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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

  [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

  For the quarterly period ended September 30, 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   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
601 NE 26th Ct    
Pompano Beach, Florida   33064
(Address of principal executive offices)   (Zip Code)

 

(954) 943-8721

(Registrant’s telephone number, including area code)

 

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 such 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. Yes [X] 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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

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” 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]
             
       

(Do not check if a smaller reporting company)

   

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

As of December 18, 2017, there were 2,726,067,954 shares of the registrant’s common stock issued and outstanding.

 

 

 

 

 

 

CYCLONE POWER TECHNOLOGIES, INC.

QUARTERLY REPORT ON FORM 10-Q

INDEX

 

PART I. FINANCIAL INFORMATION  
   
Item 1. Financial Statements
   
Condensed Consolidated Balance Sheets as of September. 30, 2017 (unaudited) and December 31, 2016 3
   
Condensed Consolidated Statements of Operations for the Nine and three months ended September 30, 2017 and 2016 (unaudited) 4
   
Condensed Consolidated Statements of Cash Flows for the Nine months ended September 30, 2017 and 2016 (unaudited) 5
   
Notes to Condensed Consolidated Financial Statements (unaudited) 6
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
   
Item 4. Controls and Procedures 21
   
PART II. OTHER INFORMATION  
   
Item 1. Legal Proceedings 22
   
Item 1A. Risk Factors 22
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
   
Item 3. Defaults upon Senior Securities 22
   
Item 4. Mine Safety Disclosures 22
   
Item 5. Other Information 22
   
Item 6. Exhibits 23

 

2

 

 

CYCLONE POWER TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2017 AND DECEMBER 31, 2016

 

   Sept. 30, 2017   December 31, 2016 
   (Unaudited)     
ASSETS          
           
CURRENT ASSETS          
Cash  $-   $591 
Inventory, net   27,498    26,667 
Other current assets   193    193 
Total current assets   27,691    27,451 
           
PROPERTY AND EQUIPMENT          
Furniture, fixtures, and equipment   302,770    302,770 
Accumulated depreciation   (230,253)   (209,498)
Net property and equipment   72,517    93,272 
           
OTHER ASSETS          
Patents, trademarks and copyrights   394,980    394,980 
Accumulated amortization   (235,588)   (216,502)
Net patents, trademarks and copyrights   159,392    178,478 
Other assets   7,862    7,862 
Total other assets   167,254    186,340 
           
Total Assets  $267,462   $307,063 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
           
CURRENT LIABILITIES          
Bank Overdraft  $52   $- 
Accounts payable and accrued expenses   1,972,091    1,472,851 
Accounts payable and accrued expenses-related parties   796,475    545,225 
Notes and other loans payable-current portion   457,832    512,642 
Derivative liabilities   1,162,397    754,000 
Notes and other loans payable-related parties   384,652    393,760 
Capitalized lease obligations-current portion   5,522    14,312 
Deferred revenue and license deposits   173,826    323,826 
Total current liabilities   4,952,847    4,016,616 
           
NON-CURRENT LIABILITIES          
Capitalized lease obligations-net of current portion   -    25,536 
Total non-current liabilities   -    25,536 
           
Total Liabilities   4,952,847    4,042,152 
           
Commitments and contingencies          
           
STOCKHOLDERS’ DEFICIT          
           

Series B preferred stock, $.0001 par value, 1,000 shares authorized, 1,000 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively.

   -    - 

Common stock, $.0001 par value, 6,000,000,000 shares authorized, 2,109,450,166 and 1,517,400,273 shares, issued and outstanding September 30, 2017 and December 31, 2016 respectively.

   210,943    151,737 
Additional paid-in capital   57,417,033    56,915,794 

Treasury Stock, 317,000 shares at September 30, 2017 and December  31, 2016 respectively, at cost.

   (3,000)   (3,000)
Accumulated deficit   (62,339,400)   (60,828,659)
Total stockholders’ deficit-Cyclone Power Technologies Inc.   (4,714,424)   (3,764,128)
Non-controlling interest in consolidated subsidiary   29,039    29,039 
           
Total Stockholders’ Deficit   (4,685,385)   (3,735,089)
           
Total Liabilities and Stockholders’ Deficit  $267,462   $307,063 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

3

 

 

CYCLONE POWER TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPT. 30, 2017 AND 2016

(UNAUDITED)

 

   Nine Months Ended Sept. 30,   Three Months Ended Sept. 30, 
   2017   2016   2017   2016 
                 
REVENUES  $175,000   $-   $175,000   $- 
                     
COST OF GOODS SOLD   138    -    138    - 
                     
Gross profit   174,862    -    174,862    - 
                     
OPERATING EXPENSES                    
Advertising and promotion   7,373    7,986    721    2,147 
General and administrative   856,934    655,309    319,551    269,801 
Research and development   162,462    131,827    65,544    57,977 
                     
Total operating expenses   1,026,769    795,122    385,816    329,925 
                     
Operating loss   (851,907)   (795,122)   (210,954)   (329,925)
                     
OTHER (EXPENSE) INCOME                    
Other (expense)   (70,934)   (12,968)   -    - 
Derivative (expense) income   (329,366)   3,320    78,101    543 
Interest (expense)   (258,534)   (95,356)   (72,511)   (32,914)
                     
Total other (expense) income   (658,834)   (105,004)   5,590    (32,371)
                     
Loss before income taxes   (1,510,741)   (900,126)   (205,364)   (362,296)
Income taxes   -    -    -    - 
                     
Net loss  $(1,510,741)  $(900,126)  $(205,364)  $(362,296)
                     
Net loss per common share, basic and diluted  $(0.00)  $(0.00)  $(0.00)  $(0.00)
                     
Weighted average number of common shares outstanding   1,635,855,113    1,403,414,280    1,828,844,965    1,445,400,243 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

4

 

 

CYCLONE POWER TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPT. 30, 2017 AND 2016

(UNAUDITED)

 

 

 

