UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
| [X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the fiscal year ended December 31, 2017 |
Or
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from to |
Commission file number 000-54449
Cyclone Power Technologies, Inc.
(Exact name of registrant as specified in its charter)
| Florida | 26-0519058 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| 601 NE 26th Ct, Pompano Beach, Florida | 33064 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number (954) 943-8721
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
| None | None |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0001 par value
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [ ] Yes [X] No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [ ] Yes [X] No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for a shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, “non-accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | [ ] | Accelerated filer | [ ] |
| Non-accelerated filer | [ ] | Smaller reporting company | [X] |
| Emerging Growth Company | [X] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) [ ] Yes [X] No
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of the closing price of such shares on the last business day of the registrant’s most recently completed fiscal year was approximately $850,000.
The number of shares outstanding of the registrant’s common stock as of May 15, 2018 is 5,292,794,570
DOCUMENTS INCORPORATED BY REFERENCE—NONE
TABLE OF CONTENTS
FORM 10-K
| 2 |
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:
| ● | 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. |
| ● | 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. |
| ● | 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. |
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.
| 3 |
Based on our business model, our revenue and income will come from:
| ● | Development and engineering fees from customers, partners and licensees; | |
| ● | Direct sales revenue from engines we manufacture through sub contractors; | |
| ● | Up-front license fees and on-going royalties based on sales by our licensees. | |
| ● | Direct sales of Cyclone powered generators to distributors. |
| ● | Income recognition from equity investment in partnerships |
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 | Size | Uses | Stage | |||
Mark 1
|
5 HP | Power generation –all fuels and heat sources | Production units (10) in field testing | |||
| Mark 3 | 25 HP | Auxiliary power for military, biomass to power, portable power, and small vehicles | Production units (10) at OEM’s | |||
| Mark 5 | 100 HP | Transportation, commercial power, military | Beta Prototype (2) | |||
| Mark 10 | 1500 HP | Transportation Train, Ship, large equipment, Power Generation |
Into finish CAD drawing, quotes out & parts ordered | |||
| Combustion Chamber | Waste fuels, biomass to power, for :transportation, commercial power, military | Preproduction units (25) |
| (1) | “Pre Production Unit” refers to an engine in the process of being engineered for manufacturing at OEM’s | |
| (2) | Beta Prototype” refers to a second generation prototype engine, which has undergone significant testing at Cyclone’s facility. |
Our engines are currently in customer field testing, and there is no guarantee that they will successfully meet customer expectations when completed.
| 4 |
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 | |
| U.S. No. 7,080,512 B2 | Heat Regenerative Engine |
| U.S. No. 7,856,822 B2 | Heat Regenerative Engine |
| U.S. No. 7,856,823 B2 | Pre-Heater Coil in a Heat Regenerative Engine |
| 5 |
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.
| 6 |
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.
Not required for smaller reporting companies.
Item 1B. Unresolved Staff Comments
None.
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.
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 160th 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.
| 7 |
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.
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
| High Bid Price | Low Bid Price | |||||||
| First Quarter | $ | 0.0024 | $ | 0.0001 | ||||
| Second Quarter | 0.0021 | 0.0005 | ||||||
| Third Quarter | 0.0015 | 0.0003 | ||||||
| Fourth Quarter | 0.0006 | 0.0001 | ||||||
Year Ended December 31, 2016
| High Bid Price | Low Bid Price | |||||||
| First Quarter | $ | 0.0030 | $ | 0.0010 | ||||
| Second Quarter | 0.0230 | 0.0010 | ||||||
| Third Quarter | 0.0028 | 0.0011 | ||||||
| Fourth Quarter | 0.0028 | 0.0016 | ||||||
| 8 |
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:
| ● | the ability to successfully complete commercialization of our technology; | |
| ● | changes in existing and potential relationships with customers and collaborative partners; | |
| ● | the ability to retain certain members of management; | |
| ● | our expectations regarding general and administrative expenses; | |
| ● | our expectations regarding cash availability and balances, capital requirements, anticipated revenue and expenses, including infrastructure and patent expenditures; | |
| ● | other factors detailed from time to time in filings with the SEC. |
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.
| 9 |
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.
| 10 |
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.
| 11 |
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.
| 12 |
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.
| 13 |
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.
| 14 |
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.
| 15 |
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.
None.
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.
| 16 |
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.
| 17 |
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.
| 18 |
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.
| 19 |
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. | |
| (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. | |
| (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.
| 20 |
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 $241,861 in unpaid deferred salary due to him.
