013. She also converted
1.5 million shares of our stock into 2.5% equity interest in Cyclone Performance LLC in 2012.
In
2014 Ms. Fruge converted $738,740 of unpaid deferred salary into 7,984,250 shares of common stock and in 2015 Ms. Fruge forgave
$287,500 of accrued salary. As of December 31, 2016, Ms. Fruge had $185,500 in unpaid, deferred salary due to her.
Ms.
Fruge’s employment agreement commenced June 30, 2007, and was amended on January 1, 2011. Ms. Fruge received 500,000 common
stock options in 2007 pursuant to the original agreement, and is to receive 600,000 options per year pursuant to the amendment.
If Ms. Fruge is terminated for “cause,” she shall receive any unpaid base salary due to her as of the date of termination.
If she is terminated without “cause” or upon a change in control, she shall receive (i) any unpaid base salary accrued
through the effective date of termination, (ii) her base salary at the rate prevailing at such termination through 12 months from
the date of termination or the end of her term then in effect, whichever is longer, and (iii) any performance bonus that would
otherwise be payable to her were she not terminated, during the 12 months following her termination. Upon termination without
cause, all of her stock options shall vest immediately.
Bruce
Schames.
Mr. Schames has an agreement with us providing for annual cash compensation of $60,000, $12,000 in restricted
common stock and 600,000 common stock options. His year-to-year contract began June 1, 2010. Either Mr. Schames or us may terminate
his employment on 60 days’ notice. If we terminate other than for “cause,” he shall receive his base compensation
due through the date of termination plus a good faith repayment plan for any deferred and unpaid compensation. If Mr. Schames
leaves or is terminated for “cause,” he shall not be paid any deferred compensation and any unvested options shall
terminate immediately. “Cause” is defined as gross negligence or willful misconduct that injures or may reasonably
injure us. Mr. Schames converted $55,292 of deferred salary to 691,152 shares of our common stock in 2014 and in 2015 Mr. Schames
forgave $42,725 of accrued salary. As of December 31, 2016, Mr. Schames had $132,725 in unpaid deferred salary due to him.
CYCLONE
OFFICER and DIRECTOR OPTIONS
As
of Dec. 31 2016
Outstanding
Equity Awards at December 31, 2016
The
following table summarizes information concerning all stock option grants held by our named executive officers as of December
31, 2016.
All
outstanding equity awards are options to purchase shares of common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
or
|
|
|
Grant
Date Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Number
|
|
|
|
|
|
Base Price of
|
|
|
Value of Stock
|
|
|
|
|
Number
|
|
Number Un-
|
|
|
|
Option
|
|
Number
|
|
|
Exercisable
|
|
|
Number
|
|
|
Option
|
|
|
in
Option
|
|
|
Option
|
|
Exercisable
|
|
exercisable
|
|
|
|
Grant
|
|
Granted
|
|
|
(Vested)
|
|
|
Un-
|
|
|
Awards
|
|
|
Awards
|
|
|
Expiration
|
|
Date
|
|
Date
|
|
Name
and Position
|
|
Dates
|
|
Granted
|
|
|
(1)
|
|
|
exercisable
|
|
|
($/Share)
|
|
|
($)
(2)
|
|
|
Date
|
|
Vested
|
|
Expires
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harry
Schoell
|
|
2007-2016
|
|
|
3,400,000
|
|
|
|
2,950,000
|
|
|
|
450,000
|
|
|
|
$.45-.$0003
|
|
|
|
$.45-.$0003
|
|
|
2017-2026
|
|
2008-2017
|
|
2017-2026
|
|
Chairman
& Chief
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frankie
Fruge
|
|
2007-2016
|
|
|
3,400,000
|
|
|
|
2,950,000
|
|
|
|
450,000
|
|
|
|
$.45-.$0003
|
|
|
|
$.45-.$0003
|
|
|
2017-2026
|
|
2008-2017
|
|
2017-2026
|
|
Director
& President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bruce
Schames
|
|
2010-2016
|
|
|
4,115,000
|
|
|
|
3,665,000
|
|
|
|
450,000
|
|
|
|
$.33-.0003
|
|
|
|
$.33-.0003
|
|
|
2012-2026
|
|
2011-2017
|
|
2017-2026
|
|
CFO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
Hasson-Director
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dennis
Dudzik - Director
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
-
|
|
-
|
|
Total
|
|
|
|
|
10,915,000
|
|
|
|
9,565,000
|
|
|
|
1,350,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Options vest one year from the date of grant.
(2)
We determined the grant date fair value of stock option awards using the methodology in footnote 10 to our Consolidated Financial
Statements for the years ended December 31, 2016 and 2015.
Option
Exercise and Stock Vesting
During
2016, none of the above named executive officers exercised any options, and 1.8 million executive officer and director options
vested.
Compensation
of the Board of Directors
The
following table sets forth compensation to our non-employee directors during the year ended December 31, 2016 and 2015.
Name
|
|
|
Fees
earned or paid in cash ($)
|
|
|
|
Option
awards ($)
|
|
|
|
Stock
Awards
($)
|
|
|
|
Nonqualified
deferred
compensation
earnings
($)
|
|
|
|
All
other
compensation
($)
|
|
|
|
Total
($)
|
|
James
Hasson
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Dennis
Dudzik
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The
following table sets forth information regarding the beneficial ownership of our Common Stock and Series B Preferred Stock by
each of our named Executive Officers and Board of Directors, and each shareholder who is known by us to own beneficially five
percent (5%) or more of the outstanding stock of such class as of March 31, 2016. On March 31, 2017, there were 1,661,876,344
shares of common and 1,000 shares of Series B Preferred stock issued and outstanding.
Name
and Address
|
|
Common
Shares Beneficially Owned
|
|
|
%
|
|
|
Series
B Pref. Shares Beneficially Owned
|
|
|
%
|
|
Harry
Schoell
, Chairman & Chief
Technology
Officer
601
NE 26th Ct.
Pompano
Beach, FL 33064
|
|
|
50,915,970
|
(1)
|
|
|
3.05
|
%
|
|
|
797
|
|
|
|
80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frankie
Fruge
, President & Director
601
NE 26th Ct.
Pompano
Beach, FL 33064
|
|
|
20,434,206
|
(2)
|
|
|
1.22
|
%
|
|
|
203
|
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bruce
Schames
, CFO
601
NE 26th Ct.
Pompano
Beach, FL 3306
|
|
|
4,778,175
|
(3)
|
|
|
.29
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
Hasson
Director
601
NE 26th Ct.
Pompano
Beach, FL 33064
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dennis
Dudzik
Director
601
NE 26th Ct.
Pompano
Beach, FL 33064
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
Executive Officers
as
a Group (5 persons)
|
|
|
76,128,351
|
|
|
|
4.56
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTALS:
|
|
|
76,128,351
|
|
|
|
4.56
|
%
|
|
|
1,000
|
*
|
|
|
100
|
%
|
*
|
The
1,000 shares of Series B Preferred stock provide their holders a majority vote on all matters brought before the common stock
shareholders.
|
|
|
(1)
|
Mr.
Schoell’s total includes 2,950,000 vested common stock options, but excludes 450,000 unvested options awarded in 2016.
|
|
|
(2)
|
Ms.
Fruge’s total includes 2,950,000 vested common stock options, but excludes 450,000 unvested options awarded in 2016.
|
|
|
(3)
|
Mr.