   Nine Months Ended Sept. 30, 
   2017   2016 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(1,510,741)  $(900,126)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   39,841    52,240 
Issuance of restricted common stock, options and warrants for services   2,568    1,693 
Loss on debt paid with common stock   70,934    57,383 
Loss (gain) from derivative liability-notes payable   408,397    (3,320)
Issuance of restricted common stock for services   5,096    - 
Amortization of derivative debt discount   39,046    11,680 
Amortization of prepaid interest expenses via common stock and warrants   -    6,000 
Changes in operating assets and liabilities:          
(Increase) in inventory   (831)   (84,007)
(Increase) in other current assets   -    (813)
Increase in accounts payable and accrued expenses   698,255    251,250 
Increase in accounts payable and accrued expenses-related parties   251,250    346,833 
(Decrease) Increase in deferred revenue and deposits   (150,000)   115,700 
Net cash used in operating activities   (146,185)   (145,487)
           
CASH FLOWS FROM INVESTING ACTIVITIES:   -    - 
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Payment of capitalized leases   -    (8,928)
Increase (decrease) in cash overdraft   52    (3,221)
Proceeds from notes and loans payable   154,650    90,725 
Repayment of notes and loans payable   -    (1,500)
Increase in related party notes and loans payable   24,560    84,513 
(Payments) of related party notes and loans payable   (33,668)   (14,715)
Net cash provided by financing activities   145,594    146,874 
           

Net (decrease) increase in cash

   (591)   1,387 
Cash, beginning of period   591    - 
           
Cash, end of period  $-   $1,387 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
           
Payment of interest in cash  $-   $4,232 
NON-CASH INVESTING AND FINANCING ACTIVITIES:          
           
Issuance of 585,679,963 shares of Common stock for debt and interest settlement  $418,244   $- 
Issuance of 70,000,000 shares of Common stock for liability settlement  $123,000   $- 
Issuance of 100,000,000 shares of Common stock for liability settlement  $49,066   $- 
Issuance of 6,370,000 shares of Common stock for services  $5,096   $- 
Issuance of 125,730,741 shares of Common stock for liability settlements  $-   $240,932 
Issuance of 3,000,000 shares of Common stock for services  $-   $6,000 

 

 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

5

 

 

CYCLONE POWER TECHNOLOGIES, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 – ORGANIZATIONAL AND SIGNIFICANT ACCOUNTING POLICIES

 

A. ORGANIZATION AND OPERATIONS

 

Cyclone Power Technologies, Inc. (the “Company”, “our,” “Cyclone”) is the successor entity to the business of Cyclone Technologies LLLP (the “LLLP”), a limited liability limited partnership formed in Florida in September 2004. The LLLP was the original developer and intellectual property holder of the Cyclone engine technology. Initialed in 2016, the Company’s current business model, is to be primarily a research and development engineering company whose main purpose is to develop, commercialize, market and license its Cyclone engine technology. Engines and related systems will be outsourced for manufacturing but the company will invoice customers. Our prior business model also included engine manufacturing.

 

In 2012, the Company established Cyclone Performance LLC (“Cyclone Performance”) f/k/a Cyclone-TeamSteam USA, LLC. The purpose of Cyclone Performance is to build, test and run a vehicle utilizing the Company’s engine. At September 30, 2017 the company had a 95% controlling interest in Cyclone Performance.

 

B. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

 

The condensed consolidated financial statements include the accounts of the Company and its 95% owned subsidiary Cyclone Performance. All material inter-company transactions and balances have been eliminated in the condensed consolidated financial statements

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to interim financial information and the requirements of Form 10-Q and Article 8 of Regulation S-X of the SEC. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States for complete consolidated financial statements. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments, consisting of normal journal entries, considered necessary for a fair presentation of the financial position and the results of operations and cash flows for the interim periods have been included. Complete financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2016, as filed with the Securities and Exchange Commission as part of the Company’s Form 10-K.

 

The results of operations for the nine months ended September 30, 2017 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2017.

 

The Company prepares its consolidated financial statements in conformity with account principles generally accepted in the United States (“U.S. GAAP”). The accounting principles utilized by the Company require the Company to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, the reported amounts of revenues and expenses, cash flows and the related footnote disclosures during the periods. On an on-going basis, the Company reviews and evaluates its estimates and assumptions, including, but not limited to, those that relate to the realizable value of inventory, identifiable intangible assets and other long-lived assets, contracts, income taxes, derivative liabilities, and contingencies. Actual results could differ from these estimates.

 

C. CASH

 

Cash includes cash on hand and cash in banks. At September 30, 2017 and December 31, 2016, the Company maintained cash and overdraft balances at one financial institution.

 

6

 

 

D. COMPUTATION OF INCOME (LOSS) PER SHARE

 

Net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is not presented as the conversion of the preferred stock and exercise of outstanding stock options and warrants would have an anti-dilutive effect. As of September 30, 2017 and 2016, total anti-dilutive shares amounted to approximately 15.8 and 14.7 million shares, respectively.

 

E. INCOME TAXES

 

Income taxes are accounted for under the asset and liability method as stipulated by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740, “Income Taxes” (“ASC 740”). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities or a change in tax rate is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced to estimated amounts to be realized by the use of a valuation allowance. A valuation allowance is applied when in management’s view it is more likely than not (50%) that such deferred tax will not be utilized.

 

In the unlikely event that an uncertain tax position exists in which the Company could incur income taxes, the Company would evaluate whether there is a probability that the uncertain tax position taken would be sustained upon examination by the taxing authorities. Reserves for uncertain tax positions would be recorded if the Company determined it is probable that a position would not be sustained upon examination or if payment would have to be made to a taxing authority and the amount is reasonably estimated. As of December 31, 2016, and September 30, 2017, the Company does not believe it has any uncertain tax positions that would result in the Company having a liability to the taxing authorities. Interest related to the unrecognized tax benefits is recognized in the consolidated financial statements as a component of income taxes. The Company’s tax returns are subject to examination by the federal and state tax authorities for the years ended 2014 through 2016.

 

F. REVENUE RECOGNITION

 

The Company’s revenue recognition policies are in compliance with ASC 605, “Revenue Recognition – Multiple Element Arrangements”, and Staff Accounting Bulletin (“SAB”) 104, Revenue Recognition. Revenue is recognized at the date of shipment of engines and systems, engine prototypes, engine designs or other deliverables to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Revenue from contracts for multiple deliverables and milestone method recognition would be evaluated and allocated as appropriate. Payments received before all of the relevant criteria for revenue recognition will be satisfied are recorded as deferred revenue on the condensed consolidated balance sheets. The Company does not allow its customers to return prototype products. Current contracts do not require the Company to provide any warranty assistance after the “deliverable” has been accepted.

