NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 – ORGANIZATIONAL AND SIGNIFICANT ACCOUNTING POLICIES
A.
ORGANIZATION AND OPERATIONS
Cyclone
Power Technologies, Inc. (the “Company”, “our,” “Cyclone”) is the successor entity to the
business of Cyclone Technologies LLLP (the “LLLP”), a limited liability limited partnership formed in Florida in September
2004. The LLLP was the original developer and intellectual property holder of the Cyclone engine technology. Initialed 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 a vehicle utilizing the Company’s engine. At September 30, 2017
the company had a 95% controlling interest in Cyclone Performance.
B.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The
condensed consolidated financial statements include the accounts of the Company and its 95% owned subsidiary Cyclone Performance.
All material inter-company transactions and balances have been eliminated in the condensed consolidated financial statements
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting
principles applicable to interim financial information and the requirements of Form 10-Q and Article 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. Interim results are not necessarily indicative of results
for a full year. In the opinion of management, all adjustments, consisting of normal journal entries, considered necessary for
a fair presentation of the financial position and the results of operations and cash flows for the interim periods have been included.
Complete financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto
for the year ended December 31, 2016, as filed with the Securities and Exchange Commission as part of the Company’s Form
10-K.
The
results of operations for the nine months ended September 30, 2017 are not necessarily indicative of the results of operations
to be expected for the full fiscal year ending December 31, 2017.
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 September 30, 2017 and December 31, 2016, the Company maintained cash and overdraft
balances at one financial institution.
D.
COMPUTATION OF INCOME (LOSS) PER SHARE
Net
income (loss) per share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding
during the period. Diluted net income (loss) per share is not presented as the conversion of the preferred stock and exercise
of outstanding stock options and warrants would have an anti-dilutive effect. As of September 30, 2017 and 2016, total anti-dilutive
shares amounted to approximately 15.8 and 14.7 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, and September 30, 2017, the Company does not believe it has any
uncertain tax positions that would result in the Company having a liability to the taxing authorities. Interest related to
the unrecognized tax benefits is recognized in the consolidated financial statements as a component of income taxes. The
Company’s tax returns are subject to examination by the federal and state tax authorities for the years ended 2014
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 is recognized
at the date of shipment of engines and systems, engine prototypes, engine designs or other deliverables to customers when a formal
arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company
exist and collectability is reasonably assured. Revenue from contracts for multiple deliverables and milestone method recognition
would be evaluated and allocated as appropriate. Payments received before all of the relevant criteria for revenue recognition
will be satisfied are recorded as deferred revenue on the condensed consolidated balance sheets. The Company does not allow its
customers to return prototype products. Current contracts do not require the Company to provide any warranty assistance after
the “deliverable” has been accepted.
It
is the Company’s intention when it has royalty revenue from its contracts to record royalty revenue periodically when earned,
as reported in sales statements from customers. The Company does not have any royalty revenue to date.
G.
WARRANTY PROVISIONS
Current
contracts do not require warranty assistance subsequent to acceptance of the “deliverable R&D prototype” by the
customer. For products that the Company will sell in the future, warranty costs are anticipated to be borne by the manufacturing
vendor.
H.
INVENTORY
Inventory
is recorded at the lower of cost or market. Based on our revised R&D company business model, commencing in 2016, costs include
material to develop a completed engine. In our former business model, costs included material, labor and allocated overhead to
manufacture a completed engine.
Costs
are periodically evaluated to determine if they have a net realizable value. If the net realizable value is lower than the carrying
amount, a reserve is provided.
I.
FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC
820, “
Fair Value Measurements and Disclosures
” requires disclosures of information about the fair value of
certain financial instruments for which it is practicable to estimate the value. The carrying amounts reported in the balance
sheet for cash, accounts payable and accrued expenses, and loans payable approximate their fair market value based on the short-term
maturity of these instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date. Inputs refer broadly to the assumptions
that market participants would use in pricing the asset or liability, including assumptions about risk. Inputs may be observable
or unobservable. Observable inputs are based on market data obtained from sources independent of the Company. Unobservable inputs
reflect the Company’s own assumptions based on the best information available in the circumstances. The fair value hierarchy
prioritizes the inputs used to measure fair value into three broad levels. The three levels of the fair value hierarchy are defined
as follows:
Level
1
|
—
|
Inputs
are quoted prices in active markets for identical assets or liabilities as of the reporting date.
|
Level
2
|
—
|
Inputs
other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly,
as of the reporting date.
|
Level
3
|
—
|
Unobservable
inputs for the asset or liability that reflect management’s own assumptions about the assumptions that market participants
would use in pricing the asset or liability as of the reporting date.
|
The
summary of fair values and changing values of financial instruments as of January 1, 2017 (beginning of period) and September
30, 2017 (end of period) is as follows:
Instrument
|
|
Beginning
of Period
|
|
|
Change
|
|
|
End
of Period
|
|
|
Level
|
|
|
Valuation
Methodology
|
Derivative liabilities
|
|
$
|
754,000
|
|
|
$
|
408,397
|
|
|
$
|
1,162,397
|
|
|
|
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 three and nine months ended September
30, 2017 and 2016 were $65,544, $162,462, $57,977 and $131,827, 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
Recent
FASB issuances:
Update
2017-03
—Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and Joint Ventures
(Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF
Meetings (SEC Update). The Company is still in the process of evaluating the effect of adoption on its financial position,
results of operations and cash flows and the effective date of application is 2018.
Update
2017-01
—Business Combinations (Topic 805): Clarifying the Definition of a Business
The
Company is still in the process of evaluating the effect of adoption of theses Updates on its financial position,
results of operations and cash flows and the effective date of application is 2018.
Modified
in 2016- Revenue Recognition –ASC 606
In
May 2014, and subsequently modified, the FASB issued ASC 606 Revenue from Contracts with Customers as guidance on the recognition
of respective revenue from contracts Revenue recognition will depict the transfer of promised goods or services to customers in
an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising
from contracts with customers. The principle sections of the guidance related to: 1. Determine if there is a contract. 2.
Identify the performance obligations 3. Establish the contract price 4. Allocate the contract price to the various phases of the
contract
The
implementation guidance permits two methods: retrospectively to each prior reporting period presented, or retrospectively with
the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up
transition method). Commencing in 2018 the company will adopt the guidance and apply the cumulative catch-up transition method.
The transition adjustment to be recorded to stockholders’ equity upon adoption of the new standard is not expected to be material.
Q.
CONCENTRATION OF RISK
The
Company does not have any off-balance sheet concentrations of credit risk. The Company expects cash and accounts receivable to
be the two assets most likely to subject the Company to concentrations of credit risk. The Company’s policy is to maintain
its cash with high credit quality financial institutions to limit its risk of loss exposure.
As
of September 30, 2017, the Company maintained its cash in one quality financial institution. The Company has not experienced any
losses in its bank accounts through September 30, 2017. 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 condensed consolidated financial statements, the Company incurred substantial operating and other losses
and expenses of approximately $1.5 million and $0.9 for the nine months ended September 30, 2017 and 2016 respectively.
The cumulative deficit since inception is approximately $62.3 million. The Company has a working capital deficit at September
30, 2017 of approximately $4.9 million. These factors raise substantial doubt about the Company’s ability to continue as
a going concern. 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
condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
The Company is currently raising working capital to fund its operations via private placements of debt, advance contract payments
(deferred revenue), advances from and deferred payments to related parties and the timing of payment of accrued liabilities.
NOTE
3 – INVENTORY, NET
Inventory
principally consists of raw material to develop an engine.
Inventory,
net consists of
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Raw
materials
|
|
$
|
27,498
|
|
|
$
|
26,667
|
|
Total
|
|
$
|
27,498
|
|
|
$
|
26,667
|
|
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:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Display equipment for
trade shows
|
|
$
|
6,270
|
|
|
$
|
6,270
|
|
Leasehold improvements and furniture
and fixtures
|
|
|
93,922
|
|
|
|
93,922
|
|
Equipment
and computers
|
|
|
202,578
|
|
|
|
202,578
|
|
Total
|
|
|
302,770
|
|
|
|
302,770
|
|
Accumulated
depreciation
|
|
|
(230,253
|
)
|
|
|
(209,498
|
)
|
Net property
and equipment
|
|
$
|
72,517
|
|
|
$
|
93,272
|
|
Depreciation
expense for the nine months ended September 30, 2017 and 2016 was $20,755 and $25,924, respectively.