CYCLONE OFFICER and DIRECTOR OPTIONS
Outstanding Equity Awards at December 31, 2017
The following table summarizes information concerning all stock option grants held by our named executive officers as of December 31, 2017.
All outstanding equity awards are options to purchase shares of common stock.
| 21 |
| Exercise or | Grant Date Fair | |||||||||||||||||||||||||||||||||||
| Total | Number | Base Price of | Value of Stock | Number | Number Un- | |||||||||||||||||||||||||||||||
| Option | Number | Exercisable | Number | Option | in Option | Option | Exercisable | exercisable | ||||||||||||||||||||||||||||
| Grant | Granted | (Vested) | Un- | Awards | Awards | Expiration | Date | Date | ||||||||||||||||||||||||||||
| Name and Position | Dates | Granted | (1) | exercisable | ($/Share) | ($)(2) | Date | Vested | Expires | |||||||||||||||||||||||||||
| Harry Schoell | 2011-2017 | 3,300,000 | 2,850,000 | 450,000 | $.19-.$0003 | $.19-.$0003 | 2021-2027 | 2012-2018 | 2027 | |||||||||||||||||||||||||||
| Chairman & Chief | ||||||||||||||||||||||||||||||||||||
| Technology Officer | ||||||||||||||||||||||||||||||||||||
| Frankie Fruge | 2007-2017 | 3,300,000 | 2,850,000 | 450,000 | $.19-.$0003 | $.19-.$0003 | 2021-2027 | 2012-2018 | 2027 | |||||||||||||||||||||||||||
| Director & President | ||||||||||||||||||||||||||||||||||||
| Bruce Schames | 2010-2017 | 4,500,000 | 4,050,000 | 450,000 | $.33-.0003 | $.33-.0003 | 2020-2027 | 2011-2018 | 2027 | |||||||||||||||||||||||||||
| CFO | ||||||||||||||||||||||||||||||||||||
| James Hasson-Director | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
| Dennis Dudzik - Director | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
| Total | 11,100,000 | 9,750,000 | 1,350,000 | |||||||||||||||||||||||||||||||||
(1) Options vest one year from the date of grant.
(2) We determined the grant date fair value of stock option awards using the methodology in footnote 10 to our Consolidated Financial Statements for the years ended December 31, 2017 and 2016.
Option Exercise, Vesting and Expiration
During 2017, none of the above named executive officers exercised any options, 1.8 million executive officer and director options vested and 1.6 million options expired.
Compensation of the Board of Directors
The following table sets forth compensation to our non-employee directors during the year ended December 31, 2017 and 2016.
| Name | Fees earned or paid in cash ($) | 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.
| 22 |
| 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.
| 23 |
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.
Item 15. Exhibits and Financial Statement Schedules
(a) Financial Statements
| 24 |
(b) Exhibits
| 25 |
| 26 |
| 10.51* | Legal Judgment by Tonaquint for $166,000 plus interest for non- payment of a convertible warrant true up, July 13, 2016. |
| 27 |
The certification attached as Exhibits 32.1 and 32.2 that accompany this Annual Report on Form 10-K are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Cyclone Power Technologies, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this annual report on Form 10-K, irrespective of any general incorporation language contained in such filing.
* Previously filed.
** Attached herewith.
† These two exhibits were previous filed using the same Exhibit 10.16 number in error.
†† These two exhibits were previous filed using the same Exhibit 10.25 number in error.