 

It is the Company’s intention when it has royalty revenue from its contracts to record royalty revenue periodically when earned, as reported in sales statements from customers. The Company does not have any royalty revenue to date.

 

G. WARRANTY PROVISIONS

 

Current contracts do not require warranty assistance subsequent to acceptance of the “deliverable R&D prototype” by the customer. For products that the Company will sell in the future, warranty costs are anticipated to be borne by the manufacturing vendor.

 

7

 

 

H. INVENTORY

 

Inventory is recorded at the lower of cost or market. Based on our revised R&D company business model, commencing in 2016, costs include material to develop a completed engine. In our former business model, costs included material, labor and allocated overhead to manufacture a completed engine.

 

Costs are periodically evaluated to determine if they have a net realizable value. If the net realizable value is lower than the carrying amount, a reserve is provided.

 

I. FAIR VALUE OF FINANCIAL INSTRUMENTS

 

ASC 820, “Fair Value Measurements and Disclosures” requires disclosures of information about the fair value of certain financial instruments for which it is practicable to estimate the value. The carrying amounts reported in the balance sheet for cash, accounts payable and accrued expenses, and loans payable approximate their fair market value based on the short-term maturity of these instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company’s own assumptions based on the best information available in the circumstances. The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels. The three levels of the fair value hierarchy are defined as follows:

 

Level 1 Inputs are quoted prices in active markets for identical assets or liabilities as of the reporting date.
Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, as of the reporting date.
Level 3 Unobservable inputs for the asset or liability that reflect management’s own assumptions about the assumptions that market participants would use in pricing the asset or liability as of the reporting date.

 

The summary of fair values and changing values of financial instruments as of January 1, 2017 (beginning of period) and September 30, 2017 (end of period) is as follows:

 

Instrument   Beginning of Period     Change      End of  Period     Level     Valuation Methodology
Derivative liabilities   $ 754,000     $ 408,397     $ 1,162,397       3     Stochastic Process Forecasting Model

 

Please refer to Note 16 for disclosure and assumptions used to calculate the fair value of the derivative liabilities.

 

J. RESEARCH AND DEVELOPMENT

 

Research and development activities for product development are expensed as incurred. Costs for the three and nine months ended September 30, 2017 and 2016 were $65,544, $162,462, $57,977 and $131,827, respectively.

 

K. STOCK BASED COMPENSATION

 

The Company applies the fair value method of ASC 718, “Share Based Payment”, in accounting for its stock based compensation. This standard states that compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. The Company values stock based compensation at the market price for the Company’s common stock as of the date in which the obligation for payment of services is incurred.

 

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L. COMMON STOCK OPTIONS AND PURCHASE WARRANTS

 

The Company accounts for common stock options and purchase warrants at fair value in accordance with ASC 815-40, “Derivatives and Hedging”. The Black-Scholes option pricing valuation method (“BSM option pricing model”) is used to determine fair value of these warrants consistent with ASC 718, “Share Based Payment”. Use of this method requires that the Company make assumptions regarding stock volatility, dividend yields, expected term of the warrants and risk-free interest rates.

 

The Company accounts for transactions in which services are received from non-employees in exchange for equity instruments based on the fair value of the equity instruments exchanged, in accordance with ASC 505-50, “Equity Based payments to Non-employees”.

 

M. ORIGINAL ISSUE DEBT DISCOUNT

 

The original issue discount (OID) related to notes payable is amortized by the effective interest method over the repayment period of the notes. The unamortized OID is represented as a reduction of the amount of the notes payable.

 

N. PROPERTY AND EQUIPMENT

 

Property and equipment are recorded at cost. Depreciation is computed on the straight-line method, based on the estimated useful lives of the assets as follows:

 

   Years 
Display equipment for trade shows   3 
Leasehold improvements and furniture and fixtures   10 - 15  
Shop equipment   7 
Computers   3 

 

Expenditures for maintenance and repairs are charged to operations as incurred.

 

O. IMPAIRMENT OF LONG LIVED ASSETS

 

The Company continually evaluates the carrying value of intangible assets and other long-lived assets to determine whether there are any impairment losses. If indicators of impairment are present and future cash flows are not expected to be sufficient to recover the assets’ carrying amount, an impairment loss would be charged to expense in the period identified. To date, the Company has not recognized any impairment charges.

 

P. RECENT ACCOUNTING PRONOUNCEMENTS

 

Recent FASB issuances:

 

Update 2017-03—Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (SEC Update). The Company is still in the process of evaluating the effect of adoption on its financial position, results of operations and cash flows and the effective date of application is 2018.

 

Update 2017-01—Business Combinations (Topic 805): Clarifying the Definition of a Business

 

The Company is still in the process of evaluating the effect of adoption of theses Updates on its financial position, results of operations and cash flows and the effective date of application is 2018.

 

Modified in 2016- Revenue Recognition –ASC 606

 

In May 2014, and subsequently modified, the FASB issued ASC 606 Revenue from Contracts with Customers as guidance on the recognition of respective revenue from contracts Revenue recognition will depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The principle sections of the guidance related to: 1. Determine if there is a contract.  2. Identify the performance obligations 3. Establish the contract price 4. Allocate the contract price to the various phases of the contract

 

The implementation guidance permits two methods: retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). Commencing in 2018 the company will adopt the guidance and apply the cumulative catch-up transition method. The transition adjustment to be recorded to stockholders’ equity upon adoption of the new standard is not expected to be material.

 

9

 

 

Q. CONCENTRATION OF RISK

 

The Company does not have any off-balance sheet concentrations of credit risk. The Company expects cash and accounts receivable to be the two assets most likely to subject the Company to concentrations of credit risk. The Company’s policy is to maintain its cash with high credit quality financial institutions to limit its risk of loss exposure.

 

As of September 30, 2017, the Company maintained its cash in one quality financial institution. The Company has not experienced any losses in its bank accounts through September 30, 2017. The Company purchases raw material and components from multiple sources, none of which may be considered a principal or material supplier. If necessary, the Company could replace these suppliers with minimal effect on its business operations.

