UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934
Cyclone Power Technologies, Inc.
(Exact name of registrant as specified in its charter)
Florida |
| 26-0519058 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
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601 NE 26th Court |
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Pompano Beach, Florida |
| 33064 |
(Address of principal executive offices) |
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With copy to:
Joel D. Mayersohn, Esq.
Roetzel & Andress
350 East Las Olas Boulevard, Suite 1150
Fort Lauderdale, Florida 33301
Telephone: (954) 462-4150
Facsimile: (954) 462-4260
Registrants telephone number, including area code: (954) 943-8721
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act: |
| Common Stock |
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| (Title of Class) |
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 filer o |
| Accelerated filer o |
| Non-accelerated filer o |
| Smaller reporting company þ |
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| (Do not check if a smaller reporting company) |
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TABLE OF CONTENTS
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| PAGE |
Item 1. |
| Business | 1 |
Item 1A. |
| Risk Factors | 6 |
Item 2. |
| Management’s Discussion and Analysis and Results of Operation | 11 |
Item 3. |
| Properties | 13 |
Item 4. |
| Security Ownership of Certain Beneficial Owners and Management | 14 |
Item 5. |
| Directors and Executive Officers | 14 |
Item 6. |
| Executive Compensation | 18 |
Item 7. |
| Certain Relationships and Related Transactions, and Director Independence | 19 |
Item 8. |
| Legal Proceedings | 20 |
Item 9. |
| Market Price of and Dividends on Common Equity and Related Stockholder Matters | 20 |
Item 10. |
| Recent Sales of Unregistered Securities | 21 |
Item 11. |
| Description of Registrants Securities to be Registered | 22 |
Item 12. |
| Indemnification of Directors and Officers | 23 |
Item 13. |
| Financial Statements and Supplementary Data | 23 |
Item 14. |
| Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 23 |
Item 15. |
| Financial Statements and Exhibits | 23 |
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ITEM 1. BUSINESS
CAUTION REGARDING FORWARD LOOKING STATEMENTS
This registration 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 including those discussed in Item 1A, uncertainties and assumptions, including, among other things:
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the ability to successfully complete development and commercialization of our technology;
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changes in existing and potential relationships with collaborative partners;
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the ability to retain certain members of management;
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our expectations regarding general and administrative expenses;
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our expectations regarding cash availability and balances, capital requirements, anticipated revenue and expenses, including infrastructure and patent expenditures;
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other factors detailed from time to time in filings with the SEC.
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.
HISTORY
We were originally organized in 2004 as Cyclone Technologies LLLP, a Florida limited liability limited partnership. On July 2, 2007, we completed a reverse merger into Coastal Technologies, Inc. (Coastal), a company originally organized in California in 1971. At the time of this transaction, Coastal was actively engaged in the business of medical software development and sales.
Pursuant to the Coastal transaction, Coastal acquired all of our assets and liabilities in return for 60% of Coastals common stock, and 100% of the newly-created Series A Convertible Preferred Stock and the Series B Preferred Stock. Coastal also changed its name to Cyclone Power Technologies, Inc., and moved its jurisdiction of incorporation to Florida.
As part of the Coastal transaction, the former management and directors of Coastal resigned and placed control of the newly-combined company in the hands of our current management, notably Harry Schoell and Frankie Fruge.
OUR COMPANY
Summary
We are an innovative engineering firm focused on developing environmentally-friendly power sources for the future. Specifically, we have developed and patented the Cyclone Engine, an award-wining thermal engine that is powerful and versatile enough for applications ranging from electric power generation from solar collectors, industrial waste heat and biomass, to all forms of land and sea transportation.
The Cyclone Engine is a heat-regenerative, reciprocating (i.e., piston) Rankine engine. It works on the same thermal dynamic cycle used to generate approximately 80% of the worlds electrical output at coal and nuclear power plants, but in a highly compact, self-contained package.
The benefits of the Cyclone Engine are many, including:
Runs on Renewable and Free Fuel: As an external combustion engine, the Cyclone Engine is capable of running on virtually any liquid, gaseous or solid fuel, including renewable bio-fuels, propane or biomass. It can also run on heat generated from solar thermal collectors or waste heat from industrial processes, flares and even other engines.
Extreme Green Engine: By burning fuel at lower temperatures and lower pressures in a centrifugal chamber that fully incinerates particulate matters, the Cyclone Engine emits far fewer toxic and greenhouse gases than current internal combustion (I/C) engines.
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Highly Efficient: The Cyclone Engine recycles its own energy through multiple heat regenerative processes, and stops burning fuel when power is not needed (such as idling at a stop light). This creates greater well to wheel efficiencies than gas or diesel powered I/C engines.
Powerful and Compact: Unlike batteries or fuel cells, the Cyclone Engine is powerful enough for heavy transportation, and unlike steam engines of the past, the Cyclone Engine is compact with an extremely high power to weight ratio, all contained in a closed-loop so it never needs its working fluid (water) replenished.
Inexpensive to Build and Maintain: By eliminating many subsystems like oil pumps (the engine uses de-ionized water, not motor oil, as its lubricating agent), catalytic converters and complex fuel injectors and automotive transmissions, Cyclone Engine systems are expected to cost less to manufacture, operate and maintain than current gas and diesel powered I/C engines.
Currently three Cyclone Engine models are in different stages of development, with the first engine slated for commencement of production in early 2012. Cyclone has several important contracts with customers that include Raytheon Company, Renovalia Energy, Phoenix Power Group, and leading U.S. auto parts manufacturer TopLine Automotive Engineering.
We received our first patent in the U.S. for the Cyclone Engine in 2006, and since then have received nine other U.S. patents and nine international patents. Cyclone has also received numerous awards, including two Tech Awards from the Society of Automotive Engineers and Popular Sciences 2008 Invention of the Year Award.
Business Model
Our business objective is to design and develop engines that we can manufacture through contracted parties for direct sale to customers, or license our technology to manufacturers and other producers of specialized applications. Our revenue has and will come from:
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Development and engineering fees from customers and licensees;
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Direct sales revenue from engines we manufacture in-house or through contractors;
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Up-front license fees and on-going royalties based on sales by our licensees.
With respect to certain waste heat recovery applications, we also expect to realize revenue through the development, design and installation of total system packages, which could be sold to customers or provided to customers through a Power Purchase Agreement (PPA). We have established a specialized subsidiary company Cyclone-WHE LLC, of which we own 82.5% of its equity to pursue these opportunities.
Over the last four years, much of our efforts have been focused on development of our technology and engine prototypes. As a result, we have limited revenue approximately $260,000 in income in 2010, and $710,000 in deferred revenue as of the end of the year, from several license and development agreements. These agreements include:
Raytheon Company: We have successfully completed the testing phase of our Independent Research & Development contracts with this $23 billion defense contractor, and in April 2011, received our first purchase order for multiple engines worth approximately $400,000. We are currently in discussions regarding the next phase of a broader collaboration agreement, under which we expect to develop additional engines for Raytheons military and civilian customers.
Renovalia Energy: Renovalia is one of the leading renewable energy companies in the world with over 500 MW of alternative power currently in its portfolio. Our license with Renovalia provides them with worldwide rights to manufacture Cyclone Engines for their solar thermal solutions, for which Cyclone has received $350,000 in development fees, and then will receive on-going royalties on each engine produced. Cyclone is currently completing the prototype Solar 1 engine which may ultimately be manufactured by this customer.
Phoenix Power Group: Our license with Phoenix Power provides them with the exclusive rights to utilize Cyclone Engines for power generators combusting waste automotive motor oil. Under its license Phoenix has paid us $500,000 in license and development fees, and then will pay us on-going royalties from their system sales. Phoenix is expected to pay minimum royalties over the life of the agreement exceeding $4 million. Cyclone is currently completing the first two 7.5 kW Phoenix-10 prototype systems for this customer, which are based around our WHE-25 engine. We expect orders for additional units to follow.
Advent Power Systems: Advent has a license to develop engines using the Cyclone technology for US, EEU and Israeli military applications on an exclusive basis (except to the extent such customers are obtained through our partner, Raytheon). This license has a 20 year term. Advent has paid over $100,000 in license fees as of May 31, 2011, and is obligated to pay additional license fees and on-going royalties from the sale of engines produced using the Cyclone Technology. Advent is currently bidding on several military contracts for use of Cyclone engines in distributed and mobile power production applications.
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Great Wall Alternative Power Systems: GWAPS is licensed to develop in China a production model of Cyclones biomass-to-power generator system. GWAPS will also have the rights to develop the larger 100hp Mark V engine for electric power production. GWAPS has paid Cyclone $125,000 in development fees, and has agreed to pay an additional $400,000 in licensing fees and then on-going royalties from the sale of Cyclone engines for use in electric power production in China. Additionally, GWAPS will invest capital to provide for legal and financial structuring, government outreach, and intellectual property protection, including retaining professional organizations to monitor and, if necessary, prosecute patent infringement cases in China. Cyclone has also retained legal counsel in China to audit the IP protocols that GWAPS establishes. GWAPS expects to complete the first prototype engines in China later in 2011.
Looking forward, the markets that we believe present the most viable business opportunities include:
Transportation | Power Generation | Equipment | Specialty |
Automobiles Trucks & Busses | 10kW 1MW Distributed Power | Off-Road Industrial | Military & Defense |
Ships & Locomotives | Waste Energy Recovery and CHP | Mining & Lifting | Underwater Oil Exploration |
Motorized Bikes & ATVs | Solar Thermal Dishes & Towers | Lawn & Garden | Oil Field & Landfill Flares |
Development Status of Technology
The Cyclone Engines are in development, however, prototypes of several different models and sizes are near completion. The following lists each of the Cyclone Engines that we have in development, and the currently estimated timing of completion:
Model | Size | Uses | Stage | Est. Completion |
Mark II | 18 HP | Portable & aux. power, light equipment | Alpha Test Engine | Completed |
WHE Waste Heat Engine | 16 HP | Waste heat recovery, waste fuels, biomass-to-power | Production Model | Q4 2011 |
Solar I | 5 HP | Solar thermal, small scale power, Combined heat and power, military | Pre-Production Model | Q4 2011 |
Mark V | 100 HP | Transportation, commercial power, military | Pre-production Beta Engine | Q2 2012 |
Mark VI | 330 HP | Heavy transport, power plant, heavy equipment | Pre-production Beta Engine | Q3 2012 |
Research and Development Activities
As a technology research and development company, much of our annual expenses are dedicated towards R&D, including labor costs, material costs, tooling and equipment and other expenses required to run our business. Our R&D expenditures for 2010 and 2009 were $830,611 and $1,115,795, respectively.
We actively pursue development agreements with customers, whereby we will develop an engine, design plans or other products for this customer at the customers full or partial expense. Sometimes these arrangements are part of a more expansive License Agreement. We currently have multiple R&D-type agreements in place, and believe that at this time, approximately 50% of our R&D operations are funded by our customers, a percentage which may increase in the future.
Prototyping and Manufacturing
We currently contract with multiple suppliers for the production of most of our prototype parts, which we design and then assemble and test at our facility. As we move forward, we plan to acquire the machinery and produce in-house a greater portion of this prototype manufacturing work.
For production manufacturing, we intend to contract with one or more manufacturers that have the expertise, machinery, tooling and other capital assets required to commercialize and manufacture in mass production our engines. With respect to this plan, in March 2011, we entered into a Letter of Understanding with TopLine Energy Systems, LLC, an affiliated company of global manufacturing leader TopLine Automotive Engineering, Inc., to build Cyclone engines. Under the terms of this preliminary agreement, TopLine Energy will provide assistance with engineering and planning of Cyclones WHE-25 model engines, and manufacture production prototypes of these units (which has begun). Given the acceptable completion and review of this first stage, TopLine Energy will position itself as the Preferred Manufacturer for Cyclones operating subsidiary Cyclone-WHE, for mass production of these engines.
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TopLine Automotive, a 30+ year-old company, is currently one of the largest manufacturers of automotive after-market parts in the United States, supplying over 50% of the market. Headquartered in Chicago, IL, TopLine Automotive has operations throughout the world, including a new, state-of-the-art 300,000 sq. ft. facility in Brooksville, FL. This Florida plant, only a few hours from Cyclone, is dedicated to the development and production of distributed and alternative energy products like the Cyclone engine.
Competitive Business Conditions
We believe that our technology, which is a heat-regenerative, Rankine cycle external combustion engine, has little direct competition. However, depending on the industry in which these engines are applied, indirect competitors utilizing different technologies do exist.
Currently, there are several companies which have developed and commercialized other types of external heat engines, such as Stirling engines. Stirling engines are similar to our technology and are used in overlapping applications (such as solar thermal power generation), however, the two engine technologies have several major differences. We believe that our engine technology is more efficient, more compact, more powerful and less expensive to build than Stirling engines; and as a result of these advantages, has more applications in mobile uses (i.e., cars, trucks and ships), and can produce power at a lower invested cost than a Stirling engine. However, we have not yet commercialized our engine technology, and these claims are still to be proven. Also, several Stirling engine companies such as Infinia Corp. have greater capital resources than we do, which could help establish their technology in the marketplace quicker than we can.
Other technologies that may be indirectly competitive with our engines are lithium-ion batteries and hydrogen fuel cells. Both these technologies, especially fuel cells, are in their early stages and it is difficult to determine how they would affect our competitive position. For instance, batteries are useful for some applications where limited sustained power (torque) and operating time is needed, however, they are in essence just fuel tanks which allow for power that is generated elsewhere (i.e., a coal-fired power plant) to be saved and transported. Fuel cells, while showing great potential promise, are truly in their technological infancy and currently are much too expensive for many practical applications.
In the automotive world, the competition to develop an environmentally clean (zero emission) engine is being driven by increasingly stringent regulatory mandates. To date, Honda, Toyota and GM have made the most advances in bringing to market hybrid and plug-in electric vehicles that will meet current Environmental Protection Agency (EPA) requirements. However, the electric vehicles that these companies have introduced and continue to develop are suitable only for light load carrying small passenger vehicles. Additionally, the hybrid-electric vehicles are running on internal combustion (I/C) engines on the highways, so there is little or no net gain.
In our opinion, hybrids are an attempt to stretch the technological life span of the I/C engine that is reaching a point of diminishing returns in terms of emissions and fuel efficiency improvement. Those electric vehicles that operate without the auxiliary I/C engine and run solely on batteries or fuel cells have short operating ranges, making them suitable only for localized, low-speed areas like core metro areas or gated communities. In short, these vehicles, which are only economically-viable due to government subsidies, are not the types of cars that most Americans want to drive. Such emotional and practical limitations are the main reasons that electric vehicles have not gained the traction expected.
With respect to the primary industries in which we plan to complete, we believe our technology has certain material advantages over other technologies and methods of operation. The following table summarizes those areas and advantages held by Cyclone.
| Competition | Companies | Cyclone Advantages |
Distributed Power Generation | -Mini-turbines -Fuel cells | -Capstone Turbine -Bloom Energy | -More efficient and cheaper than mini turbines -Cheaper and further ahead than fuel cells |
Waste Heat Recovery | -Organic Rankine Cycle -Thermal-electrics | -Calnetix (now GE) - Caterpillar - Voith Turbo | -Broader heat capabilities -Cheaper and smaller -Thermal-elec not proven outside laboratory |
Solar Thermal | -Stirling engines | -Infinia Solar -Stirling Energy Systems | -Smaller and lighter -More efficient -Self starting |
Automotive | -Clean diesel -Hybrid/plug-in electric | -Major auto manufacturers -Tesla | -Multi-fuel capable -Cleaner than diesel -Not reliant on utility grid - Can power cars we want |
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Patents and IP Protection
We currently have the following patents issued on our engine technology:
US Patents
Heat Regenerative Engine (US Patent No. 7,080,512 B2)
Heat Regenerative Engine (Continuation) (US Patent No. 7,856,822 B2)
Steam Generator in a Heat Regenerative Engine (US Patent No. 7,407,382)
Engine Reversing and Timing Control Mechanism (US Patent No. 7,784,280 B2)
Centrifugal Condenser (US Patent No. 7,798,204 B2)
Valve Controlled Throttle Mechanism (US Patent No. 7,730,873 B2)
Pre-Heater Coil in a Heat Regenerative Engine (US Patent No 7,856,823 B2)
Engine Shrouding with Air to Air Exchanger (Ser. No. 11/879,586)
Spider Bearing (Ser. No. 11/879,589)
Waste Heat Engine (Ser. No. 12/291,001)
| International Patents on Heat Regenerative Engine | ||||||
| European Union |
| Australia |
| South Africa |
| Canada |
| Russia |
| China |
| Korea |
| Indonesia |
| Mexico |
| Japan (pending) |
| India (pending) |
| Brazil (pending) |
We pursue a rigorous patent strategy, pursuant to which (and subject to our available cash resources) we file patents in the U.S. for our engines, their individual components, and other innovations and inventions we develop. We also pursue patents internationally in countries where we believe we may have manufacturing or sales opportunities and/or competition. Despite these efforts, we cannot make assurances that our patents will not infringe on other patents throughout the world, that other groups will not try to infringe on our patents, and if either of these were to occur, that we would have the resources to defend our rights. If this were to occur, it could have a material adverse effect on our business.
We require all customers, suppliers and other partners to execute Non-Disclosure Agreements. We also require our employees and certain contractors to sign agreements that assign to us any innovations or discoveries they develop while working for us, or working with our technology. Our license agreements contain similar assignment provisions. We feel that these efforts are satisfactory in protecting our technology with respect to people and companies with which we have direct business relationships.
Sources and availability of raw material
We purchase raw materials and components from multiple sources, none of which may be considered a principal or material supplier. If necessary, we could replace these suppliers with minimal effect on our business operations.
Dependence on one or a few major customers
We currently have four licensees for our engine technology: Phoenix Power Group, Renovalia Energy, Advent Power Systems, and Great Wall Alternative Power Systems and several other development customers, such as Raytheon Company, Robotic Technologies, and MEO Products (through Advent).
Each of our licensee and other development partners pursue different and unique applications for the Cyclone Engines. For instance, with Renovalia, we are developing engines to power solar thermal parabolic collectors, and with Phoenix Power, we are building engines to power waste oil electric generators. Because of the diversification of applications, uses and business models, we do not believe that the loss of one licensee or development partner would have a material adverse impact on our current or future operations. Additionally, we are actively pursuing other licensees and development partners in other product categories (e.g., home generators, industrial machinery and equipment, etc.). However, as of the date of this filing, we have taken on additional military and defense department projects for Raytheon Company, which may prove to constitute a considerable portion of our revenue for 2011 and 2012. A loss of this relationship moving forward could be detrimental to us and our results of operations.
Governmental regulation
Other than the filing of patent applications with the respective governmental bodies, we are not aware of any approval of our products or services that may be required from government authorities at this stage in our development. However, once our technology has been placed into commercial applications, such as automobiles and power generators, the governmental approval and regulatory process will become substantial. Each of such industries has many layers of regulatory requirements to ensure safety, environmental impact, usability and more. We believe that applicability of and compliance with such regulations and laws will be the responsibility of our individual licensees, as the manufacturers of the final products for sale. We have no present intention of manufacturing any of our own products for sale into the wholesale or retail markets, however, we plan to outsource some manufacturing for resale. In such cases we will need to define clearly the responsibilities and obligations for obtaining government regulatory approvals and assure procedures for maintaining compliance with such regulations.
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We are not aware of any environmental laws that directly adversely affect our business at the present time and in our current state of development. Certain federal and state environmental regulations, such as those pertaining to the emissions of gas and diesel powered internal combustion engines in the United States, have the effect of creating a greater urgency for our technology, and are thereby beneficial to our future prospects, but do not have a direct effect on the manners and methods we use in our business operations. Other environmental emissions laws pertaining to boilers and steam generating units regulate large utility-sized power plants that operate similar to our engines, but such regulations do not immediately affect our R&D operations. We try to stay abreast of environmental laws and regulations as they pertain to our technology and the business we conduct with our licensees and other partners.
Because of our work with the military, we have registered with the U.S. Department of State under its International Trafficking in Arms Regulations (ITAR). We do not believe we develop, sell or export any covered munitions under these Regulations, but have registered the company in an abundance of precaution.
Employees
As of May 31, 2011, we had 15 full-time employees, including management, and 1 part-time employee. We consider our relations with our employees to be good. None of our employees are covered under any labor union or collective bargaining agreement.
ITEM 1A. RISK FACTORS
RISK FACTORS
An investment in our common stock is highly speculative, involves a high degree of risk, and should be made only by investors who can afford a complete loss. You should carefully consider the following risk factors, together with the other information in this registration, including our financial statements and the related notes, before you decide to buy our common stock. If any of the following risks actually occur, our business, financial condition, or results of operations could be materially adversely affected, the trading of our common stock could decline, and you may lose all or part of your investment therein.
Risks Relating to the Early Stage of Our Company
We are at an early operational stage and our success is subject to the substantial risks inherent in the establishment of a new business attempting to commercialize a new technology.
The implementation of our business strategy is in an early stage. Accordingly, our intended business and operations may not prove to be successful in the near future, if at all. Any future success that we might enjoy will depend upon many factors, several of which may be beyond our control, or which cannot be predicted at this time, and which could have a material adverse effect upon our financial condition, business prospects and operations, and the value of an investment in our company. In addition, our prospects must be considered in light of the risks encountered by companies in the early stages of development in new and rapidly evolving industries, especially the alternative engine and power generation industries and markets.
We have a limited operating history and our business plan is unproven and may not be successful.
Our company was formed in 2004, but until 2008 we were a development stage company and we have only begun full scale operations over the last two years. We have not licensed or sold any substantial amount of products commercially. We have not yet proven that our business model will allow us to generate a profit.
We have suffered operating losses since inception and we may not be able to achieve profitability.
We had an accumulated deficit of $10,050,612 as of December 31, 2010 and $10,837,610 as of March 31, 2011. We expect to continue to incur significant research and development expenses in the foreseeable future related to the completion of development and commercialization of our multiple engine models. As a result, we will be sustaining substantial operating and net losses, and it is possible that we will never be able to develop the revenue levels necessary to attain profitability.
We may have difficulty raising additional capital, which could deprive us of necessary resources.
We expect to continue to devote significant capital resources to fund research and development and patents. In order to support the initiatives envisioned in our business plan, we may need to raise additional funds through public or private debt or equity financing, collaborative relationships or other arrangements. Our ability to raise additional financing depends on many factors beyond our control, including the state of capital markets, the market price of our common stock and the development or prospects for development of competitive technology by others. Sufficient additional financing may not be available to us or may be available only on terms that would result in further dilution to the current owners of our common stock.
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There are substantial doubts about our ability to continue as a going concern and if we are unable to continue our business, our shares may have little or no value.
Our ability to become a profitable operating company is dependent upon our ability to generate revenues and/or obtain financing adequate to fulfill our research and market introduction activities, and achieving a level of revenues adequate to support our cost structure. This has raised substantial doubts about our ability to continue as a going concern. We plan to attempt to raise additional equity capital by selling shares through one or more private placement or public offerings. However, the doubts raised relating to our ability to continue as a going concern may make our shares an unattractive investment for potential investors. These factors, among others, may make it difficult to raise any additional capital.
Failure to effectively manage our growth could place strains on our managerial, operational and financial resources and could adversely affect our business and operating results.
Our growth has placed, and is expected to continue to place, a strain on our managerial, operational and financial resources. Any growth or increase in the number of our strategic relationships will increase this strain on our managerial, operational and financial resources. This pressure may inhibit our ability to achieve the rapid execution necessary to implement our business plan, and could have a material adverse effect upon our financial condition, business prospects and operations and the value of an investment in our company.
Risks Relating to Our Business
We will need to achieve commercial acceptance of our engines to generate revenues and achieve profitability.
Even if our development yields technologically superior products, we may not successfully develop commercial products, and even if we do, we may not do so on a timely basis. We cannot predict when significant commercial market acceptance for our products and the affiliated products sold thereon will develop, if at all, and we cannot reliably estimate the projected size of any such potential market. If markets fail to accept our engines and related products, we may not be able to generate revenues from the commercial application of our technologies. Our revenue growth and achievement of profitability will depend substantially on our ability to introduce new products that are accepted by customers. If we are unable to cost-effectively achieve acceptance of our products by customers, or if the associated products do not achieve wide market acceptance, our business will be materially and adversely affected.
We will need to establish additional relationships with collaborative and development partners to fully develop and market our products.
We do not possess all of the resources necessary to develop and commercialize products on a mass scale. Unless we expand our development capacity, which would require substantial capital to achieve, we will need to make appropriate arrangements with collaborative partners and licensees to develop and commercialize current and future products.
Collaborations may allow us to:
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Generate positive cash flow and revenue;
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offset some of the costs associated with our internal research and development;
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successfully commercialize our products.