Schames’ total includes 3,665,000 vested common stock options, but excludes 450,000 unvested options awarded in 2016.
|
Item
13. Certain Relationships and Related Transactions, and Director Independence
Our
Board of Directors (excluding any interested director) is charged with reviewing and approving all related-person transactions,
and a special committee of our Board of Directors is established to negotiate the terms of such transactions. In considering related-person
transactions, our Board of Directors considers all relevant available facts and circumstances.
We
have an Operations Agreement dated July 2, 2007, with Schoell Marine, a company owned by Harry Schoell, providing equipment leasing,
based upon cost and going market rates and though December 2015 office facility rental. At December 31, 2016, we owed to Schoell
Marine $223,567, which is recorded as related party debt. The debt is callable at the discretion of Mr. Schoell. Through December
2015 we rented office space from Schoell Marine under this agreement at approximately $12.00/sf, which we believe to be at market
rates.
As
of December 31, 2016, we also had recorded $412,500 of accrued and deferred officer’s salaries to Mr. Schoell and Ms. Fruge,
The accrued deferred salary can be paid to the officers if and when funds are available. These funds are accounted for as non-interest
bearing accruals due on demand.
In
2012, Mr. Schoell and Ms. Fruge each acquired a 2.5% equity interest in Cyclone Performance LLC for 1.5 million shares of our
stock each.
Item
14. Principal Accountant Fees and Services
The
following table shows what, Soles, Heyn & Company, LLP and Anton & Chia LLP, our independent auditing firms, billed for
audit and other services for the years ended December 31, 2016, and 2015.
|
|
Year
Ended
December 31, 2016
|
|
|
Year
Ended
December 31, 2015
|
|
|
|
|
|
|
|
|
Audit
Fees – Soles, Heyn & Company, LLP
|
|
$
|
-
|
|
|
$
|
-
|
|
Audit
Fees -Anton & Chia, LLP
|
|
|
20,000
|
|
|
|
35,000
|
|
Audit-Related
Fees
|
|
|
-
|
|
|
|
-
|
|
Tax
Fees
|
|
|
-
|
|
|
|
-
|
|
All
Other Fees
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
20,000
|
|
|
$
|
35,000
|
|
Audit
Fees
—This category includes the audit of our annual financial statements, review of financial statements included in
our Form 10-Q Quarterly Reports and services that are normally provided by the independent auditors in connection with engagements
for those years.
Audit-Related
Fees
—N/A
Tax
Fees
—N/A
Other
Fees
- This category reflects analysis of the accounting for the Advent business and contract acquisition.
Overview
—Our Audit Committee reviews and, in its sole discretion pre-approves, our independent auditors’ annual engagement
letter including proposed fees and all audit and non-audit services provided by the independent auditors. Accordingly, all services
described under “Audit Fees,” “Audit-Related Fees,” “Tax Fees” and “Other Fees”
were pre-approved by our Audit Committee. The Audit Committee may not engage the independent auditors to perform the non-audit
services proscribed by law or regulation. Our Audit Committee may delegate pre-approval authority to a member of the Board of
Directors, and authority delegated in such manner must be reported at the next scheduled meeting of the Board of Directors.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2016 AND 2015
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. Initiated in 2016,
the Company’s current business model, is to be primarily a research and development engineering company whose main purpose
is to develop, commercialize, market and license its Cyclone engine technology. Engines and related systems will be outsourced
for manufacturing but the company will invoice customers. Our prior business model also included engine manufacturing.
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 various vehicles and vessels utilizing the Company’s engine. As
of December 31, 2016 and 2015, the company had a 95% controlling interest in Cyclone Performance.
In
2010, the Company established a subsidiary WHE Generation Corp. f/k/a, Cyclone-WHE LLC (the “WHE Subsidiary”, “WheGen”),
to market the waste heat recovery systems for all Cyclone engine models. As of September 30, 2014 the Company had sold most of
its ownership and the balance was sold in the second quarter of 2016.
B.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The
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.
Effective
September 30, 2014, Cyclone sold most of its investment in the WHE Subsidiary and as of December 31, 2015 retained approximately
a 2 million share non controlling (below 20%) interest in the WHE Subsidiary. This investment was deconsolidated on September
30, 2014 and the remaining investment was sold in the second quarter of 2016.
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.
C.
CASH
Cash
includes cash on hand and cash in banks. At December 31, 2016 and 2015, the Company maintained cash balances at one financial
institution.
D. COMPUTATION OF LOSS PER SHARE
Net loss per share is computed by dividing
the loss by the weighted average number of common shares outstanding during the period. Diluted 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 December 31, 2016 and 2015, total anti-dilutive shares amounted to approximately 14.5 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, 2016, 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 not 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 2016.
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 will be 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. 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. Based on our revised R&D company business model, commencing in 2016, costs include only material to develop a completed
engine. In our former business model 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 annual fair values and changing values of financial instruments as of January 1, 2015 through December 31 2015 and
January 1, 2016 through December 31, 2016 is as follows:
Instrument
|
|
Beginning
of Period
|
|
|
Change
|
|
|
End
of Period
|
|
|
Level
|
|
|
Valuation
Methodology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilities 2015
|
|
$
|
440,184
|
|
|
$
|
(56,706
|
)
|
|
$
|
383,482
|
|
|
|
3
|
|
|
|
Stochastic
Process Forecasting Model
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilities 2016
|
|
$
|
383,482
|
|
|
$
|
370,518
|
|
|
$
|
754,000
|
|
|
|
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 years ended December 31, 2016 and 2015
were $604,199 and $467,610, respectively.
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
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.
In
March 2016, the FASB issued ASU 2016-06, “
Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt
Instruments (a consensus of the FASB Emerging Issues Task Force)
”. which applies to all entities that are issuers of
or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call
(put) options, and requires that embedded derivatives be separated from the host contract and accounted for separately as derivatives
if certain criteria are met. One criterion is that the economic characteristics and risks of the embedded derivatives are not
clearly and closely related to the economic characteristics and risks of the host contract. This ASU is effective for financial
statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption
is permitted, including adoption in an interim period. The Company is currently assessing the impact of the ASU on its financial
position, results of operations or cash flows.
In
August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash
Payments. This standard amends and adjusts how cash receipts and cash payments are presented and classified in the statement of
cash flows.
ASU 2016-15
is effective for fiscal years beginning after December 15, 2017, and interim periods within those
fiscal years and will require adoption on a retrospective basis unless impractical. If impractical the Company would be required
to apply the amendments prospectively as of the earliest date possible. The Company is currently evaluating the impact that
ASU
2016-15
will have on its financial position, results of operations or cash flows.
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 December 31, 2016, the Company maintained its cash in one quality financial institution. The Company has not experienced any
losses in its bank accounts through December 31,2016. 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 $2.10 million
for the year ended December 31, 2016, and $1.5 million for the year ended December 31, 2015. The cumulative deficit since
inception is approximately $60.8 million. The Company has a working capital deficit at December 31, 2016 of approximately
$4.0 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 debt, advance contract payments (deferred revenue) and
advances from and deferred payments to related parties.
NOTE
3 – INVENTORY, NET
Initiated in 2016, based on our revised R&D
company business model, Inventory principally consists of raw material. to develop an engine. Under our prior business model,
inventory consisted of raw material engine parts, work in process engines, labor and overhead, net of realization, valuation and
obsolescence reserves. In the aggregate inventory is stated at the lower of cost or market.