 

R. DERIVATIVE FINANCIAL INSTRUMENTS

 

Accounting and reporting standards for derivative instruments and for hedging activities were codified by ASC Topic 815, Derivatives and Hedging (“ASC Topic 815”). It requires that all derivatives be recognized in the balance sheet and measured at fair value. Gains or losses resulting from changes in the fair value of derivatives are recognized in earnings or recorded in other comprehensive income (loss) depending on the purpose of the derivatives and whether they qualify and have been designated for hedge accounting treatment. The Company has derivative liabilities pursuant to convertible debt and common stock warrants, and has recognized net expenses on the condensed consolidated statements of operations. The Company does not have any derivative instruments for which it has applied hedge accounting treatment.

 

NOTE 2 - GOING CONCERN

 

As shown in the accompanying condensed consolidated financial statements, the Company incurred substantial operating and other losses and expenses of approximately $1.5 million and $0.9 for the nine months ended September 30, 2017 and 2016 respectively. The cumulative deficit since inception is approximately $62.3 million. The Company has a working capital deficit at September 30, 2017 of approximately $4.9 million. These factors raise substantial doubt about the Company’s ability to continue as a going concern. There is no guarantee whether the Company will be able to generate enough revenue and/or raise capital to support its operations. This raises substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on management’s plans which include implementation of its business model to generate revenue from development contracts, licenses and product sales, and continuing to raise funds through debt or equity raises. The Company will also likely continue to rely upon related-party debt or equity financing.

 

The condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. The Company is currently raising working capital to fund its operations via private placements of debt, advance contract payments (deferred revenue), advances from and deferred payments to related parties and the timing of payment of accrued liabilities.

 

NOTE 3 – INVENTORY, NET

 

Inventory principally consists of raw material to develop an engine.

 

Inventory, net consists of

 

   September 30, 2017   December 31, 2016 
Raw materials  $27,498   $26,667 
Total  $27,498   $26,667 

 

We provide estimated provisions for the realization, valuation and obsolescence of our inventories, including adjustments to market, based on various factors, including the age of such inventory and our management’s assessment of the need for such provisions. We look at historical inventory aging and usage reports and margin analyses in determining our provision estimate.

 

10

 

 

NOTE 4 – PROPERTY AND EQUIPMENT, NET

 

Property and equipment consists of the following:

 

   September 30, 2017   December 31, 2016 
Display equipment for trade shows  $6,270   $6,270 
Leasehold improvements and furniture and fixtures   93,922    93,922 
Equipment and computers   202,578    202,578 
Total   302,770    302,770 
Accumulated depreciation   (230,253)   (209,498)
Net property and equipment  $72,517   $93,272 

 

Depreciation expense for the nine months ended September 30, 2017 and 2016 was $20,755 and $25,924, respectively.

 

NOTE 5 – PATENTS, TRADEMARKS AND COPYRIGHTS

 

Patents, trademarks and copyrights consist of legal fees paid to file and perfect these claims. The net balances as of September 30, 2017 and December 31, 2016 were $159,392 and $178,478, respectively. For the nine months ended September 30, 2017 and for the year ended December 31, 2016, the Company capitalized $0 and $0, respectively, of expenditures related to these assets. As of September 30, 2017, the Company had 15 patents issued on its technology both in the U.S. and internationally, and six trademarks in the U.S.

 

Patents, trademarks and copyrights are amortized over the life of the intellectual property which is 15 years. Amortization expenses for the nine months ended September 30, 2017 and 2016 were $19,086 and $26,316, respectively.

 

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NOTE 6 – NOTES AND OTHER LOANS PAYABLE

 

A. NON-RELATED PARTIES

 

A summary of non-related party notes and other loans payable is as follows:

 

    September 30, 2017     December 31, 2016  
             
12% convertible notes payable, maturing at various dates from November 2013 through April 2016 (A)   $ 57,920     $ 42,951  
                 
10% convertible note payable, monthly payments commencing in December 2013 through July 2014 (B)     19,963       19,963  
                 
10% convertible notes payable maturing at various dates from May 2015 through February 2016 (C)     76,000       76,000  
                 
10% convertible notes payable, maturing at various dates from December 2015 through January 2016 (D)     26,192       29,303  
                 
10% convertible notes payable maturing at various dates from February 2015 through August 2015 ( F )     117,800       116,200  
                 
12% convertible notes payable, maturing at various dates from April 2015 through May 2015 ( G )     60,000       85,000  
10% note payable maturing January 2017           46,000  
10% note payable, maturing Feb 3, 2018     50,000       50,000  
                 
Various notes payable, maturing 2016 and 2017     22,957       13,500  
                 
Note payable, maturing Oct. 2016 (H)     27,000       27,000  
                 
Demand Note     -       6,725  
                 
Total non-related party notes-current portion   $ 457,832     $ 512,642   

 

  (A) Notes issued net of 10% original discount (fully amortized). This note is in default.
     
  (B)

Note issued net of original discount (fully amortized). Effective May 8, 2015, the Company is subject to a default judgment of approximately $175,000, plus subsequent penalty interest for non-payment of convertible debt and interest. The Company is negotiating a reduced settlement. Unpaid interest, default penalties and default interest are included in accounts payable and accrued liabilities.

     
  (C) Notes issued net of discount from derivative liabilities (fully amortized). At September 30, 2017, the Company held approximately 97 million shares in reserve to cover the potential conversion of this note into common stock pursuant to debt covenants. This note is in default.
     
  (D) Notes issued net of discount (fully amortized). This note is in default.
     
  (F) Notes issued net of discount from derivative liabilities (fully amortized). At September 30, 2017, the Company held 1 billion shares in reserve to cover the potential conversion of this note into common stock pursuant to debt covenants. This note is in default.
     
  (G) Notes issued net of discount from derivative liabilities (fully amortized). The Company is subject to litigation judgment of approximately $150,000, plus subsequent penalty interest for non–payment. Company has arranged a settlement. Unpaid interest, default penalties and default interest are included in accounts payable and accrued liabilities.
     
  (H) Interest of $3,000 to be paid in 1,500,000 shares of restricted common stock. This note is in default.

