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 June 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 August 11, 2017, there were 1,847,264,078 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	2
Condensed Consolidated Balance Sheets as of June 30, 2017 (unaudited) and December 31, 2016	2
Condensed Consolidated Statements of Operations for the six and three months ended June 30, 2017 and 2016 (unaudited)	3
Condensed Consolidated Statements of Cash Flows for the six months ended June 31, 2017 and 2016 (unaudited)	4
Notes to Condensed Consolidated Financial Statements (unaudited)	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3. Quantitative and Qualitative Disclosures about Market Risk	18
Item 4. Controls and Procedures	18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	19
Item 1A. Risk Factors	19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3. Defaults upon Senior Securities	19
Item 4. Mine Safety Disclosures	20
Item 5. Other Information	20
Item 6. Exhibits	20

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CYCLONE POWER TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

JUNE 30, 2017 AND DECEMBER 31, 2016

(Unaudited)

 

		June 30, 2017				December 31, 2016
ASSETS
CURRENT ASSETS
Cash		$	-			$	591
Inventory, net			27,155				26,667
Other current assets			193				193
Total current assets			27,348				27,451
PROPERTY AND EQUIPMENT
Furniture, fixtures, and equipment			302,770				302,770
Accumulated depreciation			(223,558	)			(209,498	)
Net property and equipment			79,212				93,272
OTHER ASSETS
Patents, trademarks and copyrights			394,980				394,980
Accumulated amortization			(229,226	)			(216,502	)
Net patents, trademarks and copyrights			165,754				178,478
Other assets			7,862				7,862
Total other assets			173,616				186,340
Total Assets		$	280,176			$	307,063
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Bank Overdraft		$	16,883			$	-
Accounts payable and accrued expenses			1,749,627				1,472,851
Accounts payable and accrued expenses-related parties			712,725				545,225
Notes and other loans payable-current portion			476,407				512,642
Derivative liabilities			1,307,001				754,000
Notes and other loans payable-related parties			378,285				393,760
Capitalized lease obligations-current portion			14,312				14,312
Deferred revenue and license deposits			323,826				323,826
Total current liabilities			4,979,066				4,016,616
NON CURRENT LIABILITIES
Capitalized lease obligations-net of current portion			25,536				25,536
Total non-current liabilities			25,536				25,536
Total Liabilities			5,004,602				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 June 30, 2017 and December 31, 2016, respectively.			-				-
Common stock, $.0001 par value, 8,000,000,000 shares authorized, 1,738,246,344 and 1,517,400,273 shares, issued and outstanding June 30, 2017 and December 31, 2016 respectively.			173,823				151,737
Additional paid-in capital			57,210,252				56,915,794
Treasury Stock, 317,000 shares at June 30, 2017 and December 31, 2016 respectively, at cost.			(3,000	)			(3,000	)
Accumulated deficit			(62,134,540	)			(60,828,659	)
Total stockholders’ deficit-Cyclone Power Technologies Inc.			(4,753,465	)			(3,764,128	)
Non controlling interest in consolidated subsidiary			29,039				29,039
Total Stockholders’ Deficit			(4,724,426	)			(3,735,089	)
Total Liabilities and Stockholders’ Deficit		$	280,176			$	307,063

 

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

 

 