Inventory,
net consists of:
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
Raw
materials
|
|
$
|
26,667
|
|
|
$
|
323,508
|
|
Total
|
|
$
|
26,667
|
|
|
$
|
323,505
|
|
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 estimate.
NOTE
4 – PROPERTY AND EQUIPMENT, NET
Property
and equipment consists of the following:
|
|
December
31, 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
|
|
|
(209,498
|
)
|
|
|
(178,049
|
)
|
Net
property and equipment
|
|
$
|
93,272
|
|
|
$
|
126,520
|
|
Depreciation
expense for the years ended December 31, 2016, and 2015 was $33,269 and $36,645, 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 December 31, 2016,
and 2015 were $178,478 and $283,368, respectively. For the years ended December 31, 2016, and 2015 the Company capitalized $0,
and $0, respectively, of expenditures related to these assets. In 2016, and 2015 the Company recorded net charges of $69,782
and $28,530, respectively, included in general and administrative expenses, for various expired patents; the basic patents
for the Cyclone technology are still protected.
As
of December 31, 2016, the Company had 15 patents issued on its technology both in the U.S. and internationally. Pursuant to new
US Patent Office regulations, upon approval, expired patents can be reestablished from inception.
Patents,
trademarks and copyrights are amortized over the life of the intellectual property which is 15 years. Amortization expenses for
the years ended December 31, 2016, and 2015 were $35,088 and $38,929, respectively.
NOTE
6 – NOTES AND OTHER LOANS PAYABLE
A
summary of non-related party notes and other loans payable is as follows:
|
|
December
31, 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 and 2017
|
|
|
13,500
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Note
payable, maturing Oct 14 2016, (I)
|
|
|
27,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
10%
Note payable, maturing January 26, 2017
|
|
|
46,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Demand
Note, (H)
|
|
|
6,725
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
non related party notes –net of discount
|
|
|
512,642
|
|
|
|
407,737
|
|
|
|
|
|
|
|
|
|
|
Less-Current
Portion
|
|
|
512,642
|
|
|
|
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 December 31, 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 December 31, 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.
|
|
(I)
|
Interest
of $3,000 to be paid in 1,500,000 shares of restricted company common stock This note is in default.
|
A
summary of related party notes and other loans payable is as follows:
|
|
December
31, 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)
|
|
$
|
169,751
|
|
|
$
|
117,734
|
|
6%
non-collateralized loans from officer and shareholder, payable on demand. The original principal balances were $157,101.
|
|
|
107,842
|
|
|
|
103,328
|
|
12%
non-collateralized loans from officer and shareholder, payable on demand
|
|
|
21,044
|
|
|
|
20,178
|
|
Accrued
Interest
|
|
|
95,123
|
|
|
|
80,094
|
|
Total
current related party notes, inclusive of accrued interest
|
|
$
|
393,760
|
|
|
$
|
321,334
|
|
|
(A)
|
This
note arose from 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.
|
In
June 2015 Schoell Marine forgave $710,272 of principle and accrued interest on the note.
NOTE
7 – RELATED PARTY TRANSACTIONS-Deferred Compensation
Included
in accounts payable and accrued expenses - related parties as of December 31, 2016, and December 31, 2015 are $412,500 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 due on demand.
In
June 2015, the principle officers of the company forgave $612,500 of deferred compensation.
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 year ended December 31, 2016, the Company:
|
a-
|
Issued
125,730,741 shares of restricted common stock valued at $298,315 for payment of $240,932 of liabilities and incurred a $57,383
loss on this debt payment.
|
|
|
|
|
b-
|
Amortized
(based on vesting) $2,526 of common stock options for employee services.
|
|
|
|
|
c-
|
Issued
3,000,000 shares of common stock valued at $6,000 for services
|
During
the year ended December 31, 2015, the Company:
|
a-
|
Issued
92,500,000 shares of restricted common stock valued at $116,500 for payment of $66,500 of liabilities and incurred a $50,000
loss on this debt payment.
|
|
|
|
|
b-
|
Amortized
(based on vesting) $2,526 of common stock options for employee services.
|
|
|
|
|
c-
|
Issued
424,853,956 shares of common stock valued at $130,855 as repayment of debt and related interest expense.
|
|
|
|
|
d-
|
Repaid
a loan of 10,000,000 shares of stock from the Company’s Chairman and co-founder. which had been reissued pursuant to
various debt covenants that had to be covered with stock.
|
NOTE
10 – STOCK OPTIONS AND WARRANTS
A.
COMMON STOCK OPTIONS
Per
the employment contracts with certain officers, the company issued 1,800,000 common stock options, valued at $3,690 (pursuant
to the Black Scholes valuation model) that are exercisable into shares of common stock at an average exercise price of $.0021
and with a maturity life of 10 years. For the years ended December 31, 2016, and December 31, 2015 the amortization of stock options
was $2,526 and $2,526, respectively. The unamortized balance at December 31 2016 was $2,396.
A
summary of the common stock options for the period from December 31, 2014 through December 31, 2016 follows:
|
|
Number
Outstanding
|
|
|
Weighted
Avg.
Exercise
Price
|
|
|
Weighted
Avg.
Remaining
Contractual
Life
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2014
|
|
|
11,090,000
|
|
|
$
|
0.123
|
|
|
|
6.0
|
|
Options
issued
|
|
|
1,800,000
|
|
|
|
.0009
|
|
|
|
9.6
|
|
Options
exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options
cancelled
|
|
|
(510,000
|
)
|
|
|
(.12
|
)
|
|
|
-
|
|
Cancelled-old
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2015
|
|
|
12,380,000
|
|
|
$
|
0.123
|
|
|
|
5.8
|
|
Options
issued
|
|
|
1,800,000
|
|
|
|
.0021
|
|
|
|
9.6
|
|
Options
expired
|
|
|
(150,000
|
)
|
|
|
(.098
|
)
|
|
|
|
|
Balance,
December 31, 2016
|
|
|
14,030,000
|
|
|
$
|
.096
|
|
|
|
5.3
|
|
The
vested and exercisable options at period end follows:
|
|
Exercisable/
Vested Options Outstanding
|
|
|
Weighted
Avg.
Exercise
Price
|
|
|
Weighted
Avg.
Remaining
Contractual
Life
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2016
|
|
|
12,230,000
|
|
|
$
|
.11
|
|
|
|
4.6
|
|
Additional
vesting by March 31, 2017
|
|
|
450,0000
|
|
|
|
.0002
|
|
|
|
9.0
|
|
The
fair value of new stock options, re-priced stock options, new purchase warrants and re-priced purchase warrants granted using
the Black-Scholes option pricing model was calculated using the following assumptions:
|
|
Year
Ended
December
31, 2016
|
|
|
Year
Ended
December
31, 2015
|
Risk
free interest rate
|
|
|
.71%-1.4%
|
|
|
|
.89% -1.31%
|
Expected
volatility
|
|
|
136%
- 1.39%
|
|
|
|
102%
- 131%
|
Expected
term
|
|
|
3
|
|
|
|
3
|
Expected
dividend yield
|
|
|
0%
|
|
|
|
0%
|
Average
value per options and warrants
|
|
$
|
.0019
-$.0024
|
|
|
$
|
.0003
-$.0016
|
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
During
the year ended December 31, 2016, 625,000 warrants with an average exercise price of $.0144 expired.