NOTE
5 – PATENTS, TRADEMARKS AND COPYRIGHTS
Patents,
trademarks and copyrights consist of legal fees paid to file and perfect these claims. The net balances as of September 30, 2017
and December 31, 2016 were $159,392 and $178,478, respectively. For the nine months ended September 30, 2017 and for the year
ended December 31, 2016, the Company capitalized $0 and $0, respectively, of expenditures related to these assets. As of September
30, 2017, the Company had 15 patents issued on its technology both in the U.S. and internationally, and six trademarks in the
U.S.
Patents,
trademarks and copyrights are amortized over the life of the intellectual property which is 15 years. Amortization expenses for
the nine months ended September 30, 2017 and 2016 were $19,086 and $26,316, respectively.
NOTE
6 – NOTES AND OTHER LOANS PAYABLE
A
summary of non-related party notes and other loans payable is as follows:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
12% convertible notes payable,
maturing at various dates from November 2013 through April 2016 (A)
|
|
$
|
57,920
|
|
|
$
|
42,951
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
76,000
|
|
|
|
|
|
|
|
|
|
|
10% convertible notes payable, maturing at various
dates from December 2015 through January 2016 (D)
|
|
|
26,192
|
|
|
|
29,303
|
|
|
|
|
|
|
|
|
|
|
10% convertible notes payable maturing at various
dates from February 2015 through August 2015 ( F )
|
|
|
117,800
|
|
|
|
116,200
|
|
|
|
|
|
|
|
|
|
|
12% convertible notes payable, maturing at various
dates from April 2015 through May 2015 ( G )
|
|
|
60,000
|
|
|
|
85,000
|
|
10% note payable maturing January
2017
|
|
|
-
|
|
|
|
46,000
|
|
10% note payable,
maturing Feb 3, 2018
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Various notes payable,
maturing 2016 and 2017
|
|
|
22,957
|
|
|
|
13,500
|
|
|
|
|
|
|
|
|
|
|
Note payable, maturing Oct. 2016 (H)
|
|
|
27,000
|
|
|
|
27,000
|
|
|
|
|
|
|
|
|
|
|
Demand Note
|
|
|
-
|
|
|
|
6,725
|
|
|
|
|
|
|
|
|
|
|
Total non-related
party notes-current portion
|
|
$
|
457,832
|
|
|
$
|
512,642
|
|
|
(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 are included
in accounts payable and accrued liabilities.
|
|
|
|
|
(C)
|
Notes
issued net of discount from derivative liabilities (fully amortized). At September 30, 2017, the Company held approximately
97 million shares in reserve to cover the potential conversion of this note into common stock pursuant to debt covenants.
This note is in default.
|
|
|
|
|
(D)
|
Notes
issued net of discount (fully amortized). This note is in default.
|
|
|
|
|
(F)
|
Notes
issued net of discount from derivative liabilities (fully amortized). At September 30, 2017, the Company held 1 billion 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 has arranged a settlement. Unpaid interest, default
penalties and default interest are included in accounts payable and accrued liabilities.
|
|
|
|
|
(H)
|
Interest
of $3,000 to be paid in 1,500,000 shares of restricted common stock. This note is in default.
|
A
summary of related party notes and other loans payable is as follows:
|
|
September
30, 2017
|
|
December
31, 2016
|
|
|
|
|
|
6% demand loans per Operations
Agreement with Schoell Marine Inc., a company owned by Cyclone’s Chairman and controlling shareholder (A)
|
|
$
|
211,874
|
|
$
|
169,751
|
6% non-collateralized loans from officer
and shareholder, payable on demand.
|
|
|
94,584
|
|
|
107,842
|
12% non-collateralized loans from officer
and shareholder, payable on demand
|
|
|
25,042
|
|
|
21,044
|
Accrued Interest
|
|
|
53,152
|
|
|
95,123
|
Total current
related party notes, inclusive of accrued interest
|
|
$
|
384,652
|
|
$
|
393,760
|
|
(A)
|
This
note arose from rent, equipment leases, 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.
|
NOTE
7 – RELATED PARTY TRANSACTIONS- DEFERRED COMPENSATION
Included
in accounts payable and accrued expenses - related parties as of September 30, 2017 and December 31, 2016 are $796,475 and $545,225
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.