If we need but do not find appropriate affiliate arrangements, our ability to develop and commercialize products could be adversely affected. Even if we are able to find collaborative partners, the overall success of the development and commercialization of products will depend largely on the efforts of other parties and is beyond our control. In addition, in the event we pursue our commercialization strategy through collaboration, there are a variety of attendant technical, business and legal risks, including:
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a development partner would likely gain access to our proprietary information, potentially enabling the partner to develop products without us or design around our intellectual property;
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we may not be able to control the amount and timing of resources that our collaborators may be willing or able to devote to the development or commercialization of our products or to their marketing and distribution; and
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disputes may arise between us and our collaborators that could result in the delay or termination of the development or commercialization of our products or that may result in costly litigation or arbitration that diverts our managements resources.
The occurrence of any of the above risks could impair our ability to generate revenues or funding and harm our business and financial condition.
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We may not be successful at marketing our products.
We may not be able to market our products, and any financial or research efforts we exert to develop, commercialize or promote such products may not result in revenue or earnings.
We may lose out to larger and better-established competitors.
The alternative power industry is intensely competitive. Most of our competitors have significantly greater financial, technical, marketing and distribution resources as well as greater experience in the industry than we have. Our products may not be competitive with other technologies, both existing at the current time and in the future. If this happens, our sales and revenues will decline, or fail to develop at all. In addition, our current and potential competitors may establish cooperative relationships with larger companies to gain access to greater development or marketing resources. Competition may result in price reductions, reduced gross margins and loss of market share.
Our products may be displaced by newer technology.
The alternative power industry is undergoing rapid and significant technological change. Third parties may succeed in developing or marketing technologies and products that are more effective than those developed or marketed by us, or that would make our technology obsolete or non-competitive. Accordingly, our success will depend, in part, on our ability to respond quickly to technological changes. We may not have the resources to do this.
We must hire qualified engineering, development and professional services personnel.
We cannot be certain that we can attract or retain a sufficient number of highly qualified mechanical engineers, industrial technology and manufacturing process developers and professional services personnel. To quickly and efficiently deploy our products, maintain and enhance them, we will require an increasing number of technology developers. We expect customers that license our technology will typically engage our professional engineering staff to assist with support, training, consulting and implementation. We believe that growth in sales depends on our ability to provide our customers with these services and to attract and educate third-party consultants to provide similar services. As a result, we plan to hire professional services personnel to meet these needs. New technical and professional services personnel will require training and education and it will take time for them to reach full productivity. To meet our needs for engineers and professional services personnel, we also may use more costly third-party contractors and consultants to supplement our own staff. Competition for qualified personnel is intense, particularly because our technology is specialized and only a limited number of individuals have acquired the needed skills. Additionally, we will rely on third-party implementation providers for these services. Our business may be harmed if we are unable to establish and maintain relationships with third-party implementation providers.
We are dependent upon our key personnel.
Our future success depends in large part on each member of our management team, most notably Harry Schoell, the inventor of our engine technology, as well as certain other engineering, design, sales and executive management personnel. The loss of the services of any of our management or key personnel could have a material adverse effect on our business, financial condition and results of operations.
Our sales cycles are typically long.
The period between our initial contact with a potential customer and the purchase of our products and services, or signing of a license agreement, is often long and subject to delays associated with the budgeting, approval, and competitive evaluation processes which frequently accompany significant capital expenditures. We believe that a customers decision to purchase our engines and services is discretionary, involves a significant commitment of resources, and is influenced by customer budgetary cycles. To successfully sell our engines and services, we generally must educate our potential customers regarding their use and benefits, which can require significant time and resources.
If we are unable to protect our intellectual property, we may lose a valuable asset, experience reduced market share, or incur costly litigation to protect our rights.
Our success depends, in large part, upon our proprietary technology and other intellectual property rights. To date, we hold ten patents in the U.S. and nine internationally, and have filed several other patent applications domestically and internationally as they apply to our engine and its components. Although we hold the rights to certain patents and patent applications pending, there can be no assurance that pending patent applications will be approved or that the issued patents or pending applications will not be challenged or circumvented by competitors. Certain critical technology incorporated in our products is also protected by trade secret laws and confidentiality and licensing agreements. We intend to rely upon a combination of copyright, trade secret, trademark and patent laws, and nondisclosure and other contractual restrictions on copying and distribution to protect our proprietary technology. Litigation to enforce our intellectual property rights or protect our trade secrets could result in substantial costs and may not be
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successful. There can be no assurance that such protection will prove adequate or that we will have adequate remedies for disclosure of the trade secrets or violations of the intellectual property rights. Any inability to protect our intellectual property rights could seriously harm our business, operating results and financial condition. In addition, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. Our means of protecting our intellectual property rights in the United States or abroad may not be adequate to fully protect our intellectual property rights.
We may experience claims of infringement upon proprietary rights of others.
We may be exposed to future litigation based on claims that our products and/or the intellectual property related to the use of our products infringe on the intellectual property rights of others, including, but not limited to, the patent, copyright, trademark, and publicity rights of others. Claims of infringement could require us to re-engineer our products or seek to obtain licenses from third parties in order to continue offering our products. In addition, an adverse legal decision affecting our intellectual property, or the use of significant resources to defend against this type of claim, could place a significant strain on our financial resources and harm our reputation.
Regulation may adversely affect our business.
Statutory, regulatory and administrative actions that affect our business could have adverse effects on our ability to reach our objectives. Our technology may be subject to approval and regulation by various Federal, state and county agencies, especially with respect to safety, environmental, engineering standards and related matters. Governmental regulation may materially affect utilization of our technology and the costs of its development.
Risks Relating to our Stock
The sale of the shares of common stock acquired in private placements could cause the price of our common stock to decline.
We have sold an aggregate of $2,123,075 of our securities in private placements since 2008. Depending upon market liquidity at the time, a sale of a substantial number of shares of our common stock, or anticipation of such sales, could make it more difficult for us to sell equity or equity related securities in the future at a time and price that we might otherwise wish to effect sales.
FINRA sales practice requirements may also limit a stockholders ability to buy and sell our stock.
In addition to the penny stock rules promulgated by the SEC, which are discussed in the immediately preceding risk factor, FINRA rules require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customers financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker dealers to recommend that their customers buy our common stock, which may limit the ability to buy and sell our stock and have an adverse effect on the market value for our shares.
An investors ability to trade our common stock may be limited by trading volume.
A consistently active trading market for our common stock may not occur on the OTCBB. A limited trading volume may prevent our shareholders from selling shares at such times or in such amounts as they may otherwise desire.
Our company has a concentration of stock ownership and control, which may have the effect of delaying, preventing, or deterring a change of control.
Our common stock ownership is highly concentrated. Through ownership of shares of our common stock, our executive management collectively beneficially own approximately 30% of our total outstanding shares of common stock. Furthermore, two of our executive officers and directors own all Series B Preferred Stock, which allows them to effectively vote 51% of all common stock on matters brought before the shareholders of the company. As a result of the concentrated ownership of this stock, these inside stockholders, acting together, will be able to control all matters requiring stockholder approval, including the election of directors and approval of mergers and other significant corporate transactions. This concentration of ownership may have the effect of delaying, preventing or deterring a change in control of our company. It could also deprive our stockholders of an opportunity to receive a premium for their shares as part of a sale of our company and it may affect the market price of our common stock.
We have not voluntarily implemented various corporate governance measures, in the absence of which, shareholders may have more limited protections against interested director transactions, conflicts of interest and similar matters.
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Recent federal legislation, including the Sarbanes-Oxley Act of 2002, has resulted in the adoption of various corporate governance measures designed to promote the integrity of the corporate management and the securities markets. Some of these measures have been adopted in response to legal requirements. Others have been adopted by companies in response to the requirements of national securities exchanges, such as the NYSE or The NASDAQ Stock Market, on which their securities are listed. Among the corporate governance measures that are required under the rules of national securities exchanges are those that address board of directors independence, audit committee oversight and the adoption of a code of ethics. While our Board of Directors has adopted a Code of Ethics and Business Conduct, and has established an audit committee, we have not yet adopted many other of these corporate governance measures and, since our securities are not listed on a national securities exchange, we are not required to do so. It is possible that if we were to adopt some or all of these corporate governance measures, shareholders would benefit from somewhat greater assurances that internal corporate decisions were being made by disinterested directors and that policies had been implemented to define responsible conduct. For example, in the absence of nominating and compensation committees comprised of at least a majority of independent directors, decisions concerning matters such as compensation packages to our senior officers and recommendations for director nominees may be made by a majority of directors who have an interest in the outcome of the matters being decided. Prospective investors should bear in mind our current lack of corporate governance measures in formulating their investment decisions.
Because we will not pay dividends in the foreseeable future, stockholders will only benefit from owning common stock if it appreciates.
We have never paid dividends on our common stock and we do not intend to do so in the foreseeable future. We intend to retain any future earnings to finance our growth. Accordingly, any shareholder who anticipates the need for current dividends from his investment should not purchase our common stock.
We intend to attempt to have our common stock quoted on the OTC Bulletin Board, which will limit the liquidity and price of our securities more than if our securities were quoted or listed on a national exchange.
Initially, our securities will be traded in the over-the-counter market. We intend to commence the process of obtaining a quotation of our common stock on the OTC Bulletin Board (OTCBB). In order for our common stock to trade on the OTCBB, a registered broker-dealer, serving as a market maker, must be willing to list bid and ask quotations for our common stock, sponsor our listing on the OTCBB, and file an application with the OTCBB on our behalf to make a market in our common stock. It is not possible to predict how long it may take to obtain a listing on the OTCBB. In the event an application for quotation of our common stock is submitted to the OTCBB, there can be no guaranty that the OTCBB will approve the application. Quotation of our securities on the OTC Bulletin Board will limit the liquidity and price of our securities more than if our securities were quoted or listed on a national exchange.
Our common stock is subject to the penny stock rules of the SEC, which may make it more difficult for stockholders to sell the common stock.
The SEC has adopted Rule 15g-9 which establishes the definition of a penny stock, for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
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that a broker or dealer approve a persons account for transactions in penny stocks; and
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the broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In order to approve a persons account for transactions in penny stocks, the broker or dealer must:
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obtain financial information and investment experience objectives of the person; and
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make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form:
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sets forth the basis on which the broker or dealer made the suitability determination; and
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that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
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Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
The regulations applicable to penny stocks may severely affect the market liquidity for the common stock and could limit an investors ability to sell the common stock in the secondary market.
As an issuer of penny stock, the protection provided by the federal securities laws relating to forward looking statements does not apply to us.
Although federal securities laws provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, we do not have the benefit of this safe harbor protection in the event of any legal action based upon a claim that the material provided by us contained a material misstatement of fact or was misleading in any material respect because of our failure to include any statements necessary to make the statements not misleading. Such an action could hurt our financial condition.
We will become subject to Sarbanes-Oxley and the reporting requirements of federal securities laws, which can be expensive.
As a public reporting company, we will become subject to Sarbanes-Oxley and, accordingly, will be subject to the information and reporting requirements of the Securities Exchange Act of 1934 and other federal securities laws. The costs of compliance with Sarbanes-Oxley, of preparing and filing annual and quarterly reports, proxy statements and other information with the SEC, furnishing audited reports to our Stockholders, and other legal, audit and internal resource costs attendant with being a public reporting company will cause our expenses to be higher than if we were privately held.
Our internal control over financial reporting may have weaknesses or inadequacies that may be material.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to perform an evaluation of our internal control over financial reporting. Ongoing compliance with this requirement is expected to be expensive and time-consuming and may negatively impact our results of operations. We cannot make any assurances that material weaknesses in our internal control over financial reporting will not be identified in the future. If any material weaknesses are identified in the future, we may be required to make material changes in our internal control over financial reporting, which could negatively impact our results of operations. In addition, upon such occurrence, our management may not be able to conclude that our internal control over financial reporting is effective If we cannot conclude that our internal control over financial reporting is effective, we may be subject to regulatory scrutiny, and a loss of public confidence in our internal control over financial reporting, which may cause the value of our common stock to decrease.
Impact of corporate governance laws.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and new SEC regulations, are creating uncertainty for public companies. We are required to invest significant management time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
We are engaged in the research and development of all-fuel, eco-friendly engine technologies. Several prototypes of these engines are nearing completion with one model currently expected to go into production by the end of 2011. While we started to generate revenue from operations as early as 2008, we have not had material or consistent revenue in each of the last two fiscal years. In order for us to maintain and expand operations through the next 12 months, we will continue to raise capital by means of equity or debt offerings, and seek license and development agreements that provide up-front or progress payment revenue to us.
With respect to these endeavors, in the first quarter of 2011, we completed a $1 million offering of Series A Preferred Stock. In April 2011, we received an important purchase order for multiple Mark V engines (named the Manta-Ray) from Raytheon Company worth $400,000. Management believes that this purchase order will constitute one of multiple contracts that we could receive from Raytheon over the next few years.
We incurred substantial net losses for the years ended December 31, 2010 and 2009 of ($2,171,409) and ($2,525,101), respectively and in the first quarter of 2011 of ($789,623). Cumulative losses since inception (through March 31, 2011) are ($10,837,610). We have a working capital deficit at December 31, 2010 and March 31, 2011 of ($2,322,199) and ($2,529,871), respectively. There is no guarantee that we will be able to support our operations on a long term basis. This raises doubt about our ability to continue as a going concern. If additional funds cannot be raised or otherwise generated, we may be forced to reduce staff, minimize our research and development activities, or in a worst case scenario, shut-down operations.
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Management is cautiously optimistic that we can continue to improve operations and raise the appropriate funds to grow our business. We have ongoing and pending contracts that are expected to generate operating cash to support operations into 2012. Management is also deferring a significant amount of their salary to reduce our current cash expenditures. As of March 31, 2011, management has deferred $1,094,519 in executive compensation.
Private Placements. In the first quarter of 2011, we sold 950,655 shares of restricted common stock and 44,547 shares of two-year restricted Series A Preferred Stock in private placements under Regulation D and Regulation S of the Securities Act of 1933, as amended, for an aggregate of $356,235. The funds raised in these private offerings were used for working capital, general administrative, and research and development activities.
Stock for Services. Despite our limited cash resources, we are able to retain engineering, consulting, legal and accounting personnel partially through the issuance of restricted common stock. In the first quarter of 2011, we issued 1,059,500 shares of restricted common stock in lieu of $165,192 in cash compensation. Management believes that the agreement of these individuals and groups to forego some or all of their agreed upon cash compensation for shares of restricted common stock demonstrates a strong dedication and long-term commitment to the company, our technology and our future prospects.
Research & Development. As a research and development company, a material portion of all funds raised or generated through operations are placed back into the R&D activities of the company. Our R&D expenditures were $224,403 for the first quarter of 2011.
Commitments for Capital Expenditures. We do not immediately anticipate a significant purchase of facilities or equipment, however, should additional funding be secured, proceeds will be used to purchase capital equipment for development and testing of our technology, and build-out of our facility to accommodate additional development and testing projects. Additionally, should adequate funding be secured, we expect to increase the number of skilled and unskilled employees on payroll, including the recruitment of high level executive management and additional engineers and mechanical staff. Such new hires will considerably increase our monthly operational expenses.
Conversion of Series A Preferred Stock. On May 12, 2011, the holders of a majority of the shares of Series A Preferred Stock executed a resolution to convert all of the Series A Preferred shares into approximately 95.1 million shares of common stock, and to retire all Series A Preferred shares, effective as of May 15, 2011. Of these converted common shares, approximately 55 million are held by affiliates, employees and control persons of the company, and approximately 24 million more are subject to a two-year hold back from the date of issuance. In both cases, the resale of these common shares (approximately 83% of the total amount) is restricted.
Critical Accounting Policies
Our critical accounting policies are set forth in the Note 1 (specifically, C, D, I, J, L and M) to the Consolidated Financial Statements attached to this Registration Statement.
Results of Operations
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Revenues. Revenues for the year ended December 31, 2010 were $261,525 as compared to $63,938 for the prior year, an increase of $197,587 or 309%. This increase is due to recognition of revenue from certain contracts completed during the year, including the installation of the Bent Glass waste heat recovery system, and the delivery to Great Wall Alternative Power Systems, our licensee in China, of completed engine design drawings. Also in 2010, we received and completed an R&D project for Raytheon Company, which is reflected in the annual revenue.
Gross Profit. Gross profit for the year ending December 31, 2010 was $151,132 as compared to $28,003 for the year ending December 31, 2009, an increase of $123,129. For the year ending December 31, 2010, our gross margin was 58% as a percentage of net sales versus 44% in 2009. Management does not place great weight on these gross profit results at this time, as sales revenue and cost of goods sold figures are in an early stage of developing and refinement.
Operating Expenses. Operating Expenses incurred for the year ending December 31, 2010 were $2,123,828 as compared to $2,515,246 for the year ending December 31, 2009, a decrease of $391,418 (15.6%). The majority of the decrease was due to a reduction in R&D expenses of $285,184 (25%) and reduced general and administrative expenses of $91,378 (7%), reflective of the assignment of more production resources to deliverable inventory (a balance sheet item) and control expenditures.
Other Expenses. In 2010 we recognized a loss of $159,050 pursuant to converting debt into common stock.
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Income and Earnings per Share. The net loss for the year ending December 31, 2010 was ($2,171,409), compared to net loss of ($2,525,101) for the year ending December 31, 2009, a lower loss of $353,692 or 14%. This variance is due to the factors outlined above. Net loss per weighted average share was ($0.02) for 2010 and ($0.03) for 2009.
Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
Revenues. For the quarter ended March 31, 2011 there were no recognized revenues as compared to $104,900 for the same period in the prior year.
Gross Profit. Gross profit for the quarter ended March 31, 2011 was ($175,867), as compared to $53,103 for the same period in the previous year. The loss in 2011 was due to us recording a charge against a license agreement for current and subsequent penalty payments, payable in restricted common stock for late delivery of product.
Operating Expenses. Operating Expenses incurred for the quarter ended March 31, 2011 were $603,497 as compared to $434,837 for the same period in the previous year, an increase of $168,660 (39%). The majority of the increase was due to an increase in R&D expenses of $79,980 (55%) from continued improvements and enhancements to the engines, and increased general and administrative expenses of $89,826 (32%), reflective of the amortization of employee stock options previously issued, and the amortization of services provided to the WHE subsidiary, paid with related equity.
Income and Earnings per Share. The net loss for the quarter ended March 31, 2011 was ($789,623), compared to net loss of ($393,901) for the same period in the previous year, a larger loss of $395,722 or 100%. This variance is due to the factors outlines above. Net loss per weighted average share was ($0.01) for the current quarter and ($0.00) in 2010.
Liquidity and Capital Resources
At March 31, 2011, net working capital was ($2,529,871) as compared with ($2,322,199) at December 31, 2010, a decrease of ($207,672) or (9%). In the first quarter of 2011, funds were primarily used by the net loss of ($789,623). Funds were provided by the net sale of 950,655 shares of common stock and 44,547 shares of Series A Preferred Stock for $356,235, an increase in deferred revenue of $42,500, and an increase in accounts payable and accruals from related parties of $64,174 (primarily deferred salary). Additionally, to conserve cash we issued 10,059,500 shares of common stock, and 150,000 common stock options for services. This non-cash charge to the Income Statement was $165,192 in the quarter. Also we incurred a non-cash charge of $175,867 (paid with common stock and accrued expenses) as a penalty for late product delivery.
For the quarter ended March 31, 2010, net cash flows increased by $94,659. This is reflective of the sale of common and Series A Preferred Stock for $210,211, an increase in deferred revenue of $55,000, higher accounts payable and accrued expenses of $52,101, use of common stock and options to pay for services of $89,722 and an increase in related party notes and loans payable of $121,144. Funds were used by the net loss of $393,901, increases in inventory of $74,179 and higher receivables of $25,616.
We need to obtain capital, however, no assurance can be given that we will be able to obtain this capital on acceptable terms, if at all. In such an event, this may have a materially adverse effect on our business, operating results and financial condition. If the need arises, we may attempt to obtain funding or pay expenses through the continued sale or issuance of restricted stock. We may also use various types of short term funding, related party advances and expenses payment deferrals and external loans our auditors have issued a going concern opinion for the year ended December 31, 2010. Management is cautiously optimistic, however, that we will be able to generate the funding required to continue and expand our operations over the long term, and believes that we currently have cash reserves and cash commitments available to fund operations through the end of the year or longer.
Recent Accounting Pronouncements. Our significant accounting policies are described in Note 1 to the accompanying financial statements.
Off-Balance Sheet Arrangements. We do not have any off-balance sheet arrangements at this time.
ITEM 3. PROPERTIES
We currently operate in a leased warehouse facility owned by Schoell Marine, Inc., a company wholly-owned by our Chairman and CEO, Harry Schoell. Schoell Marine leases 6,000 sf of space to the company at approximately $12/sf, ($64,800 per year) which we believe to be at or below market rates for industrial space in the area. Our address is 601 NE 26th Ct., Pompano Beach, FL 33064. We believe these facilities are in good condition, but we may need to expand our leased space as our research and development efforts increase.
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ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial ownership of our Common Stock and Series B Preferred Stock by each of our named Executive Officers and Board of Directors, and each shareholder who is known by us to own beneficially five percent (5%) or more of the outstanding stock of such class as of June 15, 2011. On June 15, 2011, 216,371,789 shares of common and 1,000 shares of Series B Preferred stock were issued and outstanding.
Name and Address | Common Shares Beneficially Owned | % | Series B Pref. Shares Beneficially Owned | % |
Harry Schoell, Chairman & CEO 601 NE 26th Ct. Pompano Beach, FL 33064 | 46,374,755 (1) | 21.4% | 797 | 80% |
Frankie Fruge, COO & Director 601 NE 26th Ct. Pompano Beach, FL 33064 | 12,092,511 (2) | 5.6% | 203 | 20% |
James Landon, Director 4401 N Federal Hwy Boca Raton, FL 33431 | 2,026,200 (3) | 0.9% | - | - |
Christopher Nelson, President, General Counsel 601 NE 26th Ct. Pompano Beach, FL 33064 | 5,945,400 (4) | 2.7% | - | - |
Bruce Schames, CFO 601 NE 26th Ct. Pompano Beach, FL 33064 | 185,001 (5) | 0.1% | - | - |
All Executive Officers as a Group (5 persons) | 66,623,867 | 30.6% | - | - |
TOTALS: | 66,623,867 | 30.6% | 1,000 * | 100% |
* The 1,000 shares of Series B Preferred stock provide their holders a majority vote on all matters brought before the common stock shareholders.
(1) Mr. Schoells total includes 500,000 vested common stock options, but excludes 150,000 unvested options.
(2) Ms. Fruges total includes 500,000 vested common stock options, but excludes 150,000 unvested options.
(3) Mr. Landons total includes 50,000 vested common stock options, but excludes 150,000 unvested options.
(4) Mr. Nelsons total includes 250,000 vested common stock options, and 635,000 shares of common stock owned by a company controlled by Mr. Nelsons wife. The total excludes 120,000 unvested options.
(5) Mr. Schames total includes 100,000 vested common stock options, but excludes 7200,000 unvested options.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
DIRECTORS AND EXECUTIVE OFFICERS
The names, ages, positions and dates appointed of our current directors and executive officers are set forth in the table below:
Name | Age | Position | Date of Appointment |
Harry Schoell | 68 | Chairman and Chief Executive Officer | June 2004 |
Frankie Fruge | 66 | Director and Chief Operating Officer | June 2004 |
James C. Landon | 68 | Director | December 2008 |
Christopher Nelson | 41 | President and General Counsel | March 2011* |
Bruce Schames | 64 | Chief Financial Officer | April 2010 |
* Mr. Nelson served as General Counsel from January 2009, and as Executive Vice President and General Counsel since June 2010, prior to being appointed as President and General Counsel in March 2011.
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Harry Schoell, Chairman and Chief Executive Officer, is a life-long entrepreneur and technology visionary. He is a native Floridian, born in Miami, and a third generation inventor and engineer. Mr. Schoell has worked for years to realize his dream to create an environmentally-friendly engine, and has 18 patents issued to date on the Schoell Cycle heat regenerative external combustion engine, now called the Cyclone Engine.
Mr. Schoell is well versed in all facets of manufacturing procedures, including, appropriate foundry protocol, castings, machining, production design and manufacturing, and plastic and fiberglass laminates. He also has extensive experience in designing, inventing and building unique boat hull designs and patented marine propulsion systems, through Schoell Marine, a company he founded in 1966 and still exists today.
Mr. Schoell successfully built Schoell Marine and its reputation based on his original ideas, highly trained engineers, and prototype and production specialists the same as he is doing now for Cyclone. Over these 40+ years, his inventiveness resulted in over 40 specialized patents and patent applications, including a Jet Drive System, a trimmable surface drive, a Ground Effect Craft, and a lightweight internal engine that he designed and built in 1990.