A
summary of outstanding vested warrant activity for the period from December 31, 2014 to December 31, 2016 follows:
|
|
Number
Outstanding
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
Common Stock Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2014
|
|
|
3,633,692
|
|
|
$
|
0.074
|
|
|
|
0.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants expired
|
|
|
(2,508,692
|
)
|
|
|
(.148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
|
|
1,125,000
|
|
|
$
|
.0042
|
|
|
|
2.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants expired
|
|
|
(625,000
|
)
|
|
|
(.011
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
|
500,000
|
|
|
$
|
.08
|
|
|
|
.67
|
|
All warrants were vested and exercisable as of the date issued.
NOTE
11 – INCOME TAXES
A
reconciliation of the differences between the effective income tax rates and the statutory federal tax rates for the years ended
December 31, 2016 and 2015 are as follows:
|
|
Year
ended
December
31, 2016
|
|
|
|
|
|
Year
ended
December
31, 2015
|
|
|
|
|
Tax
benefit at U.S. statutory rate
|
|
$
|
470,466
|
|
|
|
34
|
%
|
|
$
|
235,276
|
|
|
|
34
|
%
|
State
taxes, net of federal benefit
|
|
|
55,349
|
|
|
|
4
|
|
|
|
27,679
|
|
|
|
4
|
|
Change
in valuation allowance
|
|
|
(525,818
|
)
|
|
|
(38
|
)
|
|
|
(262,955
|
)
|
|
|
(38
|
)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
The
tax effect of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December
31, 2016 and December 31, 2015 consisted of the following:
Deferred
Tax Assets
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
Net
Operating Loss Carry-forward
|
|
$
|
10,577,607
|
|
|
$
|
9,924,492
|
|
Deferred
Tax Liabilities – Accrued Officers’ Salaries
|
|
|
(900,306
|
)
|
|
|
(795,805
|
)
|
Net
Deferred Tax Assets
|
|
|
9,677,301
|
|
|
|
9,128,687
|
|
Valuation
Allowance
|
|
|
(9,677,301
|
)
|
|
|
(9,128,687
|
)
|
Total
Net Deferred Tax Assets
|
|
$
|
-
|
|
|
$
|
-
|
|
As
of December 31, 2016, the Company had a net operating loss carry forward for income tax reporting purposes of approximately $22.8
million that may be offset against future taxable income through 2031. 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.
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, was at an annual rent of $60,000. The lease period ended December 2016 and the current lease is monthly with a 3% rate
increase. Occupancy costs for the years ended December 31, 2016, and 2015 were $64,100 and $60,000, respectively.
B .CAPITALIZED LEASE OBLIGATIONS
In
2013 and 2014, the company acquired $45,566 of equipment via capitalized leases at interest rates ranging from 6.9% to 15.5%.
Total lease payments made for the year ended December 31, 2016 were $10,042. The balance of capitalized lease obligations payable
at December 31, 2016, and December 31, 2015 were $39,847 and $49,889, respectively. Future lease payments are:
2017
|
|
$
|
14,312
|
|
2018
|
|
|
9,754
|
|
2019
|
|
|
8,127
|
|
2020
|
|
|
7,654
|
|
2021
|
|
|
0
|
|
|
|
$
|
39,847
|
|
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 December 31, 2016, the cumulative unallocated losses to the non-controlling
interests of this subsidiary of $953 are to be recovered by the parent from future subsidiary profits if they materialize.
NOTE
15 – RECEIVABLES, DEFERRED REVENUE AND BACKLOG
As
of December 31, 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. In 2016, 3 other customers advanced $175,700 as deposits towards
payments on $355,000 of contracts for engines currently estimated to be delivered in 2017 and license deposits.
NOTE
16 – DERIVATIVE FINANCIAL INSTRUMENTS
Prior to 2015,
the Company entered into convertible note agreements (subject to derivative accounting treatment). The conversion prices into
common stock 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 year ended December 31, 2016, the Company
recorded a $11,680 non-cash charge to interest expense (reflective of debt discount amortization), and $370,519 of derivative loss
related to adjusting the derivative liability to fair value. At December 31, 2016, the derivative related fair value of debt was
$754,000. The significant increase in the derivative loss was the inclusion of default judgments, default and accrued interest
in the fair market debt calculation.
In the year ended December 31, 2015, the Company
recorded a $174,043 non-cash charge to interest expense (reflective of debt discount amortization), an increase of $0 in additional
paid in capital pursuant to conversion of convertible notes to common stock, and a $56,702 of derivative gain related to adjusting
the derivative liability to fair value. At December 31, 2015, the derivative related fair value of debt was $383,482.
The Company calculates the estimated fair values
of the liabilities for derivative instruments at each quarter-end using the 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.
|
|
Year
Ended
December
31, 2016
|
|
|
Year
Ended
December
31, 2015
|
|
Volatility
|
|
|
71%-
91
|
%
|
|
|
103%-
343
|
%
|
Risk
Free Rate
|
|
|
.02%
- .28
|
%
|
|
|
.01%
- .28
|
%
|
Expected
Term (years)
|
|
|
0
– 1.05
|
|
|
|
0
– 1.05
|
|
Dividend
Rate
|
|
|
0
|
%
|
|
|
0
|
%
|
NOTE
17 – LITIGATION
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 Tonaquint Inc. filed and received a judgment and the Company is negotiating a reduced settlement.
As at December 31 2016, outstanding interest, default interest and default judgment penalties are included in accrued liabilities.
In August 2015, the Company is subject to
litigation of approximately $150,000, plus subsequent penalty interest for non -payment of a liability. JSJ filed and received
a judgment and the Company entered into a settlement agreement for conversion of judgment based on value and conversions of
original note on January 9, 2017.
As at December 31, 2016, outstanding interest,
default interest and default judgment penalties are included in accrued liabilities.
NOTE
18 – SUBSEQUENT EVENTS
In
the first and second quarters of 2017, the Company engaged in the following transactions:
|
a-
|
The
Company issued approximately 6.4 million shares of common stock value at $5,096 for services.
|
|
|
|
|
b-
|
The
Company issued 70 million shares of common stock in payment of a $123,000 accrued liability for services.
|
|
|
|
|
c-
|
The
Company issued 100 million shares of common stock in settlement of a $49,000 note payable and related interest
|
|
|
|
|
d-
|
The
Company issued approximately 44.5 million shares of common stock pursuant of conversion of approximately $34,000 of note payable
an related interest.
|
In January 2017 Falck Schmidt Defense
Systems (“FSDS”) of Denmark signed an Exclusive Worldwide Technology License Agreement to use the Cyclone engine
technology for both military and aerospace power applications. For each Cyclone engine that FSDS manufactures Cyclone will
receive a royalty. Additionally these contracts call for Cyclone to be the R&D arm of FSDS.
Through
the first half of 2017, the company received funds of approximately $153,000 from current derivative and non-derivative note holders.
The
Company entered into a consulting contract on January 3, 2017 to oversee and complete the process of its 2016 audit and to provide
other financial consulting. Compensation is to be in the amount of 10,000,000 shares per month for a period of twelve months.
The Company entered an addendum to a consulting
agreement “Tendrich Consulting Addendum # 2 dated March 30,2017.” The Addendum calls for a one time payment
of 50,0000,000 shares for additional responsibilities performed.
The Company entered into a consulting contract
on April 1, 2017 “ Tendrich consulting Agreement dated April 1, 2017” to provide the directors and executives
guidance on certain matters. Compensation is to be in the amount of $10,000 of Restricted Stock per month for a period
of twelve months, with an optional twelve month extension.