CYCLONE POWER TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		Six Months Ended June 30,								Three Months Ended June 30,
		2017				2016				2017				2016
REVENUES		$	-			$	-			$	-			$	-
COST OF GOODS SOLD			-				-				-				-
Gross profit			-				-				-				-
OPERATING EXPENSES
Advertising and promotion			6,652				5,839				6,472				548
General and administrative			537,383				385,509				219,828				194,890
Research and development			96,918				73,850				56,242				39,157
Total operating expenses			640,953				465,198				282,542				234,595
Operating loss			(640,953	)			(465,198	)			(282,542	)			(234,595	)
OTHER (EXPENSE) INCOME
Other (expense)			(70,934	)			(12,969	)			-				(13,469	)
Derivative (expense) income			(407,467	)			2,777				(84,000	)			456
Interest (expense)			(186,023	)			(62,442	)			(136,049	)			(29,614	)
Total other (expense)			(664,424	)			(72,634	)			(220,049	)			(42,627	)
Loss before income taxes			(1,305,377	)			(537,832	)			(502,591	)			(277,222	)
Income taxes			-				-				-				-
Net loss		$	(1,305,377	)		$	(537,832	)		$	(502,591	)		$	(277,222	)
Net loss per common share, basic and diluted		$	(0.00	)		$	(0.00	)		$	(0.00	)		$	(0.00	)
Weighted average number of common shares outstanding			1,589,583,513				1,393,890,683				1,669,513,344				1,403,288,754

 

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

 

 

CYCLONE POWER TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Six Months Ended June 30,
		2017				2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(1,305,377	)		$	(537,832	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			26,784				34,872
Issuance of restricted common stock, options and warrants for services			1,733				987
Loss on debt paid with common stock			70,934				57,383
Loss (gain) from derivative liability-notes payable			400,701				(2,777	)
Issuance of restricted common stock for services			5,096				-
Amortization of derivative debt discount			92,382				11,680
Amortization of prepaid interest expenses via common stock and warrants			-				6,000
Changes in operating assets and liabilities:
(Increase) in inventory			(488	)			(26,005	)
Decrease in other current assets			-				337
Increase in accounts payable and accrued expenses			414,086				203,521
Increase (decrease) in cash overdraft			16,883				(3,221	)
Increase in accounts payable and accrued expenses-related parties			167,500				167,500
Increase in deferred revenue and deposits			-				40,700
Net cash used in operating activities			(109,766	)			(46,855	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash used by investing activities			-				-
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capitalized leases			-				(7,754	)
Proceeds from notes and loans payable			124,650				7,000
Repayment of notes and loans payable			-				(1,500	)
(Decrease) increase in related party notes and loans payable-net			(15,475	)			63,970
Net cash provided by financing activities			109,175				61,716
Net (decrease) increase in cash			(591	)			14,861
Cash, beginning of period			591				-
Cash, end of period		$	-			$	14,861
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Payment of interest in cash		$	-			$	3,379
NON CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of 100,000,000 shares of Common stock for liability settlement		$	49,066			$	-
Issuance of 44,476,071 shares of Common stock for debt and interest settlement		$	34,246			$	-
Issuance of 70,000,000 shares of Common stock for liability settlement		$	123,000			$	-
Issuance of 6,370,000 shares of Common stock for services		$	5,096			$	-
Issuance of 45,730,741 shares of Common stock for liability settlements		$	-			$	24,932
Issuance of 3,000,000 shares of Common stock for services		$	-			$	6,000

 

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

 

 

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 June 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 six months ended June 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 June 30, 2017 and December 31, 2016, the Company maintained cash balances at one financial institution.

 

D. COMPUTATION OF INCOME (LOSS) PER SHARE

 

Net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is not presented as the conversion of the preferred stock and exercise of outstanding stock options and warrants would have an anti-dilutive effect. As of June 30, 2017 and 2016, total anti-dilutive shares amounted to approximately 15.4 and 14.3 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 June 30,2017, the Company does not believe it has any uncertain tax positions that would result in the Company having a liability to the taxing authorities. Interest related to the unrecognized tax benefits is recognized in the consolidated financial statements as a component of income taxes. The Company’s tax returns are subject to examination by the federal and state tax authorities for the years ended 2014 through 2016.

 

F. REVENUE RECOGNITION

 

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

 

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

 

 

G. WARRANTY PROVISIONS

 

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

 

H. INVENTORY

 

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

 

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

 

I. FAIR VALUE OF FINANCIAL INSTRUMENTS

 

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

 

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

 

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

 

Instrument		Beginning of Period				Change				End of Period				Level			Valuation Methodology
Derivative liabilities		$	754,000			$	553,001			$	1,307,001				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 six months ended June 30, 2017 and 2016 were $56,242, $96,918, $39,157 and $73,850, respectively.