Mr. Schoell is known throughout the industry for his vision and is highly sought after for his knowledge and expertise. In 2010, Boating Magazine named him one of the most important Game Changers in the marine industry. Harry has won the Engineer of the Year Award and Designer of the Year Award from Vapor Trails Magazine. He has also been presented with four different Innovation of the Year Awards from the NMMA (National Marine Manufacturers Association). Mr. Schoell belongs to SAE (Society of Automotive Engineers), the ASME (American Society of Marine Engineers), and The Society of Naval Architects and Marine Engineers.
Mr. Schoell has no other Board of Directors affiliations other than with the Company.
Mr. Schoells qualifications to be a director of the Company, in addition to his business background (as described above), include his intimate involvement in the development of the Cyclone Engine as well as the business plan for its commercialization.
Frankie Fruge serves as Chief Operating Officer and Director of Cyclone. She has been with the Company since its inception in 2004 in the role of General Partner and Director of Administration. Ms. Fruge is in charge of the daily operations and financial concerns of the Company.
Ms. Fruge has been working with Mr. Schoell since 1995, serving in multiple administrative, operational and financial positions with Schoell Marine. Between 1999 and 2003, Ms. Fruge was President of Propulsion Systems, Inc., a company that developed and sold marine surface drives, and then CFO of Pulse Drive Inc., between 2003 and 2005, a company also in the marine propulsion field.
Prior to her career in marine-based engine technology, Ms. Fruge spent over 10 years as an operating engineer for several oil refinery companies in Louisiana, including Conoco, and eight years as an auditor for Ernst & Ernst (the predecessor company to Ernst & Young). Ms. Fruge is also a certified industrial firefighter, and is on the Board of the Steam Automobile Club of America. Ms. Fruge has no other Board of Directors affiliations
Ms. Fruges qualification to be a director of the Company, in addition to her general business background (as described above), include her extensive engineering technology experience.
James Landon, a CPA and CFE, serves as Director of Cyclone. As President of Landon & Associates P.A., Mr. Landon was previously the companys accountant of record for over four years. He is a member of the American Institute of Certified Public Accountants, the Florida Institute of Certified Public Accountants, the Association of Certified Fraud Examiners, and the South Florida Chapter of the Association of Certified Fraud Examiners.
Mr. Landon is also a director of US Lacrosse, Inc., and chairs their Strategic Planning Committee, a director of the South Florida Chapter of US Lacrosse, a director of the Florida Youth Lacrosse Foundation, a director of Children Hope and Horses Corporation, and the immediate past president of the South Florida Chapter of the Association of Certified Fraud Examiners.
Mr. Landon also has considerable experience in the manufacturing world, holding positions for several companies over the years as vice president of operations, vice president of finance and administration, chief financial officer and president. Mr. Landon received his Bachelor of Engineering Science from The Johns Hopkins University, and his Master of Science in Administration with a concentration in Business Financial Management from The George Washington University.
Mr Landons qualifications to be a director of the Company include his extensive accounting and business experience.
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Christopher Nelson serves as President and General Counsel of the Company, positions he has held since March 2011. Prior to that, he was Executive Vice President and General Counsel of the Company, and since July 2007, outside corporate counsel for Cyclone. Over the past three years, he has assisted and overseen all aspects of the Companys business and legal affairs, including: public securities filings and financing, licensing and development agreements, investors and public relations, and general corporate matters.
Mr. Nelson has practiced law in Florida for over 16 years, and since 2001, has served in a general corporate counsel role for many start-up, early stage and established businesses seeking financing, acquisitions and general growth management counseling. Such companies recently included Dental Practice Management, a $4 million medical management company based in Ft. Lauderdale, Florida: UMT International, a $5 million industrial machine manufacturing company, based in Dania Beach, Florida, and InfoLink, a $6 million information services company in Miami, Florida. He has been a member of the Florida Bar since 1995.
Between 1997 and 2000, Mr. Nelson was an associate with Greenberg Traurig PA, and between 1995 and 1997 an associate with Akerman Senterfitt PA, both in Miami, Florida. At both firms he served in their corporate and securities practice, representing NYSE and NASDAQ companies such as AutoNation, Republic Industries and Wackenhut. Mr. Nelson received a BA from Princeton University, and JD from University of Miami School of Law.
Bruce Schames serves as CFO for Cyclone. He has been a CPA since 1971, representing both public and private clients in his own practice since 2001. Prior to that, Mr. Schames served as CFO of East Coast Beverage Corp. (OTCBB: ECBV), Medcom USA (NASDAQ: EMED), Financial Reporting Manager for Dole Fresh Fruit Co., and in various accounting and reporting capacities of NYSE companies. Mr. Schames received his BBA from Baruch College of the City University of N.Y., and an MBA from the University of Southern California.
Board Leadership Structure and Role in Risk Oversight
We have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined. Mr. Schoell has served as Chief Executive Officer and Chairman of the Company since inception in 2004.
Our Board of Directors is primarily responsible for overseeing our risk management processes. The Board of Directors receives and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our assessment of risks. The Board of Directors focuses on the most significant risks facing our Company and our Companys general risk management strategy, and also ensures that risks undertaken by our Company are consistent with the Boards appetite for risk. While the Board oversees our Companys risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our Company and that our board leadership structure supports this approach.
James Landon, as a non-employee Board of Directors member, may be compensated for his time in cash or restricted shares of common stock, as may be provided under the independence requirements of current securities laws.
The Company has an Audit Committee currently only comprised of Mr. Landon (Chairman). We expect to add additional members to this committee in the near future. We do not have a Compensation Committee, Nominating Committee or other committees at this time. We expect to create such committees in the future.
Director Independence
Our Board of Directors has adopted the definition of independence as described under the Sarbanes Oxley Act of 2002 (Sarbanes-Oxley) Section 301, Rule 10A-3 under the Securities Exchange Act of 1934 (the Exchange Act) and NASDAQ Rules 4200 and 4350. Our Board of Directors has determined that only Mr. Landon meets the independence requirements.
Board of Advisors
From time to time, we add members to our Board of Advisors. These individuals are comprised of distinguished scientists, engineers and businessmen whose experience, knowledge and counsel help in the development of the company and our technology. These Board of Advisor members may be compensated for their time in restricted shares of common stock. Currently, the Board of Advisors is comprised of:
James D. Crank, a retired engineer with Lockheed and one of the foremost experts on automotive steam engine systems. During his long year career with Lockheed, Mr. Crank worked in senior research positions on many important projects, including: engine development for the Ground Vehicles Department, primary battery systems for the Triton II missile, battery systems for the Hubbell Space Telescope, heat shields for the Mercury and Apollo space systems, and dynamic solar and nuclear space power systems for SDI. Mr. Crank was also a Research Engineer for the Stanford Research Institute where he worked on explosive cladding of materials for cylinder construction in Porsche and Mercedes-Benz, among other projects.
16
Mr. Crank also has over 50 years experience in restoration, repair and driving of various steam cars, including the total redesign of the complete Doble crankcase assembly and cylinders for the Series E Doble steam cars (with 10 sets constructed), and the design and construction of the current speed world record holding steam car. He served as a consultant on steam car restoration to Harrah Automobile Collection, Nethercutt Collection, Jay Leno Collection, Stephen Finn Collection, and the Besler General Motors Chevelle steam car, among others, and a consultant to the State of California on the steam bus development program. He is the owner and president of Doble Steam Motors Corporation, and is currently working on a book about the history of the Doble steam car and its founding family.
Jerry A. Peoples, a retired NASA engineer with over 30 years service in the governments most elite scientific divisions. Mr. Peoples work with NASA spans over 30 years. Most recently, after the 1986 Space Shuttle Challenger disaster, Mr. Peoples was assigned to the Solid Motor Redesign Team, where he made major contributions to the design, fabrication and testing of the Double O-ring Interference Joint, which solved the O-ring burn problem.
Mr. Peoples work at NASA also included participation on a governmental energy task force studying solar heating and cooling, ocean thermal electric energy conversion, and the Rankine Cycle as an alternative to the internal combustion engine. On this last subject, he published over 12 research papers on the design and operation of the modern steam powered automobile.
Early in his career, Mr. Peoples served at the Marshall Space Flight Center as project engineer responsible for thermal control systems for orbiting spacecraft such as the Hubble Telescope, HEAO-1, and Gravity Probe B. Prior to that, he worked at the Wright Patterson Air Development Center on the F-105 aircraft.
George Nutz is technology consultant with almost 50 years experience working with external combustion and steam engines. He is the founder of Millennium Engineering Systems and Millennium Energy Systems, through which he has provided engineering guidance and expertise to multiple external combustion engine projects over the last twenty years.
Prior to consulting, Mr. Nutz was a staff research engineer at MIT Instrumentation Laboratory, part of the Department of Aeronautics and Astronautics. While in residence, he designed hardware and control systems, as well as steam cycles and applications. He represented MIT-IL at the Department of Transportation Clean Air / External Combustion hearings, and wrote several proposal papers outlining a working steam system. During this time he also became involved with steam automobile and steamboat groups and worked on boiler and engine designs/modifications, including being part of the MIT team designing and building a steam powered automobile for Saab for the MIT-Caltech "Clean Air Car Race".
Prior to his time at MIT, Mr. Nutz spent nine years at Bendix Aerospace designing gyro and guidance equipment and test platforms, and working with optics and sensors. He served in the U.S. Air Force and received his mechanical engineering degree from the New Jersey Institute of Technology in 1959.
Allen Brown, Cyclones Senior Engineering Fellow, is an engineer whose experience spans over 56 years in the marine industry where he has developed propulsion, hydraulic, electrical and exhaust systems for some of the best known names in the business. Over the years, Mr. Brown has served as: Director of Product Development for Cigarette Racing Team, President and CEO of Cougar Marine, which built powerboats that won 33 consecutive offshore races including 12 World and National Championships, Director of Product Development for Stainless Marine, Project Engineer for Gentry Transatlantic on the Gentry Eagle, a 113 mega-yacht that held the transatlantic speed crossing record, Product Development Consultant for Teleflex Marine, and General Manager of Donzi Marine.
Mr. Brown is widely regarded as a mechanical genius. Pete Smythe, Editor of Motorboating Magazine, wrote: Brownie is generally considered to have more engineering moxie than anyone else in the high performance boat business. Hotboat Magazine wrote that Brownies experience in the business is second to none, with almost 50 years of high performance expertise in building, driving and designing every part of a raceboat. Powerboat Magazine called Brownie a mechanical wizard.
Compensation to Advisors
We have compensated our Board of Advisors members with shares of restricted common stock and stock options for their past services rendered on behalf of Cyclone, and reserve the right to issue additional shares, stock options or cash in the future.
Family Relationships. There are no family relationships among the directors and executive officers of the company.
Code of Conduct and Ethics. We have adopted a code of business conduct and ethics that applies to our directors, officers and all employees. The code of business conduct and ethics may be obtained free of charge on our web site, or by writing to the company, Attn: Chief Financial Officer, 601 NE 26th Ct., Pompano Beach, FL 33064.
17
ITEM 6. EXECUTIVE COMPENSATION
Executive Compensation
Summary Compensation Table. The following table sets forth certain information concerning the annual and long-term compensation of our Chief Executive Officer and our other executive officers during the last two fiscal years.
Current Officers Name & Principal Position |
| Year |
| Salary ($) |
| Bonus ($) |
| Stock Awards (S) |
| All Other Compensation ($) |
| Option Awards ($) |
| Total ($) |
Harry Schoell |
| 2009 | $ | 150,000 | (1) | 0 | $ | 52,800 |
| 0 |
| 0 | $ | 202,800 |
Chairman & CEO |
| 2010 | $ | 150,000 | (1) | 0 |
| 0 |
| 0 | $ | 11,900 | $ | 161,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frankie Fruge |
| 2009 | $ | 120,000 | (2) | 0 | $ | 52,800 |
| 0 |
| 0 | $ | 172,800 |
Director & COO |
| 2010 | $ | 120,000 | (2) | 0 |
| 0 |
| 0 | $ | 11.900 | $ | 131,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bruce Schames |
| 2009 | $ | 0 | (3) | 0 | $ | 880 |
| 0 |
| 0 | $ | 880 |
CFO |
| 2010 | $ | 42,156 | (3) | 0 | $ | 26,700 |
| 0 | $ | 70,408 | $ | 139,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher Nelson |
| 2009 | $ | 91,500 | (4) | 0 | $ | 102,712 |
| 0 |
| 0 | $ | 194,212 |
President & General Counsel |
| 2010 | $ | 120,000 | (4) | 0 | $ | 14,500 |
| 30,000 | $ | 35,957 | $ | 200,457 |
(1) All of Mr. Schoells salary in 2010 and 2009, except for $20,000 converted to 4,000 shares of Series A Preferred stock in 2010, has been deferred until determined by the Board of Directors that the Company can afford to pay such salary.
(2) All of Ms. Fruges salary in 2010 and 2009, except for $6,000 converted to 1,200 shares of Series A Preferred stock in 2010, has been deferred until determined by the Board of Directors that the Company can afford to pay such salary.
(3) Mr. Schames has deferred $33,656 of his salary in 2010.
(4) Mr. Nelson has deferred $16,000 of his salary in 2009 and $53,000 in 2010.
Employment Agreements:
Mr. Schoell has an employment agreement with the Company providing for a base salary of $150,000 per year plus standard benefits. This compensation is currently being deferred until we have sufficient revenue to support its payment, and to date, he has not received any cash compensation under his agreement. Mr. Schoell has converted $20,000 of deferred salary to common stock in 2010. The term of Mr. Schoells agreement is three years with automatic one-year renewals.
Ms. Fruge has an Employment Agreement with the Company providing for a base salary of $120,000 per year plus standard benefits. This compensation is currently being deferred, and to date, she has not received any cash compensation under her agreement. Ms. Fruge has converted $6,000 of deferred salary to common stock in 2010. The term of Ms. Fruges agreement is three years with automatic one-year renewals.
Mr. Nelson has an agreement with the Company providing for $10,000 per month, of which $3,000 per month is deferred until the Company is in a position to pay such funds. This is a year-to-year contract.
Mr. Schames has an agreement with the Company providing for $60,000 per year, of which $23,500 per year is deferred until the Company is in a position to pay such funds. Additionally, he is to receive $12,000 in restricted common stock annually, and 150,000 common stock options quarterly. His year-to-year contract began June 2010.
18
Outstanding Equity Awards at December 31, 2010
The following table sets forth information concerning all stock option grants held by our named executive officers as of December 31, 2010. All outstanding equity awards are options to purchase shares of common stock.
All Option Awards
Name and Position | Option Grant Date | Number Granted | Number Vested | Number Unvested | Exercise or Base Price of Option Awards ($/Share) | Grant Date Fair Value of Stock in Option Awards ($) | Option Expiration Date |
|
|
|
|
|
|
|
|
Harry Schoell Chairman & CEO | 6/30/2007 6/30/2007 6/30/2007 12/31/2010 | 250,000 125,000 125,000 100,000 | 250,000 125,000 125,000 0 | 0 0 0 100,000 | 0.25 0.35 0.45 0.12 | 0.25 0.25 0.25 0.12 | 6/30/2017 6/30/2017 6/30/2017 12/31/2015 |
|
|
|
|
|
|
|
|
Frankie Fruge Director & COO | 6/30/2007 6/30/2007 6/30/2007 | 250,000 125,000 125,000 | 250,000 125,000 125,000 | 0 0 0 | 0.25 0.35 0.45 | 0.25 0.25 0.25 | 6/30/2017 6/30/2017 6/30/2017 |
|
|
|
|
|
|
|
|
Bruce Schames CFO | 4/5/2010 6/30/2010 9/30/2010 12/31/2010 12/31/2010 | 100,000 150,000 150,000 150,000 75,000 | 0 0 0 0 0 | 100,000 150,000 150,000 150,000 100,000 | 0.15 0.10 0.09 0.12 0.12 | 0.14 0.10 0.09 0.12 0.12 | 4/5/2012 6/30/2020 9/30/2020 12/31/2020 12/31/2015 |
|
|
|
|
|
|
|
|
Christopher Nelson President & General Counsel | 4/5/2010 12/31/2010 | 250,000 100,000 | 0 0 | 250,000 100,000 | 0.15 0.12 | 0.14 0.12 | 4/5/2012 12/31/2015 |
|
|
|
|
|
|
|
|
James Landon Director | 4/5/2010 12/31/2010 | 50,000 100,000 | 0 0 | 50,000 100,000 | 0.15 0.12 | 0.14 0.12 | 4/5/2012 12/31/2015 |
Option Exercise and Stock Vesting
During 2010, none of the named executive officers exercised any options. No options were vested in 2010.
Compensation of the Board of Directors
The following table sets forth the compensation received by our non-employee director, for his service as a director, during the year ended December 31, 2010.
Name | Fees earned or paid in cash ($) | Option awards ($) | Stock Awards | Nonqualified deferred compensation earnings ($) | All other compensation ($) | Total ($) |
|
|
|
|
|
|
|
James Landon | $ 12,000 | 0 | $ 44,300 | 0 | 0 | $ 56,300 |
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
RELATED PARTY TRANSACTIONS
Our Board of Directors (excluding any interested director) is charged with reviewing and approving all related-person transactions, and a special committee of our Board of Directors is established to negotiate the terms of such transactions. In considering related-person transactions, our Board of Directors takes into account all relevant available facts and circumstances.
19
We have an Operations Agreement with Schoell Marine, a company owed by Harry Schoell, to provide some turnkey operations, including office facility rental and equipment leasing, based upon cost and going market rates. This arrangement began being phased-out in 2008, however, at December 31, 2010, we owed to Schoell Marine $588,928, which is booked as debt. The debt is callable at the discretion of Mr. Schoell and is secured by a perfected security interest on our patent and patent applications for the heat-regenerative external combustion engine. We currently rent office space from Schoell Marine under this agreement at approximately $12.00/sf, which we believe to be at or below comparable market rates.
As of December 31, 2010, the Company also had on its books $970,614 of accrued and deferred officers salaries to Mr. Schoell and Ms. Fruge. This deferred salary can be paid to the officers if and when funds are available. These funds are accounted for as non-interest bearing notes due on demand. $102,656 was deferred for other officers.
Mr. Nelson owns a 5% equity stake in Cyclone-WHE LLC, our majority owned subsidiary, which was obtained by him in 2010 in exchange for services rendered with a fair market value of $30,000.
ITEM 8. LEGAL PROCEEDINGS.
We are not engaged in any legal proceeding or threatened proceeding at this time, and have no knowledge of any actions or inactions taken by the company or its management that could reasonably lead to a legal proceeding.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
DIVIDENDS
We have not paid any dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. We intend to retain any earnings to finance the growth of our business. We cannot assure you that we will ever pay cash dividends. Whether we pay cash dividends in the future will be at the discretion of our Board of Directors and will depend upon our financial condition, results of operations, capital requirements and any other factors that the Board of Directors decides are relevant. See Managements Discussion and Analysis of Financial Condition and Results of Operations.
Our common stock is currently traded on the OTC Pink Marketplace (the Pink Sheets). The following table represents the high and low bid information for our common stock for each quarterly period within the two most recent fiscal years and the subsequent interim period, as regularly quoted on the Pink Sheets. Such over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not necessarily represent actual transactions.
According to the records of our transfer agent, as of May 31, 2011, there were approximately 3,600 shareholders of record of our common stock and two shareholders of record of our Series B Preferred Stock.
| Bid Prices | |
| High | Low |
2009 |
|
|
Q1 | .53 | .13 |
Q2 | .27 | .17 |
Q3 | .20 | .17 |
Q4 | .18 | .13 |
2010 |
|
|
Q1 | .17 | .13 |
Q2 | .15 | .08 |
Q3 | .15 | .08 |
Q4 | .16 | .09 |
2011 |
|
|
Q1 | .48 | .10 |
Q2-May 31 | .40 | .20 |
20
The following table describes our equity compensation plans as of December 31, 2010:
Plan Category |
| Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights(a) |
| Weighted Average Exercise Price of Outstanding Options, Warrants and Rights(b) |
| Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans(excluding Securities referenced in column (a)) (c) |
|
|
|
|
|
|
|
Equity compensation plans approved by our stockholders (1) |
| 1,475,000 |
| $.14 |
| 3,525,000 |
(1) Equity compensation plans approved by our stockholders consist of our 2010 Stock Option Plan.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
In the past three years, from January 1, 2009 to March 31, 2011, we have issued the following securities in transactions not registered under the Securities Act of 1933, as amended (the Securities Act):
The Company sold an aggregate of 250,000 shares of its Series A Convertible Preferred Stock to 56 accredited investors at a price of $5.00 per share. On May 12, 2011, a total of 750,000 shares of Series A Preferred Stock were converted into 95,100,000 shares of Company Common Stock in accordance with the terms and conditions of the Series Preferred Stock. The securities were offered pursuant to the accredited investors pursuant to an exemption under Section 4(2) of the Securities Act and Regulation D thereunder.
The Company issued an aggregate of 12,871,592 shares of its Common Stock to 71 accredited and/or sophisticated investors at a price equal to a 40% discount from the 5-day weighted average closing price of the companys common stock on the OTC Markets. The Shares were issued pursuant to an exemption under Section 4(2) of the Securities Act of 1933, and Regulation D thereunder.
The Company issued an aggregate of 3,650,865 shares of its Common Stock to 26 foreign investors at a price equal to a 20% discount from the 5-day weighted average closing price of the companys common stock on the OTC Markets. The Company also paid between a 10% and 20% finders fee on the shares sold in this manner. The Shares were issued pursuant to an exemption under Section 4(2) of the Securities Act of 1933, and Regulation S thereunder.
The Company issued an aggregate of 10,034,379 shares of its Common Stock to 47 individuals in connection with various services rendered. The Shares were issued to the accredited and/or sophisticated investors pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933 and the transfer was restricted.
The Company issued an aggregate of 8,213,975 shares of its Common Stock to six accredited investors pursuant to the terms of three separate outstanding convertible notes. The securities are offered pursuant to an exemption under Section 4(2) of the Securities Act of 1933, amended.
The Company issued an aggregate of 19,953 shares of its Series A Convertible Preferred Stock to eight investors pursuant to the terms of eight separate accounts receivable obligations of the Company. The securities are offered pursuant to an exemption under Section 4(2) of the Securities Act of 1933, amended.
The Company issued 1,012,588 shares of its Common Stock to one entity under the terms of a settlement agreement. The securities were issued pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933.
The Company issued through June 15, 2011 an aggregate of 3,525,000 common stock options at an exercise prices between $.097 and $.325 per share to 21 accredited and/or sophisticated individuals, 1,600,000 of which are currently vested and the remainder of which vest between September 2, 2011 and March 31, 2012. The options have termination dates between July 1, 2018 and September 30, 2021.
21
The Company issued warrants to purchase two percent (2%) of the fully diluted outstanding shares of the Companys Common Stock to one entity at an exercise price of $.19 a share, which is expected to vest on September 1, 2011 and terminate two year later. The Company also issued to one entity a warrant to purchase 775,000 common shares exercisable at $.15 a share, which is currently vested and terminates on August 23, 2012. The warrants were issued pursuant to an exemption of Section 4(2) of the Securities Act of 1933.
ITEM 11. DESCRIPTION OF REGISTRANTS SECURITIES TO BE REGISTERED
AUTHORIZED CAPITAL STOCK
This registration relates to our common stock, par value $.0001 per share. We are authorized to issue 300,000,000 shares of common stock, with a par value of $.0001 per share (Common Stock) and 1,000,000 shares of Preferred Stock, with par value $.0001 (Preferred Stock) which can be designated into series by action of the Board of Directors. We have designated 1,000 shares of Preferred Stock as Series B Preferred. An additional 750,000 designated shares of Series A Convertible Preferred stock were converted to common stock as of May 12, 2011, and returned to the amount of authorized shares of Preferred Stock available to be issued in the future.
As of June 15, 2011, there are 216,371,789 shares of Common Stock and 1,000 shares of Series B Preferred Stock outstanding. In addition, as of the date of the filing of this registration statement there are warrants to purchase 4,327,436 shares of common stock at exercise prices from $0.15 to $0.19 outstanding, and 3,525,000 options to purchase common stock at an exercise prices from $0.092 to $0.45 outstanding.
Common Stock
Dividends. Each share of common stock is entitled to receive an equal dividend, if one is declared, which is unlikely. We have never paid dividends on our common stock and do not intend to do so in the foreseeable future. We intend to retain any future earnings to finance our growth. See Risk Factors.
Liquidation. If our company is liquidated, any assets that remain after the creditors are paid, and the owners of preferred stock receive any liquidation preferences, will be distributed to the owners of our common stock pro-rata.