CYCLONE
POWER TECHNOLOGIES, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
SEPTEMBER
30, 2016, JUNE 30, 2016 AND MARCH 31, 2016
(UNAUDITED)
|
|
March 31 2016
|
|
|
June 30, 2016
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
-
|
|
|
$
|
14,861
|
|
|
$
|
1,387
|
|
Inventory, net
|
|
|
337,959
|
|
|
|
349,513
|
|
|
|
407,515
|
|
Other current assets
|
|
|
587
|
|
|
|
250
|
|
|
|
1,400
|
|
Total current assets
|
|
|
338,546
|
|
|
|
364,624
|
|
|
|
410,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture, fixtures, and equipment
|
|
|
302,770
|
|
|
|
302,770
|
|
|
|
302,770
|
|
Accumulated depreciation
|
|
|
(184,981
|
)
|
|
|
(193,577
|
)
|
|
|
(202,153
|
)
|
Net property and equipment
|
|
|
117,789
|
|
|
|
109,193
|
|
|
|
100,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents, trademarks and copyrights
|
|
|
539,446
|
|
|
|
539,446
|
|
|
|
539,446
|
|
Accumulated amortization
|
|
|
(264,999
|
)
|
|
|
(273,622
|
)
|
|
|
(282,414
|
)
|
Net patents, trademarks and copyrights
|
|
|
274,447
|
|
|
|
265,824
|
|
|
|
257,032
|
|
Other assets
|
|
|
8,062
|
|
|
|
8,062
|
|
|
|
8,062
|
|
Total other assets
|
|
|
282,509
|
|
|
|
273,886
|
|
|
|
265,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
738,844
|
|
|
$
|
747,703
|
|
|
$
|
776,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank overdraft
|
|
$
|
3,068
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Accounts payable and accrued expenses
|
|
|
1,253,933
|
|
|
|
1,337,627
|
|
|
|
1,264,939
|
|
Accounts payable and accrued expenses-related parties
|
|
|
293,975
|
|
|
|
377,725
|
|
|
|
461,475
|
|
Notes and other loans payable-current portion
|
|
|
422,930
|
|
|
|
424,917
|
|
|
|
508,642
|
|
Derivative liabilities
|
|
|
381,161
|
|
|
|
380,705
|
|
|
|
380,162
|
|
Notes and other loans payable-related parties
|
|
|
385,511
|
|
|
|
385,304
|
|
|
|
391,132
|
|
Capitalized lease obligations-current portion
|
|
|
13,426
|
|
|
|
13,916
|
|
|
|
14,052
|
|
Deferred revenue and license deposits
|
|
|
153,731
|
|
|
|
188,826
|
|
|
|
263,826
|
|
Total current liabilities
|
|
|
2,907,735
|
|
|
|
3,109,020
|
|
|
|
3,284,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized lease obligations-net of current portion
|
|
|
32,341
|
|
|
|
28,219
|
|
|
|
26,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
32,341
|
|
|
|
28,219
|
|
|
|
26,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
2,940,076
|
|
|
|
3,137,239
|
|
|
|
3,311,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B preferred stock, $.0001 par value, 1,000 shares authorized, 1,000 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively.
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common stock, $.0001 par value, 4,000,000,000 shares authorized, 1,388,669,532, 1,437,400,273 and 1,517,400,273 shares issued and outstanding at March 31, 2016, June 30, 2016 and September 30, 2016, respectively.
|
|
|
138,864
|
|
|
|
143,738
|
|
|
|
151,738
|
|
Additional paid-in capital
|
|
|
56,622,211
|
|
|
|
56,706,255
|
|
|
|
56,914,961
|
|
Treasury Stock, 317,000 shares, at cost.
|
|
|
(3,000
|
)
|
|
|
(3,000
|
)
|
|
|
(3,000
|
)
|
Accumulated deficit
|
|
|
(58,988,346
|
)
|
|
|
(59,265,568
|
)
|
|
|
(59,627,862
|
)
|
Total stockholders’ deficit-Cyclone Power Technologies Inc.
|
|
|
(2,230,271
|
)
|
|
|
(2,418,575
|
)
|
|
|
(2,564,163
|
)
|
Non controlling interest in consolidated subsidiaries
|
|
|
29,039
|
|
|
|
29,039
|
|
|
|
29,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders’ Deficit
|
|
|
(2,201,232
|
)
|
|
|
(2,389,536
|
)
|
|
|
(2,535,124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Deficit
|
|
$
|
738,844
|
|
|
$
|
747,703
|
|
|
$
|
776,013
|
|
The
accompanying notes are an integral part of these consolidated financial statements
CYCLONE
POWER TECHNOLOGIES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
Three
Months Ended March 31
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
COST
OF GOODS SOLD
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
Advertising
and promotion
|
|
|
5,291
|
|
|
|
254
|
|
General
and administrative
|
|
|
190,619
|
|
|
|
271,579
|
|
Research
and development
|
|
|
34,693
|
|
|
|
106,927
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
230,603
|
|
|
|
378,760
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(230,603
|
)
|
|
|
(378,760
|
)
|
|
|
|
|
|
|
|
|
|
OTHER
(EXPENSE) INCOME
|
|
|
|
|
|
|
|
|
Other
(expense)
|
|
|
500
|
|
|
|
(50,000
|
)
|
Derivative
income (expense)
|
|
|
2,321
|
|
|
|
(17,654
|
)
|
Interest
(expense)
|
|
|
(32,828
|
)
|
|
|
(141,223
|
)
|
|
|
|
|
|
|
|
|
|
Total
other (expense)
|
|
|
(30,007
|
)
|
|
|
(208,877
|
)
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(260,610
|
)
|
|
|
(587,637
|
)
|
Income
taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(260,610
|
)
|
|
$
|
(587,637
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss per common share, basic and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
1,388,669,532
|
|
|
|
972,124,660
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements
CYCLONE
POWER TECHNOLOGIES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
Six
Months Ended June 30,
|
|
|
Three
Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF GOODS SOLD
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
and promotion
|
|
|
5,839
|
|
|
|
434
|
|
|
|
548
|
|
|
|
180
|
|
General
and administrative
|
|
|
385,509
|
|
|
|
401,014
|
|
|
|
194,890
|
|
|
|
129,435
|
|
Research
and development
|
|
|
73,850
|
|
|
|
188,164
|
|
|
|
39,157
|
|
|
|
81,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
465,198
|
|
|
|
589,612
|
|
|
|
234,595
|
|
|
|
210,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(465,198
|
)
|
|
|
(589,612
|
)
|
|
|
(234,595
|
)
|
|
|
(210,852
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
(EXPENSE) INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
(12,969
|
)
|
|
|
(50,000
|
)
|
|
|
(13,469
|
)
|
|
|
-
|
|
Derivative income(expense)
|
|
|
2,777
|
|
|
|
(10,811
|
)
|
|
|
456
|
|
|
|
6,843
|
|
Interest
(expense)
|
|
|
(62,442
|
)
|
|
|
(227,854
|
)
|
|
|
(29,614
|
)
|
|
|
(86,631
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other (expense)
|
|
|
(72,634
|
)
|
|
|
(288,665
|
)
|
|
|
(42,627
|
)
|
|
|
(79,788
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(537,832
|
)
|
|
|
(878,277
|
)
|
|
|
(277,222
|
)
|
|
|
(290,640
|
)
|
Income
taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(537,832
|
)
|
|
$
|
(878,277
|
)
|
|
$
|
(277,222
|
)
|
|
$
|
(290,640
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share, basic and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding, basic and diluted
|
|
|
1,393,890,683
|
|
|
|
1,082,119,889
|
|
|
|
1,403,288,754
|
|
|
|
353,877,991
|
|
See
accompanying notes to the condensed consolidated financial statements
CYCLONE
POWER TECHNOLOGIES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