| 28 |
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Cyclone Power Technologies, Inc. | ||
| By: | /S/ HARRY SCHOELL | |
| Harry Schoell | ||
| Chairman and Chief Technical Officer | ||
| Dated: | May 29, 2018 | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| By: | /S/ HARRY SCHOELL | |
| Harry Schoell | ||
| Chairman and Chief Technical Officer | ||
| Dated: | May 29, 2018 | |
| By: | /S/ FRANKIE FRUGE | |
| Frankie Fruge | ||
| President, (principal executive officer) and Director | ||
| Dated: | May 29, 2018 |
| By: | /S/ BRUCE SCHAMES | |
| Bruce Schames | ||
| Chief Financial Officer | ||
| (principal accounting and financial officer) | ||
| Dated: | May 29, 2018 |
| 29 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and
Stockholders of Cyclone Power Technologies, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Cyclone Power Technologies, Inc. (the Company) as of December 31, 2017 and 2016, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2017 and 2016, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2017 and 2016, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying financials have been prepared assuming the Company will continue as a going concern. As of December 31, 2017, the Company had accumulated losses of approximately $62,962,000, and has negative working capital of approximately $5,370,000, and may experiences losses in the near term. These factors and the need for additional financing in order for the Company to meet its business plan, raise substantial doubt about its ability to continue as a going concern. Management's plan to continue as a going concern is also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
| /s/ Soles, Heyn & Company, LLP | |
We have served as the Company’s auditor since 2017. |
|
West Palm Beach, Florida May 29, 2018 |
| F -1 |
CYCLONE POWER TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2017 AND 2016
| 2017 | 2016 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | - | $ | 591 | ||||
| Inventory, net | - | 26,667 | ||||||
| Other current assets | 193 | 193 | ||||||
| Total current assets | 193 | 27,451 | ||||||
| PROPERTY AND EQUIPMENT | ||||||||
| Furniture, fixtures, and equipment | 302,770 | 302,770 | ||||||
| Accumulated depreciation | (236,938 | ) | (209,498 | ) | ||||
| Net property and equipment | 65,832 | 93,272 | ||||||
| OTHER ASSETS | ||||||||
| Patents, trademarks and copyrights | 394,980 | 394,980 | ||||||
| Accumulated amortization | (304,807 | ) | (216,502 | ) | ||||
| Net patents, trademarks and copyrights | 90,173 | 178,478 | ||||||
| Other assets | 7,660 | 7,862 | ||||||
| Total other assets | 97,833 | 186,340 | ||||||
| Total Assets | $ | 163,858 | $ | 307,063 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES | ||||||||
| Bank overdraft | $ | 52 | $ | - | ||||
| Accounts payable and accrued expenses | 2,057,068 | 1,472,851 | ||||||
| Accounts payable and accrued expenses-related parties | 880,225 | 545,225 | ||||||
| Notes and other loans payable-current portion net of discount of $30,764 | 494,795 | 512,642 | ||||||
| Derivative liabilities | 1,424,001 | 754,000 | ||||||
| Notes and other loans payable-related parties | 399,873 | 393,760 | ||||||
| Capitalized lease obligations-current portion | 5,522 | 14,312 | ||||||
| Deferred revenue and license deposits | 173,826 | 323,826 | ||||||
| Total current liabilities | 5,435,362 | 4,016,616 | ||||||
| NON CURRENT LIABILITIES | ||||||||
| Capitalized lease obligations-net of current portion | - | 25,536 | ||||||
| Notes and other loans payable-net of current portion | 1,500 | - | ||||||
| Total non-current liabilities | 1,500 | 25,536 | ||||||
| Total Liabilities | 5,436,862 | 4,042,152 | ||||||
| Commitments and contingencies | ||||||||
| STOCKHOLDERS’ DEFICIT | ||||||||
| Series A preferred stock, $.0001 par value, 750,000 shares authorized, 0 shares issued and outstanding at December 31, 2017 and December 31, 2016, respectively. | - | - | ||||||
| Series B preferred stock, $.0001 par value, 1,000 shares authorized, 1,000 shares issued and outstanding at December 31, 2017 and December 31, 2016, respectively. | - | - | ||||||
| Common stock, $.0001 par value, 6,000,000,000 shares authorized, 2,859,645,298 and 1,517,400,273, shares issued and outstanding at December 31, 2017, and December 31, 2016, respectively. | 285,963 | 151,737 | ||||||
| Additional paid-in capital | 57,377,491 | 56,915,794 | ||||||
| Treasury Stock 317,000 shares, at December 31, 2017, and December 31, 2016 respectively, at cost. | (3,000 | ) | (3,000 | ) | ||||
| Accumulated deficit | (62,962,497 | ) | (60,828,659 | ) | ||||
| Total stockholders’ deficit - Cyclone Power Technologies Inc. | (5,302,043 | ) | (3,764,128 | ) | ||||
| Non controlling interest in consolidated subsidiaries | 29,039 | 29,039 | ||||||
| Total Stockholders’ Deficit | (5,273,004 | ) | (3,735,089 | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | 163,858 | $ | 307,063 | ||||
The accompanying notes are an integral part of these consolidated financial statements
| F -2 |
CYCLONE POWER TECHNOLOGIES, INC .