 

K. STOCK BASED COMPENSATION

 

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

 

 

L. COMMON STOCK OPTIONS AND PURCHASE WARRANTS

 

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

 

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

 

M. ORIGINAL ISSUE DEBT DISCOUNT

 

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

 

N. PROPERTY AND EQUIPMENT

 

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

 

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

 

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

 

O. IMPAIRMENT OF LONG LIVED ASSETS

 

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

 

P. RECENT ACCOUNTING PRONOUNCEMENTS

 

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting. This addresses the accounting for share-based payment transactions and includes the recognition of the income tax effects of awards that vest or settle as income tax expense and clarification of the presentation of certain components of share-based awards in the statement of cash flows. The Company is still in the process of evaluating the effect of adoption on its financial position, results of operations and cash flows. The effective date of application is 2018.

 

 

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 June 30, 2017, the Company maintained its cash in one quality financial institution. The Company has not experienced any losses in its bank accounts through June 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 $0.6 million and $0.4 for the six months ended June 30, 2017 and 2016 respectively. The cumulative deficit since inception is approximately $62.1 million. The Company has a working capital deficit at June 30, 2017 of approximately $5.0 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:

		June 30, 2017				December 31, 2016
Raw materials		$	27,155			$	26,667
Total		$	27,155			$	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:

		June 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			(223,558	)			(209,498	)
Net property and equipment		$	79,212			$	93,272

 

Depreciation expense for the six months ended June 30, 2017 and 2016 was $14,060 and $17,328, 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 June 30, 2017 and December 31, 2016 were $165,754 and $178,478, respectively. For the six months ended June 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 June 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 six months ended June 30, 2017 and 2016 were $12,724 and $17,544, respectively.

 

 

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:

 

		June 30, 2017				December 31, 2016
12% convertible notes payable, maturing at various dates from November 2013 through April 2016 (A)		$	42,951			$	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)			29,303				29,303
10% convertible notes payable maturing at various dates from February 2015 through August 2015 ( F )			116,200				116,200
12% convertible notes payable, maturing at various dates from April 2015 through May 2015 ( G )			60,000				85,000
10% note payable, maturing Feb 3, 2018			50,000				50,000
Various notes payable, maturing 2016 and 2017			43,150				13,500
Note payable, maturing Oct 14 2016, (I)			27,000				27,000
Demand Note, (H)			6,725				6,725
12% convertible notes payable maturing October 2017 ( J )			708				-
12% convertible notes payable maturing May 2018 ( K )			360				-
8% convertible note payable maturing May 2018 ( L )			4,047				-
Total non related party notes-current portion		$	476,407			$	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 is included in accounts payable and accrued liabilities.
	(C)	Notes issued net of discount from derivative liabilities (fully amortized). At June 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 June 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 is included in accounts payable and accrued liabilities.
	(H)	Note convertible into common stock at a 40% discount to 20 day market average.
	(I)	Interest of $3,000 to be paid in 1,500,000 shares of restricted company common stock This note is in default
	(J)	Note convertible into common stock at a 55% discount to average of three lowest closing prices of previous 20 day market prices. Derivative discount $ 26,792. Note originally issued less $5,000 OID interest.
	(K)	Note convertible at the lower of a 50% discount to the lowest trading price during the previous 20 trading days prior to conversion, or a 50% discount to the lowest trading price during the previous 20 trading days before the date this note was executed. At June 30, 2017, the Company held 900 million shares in reserve to cover the potential conversion of this note into common stock pursuant to debt covenants. Derivative discount $30,640.
	(L)	Note convertible at a 50% discount to the lowest trading price during the previous 20 trading days prior to conversion. Derivative discount $ 25,950.