Voting Rights. Each share of our common stock entitles the owner to one vote. There is no cumulative voting. A simple majority can elect all of the directors at a given meeting and the minority would not be able to elect any directors at that meeting. The voting rights of the common stock is affected by the Series B Preferred Stock voting rights, as described below.
Preemptive Rights. Owners of our common stock have no preemptive rights. We may sell shares of our common stock to third parties without first offering it to current stockholders.
Redemption Rights. We do not have the right to buy back shares of our common stock except in extraordinary transactions such as mergers and court approved bankruptcy reorganizations. Owners of our common stock do not ordinarily have the right to require us to buy their common stock. We do not have a sinking fund to provide assets for any buy back.
Conversion Rights. Shares of our common stock cannot be converted into any other kind of stock except in extraordinary transactions, such as mergers and court approved bankruptcy reorganizations.
Description of Preferred Stock
We are authorized to issue up to 1,000,000 shares of Preferred Stock. Our Board of Director has the right, without stockholder approval, to issue such Preferred Stock with voting, dividend, conversion, liquidation or other rights which could adversely effect the voting power and equity interest of the Holders of the common stock, could be issued with the right to more than one (1) vote per share, and could be utilized in the method of discouraging, delaying or preventing a change in control. Our Preferred Stock is currently designated into one series: Series B Preferred Stock (Series B Preferred).
Series B Preferred Stock
The Series B Preferred shares are held by our executive management and founders Mr. Schoell and Ms. Fruge. The Series B Preferred is a majority voting stock, whereby its holders collectively are able to cast votes equal to 51% of all shares of Common Stock issued and outstanding and able to vote in matters brought before our shareholders. The Series B Preferred, in essence, provides our two executive managers with control over the voting matters brought before our shareholders and could serve to delay, defer or prevent a change in control of the company. In the instance of a liquidating event winding-up, merger or acquisition of the company, the shares of Series B Preferred will convert to Common Stock on a one-for-one basis.
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ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to Section 607.0850 of the Florida Statutes, the Company has the power to indemnify any person made a party to any lawsuit by reason of being a director or officer of the Company, or serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is therefore unenforceable.
Our Articles of Incorporation provide that our directors and officers shall be indemnified and the Company shall advance expenses on behalf of its officers and directors to the fullest extent not prohibited by law either now or hereafter.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 15. Financial Statements and Exhibits of this Registration Statement on Form 10.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements See Page F-1
(b) Exhibits
Exhibit No. |
| Description |
3.1 |
| Articles of Incorporation, dated June 14, 2007 |
3.2 |
| Certificate of Domestication, dated June 14, 2007 |
3.3 |
| Articles of Amendment to Articles of Incorporation, dated July 1, 2007 |
3.4 |
| Articles of Amendment to Articles of Incorporation, dated July 27, 2007 |
3.5 |
| Articles of Amendment to Articles of Incorporation, dated July 24, 2009 |
3.6 |
| Articles of Amendment to Articles of Incorporation, dated March 30, 2010 |
3.7 |
| Articles of Amendment to Articles of Incorporation, dated April 28, 2010 |
3.8 |
| By-Laws of Cyclone Power Technologies, Inc. |
10.1 |
| Employment Agreement, dated June 30, 2007, between the Company and Frankie Fruge |
10.2 |
| Employment Agreement, dated June 30, 2007, between the Company and Harry Schoell |
10.3 |
| Common Stock Purchase Warrant, dated July 30, 2009, between the Company and Phoenix Power Group, LLC |
10.4 |
| Cyclone Power Technologies 2010 Stock Option Plan |
21 |
| Subsidiaries of the Company |
23
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement on Form 10 to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: July 1, 2011 | Cyclone Power Technologies, Inc. | |
|
| |
|
| |
| By: | /s/ Harry Schoell |
|
| Harry Schoell, Chairman & CEO |
24
CYCLONE POWER TECHNOLOGIES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
QUARTERLY REPORT FOR PERIOD ENDED MARCH 31, 2011
|
| Page # |
1) | Consolidated Balance Sheets as of March 31, 2011(Unaudited) and December 31, 2010 (Audited) | F-2 |
|
|
|
2) | Consolidated Statement of Operations, Three Months Ended March 31, 2011 and 2010 (Unaudited) | F-3 |
|
|
|
3) | Consolidated Statement of Stockholders Deficit, Year Ended December 31, 2010 (Audited) and Three Months Ended March 31, 2011 (Unaudited) | F-4 |
|
|
|
4) | Consolidated Statement of Cash Flows, Three Months Ended March 31, 2011 and 2010 (Unaudited) | F-5 |
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|
|
5) | Notes to the Consolidated Financial Statements | F-6 F-14 |
ANNUAL REPORT FOR PERIODS ENDED DECEMBER 31, 2010 AND 2009
|
| Page # |
1) | Report of Independent Registered Public Accounting Firm | F-15 |
|
|
|
2) | Consolidated Balance Sheets | F-16 |
|
|
|
3) | Consolidated Statements of Operations | F-17 |
|
|
|
4) | Consolidated Statements of Stockholders Deficit | F-18 |
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|
|
5) | Consolidated Statements of Cash Flows | F-19 |
|
|
|
6) | Notes to the Consolidated Financial Statements | F-20 F-28 |
F-1
CYCLONE POWER TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2011 AND DECEMBER 31, 2010
|
| March 31, 2011 |
| December 31, 2011 |
|
| (Unaudited) |
| (Unaudited) |
ASSETS |
|
|
|
|
CURRENT ASSETS |
|
|
|
|
Cash | $ | 65,272 | $ | 6,557 |
Accounts receivable |
| - |
| 4,200 |
Inventory |
| 214,278 |
| 228,838 |
Other current assets |
| 5,827 |
| 828 |
Total current assets |
| 285,377 |
| 240,423 |
|
|
|
|
|
PROPERTY AND EQUIPMENT |
|
|
|
|
Furniture, fixtures, and equipment |
| 139,428 |
| 139,428 |
Less: Accumulated depreciation |
| (59,984) |
| (55,644) |
Net property and equipment |
| 79,444 |
| 83,784 |
|
|
|
|
|
OTHER ASSETS |
|
|
|
|
Patents, trademarks and copyrights |
| 489,137 |
| 486,466 |
Less: Accumulated amortization |
| (89,103) |
| (81,115) |
Net patents, trademarks and copyrights |
| 400,034 |
| 405,351 |
Other assets |
| 1,156 |
| 1,156 |
Total other assets |
| 401,190 |
| 406,507 |
|
|
|
|
|
Total Assets | $ | 766,011 | $ | 730,714 |
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT |
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
Accounts payable and accrued expenses | $ | 296,892 | $ | 187,887 |
Accounts payable and accrued expenses-related parties |
| 1,052,864 |
| 991,269 |
Notes and other loans payable |
| 5,000 |
| 5,000 |
Notes and other loans payable-related parties |
| 702,156 |
| 659,577 |
Capitalized lease obligations-current portion |
| 3,512 |
| 6,565 |
Deferred revenue & license deposits |
| 752,500 |
| 710,000 |
Warranty provision |
| 2,324 |
| 2,324 |
|
|
|
|
|
Total Current Liabilities |
| 2,815,248 |
| 2,562,622 |
|
|
|
|
|
NON CURRENT LIABILITIES |
|
|
|
|
Capitalized lease obligations-net of current portion |
| 2,451 |
| 2,451 |
Total non-current liabilities |
| 2,451 |
| 2,451 |
|
|
|
|
|
Total Liabilities |
| 2,817,699 |
| 2,565,073 |
|
|
|
|
|
STOCKHOLDERS' DEFICIT |
|
|
|
|
Series A convertible preferred stock, $.0001 par value, 750,000 shares authorized, 750,000 and 705,453 shares issued and outstanding at March 31,2011 and December 31, 2010, respectively. |
| 75 |
| 71 |
|
|
|
|
|
Series B preferred stock, $.0001 par value, 1,000 shares authorized, 1,000 shares issued and outstanding |
| - |
| - |
|
|
|
|
|
Common stock, $.0001 par value, 300,000,000 shares authorized, 116,751,548 and 114,020,135 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively. |
| 11,675 |
| 11,402 |
Additional paid-in capital |
| 8,687,422 |
| 8,115,405 |
Prepaid expenses from equity contribution |
| (27,500) |
| (27,500) |
Preferred stock subscription receivable |
| (18,000) |
| (18,000) |
Non controlling interest in consolidated subsidiary |
| 132,250 |
| 134,875 |
Accumulated deficit |
| (10,837,610) |
| (10,050,612) |
|
|
|
|
|
Total Stockholders' Deficit |
| (2,051,688) |
| (1,834,359) |
|
|
|
|
|
Total Liabilities and Stockholders' Deficit | $ | 766,011 | $ | 730,714 |
See the accompanying notes to consolidated financial statements
F-2
CYCLONE POWER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010
(UNAUDITED)
|
| Three Months Ended March 31, | ||
|
| 2011 |
| 2010 |
|
|
|
|
|
REVENUES | $ | - | $ | 104,900 |
|
|
|
|
|
COST OF GOODS SOLD |
| 175,867 |
| 51,797 |
|
|
|
|
|
Gross profit |
| (175,867) |
| 53,103 |
|
|
|
|
|
OPERATING EXPENSES |
|
|
|
|
Advertising and promotion |
| 11,075 |
| 12,221 |
General and administrative |
| 368,019 |
| 278,193 |
Research and development |
| 224,403 |
| 144,423 |
|
|
|
|
|
Total operating expenses |
| 603,497 |
| 434,837 |
|
|
|
|
|
Operating loss |
| (779,364) |
| (381,734) |
|
|
|
|
|
OTHER EXPENSE |
|
|
|
|
Interest expense |
| (10,259) |
| (12,167) |
|
|
|
|
|
Total other expense |
| (10,259) |
| (12,167) |
|
|
|
|
|
Loss before income taxes |
| (789,623) |
| (393,901) |
Income taxes |
| - |
| - |
|
|
|
|
|
Net loss | $ | (789,623) | $ | (393,901) |
|
|
|
|
|
Net loss per common share, basic and diluted | $ | (0.01) | $ | (0.00) |
|
|
|
|
|
Weighted average number of common shares outstanding |
| 114,464,073 |
| 104,484,777 |
See the accompanying notes to consolidated financial statements
F-3
CYCLONE POWER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 2010 (AUDITED) AND
THREE MONTHS ENDED MARCH 31, 2011 (UNAUDITED)
|
|
|
| Additional Paid In Capital | Treasury Stock | Prepaid Expenses From Equity Contribution | Preferred Stock Subscription Receivable | Non Controlling Interest In Consol. Subsidiary | Accumulated (Deficit) | Total Stockholders (Deficit) | |||
| Preferred Stock A | Preferred Stock B | Common Stock | ||||||||||
| Shares | Value | Shares | Value | Shares | Value | |||||||
Balance, December 31, 2009 | 540,000 | $ 54 | 1,000 | $ - | 103,699,133 | $ 10,369 | $6,438,183 | $ - | $ - | $ (18,000) |
| $ (7,884,328) | $ (1,453,722) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted shares for outside services | 2,000 | - | - | - | 4,077,280 | 409 | 364,967 | - | - | - | - | - | 365,376 |
Issuance of restricted shares and options for employee services | 2,500 | 1 |
|
| 1,681,500 | 168 | 157,234 | - | - | - | - | - | 157,403 |
Sale of common stock | - | - | - | - | 2,062,222 | 206 | 163,372 | - | - | - | - | - | 163,578 |
Sale of preferred stock | 141,000 | 14 |
|
|
|
| 635,997 | - | - | - | - | - | 636,011 |
Warrants issued pursuant to preferred stock sale |
|
|
|
|
|
| 84,589 | - | - | - | - | - | 84,589 |
Conversion of debt to common stock | - | - | - | - | 2,500,000 | 250 | 171,300 | - | - | - | - | - | 171,550 |
Conversion of debt to preferred stock | 19,953 | 2 | - | - | - | - | 99,763 | - | - | - | - | - | 99,765 |
Conversion of debt to equity in subsidiary | - | - | - | - | - | - | - | - | - | - | 30,000 | - | 30,000 |
Sale of equity in subsidiary for cash | - | - | - | - | - | - | - | - | - | - | 50,000 | - | 50,000 |
Sale of equity in subsidiary for services | - | - | - | - | - | - | - | - | (60,000) | - | 60,000 | - | 0 |
Amortization of prepaid services for subsidiary equity | - | - | - | - | - | - | - | - | 32,500 | - | - | - | 32,500 |
Allocation of loss of subsidiary to non controlling interest | - | - | - | - | - | - | - | - | - | - | (5,125) | 5,125 | 0 |
Net loss year ended December 31, 2010 | - | - | - | - | - | - | - | - | - | - | - | (2,171,409) | (2,171,409) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010 | 705,453 | 71 | 1,000 | - | 114,020,135 | 11,402 | 8,115,405 | - | (27,500) | (18,000) | 134,875 | (10,050,612) | (1,834,359) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted shares for outside services | - | - | - | - | 779,500 | 78 | 78,064 | - | - | - | - | - | 78,142 |
Issuance of restricted shares and options for employee services | - | - | - | - | 280,000 | 28 | 87,022 | - | - | - | - | - | 87,050 |
Sale of common stock | - | - | - | - | 950,655 | 95 | 123,405 | - | - | - | - | - | 123,500 |
Sale of preferred stock | 44,547 | 4 | - | - | - | - | 192,731 | - | - | - | - | - | 192,735 |
Issuance of restricted shares for contract penalty re-delayed shipment | - | - | - | - | 521,258 | 52 | 75,815 | - | - | - | - | - | 75,867 |
Purchase of Treasury Stock | - | - | - | - | - | - | - | 40,000 | - | - | - | - | 40,000 |
Sale of Treasury Stock | - | - | - | - | - | - | - | (40,000) | - | - | - | - | (40,000) |
Amortization of prepaid services for subsidiary equity | - | - | - | - | - | - | - | - | 15,000 | - | - | - | 15,000 |
Allocation of loss of subsidiary to non controlling interest | - | - | - | - | - | - | - | - | - | - | (2,625) | 2,625 | - |
Issuance of restricted common shares for future services | - | - | - | - | 200,000 | 20 | 14,980 | - | (15,000) | - | - | - | - |
Net loss three months ended March 31, 2011 | - | - | - | - | - | - | - | - | - | - | - | (789,623) | (789,623) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2011 | 750,000 | $ 75 | 1,000 | $ - | 116,751,548 | $ 11,675 | $8,687,422 | $ - | $ (27,500) | $ (18,000) | $ 132,250 | $ (10,837,610) | $ (2,051,688) |
See the accompanying notes to consolidated financial statements
F-4
CYCLONE POWER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010
(UNAUDITED)
|
| Three Months Ended March 31, | |||
|
| 2011 |
| 2010 | |
|
|
|
|
| |
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
| |
Net loss | $ | (789,623) | $ | (393,901) | |
Adjustments to reconcile net loss to net cash used by operating activities: |
|
|
|
| |
Depreciation and amortization |
| 12,328 |
| 12,814 | |
Issuance of restricted common and preferred stock and options for services |
| 165,192 |
| 89,722 | |
Issuance of restricted common stock for contract penalty |
| 75,867 |
| - | |
Amortization of prepaid expenses purchased with equity |
| 15,000 |
|
| |
Changes in operating assets and liabilities: |
|
|
|
| |
Decrease (increase) in accounts receivable |
| 4,200 |
| (25,616) | |
Decrease (increase) in inventory |
| 14,560 |
| (74,179) | |
(Increase) decrease in other assets |
| (4,999) |
| 5,340 | |
Increase in deferred revenue and deposits |
| 42,500 |
| 55,000 | |
Increase in accounts payable and accrued expenses |
| 109,005 |
| 52,101 | |
Increase in accounts payable and accrued expenses-related parties |
| 61,595 |
| 73,515 | |
Net cash used by operating activities |
| (294,375) |
| (205,204) | |
|
|
|
|
| |
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
| |
Payments incurred for patents, trademarks and copyrights |
| (2,671) |
| (23,833) | |
Purchase of property and equipment |
| - |
| (4,966) | |
Net cash used by investing activities |
| (2,671) |
| (28,799) | |
|
|
|
|
| |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
| |
Proceeds from sale of Series A Preferred treasury stock |
| 40,000 |
| - | |
Payment of capitalized leases |
| (3,053) |
| (2,693) | |
Proceeds from sale of common stock |
| 123,500 |
| 115,211 | |
Proceeds from sale of preferred stock |
| 192,735 |
| 95,000 | |
Proceeds from related party notes and loans payable |
| 2,579 |
| 121,144 | |
Net cash provided by financing activities |
| 355,761 |
| 328,662 | |
|
|
|
|
| |
Net increase in cash and cash equivalents |
| 58,715 |
| 94,659 | |
Cash and cash equivalents, beginning of period |
| 6,557 |
| 28,558 | |
|
|
|
|
| |
Cash and cash equivalents, end of period | $ | 65,272 | $ | 123,217 | |
|
|
|
|
| |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
| |
|
|
|
|
| |
Payment of interest in cash | $ | 397 | $ | 757 | |
Payment of income taxes in cash | $ | - | $ | - | |
NON CASH INVESTING AND FINANCING ACTIVITIES: |
|
|
|
| |
Expenses paid with 869,200 shares of restricted common stock and 450,000 options | $ | - | $ | 89,722 | |
Purchase of 8,000 shares of Series A Preferred treasury stock via note payable | $ | 40,000 | $ | - |
See the accompanying notes to consolidated financial statements
F-5
CYCLONE POWER TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
NOTE 1 ORGANIZATIONAL AND SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION AND OPERATIONS
Cyclone Power Technologies, Inc. (the Company) is the successor entity to the business of Cyclone Technologies LLLP (the LLLP), a limited liability limited partnership formed in Florida in June 2004. The LLLP was the original developer and intellectual property holder of the Cyclone engine technology.
On July 2, 2007, the LLLP merged into Cyclone Power Technologies, Inc., a publicly-traded Florida corporation that had recently re-domiciled from California and changed its name from Coastal Technologies, Inc. (the Pink Sheet Company). Prior to the merger, the Pink Sheet Company was engaged in the business of medical software development, which the Company divested concurrently with the merger.
In the third quarter of 2010, the Company established a subsidiary, Cyclone-WHE LLC (the Subsidiary) to market the waste heat recovery systems for all Cyclone engine models. As of March 31, 2011, the Company had an 82.5% equity interest in the Subsidiary.
The Company is primarily a research and development engineering company whose main purpose is to develop, commercialize, market and license its Cyclone engine technology.
B. ACCOUNTING STANDARDS CODIFICATION
The Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASC) 105-10 in June 2009, to be effective September 15, 2009. This establishes the ASC codification as the single source of authoritative nongovernmental Generally Accepted Accounting Principles (GAAP). All existing accounting standards are superseded as described in FASB Accounting Standards Codification (SFAS) No. 168, aside from those issued by the SEC. All other accounting literature not included in the Codification is non-authoritative. Adoption of this Codification as of September 30, 2009, which is reflected in our disclosures and references to accounting standards, had no change to our financial position or results of operations.
C. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of Cyclone Power Technologies and its 82.5% owned Subsidiary. All material inter-company transactions and balances have been eliminated in the consolidated financial statements. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. As such, not all of the information and footnotes required by generally accepted accounting principles for complete financial statements have been presented.
The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results for the full fiscal year ending December 31, 2011. These financial statements should be read in conjunction with the financial statements and footnotes for the year ended December 31, 2010.
D. SUBSEQUENT EVENTS
In May 2009, the FASB issued SFAS No. 165, (ASC 855) Subsequent Events (ACS 855) which offers assistance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ACS 855 does not result in material changes in the subsequent events that an entity reports. This guidance requires disclosure of the date through which events subsequent to the Balance Sheet date have been evaluated and whether such date represents the date the financial statements were issued or were available to be issued. ASC 855 is effective for interim and annual periods ending after June 15, 2009. Management evaluated events occurring between the Balance Sheet date of March 31, 2011, and when the financial statements were available to be issued.
E. CASH
Cash includes cash on hand and cash in banks. The Company maintains cash balances at several financial institutions.
F-6
F. ACCOUNTS RECEIVABLE
Accounts receivable consist of amounts due pursuant to research and development prototype charges. At March 31, 2011 and December 31, 2010, no allowance for doubtful accounts was deemed necessary.
G. COMPUTATION OF LOSS PER SHARE
Net loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted net 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 March 31, 2011 total anti-dilutive shares amounted to approximately 100.4 million shares.
H. INCOME TAXES
Income taxes are accounted for under the asset and liability method as stipulated by Accounting Standards Codification (ASC) 740 formerly Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. 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 managements view it is more likely than not (50%) that such deferred tax will not be utilized.
Effective January 1, 2009, the Company adopted certain provisions under ASC Topic 740, Income Taxes, (ASC 740), which provide interpretative guidance for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Effective with the Companys adoption of these provisions, interest related to the unrecognized tax benefits is recognized in the financial statements as a component of income taxes. The Adoption of ASC 740 did not have an impact on the Companys financial position and results of operations.
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 March 31, 2011, the Company does not believe it has any uncertain tax positions that would result in the Company having a liability to the taxing authorities. The Companys tax returns are subject to examination by the federal and state tax authorities for the years ended 2007 through 2010.
I. REVENUE RECOGNITION
The Companys revenue recognition policies are in compliance with accounting Codification as ASC 605, and Staff Accounting Bulletin (SAB) 104, Revenue Recognition. Sales 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. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as deferred revenue. The Company does not allow its customers to return prototype products. It is the Companys intention, when it has royalty revenue from its contracts, to record royalty revenue in the quarter received. The Company does not have any royalty revenue to date.
J. INVENTORY
Inventory is recorded at the lower of standard cost or market. Standard costs for material, labor and allocated overhead, are reflective of the estimated costs to manufacture a completed engine after related developmental research and development expenses have been provided for.
K. 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. For purpose of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The carrying amounts reported in the balance sheet for cash, accounts receivable, accounts payable and accrued expenses, and loans payable approximate their fair market value based on the short-term maturity of these instruments.
F-7
L. RESEARCH AND DEVELOPMENT
Research and development activities for product development are expensed as incurred. Costs for the three months ended March 31, 2011 and 2010 were $224,403 and $144,423, respectively.
M. STOCK BASED COMPENSATION
The Company applies the fair value method of ASC 718, Share Based Payment, formerly Statement of Financial Accounting Standards (SFAS) No. 123R Accounting for Stock Based Compensation, 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. As the Company does not have sufficient, reliable and readily determinable values relating to its common stock, the Company has used the stock value pursuant to its most recent sale of restricted stock sold to unaffiliated third-parties in the U.S. for purposes of valuing stock based compensation.
N. COMMON STOCK PURCHASE WARRANTS
The Company accounts for common stock purchase warrants at fair value in accordance with ASC 815-40 Derivatives and Hedging, formerly Emerging Issues Task Force Issue (EITF) No. 00-19, Accounting for Derivative Financial Instruments Indexed to and Practically Settled in a Companys Own Stock. The Black-Scholes option pricing valuation method is used to determine fair value of these warrants consistent with ASC 718, Share Based Payment, formerly Statement of Financial Accounting Standards (SFAS) No. 123 R Accounting for Stock Based Compensation. 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 in exchange for equity instruments based on the fair value of such services received from non-employees, in accordance with ASC 505-50 Equity Based payments to Non-employees, formerly EITF No. 96-18, Accounting for Equity Instruments that are Issued to other than Employees for Acquiring, or in Conjunction with Selling Goods or Services.
O. 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:
Computers and trade show equipment | 3 years |
Shop equipment | 7 years |
Furniture, fixtures, and leasehold improvements | 10-15 years |
Expenditures for maintenance and repairs are charged to operations as incurred.
P. 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.
Q. RECLASSIFICATIONS
Certain balances that have been presented previously have been reclassified to conform to the financial statement presentation adopted for this year.
R. CURRENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standard Board (FASB) in October 2009 issued Account Standards Update (ASU) 2009-13 Revenue Recognition (Topic 605). This update provides guidance for revenue recognition consideration in multiple-deliverable contractual arrangements. The update requires that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis. This update was effective after June 15, 2010, and early adoption was permitted. The Company has implemented this update effective for the years beginning January 1, 2010. The disclosure requirements for this update are:
a.
Multiple deliverable arrangements: the Company has contracts that provide for a working prototype or plans/schematics of the prototype engine (initial deliverable) and will record royalty fees after the customer constructs and puts the engine into operation or manufacturing, depending on the terms of the agreement.
F-8
b.
The initial deliverables are usually within a year of signing of the contract and upon the complete customer payment of the initial license/development fees.
c.
Revenue is based on the initial license/development fees charged for the deliverable, and then royalty income is recognized thereafter, through the life of the contract.
