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, to be high performance, and to be 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 four 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. This was done in 2017. These are now being readied to sell to commercial customers, vertical partners and
distributors in 2018.
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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. We have now secured a strong investment partner for funding and support that will allow
us to complete heavy equipment and vehicle integration in 2018.
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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. Falck Schmidt Defense Systems (“FSDS”) of Denmark,
has filed bankruptcy due to non-renewal of bank loans. The owner Falck Schmidt has started
a new Company and has asked to continue as a worldwide military supplier. They will take
the unit to a trial for military compliance.
Solar
Microgrid System:
We have a Mark 10 drawn and is going into CAD. The first 1500 horsepower unit is projected
to be tested by the end of 2018. The Cyclone solar trough is being manufactured by an American solar company and the Thermal
Storage Unit will also be built and tested this year for the 1 Megawatt Microgrid Market. The new investment group is
facilitating integration of our engine with their Solar products.
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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 and income 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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Income
recognition from equity investment in partnerships
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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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Production
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, and small vehicles
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Production
units (10) 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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Mark
10
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1500
HP
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Transportation
Train, Ship, large equipment, Power
Generation
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Into
finish CAD drawing, quotes out & parts ordered
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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 2017 and 2016
were $238,682 and $604,199, 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 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. We feel starting in 2018 with the new capital investment we will catch up to these other technologies.
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 U.S. 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. 7,856,822 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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Pursuant
to new US Patent Office regulations, upon approval and payment of back fees , the Company’s 8 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 customers
We
have contracts for development and licensing of our engine technology, our Thermal Storage Battery, and our Solar Trough: Combi-Lift
LTD. (a global materials handling and lift equipment manufacturer based in Ireland), Falck Schmidt Defense Systems of Denmark
(“FSDS”) which is in reorganization after a forced bankruptcy (a global military products manufacturing and supplier),
IBES (a producer of biomass furnace electric systems) which is in breach of contract currently, Genesis, (a major construction
builder with concrete technology) to build our Thermal Storage Units, a current list of four Distributors for sales of the generators
being supplied through TAW Power Systems, and four integrators for Solar, off road vehicle, and two biomass fuel manufacturers.
We have formed working relationships with other major industrial groups, and teaming agreements with manufacturers.
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 cannot develop, sell or export any covered munitions under these Regulations, but have
registered the company in an abundance of precaution.
Employees.
In 2017, we had 6 full-time employees including management, and two part-time employees. 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, machine shops / fabricators 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. As of February 20, 2018 we entered into a settlement agreement for conversion of a set amount of $150,000 on a 1 to 1
bases to common stock sales.
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 $7,266 has been reflected in accrued liabilities with an appropriate reduction of the
capitalized lease liability.
Item
4. Mine Safety Disclosures
None.
PART
II
Item
5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our
common stock is currently traded on the OTC Pink sheets. The following table represents the high and low bid information for our
common stock for each quarterly period within the two most recent fiscal years, as regularly quoted on the OTCPK. Such over-the-counter
market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not necessarily represent
actual transactions.
According
to the records of our transfer agent and NOBO listing, as of March 31, 2018, there were approximately 4,700 shareholders of record
of our common stock, and two shareholders of record of our Series B Preferred Stock.
Year
ended December 31, 2017
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High
Bid Price
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Low
Bid Price
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First
Quarter
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$
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0.0024
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$
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0.0001
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Second
Quarter
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0.0021
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0.0005
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Third
Quarter
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0.0015
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0.0003
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Fourth
Quarter
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0.0006
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0.0001
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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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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
are receiving monthly payments from our investor and anticipate for that to continue as they proceed with their due diligence.
Our
goals for 2018 and 2019 are to sell the Mark 1 and Mark 3 engine (with the TAW generator) to commercial customers and distributors.
We are developing the Mark 5 engine for incorporation into solar power systems that will be sold via our investment partner. The
Company is looking to expand with other military associates for its S-2 engine.
Funding
in 2018 to complete various Company projects has been negotiated with an investor that wants to integrate Cyclone technology with
its Solar products. Final testing of the Mark 10 1500 horse power unit is projected by year end. The new Thermal Storage unit
for the 1 Megawatt Microgrid market and the Cyclone solar trough is expected to be manufactured by early next year.
Financing
Transactions
In
2017, we financed our operations via funds generated from $165,813 in notes payable, an increase in trade accounts payables and,
accrued liabilities of $646,741 and a net increase in payables and debt to related parties of approximately $341,000.