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR YEARS ENDED DECEMBER 31 2017, AND 2016
| 2017 | 2016 | |||||||
| REVENUES | ||||||||
| Engine sales and design revenue | $ | 150,000 | $ | - | ||||
| License revenue | 25,000 | - | ||||||
| Total revenue | 175,000 | - | ||||||
| COST OF GOODS SOLD | 138 | - | ||||||
| Gross profit | 174,862 | - | ||||||
| OPERATING EXPENSES | ||||||||
| Advertising and promotion expenses | 7,438 | 8,166 | ||||||
| General and administrative | ||||||||
| Retirement of patents | 62,857 | 69,782 | ||||||
| Other general and administrative | 1,062,871 | 897,924 | ||||||
| Total general and administrative | 1,125,728 | 967,706 | ||||||
| Research and development | ||||||||
| Inventory reserve provision | - | 125,900 | ||||||
| Other research and development | 238,682 | 478,299 | ||||||
| Total research and development | 238,682 | 604,199 | ||||||
| Total operating expenses | 1,371,848 | 1,580,071 | ||||||
| Operating loss | (1,196,986 | ) | (1,580,071 | ) | ||||
| OTHER (EXPENSE) INCOME | ||||||||
| Other income (expense) | ||||||||
| Other income and (expense) | 168,702 | (8,883 | ) | |||||
| Change in fair value of derivative liability | (728,144 | ) | (370,519 | ) | ||||
| Interest (expense) | (377,410 | ) | (141,450 | ) | ||||
| Total other income (expense) | (936,852 | ) | (520,852 | ) | ||||
| Loss before income taxes | (2,133,838 | ) | (2,100,923 | ) | ||||
| Income taxes | - | - | ||||||
| Net loss | $ | (2,133,838 | ) | $ | (2,100,923 | ) | ||
| Net loss per common share, basic and diluted | $ | (0.00 | )* | $ | (0.00 | ) | ||
| Weighted average number of common shares outstanding | 1,720,378,311 | 1,416,738,836 | ||||||
* Net loss per share less than $0.00
The accompanying notes are an integral part of these consolidated financial statements
| F -3 |
CYCLONE POWER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2017
| Prepaid | Stockholders’ | Non | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Expenses | Preferred | (Deficit) | Controlling | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred | Preferred | Additional | via | Stock | Cyclone | Interest | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock A | Stock B | Common Stock | Paid In | Treasury | Common | Subscription | Accumulated | Power | In Consol. | Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Value | Shares | Value | Shares | Value | Capital | Stock | Stock | Receivable | (Deficit) | Tech. Inc. | Subsidiaries | (Deficit) | |||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2015 | - | - | 1,000 | - | 1,388,669,532 | $ | 138,864 | $ | 56,621,826 | $ | (3,000 | ) | $ | - | $ | - | $ | (58,727,736 | ) | $ | (1,970,046 | ) | $ | 29,039 | $ | (1,941,007 | ) | |||||||||||||||||||||||||||||
| Issuance of options for employee services | - | - | - | - | - | - | 2,526 | - | - | - | - | 2,526 | - | 2,526 | ||||||||||||||||||||||||||||||||||||||||||
| Repayment of liabilities in common stock | - | - | - | - | 125,730,741 | 12,573 | 228,359 | - | - | - | - | 240,932 | - | 240,932 | ||||||||||||||||||||||||||||||||||||||||||
| Loss on debt paid with common stock | - | - | - | - | - | - | 57,383 | - | - | - | - | 57,383 | - | 57,383 | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for services | - | - | - | - | 3,000,000 | 300 | 5,700 | - | - | - | - | 6,000 | - | 6,000 | ||||||||||||||||||||||||||||||||||||||||||
| Net loss year ended December 31, 2016 | - | - | - | - | - | - | - | - | - | - | (2,100,923 | ) | (2,100,923 | ) | - | (2,100,923 | ) | |||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2016 | - | - | 1,000 | - | 1,517,400,273 | 151,737 | 56,915,794 | (3,000 | ) | - | - | (60,828,659 | ) | (3,764,128 | ) | 29,039 | (3,735,089 | ) | ||||||||||||||||||||||||||||||||||||||
| Issuance of options for employee services | - | - | - | - | - | - | 3,153 | - | - | - | - | 3,153 | - | 3,153 | ||||||||||||||||||||||||||||||||||||||||||
| - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Repayment of debt and interest with common stock | - | - | - | - | 851,291,692 | 85,131 | 255,168 | - | - | - | - | 340,299 | - | 340,299 | ||||||||||||||||||||||||||||||||||||||||||
| - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Repayment of liabilities in common stock | - | - | - | - | 484,583,333 | 48,458 | 198,917 | - | - | - | - | 247,375 | - | 247,375 | ||||||||||||||||||||||||||||||||||||||||||
| - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Services paid with common stock | - | - | - | - | 6,370,000 | 637 | 4,459 | - | - | - | - | 5,096 | - | 5,096 | ||||||||||||||||||||||||||||||||||||||||||
| Net loss year ended December 31, 2017 | - | - | - | - | - | - | - | - | - | - | (2,133,838 | ) | (2,133,838 | ) | - | (2,133,838 | ) | |||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2017 | - | - | 1,000 | - | 2,859,645,298 | 285,963 | 57,377,491 | (3,000 | ) | - | - | (62,962,497 | ) | (5,302,043 | ) | 29,039 | (5,273,004 | ) | ||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
| F -4 |