The implementation of this topic did not have any material effect on the financial statements and did not change any pattern and timing of revenue recognition.
In January 2010 FASB issued ASU Equity (Topic 505), accounting for distributions to shareholders with components of stock and cash. This amendment affects entities that declare dividends to shareholders that may be paid in cash or shares at the election of the shareholders with a potential limitation in the total amount of cash that all shareholders can elect to receive in the aggregate. The Company does not believe that this Topic currently has an impact on these financial statements.
NOTE 2 - GOING CONCERN
As shown in the accompanying financial statements, the Company incurred substantial net losses for the three months ended March 31, 2011 of $789,623. For the years ended December 31, 2010 and 2009 net losses were $2,171,409 and $2,525,101, respectively. The cumulative deficit since inception is approximately $10.8 million and the Company has a working capital deficit at March 31, 2011 of approximately $2.5 million. There is no guarantee whether the Company will be able to generate enough revenue and/or raise capital to support its operations. This raises substantial doubt about the Companys ability to continue as a going concern.
The ability of the Company to continue as a going concern is dependent on managements plans, which includes 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 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 common stock, advance contract payments (deferred revenue) and advances from and deferred payments to related parties.
NOTE 3 INVENTORY
Inventory at March 31, 2011 and December 31, 2010 consists of:
|
| March 31, 2011 |
| December 31, 2010 |
Engine material and parts | $ | 178,784 | $ | 183,893 |
Labor |
| 30,326 |
| 38,556 |
Applied overhead |
| 5,168 |
| 6,389 |
Total Inventory | $ | 214,278 | $ | 228,838 |
NOTE 4 PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2011 and December 31, 2010 consists of the following:
|
| March 31, 2011 |
| December 31, 2010 |
Display Equipment for Trade Shows | $ | 9,648 | $ | 9,648 |
Leasehold Improvements and Furniture and Fixtures |
| 46,332 |
| 46,332 |
Equipment and Computers |
| 83,448 |
| 83,448 |
Total |
| 139,428 |
| 139,428 |
Less: Accumulated Depreciation |
| 59,984 |
| 55,644 |
Net Property and Equipment | $ | 79,444 | $ | 83,784 |
Depreciation expense for the three months ended March 31, 2011 and 2010 was $4,340 and $5,723, respectively.
F-9
NOTE 5 PATENTS AND TRADEMARKS AND COPYRIGHTS
The Cyclone Engine is currently protected under the following U.S. Patents:
Heat Regenerative Engine (US Patent No. 7,080,512 B2)
Heat Regenerative Engine (Continuation)(US Patent No. 7,856,822 B2)
Steam Generator in a Heat Regenerative Engine (US Patent No. 7,407,382)
Engine Reversing and Timing Control Mechanism (US Patent No. 7,784,280 B2)
Centrifugal Condenser (US Patent No. 7,798,204 B2)
Valve Controlled Throttle Mechanism (US Patent No. 7,730,873 B2)
Pre-Heater Coil in a Heat Regenerative Engine (US Patent No 7,856,823 B2)
Engine Shrouding with Air to Air Exchanger (Ser. No. 11/879,586)
Spider Bearing (Ser. No. 11/879,589)
Waste Heat Engine (Ser. No. 12/291,001)
The Company also has received patents for the main Cyclone engine in eight other countries plus the European Economic Union, which covers approximately 40 countries (which would require the Company perfecting the EEU patent in some or all of these countries), and patents pending in three more countries. The Company plans to continue to pursue patent protection in the U.S. and internationally for its intellectual property.
The Company has filed trademark applications in the U.S. for Cyclone Power Technologies, Cyclone Power, WHE, WHE Generation, and Generation WHE.
Patents, trademarks and copyrights consist of legal fees paid to file and perfect these claims. The net balances as of March 31, 2011 and December 31, 2010 was $400,034 and $405,351 respectively. For the three months ended March 31, 2011 and for the year ended December 31, 2010, $2,671 and $85,968 was capitalized, respectively. Patents, trademarks and copyrights are amortized over the life of the intellectual property which is 15 years. Amortization for the three months ended March 31, 2011 and 2010 was $7,988 and $7,091, respectively. The Company wrote off abandoned patents $0 for the three months ended March 31, 2011 and $9,855 for the year ended December 31, 2010, respectively.
NOTE 6 NOTES AND OTHER LOANS PAYABLE
A summary of non-related party notes and other loans payable as of March 31 2011 and December 31, 2010 follows:
|
| March 31, 2011 |
| December 31, 2010 |
|
|
|
|
|
6% uncollateralized $5,000 demand note | $ | 5,000 | $ | 5,000 |
|
|
|
|
|
Total current non related party notes and loans payable (accrued interest is included in accrued liabilities) | $ | 5,000 | $ | 5,000 |
A summary of related party notes and other loans payable as of March 31, 2011 and December 31, 2010 follows:
|
| March 31, 2011 |
| December 31, 2010 |
|
|
|
|
|
6% demand loan owned by controlling shareholder, uncollateralized (A) | $ | 40,000 | $ | - |
|
|
|
|
|
6% demand loans per Operations Agreement with Schoell Marine Inc., a company owned by Cyclones CEO and controlling shareholder, collateralized by lien on Cyclones patent for heat regenerative engine (B) |
| 440,726 |
| 444,209 |
|
|
|
|
|
6% non-collateralized loan from officer and shareholder, payable on demand. The original principle balance was $137,101. |
| 82,464 |
| 86,264 |
|
|
|
|
|
Accrued Interest |
| 138,966 |
| 129,104 |
|
|
|
|
|
Total current related party notes, inclusive of accrued interest | $ | 702,156 | $ | 659,577 |
(A)
This note was issued to purchase 8,000 shares of the Companys Series A Preferred Stock.
(B)
This note arose from services and salaries incurred by Schoell Marine on behalf of the Company. Schoell Marine also owns the building that is leased to the Company. The Schoell Marine note bears an interest rate of 6% and repayments occur as cash flow of the Company permits. The note is secured by a UCC-1 filing on the Companys patents and patent applications. During the three months ended March 31, 2011, $3,483 was paid on the note balance.
F-10
NOTE 7 RELATED PARTY TRANSACTIONS
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, which is part of the Companys Operations Agreement with Schoell Marine, provides for the Company to pay rent equal to the monthly mortgage payment on the building plus property taxes, rent, utilities and sales tax due on rent. Occupancy costs for the three months ended March 31, 2011 and 2010 were $15,741 and $15,741, respectively. The Operations Agreement runs year-to-year, however, the lease portion of this agreement is month-to-month, but can only be cancelled on 180 days notice by Schoell Marine.
B. DEFERRED COMPENSATION
Included in related party payables as of March 31, 2011 and December 31, 2010 is $1,052,864 and $970,614, respectively, of accrued and deferred officers salaries compensation which can be paid if funds are available. These are non-interest bearing and due on demand.
C. PURCHASE OF SERIES A PREFERRED TREASURY STOCK
On March 7, 2011 the Company purchased from the controlling shareholder 8,000 shares of Series A Preferred for a $40,000 demand 6% unsecured promissory note.
NOTE 8 PREFERRED STOCK
The Series A Convertible Preferred stock (the Series A Preferred) as a group is currently convertible into a number of common shares that equal sixty percent (60%) of the total issued and outstanding common shares of the Company, less 33 million common shares. The Series A Preferred stock holders were initially the original equity holders of LLLP, but in 2010, the Company issued additional shares of Series A Preferred stock to accredited investors in a private placement. These newly issued shares have a two-year holding period from the date of issuance. The conversion of the Series A Preferred shares will have the effect of diluting all other common stock shareholders, however, the issuance of the new Series A Preferred shares did not increase this dilution to the common stock holders. As of March 31, 2011, the Series A Preferred shares were convertible into approximately 92.7 million shares of common stock. On May 12, 2011 the holders of a majority of the shares of Series A Preferred stock executed a resolution to convert all of the Series A Preferred Shares into approximately 95.1 million shares of common stock, and to retire all Series A Preferred shares, effective as of May 15, 2011.
The Series B Preferred Stock is majority voting stock and is held by senior management. Ownership of the Series B Preferred Stock shares assures the holders thereof a 51% voting control over the common stock of the Company. The Series B Preferred Stock shares are convertible on a one-for-one basis with the common stock in the instance the Company is merged or sold.
NOTE 9 STOCK TRANSACTIONS
The Company relies on capital raised through private placements of common and preferred stock, and loans primarily from related parties, to assist in the funding of operations.
During the three months ended March 31, 2011, the Company issued 1,059,500 shares of restricted common stock valued at $97,342 for employee services, of which $90,942 was charged to general and administrative services, and $6,400 was for research and development related services and activities. Additionally, the Company amortized (based on vesting) $60,850 of common stock options, previously issued.
During the three months ended March 31, 2011, the Company sold 950,655 shares of restricted common stock for $123,500, and 44,547 shares of Series A Preferred stock for $192,735. Additionally, the Company sold 8,000 shares of Series A Preferred treasury stock for $40,000.
The Company issued 521,258 shares of restricted common stock, valued at $75,827, in the three months ended March 31, 2011, as satisfaction of a contract penalty agreement.
During the year ended December 31, 2010, the Company issued 2,500 shares of Series A Preferred shares, 1,681,500 shares of restricted common stock, and options convertible into 2,040,000 shares of common stock, cumulatively valued at $157,403 for employee services, of which $139,683 was charged to general and administrative services, and $17,720 was for research and development related services and activities. Additionally, the Company issued 2,000 shares of Series A Preferred shares and 4,077,280 shares of restricted common stock valued at $365,376 for outside services.
F-11
During the year ended December 31, 2010, the Company converted $171,550 of debt into 2,500,000 shares of common stock and $99,765 of debt into 19,953 shares of Series A Preferred stock.
During the year ended December 31, 2010, the Company sold 2,062,222 shares of restricted common stock for $163,578, and 141,000 shares of Series A Preferred stock for $720,586.
NOTE 10 STOCK OPTIONS AND WARRANTS
A. COMMON STOCK OPTIONS
For the three months ended March 31, 2011, the Company issued options, valued at $46,488, exercisable into 150,000 shares of common stock to an employee, with an exercise price per share of $.33 per share and a maturity life of 10 years. For services provided by employees in the first quarter of 2011, the Company issued effective April 15, 2011, 335,000 common stock options at an exercise price of $.22 per share with a 1 year vesting and a 5 year exercise term. These options were value at $70,407. For the quarter ended March 31, 2011, the income statement charge for the amortization of stock options was $60,850 and the unamortized balance was $234,459.
For the year ended December 31, 2010, the Company issued 2,040,000 options exercisable into 2,040,000 shares of common stock to employees and staff, with an average exercise price per share of $.122, and an average maturity life of 5.8 years. The income statement charge for the year ended December 31, 2010 was $64,988 and the unamortized balance was $178,414.
A summary of the common stock options for the period from December 31, 2009 through March 31, 2011 follows:
Common Stock Options |
| Number Outstanding |
| Weighted Average Exercise Price |
| Weighted Average Remaining Contractual Life (Years) |
|
|
|
|
|
|
|
Balance, December 31, 2009 |
| 1,000,000 | $ | 0.325 |
| 6.5 |
Options issued |
| 2,040,000 |
| 0.122 |
| 5.4 |
Options exercised |
| - |
| - |
| - |
Options cancelled |
| - |
| - |
| - |
|
|
|
|
|
|
|
Balance, December 31, 2010 |
| 3,040,000 |
| 0.188 |
| 5.0 |
Options issued |
| 150,000 |
| .330 |
| 10.0 |
Options exercised |
| - |
| - |
| - |
Options cancelled |
| - |
| - |
| - |
|
|
|
|
|
|
|
Balance, March 31, 2011 |
| 3,190,000 | $ | .195 |
| 5.7 |
The fair value of stock options and purchase warrants granted using the Black-Scholes option pricing model was calculated using the following assumptions:
| Three Months Ended |
| Year Ended |
| March 31, 2011 |
| Dec. 31, 2010 |
Risk Free Interest Rate | 1.20% |
| .6% - 1.18% |
Expected Volatility | 730% |
| 458% - 628% |
Expected term in years | 10 |
| 2-3 |
Expected dividend yield | 0% |
| 0% |
Average value per options and warrants | $.31 |
| $.09 - $.14 |
Expected volatility is based on historical volatility of the Company and other comparable companies. Short Term U.S. Treasury rates were utilized. The expected term of the options and warrants was calculated using the alternative simplified method newly codified as ASC 718, formerly Staff Accounting Bulletin (SAB) 107, 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 trenches.
B. COMMON STOCK WARRANTS
Outstanding-
In August 2010, the Company issued 770,500 warrants at a $.15 exercise price, with a 2 year term, pursuant to the sale of Series A Preferred stock to an unaffiliated third party.
F-12
A summary of outstanding warrant activity for the three months ended March 31, 2011 follows:
Common Stock Warrants |
| Number Outstanding |
| Weighted Average Exercise Price |
| Weighted Average Remaining Contractual Life (Years) |
|
|
|
|
|
|
|
Balance, December 31, 2010 |
| 770,500 | $ | 0.150 |
| 1.67 |
Warrants issued |
| - |
| - |
| - |
Warrants exercised |
| - |
| - |
| - |
Warrants cancelled |
| - |
| - |
| - |
|
|
|
|
|
|
|
Balance, March 31, 2011 |
| 770,500 | $ | .150 |
| 1.33 |
Commitments-
As part of the Companys license agreement with Phoenix Power Group (Phoenix), in 2009 the Company agreed to issue to Phoenix common stock purchase warrants at a price of $.19 per share, equal to two (2%) percent of the total issued, outstanding, convertible and dilutive common stock of the Company at the time of exercise. The number of warrants to be issued is contingent upon the number of shares outstanding at the date the warrants are issued. As of March 31, 2011, 2% of the outstanding, convertible and dilutive common stock of the company was approximately 4.3 million shares. The warrants vest upon the delivery of the first two prototype Cyclone Mark V Engines to Phoenix and payment by Phoenix of the full $400,000 license. These warrants terminate 24 months thereafter. Delivery of the prototypes is estimated in the second half of 2011. The warrants are valued at approximately $873,000 (by the Black Scholes valuation method) and are to be amortized in conjunction with revenue and royalty recognition from this contract, anticipated to commence in 2011.
NOTE 11 INCOME TAXES
A reconciliation of the differences between the effective income tax rates and the statutory federal tax rates for the three months ended March 31, 2011 and 2010 are as follows:
|
| 3 months ended March 31, 2011 |
| Amount |
| 3 months ended March 31, 2010 |
| Amount |
Tax benefit at U.S. statutory rate |
| 34% | $ | 268,472 |
| 34% | $ | 133,926 |
State taxes, net of federal benefit |
| 4 |
| 31,585 |
| 4 |
| 15,756 |
Change in valuation allowance |
| (38) |
| (300,057) |
| (38) |
| (149,682) |
|
| - % | $ | -. |
| - % | $ | - |
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and liabilities for three months ended March 31, 2011 and for the year ended December 31, 2010 consisted of the following:
Deferred Tax Assets |
| March 31, 2011 |
| December 31, 2010 |
Net Operating Loss Carryforward | $ | 3,067,337 | $ | 2,860,156 |
Deferred Tax Liabilities Accrued Salaries |
| (31,255) |
| (92,876) |
Net Deferred Tax Assets |
| 3,036,082 |
| 2,767,280 |
Valuation Allowance |
| (3,036,082) |
| (2,767,280) |
Total Net Deferred Tax Assets | $ | - | $ | - |
As of December 31, 2010, the Company had a net operating loss carry forward for income tax reporting purposes of approximately $7 million that may be offset against future taxable income through 2029. 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.
F-13
NOTE 12 CAPITALIZED LEASE OBLIGATIONS
In June 2009, the Company acquired $27,401 of property and equipment via capitalized lease obligations at an average interest rate of 18.4%. Lease principle payments made in the three months ended March 31, 2011 was $3,450. The balance of leases payable at March 31, 2011 was $5,963. Future lease payments are:
2011 | $ | 3,872 |
2012 |
| 927 |
2013 |
| 975 |
2014 |
| 189 |
| $ | 5,963 |
NOTE 13 COMMITMENTS AND CONTINGENCIES
The Company has employment agreements with Harry Schoell, CEO, at $150,000 per year, and Frankie Fruge, COO, at $120,000 per year (the Executives), that provide for a term of three (3) years from their Effective Date (July 2, 2007), with automatically renewing successive one year periods starting on the end of the second anniversary of the Effective Date. If either 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 Executives 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 not terminated, during the 12 months following his or her termination.
As of March 31, 2011, the Company was named as defendant in a lawsuit involving an alleged breach of contract, which was settled in April 2011 for a non-material amount and dismissal of the suit with prejudice.
NOTE 14 CONSOLIDATED SUBSIDIARY
Commencing in the second quarter of 2010, the Company has started operations in the Subsidiary (Cyclone-WHE LLC) to license and market waste heat recovery systems for all engine models. A 5% equity participation was sold to a minority investor for $30,000, via the conversion of a Cyclone note payable. Another 5% was purchased directly from the Subsidiary by a minority investor for services valued at $30,000 consisting of assistance in marketing, management and financing for projects to be carried out by the Subsidiary. These services are being amortized over a 12 month period. This investor also received and exercised a 2.5% equity purchase warrant in the Subsidiary for $50,000.
Effective July 1, 2010, a 5% equity contribution was provided to the new Managing Director of the Subsidiary in consideration of $30,000 of future professional services (which are being amortized over a 12 month period). Additionally, options were given for the acquisition of an additional 5% equity in the subsidiary at a total price of $100,000, vesting half in 12 months and half in 24 months, exercisable for 5 years.
NOTE 15 PENALTY FOR DELAYED DELIVERY OF PRODUCT
In 2009, the Company signed a contract for the delivery of two Mark V engines that had a performance penalty of $25,000 per month for late delivery, paid with restricted Company common stock. Other terms of the contract reflected development fees paid by the customer, and royalties to be paid to the Company based on units subsequently manufactured and sold by the customer. The original delivery date was revised to January 1, 2011, and now the updated and enhanced Mark V engines are anticipated to be shipped in the third quarter of 2011. In the quarter ended March 31, 2011, the Company charged $175,867 to cost of goods sold for this penalty. This is reflective of 521,258 shares of restricted common stock issued in the first quarter and valued at $75,867, and $100,000 of accrued expenses for subsequent delayed engine delivery.
NOTE 16 SUBSEQUENT EVENTS CONVERSION OF SERIES A PREFERRED SHARES
On May 12, 2011, the holders of a majority of the shares of Series A Preferred stock executed a resolution to convert all the Series A Preferred shares into approximately 95.1 million shares of common stock, and to retire all Series A Preferred shares, effective as of May 15, 2011.