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
The
Company authorized an increase of Common Stock to 6 Billion shares
in
the last quarter of 2017. This is a requirement by debt covenants to cover old convertible debt. This is required as the
stock price has fallen and shares have to be available at 4 times the conversion rate
.
During
the nine months ended September 30, 2017, the Company:
|
a-
|
Amortized (based
on vesting) $2,568 of common stock options for employee services.
|
|
|
|
|
b-
|
Issued approximately
585.7 million shares of common stock pursuant to conversions of approximately $418,000 of notes payable, accrued liabilities
and related interest
|
|
|
|
|
c-
|
The Company issued
6.4 million shares of common stock valued at approximately $5,000 for services
|
|
|
|
|
d-
|
Converted $134,877 of derivatives
associated with certain debt that was converted into common stock.
|
NOTE
10 – STOCK OPTIONS AND WARRANTS
A.
COMMON STOCK OPTION
Per
the employment contracts with certain officers, for the nine months ended September 30, 2017, the company issued 1,350,000 common
stock options, valued at $1,260 (pursuant to the Black Scholes valuation model) that are exercisable into shares of common stock
at an average exercise price of $.0009 and with a maturity life of 10 years. For the nine months year ended September 30, 2017,
the amortization of stock options was $2,568 and the unamortized balance was $1,089.
A
summary of the common stock options for the period from December 31, 2016 through September 30, 2017 follows:
|
|
Number
Outstanding
|
|
|
Weighted
Avg. Exercise Price
|
|
|
Weighted
Avg. Remaining Contractual Life (Years)
|
|
Balance, December 31, 2016
|
|
|
14,030,000
|
|
|
$
|
.0960
|
|
|
|
5.3
|
|
Options issued
|
|
|
1,350,000
|
|
|
|
.0009
|
|
|
|
9.75
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance, September
30 , 2017
|
|
|
15,380,000
|
|
|
$
|
.0878
|
|
|
|
5.0
|
|
The
vested and exercisable options at period end follows:
|
|
Exercisable/
Vested Options Outstanding
|
|
|
Weighted
Avg. Exercise Price
|
|
|
Weighted
Avg. Remaining Contractual Life (Years)
|
|
Balance September 30 , 2017
|
|
|
14,930,000
|
|
|
$
|
.085
|
|
|
|
4.86
|
|
Additional vesting by December 31, 2017
|
|
|
450,000
|
|
|
|
.0024
|
|
|
|
9.0
|
|
The
fair value of new stock options, granted using the Black-Scholes option pricing model was calculated using the following assumptions:
|
|
Nine
Months Ended September 30, 2017
|
|
|
Nine
Months Ended September 30, 2016
|
|
Risk free interest rate
|
|
|
1.5-1.62%
|
|
|
|
.71-.88%
|
|
Expected volatility
|
|
|
122-134%
|
|
|
|
136-139%
|
|
Expected term
|
|
|
3
|
|
|
|
3
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Average value per options and warrants
|
|
|
$
.0004-.0015
|
|
|
|
$
.0019-.0020
|
|
Expected
volatility is based on historical volatility of the Company’s common stock price. Short Term U.S. Treasury rates were utilized
at the risk-free interest rate. The expected term of the options and warrants was calculated using the alternative simplified
method newly codified as ASC 718 “
Accounting for Stock Based Compensation,
” which defined the expected life
as the average of the contractual term of the options and warrants and the weighted average vesting period for all issuances.
B.