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, 2017, we issued approximately 6.4 million shares of common
stock for $5,000 of services. We also amortized (based on vesting) $3,153 of common stock options for employee services.
Stock
for Liabilities.
During the year ended December 31, 2017, we issued approximately 1,335.9 million shares of common stock pursuant
to conversions of approximately $585,000 of notes payable, accrued liabilities and related interest
.
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 2017 and 2016 our R&D expenses
were $238,682 and $604,199, respectively.
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. There have been
no impairments of our intangible assets, 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 the accounts of 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.
Going
concern
As
shown in the accompanying consolidated financial statements, the Company sustained substantial operating and other losses
and expenses of approximately $2.1 million for the year ended December 31, 2017, and $2.1 million for the year ended December
31, 2016. The cumulative deficit since inception is approximately $63.0 million. The Company has a working capital deficit at
December 31, 2017 of approximately $5.4 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.
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
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,”
which supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition” and requires entities to
recognize revenue in a way that depicts 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. In August 2015, the FASB issued
ASU 2015-14, which defers by one year the effective date of ASU 2014-09. Accordingly, this guidance is effective for interim and
annual periods beginning after December 15, 2017. The Company adopted this guidance on January 1, 2018 and does not
expect this guidance to have a material effect on its financial position, results of operations and cash flows.
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 required dates of adoption.
Our
significant accounting policies are described in Note 1 to the accompanying financial statements, and above in “Critical
Accounting Policies”.
Results
of Operations –
Year
Ended December 31, 2017 Compared to Year Ended December 31, 2016
Revenues
and Gross Profit
In
2017, the Company recognized $150,000 pursuant to the delivery of a S-2 engine and $25,000 in license fees for waste heat engine
applications. The total gross profit for 2017 was $174,862.
There
were no revenues or gross profit for the year ended December 31, 2016
Operating
Expenses
Our
operating expenses decreased $208,223 or 13%, to $1,371,848 for the year ended December 31, 2017 compared to $1,580,071 for the
comparable period in 2016. The majority of the decrease was due to lower research and development expenses of $365,517 (60%) that
were attributable to the 2016 complete expensing of engine developmental labor and overhead, inclusive of a 2016 inventory reserve
provision of $125,900, partially offset by higher 2017 general and administrative expenses of $158,022 (16%) attributable to public
company related accounting and consulting expenses. On October 1, 2017 the Company executed a consulting agreement known as
“Romero Consulting Agreement date October 1, 2017” to render such advice, consultation, information, and services
to the Directors and/or Officers of the Company regarding advise, consultation, information and services not limited to business
development in Mexico, Central and South America; additional services in social media including but not limited to Facebook, Twitter
and SnapChat.
Operating
Loss
Our
operating losses decreased $383,085 or 24%, to $1,196,986 for the year ended December 31, 2017 compared to $1,580,071 for the
comparable period in 2016.
Other
Income (Expense)
Net
other expense for the year ended December 31 2017 of $(936,852) was inclusive of interest expense of $377,410 , and to the non-cash
expense in the change in fair value of derivative liability of $728,144.
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
Income and Earnings per Share
Our
net loss decreased $32,915 or 2% to $2,133,838 for the year ended December 31, 2017 compared to a net loss of $2,100,923 for the
comparable period in 2016. The decrease is due to the factors set forth above. The resulting net loss per weighted average share
for 2017 and 2016 was ($0.00) and ($0.00), respectively.
Liquidity
and Capital Resources
Our
working capital deficiency increased by $1.4 million or 35%, to $5.4 million for the year ended December 31, 2017 compared $4.0
million for the comparable period in 2016. The variance is primarily due to higher accounts payables and accruals, higher related
party accounts and loans payable, an increase in derivative fair value liabilities partially offset by recognition of $150,000
in deferred revenue
For
the year ended December 31, 2017, funds were provided by a $646,741 increase in accounts payable and accruals, a net $341,113
increase in related party accounts payable, accruals and notes payable, and $165,813 in traditional, non derivative related indebtedness.
Funds were used by the net loss of $2,133,838 and $150,000 in realization of deferred revenue. Included in the net loss is a non-cash
charge of $728,144 attributable to a loss on the change in fair value of derivative liability, and $ 70,934 on a loss on debt
conversion paid with common stock.
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.
Cash Flows and Management Plans
As of May 24, 2018, an investor provided
$199,500 for additional development of the Cyclone Engines as part of a binding letter of intent for $5 million. The consideration
is to be the issuance of Preferred A shares, which represents 20% ownership of the Company at the completion of funding. The funds
are to be paid over a 2-year period upon reaching various milestones.