Nine
Months Ended Sept. 30,
|
|
|
Three
Months Ended Sept. 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF GOODS SOLD
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
and promotion
|
|
|
7,986
|
|
|
|
2,934
|
|
|
|
2,147
|
|
|
|
2,500
|
|
General
and administrative
|
|
|
655,309
|
|
|
|
526,241
|
|
|
|
269,801
|
|
|
|
125,227
|
|
Research
and development
|
|
|
131,827
|
|
|
|
291,769
|
|
|
|
57,977
|
|
|
|
103,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
795,122
|
|
|
|
820,944
|
|
|
|
329,925
|
|
|
|
231,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(795,122
|
)
|
|
|
(820,944
|
)
|
|
|
(329,925
|
)
|
|
|
(231,332
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
(EXPENSE) INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
(12,968
|
)
|
|
|
(50,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Derivative income (expense)
|
|
|
3,320
|
|
|
|
(11,406
|
)
|
|
|
543
|
|
|
|
(595
|
)
|
Interest
(expense)
|
|
|
(95,356
|
)
|
|
|
(293,123
|
)
|
|
|
(32,914
|
)
|
|
|
(65,269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other (expense)
|
|
|
(105,004
|
)
|
|
|
(354,529
|
)
|
|
|
(32,371
|
)
|
|
|
(65,864
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(900,126
|
)
|
|
|
(1,175,473
|
)
|
|
|
(362,296
|
)
|
|
|
(297,196
|
)
|
Income
taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(900,126
|
)
|
|
$
|
(1,175,473
|
)
|
|
$
|
(362,296
|
)
|
|
$
|
(297,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share, basic and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding, basic and diluted
|
|
|
1,403,414,280
|
|
|
|
1,145,656,355
|
|
|
|
1,445,400,243
|
|
|
|
1,346,156,963
|
|
See
accompanying notes to the condensed consolidated financial statements
CYCLONE
POWER TECHNOLOGIES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Three months Ended
|
|
|
Six Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(260,610
|
)
|
|
$
|
(587,637
|
)
|
|
$
|
(537,832
|
)
|
|
$
|
(878,277
|
)
|
|
$
|
(900,126
|
)
|
|
$
|
(1,175,473
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
17,653
|
|
|
|
19,078
|
|
|
|
34,872
|
|
|
|
38,031
|
|
|
|
52,240
|
|
|
|
56,810
|
|
Issuance of restricted common stock, options and warrants for services
|
|
|
-
|
|
|
|
62,084
|
|
|
|
987
|
|
|
|
62,953
|
|
|
|
1,693
|
|
|
|
63,377
|
|
Loss on debt paid with common stock
|
|
|
-
|
|
|
|
50,000
|
|
|
|
57,383
|
|
|
|
50,000
|
|
|
|
57,383
|
|
|
|
50,000
|
|
Amortization of prepaid interest expenses via common stock & warrants
|
|
|
-
|
|
|
|
28,459
|
|
|
|
6,000
|
|
|
|
-
|
|
|
|
6,000
|
|
|
|
-
|
|
(Gain) loss from derivative liability-notes payable
|
|
|
(2,321
|
)
|
|
|
17,654
|
|
|
|
(2,777
|
)
|
|
|
10,811
|
|
|
|
(3,320
|
)
|
|
|
11,406
|
|
Amortization of derivative debt discount
|
|
|
8,193
|
|
|
|
78,861
|
|
|
|
11,680
|
|
|
|
132,531
|
|
|
|
11,680
|
|
|
|
157,507
|
|
Interest paid with common stock
|
|
|
-
|
|
|
|
11,372
|
|
|
|
-
|
|
|
|
11,371
|
|
|
|
-
|
|
|
|
12,394
|
|
Amortization of prepaid expenses via common stock & warrants
|
|
|
385
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28,459
|
|
|
|
-
|
|
|
|
28,459
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in inventory
|
|
|
(14,451
|
)
|
|
|
(45,759
|
)
|
|
|
(26,005
|
)
|
|
|
(46,417
|
)
|
|
|
(84,007
|
)
|
|
|
13,533
|
|
Increase in other current assets
|
|
|
-
|
|
|
|
15,116
|
|
|
|
337
|
|
|
|
15,240
|
|
|
|
(813
|
)
|
|
|
15,365
|
|
Decrease in cash overdraft
|
|
|
(153
|
)
|
|
|
0
|
|
|
|
(3,221
|
)
|
|
|
1,228
|
|
|
|
(3,221
|
)
|
|
|
3,027
|
|
Increase in accounts payable and accrued expenses
|
|
|
94,799
|
|
|
|
177,782
|
|
|
|
203,521
|
|
|
|
226,286
|
|
|
|
251,250
|
|
|
|
315,437
|
|
Increase in accounts payable and accrued expenses-related parties
|
|
|
83,750
|
|
|
|
83,750
|
|
|
|
167,500
|
|
|
|
186,470
|
|
|
|
346,833
|
|
|
|
361,522
|
|
Increase in deferred revenue and deposits
|
|
|
5,700
|
|
|
|
-
|
|
|
|
40,700
|
|
|
|
25,000
|
|
|
|
115,700
|
|
|
|
25,403
|
|
Net cash used in operating activities
|
|
|
(67,055
|
)
|
|
|
(89,240
|
)
|
|
|
(46,855
|
)
|
|
|
(136,314
|
)
|
|
|
(148,708
|
)
|
|
|
(61,233
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of capitalized leases
|
|
|
(4,122
|
)
|
|
|
(1,370
|
)
|
|
|
(7,754
|
)
|
|
|
(5,254
|
)
|
|
|
(8,928
|
)
|
|
|
(6,731
|
)
|
Proceeds from notes and loans payable
|
|
|
7,000
|
|
|
|
50,000
|
|
|
|
7,000
|
|
|
|
50,000
|
|
|
|
90,725
|
|
|
|
50,000
|
|
Repayment of notes and loans payable
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,500
|
)
|
|
|
-
|
|
|
|
(1,500
|
)
|
|
|
-
|
|
Increase in related party notes and loans payable-net
|
|
|
64,177
|
|
|
|
40,339
|
|
|
|
63,970
|
|
|
|
91,290
|
|
|
|
69,798
|
|
|
|
17,686
|
|
Net cash provided by financing activities
|
|
|
67,055
|
|
|
|
88,969
|
|
|
|
61,716
|
|
|
|
136,036
|
|
|
|
150,095
|
|
|
|
60,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
-
|
|
|
|
(271
|
)
|
|
|
14,861
|
|
|
|
(278
|
)
|
|
|
1,387
|
|
|
|
(278
|
)
|
Cash, beginning of period
|
|
|
-
|
|
|
|
278
|
|
|
|
-
|
|
|
|
278
|
|
|
|
|
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period
|
|
$
|
-
|
|
|
$
|
7
|
|
|
$
|
14,861
|
|
|
$
|
-
|
|
|
$
|
1387
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of interest in cash
|
|
$
|
1,603
|
|
|
$
|
10,869
|
|
|
$
|
3,379
|
|
|
$
|
11,372
|
|
|
$
|
4,232
|
|
|
$
|
13,836
|
|
Payment of Taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
NON CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 40,000,000 shares of Common stock for liability settlement
|
|
$
|
-
|
|
|
$
|
14,000
|
|
|
$
|
-
|
|
|
$
|
14,000
|
|
|
$
|
-
|
|
|
$
|
14,000
|
|
Issuance of 5,250,000 shares of Common stock pursuant to prior year common stock price guarantees
|
|
$
|
-
|
|
|
$
|
52,500
|
|
|
$
|
-
|
|
|
$
|
52,500
|
|
|
$
|
-
|
|
|
$
|
52,500
|
|
Issuance of 328,161,744 shares of Common stock for debt repayment
|
|
$
|
-
|
|
|
$
|
109,462
|
|
|
$
|
-
|
|
|
$
|
109,462
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Issuance of 35,959,970 shares of Common stock for debt interest
|
|
$
|
-
|
|
|
$
|
11,372
|
|
|
$
|
-
|
|
|
$
|
11,372
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Issuance of 45,730,741 shares of Common stock for liability settlements
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
24,932
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Issuance of 3,000,000 shares of Common stock for services
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,000
|
|
|
$
|
-
|
|
|
$
|
6,000
|
|
|
$
|
-
|
|
Issuance of 125,730,741 shares of Common stock for liability settlements
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
240,932
|
|
|
$
|
-
|
|
Issuance of 328,707,198 shares of Common stock for debt repayment
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
118,462
|
|
Issuance of 42,146,758 shares of Common stock for debt interest
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