 

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B. RELATED PARTIES

 

A summary of related party notes and other loans payable is as follows:

 

   September 30, 2017  December 31, 2016
       
6% demand loans per Operations Agreement with Schoell Marine Inc., a company owned by Cyclone’s Chairman and controlling shareholder (A)  $211,874  $169,751
6% non-collateralized loans from officer and shareholder, payable on demand.   94,584   107,842
12% non-collateralized loans from officer and shareholder, payable on demand   25,042   21,044
Accrued Interest   53,152   95,123
Total current related party notes, inclusive of accrued interest  $384,652  $393,760

 

  (A) This note arose from rent, equipment leases, services and salaries incurred by Schoell Marine on behalf of the Company. The Schoell Marine note bears an interest rate of 6% and repayments occur as cash flow of the Company permits.

 

NOTE 7 – RELATED PARTY TRANSACTIONS- DEFERRED COMPENSATION

 

Included in accounts payable and accrued expenses - related parties as of September 30, 2017 and December 31, 2016 are $796,475 and $545,225 respectively, of accrued and deferred officers’ salaries compensation which may be paid as funds are available. These are non-interest bearing and due on demand.

 

NOTE 8 – PREFERRED STOCK

 

The Series B Preferred Stock is majority voting stock and is held by the two co-founders of the Company. Ownership of the Series B Preferred Stock shares assures the holders thereof a 51% voting control over the common stock of the Company. The 1,000 Series B Preferred Stock shares are convertible on a one-for-one basis with the common stock in the instance the Company is merged, sold or otherwise dissolved.

 

NOTE 9 – STOCK TRANSACTIONS

 

The Company authorized an increase of Common Stock to 6 Billion shares in the last quarter of 2017. This is a requirement by debt covenants to cover old convertible debt. This is required as the stock price has fallen and shares have to be available at 4 times the conversion rate.

 

During the nine months ended September 30, 2017, the Company:

 

  a- Amortized (based on vesting) $2,568 of common stock options for employee services.
     
  b- Issued approximately 585.7 million shares of common stock pursuant to conversions of approximately $418,000 of notes payable, accrued liabilities and related interest
     
  c- The Company issued 6.4 million shares of common stock valued at approximately $5,000 for services  
     
  d- Converted $134,877 of derivatives associated with certain debt that was converted into common stock.

 

NOTE 10 – STOCK OPTIONS AND WARRANTS

 

A. COMMON STOCK OPTION

 

Per the employment contracts with certain officers, for the nine months ended September 30, 2017, the company issued 1,350,000 common stock options, valued at $1,260 (pursuant to the Black Scholes valuation model) that are exercisable into shares of common stock at an average exercise price of $.0009 and with a maturity life of 10 years. For the nine months year ended September 30, 2017, the amortization of stock options was $2,568 and the unamortized balance was $1,089.

 

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A summary of the common stock options for the period from December 31, 2016 through September 30, 2017 follows:

 

    Number Outstanding     Weighted Avg. Exercise Price     Weighted Avg. Remaining Contractual Life (Years)  
Balance, December 31, 2016     14,030,000     $ .0960       5.3  
Options issued     1,350,000       .0009       9.75  
Options exercised     -       -       -  
Expired     -       -       -  
Balance, September 30 , 2017     15,380,000     $ .0878       5.0  

 

The vested and exercisable options at period end follows:

 

   Exercisable/ Vested Options Outstanding   Weighted Avg. Exercise Price   Weighted Avg. Remaining Contractual Life (Years) 
Balance September 30 , 2017   14,930,000   $.085    4.86 
Additional vesting by December 31, 2017   450,000    .0024    9.0 

 

The fair value of new stock options, granted using the Black-Scholes option pricing model was calculated using the following assumptions:

 

   Nine Months Ended September 30, 2017   Nine Months Ended September 30, 2016 
Risk free interest rate   1.5-1.62%    .71-.88% 
Expected volatility   122-134%    136-139% 
Expected term   3    3 
Expected dividend yield   0%   0%
Average value per options and warrants   $ .0004-.0015    $ .0019-.0020 

 

Expected volatility is based on historical volatility of the Company’s common stock price. Short Term U.S. Treasury rates were utilized at the risk-free interest rate. The expected term of the options and warrants was calculated using the alternative simplified method newly codified as ASC 718 “Accounting for Stock Based Compensation,” which defined the expected life as the average of the contractual term of the options and warrants and the weighted average vesting period for all issuances.

 

B. COMMON STOCK WARRANTS

 

A summary of outstanding vested warrant activity for the period from December 31, 2016 to September 30, 2017 follows:

 

   Number Outstanding   Weighted Average Exercise Price   Weighted Average Remaining Contractual Life (Years) 
Common Stock Warrants               
Balance, December 31, 2016   500,000   $.08    .67 
Warrants issued   -    -    - 
Warrants expired   -    -    - 
Warrants expired   (500,000)   -    - 
Balance, September 30, 2017   -   $-    - 

 

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NOTE 11 – INCOME TAXES

 

A reconciliation of the differences between the effective income tax rates and the statutory federal tax rates for the Nine months ended September 30, 2017 and 2016 are as follows:

 

   Nine Months ended
September 30 , 2017
   Amount   Nine Months ended
September 30, 2016
   Amount 
Tax benefit at U.S. statutory rate   34%  $273,037    34%  $233,075 
State taxes, net of federal benefit   4%   32,122    4%   27,421 
Change in valuation allowance   (38)%  $(305,159)   (38)%  $(260,496)
         -         - 

 

The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at September 30, 2017 and December 31, 2016 consisted of the following:

 

Deferred Tax Assets  September 30, 2017   December 31, 2016 
Net Operating Loss Carry-forward  $10,981,661   $10,577,607 
Deferred Tax Liabilities – Accrued Officers’ Salaries   (978,681)   (900,306)
Net Deferred Tax Assets   10,002,980    9,677,301 
Valuation Allowance   (10,002,980)   (9,677,301)
Total Net Deferred Tax Assets  $-   $- 

 

As of September 30, 2017, the Company had a net operating loss carry forward for income tax reporting purposes of approximately $23.6 million that may be offset against future taxable income through 2031. Current tax laws limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs. Therefore, the amount available to offset future taxable income may be limited. No tax asset has been reported in the financial statements because the Company believes there is a 50% or greater chance the carry forwards will expire unused. Accordingly, the potential tax benefits of the loss carry forwards are offset by a valuation allowance of the same amount.