F-14
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Cyclone Power Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Cyclone Power Technologies, Inc. as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders deficit, and cash flows for the years then ended. Cyclone Power Technologies, Inc.s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cyclone Power Technologies, Inc. as of December 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Companys dependence on outside financing, lack of sufficient working capital, and recurring losses raises substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Mallah Furman |
Fort Lauderdale, FL |
April 19, 2011 |
F-15
CYCLONE POWER TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2010 AND 2009
|
| 2010 |
| 2009 |
ASSETS |
|
|
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
Cash | $ | 6,557 | $ | 28,558 |
Accounts receivable |
| 4,200 |
| - |
Inventory |
| 228,838 |
| 140,841 |
Other current assets |
| 828 |
| 6,628 |
Total current assets |
| 240,423 |
| 176,027 |
|
|
|
|
|
PROPERTY AND EQUIPMENT |
|
|
|
|
Furniture, fixtures, and equipment |
| 139,428 |
| 108,244 |
Less: Accumulated depreciation |
| (55,644) |
| (30,114) |
Net property and equipment |
| 83,784 |
| 78,130 |
|
|
|
|
|
OTHER ASSETS |
|
|
|
|
Patents, trademarks and copyrights |
| 486,466 |
| 405,220 |
Less: Accumulated amortization |
| (81,115) |
| (51,092) |
Net patents, trademarks and copyrights |
| 405,351 |
| 354,128 |
Other assets |
| 1,156 |
| 8,146 |
Total other assets |
| 406,507 |
| 362,274 |
|
|
|
|
|
Total Assets | $ | 730,714 | $ | 616,431 |
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT |
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
Accounts payable and accrued expenses | $ | 187,887 | $ | 133,271 |
Accounts payable and accrued expenses-related parties |
| 991,269 |
| 677,438 |
Notes and other loans payable |
| 5,000 |
| 20,950 |
Notes and other loans payable-related parties |
| 659,577 |
| 627,900 |
Capitalized lease obligations-current portion |
| 6,565 |
| 10,798 |
Deferred revenue and license deposits |
| 710,000 |
| 587,475 |
Accrued contract loss provision |
| - |
| 5,036 |
Warranty provision |
| 2,324 |
| - |
|
|
|
|
|
Total current liabilities |
| 2,562,622 |
| 2,062,868 |
|
|
|
|
|
NON CURRENT LIABILITIES |
|
|
|
|
Capitalized lease obligations-net of current portion |
| 2,451 |
| 7,285 |
Total non-current liabilities |
| 2,451 |
| 7,285 |
|
|
|
|
|
Total Liabilities |
| 2,565,073 |
| 2,070,153 |
|
|
|
|
|
STOCKHOLDERS' DEFICIT |
|
|
|
|
Series A convertible preferred stock, $.0001 par value, 750,000 shares authorized,705,453 and 540,000 shares issued and outstanding at December 31, 2010 and 2009, respectively |
| 71 |
| 54 |
|
|
|
|
|
Series B preferred stock, $.0001 par value, 1,000 shares authorized,1,000 shares issued and outstanding |
| - |
| - |
|
|
|
|
|
Common stock, $.0001 par value, 300,000,000 shares authorized,114,020,135 and 103,699,133 shares issued and outstanding at December 31, 2010 and 2009, respectively |
| 11,402 |
| 10,369 |
Additional paid-in capital |
| 8,115,405 |
| 6,438,183 |
Prepaid services for subsidiary equity |
| (27,500) |
| - |
Preferred stock subscription receivable |
| (18,000) |
| (18,000) |
Accumulated deficit |
| (10,050,612) |
| (7,884,328) |
Total stockholders' deficit |
| (1,969,234) |
| (1,453,722) |
Non controlling interest in consolidated subsidiary |
| 134,875 |
| - |
|
|
|
|
|
Total Stockholders' Deficit |
| (1,834,359) |
| (1,453,722) |
|
|
|
|
|
Total Liabilities and Stockholders' Deficit | $ | 730,714 | $ | 616,431 |
See the accompanying notes to consolidated financial statements
F-16
CYCLONE POWER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR YEARS ENDED DECEMBER 31, 2010 AND 2009
|
| 2010 |
| 2009 |
|
|
|
|
|
REVENUES | $ | 261,525 | $ | 63,938 |
|
|
|
|
|
COST OF GOODS SOLD |
| 110,393 |
| 35,935 |
|
|
|
|
|
Gross Profit |
| 151,132 |
| 28,003 |
|
|
|
|
|
OPERATING EXPENSES |
|
|
|
|
Advertising and promotion |
| 51,838 |
| 66,694 |
General and administrative |
| 1,241,379 |
| 1,332,757 |
Research and development |
| 830,611 |
| 1,115,795 |
|
|
|
|
|
Total operating expenses |
| 2,123,828 |
| 2,515,246 |
|
|
|
|
|
Operating loss |
| (1,972,696) |
| (2,487,243) |
|
|
|
|
|
OTHER INCOME (EXPENSE) |
|
|
|
|
Other income (expense) |
| (159,050) |
| 10,387 |
Interest (expense) |
| (39,663) |
| (48,245) |
|
|
|
|
|
Total other expense |
| (198,713) |
| (37,858) |
|
|
|
|
|
Loss before income taxes |
| (2,171,409) |
| (2,525,101) |
Income taxes |
| - |
| - |
|
|
|
|
|
Net loss | $ | (2,171,409) | $ | (2,525,101) |
|
|
|
|
|
Net loss per common share, basic | $ | (0.02) | $ | (0.03) |
|
|
|
|
|
Weighted average number of common shares outstanding |
| 107,100,629 |
| 95,553,636 |
See the accompanying notes to consolidated financial statements
F-17
CYCLONE POWER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT
FOR YEARS ENDED DECEMBER 31, 2010 AND 2009
|
|
|
| Additional Paid In Capital | Prepaid Services for Subsidiary Equity | Preferred Stock Subscription Receivable | Non Controlling Interest In Consol. Subsidiary | Accumulated (Deficit) | Total Stockholders (Deficit) | |||
| Preferred Stock A | Preferred Stock B | Common Stock | |||||||||
| Shares | Value | Shares | Value | Shares | Value | ||||||
Balance, December 31, 2008 | 500,000 | $ 50 | 1,000 | $ - | 83,016,048 | $ 8,302 | $4,468,122 | $ - | $ - |
| $(5,359,227) | $(882,753) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted shares for services | - | - | - | - | 7,422,900 | 742 | 892,943 | - | - | - | - | 893,685 |
Sale of common stock | - | - | - | - | 8,247,597 | 824 | 1,006,427 | - | - | - | - | 1,007,251 |
Conversion of debt to common stock | - | - | - | - | 4,000,000 | 400 | 19,600 | - | - | - | - | 20,000 |
Conversion of debt to preferred stock | 25,000 | 3 | - | - | - | 0 | 29,997 | - | - | - | - | 30,000 |
Issuance of preferred stock A for notes receivables | 15,000 | 1 | - | - | - | 0 | 21,195 | - | (18,000) | - | - | 3,196 |
Issuance of common stock pursuant to reverse merger | - | - | - | - | 1,012,588 | 101 | (101) | - | - | - | - | 0 |
Net loss year ended December 31, 2009 | - | - | - | - | - | - | - | - | - | - | (2,525,101) | (2,525,101) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009 | 540,000 | 54 | 1,000 | - | 103,699,133 | 10,369 | 6,438,183 | - | (18,000) | - | (7,884,328) | (1,453,722) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted shares for outside services | 2,000 | - | - | - | 4,077,280 | 409 | 364,967 | - | - | - | - | 365,376 |
Issuance of restricted shares and options for employee services | 2,500 | 1 | - | - | 1,681,500 | 168 | 157,234 | - | - | - | - | 157,403 |
Sale of common stock | - | - | - | - | 2,062,222 | 206 | 163,372 | - | - | - | - | 163,578 |
Sale of preferred stock | 141,000 | 14 | - | - | - | - | 635,997 | - | - | - | - | 636,011 |
Warrants issued pursuant to preferred stock sale |
|
|
|
|
|
| 84,589 | - | - | - | - | 84,589 |
Conversion of debt to common stock | - | - | - | - | 2,500,000 | 250 | 171,300 | - | - | - | - | 171,550 |
Conversion of debt to preferred stock | 19,953 | 2 | - | - | - | - | 99,763 | - | - | - | - | 99,765 |
Conversion of debt to equity in subsidiary | - | - | - | - | - | - | - | - | - | 30,000 | - | 30,000 |
Sale of equity in subsidiary for cash | - | - | - | - | - | - | - | - | - | 50,000 | - | 50,000 |
Issuance of equity in subsidiary for services | - | - | - | - | - | - | - | (60,000) | - | 60,000 | - | 0 |
Amortization of prepaid services for subsidiary equity | - | - | - | - | - | - | - | 32,500 | - | - | - | 32,500 |
Allocation of loss of subsidiary to non controlling interest | - | - | - | - | - | - | - | - | - | (5,125) | 5,125 | 0 |
Net loss year ended December 31, 2010 | - | - | - | - | - | - | - | - | - | - | (2,171,409) | (2,171,409) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010 | 705,453 | $ 71 | 1,000 | $ - | 114,020,135 | $ 11,402 | $8,115,405 | $ (27,500) | $ (18,000) | $ 134,875 | $(10,050,612) | $(1,834,359) |
See the accompanying notes to consolidated financial statements
F-18
CYCLONE POWER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR YEARS ENDED DECEMBER 31, 2010 AND 2009
|
| 2010 |
| 2009 |
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
Net loss | $ | (2,171,409) | $ | (2,525,101) |
Adjustments to reconcile net loss to net cash used by operating activities: |
|
|
|
|
Depreciation and amortization |
| 55,587 |
| 49,649 |
Issuance of restricted common and preferred stock and options for services |
| 522,779 |
| 893,685 |
Write-off of abandoned patent |
| 9,855 |
| 24,715 |
Amortization of prepaid expenses purchased with equity |
| 32,500 |
| - |
Forgiveness of debt income |
| (2,685) |
| 10,387 |
Loss on conversion of debt to stock |
| 159,050 |
| - |
Changes in operating assets and liabilities: |
|
|
|
|
Decrease (increase) in accounts receivable |
| (4,200) |
| 37,245 |
(Increase) in inventory |
| (87,997) |
| (122,712) |
(Increase) Decrease in other assets |
| 12,790 |
| (13,004) |
Increase in deferred revenue and deposits |
| 122,525 |
| 575,964 |
(Decrease) in provision for contract loss |
| (5,036) |
| - |
Increase in accounts payable and accrued expenses |
| 57,449 |
| 5,687 |
Increase in accounts payable and accrued expenses-related parties |
| 339,831 |
| 304,008 |
Increase in warranty provision |
| 2,324 |
| - |
Net cash used by operating activities |
| (956,637) |
| (759,477) |
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
Expenditures incurred for patents, trademarks and copyrights |
| (85,968) |
| (125,035) |
Expenditures for furniture and equipment |
| (31,184) |
| (35,318) |
Net cash used by investing activities |
| (117,152) |
| (160,353) |
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
Increase (decrease) in loans-net |
| 5,000 |
| (75,060) |
Sale of equity in subsidiary for cash |
| 50,000 |
| - |
Payment of capitalized leases |
| (9,067) |
| (6,962) |
Proceeds from sale of common stock |
| 163,578 |
| 1,007,251 |
Proceeds from sale of preferred stock |
| 720,600 |
| 3,196 |
Increase in related party notes and loans payable |
| 121,677 |
| 18,597 |
Net cash provided by financing activities |
| 1,051,788 |
| 947,022 |
|
|
|
|
|
Net (decrease) increase in cash |
| (22,001) |
| 27,192 |
Cash at beginning of year |
| 28,558 |
| 1,366 |
|
|
|
|
|
Cash at end of year | $ | 6,557 | $ | 28,558 |
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
|
Payment of interest in cash | $ | 2,955 | $ | 1,193 |
Payment of income taxes in cash | $ | - | $ | - |
NON CASH INVESTING AND FINANCING ACTIVITIES: |
|
|
|
|
Conversion of debt to common and preferred stock | $ | 289,610 | $ | 50,000 |
Issuance of preferred stock for notes receivable | $ | - | $ | 18,000 |
Equipment acquired via capital lease | $ | - | $ | 27,401 |
Conversion of debt to equity in subsidiary | $ | 30,000 | $ | - |
Issuance of common stock pursuant to reverse merger adjustment | $ | - | $ | 101 |
See the accompanying notes to consolidated financial statements
F-19
CYCLONE POWER TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
NOTE 1 ORGANIZATIONAL AND SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION AND OPERATIONS
Cyclone Power Technologies, Inc. (the Company) is the successor entity to the business of Cyclone Technologies LLLP (the LLLP), a limited liability limited partnership formed in Florida in June 2004. The LLLP was the original developer and intellectual property holder of the Cyclone engine technology.
On July 2, 2007, the LLLP merged into Cyclone Power Technologies, Inc., a publicly-traded Florida corporation that had recently re-domiciled from California and changed its name from Coastal Technologies, Inc. (the Pink Sheet Company). Prior to the merger, the Pink Sheet Company was engaged in the business of medical software development, which the Company divested concurrently with the merger.
In the third quarter of 2010, the Company signed a license agreement with its subsidiary, Cyclone-WHE LLC (the Subsidiary) to allow the subsidiary to begin marketing waste heat recovery systems for all Cyclone engine models. As of December 31, 2010, the Company had an 82.5% equity interest in the Subsidiary.
The Company is primarily a research and development engineering company whose main purpose is to develop, commercialize, market and license its Cyclone engine technology.
B. ACCOUNTING STANDARDS CODIFICATION
The Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASC) 105-10 in June 2009, to be effective September 15, 2009. This establishes the ASC codification as the single source of authoritative nongovernmental Generally Accepted Accounting Principles (GAAP). All existing accounting standards are superseded as described in FASB Accounting Standards Codification (SFAS) No. 168, aside from those issued by the SEC. All other accounting literature not included in the Codification is non-authoritative. Adoption of this Codification as of September 30, 2009, which is reflected in our disclosures and references to accounting standards, had no change to our financial position or results of operations.
C. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Cyclone Power Technologies and its 82.5% owned Subsidiary. All material inter-company transactions and balances have been eliminated in the consolidated financial statements. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
D. SUBSEQUENT EVENTS
In May 2009, the FASB issued SFAS No. 165, (ASC 855) Subsequent Events (ACS 855) which offers assistance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ACS 855 does not result in material changes in the subsequent events that an entity reports. This guidance requires disclosure of the date through which events subsequent to the Balance Sheet date have been evaluated and whether such date represents the date the financial statements were issued or were available to be issued. ASC 855 is effective for interim and annual periods ending after June 15, 2009. Management evaluated events occurring between the end of the Companys fiscal year, December 31, 2010, and when the financial statements were available to be issued.
E. CASH
Cash includes cash on hand and cash in banks. The Company maintains cash balances at several financial institutions.
F-20
F. ACCOUNTS RECEIVABLE
Accounts receivable consist of amounts due pursuant to research and development prototype charges. At December 31, 2010 and 2009, no allowance for doubtful accounts was deemed necessary.
G. COMPUTATION OF LOSS PER SHARE
Net loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is not presented as the conversion of the preferred stock and exercise of outstanding stock options and warrants would have an anti-dilutive effect. As of December 31, 2010, total anti-dilutive shares amounted to approximately 214,435,000 shares.
H. INCOME TAXES
Income taxes are accounted for under the asset and liability method as stipulated by Accounting Standards Codification (ASC) 740 formerly Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. 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 managements view it is more likely than not (50%) that such deferred tax will not be utilized.
Effective January 1, 2009, the Company adopted certain provisions under ASC Topic 740, Income Taxes, (ASC 740), which provide interpretative guidance for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Effective with the Companys adoption of these provisions, interest related to the unrecognized tax benefits is recognized in the financial statements as a component of income taxes. The Adoption of ASC 740 did not have an impact on the Companys financial position and results of operations.
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, 2010, the Company does not believe it has any uncertain tax positions that would result in the Company having a liability to the taxing authorities. The Companys tax returns are subject to examination by the federal and state tax authorities for the years ended 2007 through 2009.
I. REVENUE RECOGNITION
The Companys revenue recognition policies are in compliance with accounting Codification as ASC 605, and Staff Accounting Bulletin (SAB) 104, Revenue Recognition. Sales revenue is recognized at the date of shipment of 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. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as deferred revenue. The Company does not allow its customers to return prototype products. It is the Companys intention, when it has royalty revenue from its contracts, to record royalty revenue in the quarter received. The Company does not have any royalty revenue to date.
J. INVENTORY
Inventory is recorded at the lower of standard cost or market. Standard costs for material, labor and allocated overhead, are reflective of the estimated costs to manufacture a completed engine after related developmental research and development expenses have been provided for.
K. 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. For purpose of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The carrying amounts reported in the balance sheet for cash, accounts receivable, accounts payable and accrued expenses, and loans payable approximate their fair market value based on the short-term maturity of these instruments.
F-21
L. RESEARCH AND DEVELOPMENT
Research and development activities for product development are expensed as incurred. Costs for the years ended December 31, 2010 and 2009 were $830,611 and $1,115,795, respectively.
M. STOCK BASED COMPENSATION
The Company applies the fair valve method of ASC 718, Share Based Payment, formerly Statement of Financial Accounting Standards (SFAS) No. 123R Accounting for Stock Based Compensation, 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. As the Company does not have sufficient, reliable and readily determinable values relating to its common stock, the Company has used the stock value pursuant to its most recent sale of restricted stock sold to unaffiliated third-parties in the U.S. for purposes of valuing stock based compensation.
N. COMMON STOCK PURCHASE WARRANTS
The Company accounts for common stock purchase warrants at fair value in accordance with ASC 815-40 Derivatives and Hedging, formerly Emerging Issues Task Force Issue (EITF) No. 00-19, Accounting for Derivative Financial Instruments Indexed to and Practically Settled in a Companys Own Stock. The Black-Scholes option pricing valuation method is used to determine fair value of these warrants consistent with ASC 718, Share Based Payment, formerly Statement of Financial Accounting Standards (SFAS) No. 123 R Accounting for Stock Based Compensation. 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 in exchange for equity instruments based on the fair value of such services received from non-employees, in accordance with ASC 505-50 Equity Based payments to Non-employees, formerly EITF No. 96-18, Accounting for Equity Instruments that are Issued to other than Employees for Acquiring, or in Conjunction with Selling Goods or Services.
O. 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:
Computers and trade show equipment | 3 years |
Shop equipment | 7 years |
Furniture, fixtures, and leasehold improvements | 10-15 years |
Expenditures for maintenance and repairs are charged to operations as incurred.
P. 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.
Q. RECLASSIFICATIONS
Certain balances from the prior year have been reclassified to conform to the financial statement presentation adopted for this year.
R. CURRENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standard Board (FASB) in October 2009 issued Account Standards Update (ASU) 2009-13 Revenue Recognition (Topic 605). This update provides guidance for revenue recognition consideration in multiple-deliverable contractual arrangements. The update requires that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis. This update was effective after June 15, 2010, and early adoption was permitted. The Company has implemented this update effective for the years beginning January 1, 2010. The disclosure requirements for this update are:
d.
Multiple deliverable arrangements: the Company has contracts that provide for a working prototype or plans/schematics of the prototype engine (initial deliverable) and will record royalty fees after the customer constructs and puts the engine into operation or manufacturing, depending on the terms of the agreement.
F-22
e.
The initial deliverables are usually within a year of signing of the contract and upon the complete customer payment of the initial license/development fees.
f.
Revenue is based on the initial license/development fees charged for the deliverable, and then royalty income is recognized thereafter, through the life of the contract.
The implementation of this topic did not have any material effect on the financial statements and did not change any pattern and timing of revenue recognition.
In January 2010 FASB issued ASU Equity (Topic 505), accounting for distributions to shareholders with components of stock and cash. This amendment affects entities that declare dividends to shareholders that may be paid in cash or shares at the election of the shareholders with a potential limitation in the total amount of cash that all shareholders can elect to receive in the aggregate. The Company does not believe that this Topic currently has an impact on these financial statements.
NOTE 2 - GOING CONCERN
As shown in the accompanying financial statements, the Company incurred substantial net losses for the years ended December 31, 2010 and 2009 of $2,171,409 and $2,525,101, respectively. Cumulative deficit since inception are approximately $10,000,000. The Company has a working capital deficit at December 31, 2010 of $2,322,199. 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 Companys ability to continue as a going concern.
The ability of the Company to continue as a going concern is dependent on managements plans, which includes 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 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 common stock and advances from and deferred payments to related parties.
NOTE 3 - INVENTORY
Inventory at December 31, 2010 and 2009 consists of:
|
| 2010 |
| 2009 |
Engine material and parts | $ | 183,893 | $ | 109,268 |
Labor |
| 38,556 |
| 18,673 |
Applied overhead |
| 6,389 |
| 12,900 |
Total Inventory | $ | 228,838 | $ | 140,841 |
NOTE 4 PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2010 and 2009 consists of the following:
|
| 2010 |
| 2009 |
Display Equipment for Trade Shows | $ | 9,648 | $ | 9,648 |
Leasehold Improvements and Furniture and Fixtures |
| 46,332 |
| 39,953 |
Equipment and Computers |
| 83,448 |
| 58,643 |
Total |
| 139,428 |
| 108,244 |
Less: Accumulated Depreciation |
| 55,644 |
| 30,114 |
Net Property and Equipment | $ | 83,784 | $ | 78,130 |
Depreciation and amortization expense for the years ended December 31, 2010 and 2009 was $25,530 and $14,704, respectively.
F-23
NOTE 5 PATENTS AND TRADEMARKS AND COPYRIGHTS
The Cyclone Engine is currently protected under the following U.S. Patents:
Heat Regenerative Engine (US Patent No. 7,080,512 B2)
Heat Regenerative Engine (Continuation)(US Patent No. 7,856,822 B2)
Steam Generator in a Heat Regenerative Engine (US Patent No. 7,407,382)
Engine Reversing and Timing Control Mechanism (US Patent No. 7,784,280 B2)
Centrifugal Condenser (US Patent No. 7,798,204 B2)
Valve Controlled Throttle Mechanism (US Patent No. 7,730,873 B2)
Pre-Heater Coil in a Heat Regenerative Engine (US Patent No 7,856,823 B2)
Engine Shrouding with Air to Air Exchanger (Ser. No. 11/879,586)
Spider Bearing (Ser. No. 11/879,589)
Waste Heat Engine (pending)
The Company also has received patents for the main Cyclone engine in eight other countries plus the European Economic Union, which covers approximately 40 countries (which would require the Company perfecting the EEU patent in some or all of these countries), and patents pending in three more countries. The Company plans to continue to pursue patent protection in the U.S. and internationally for its intellectual property.
The Company has filed trademark applications in the U.S. for Cyclone Power Technologies, Cyclone Power, WHE, WHE Generation, and Generation WHE.
Patents, trademarks and copyrights consist of legal fees paid to file and perfect these claims. The net balances as of December 31, 2010 and 2009 was $405,351 and $354,128, respectively. For the years ended December 31, 2010 and 2009, $85,968 and $125,035 was capitalized, respectively. Patents, trademarks and copyrights are amortized over the life of the intellectual property which is 15 years. Amortization for the years ended December 31, 2010 and 2009 was $30,057 and $31,159, respectively. The Company wrote off $9,855 and $24,715 for abandoned patents in 2010 and 2009, respectively.
NOTE 6 NOTES AND OTHER LOANS PAYABLE
A summary of non-related party notes and other loans payable as of December 31, 2010 and 2009 is as follows:
|
| 2010 |
| 2009 |
|
|
|
|
|
6% uncollateralized convertible note payable on demand for original principle amount of $62,275 (converted into 2,500,000 shares of common stock) | $ | - | $ | 15,950 |
|
|
|
|
|
6% uncollateralized $5,000 demand note |
| 5,000 |
| - |
|
|
|
|
|
6% uncollateralized demand note (converted into 1,153 shares of Series A Preferred Stock) |
| - |
| 5,000 |
|
|
|
|
|
Total current non related party notes and loans payable (accrued interest is included in accrued liabilities) | $ | 5,000 | $ | 20,950 |
A summary of related party notes and other loans payable as of December 31, 2010 and 2009 is as follows:
|
| 2010 |
| 2009 |
|
|
|
|
|
6% demand loans from Company owned by shareholder, collateralized by lien on Companys patent application for its waste heat engine. | $ | - | $ | 90,000 |
|
|
|
|
|
6% demand loans per Operations Agreement with Schoell Marine Inc., a company owned by Cyclones CEO and controlling shareholder, collateralized by lien on Cyclones patent for heat regenerative engine (A) |
| 444,209 |
| 448,628 |
|
|
|
|
|
6% non-collateralized loan from officer and shareholder, payable on demand. The original principle balance was $137,101. |
| 86,264 |
| - |
|
|
|
|
|
Accrued Interest |
| 129,104 |
| 89,272 |
|
|
|
|
|
Total current related party notes, inclusive of accrued interest | $ | 659,577 | $ | 627,900 |
F-24
(A)
This note arose from services and salaries incurred by Schoell Marine on behalf of the Company. Schoell Marine also owns the building that is leased to the Company. The Schoell Marine note bears an interest rate of 6% and repayments occur as cash flow of the Company permits. The note is secured by a UCC-1 filing on the Companys patents and patent applications. During the year ending December 31, 2010, $9,916 was paid on the note balance.
NOTE 7 RELATED PARTY TRANSACTIONS
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, which is part of the Companys Operations Agreement with Schoell Marine, provides for the Company to pay rent equal to the monthly mortgage payment on the building plus property taxes, rent, utilities and sales tax due on rent. Occupancy costs for the years ended December 31, 2010 and 2009 were $62,964 and $76,320, respectively. The Operations Agreement runs year-to-year, however, the lease portion of this agreement is month-to-month, but can only be cancelled on 180 days notice by Schoell Marine.
B. DEFERRED COMPENSATION
Included in related party payables as of December 31, 2010 and 2009 is $970,614 and $664,173, respectively, of accrued and deferred officers salaries compensation which can be paid if funds are available. These are non-interest bearing and due on demand.
NOTE 8 PREFERRED STOCK
The Series A Convertible Preferred stock (the Series A Preferred) as a group is currently convertible into a number of common shares that equal sixty percent (60%) of the total issued and outstanding common shares of the Company, less 33 million common shares. The Series A Preferred stock holders were in initially the original equity holders of LLLP, but in 2010, the Company issued additional shares of Series A Preferred stock to accredited investors in a private placement. These newly issued shares have a two-year holding period from the date of issuance. The conversion of the Series A Preferred shares will have the effect of diluting all other common stock shareholders, however, the issuance of the new Series A Preferred shares did not increase this dilution to the common stock holders. As of December 31, 2010, the Series A shares were convertible into approximately 88.5 million shares of common stock. The Series B Preferred Stock is majority voting shares and is held by senior management. Ownership of the Series B shares assures the holders thereof a 51% voting control over the common stock of the Company. The Series B shares are convertible on a one-for-one basis with the common stock in the instance the Company is merged or sold.
NOTE 9 STOCK TRANSACTIONS
The Company relies on capital raised through loans, private placement memorandums and Regulation S transactions (stock sold to foreign investors) to assist in the funding of operations.
During the year ended December 31, 2010, the Company issued 2,500 shares of Series A Preferred shares, 1,681,500 shares of restricted common stock, and options convertible into 2,040,000 shares of common stock, cumulatively valued at $157,403 for employee services, of which $139,692 was charged to general and administrative services, and $17,720 was for research and development related services and activities. Additionally, the Company issued 2,000 shares of Series A Preferred shares and 4,077,280 shares of restricted common stock valued at $365,376 for outside services.
During the year ended December 31, 2009, the Company issued 7,422,900 shares of restricted common stock for services, of which $748,054 was charged to general and administrative services, and $145,631 was for research and development related services and activities.
During the year ended December 31, 2010, the Company sold 2,062,222 shares of restricted common stock for $163,578, and 141,000 shares of Series A Preferred stock for $720,586. The Company also converted $171,550 of debt into 2,500,000 shares of common stock and $99,765 of debt into 19,953 shares of Series A Preferred stock.
In 2009, the Company issued 40,000 shares of Series A Preferred Stock for $3,196 of cash, conversion of $30,000 of notes payable to the Company, and $18,000 of subscription notes receivable. The notes receivable accrue interest at 7% per annum and are due on the earlier of August 1, 2011 or the date on which the Series A Preferred stock is converted into common stock by the resolution of a majority of the holders of the Series A Preferred stock.,
The Company also issued 1,012,588 shares of restricted common stock in 2009 as an adjustment to common stock issued pursuant to the Acquisition Agreement with the Pink Sheet Company.
F-25
NOTE 10 STOCK OPTIONS AND WARRANTS
A. COMMON STOCK OPTIONS
For the year ended December 31, 2010, the Company issued options convertible into 2,040,000 shares of common stock to employees and staff, with an average exercise price per share of $.122, and an average maturity life of 5.8 years. The income statement charge for the year ended December 31, 2010 was $64,988 and the unamortized balance was $178,414.
A summary of the common stock options for the years ended December 31, 2010 and 2009 follows:
Common Stock Options |
| Number Outstanding |
| Weighted Average Exercise Price |
| Weighted Average Remaining Contractual Life (Years) |
|
|
|
|
|
|
|
Balance, December 31, 2008 |
| 1,000,000 | $ | 0.325 |
| 8.5 |
Options issued |
| - |
| - |
| - |
Options exercised |
| - |
| - |
| - |
Options cancelled |
| - |
| - |
| - |
|
|
|
|
|
|
|
Balance, December 31, 2009 |
| 1,000,000 |
| 0.325 |
| 7.5 |
Options issued |
| 2,040,000 |
| 0.122 |
| 5.8 |
Options exercised |
| - |
| - |
| - |
Options cancelled |
| - |
| - |
| - |
|
|
|
|
|
|
|
Balance, December 31, 2010 |
| 3,040,000 | $ | 0.220 |
| 6.4 |
The fair value of stock options and purchase warrants granted using the Black-Scholes option pricing model was calculated using the following assumptions:
| Year Ended December 31, | ||
| 2010 |
| 2009 |
Risk Free Interest Rate | .6% - 1.18% |
| 2.0% |
Expected Volatility | 458% - 628% |
| 72% |
Expected term in years | 2-3 |
| 1-2 |
Expected dividend yield | 0% |
| 0% |
Average value per options & warrant | $.09 - $.14 |
| $.02-.05 |
Expected volatility is based on historical volatility of the Company and other comparable companies. Short Term U.S. Treasury rates were utilized. The expected term of the options and warrants was calculated using the alternative simplified method newly codified as ASC 718, formerly Staff Accounting Bulletin (SAB) 107, 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 trenches.