12,392
|
|
Foregivness of deferred officers salaries
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
655,225
|
|
Foregivness of accrued rent, interest and other expenses due officer’s company
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
710,272
|
|
The
accompanying notes are an integral part of these consolidated financial statements
NOTE
1 – SIGNIFICANT ACCOUNTING POLICIES
A.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The unaudited 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 accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) applicable to interim
financial information and the requirements of Form 10-Q and Article 8 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. We follow the same accounting policies in preparation of interim reports as we do
in our annual reports.
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. We suggest that these
financial statements be read in conjunction with the financial statements and notes thereto included in the Company's annual
report for the year ended December 31, 2016.
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.
NOTE
2 - GOING CONCERN
As
shown in the accompanying condensed 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 the cumulative deficit since inception
to September 30, 2016 is approximately $59.6 million,. 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 condensed
consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
The
ability of the Company to continue as a going concern is dependent on management’s plans which include continuation of its
business model to generate revenue from development contracts, licenses and product sales, and continuing to raise funds through
debt and advances from strategic partners and deferred payments to related parties.
NOTE 3 – RELATED PARTY TRANSACTIONS
Cumulatively, for the nine months ended September
30, 2016, related party indebtness increased $416,631 from December 31, 2015.
NOTE 4 – 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
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results
of Operations (unaudited)
Three
Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015
Revenue.
The Company had no revenues in the quarters ended March 31 2016 and March 31, 2015.
Gross
Margin.
In the quarters ended March 31, 2016 and 2015, the company has no gross margins.
Operating
Expenses.
Operating
expenses incurred for the quarter ended March 31, 2016 were $220,603 as compared to $378,760 for the same period in the previous
year, a reduction of $148,157 or 39%. The majority of the decrease was due to a reduction in General and Administrative expenses
of $80,960 (30%): staffing, insurance and professional fees. Research and Development expenses were lower by $72,234 or 68%, reflective
of staff reduction.
Operating
Loss.
The operating losses for the quarters ended March 31, 2016 and 2015 were $230,603 and $378,760, respectively, a reduced
loss of $148,157 or 39%, due to the factors outlined above.
Other
Expense.
Other expense for the quarter ended March 31, 2016 was $30,007 versus $208,877 for the same period in the prior
year, a reduction of $178,870 or 86%.,
The
2016 net other expense included $32,828 of interest expense. The 2015 other expenses included $62,362 of interest expense, $78,861
of derivative accounting related interest charges and a loss of $50,000 from debt settled with common stock.
Net
Loss and Loss per Share.
The net loss for the quarter ended March 31, 2016 was $260,610, compared to a net loss of $587,637
for the same period in the previous year. The decreased loss of $327,027 or 56% is related to the factors outlined above. The
net loss per weighted average share was $0.00 for both the current quarter and prior quarter.
Liquidity
and Capital Resources
At
March 31, 2016, the net working capital deficiency was $2,569,189 as compared to a deficiency of $2,272,018 at December 31, 2015,
a variance of $297,171 or 13%.
For
the three months ended March 31, 2016, cash decreased by $0. This is reflective of funds used by the net loss of $260,610 and
the $14,451 increase in inventory. Funds were provided by debt proceeds of $7,000, higher accounts payable and accrued expenses
of $94,799 and an increase of $147,927 in related party notes payables and accrued expenses.
For
the three months ended March 31, 2015, cash decreased by $271. This is reflective of funds used by the net loss of $587,637 and
the $45,759 increase in inventory. Funds were provided by debt proceeds of $50,000, higher accounts payable and accrued expenses
of $177,782 and an increase of $83,750 in related party payables and accrued expenses. Non-cash charges for the three months were
from the issuance of common stock, warrants and options for services of $62,084, amortization of prepaid expenses paid with common
stock of $28,459, $78,861 of derivative debt discount amortization, and a $50,000 loss recognized by settling debt with common
stock.
Results
of Operations (unaudited)
Three
Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015
Revenue.
The Company had $0 revenue in the quarters ended June 30, 2016 and June 30, 2015
Gross
Margin.
The Company had $0 gross margin in the quarters ended June 30, 2016 and June 30, 2015.
Operating
Expenses.
Operating expenses incurred for the quarter ended June 30, 2016 were $234,595 as compared to $210,852 for the same
period in the previous year, an increase of $23,743 (11%). R&D expenses for the three months ending June 30 2016 were $39,157
or $42,080 or 52% lower versus 2015 on reduced staff and expenses. General and administrative expenses increased by $65,453 (51%)
primarily from higher consulting expenses and increased patent maintenance fees (renewal timing), offset by lower staff and related
expenses.
Operating
Loss.
The operating losses for the quarters ended June 30, 2016 and 2015 were $234,595 and $210,852, respectively, an increased
loss of $23,743 or 11%, due to the factors outlined above.
Other
Income (Expense)
The net other loss for the quarter ended June 30, 2016 was ($42,627) versus a net loss of ($79,788) for the
comparable period of last year, a favorable variance of $37,161 or 47%. The 2016 net other expense included a $44,000 gain on
the sale of the Whe Gen stock, a $57,383 loss on debt paid with stock and interest expense of $29,614
Net
other expense for the quarter ended June 30, 2015 was $79,788, primarily due to interest expense of $86,631.
Net
Loss and Loss per Share.
The net loss for the quarter ended June 30, 2016 was $277,222, compared to a net loss of $290,640
for the same period in the previous year, a favorable variance of $13,418 or 4.6%. The net income per weighted average share was
$0.00 for the quarter ended June 30, 2016 and $0.00 for the prior year comparable quarter.
Six
Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015
Revenue.