Our
auditors have issued a going concern opinion for the years ended December 31, 2017 and 2016. Management is optimistic, however,
that revenue can be generated shortly and that funding has been secured in 2018 through 2020 to maintain operations and development
at the current and at an accelerated pace.
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, and to review the quarterly financial statements of March 31, 2017, June 30, 2017,
and September 30, 2017.
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, 2017.
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 financial
statements that material misstatements will not be prevented or detected on a timely basis by our internal controls.
Changes
in Internal Control Over Disclosure Controls 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.
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act). Our internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes
in accordance with generally accepted accounting principles. Our internal control over financial reporting is being designed to
include policies and procedures that are intended to:
(i)
maintain records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
(ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management
and directors; and
(iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets
that could have a material effect on our financial statements.
Our
management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. In making this
assessment, our management applied the integrated framework and criteria which has been developed and set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (Coso) (Revised 2013). This assessment included an evaluation of the design
and procedures of our control over financial reporting. Based on this evaluation, our management concluded that as of December
31, 2017 our internal control over financial reporting was not effective due to certain material weaknesses. These identified
material weaknesses included (i) an insufficient accounting staff; (ii) limited checks and balances in processing cash and other
transactions; and (iii) lack of sufficient active independent directors and an independent audit committee.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate
We
are committed to improving our financial and oversight organization and procedures. During the remainder of 2018 and into 2019,
we intend to adopt new accounting and disclosure controls and procedures, improve existing procedures to remedy material weaknesses
in our internal control over financial reporting and to add experienced personnel to our accounting staff as our financial ability
allows. We also hope to add independent directors to our Board of Directors, and to establish an Audit Committee comprised of
independent directors with accounting and /or financial reporting expertise.
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
|
|
75
|
|
Chairman
and Chief Technology Officer
|
|
June
2004*
|
|
|
|
|
|
|
|
Frankie
Fruge
|
|
73
|
|
Director
and President
|
|
June
2004
|
|
|
|
|
|
|
|
Bruce
Schames
|
|
71
|
|
Chief
Financial Officer
|
|
April
2010
|
|
|
|
|
|
|
|
James
Hasson
|
|
77
|
|
Director
|
|
June
2014
|
|
|
|
|
|
|
|
Dennis
Dudzik
|
|
66
|
|
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 had received salaries for their services which were 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, 2017, 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, 2017.
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
|
|
|
2017
|
|
|
$
|
150,000
|
(1)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
465
|
|
|
$
|
150,465
|
|
Chairman
& CTO
|
|
|
2016
|
|
|
|
150,000
|
(1)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,230
|
|
|
|
151,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frankie
Fruge
|
|
|
2017
|
|
|
$
|
125,000
|
(2)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
465
|
|
|
$
|
125,465
|
|
Director
& President
|
|
|
2016
|
|
|
|
125,000
|
(2)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,230
|
|
|
|
126,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bruce
Schames
|
|
|
2017
|
|
|
$
|
72,000
|
(3)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
465
|
|
|
$
|
72,465
|
|
CFO
|
|
|
2016
|
|
|
|
72,000
|
(3)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,230
|
|
|
|
73,230
|
|
|
(1)
|
All
of Mr. Schoell’s salary in 2017 and 2016 has been deferred until determined by the Board of Directors that we can afford
to pay such salary. The total accrued deferred salary is $375,000. In 2015 Mr. Schoell forgave $325,000 of accrued salary.
|
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|
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(2)
|
All
of Ms. Fruge’s salary in 2017 and 2016 has been deferred until determined by the Board of Directors that we can afford
to pay such salary. The total accrued deferred salary is $312,500 In 2015 Ms. Fruge forgave $287,500 of accrued salary.
|
|
|
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(3)
|
As
of December 31, 2017, Mr. Schames had $241,861 of total deferred total compensation, 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,
2017, Mr. Schoell had $375,000 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, 2017, Ms. Fruge had $312,500 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, 2017, Mr. Schames had $241,861 in unpaid deferred salary due to him.
CYCLONE
OFFICER and DIRECTOR OPTIONS
Outstanding
Equity Awards at December 31, 2017
The
following table summarizes information concerning all stock option grants held by our named executive officers as of December
31, 2017.