 

NOTE 12- LEASE OBLIGATIONS

 

A. LEASE ON FACILITIES

 

The Company leases a 6,000-square foot warehouse and office facility located at 601 NE 26th Court in Pompano Beach, Florida. The lease period ended December 2016 and the current lease is monthly with a 3% rate increase. Occupancy costs for the nine months ended September 30, 2017 and 2016 were $46,038 and $48,200, respectively.

 

B. CAPITALIZED LEASE OBLIGATIONS

 

Total lease payments made for the nine months ended September 30, 2017 were $0. The company is in default on its remaining capitalized lease with Leaf Capital Funding, LLC.

 

Effective October 13, 2017 the Company was subject to a summary judgment of $ 37,278 plus attorney fees for non-payment of 3 capitalized leases from Marlin Business Bank. This amount is including $11,379 of past due lease payments, accelerated lease payments, late charges and other fees. The $37,278 has been reflected in accrued expenses with an appropriate reduction of the capitalized lease liability.

 

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In the third quarter of 2017, the company recognized a summary judgment of $7,266 plus accrued interest for non-payment of a capitalized lease from Navitas Lease Corp. This amount is including $4,177 of past due lease payments, accelerated lease payments, interest expense, late charges and other fees. The $7,266 has been reflected in accrued liabilities with an appropriate reduction of the capitalized lease liability.

 

The balance of capitalized lease obligations payable at September 30, 2017 and December 31, 2016 was $5,522 and $39,848, respectively. Future lease payments are:

 

2017  $5,522 
2018   0 
2019   0 
2020   0 
2021   0 
   $5,522 

 

NOTE 13 – COMMITMENTS AND CONTINGENCIES

 

The Company has employment agreements with Harry Schoell, Chairman and CTO (previously, CEO), at $150,000 per year and Frankie Fruge, President, at $120,000 per year; (collectively, the “Executives”). These agreements provide for a term of three (3) years from their Effective Date (July 2007 with automatically renewing successive one-year periods starting on the end of the second anniversary of the Effective Date. If the Executive is terminated “without cause” or pursuant to a “change in control” of the Company, as both defined in the respective agreements, the Executive shall be entitled to (i) any unpaid Base Salary accrued through the effective date of termination, (ii) the Executive’s Base Salary at the rate prevailing at such termination through 12 months from the date of termination or the end of his Term then in effect, whichever is longer, and (iii) any performance bonus that would otherwise be payable to the Executive were he/she not terminated, during the 12 months following his or her termination.

 

Since inception of the company, these officers have not been paid any salary

 

NOTE 14 –CONSOLIDATED SUBSIDIARY

 

In 2012, the Company established a 100% owned subsidiary (renamed) Cyclone Performance LLC. The purpose of Cyclone Performance is to build, test and run a vehicle utilizing the Company’s engine. In the last quarter of 2012, the Company sold a 5% equity investment to an unrelated investor for $30,000. Subsequent to December 31, 2012, this 5% equity investment was acquired by a corporate officer of the Company. Losses of the subsidiary are currently fully borne by the Company, as there is no guarantee of future profits or positive cash flow of the subsidiary. As of September 30, 2017, the cumulative unallocated losses to the non-controlling interests of this subsidiary of $953 are to be recovered by the parent from future subsidiary profits if they materialize.

 

NOTE 15 – RECEIVABLES, DEFERRED REVENUE AND BACKLOG

 

As of September 30, 2017, total backlog for prototype engines to be delivered was $400,000 from the Combilift agreement, of which $100,000 has been paid and has been recorded as deferred revenue. In 2016, three (3) other customers advanced $206,950 as deposits towards payments on $355,000 of contracts for engines currently estimated to be delivered during 2018 and license deposits. In the third quarter of 2017, the company recognized $150,000 of deferred revenue from FSDS upon the delivery of the engine design and documentation (as per the contract). The company also delivered the first of 2 engines for evaluation and testing. The Danish military had provided funds to FSDS for the militarization of the Cyclone engine project. FSDS has been placed under Danish government receivership and the Company has reached out to the Danish Ministry of Defense and other Danish military contractors to complete the contract.

 

NOTE 16 – DERIVATIVE FINANCIAL INSTRUMENTS

 

In the second quarter of 2017 we again entered into additional convertible debt agreements. The current convertible notes have conversion prices into common stock that ranged from a discount of 30% to 45% of the lowest closing prices in the 10 to 20 trading days prior to the conversion. Under provisions of ASC Topic 815-40, this conversion feature triggered derivative accounting treatment because the convertible note was convertible into an indeterminable number of shares of common stock. The fair value of the embedded conversion option was required to be presented as a derivative liability and adjusted to fair value at each reporting date, with changes in fair value reported in the condensed consolidated statements of operation.

 

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In the Nine months ended September 30, 2017, the Company recorded a $118,076 non-cash charge to interest expense (reflective of debt discount amortization), and a non-cash charge of $329,366 of derivative losses related to adjusting the derivative liability to fair value. At September 30, 2017, the derivative related fair value of debt and related convertible liabilities was $1,162,397.

 

NOTE 17 – LlTIGATION

 

Effective May 8, 2015, the Company is subject to a default judgment of approximately $175,000, plus subsequent penalty interest for non-payment of convertible debt and interest. Tonaquint Inc. filed and received a judgment and the Company is negotiating a reduced settlement. As of September 30, 2017, outstanding interest, default interest and default judgment penalties are included in accrued liabilities.

 

The Company is subject to litigation of approximately $150,000, plus subsequent penalty interest for non-payment of a liability. JSJ filed and received a judgment and the Company has arranged a settlement. As of September 30, 2017, outstanding interest, default interest and default judgment penalties are included in accrued liabilities.

 

Effective October 13, 2017 the Company was subject to a summary judgement of $ 37,278 plus attorney fees for nonpayment of 3 capitalized leases from Marlin Buesinee Bank. This amount includes $11,379 of past due lease payments, accelerated lease payments, late charges and other fees. The $37,278 has been reflected in accrued liabilities with an appropriate reduction of capitalized lease liability.