 

 

B.	RELATED PARTIES

 

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

 

		June 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)		$	155,058			$	169,751
6% non-collateralized loans from officer and shareholder, payable on demand.			96,484				107,842
12% non-collateralized loans from officer and shareholder, payable on demand			21,044				21,044
Accrued Interest			105,699				95,123
Total current related party notes, inclusive of accrued interest		$	378,285			$	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 June 30, 2017 and December 31, 2016 are $712,725 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

 

During the six months ended June 30, 2017, the Company:

 

	a-	Amortized (based on vesting) $1,733 of common stock options for employee services.
	b-	Issued approximately 214.5 million shares of common stock pursuant to conversions of approximately $206,000 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

 

 

NOTE 10 – STOCK OPTIONS AND WARRANTS

 

A. COMMON STOCK OPTIONS

 

Per the employment contracts with certain officers, for the six months ended June 30, 2017, the company issued 900,000 common stock options, valued at $1,080 ( pursuant to the Black Scholes valuation model) ) that are exercisable into shares of common stock at an average exercise price of $.0012 and with a maturity life of 10 years. For the six months year ended June 30, 2017, the amortization of stock options was $1,733 and the unamortized balance was $1,744.

 

A summary of the common stock options for the period from December 31, 2016 through June 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			900,000				.0012				9.9
Options exercised			-				-				-
Expired			-				-				-
Balance, June 30 , 2017			14,930,000			$	.0910				5.1

 

The vested and exercisable options at period end follows:

 

		Exercisable/ Vested Options Outstanding				Weighted  Avg. Exercise Price				Weighted Avg. Remaining Contractual Life (Years)
Balance June 30 , 2017			13,130,000			$	.096				4.7
Additional vesting by Sept. 30, 2017			450,000				.002				9.0

 

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

 

		Six Months Ended June 30, 2017				Six Months Ended June 30, 2016
Risk free interest rate			1.5-1.50%				.71-.86%
Expected volatility			122-134%				136-137%
Expected term			3				3
Expected dividend yield			0	%			0	%
Average value per options and warrants			$ .0009-.0015				$ .0019-.0019

 

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 June 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 cancelled			-				-				-
Balance, June 30, 2017			500,000			$	.08				.17

 

NOTE 11 – INCOME TAXES

 

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

 

		Six Months ended June 30 , 2017				Amount				Six Months ended June 30, 2016				Amount
Tax benefit at U.S. statutory rate			34	%		$	247,704				34	%		$	133,086
State taxes, net of federal benefit			4	%			29,142				4	%			15,657
Change in valuation allowance			(38	)%		$	(276,846	)			(38	)%		$	(148,743	)
							-								-

 

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

 

Deferred Tax Assets		June 30, 2017				December 31, 2016
Net Operating Loss Carry-forward		$	10,886,278			$	10,577,607
Deferred Tax Liabilities – Accrued Officers’ Salaries			(926,431	)			(900,306	)
Net Deferred Tax Assets			9,959,847				9,677,301
Valuation Allowance			(9,959,847	)			(9,677,301	)
Total Net Deferred Tax Assets		$	-			$	-

 

As of June 30, 2017, the Company had a net operating loss carry forward for income tax reporting purposes of approximately $23.5 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 six months ended June 30, 2017 and 2016 were $32,522 and $32,300 respectively.

 

B. CAPITALIZED LEASE OBLIGATIONS

 

Total lease payments made for the six months ended June 30, 2017 were $0. The balance of capitalized lease obligations payable at June 30, 2017 and December 31, 2016 was $39,848 , respectively. Future lease payments are:

 

2017			$	14,312
2018				9,754
2019				8,127
2020				7,655
2021				0
			$	39,848

 

 

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 June 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 June 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 in 2017 and license deposits.