All
outstanding equity awards are options to purchase shares of common stock.
|
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Exercise
or
|
|
|
Grant
Date Fair
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|
|
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|
|
|
|
Total
|
|
|
Number
|
|
|
|
|
|
Base
Price of
|
|
|
Value
of Stock
|
|
|
|
|
|
Number
|
|
|
Number
Un-
|
|
|
|
Option
|
|
|
Number
|
|
|
Exercisable
|
|
|
Number
|
|
|
Option
|
|
|
in
Option
|
|
|
Option
|
|
|
Exercisable
|
|
|
exercisable
|
|
|
|
Grant
|
|
|
Granted
|
|
|
(Vested)
|
|
|
Un-
|
|
|
Awards
|
|
|
Awards
|
|
|
Expiration
|
|
|
Date
|
|
|
Date
|
|
Name
and Position
|
|
Dates
|
|
|
Granted
|
|
|
(1)
|
|
|
exercisable
|
|
|
($/Share)
|
|
|
($)(2)
|
|
|
Date
|
|
|
Vested
|
|
|
Expires
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
Harry
Schoell
|
|
|
2011-2017
|
|
|
|
3,300,000
|
|
|
|
2,850,000
|
|
|
|
450,000
|
|
|
|
$.19-.$0003
|
|
|
|
$.19-.$0003
|
|
|
|
2021-2027
|
|
|
|
2012-2018
|
|
|
|
2027
|
|
Chairman
& Chief
|
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|
|
|
|
|
|
|
|
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|
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|
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|
Technology
Officer
|
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|
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|
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|
|
|
|
|
|
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|
|
Frankie
Fruge
|
|
|
2007-2017
|
|
|
|
3,300,000
|
|
|
|
2,850,000
|
|
|
|
450,000
|
|
|
|
$.19-.$0003
|
|
|
|
$.19-.$0003
|
|
|
|
2021-2027
|
|
|
|
2012-2018
|
|
|
|
2027
|
|
Director
& President
|
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|
|
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|
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|
|
|
|
|
|
|
|
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|
|
Bruce
Schames
|
|
|
2010-2017
|
|
|
|
4,500,000
|
|
|
|
4,050,000
|
|
|
|
450,000
|
|
|
|
$.33-.0003
|
|
|
|
$.33-.0003
|
|
|
|
2020-2027
|
|
|
|
2011-2018
|
|
|
|
2027
|
|
CFO
|
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|
|
|
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|
|
|
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|
James
Hasson-Director
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
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|
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|
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|
Dennis
Dudzik - Director
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
|
|
|
|
11,100,000
|
|
|
|
9,750,000
|
|
|
|
1,350,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
(1)
Options vest one year from the date of grant.
(2)
We determined the grant date fair value of stock option awards using the methodology in footnote 10 to our Consolidated Financial
Statements for the years ended December 31, 2017 and 2016.
Option
Exercise, Vesting and Expiration
During
2017, none of the above named executive officers exercised any options, 1.8 million executive officer and director options vested
and 1.6 million options expired.
Compensation
of the Board of Directors
The
following table sets forth compensation to our non-employee directors during the year ended December 31, 2017 and 2016.
Name
|
|
|
Fees
earned or paid in cash ($)
|
|
|
|
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, 2018. On March 31, 2018, there were 5,292,794,570
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
|
|
|
50,815,970
|
(1)
|
|
|
0.96
|
%
|
|
|
797
|
|
|
|
80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frankie
Fruge
, President & Director
601
NE 26th Ct.
Pompano
Beach, FL 33064
|
|
|
20,334,206
|
(2)
|
|
|
0.38
|
%
|
|
|
203
|
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bruce
Schames
, CFO
601
NE 26th Ct.
Pompano
Beach, FL 3306
|
|
|
5,163,175
|
(3)
|
|
|
.0.10
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
76,313,351
|
|
|
|
1.44
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTALS:
|
|
|
76,313,351
|
|
|
|
1.44
|
%
|
|
|
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 3,300,000 vested common stock options, but excludes 450,000 unvested options awarded in 2017.
|
|
|
(2)
|
Ms.
Fruge’s total includes 3,300,000 vested common stock options, but excludes 450,000 unvested options awarded in 2017.
|
|
|
(3)
|
Mr.