B. COMMON STOCK WARRANTS
As part of the Companys license agreement with Phoenix Power Group (Phoenix), the Company issued to Phoenix common stock purchase warrants at a price of $.19 per share, equal to two (2%) percent of the total issued and outstanding common stock of the Company at the time of exercise. The warrants vest upon the delivery of the first two prototype Cyclone Mark V Engines to Phoenix and payment by Phoenix of the full $400,000 license, and terminates 24 months thereafter. Delivery of the prototypes is estimated in the second half of 2011. The warrants are valued at approximately $100,000 (by the Black Scholes valuation method) and are to be amortized in conjunction with revenue recognition from this contract, anticipated to commence in 2011.
In conjunction with the sale of Series A Preferred stock, 770,500 stock purchase warrants were issued in August 2010, at an exercise price of $.15 per share, that had a 2 year exercise provision.
In 2009, as part of the license and royalty agreement with Renovalia Energy S.A. (Renovalia) for solar thermal engines, the Company issued to Renovalia stock purchase warrants for 8,000,000 shares of restricted common stock, exercisable at a strike price of $.25 per share. These warrants expired in 2010.
F-26
A summary of outstanding warrants for the years ended December 31, 2010 and 2009 follows:
Common Stock Warrants |
| Number Outstanding |
| Weighted Average Exercise Price |
| Weighted Average Remaining Contractual Life (Years) |
|
|
|
|
|
|
|
Balance, December 31, 2008 |
| 250,000 | $ | .08 |
| 0.9 |
Warrants issued |
| 10,073,983 |
| .238 |
| - |
Warrants exercised |
| - |
| - |
| - |
Warrants cancelled |
| (250,000) |
| .08 |
| - |
|
|
|
|
|
|
|
Balance, December 31, 2009 |
| 10,073,983 |
| .238 |
| * |
Warrants issued |
| 770,500 |
| .150 |
| 2 |
Warrants exercised |
| - |
| - |
| - |
Warrants cancelled |
| (8,000,000) |
| - |
| - |
|
|
|
|
|
|
|
Balance, December 31, 2010 |
| 2,844,483 | $ | .238 |
| * |
*Vesting conditioned upon future events
NOTE 11 INCOME TAXES
A reconciliation of the differences between the effective income tax rates and the statutory federal tax rates for 2010 and 2009 are as follows:
|
| 2010 |
| Amount |
| 2009 |
| Amount |
Tax benefit at U.S. statutory rate |
| 34% | $ | 738,279 |
| 34% | $ | 858,534 |
State taxes, net of federal benefit |
| 4 |
| 86,856 |
| 4 |
| 101,004 |
Change in valuation allowance |
| (38) |
| (825,135) |
| (38) |
| (959,538) |
|
| - % | $ | -. |
| - % | $ | - |
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2010 and 2009 consisted of the following:
Deferred Tax Assets |
| 2010 |
| 2009 |
Net Operating Loss Carryforward | $ | 5,355,318 | $ | 6,247,795 |
Deferred Tax Liabilities Accrued Salaries |
| (244,411) |
| (296,666) |
Net Deferred Tax Assets |
| 5,110,907 |
| 5,951,129 |
Valuation Allowance |
| (5,110,907) |
| (5,591,129) |
Total Net Deferred Tax Assets | $ | - | $ | - |
As of December 31, 2010, the Company had a net operating loss carry forward for income tax reporting purposes of approximately $7 million that may be offset against future taxable income through 2029. 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 carryforwards will expire unused. Accordingly, the potential tax benefits of the loss carry forwards are offset by a valuation allowance of the same amount.
NOTE 13 CAPITALIZED LEASE OBLIGATIONS
In June 2009, the Company acquired $27,401 of property and equipment via capitalized lease obligations at an average interest rate of 18.4%. Lease principle payments made in 2010 and 2009 were $9,067 and $6,962, respectively. The balance of leases payable at December 31, 2010 was $9,016. Future lease payments are:
2011 | $ | 6,565 |
2012 |
| 904 |
2013 |
| 1,095 |
2014 |
| 452 |
| $ | 9,016 |
F-27
NOTE 14 COMMITMENTS AND CONTINGENCIES
The Company has employment agreements with Harry Schoell, CEO, at $150,000 per year, and Frankie Fruge, COO, at $120,000 per year (the Executives), that provide for a term of three (3) years from their Effective Date (July 2, 2007), with automatically renewing successive one year periods starting on the end of the second anniversary of the Effective Date. If either 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 Executives 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 not terminated, during the 12 months following his or her termination.
As of December 31, 2010, the Company was named as defendant in a lawsuit involving an alleged breach of contract, which was settled in April 2011 for a non-material amount and dismissal of the suit with prejudice.
NOTE 15 CONSOLIDATED SUBSIDIARY
Commencing in the second quarter of 2010, the Company has started operations in the Subsidiary (Cyclone-WHE LLC) to license and market waste heat recovery systems for all engine models. A 5% equity participation was sold to a minority investor for $30,000, via the conversion of a Cyclone note payable. 5% was purchased directly from the Subsidiary by a minority investor for services valued at $30,000 consisting of assistance in marketing, management and financing for projects to be carried out by the Subsidiary. These services are being amortized over a 12 month period. This investor also received and exercised a 2.5% equity purchase warrant in the Subsidiary for $50,000.
Effective July 1, 2010, a 5% equity contribution was provided to the new Managing Director of the Subsidiary in consideration of $30,000 of future professional services (which are being amortized over a 12 month period). Additionally, options were given for the acquisition of an additional 5% equity in the subsidiary at a total price of $100,000, vesting half in 12 months and half in 24 months, exercisable for 5 years.
NOTE 16 - SUBSEQUENT EVENTS
In the first quarter of 2011, the Company closed a $1 million private placement of 200,000 shares of Series A Preferred stock, which commenced in 2010. In the recent quarter, the Company collected $232,735 for the sale of 46,547 Series A Preferred shares. The Company also sold 950,655 shares of restricted common stock for $123,500 in the first quarter of 2011.
F-28
Exhibit 3.1
Articles of Incorporation
of
Cyclone Power Technologies, Inc.
(a Florida corporation)
Pursuant to Section 607 of the Florida Business Corporation Act, the Articles of Incorporation of Cyclone Power Technologies, Inc., are as follows:
ARTICLE I
Name
The name of the corporation is Cyclone Power Technologies, Inc. (the "Corporation").
ARTICLE II
Principal Office
The address of the principal office and the mailing address of the Corporation is 601 NE 26th Court, Pompano Beach, Florida, 33064.
ARTICLE III
Purpose
The Corporation may engage in any and all lawful activities or business permitted under the laws of the United States and the provisions of Chapter 607 of the Florida Statutes, as amended from time to time.
ARTICLE IV
Capital Stock
The total number of shares of stock which the Corporation shall have the authority to issue is two hundred fifty-one million (251,000,000) shares, consisting of: (1) two hundred fifty million (250,000,000) shares of common stock, par value $0.0001 per share (the "Common Stock"), and (2) one million (1,000,000) shares of preferred stock, par value $0.0001 per share (the "Preferred Stock").
The designation and the preferences, limitations and relative rights of the Common Stock and the Preferred Stock of the Corporation are as follows:
A. Provisions Relating to the Common Stock.
1. Voting Rights. The holders of the Common Stock shall be entitled to one vote per share on all matters submitted to a vote of shareholders, including, without limitation, the election of directors. Unless otherwise adopted by the Board of Directors and approved by a vote of the shareholders of the Corporation, a simple majority of 51% of all the shares of Common Stock eligible to vote shall be required to pass matters brought before the shareholders of the Corporation.
2. Dividends. Except as otherwise provided by law or as may be provided by the resolutions of the Board of Directors authorizing the issuance of any class or series of Preferred Stock, the holders of the Common Stock shall be entitled to receive when, as and if provided by the Board of Directors, out of funds legally available therefor, dividends payable in cash, stock or otherwise.
3. Liquidating Distributions. Upon any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, and after payment or provision for payment of the debts and other liabilities of the Corporation, and except as may be provided by the resolutions of the Board of Directors authorizing the issuance of any class or series of Preferred Stock, the remaining assets of the Corporation shall be distributed pro-rata to the holders of the Common Stock.
B. Provisions Relating to the Preferred Stock
1. General. The Preferred Stock may be issued from time to time in one or more classes or series, the shares of each class or series to have such designations, powers, preferences, rights, qualifications, limitations and restrictions thereof as are stated and expressed herein and in the resolution or resolutions providing for the issue of such class or series adopted by the Board of Directors as hereinafter prescribed.
1
2. Preferences. Authority is hereby expressly granted to and vested in the Board of Directors to authorize the issuance of the Preferred Stock from time to time in one or more classes or series, to determine and take necessary proceedings fully to effect the issuance and redemption of any such Preferred Stock, and, with respect to each class or series of the Preferred Stock, to fix and state by the resolution or resolutions from time to time adopted providing for the issuance thereof the following:
(a) whether or not the class or series is to have voting rights, full or limited, or is to be without voting rights;
(b) the number of shares to constitute the class or series and the designation thereof;
(c) the preferences and relative, participating, optional or other special rights, if any, and the qualifications, limitations or restrictions thereof, if any, with respect to any class or series;
(d) whether or not the shares of any class or series shall be redeemable and if redeemable the redemption price or prices, and the time or times at which and the terms and conditions upon which, such shares shall be redeemable and the manner of redemption;
(e) whether or not the shares of a class or series shall be subject to the operation of retirement of sinking funds to be applied to the purchase or redemption of such shares for retirement, and if such retirement or sinking fund or funds be established, the annual amount thereof and the terms and provisions relative to the operation thereof;
(f) the dividend rate, whether dividends are payable in cash, stock of the Corporation, or other property, the conditions upon which and the times when such dividends are payable, the preference to or the relation to the payment of the dividends payable on any other class or classes or series of stock, whether or not such dividend shall be cumulative or noncumulative, and if cumulative, the date or dates from which such dividends shall accumulate;
(g) the preferences, if any, and the amounts thereof that the holders of any class or series thereof shall be entitled to receive upon the voluntary or involuntary dissolution of, or upon any distribution of the assets of, the Corporation;
(h) whether or not the shares or any class or series shall be convertible into, or exchangeable for, the shares of any other class or classes or of any other series of the same or any other class or classes of the Corporation and the conversion price or prices or ratio or ratios or the rate or rates at which such conversion or exchange may be made, with such adjustments, if any, as shall be stated and expressed or provided for in such resolution or resolutions; and
(i) such other special rights and protective provisions with respect to any class or series as the Board of Directors may deem advisable.
The shares of each class or series of the Preferred Stock may vary from the shares of any other class or series thereof in any or all of the foregoing respects. The Board of Directors may increase the number of shares of Preferred Stock designated for any existing class or series by a resolution adding to such class or series authorized and unissued shares of the Preferred Stock not designated for any other class or series. The Board of Directors may decrease the number of shares of the Preferred Stock designated for any existing class or series by a resolution subtracting from such class or series unissued shares of the Preferred Stock designated for such class or series and the shares so subtracted shall become authorized, unissued and undesignated shares of the Preferred Stock.
ARTICLE V
Directors
The Board of Directors of the Corporation shall consist of at least one Director, with the exact number of Directors to be fixed from time to time in the manner provided in the Company's Bylaws.
The initial Director of the Corporation shall be: James C. DiPrima, 1018 S. 90th Street, Omaha, NE, 68114.
ARTICLE VI
Registered Office and Registered Agent
The street address of the Corporation's registered office in the State of Florida is Frankie Fruge, 601 NE 26th Court, Pompano Beach, Florida, 33064
2
ARTICLE VII
Incorporator
The name ad address of the Incorporator of the Corporation is James C. DiPrima, 1018 S. 90th Street, Omaha, NE 68114
ARTICLE VIII
Indemnification
This Corporation shall indemnify and shall advance expenses on behalf of its officers and directors to the fullest extent not prohibited by law either now or hereafter.
Having been named as Registered Agent and to accept service of process for the above stated Corporation at the place designated in this certificate, I am familiar with and accept the appointment as Registered Agent and agree to act in this capacity.
/s/ Richard M. Muller June 8, 2007
Registered Agent
/s/ James C. DiPrima June 8, 2007
Incorporator
3
Exhibit 3.2
Fax Audit #(((H07000156652 3)))
CERTIFICATE OF DOMESTICATION
The undersigned, JAMES C. DIPRIMA, PRESIDENT, of COASTAL TECHNOLOGIES, INC., a foreign corporation, in accordance with s.607.1801, Florida Statutes, does hereby certify:
1.
The date on which corporation was first form was APRIL 2, 1971.
2.
The jurisdiction where the above named corporation was first formed, incorporated, or otherwise came into being was CALIFORNIA.
3.
The name of the corporation immediately prior to the filing of this Certificate of Domestication was COASTAL TECHNOLOGIES, INC.
4.
The name of the corporation, as set forth in it articles of incorporation, to be filed pursuant to s.607.0202 and 607.0401 with this certificate is CYCLONE POWER TECHNOLOGIES, INC.
5.
The jurisdiction that constituted the seat, siege social, or principal place of business or central administration of the corporation, or any other equivalent jurisdiction under applicable law, immediately before the filing of the Certificate of Domestication was THE STATE OF CALIFORNIA.
6.
Attached are Florida articles of incorporation to complete the domestication requirements pursuant to s.607.1801.
I am PRESIDENT of COASTAL TECHNOLOGIES, INC. and am authorized to sign this Certificate of Domestication on behalf of the corporation and have so this 14th day of JUNE, 2007.
/s/ James C. DiPrima
(Authorized Signature)
| FILED |
| 07 JUN AM10:32 |
| SECRETARY OF STATE |
| TALLAHASSEE, FLORIDA |
| Filing Fee: |
|
|
| Certificate of Domestication | $ | 50.00 |
| Articles of Incorporation and Certified Copy | $ | 78.75 |
| Total to domesticate and file | $ | 128.75 |
Fax Audit #(((H07000156652 3)))
Exhibit 3.3
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
CYCLONE POWER TECHNOLOGIES, INC.
Effective Date: July 1, 2007
By consent of the directors of Cyclone Power Technologies, Inc. (the Corporation), the Corporation does hereby amend its Articles of Incorporation as follows:
(a)
The name of the Corporation is Cyclone Power Technologies, Inc.
(b)
The date of adoption by the board of directors of the resolution approving this amendment was June 30, 2007. No shareholder action is required under Section 607.0602 of the Florida Statutes.
(c)
The board of directors have created Series A Convertible Preferred Shares, the terms, preferences, limitations and rights for which are set forth on Exhibit A hereof.
(d)
The board of directors have created Series B Preferred Shares, the terms, preferences, limitations and rights for which are set forth on Exhibit B hereof.
By order of the Board of Directors of the Corporation, these Articles of Amendment are hereby approved and authorized for filing.
/s/ Harry Schoell
Harry Schoell
Director
/s/ Frankie Fruge
Frankie Fruge
Director
EXHIBIT A
CERTIFICATE OF DESIGNATION
OF
SERIES A CONVERTIBLE PREFERRED SHARES
OF
CYCLONE POWER TECHNOLOGIES, INC.
(Pursuant to Section 607.0821 of the Florida
Business Corporation Act)
Cyclone Power Technologies, Inc. (the Corporation), a corporation organized and existing under and by virtue of the Business Corporation Act of the State of Florida, does hereby certify that pursuant to the provisions of Sections 607.0821, 607.0602 and 607.0603 of the Business Corporation Act of the State of Florida, the Board of Directors of the Corporation, pursuant to unanimous written consent effective on June 30, 2007, adopted the following resolution:
RESOLVED, that the Board of Directors of the Corporation by its Articles of Incorporation does hereby provide for the issue of a series of the Corporations Series A Convertible Preferred Shares, $0.0001 par value per share, to be designated as Series A Convertible Preferred Shares (the Series A Preferred Shares). The Series A Preferred Shares shall, with respect to dividend rights and rights on liquidation, winding up and dissolution, rank prior to all other classes of the capital stock of the Corporation (except as otherwise provided herein).
The voting powers, designations, preferences, relative, participating, optional, conversion and other special rights, and the qualifications, limitations and restrictions of the Series A Preferred Shares are as follows:
1.
Designation of Series. There shall be a series of Preferred Shares designated as Series A Convertible Preferred Shares, $0.0001 par value per share, consisting of 500,000 shares. Each share of Series A Convertible Preferred Shares shall be referred to herein as a Series A Preferred Share. The Series A Preferred Shares may be issued in fractional shares, each such share to be entitled, proportionately, to the full rights of the Series A Preferred Shares as herein provided.
2.
Dividends. The holders of Series A Preferred Shares shall not be entitled to receive dividends, out of assets legally available thereof, prior and in preference to any declaration or payment of any dividend on the common stock or any other capital stock of the Corporation.
3.
Voting. Except as provided in this Section 3, or as provided in the Amended and Restated Articles of Incorporation, or as otherwise required by law, the holders of Series A Preferred Shares shall not have any right to vote for the election of directors or any other purpose.
4.
Redemption. Series A Preferred Stock is not subject to automatic redemption upon the occurrence of any event, nor shall the Corporation or any holder of Series A Preferred Shares have the right at its option to redeem or have redeemed any outstanding Series A Preferred Shares.
5.
Liquidation. The following events each shall constitute a Liquidation Event as provided herein;
(A)
a liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary;
(B)
any transaction or series of related transactions for the purpose of or resulting, directly or indirectly, in the acquisition of the primary operating business of the Corporation or all or substantially all of the assets of the Corporation; or
(C)
a consolidation or merger of the Corporation which does not result in the Corporation being the surviving entity and/or the current stockholders of the Corporation owning a controlling interest in the surviving entity.
Immediately prior to the consummation of a Liquidation Event, the Series A Preferred Shares shall immediately and automatically covert into shares of Common Stock of the Corporation on a one-for-one basis.
6.
Conversion. The Series A Preferred Stock shall be convertible in whole but not in part at the option of the holders of a majority of the Series A Preferred Stock upon the first to occur of: (1) any closing or closings of equity and/or debt financing which, in the aggregate, equal or exceeds $5,000,000 in gross proceeds, or (2) December 31, 2008. Notwithstanding the above, such conversion shall automatically be deemed to have been effected immediately prior to the Qualified Public Offering, and the person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the Common Stock represented thereby at such time.
Upon any such conversion, the Series A Preferred Shares shall convert into that number of fully paid and non-assessable shares of Common Stock (calculated as to each conversion to the nearest 1/100th of a share) which would, together with the Common Stock held by the owners of the Series A Preferred Stock as of the date of the original issuance of the Series A Preferred Stock to the original holders thereof, constitute a total of sixty percent (60%) of the outstanding Common Stock on a fully-diluted basis.
Upon such conversion, each holder of Series A Preferred Shares shall surrender such shares, accompanied by instruments of transfer satisfactory to the Corporation and sufficient to transfer the Series A Preferred Shares being converted to the Corporation free of any adverse interest, at any of the offices or agencies maintained for such purpose by the Corporation. As promptly as practicable after the surrender of such Series A Preferred Shares as aforesaid, the Corporation shall issue and shall deliver at such office or agency to such holder, or on his written order, a certificate or certificates for the number of full shares of Common Stock issuable upon the conversion of such shares in accordance with the provisions hereof, in proportion to their Common Stock holdings as of the date of this Designation, and any fractional interest in respect of a share of Common Stock arising upon such conversion shall be settled in cash as provided below.
No fractional shares of Common Stock shall be issued upon any conversion of the Series A Preferred Shares. Instead of any fractional interest in a share of Common Stock which would otherwise be deliverable upon the conversion of any Series A Preferred Shares, the Corporation shall make an adjustment therefor to the nearest 1/100th of a share in cash at the fair market value of the Common Stock as determined in good faith by the Board of Directors, as of the close of business on the business day next preceding the day of conversion.
The Corporation will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on conversion of the Series A Preferred Shares pursuant hereto; provided, however, that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of shares of Common Stock in a name other than that of the holder of the Series A Preferred Shares converted and no such issue or delivery shall be made unless and until the person requesting such issue or delivery had paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid.
The Corporation covenants that all shares of Common Stock which may be delivered upon conversion of the Series A Preferred Shares will upon delivery be duly and validly issued and fully paid and nonassessable, free of all liens and charges and not subject to any preemptive rights. The number of shares of Common Stock required to effect conversion of all Series A Preferred Shares at any given time shall automatically be deemed to be reserved in a quantity sufficient to effect such conversion, and the issuance of shares of Common Stock upon conversion of Series A Preferred Shares is authorized in all respects.
7.
Status of Reacquired Series A Preferred Shares. Series A Preferred Shares issued and reacquired by the Corporation (including Series A Preferred Shares which have been converted into shares of Common Stock) shall have the status of authorized and unissued shares of Series A Preferred Shares undesignated as to the series, subject to later issuance.
8.
Definitions. For purposes of this Certificate of Designation, the following terms have the meanings set forth below.
Qualified Public Offering shall mean the closing of a firm commitment underwritten public offering of Common Shares at an offering price of not less than $10.00 per share that raises gross proceeds of not less than $20 million.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be executed in its name by the undersigned, thereunto duly authorized, this 30th day of June, 2007.
CYCLONE POWER TECHNOLOGIES, INC.
By: /s/ James DiPrima
Its: President and Director
By: /s/ Robin Moody
Its: Secretary and Director
EXHIBIT B
CERTIFICATE OF DESIGNATION
OF
SERIES B PREFERRED SHARES
OF
CYCLONE POWER TECHNOLOGIES, INC.
(Pursuant to Section 607.0821 of the Florida
Business Corporation Act)
Cyclone Power Technologies, Inc. (the Corporation), a corporation organized and existing under and by virtue of the Business Corporation Act of the State of Florida, does hereby certify that pursuant to the provisions of Sections 607.0821, 607.0602 and 607.0603 of the Business Corporation Act of the State of Florida, the Board of Directors of the Corporation, pursuant to unanimous written consent effective on June 30, 2007, adopted the following resolution:
RESOLVED, that the Board of Directors of the Corporation by its Articles of Incorporation does hereby provide for the issue of a series of the Corporations Series B Preferred Shares, $0.0001 par value per share, to be designated as Series B Preferred Shares (the Series B Preferred Shares). The Series B Preferred Shares shall, with respect to dividend rights and rights on liquidation, winding up and dissolution, rank prior to all other classes of the capital stock of the Corporation (except as otherwise provided herein).
The voting powers, designations, preferences, conversion and other special rights, and the qualifications, limitations and restrictions of the Series B Preferred Shares are as follows:
9.
Designation of Series. There shall be a series of Preferred Shares designated as Series B Preferred Shares, $0.0001 par value per share, consisting of 1,000 shares. Each share of Series B Preferred Shares shall be referred to herein as a Series B Preferred Share. The Series B Preferred Shares may be issued in fractional shares, each such share to be entitled, proportionately, to the full rights of the Series B Preferred Shares as herein provided.
10.
Dividends. The holders of Series B Preferred Shares shall not be entitled to receive dividends, out of assets legally available thereof, prior and in preference to any declaration or payment of any dividend on the common stock or any other capital stock of the Corporation.
11.
Voting. The holders of Series B Preferred Stock shall have voting rights, when combined with their existing holdings of the Corporations common stock, that entitle them to have an aggregate of 51% of the votes eligible to be cast by all shareholders with respect to all matters brought before a vote of the shareholders of the Corporation.
12.
Redemption. Series B Preferred Stock is not subject to automatic redemption upon the occurrence of any event, nor shall the Corporation or any holder of Series B Preferred Shares have the right at its option to redeem or have redeemed any outstanding Series B Preferred Shares.
13.
Liquidation. The following events each shall constitute a Liquidation Event as provided herein;
(A)
a liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary;
(B)
any transaction or series of related transactions for the purpose of or resulting, directly or indirectly, in the acquisition of the primary operating business of the Corporation or all or substantially all of the assets of the Corporation; or
(C)
a consolidation or merger of the Corporation which does not result in the Corporation being the surviving entity and/or the current stockholders of the Corporation owning a controlling interest in the surviving entity.
Immediately prior to the consummation of a Liquidation Event, the Series B Preferred Shares shall immediately and automatically covert into shares of Common Stock of the Corporation on a one-for-one basis.
14.
Status of Reacquired Series B Preferred Shares. Series B Preferred Shares issued and reacquired by the Corporation (including Series B Preferred Shares which have been converted into shares of Common Stock) shall have the status of authorized and unissued shares of Series B Preferred Shares undesignated as to the series, subject to later issuance.
(Signatures on following page)
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be executed in its name by the undersigned, thereunto duly authorized, this 30th day of June, 2007.
CYCLONE POWER TECHNOLOGIES, INC.