CYCLONE POWER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR YEARS ENDED DECEMBER 31 2017, AND 2016
| 2017 | 2016 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (2,133,838 | ) | $ | (2,100,923 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 52,888 | 68,357 | ||||||
| Provision for inventory reserve | - | 125,900 | ||||||
| Issuance of restricted common stock, options and warrants for services | 3,153 | 2,526 | ||||||
| Loss from derivative liability-conversion notes payable | 70,934 | 57,383 | ||||||
| Amortization of derivative debt discount | 61,617 | 11,680 | ||||||
| Change in fair value of derivative liability | 728,144 | 370,518 | ||||||
| Expenses paid with common stock | 123,066 | 6,000 | ||||||
| Write-off of expired patents | 62,857 | 69,782 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Decrease in inventory | 26,667 | 170,941 | ||||||
| Decrease in other current assets | 202 | 594 | ||||||
| Increase (decrease) in cash overdraft | 52 | (3,221 | ) | |||||
| Increase in accounts payable and accrued expenses | 646,741 | 554,744 | ||||||
| Increase in accounts payable and accrued expenses-related parties | 335,000 | 335,000 | ||||||
| Increase (decrease) in deferred revenue and deposits | (150,000 | ) | 175,700 | |||||
| Net cash used in operating activities | (172,517 | ) | (155,019 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Net cash used by investing activities | - | - | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Payment of capitalized lease obligations | - | (10,041 | ) | |||||
| Proceeds from notes and loans payable | 165,813 | 94,725 | ||||||
| Repayment of notes and loans payable | - | (1,500 | ) | |||||
| Proceeds from related party notes and loans payable | 39,834 | 87,141 | ||||||
| Repayment of related party notes and loans payable | (33,721 | ) | (14,715 | ) | ||||
| Net cash provided by financing activities | 171,926 | 155,610 | ||||||
| Net (decrease) increase in cash | (591 | ) | 591 | |||||
| Cash, beginning of period | 591 | - | ||||||
| Cash, end of period | $ | - | $ | 591 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Payment of interest in cash | $ | - | $ | - | ||||
| Payment of income tax in cash | $ | - | $ | - | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Issuance of 484,583,333 shares of Common stock for liabilities | $ | 247,375 | $ | - | ||||
| Issuance of 6,370,000 shares of Common stock for services | $ | 5,096 | $ | - | ||||
| Issuance of 851,291,692 shares of Common stock for debt and interest repayment | $ | 340,299 | $ | - | ||||
| Issuance of 20,313,416 shares of Common stock for repayment of related party payables | $ | - | $ | 6,000 | ||||
| Issuance of 125,730,741 shares of Common stock for liabilities | $ | - | $ | 240,932 | ||||
The accompanying notes are an integral part of these consolidated financial statements
| F -5 |
CYCLONE POWER TECHNOLOGIES, INC.
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.
| F -6 |
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 -7 |
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. |
| F -8 |
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.
| F -9 |
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.
| F -10 |
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.
| F -11 |
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 |
| F -12 |
NOTE 6 – NOTES AND OTHER LOANS PAYABLE
| A. | Third PARTIES |
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. |
| F -13 |
| B. | RELATED PARTIES |
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.
| F -14 |
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 | ||||||||
| F -15 |
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.
| F -16 |
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.
| F -17 |
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:
| 2018 | $ | 5,522 | ||
| $ | 5,522 |
NOTE 13 – COMMITMENTS AND CONTINGENCIES
The Company has employment agreements with Harry Schoell, Chairman and CTO (previously, CEO), at $150,000 per year and Frankie Fruge, President, at $120,000 per year; (collectively, the “Executives”). These agreements provide for a term of three (3) years from their Effective Date (July 2007 with automatically renewing successive one year periods starting on the end of the second anniversary of the Effective Date. If the Executive is terminated “without cause” or pursuant to a “change in control” of the Company, as both defined in the respective agreements, the Executive shall be entitled to (i) any unpaid Base Salary accrued through the effective date of termination, (ii) the Executive’s Base Salary at the rate prevailing at such termination through 12 months from the date of termination or the end of his Term then in effect, whichever is longer, and (iii) any performance bonus that would otherwise be payable to the Executive were he/she not terminated, during the 12 months following his or her termination.
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.
| F -18 |
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.
| F -19 |