Schames’ total includes 4,500,000 vested common stock options, but excludes 450,000 unvested options awarded in 2017.
|
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, 2017, we owed to Schoell
Marine $224,810, for loans, unpaid related interest and leases, 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, 2017, we also had recorded $687,500 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, 2017, and 2016.
|
|
Year
Ended
December 31, 2017
|
|
|
Year
Ended
December 31, 2016
|
|
|
|
|
|
|
|
|
Audit
Fees – Soles, Heyn & Company, LLP
|
|
$
|
32,500
|
|
|
$
|
-
|
|
Audit
Fees -Anton & Chia, LLP
|
|
|
-
|
|
|
|
20,000
|
|
Audit-Related
Fees
|
|
|
-
|
|
|
|
-
|
|
Tax
Fees
|
|
|
-
|
|
|
|
-
|
|
All
Other Fees
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
32,500
|
|
|
$
|
20,000
|
|
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.
The accompanying notes
are an integral part of these consolidated financial statements
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 AND 2016
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 2017,
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, 2017 and 2016, 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, 2016 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 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, 2017 and 2016, 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, 2017 and 2016, total anti-dilutive shares related to the common
stock options plan amounted to approximately 13.4 million and 14.5 million shares, respectively. On a pro-forma basis if the
convertible debt and related interest and penalties were converted at respective conversion rates and applied discounts at the year end common stock price, for the years ended December 31 2017 and 2016 an additional 5.5 billion and 658 million shares
would be issuable, 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, 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 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 2017.
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 for sale. 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. All inventory was fully reserved
at December 31, 2017 and most of the inventory was reserved at December 31, 2016.
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, 2017 is
as follows:
|
|
Derivative
Liabilities
|
|
Balance,
December 31, 2015
|
|
$
|
383,482
|
|
Additions
|
|
|
-
|
|
Conversion
|
|
|
-
|
|
Deletions
|
|
|
-
|
|
Fair
Value Adjustment –loss
|
|
|
370,518
|
|
|
|
|
|
|
Balance,
December 31, 2016
|
|
|
754,000
|
|
Additions
|
|
|
116,615
|
|
Conversions
|
|
|
(174,758
|
)
|
|
|
|
|
|
Deletions
|
|
|
-
|
|
|
|
|
|
|
Fair
Value Adjustment –loss
|
|
|
728,144
|
|
Balance,
December 31, 2017
|
|
$
|
1,424,001
|
|
The
table above is based on Level 3 hierarchy using the Stochastic Process Forecasting Model valuation methodology
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, 2017 and 2016
were $238,682 and $604,199, 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:
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 and changes pursuant to continued application of ASC 606 is not expected to be significant.
In March 2016, the FASB issued ASU 2017-09,
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 2017-06, “
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, 2017, 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.
Q.
CONCENTRATION OF RISK
The
Company does not have any off-balance sheet concentrations of credit risk. The Company expects cash and to be the only asset 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. The company has no accounts receivable at December 31, 2017
As
of December 31, 2017, the Company maintained its cash in one quality financial institution. The Company has not experienced any
losses in its bank accounts through December 31,2017. 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 consolidated financial statements, the Company incurred substantial operating and other losses and expenses
of approximately $2.1 million for the year ended December 31, 2017, and $2.1 million for the year ended December 31, 2016. The
cumulative deficit since inception is approximately $63.0 million. The Company has a working capital deficit at December 31, 2017
of approximately $5.4 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
Inventory principally consists of raw material. to develop an engine at the lower of cost or market.
Inventory, net consists of:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Raw materials
|
|
$
|
0
|
|
|
$
|
26,667
|
|
Total
|
|
$
|
0
|
|
|
$
|
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:
|
|
December
31, 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
|
|
|
(236,938
|
)
|
|
|
(209,498
|
)
|
Net
property and equipment
|
|
$
|
65,832
|
|
|
$
|
93,272
|
|
Depreciation
expense for the years ended December 31, 2017, and 2016 was $27,440 and $33,269, 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, 2017, and 2016 were $90,173 and $178,478,
respectively. There were no capitalized additions to patents, trademarks and copyrights during the years ended December
31, 2017, and 2016. In 2017, and 2016 the Company recorded net charges of $62,857 and $69,782, respectively, included in
general and administrative expenses, for various international expired patents; the basic US patents for the Cyclone technology
are still protected.
As
of December 31, 2017, the Company had 3 active and 8 expired 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 reinstated upon payment of past maintenance
fees.