 

In the third quarter of 2017 the company recognized a summary judgment of $7,266 plus accrued interest for non-payment of a capitalized lease from Navitas Lease Corp. This amount is including $4,177 of past due lease payments, accelerated lease payments, interest expense, late charges and other fees. The $7,266 has been reflected in accrued liabilities with an appropriate reduction of capitalized lease liability.

 

NOTE 18 – SUBSEQUENT EVENTS

 

Subsequent to the fourth quarter of 2017, the Company engaged in the following activities:

 

a- FSDS, is under Danish government receivership for reorganization. Prior to this receivership, the Danish military had provided funds FSDS to complete the militarization of the Cyclone engine project. We have reached out to the Danish Ministry of Defense and various other Danish military contractors to complete this project.

 

b-The Company issued approximately 335 million shares of common stock pursuant to conversions of debts and related interest and approximately 282 million shares to satisfy accrued liabilities for consulting services. 

 

c- The Company authorized an increase of Common Stock to 6 Billion shares. This is a requirement by debt covenants to cover old convertible debt. This is required as the stock price has fallen and shares have to be available at 4 times the conversion rate.

 

d. Plunkett Power has paid for the changes and updates of the CAD drawings for the production models of the Mark 1 ( 9 HP) and Mark 3 ( 25 HP) engines. The Company has been in meetings over the last 5 months with the production engineers for completion of the updated production engine models.

 

e.-Our engines have been updated and now serve both as a waste heat engine and an efficient Rankin Cycle engine effectively reducing the cost to manufacture. The waste heat and solar engine models are expected to be ready for sales by the end of the first quarter 2018 and for integration into the TAW generator system.

 

f.- The Company is in the process of evaluating the updating and / or filing of new patents to protect our revised production models.

 

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ITEM 2. 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 development and commercialization of our technology;
     
  changes in existing and potential relationships with 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 registration, 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 registration. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this registration may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements.

 

Overview

 

The Company is engaged in the research and development of all-fuel, eco-friendly engine and parts technologies for integration and use within customers systems. The company anticipates that it will concentrate on the following engine models (power ratings) : Mark 1 (2.7 KW- 6 HP), Mark 3 (12 KW-22 HP) and the Mark 5 ( 60 KW- 100 HP). Additionally, revenue is anticipated via sales of component parts and licensing fees.

 

The company has progressed from development of proof of concept engines to the enhanced design of production models which promote manufacturing efficiency, engine application dynamics and durability.

 

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Results of Operations

 

Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016

 

Revenue. In the quarter ended September 30, 2017 the Company recognized $150,000 pursuant to delivery of engine design and building documentation from the FSDS contract and a $25,000 licenses fee from Phoenix Power Group. There were no revenues in the quarter ended September 30, 2016.

 

Gross Profit. In the quarter ended September 30, 2017 the gross profit was attributable to the above revenue recognition. In the quarter ended September 30, 2016, the company had no gross profit.

 

Operating Expenses.

 

Operating expenses incurred for the quarter ended September 30, 2017 were $385,816 as compared to $329,925 for the same period in the previous year, an increase of $55,891 or 17%. The majority of the variance was due to higher General and Administrative expenses of $49,750 (18%) from consulting and professional fees, and higher R&D expenses of $7,567 (13%) from reduced staffing allocations to WIP inventory. On August 1, 2017 the Company executed two one-time consulting payments in the amount of one hundred million shares each. The consulting agreements are known as the “Tendrich Consulting Agreement” dated August 1, 2017 and the “Bornstein Consulting Agreement dated August 1, 2017.

 

Operating Loss. The operating loss for the quarter ended September 30, 2017 was $210,954 and the operating loss for the quarter ended September 30, 2016 was $329,925 respectively, a favorable variance of $118,971 or 36%, due to the factors outlined above.

 

Other Income (Expense). Net other income for the quarter ended September 30, 2017 was $5,590 versus a net other expense of $32,914 for the same period in the prior year, a variance of 37,961.

 

The 2017 net other income include: $72,511 of interest expense, and $78,101 of non-cash derivative fair value accounting related credits. The 2016 other expenses included $32,914 of interest expense

 

Net Loss and Loss per Share. The net loss for the quarter ended September 30, 2017 was $205,364, compared to a net loss of $362,296 for the same period in the previous year. The reduced loss of $156,932 or 43% is related to the factors outlined above. The net loss per weighted average share was $0.00 for both the current quarter and the comparable quarter of the prior year.

 

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30 , 2016

 

Revenue. In the three quarters ended September 30, 2017 the Company recognized $150,000 pursuant to delivery of engine design and building documentation from the FSDS contract and a $25,000 licenses fee from the Phoenix Power Group. The Company had no revenues in the three quarters ended September 30, 2016.

 

Gross Profit. In the nine months ended September 30, 2017 the gross profit of $ 174,862 was attributable to the above revenue recognition. In the nine months ended September 30, 2016, the company had no gross profit.

 

Operating Expenses.

 

Operating expenses incurred for the nine months ended September 30, 2017 were $1,026,769 as compared to $795,122 for the same period in the previous year, an increase of $231,647, or 29%. The majority of the variance was due to a higher General and Administrative expenses of $201,625 (31%) from consulting and professional fees and higher R&D expenses of $30,635 (23%) attributable to reduced staffing allocations to WIP inventory.

 

Operating Loss. The operating losses for the nine months ended September 30, 2017 and 2016 were $851,907 and $795,122, respectively, an unfavorable variance of $56,795, or 7.1%, due to the factors outlined above.

 

Other Expense. Other expense for the nine months ended September 30, 2017 was $658,834 versus $105,004 for the same period in the prior year, an increase of $553,830 or 527%

 

The 2017 other expenses include a $70,934 loss on debt conversion via common stock, $258,534 of interest expense and $329,366 of non-cash derivative fair value accounting charges. The 2016 other expenses included $95,356 of interest expense, a $57,383 loss on the settlement of a liability pursuant to payment in common stock, net of a $44,000 gain on the sale of the Q2 Power investment

 

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Net Loss and Loss per Share. The net loss for the nine months ended September 30, 2017 was $1,510,741, compared to a net loss of $900,126 for the same period in the previous year. The increased loss of $610,615 or 68% is related to the other factors outlined above. The net loss per weighted average share was $0.00 for both the current Nine months and the comparable period of the prior year.