 

NOTE 16 – DERIVATIVE FINANCIAL INSTRUMENTS

 

Pursuant to additional financing, in the year ended December 31, 2016 the Company entered into no convertible note agreements. In the second quarter of 2017 we again entered into additional convertible debt agreements. The current convertible notes have conversion prices into common stock that ranged from a discount of 30% to 45% of the lowest closing prices in the 10 to 20 trading days prior to the conversion. Under provisions of ASC Topic 815-40, this conversion feature triggered derivative accounting treatment because the convertible note was convertible into an indeterminable number of shares of common stock. The fair value of the embedded conversion option was required to be presented as a derivative liability and adjusted to fair value at each reporting date, with changes in fair value reported in the condensed consolidated statements of operation.

 

In the six months ended June 30, 2017, the Company recorded a $85,618 non-cash charge to interest expense (reflective of debt discount amortization), and a non cash charge of $407,467 of derivative losses related to adjusting the derivative liability to fair value. At June 30, 2017, the derivative related fair value of debt and related convertible liabilities was $1,307,001.

 

 

The Company calculates the estimated fair values of the liabilities for derivative instruments at each quarter-end using the BSM option pricing model and 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. Update

 

		3 Months Ended June 30 , 2017				Year Ended December. 31, 2016
Volatility			121% - 277	%			71% - 91	%
Risk Free Rate			1.0% - 1.24	%			.02% -.28	%
Expected Term (years)			.25-1.0	-			0 -1.05
Dividend Rate			0	%			0	%

 

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 June 30, 2017, outstanding interest, default interest and default judgment penalties are included in accrued liabilities.

 

In August 2015, the Company is subject to litigation of approximately $150,000, plus subsequent penalty interest for non -payment of a liability. JSJ filed and received a judgment and the Company has arranged a settlement. As of June 30, 2017, outstanding interest, default interest and default judgment penalties are included in accrued liabilities.

 

NOTE 19 – SUBSEQUENT EVENTS

 

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

 

	a-	Q2 Power transferred it’s exclusive license agreement with Cyclone Power to the Phoenix Power Group. On the transfer, the license transforms from an exclusive to a non-exclusive basis and Phoenix will be authorized to produce the Waste Heat Engine.
	b-	The company delivered an engine to FSDS pursuant to the contract, resulting in the recognition of deferred income of $75,000.
	c-	The Company issued 109,017,734 shares of common stock pursuant to conversions of debts and related interest.

 

 

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.

 

Results of Operations

 

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

 

Revenue. The Company had no revenues in the quarters ended June 30, 2017 and June 30, 2016.

 

Gross Profit. In the quarters ended June 30, 2017 and 2016, the company has no gross profit.

 

Operating Expenses.

 

Operating expenses incurred for the quarter ended June 30, 2017 were $282,542 as compared to $234,595 for the same period in the previous year, an increase of $47,947 or 20%. The majority of the variance was due to higher General and Administrative expenses of $24,938 (13%) from consulting and professional fees, and higher R&D expenses of $ 17,085 (44%) from increased staffing.

 

Operating Loss. The operating losses for the quarters ended June 30, 2017 and 2016 were $282,542 and $234,595, respectively, a variance of $47,947 or 20%, due to the factors outlined above.

 

Other Expense. Other expense for the quarter ended June 30, 2017 was $220,049 versus $42,627 for the same period in the prior year, an increase of $177,422 or 416%.

 

The 2017 other expenses include: $50,431 of interest expense, $85,618 of non cash derivative interest expense and $84,000 of non cash derivative fair value accounting related charges. The 2016 other expenses included $29,614 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.

 

Net Loss and Loss per Share. The net loss for the quarter ended June 30, 2017 was $502,591, compared to a net loss of $277,222 for the same period in the previous year. The increased loss of $225,369 or 81% is related to the other 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.

 

 

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30 , 2016

 

Revenue. The Company had no revenues in the six months ended June 30, 2017 and June 30, 2016.

 

Gross Profit. In the six months ended June 30, 2017 and 2016, the company has no gross profit.

 

Operating Expenses.