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, 2017, and
2016 were $25,448 and $35,088, respectively. Future annual patent amortizations are:
2018
|
|
$
|
15,472
|
|
2019
|
|
|
15,472
|
|
2020
|
|
|
15,472
|
|
2021
|
|
|
15,472
|
|
2022
|
|
|
11,337
|
|
Thereafter
|
|
|
16,948
|
|
|
|
$
|
90,173
|
|
NOTE
6 – NOTES AND OTHER LOANS PAYABLE
A
summary of non-related party notes and other loans payable is as follows:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
12%
convertible notes payable, maturing at various dates from November 2013 through October 2017 (A)JMJ
|
|
$
|
61,196
|
|
|
$
|
42,951
|
|
|
|
|
|
|
|
|
|
|
10%
convertible note payable, monthly payments commencing in December 2013 through July 2014 (B) TONQ
|
|
|
19,963
|
|
|
|
19,963
|
|
|
|
|
|
|
|
|
|
|
10%
convertible notes payable maturing at various dates from May 2016 through February 2017 (C) LG
|
|
|
76,000
|
|
|
|
76,000
|
|
|
|
|
|
|
|
|
|
|
10%
convertible notes payable, maturing at various dates from December 2016 through January 2017 (D)GEL
|
|
|
26,192
|
|
|
|
29,303
|
|
|
|
|
|
|
|
|
|
|
10%
convertible notes payable maturing at various dates from February 2016 through August 2016 (E)UNION
|
|
|
140,658
|
|
|
|
116,200
|
|
|
|
|
|
|
|
|
|
|
12%
convertible notes payable, maturing at various dates from April 2016 through May 2016 (F)JSJ
|
|
|
35,936
|
|
|
|
85,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10%
note payable, maturing Feb 3, 2017
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Various
notes payable, maturing 2017 and 2018 (G) (white)
|
|
|
72,650
|
|
|
|
34,000
|
|
|
|
|
|
|
|
|
|
|
6%
note payable, maturing Oct 12 2019
|
|
|
1,500
|
|
|
|
-
|
|
10%
note payable maturing January 26, 2017
|
|
|
-
|
|
|
|
46,000
|
|
Various
notes payable, maturing 2017 and 2018
|
|
|
12,200
|
|
|
|
6,500
|
|
|
|
|
|
|
|
|
|
|
Demand
note
|
|
|
-
|
|
|
|
6,725
|
|
|
|
|
|
|
|
|
|
|
Total third party notes –net of discount
|
|
|
496,295
|
|
|
|
512,642
|
|
|
|
|
|
|
|
|
|
|
Less-Current
Portion
|
|
|
494,795
|
|
|
|
512,642
|
|
|
|
|
|
|
|
|
|
|
Total non-current third
party notes
|
|
$
|
1,500
|
|
|
$
|
-
|
|
|
(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, 2016, the Company is subject to a default judgment of
approximately $175,000, plus subsequent penalty interest for non-payment of convertible debt and interest. Unpaid interest,
default penalties and default interest is included in accounts payable and accrued liabilities. In 2018 The company negotiated
a reduced settlement for $150,000 via the issuance of company stock.
|
|
|
|
|
(C)
|
Notes
issued net of discount from derivative liabilities (fully amortized). At December 31, 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.
|
|
|
|
|
(E)
|
Notes
issued net of discount from derivative liabilities (fully amortized). At December 31, 2017, the Company held 761.9 million
shares in reserve to cover the potential conversion of this note into common stock pursuant to debt covenants. This note is
in default.
|
|
(F)
|
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. Unpaid interest, default penalties and default interest
is included in accounts payable and accrued liabilities. The company negotiated the settlement of the debt, interest and penalties
via the conversion of company stock.
|
|
(G)
|
Interest
on $62,000 of notes to be paid in 6,000,000 shares of restricted company common stock. Other notes at various interest rates
These notes are in default.
|
A
summary of related party notes and other loans payable is as follows:
|
|
December
31, 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)
|
|
$
|
161,005
|
|
|
$
|
169,751
|
|
6%
non-collateralized loans from officer and shareholder, payable on demand. The original principal balances were $157,101.
|
|
|
101,546
|
|
|
|
107,842
|
|
12%
non-collateralized loans from officer and shareholder, payable on demand
|
|
|
21,044
|
|
|
|
21,044
|
|
Accrued
Interest
|
|
|
116,278
|
|
|
|
95,123
|
|
Total
current related party notes, inclusive of accrued interest
|
|
$
|
399,873
|
|
|
$
|
393,760
|
|
|
(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 2016 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, 2017, and December 31, 2016 are $687,500 and $412,500,
respectively, of accrued and deferred officers’ salaries compensation for the President and the CTO which may be paid as
funds are available. These are non-interest bearing and due on demand.
In
June 2016, the principle officers of the company forgave $612,500 of deferred compensation.