The Company had $0 revenue in the six months ended June 30, 2016 and June 30, 2015.
Gross
Margin.
The Company had $0 gross margin in the six months ended June 30, 2016 and June 30, 2015.
Operating
Expenses.
Operating expenses incurred for the six months ended June 30, 2016 were $465,198 as compared to $589,612 for the
same period in the previous year, a decrease of $124,414 or 21%. The decrease was due to a reduction in research and development
staff and expenses of $114,314 or 61%, Also, general and administrative expenses decreased by $15,505 (4%) primarily from a reduction
professional and consulting expenses partially offset by reduced stock issued for services.
Operating
Loss.
The operating losses for the six months ended June 30, 2016 and 2015 were $465,198 and $589,612, respectively, a decrease
of $124,414 or 21%, due to the factors outlined above.
Other
Income (Expense)
Net other expense for the six months ended June 30, 2016 was ($72,634) versus ($288,665) for the comparable
period of the prior year, a favorable variance of $216,031 or 75%. The 2016 net expense included interest expenses of $62,442,
and a $57,383 loss on a debt conversion paid with restricted common stock, partially offset by a $44,000 gain on the sale of the
Whe Gen investment.
Net
other expense for the six months ended June 30, 2015 was $(288,665) included interest expenses of $227,854, and a $50,000 loss
on a debt conversion paid with restricted common stock.
Net
Loss and Loss per Share.
The net loss for the six months ended June 30, 2016 was a loss of $537,832, compared to a net loss
of $878,277 for the same period in the previous year a favorable variance of $340,445 or
39%.
The net income per weighted average share was $0.00 for the six months ended June 30, 2016 and 2015, respectively.
Liquidity
and Capital Resources
At
June 30, 2016, the net working capital deficiency was $2,744,396 as compared to a deficiency of $2,272,018 at December 31, 2015,
an increased deficiency of $472,378 or 21%.
For
the six months ended June 30, 2016, cash increased by $14,861. Funds were provided by the $231,470 increase in notes, accounts
payable and accruals to related parties, higher accounts payable and accrued expenses of $203,521. Funds were used by the $537,832
loss and a $26,005 increase in inventory. Non-cash charges for the six months were from: a $24,932 loss on liabilities and debt
paid with common stock and $6,000 of expense paid with common stock.
The
six months ended June 30, 2015, cash increased by $0. Funds were used by the net loss of ($878,277), and $46,417 higher inventory.
Funds were provided by $50,000 of new debt financing, a $277,760 increase in related party debt and accrued expenses, an a $226,286
increase in accounts payable and accrued expenses. Non-cash charges for the six months were from the issuance of common stock
and options for services of $62,953, a $50,000 loss on liabilities and debt paid with common stock, and $132,531 of amortization
of derivative debt discount.
Results
of Operations (unaudited)
Three
Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015
Revenue.
The Company had $0 revenue in the quarters ended September 30, 2016 and September 30, 2015
Gross
Margin.
The Company had $0 gross margin in the quarters ended September 30, 2016 and September 30, 2015.
Operating
Expenses.
Operating expenses incurred for the quarter ended September 30, 2016 were $329,923 as compared to $231,332 for the
same period in the previous year, an increase of $98,591 or 43%. R&D expenses were $45,628 or 44% lower largely due to a $60,000
inventory reserve provided for in 2015. General and administrative expenses increased by $144,572 (115%) primarily from higher
audit and legal fees for the 2014 and 2015 audit, increased consulting expenses and increased patent maintenance fees (renewal
timing).
Operating
Loss.
The operating losses for the quarters ended September 30, 2016 and 2015 were $329,923 and $231,332, respectively, an
increased loss of $98,591 or 43%, due to the factors outlined above.
Other
Income (Expense)
The net other loss for the quarter ended September 30, 2016 was 32,371, versus a net loss of $65,864 for
the comparable period or the prior year, a favorable variance of $33,493 (51%) primarily due to reduced interest expense.
Net
Loss and Loss per Share.
The net loss for the quarter ended September 30, 2016 was $362,294, compared to a net loss of $297,196
for the same period in the previous year. The unfavorable variance of $65,098 or 22% primarily relates to the higher General
and Administrative expense. The net income per weighted average share was $0.00 for the quarter ended September 30, 2016 and the
net loss per weighted average share was $0.00 for the prior year comparable quarter.
Nine
months Ended September 30, 2016 Compared to Six Months Ended September 30, 2015
Revenue.
The Company had $0 revenue in the nine months ended September 30, 2016 and September 30, 2015.
Gross
Margin.
The Company had $0 gross margin in the nine months ended September 30, 2016 and September 30, 2015.
Operating
Expenses.
Operating expenses incurred for the nine months ended September 30, 2016 were $795,122 as compared to $820,944 for
the same period in the previous year, a decrease of $25,822 or 3.1%. The decrease was due to lower research and development expenses
of $159,942 or 55%, largely due to a $60,000 inventory reserve provided for in 2015 and a higher 2016 allocation of engineering
labor to new engine WIP inventory. General and administrative expenses increased by $129,067 (25) %) primarily from higher audit
and legal fees for the 2014 and 2015 audit, increased consulting expenses and increased patent maintenance fees (renewal timing).
Operating
Loss.
The operating losses for the nine months ended September 30, 2016 and 2015 were $795,121 and $820,944, respectively,
a decrease of $25,822 or 3.1%, due to the factors outlined above.
Other
Income (Expense)
Net other income (loss) for the nine months ended September 30, 2016 was ($105,005) versus a loss of ($354,529)
for the same period in the prior year, for a variance of $249,524 (70%). The net other 2016 loss included interest expense of
$95,356, and a $57,383 loss on a debt conversion paid with restricted common stock, partially offset by a $44,000 gain on the
sale of the Whe Gen investment.
Net
other expense for the nine months ended September 30, 2015 was $(354,529) included interest expenses of $293,123 and a $50,000
loss on a debt conversion paid with restricted common stock.
Net
Loss and Loss per Share.
The net income for the nine months ended September 30, 2016 was a loss of $900,126, compared to a
net loss of $1,175,473 for the same period in the previous year for a variance of $275,347 or 23% The net income per weighted
average share was $0.00 for the nine months ended September 30, 2016 and the net loss per weighted average share was $0.00 for
the prior comparable nine month period.
Liquidity
and Capital Resources
At
September 30, 2016, the net working capital deficiency was $2,873,926 as compared to a deficiency of $2,272,018 at December 31,
2015, an increase of $601,908 or 26%.
For
the nine months ended September 30, 2016, cash increased by $1,387. Funds were provided by the $416,631 increase in notes, accounts
payable and accruals to related parties, higher accounts payable and accrued expenses of $251,250, an increase in deferred revenue
of $115,700, $90,725 in loan and note proceeds and $44,000 from the sale of the Whe Gen stock. Funds were used by the $900,126
loss and a $84,007 increase in inventory. Non-cash charges for the nine months were from: a $57,383 loss on liabilities and debt
paid with common stock and $6,000 of expense paid with common stock.
For
the nine months ended September 30, 2015 cash decreased by $278. This is reflective of funds provided by $50,000 of new debt funding,
$315,437 increase in accounts payable and accruals, and a $379,208 increase in related party notes and accounts payables. Non-cash
charges for the nine months were from the issuance of common stock for liability and debt settlement of $50,000 and the issuance
of common stock, options and warrants for services of $63,377.