 

Operating expenses incurred for the six months ended June 30, 2017 were $640,953 as compared to $465,198 for the same period in the previous year, an increase of $175,755 or 38%. The majority of the variance was due to a higher General and Administrative expenses of $151,874 (39%) from consulting and professional fees and higher R&D expenses of $23,068 (31%) attributable to re staffing.

 

Operating Loss. The operating losses for the six months ended June 30, 2017 and 2016 were $640,953 and $465,198, respectively, a variance of $175,755 or 38%, due to the factors outlined above.

 

Other Expense. Other expense for the six months ended June 30, 2017 was $664,424 versus $72,634 for the same period in the prior year, an increase of $591,790 or 815%.

 

The 2017 other expenses include a $70,934 loss on debt conversion via common stock, $100,405 of interest expense and $493,085 of non cash derivative fair value accounting and derivative interest expense. The 2016 other expenses included $62,442 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

 

Net Loss and Loss per Share. The net loss for the six months ended June 30, 2017 was $1,305,377, compared to a net loss of $537,832 for the same period in the previous year. The increased loss of $767,545 or 143% is related to the other factors outlined above. The net loss per weighted average share was $0.00 for both the current six months and the comparable period of the prior year.

 

Liquidity and Capital Resources

 

At June 30, 2017, the net working capital deficiency was $4,951,718 as compared to a deficiency of $3,989,165 at December 31, 2016, an unfavorable variance of $962,553 or 24%.

 

For the six months ended June 30, 2017, cash decreased by $591. This is reflective of funds used by the net loss of $1,305,377 which was offset by funds provided by debt proceeds of $124,650, higher accounts payable and accrued expenses of $414,086 and a net increase of $152,025 in related party notes payables and accrued expenses. Non cash charges were a $70,934 loss recognized by settling debt with common stock and $493,085 of non cash charges from fair value derivative accounting and derivative expense.

 

For the six months ended June 30, 2016, cash increased by $14,861. This is reflective of funds used by the net loss of $537,832 and an increase of $26,005 in inventory. This was offset by funds provided by higher accounts payable and accrued expenses of $203,521, an increase of $231,470 in related party payables, accrued expenses and notes payable and a $40,700 increase in customer contract deposits recorded in deferred revenue.

 

 

Cash Flow Management Plan

 

As shown in the accompanying condensed financial statements, the Company incurred substantial operating losses and other for the six months ended June 30, 2017 of approximately $1.3 million. Cumulative operating and other losses since inception are approximately $29.0 million and non cash derivative losses are $33.1 million. The Company has a working capital deficit at June 30, 2017 of approximately $5.0 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.

 

In the latter half of 2017, the company projects $300,000 in revenue from the completion of the Combilift Mark 5 contract. An engine for the FSDS contract has been delivered in the third quarter and the final engine is anticipated to be delivered and accepted prior to year end. 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 fourth quarter of 2017. The Company has signed three contracts for deliverables and anticipates purchase orders for manufactured engines by end of third quarter of 2017.

 

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.

 

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 June 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 misstatements 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.

 

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.

 

ITEM 1A. RISK FACTORS

 

Not required.

 

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

 

In the first half of 2017 the Company issued approximately 214.5 million shares of common stock in settlement of debt, related accrued interest and accrued liabilities and of approximately $206,000

 

In the first half 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.

 

ITEM 6. EXHIBITS:

 

The Company filed all required exhibits for this period in the Super 10K.

 

Exhibit Number		Description
10.60		Settlement Agreement with Anton and Chia
10.61		License Modification. Agreement and Transfer Consent with Q2 Power
10.62		$31,000 Note from JSJ Investments Inc
10.63		$30,000 Note Union Capital LLC
10.64		$30,000 Back end Note Union Capital LLC
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.

 

 

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.
August 21, 2017	/s/ Frankie Fruge
	Frankie Fruge
	President
	(Principal executive officer)
August 21, 2017	/s/ Bruce Schames.
	Bruce Schames
	Chief Financial Officer
	(Principal financial and accounting officer)