NOTE
8 – PREFERRED STOCK
At
December 31, 2017 and 2016 the Series A Preferred Stock had 750,000 shares authorized and no shares issued and outstanding.
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 fourth quarter of 2017. This is a requirement by debt
covenants to maintain a sufficient authorized number of shares to satisfy conversion of legacy 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 year ended December 31, 2017, the Company:
|
a-
|
Amortized
(based on vesting) $3,153 of common stock options for employee services.
|
|
|
|
|
b-
|
Issued
approximately 1,335.9 million shares of common stock pursuant to conversions of approximately $587,000 of notes payable, accrued
liabilities and related interest
|
|
|
|
|
c-
|
Issued 6.4 million shares of common
stock valued at approximately $5,000 for services
|
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
|
In
the first quarter of 2018, the Company entered into an agreement with an investor to provide up to $5 million to the Company,
and the Company will issue Preferred A shares, which will be convertible into shares of the Company’s Common Stock representing
approximately 20% of the Company’s outstanding Common stock at the completion of funding.
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, 2017, and December 31, 2016 the amortization of stock options
was $2,526 and $2,526, respectively. The unamortized balance at December 31 2017 was $641.
A
summary of the common stock options for the period from December 31, 2015 through December 31, 2017 follows:
|
|
Number
Outstanding
|
|
|
Weighted
Avg.
Exercise
Price
|
|
|
Weighted
Avg.
Remaining
Contractual
Life
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2015
|
|
|
12,380,000
|
|
|
$
|
0.123
|
|
|
|
5.8
|
|
Options
issued
|
|
|
1,800,000
|
|
|
|
.0021
|
|
|
|
9.6
|
|
Options
cancelled
|
|
|
(150,000
|
)
|
|
|
(..98
|
)
|
|
|
-
|
|
Balance,
December 31, 2016
|
|
|
14,030,000
|
|
|
$
|
0.096
|
|
|
|
5.3
|
|
Options
issued
|
|
|
1,800,000
|
|
|
|
.0008
|
|
|
|
9.6
|
|
Options
expired
|
|
|
(2,430,000
|
)
|
|
|
(.203
|
)
|
|
|
|
|
Balance,
December 31, 2017
|
|
|
13,400,000
|
|
|
$
|
.064
|
|
|
|
5.8
|
|
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, 2017
|
|
|
12,050,000
|
|
|
$
|
.059
|
|
|
|
5.5
|
|
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, 2017
|
|
|
Year
Ended
December
31, 2016
|
|
Risk
free interest rate
|
|
|
1.5%-1.98%
|
|
|
|
.71%-1.4%
|
|
Expected
volatility
|
|
|
121%
- 134%
|
|
|
|
136%
- 139%
|
|
Expected
term
|
|
|
3
|
|
|
|
3
|
|
Expected
dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Average
value per options and warrants
|
|
$
|
.0003
-$.0015
|
|
|
$
|
.0019
-$.0024
|
|
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, 2017, 500,000 warrants with an average exercise price of $.08 expired.
A
summary of outstanding vested warrant activity for the period from December 31, 2015 to December 31, 2017 follows:
|
|
Number
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
Common
Stock Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2015
|
|
|
1,125,000
|
|
|
$
|
.0042
|
|
|
|
2.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
expired
|
|
|
(625,000
|
)
|
|
|
(.011
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2016
|
|
|
500,000
|
|
|
$
|
.08
|
|
|
|
.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
expired
|
|
|
(500,000
|
)
|
|
|
(.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2017
|
|
|
0
|
|
|
$
|
0.0
|
|
|
|
.-
|
|
All
warrants were vested and exercisable as of the date issued.
NOTE
11 – INCOME TAXES
In
December 2017, new tax known as Tax Cut and Jobs Act of 2017 was enacted. The new tax law includes significant changes to the
U.S. corporate tax systems including a rate reduction from 35% to 21% beginning in January of 2018, a change in the treatment
of foreign earnings going forward, a deemed repatriation transition tax, and changes to allow net operating losses to be carried
forward indefinitely. In addition, net operating losses arising after December 31, 2017 will be limited to the lesser of the available
net operating loss or 80% of the pre-net operating loss taxable income. In accordance with ASC 740, the impact of a change in
tax law is recorded in the period of enactment.