COMMON STOCK WARRANTS
A
summary of outstanding vested warrant activity for the period from December 31, 2016 to September 30, 2017 follows:
|
|
Number
Outstanding
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
Common
Stock Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
|
500,000
|
|
|
$
|
.08
|
|
|
|
.67
|
|
Warrants issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants expired
|
|
|
(500,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Balance, September 30, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
NOTE
11 – INCOME TAXES
A
reconciliation of the differences between the effective income tax rates and the statutory federal tax rates for the Nine months
ended September 30, 2017 and 2016 are as follows:
|
|
Nine
Months ended
September 30 , 2017
|
|
|
Amount
|
|
|
Nine
Months ended
September 30, 2016
|
|
|
Amount
|
|
Tax benefit at U.S. statutory
rate
|
|
|
34
|
%
|
|
$
|
273,037
|
|
|
|
34
|
%
|
|
$
|
233,075
|
|
State taxes, net of federal benefit
|
|
|
4
|
%
|
|
|
32,122
|
|
|
|
4
|
%
|
|
|
27,421
|
|
Change in valuation
allowance
|
|
|
(38
|
)%
|
|
$
|
(305,159
|
)
|
|
|
(38
|
)%
|
|
$
|
(260,496
|
)
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
The
tax effect of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at September
30, 2017 and December 31, 2016 consisted of the following:
Deferred Tax Assets
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Net Operating Loss Carry-forward
|
|
$
|
10,981,661
|
|
|
$
|
10,577,607
|
|
Deferred Tax
Liabilities – Accrued Officers’ Salaries
|
|
|
(978,681
|
)
|
|
|
(900,306
|
)
|
Net Deferred Tax Assets
|
|
|
10,002,980
|
|
|
|
9,677,301
|
|
Valuation Allowance
|
|
|
(10,002,980
|
)
|
|
|
(9,677,301
|
)
|
Total Net Deferred
Tax Assets
|
|
$
|
-
|
|
|
$
|
-
|
|
As
of September 30, 2017, the Company had a net operating loss carry forward for income tax reporting purposes of approximately $23.6
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 lease period ended December 2016 and the current lease is monthly with a 3% rate increase. Occupancy costs for the nine months
ended September 30, 2017 and 2016 were $46,038 and $48,200, respectively.
B.
CAPITALIZED LEASE OBLIGATIONS
Total
lease payments made for the nine months ended September 30, 2017 were $0. The company is in default on its remaining capitalized
lease with Leaf Capital Funding, LLC.
Effective
October 13, 2017 the Company was subject to a summary judgment of $ 37,278 plus attorney fees for non-payment of 3 capitalized
leases from Marlin Business Bank. This amount is including $11,379 of past due lease payments, accelerated lease payments,
late charges and other fees. The $37,278 has been reflected in accrued expenses with an appropriate reduction of the capitalized
lease liability.
In
the third quarter of 2017, the company recognized a summary judgment of $7,266 plus accrued interest for non-payment of a capitalized
lease from Navitas Lease Corp. This amount is including $4,177 of past due lease payments, accelerated lease payments,
interest expense, late charges and other fees. The $7,266 has been reflected in accrued liabilities with an appropriate reduction
of the capitalized lease liability.
The
balance of capitalized lease obligations payable at September 30, 2017 and December 31, 2016 was $5,522 and $39,848, respectively.
Future lease payments are:
2017
|
|
$
|
5,522
|
|
2018
|
|
|
0
|
|
2019
|
|
|
0
|
|
2020
|
|
|
0
|
|
2021
|
|
|
0
|
|
|
|
$
|
5,522
|
|
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.