 

Liquidity and Capital Resources

 

At September 30, 2017, the net working capital deficiency was $4,925,156 as compared to a deficiency of $3,989,165 at December 31, 2016, a variance of $935,991 or 24%.

 

For the nine months ended September 30, 2017, cash decreased by $591. This is reflective of funds used by the net loss of $1,510,741 and recognition of $150,000 deferred revenue. This was offset by funds provided by debt proceeds of $154,650, higher accounts payable and accrued expenses of $698,255 and a net increase of $242,142 in related party notes payables and accrued expenses. Non-cash charges included a $70,934 loss recognized by settling debt with common stock and $447,443 of non-cash charges from fair value derivative accounting and derivative expense.

 

For the nine months ended September 30, 2016, cash increased by $1,387. This is reflective of funds used by the net loss of $900,126 and an increase of $84,007 in inventory (WIP labor and materials). This was offset by funds provided by higher accounts payable and accrued expenses of $251,250, an increase of $416,631 in related party payables, accrued expenses and notes payable, a $115,700 increase in customer contract deposits recorded in deferred revenue and $90,725 in note proceeds

 

Cash Flow Management Plan

 

As shown in the accompanying condensed financial statements, the Company incurred substantial operating losses and other for the nine months ended September 30, 2017 of approximately $1.5 million. Cumulative losses since inception are approximately $62.3 million. The Company has a working capital deficit at September 30, 2017 of approximately $4.9 million. There is no guarantee whether the Company will be able to support its operations on a long-term basis. This raises doubt about the Company’s ability to continue as a going concern. If additional funds cannot be raised or otherwise generated, the Company may be forced to reduce staff, minimize its research and development activities, or in a worst-case scenario, shut-down operations.

 

Through early 2018, the company projects deposits on purchase orders. Sales prices for these engines were delayed until final purchase costs were received from our manufacturers and integrators.

 

An engine for the FSDS contract had been delivered in the third quarter and the final engine delivery is in waiting for the outcome of the FSDS reorganization. The remaining $75,000 balance of the contract is contractually required upon delivery.

 

IBES is negotiating to purchase 5 more beta site projects with anticipated additional revenue from sales of $80,000.

 

We anticipate delivering manufactured products thru our integrators and manufacturers by the second quarter of 2018. The Company has signed three contracts for deliverables and anticipates purchase orders for manufactured engines by end of the first quarter 2018

 

Additionally, we have potential contracts in various stages of negotiation that could generate another $2 million in revenue over the following 12 to 24 months. We cannot guarantee that we will be successful in closing these new contracts, but we are cautiously optimistic that these or other opportunities will materialize in the coming quarters.

 

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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 the purpose of 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.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not required for smaller reporting companies.

 

ITEM 4. 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 September 30, 2017.

 

A material weakness can be defined as an insufficiency of internal controls that may result in a more than remote likelihood that a material misstatement will not be prevented, detected or corrected in a company’s financial statements.

 

Based upon that evaluation, our President (Chief Executive Officer) and Chief Financial Officer concluded that our disclosure controls and procedures were not effective, based on the following deficiencies:

 

- Weaknesses in Accounting and Finance Personnel: We have a small accounting staff and we do not have the robust employee resources and expertise needed to meet complex and intricate GAAP and SEC reporting requirements of a U.S. public company. Additionally, numerous adjustments and proposed adjustments have been noted by our auditors. This is deemed by management to be a material weakness in preparing financial statements.
   
- We have written accounting policies and control procedures, but we do not have sufficient staff to implement the related controls. Management had determined that this lack of the implantation of segregation of duties, as required by our written procedures, represents a material weakness in our internal controls.
   
- Internal control has as its core a basic tenant of segregation of duties. Due to our limited size and economic constraints, the Company is 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.

 

The Company has determined that the above internal control weaknesses and deficiencies could result in a reasonable possibility for interim financial statements that a material misstatement will not be prevented or detected on a timely basis by the Company’s internal controls.

 

Management is currently evaluating what steps can be taken in order to address these material weaknesses. As a growing small business, the Company continuously devotes 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. The Company is anticipating correcting deficiencies as funds become available.

 

Changes in Internal Control Over Financial Reporting and Procedures.

 

There were no changes in internal control over financial reporting and procedures from the previous quarter.

 

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

Effective May 8, 2015, the Company is subject to a default judgment of approximately $175,000 plus default interest for non-payment of convertible debt and interest. The Company is seeking to negotiate a reduced settlement.

 

In August 2015, the Company is subject to litigation of approximately $150,000 plus default interest for non- payment of a liability. The Company has arranged a settlement.

 

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 Buesinee Bank. This amount includes $11,379 of past due lease payments, accelerated lease payments, and late charges and other fees.

 

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, and late charges and other fees.

 

ITEM 1A. RISK FACTORS

 

Not required.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

In the first nine months of 2017 the Company issued approximately 585.7 million shares of common stock in settlement of debt, related accrued interest and accrued liabilities and of approximately $418,000.

 

In the nine months of 2017, the Company issued 6,370,000 shares of restricted common value at $5,096 for services.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

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ITEM 6. EXHIBITS:

 

The Company filed all required exhibits for this period

 

Exhibit

Number

  Description
31.1   Certification of the President (Principal Executive Officer), as required by Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Certification of Principal Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.
32.1   Certification of the President (Chief Executive Officer), as required by Section 906 of the Sarbanes-Oxley Act of 2002.
32.2   Certification of the Chief Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS*   XBRL Instance
101.SCH*   XBRL Taxonomy Extension Schema
101.CAL*   XBRL Taxonomy Extension Calculation
101.DEF*   XBRL Taxonomy Extension Definition
101.LAB*   XBRL Taxonomy Extension Labels
101.PRE*   XBRL Taxonomy Extension Presentation

 

The certification attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

 

* Information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

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SIGNATURES

 

Pursuant to the requirements 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.
   

January 8, 2018

/s/ Frankie Fruge
  Frankie Fruge
  President
  (Principal executive officer)
   

January 8, 2018

/s/ Bruce Schames.
  Bruce Schames
  Chief Financial Officer
  (Principal financial and accounting officer)

 

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