A
reconciliation of the differences between the effective income tax rates and the statutory federal tax rates for the years ended
December 31, 2017 and 2016 are as follows:
|
|
Year
ended
December
31, 2017
|
|
|
|
|
|
Year
ended
December
31, 2016
|
|
|
|
|
Tax
benefit at U.S. statutory rate
|
|
$
|
240,997
|
|
|
|
21
|
%
|
|
$
|
470,466
|
|
|
|
34
|
%
|
State
taxes, net of federal benefit
|
|
|
45,904
|
|
|
|
4
|
|
|
|
55,349
|
|
|
|
4
|
|
Change
in valuation allowance
|
|
|
(286,901
|
)
|
|
|
(25
|
)
|
|
|
(525,818
|
)
|
|
|
(38
|
)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
The
tax effect of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December
31, 2017 and December 31, 2016 consisted of the following:
Deferred
Tax Assets
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Net
Operating Loss Carry-forward
|
|
$
|
10,951,258
|
|
|
$
|
10,577,607
|
|
Deferred
Tax Liabilities – Accrued Officers’ Salaries
|
|
|
(987,056
|
)
|
|
|
(900,306
|
)
|
Net
Deferred Tax Assets
|
|
|
9,964,202
|
|
|
|
9,677,301
|
|
Valuation
Allowance
|
|
|
(9,964,202
|
)
|
|
|
(9,677,301
|
)
|
Total
Net Deferred Tax Assets
|
|
$
|
-
|
|
|
$
|
-
|
|
As
of December 31, 2017, the Company had a net operating loss carry forward for income tax reporting purposes of approximately $17
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, inclusive of late charges, for the years ended December 31, 2017, and 2016 were $71,082 and $64,100, respectively.
B
.CAPITALIZED LEASE OBLIGATIONS
Total
lease payments made for the year ended December 31, 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 December 31, 2017 and December 31, 2016 was $5,522 and $5,522, respectively.
Future lease payments are:
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, 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 December 31, 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. As of December 31, 2017, the Company has $56,950 of advances
as deposits on three (3) contracts for engines to be delivered to customers.
NOTE
16 – DERIVATIVE FINANCIAL INSTRUMENTS
Prior
to 2016, 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. As of December 31, 2017, the Company has outstanding
stock options and convertible debt that upon exercise could exceed the number of shares authorized.
In
the year ended December 31, 2017, the Company recorded a $147,233 non-cash charge to interest expense (reflective of debt discount
amortization), and $728,144 of derivative loss related to adjusting the derivative liability to fair value. At December 31, 2017,
the derivative related fair value of debt was $1,424,001. 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, 2016, 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, 2016, the derivative
related fair value of debt was $754,000.
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, 2017
|
|
|
Year
Ended
December
31, 2016
|
|
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, 2016, 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 2017, outstanding interest, default interest and default judgment penalties are included in accrued liabilities.
In 2018, the Company negotiated a reduced settlement for $150,000 via the issuance Company stock.
In
August 2016, 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, 2017, outstanding interest, default interest and default judgment penalties for debt are included in accrued liabilities.
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 related reduction
to the capitalized lease liability.
NOTE
18 – SUBSEQUENT EVENTS
In
the first quarter of 2018, the Company engaged in the following transactions:
|
a-
|
The issuance of
approximately 571 million shares of common stock in settlement of an accrued liability for services in the amount of
approximately $135,000.
|
|
|
|
|
b-
|
The
issuance of approximately 1,862 million shares of common stock pursuant of conversion of approximately $208,000 of notes
payable and related interest.
|
As of May 24, 2018, an investor
provided $199,500 for additional development of the Cyclone Engines as part of a binding letter of intent for $5 million. The
consideration is to be the issuance of Preferred A shares, which represents 20% ownership of the Company at the completion of
funding. The funds are to be paid over a 2-year period upon reaching various milestones.
On February 1, 2018 the Company executed
a consulting agreement known as “Bornstein Consulting Agreement dated February 1, 2018” to render such advice, consultation,
information, and services to the Directors and/or Officers of the Company regarding public company financials and audit for the
Company. Specifically, the Consultant shall be the lead for the company in dealing with the auditors and the company to completely
manage the audit process, manage its timing, conference calls, all document flow and any other items required to complete the
audit and public reporting. Additionally, Consultant will be able to work with Company and other Consultants to complete budgets,
forecasting and going forward projections for the company, as well as assisting in documents used to help with acquisitions and
mergers and capital raising.
In
the May 2018, the Company established a wholly owned subsidiary, Emerging Power Solutions Inc., whose purpose is to provide alternative
power solutions for various industries based on the application of the Cyclone Engine.