Since
inception of the company, these officers have not been paid any salary
NOTE
14 –CONSOLIDATED SUBSIDIARY
In
2012, the Company established a 100% owned subsidiary (renamed) Cyclone Performance LLC. The purpose of Cyclone Performance is
to build, test and run a vehicle utilizing the Company’s engine. In the last quarter of 2012, the Company sold a 5% equity
investment to an unrelated investor for $30,000. Subsequent to December 31, 2012, this 5% equity investment was acquired by a
corporate officer of the Company. Losses of the subsidiary are currently fully borne by the Company, as there is no guarantee
of future profits or positive cash flow of the subsidiary. As of September 30, 2017, 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 September 30, 2017,
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, three (3) other customers advanced $206,950 as deposits towards payments
on $355,000 of contracts for engines currently estimated to be delivered during 2018 and license deposits. In the third
quarter of 2017, the company recognized $150,000 of deferred revenue from FSDS upon the delivery of the engine design and documentation
(as per the contract). The company also delivered the first of 2 engines for evaluation and testing. The Danish military had provided
funds to FSDS for the militarization of the Cyclone engine project. FSDS has been placed under Danish government receivership
and the Company has reached out to the Danish Ministry of Defense and other Danish military contractors to complete the contract.
NOTE
16 – DERIVATIVE FINANCIAL INSTRUMENTS
In
the second quarter of 2017 we again entered into additional convertible debt agreements. The current convertible notes have conversion
prices into common stock that ranged from a discount of 30% to 45% of the lowest closing prices in the 10 to 20 trading days prior
to the conversion. Under provisions of ASC Topic 815-40, this conversion feature triggered derivative accounting treatment because
the convertible note was convertible into an indeterminable number of shares of common stock. The fair value of the embedded conversion
option was required to be presented as a derivative liability and adjusted to fair value at each reporting date, with changes
in fair value reported in the condensed consolidated statements of operation.
In
the Nine months ended September 30, 2017, the Company recorded a $118,076 non-cash charge to interest expense (reflective of debt
discount amortization), and a non-cash charge of $329,366 of derivative losses related to adjusting the derivative liability
to fair value. At September 30, 2017, the derivative related fair value of debt and related convertible liabilities was $1,162,397.
NOTE
17 – LlTIGATION
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 of September 30, 2017, outstanding interest, default interest and default judgment penalties are included in accrued liabilities.
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 has arranged a settlement. As of September 30, 2017, outstanding interest, default
interest and default judgment penalties are included in accrued liabilities.
Effective
October 13, 2017 the Company was subject to a summary judgement of $ 37,278 plus attorney fees for nonpayment of 3 capitalized
leases from Marlin Buesinee Bank. This amount includes $11,379 of past due lease payments, accelerated lease payments, late charges
and other fees. The $37,278 has been reflected in accrued liabilities with an appropriate reduction of capitalized lease liability.
In
the third quarter of 2017 the company recognized a summary judgment of $7,266 plus accrued interest for non-payment of a capitalized
lease from Navitas Lease Corp. This amount is including $4,177 of past due lease payments, accelerated lease payments,
interest expense, late charges and other fees. The $7,266 has been reflected in accrued liabilities with an appropriate reduction
of capitalized lease liability.
NOTE
18
– SUBSEQUENT EVENTS
Subsequent
to the fourth quarter of 2017, the Company engaged in the following activities:
a-
FSDS, is under Danish government receivership for reorganization. Prior to this receivership, the Danish military had
provided funds FSDS to complete the militarization of the Cyclone engine project. We have reached out to the Danish Ministry
of Defense and various other Danish military contractors to complete this project.
b-The
Company issued approximately 335 million shares of common stock pursuant to conversions of debts and related interest and
approximately 282 million shares to satisfy accrued liabilities for consulting services.
c-
The Company authorized an increase of Common Stock to 6 Billion shares
.
This is a requirement by debt covenants to cover old convertible debt. This is required as the stock price has fallen and shares
have to be available at 4 times the conversion rate.
d.
Plunkett Power has paid for the changes and updates of the CAD drawings for the production models of the Mark 1 ( 9 HP) and Mark
3 ( 25 HP) engines. The Company has been in meetings over the last 5 months with the production engineers for completion of the
updated production engine models.
e.-Our
engines have been updated and now serve both as a waste heat engine and an efficient Rankin Cycle engine effectively reducing
the cost to manufacture. The waste heat and solar engine models are expected to be ready for sales by the end of the first quarter
2018 and for integration into the TAW generator system.
f.-
The Company is in the process of evaluating the updating and / or filing of new patents to protect our revised production models.