By: /s/ James DiPrima
Its: President and Director
By: /s/ Robin Moody
Its: Secretary and Director
Exhibit 3.4
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
CYCLONE POWER TECHNOLOGIES, INC.
July 27, 2007
By consent of the sole director of Cyclone Power Technologies, Inc. (the Corporation), the Corporation does hereby amend its Articles of Incorporation as follows:
(a)
The name of the Corporation is Cyclone Power Technologies, Inc.
(b)
The date of adoption by the board of directors of the resolution approving this amendment was July 26, 2007.
(c)
The following amendment to the Articles of Incorporation does not adversely affect the rights or preferences of the holders of outstanding shares of any class or series of the Corporations stock, and does not result in the percentage of authorized shares that remain unissued after the amendment exceeding the percentage of authorized shares that were unissued before the amendment.
(d)
The amendment concerns the Corporations Common Stock, par value $0.0001 per share (the Common Stock). Prior to this amendment there are 2,500,000,000 shares of Common Stock authorized for issuance by the Corporation; and upon the Effective Date of this amendment there are 1,000,000,000 shares of Common Stock authorized for issuance by the Corporation.
(e)
The Effective Date for the change in authorized Common Stock shall be July 31, 2007.
(f)
The amendment to the Corporations Articles of Incorporation is as follows:
The first paragraph of Article IV shall be deleted and replaced with the following:
ARTICLE IV
Capital Stock
The total number of shares of stock which the Corporation shall have the authority to issue is one billion one million (1,001,000,000) shares, consisting of: (1) one billion (1,000,000,000) shares of common stock, par value $0.0001 per share (the "Common Stock"), and (2) one million (1,000,000) shares of preferred stock, par value $0.0001 per share (the "Preferred Stock").
By order of the Board of Directors of the Corporation, these Articles of Amendment are hereby approved and authorized for filing.
/s/ Harry Schoell
Harry Schoell
Sole Director
Dated: July 27, 2007
Exhibit 3.5
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
CYCLONE POWER TECHNOLOGIES, INC.
Effective Date: July 24, 2009
By consent of the Board of Directors of Cyclone Power Technologies, Inc. (the Corporation), the Corporation does hereby amend its Articles of Incorporation as follows:
(a)
The name of the Corporation is Cyclone Power Technologies, Inc.
(b)
The date of adoption by the Board of Directors of the resolution approving this amendment was July 8, 2009. No shareholder action is required under Section 607.0602 of the Florida Statutes.
(c)
The board of directors has previously created Series A Convertible Preferred Shares. The board of directors hereby increases the number of shares of Series A Convertible Preferred authorized to be issued to 550,000. All other terms, preferences, limitations and rights for the Series A Preferred Shares shall remain the same.
By order of the Board of Directors of the Corporation, these Articles of Amendment are hereby approved and authorized for filing.
/s/ Harry Schoell
Harry Schoell
Director
/s/ Frankie Fruge
Frankie Fruge
Director
/s/ James C. Landon
James C. Landon
Director
Exhibit 3.6
ARTICLES OF AMENDMENT TO
ARTICLES OF INCORPORATION OF
CYCLONE POWER TECHNOLOGIES, INC.
March 30, 2010
By consent of the Board of Directors of Cyclone Power Technologies, Inc. (the Corporation), the Corporation does hereby amend its Articles of Incorporation as follows:
WHEREAS:
(a)
The name of the Corporation is Cyclone Power Technologies, Inc.
(b)
The date of adoption by the Board of Directors of the resolution approving this amendment was March 1, 2010. No shareholder action is required under Section 607.0602 of the Florida Statutes.
(c)
The Board of Directors has previously created Series A Convertible Preferred Shares, and by Amendment to its Articles of Incorporation dated July 24, 2009, increased the number of shares of Series A Convertible Preferred to 550,000.
NOW THEREFORE:
(d)
The Board of Directors hereby increases the number of shares of Series A Convertible Preferred authorized to be issued to 750,000.
(e)
The Board of Directors hereby deletes the last paragraph of Section 5 Liquidation and replaces it in its entirety with the following paragraph:
Immediately prior to the consummation of a Liquidation Event, the Series A Preferred Shares shall immediately and automatically convert into shares of Common Stock of the Corporation as provided in Section 6 hereof.
(f)
All other terms, preferences, limitations and rights for the Series A Preferred Shares shall remain the same.
By order of the Board of Directors of the Corporation, these Articles of Amendment are hereby approved and authorized for filing as of the date written above.
/s/ Harry Schoell
Harry Schoell
Director
/s/ Frankie Fruge
Frankie Fruge
Director
/s/ James C. Landon
James C. Landon
Director
Exhibit 3.7
ARTICLES OF AMENDMENT TO
ARTICLES OF INCORPORATION OF
CYCLONE POWER TECHNOLOGIES, INC.
April 28, 2010
By consent of the Board of Directors of Cyclone Power Technologies, Inc. (the Corporation), the Corporation does hereby amend its Articles of Incorporation as follows:
WHEREAS:
(a)
The name of the Corporation is Cyclone Power Technologies, Inc.
(b)
The date of adoption by consent of Shareholders representing a majority of the Common Stock of the Corporation, under Section 607.0704 of the Florida Statutes, approving this amendment was April 28, 2010, as attached.
NOW THEREFORE:
(c)
The Board of Directors hereby decreases the number of shares of Common Stock authorized from 1,000,000,000 (One Billion) to 300,000,000 (Three Hundred Million).
(d)
All other terms, preferences, limitations and rights for the Common Shares shall remain the same.
By order of the Board of Directors of the Corporation, these Articles of Amendment are hereby approved and authorized for filing as of the date written above.
/s/ Harry Schoell
Harry Schoell
Director
/s/ Frankie Fruge
Director
/s/ James C. Landon
James C. Landon
Director
Exhibit 3.8
BY-LAWS
OF
CYLCONE POWER TECHNOLOGIES, INC.
ARTICLE I
SHAREHOLDERS
1.1 Annual Meeting. A meeting of shareholders shall be held each year for the election of directors and for the transaction of any other business that may come before the meeting. The time and place of the meeting shall be designated by the Board of Directors.
1.2 Special Meeting. Special meetings of the shareholders, for any purpose or purposes, shall be held when directed by the Board of Directors, or at the request of the holders of not less than one tenth of all outstanding shares of the corporation entitled to vote at the meeting.
1.3 Place of Meeting. The Board of Directors may designate any place, either within or without the State of Florida, as the place of meeting for any annual or special meeting of the shareholders. If no designation is made, the place of meeting shall be the principal office of the corporation in the state of Florida.
1.4 Action Without a Meeting. Unless otherwise provided in the Articles of Incorporation, action required or permitted to be taken at any meeting of the shareholders may be taken without a meeting, without prior notice and without a vote if the action is taken by the holders of outstanding shares of each voting group entitled to vote on it having not less than the minimum number of votes with respect to each voting group that would be necessary to authorize or take such action at a meeting at which all voting groups and shares entitled to vote were present and voted. In order to be effective, the action must be evidenced by one or more written consents describing the action taken, dated an signed by approving shareholders having the requisite number of votes of each voting group entitled to vote, and delivered to the corporation at its principle office in Florida or its principle place of business, or to the corporate secretary or another office or agent of the corporation having custody of the book in which proceedings of meetings of shareholders are recorded. No written consent shall be effective to take corporate action unless, within 60 days of the date of the earliest dated consent delivered in the manner required by this section, written consents signed by the number of holders required to take action are delivered to the corporation.
Any written consent may be revoked before the date that the corporation receives the required number of consents to authorize the proposed action. No revocation is effective unless in writing and until received by the corporation at its principle office or its principle place of business, or received by the corporate secretary or other office or agency of the corporation having custody of the book in which proceedings of meetings of shareholders are recorded.
Within ten days after obtaining authorization by written consent, notice must be given to those shareholders who have not consented in writing or who are not entitled to vote on the action. The notice shall fairly summarize the material features of the authorized action and, if the action is one for which dissenters rights are provided under the Articles of Incorporation or by law, the notice shall contain a clear statement of the right of shareholders dissenting there from to be paid a fair value of their shares upon compliance with applicable law.
A consent sighed as required by this section has the effect of a meeting vote and may be describe as such in any document.
Whenever action is taken as provided in this section, the written consent of the shareholders consenting or the written reports of inspectors appointed to tabulate such consents shall be filed with the minutes of proceedings of shareholders.
1.5 Notice of Meeting. Except as provided in Florida Statutes Chapter 607, the Florida Business Corporation Act, written or printed notice stating the place, day and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than 10 nor more than 60 days before the date of the meeting, either personally or by first-class mail, by, or at the direction of, the President or the Secretary, or the officer or other person calling the meeting, to each shareholder of record entitled to vote at the meeting. If the notice is mailed at least 30 days before the meeting, it may be effected by a class of United States mail other than first-class. If mailed, the notice shall be effective when mailed, if mailed, postage prepaid and correctly addressed to the shareholders address shown in the current record of shareholders of the corporation.
When a meeting is adjourned to another time or place, it shall not be necessary to give any notice of the adjourned meeting if the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken. At the adjourned meeting any business may be transacted that might have been transacted on the original date of the meeting. If, however, after the adjournment of the Board of Directors fixes a new record date for the adjourned meeting, a notice of the adjourned meeting shall be given as provided in this section to each shareholder of record on the new record date entitled to vote at such meeting.
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1.6. Waiver of Notice. Whenever any notice is required to be given to any shareholder, a waiver in writing signed by the person or persons entitled to such notice, whether signed before, during, or after the time of the meeting and delivered to the corporation for inclusion in the minutes or filing with the corporate records, shall be equivalent to the giving of such notice. Attendant of a person at a meeting shall constitute a waiver of (a) lack of or defective notice of the meeting, unless the person objects at the beginning of the meeting to the holding of the meeting or the transacting of any business at the meeting or (b) lack of defective notice of a particular matter at a meeting that is not within the purpose or purposes described in the meeting notice, unless the person objects to considering the matter when it is presented.
1.7 Fixing of Record Date. In order that the corporation may determine the shareholders entitled to notice of, or to vote at, any meeting of shareholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or to demand a special meeting, the Board of Directors may fix, in advance, a record date, not more than 70 days before the date of the meeting or any other action. A determination of shareholders of record entitled to notice of, or to vote at, a meeting of shareholders shall apply to any adjournment of the meeting unless thee Board fixes a new record date, which it must do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting.
If no prior action is required by the Board, the record date for determining shareholders entitled to take action without a meeting is the date the first signed written consent is delivered to the corporation under Section 1.4 of this Article.
1.8 Voting Record. After fixing a record date for a meeting of shareholders, the corporation shall prepare an alphabetical list of the names of all its shareholders entitled to notice of the meeting, arranged by voting group with the address of, and the number, class and series, if any, of shares held by, each shareholder. The shareholders list must be available for inspection by any shareholder for a period of 10 days before the meeting or such shorter time as exists between the record date and the meeting and continuing through the meeting at the corporations principal office, at a place identified in the meeting notice in the city where the meeting will be held, or at the office of the corporations transfer agent or registrar. Any shareholder of the corporation or the shareholders agent or attorney is entitled on written demand to inspect the shareholders list (subject to the requirements of Florida Statutes during regular business hours and at the shareholders expense, during the period available for inspection.
The corporation shall make the shareholders list available at the meting of shareholders, and any shareholder or the shareholders agent or attorney is entitled to inspect the list at any time during the meeting or any adjournment.
1.9 Voting Per Share. Except as otherwise provided in the Articles of Incorporation, Certificate of Designations of Preferred Stock, or by Florida Statutes, each shareholder is entitled to one vote for each outstanding share held by him or her on each matter voted at a shareholders meeting.
1.10 Voting of Shares. A shareholder may vote at any meeting of shareholders of the corporation, either in person or by proxy.
Shares standing the name of another corporation domestic or foreign, may be voted by the officer, agent, or proxy designated by the by-laws of the corporate shareholder, or in the absence of any applicable by-law, by a person or persons designated by the board of directors of the corporate shareholder. In the absence of any such designation or, in case of conflicting designation by the corporate shareholder, the chairman of the board, the president, any vice president, the secretary, and the treasurer of the corporate shareholder, in that order, shall be presumed to be fully authorized to vote the shares.
Shares held by an administrator, executor, guardian, personal representative, or conservator may be voted by him or her, either in person or by proxy, without a transfer of such shares into his or her name. Shares standing in the name of a trustee may be voted by him or her without a transfer of such shares into his or her name or the name of his or her nominee.
Shares held by or under the control of, a receiver, a trustee in bankruptcy proceedings, or any assignee for the benefit of creditors may be voted by such person without the transfer into his or her name.
If shares stand of record in the names of two or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety, or otherwise, or if two or more persons have the same fiduciary relationship respecting the same shares, unless the secretary of the corporation is given notice to the contrary and furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, the acts with respect to voting shall have the following effect: (a) if only one votes, in person or by proxy, that act binds all; (b) if more than one vote, in person or by proxy, the majority binds all; (c) if more than one votes, in person or by proxy, but the vote is evenly split on any particular matter, each faction is entitled to vote the share or shares in question proportionally; or (d) if the instrument or order so filed shows in any such tenancy is held in unequal interest, a majority or a vote evenly split for purposes hereof shall be a majority or a vote evenly split in interest. The principles of this paragraph shall apply, insofar as possible, to execution of proxies, waivers, consents, or objections and for the purpose of ascertaining the presence of a quorum.
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1.11 Proxies. Any shareholder of the corporation, other person entitled to vote on behalf of a shareholder pursuant to Florida Statute, or attorney-in-fact for such persons, may vote the shareholders shares in person or by proxy. Any shareholder may appoint a proxy to vote or otherwise act for him or her by signing an appointment form, either personally or by an attorney-in-fact. An executed telegram or cablegram appearing to have been transmitted by such person. Or a photostatic, or equivalent reproduction of an appointment form, shall be deemed a sufficient appointment form.
An appointment of proxy is effective when received by the secretary of the corporation or such other officer or agent authorized to tabulate votes, and shall be valid for up to 11 months, unless a longer period is expressly provided in the appointment form.
The death or incapacity of the shareholder appointing a proxy does not affect the right of the corporation to accept the proxys authority unless notice of the death or incapacity is received by the secretary or other officer or agent authorized to tabulate votes before the proxy exercises authority under the appointment.
An appointment of a proxy is revocable by the shareholder unless the appointment form conspicuously states that it is irrevocable and the appointment is coupled with an interest.
1.12 Quorum. Shares entitled to vote as a separate voting group may take action on a matter at a meeting only if a quorum of those shares exists with respect to that matter. Except as otherwise provided in the Articles of Incorporation or by law, a majority of the shares entitled to vote on the matter by each voting group, represented in person or by proxy, shall constitute a quorum at any meeting of shareholders, but in no event shall a quorum consists of less than one third of the shares of each voting group entitled to vote. If less than a majority of the shares so represented may adjourn the meeting from time to time without further notice. After a quorum has been established at any shareholders meeting, the subsequent withdrawal of shareholders, so as to reduce the number of shares entitled to vote at the meeting below the number required for a quorum, shall not affect the validity of any action taken at the meeting or any adjournment thereof.
Once a share is represented for any purpose at a meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for that adjourned meeting.
1.13 Manner of Action. If a quorum is present, action on a matter (other than the election of directors) by a voting group is approved if the votes cast within the voting group favored the action exceed the votes cast opposing the action, unless a greater or lesser number of affirmative votes is required by the Articles of Incorporation or by law.
1.14 Voting for Directors. Unless otherwise provided in the Articles of Incorporation, directors will be elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present.
1.15 Inspectors of Election. Before each shareholders meeting, the Board of Directors or president shall appoint one or more Inspectors of Election. Upon appointment, each inspector shall take and sign an oath faithfully to execute the duties of inspector at the meeting with strict impartiality and to the best of his or her ability. Inspectors shall determine the number of shares outstanding, the number of shares present at the meeting, and whether a quorum is present. The inspectors shall receive votes and ballots and determine all challenges and questions as to the right to vote. The inspectors shall count and tabulate all votes and ballots and determine the results. Inspectors shall perform other duties as are proper to conduct elections of directors and votes on other matters with fairness to all shareholders. Inspectors shall make a certificate of the results of elections of directors and votes on other matters. No inspector shall be a candidate for election as a director of the corporation.
ARTICLE 2
BOARD OF DIRECTORS
2.1 General Powers. Except as provided in the Articles of Incorporation and by law, all corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation shall be managed under the direction of, its board of directors.
2.2 Number, terms, Classification and Qualification. The Board of Directors of the corporation shall consist of a minimum of one person and a maximum of seven persons. The number of directors may at any time and from time to time be increased or decreased by action of either the shareholders or the Board of Directors, but no decrease in the number of directors shall have the effect of shortening the term if any incumbent director. A director must be a natural person of at least 18 years of age, but need not be a citizen of the United States of America, a resident of the state of Florida, or a shareholder of the corporation. Each director shall hold office until a successor has been elected and qualified or until an earlier resignation, removal from office or death.
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2.3 Regular Meeting. An annual regular meeting of the Board of Directors shall be held without notice immediately after, and at the same place as, the annual meeting of the shareholders and at such other time and place as may be determined by the Board of Directors. The board may, at ant time and from time to time, provide by resolution the time and place, either within or without the State of Florida, for the holding of the annual regular meeting or additional regular meeting of the board without other notice the resolution.
2.4 Special Meetings. Special meetings of the Board of Directors may be called by the chairman of the board, the president, or any two directors.
The person or persons authorized to call special meetings of the board may designate any place, either within or without the State of Florida, as the place for holding any special meeting of the board called by them. If no designation is made, the place of the meeting shall be the principal office of the corporation in Florida.
Notice of any special meeting of the board may be given by any reasonable means, oral or written, and at any reasonable time before the meeting. The reasonableness of notice given in connection with any special meeting of the board shall be determined in light of all pertinent circumstances. It shall be presumed that notice of any special meeting given at least two days before the meeting either orally (by telephone or in person), or by written notice delivered personally or mailed to each director at his or her business or residence address, is reasonable. If mailed, the notice of any special meeting shall be deemed to be delivered on the second day after it is deposited in the United States mail, so addressed, with postage prepaid. If notice is given by telegram, it shall be deemed to be delivered when the telegram is delivered to the telegraph company. Neither the business to be transacted at, nor the purpose or purposes of, any special meeting need to be specified in the notice or in any written waiver of notice of the meeting.
2.5 Waiver of Notice of Meeting. Notice of a meeting of the Board of Directors need not be given to any director who signs a written waiver of notice before, during, or after the meeting. Attendance of a director at a meeting shall constitute a waiver of notice of the meeting and a waiver of any and all objections to the place of the meeting, the time of the meeting, and the manner in which it has been called or convened, except when a director states, at the beginning of the meeting or promptly upon arrival at the meeting, any objection to the transaction of business because the meeting is not lawfully called or convened.
2.6 Quorum. A majority of the number of directors fixed by, or in the manner provided in, these by-laws shall constitute a quorum for the transaction of business; provided however, tat whenever, for any reason, a vacancy occurs in the Board of Directors, a quorum shall consist of a majority of the remaining directors until the vacancy has been filled.
2.7 Manner of Action. The act of a majority of the directors present at a meeting at which a quorum is present when the vote is taken shall be the act of the Board of Directors.
2.8 Presumption of Assent. A director of the corporation who is present at a meeting of the Board of Directors or a committee of the board when corporate action is taken shall be presumed to have assented to the action taken, unless he or she objects at the beginning of the meeting, or promptly upon arrival, to holding the meeting or transacting specific business at the meeting, or he or she votes against or abstains from the action taken.
2.9 Action Without a Meeting. Any action required or permitted to be taken at a meeting of the Board of Directors or a committee of it may be taken without a meeting if consent in writing, stating the action so taken, is signed by all the directors. Action taken under this section is effective when the last director signs the consent, unless the consent specifies a different effective date. A consent signed under this section shall have the effect of a meeting vote and may be described as such in any document.
2.10 Meetings by Means of Conference Telephone Call or Similar Electronic Equipment. Members of the Board of Directors may participate in a meeting of the Board of Directors by means of a conference telephone call or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation by such means constitutes presence in person at a meeting.
2.11 Resignation. Any director may resign at any time by giving written notice to the corporation, the Board of Directors, or its chairman. The resignation of any director shall take effect when the notice is delivered unless the notice specifies a later effective date, in which event the board may fill the pending vacancy before the effective date if they provide that the successor does not take office until the effective date.
2.12 Removal. Any director, or the entire board may be removed at any time, with or without cause, by action of the shareholders, unless the Articles of Incorporation provide that directors may be removed only for cause. If a director was elected by a voting group of shareholders, only the shareholders of that voting group may participate in the vote to remove that director. The notice of the meeting at which a vote is taken to remove a director must state that the purpose or one of the purposes of the meeting is the removal of the director or directors.
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2.13 Vacancies. Any vacancy in the Board of Directors, including any vacancy created by reason of any increase in the number of directors, may be filled by the affirmative vote of a majority of the remaining directors though less than a quorum of the Board of Directors, or by the shareholders.
2.14 Compensation. Each director may be paid the expenses, if any, of attendance at each meeting of the Board of Directors, any may be paid a stated salary as a director of a fixed sum for attendance at each meeting of the Board of Directors or both, as may from time to time be determined by action of the Board of Directors. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefore.
ARTICLE 3
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors, by resolution adopted by a majority of the full board, may designate from among its members an executive committee and one or more other committees each of which, to the extent provided in the resolution, shall have and may exercise all the authority of the Board of Directors, except as prohibited by Florida Statutes.
Each committee must have two or more members who serve at the pleasure of the board. The Board of Directors, by resolution adopted in accordance with this article, may designate one or more directors as alternate members of any committee, who may act in the place and stead of any absent member or members at any meeting of the committee.
ARTICLE 4
OFFICERS
4.1 Officers. The officers of the corporation shall be a president, vice president, a secretary, a treasurer and any other officers and assistant officers as may be deemed necessary and as shall be approved, by the Board of Directors. Any two or more offices may be held by the same person.
4.2 Appointment and Term of Office. The officers of the corporation shall be appointed annually by the Board of Directors at the first meeting of the board held after the shareholders annual meeting. If the appointment of officers does not occur at this meeting, the appointment shall occur as soon thereafter ass practicable. Each officer shall hold office until a successor has been duly appointed and qualified, or until an earlier resignation, removal from office, or death.
4.3 Resignation. Any officer of the corporation may resign from his or her respective office or position by delivering notice to the corporation. The resignation is effective when delivered unless the notice specifies a later effective date. If a resignation is made effective at a later date and the corporation accepts the future effective date, the Board of Directors may fill the pending vacancy before the effective date if the board provides that the successor does not take office until the effective date.
4.4 Removal. Any officer of the corporation may be removed from his or her respective office or position at any time, with or without cause, by the Board of Directors.
4.5 President. The president shall be the chief executive officer of the corporation and shall, subject to the control of the Board of Directors, generally supervise and control all of the business and affairs of the corporation, and preside at all the meetings of the shareholders, the Board of Directors and all committees of the Board of Directors on which he or she may serve. In addition, the president shall possess, and may exercise, such power and authority, and perform such duties, as may from time to time be assigned to him or her by the Board of Directors and as are incident to the offices of president and chief executive officer.
4.6 Vice Presidents. Each vice president shall possess, and may exercise, such power and authority and shall perform such duties as may from time to time be assigned to him or her by the Board of Directors.
4.7 Secretary. The secretary shall keep the minutes of the proceedings of the shareholders and of the Board of Directors in one or more books provided for that purpose; see that all notices are duly given in accordance with the provisions of these by-laws or as required by law; be custodian of the corporate records and of the seal of the corporation; and keep a register of the post office address of each shareholder of the corporation. In addition, the secretary shall possess, and may exercise, such power and authority, and shall perform such duties, as may from time to time be assigned to him or her by the Board of Directors and as are incident to the office of the secretary.
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4.8 Treasurer. The treasurer shall have charge and custody of and be responsible for, all funds and securities of the corporation; receive and give receipts for money due and payable to the corporation from any source whatsoever; and deposit all such money in the name of the corporation in such banks, trust companies or other depositories as shall be used by the corporation. In addition, the treasurer shall possess, and may exercise such power and authority, and shall perform such duties, as may from time to time be assigned to him or her by the Board of Directors and as are incident to the office of the treasurer.
4.9 Other Officers, Employees and Agents. Each and every other officer, employee and agent of the corporation shall possess, and may exercise, such power and authority and shall perform such duties, as may from time to time be assigned to him or her by the Board of Directors, the officer appointing him or her, and such officer or officers who may from time to time be designated by the board to exercise supervisory authority.
4.10 Compensation. The compensation of the officers of the corporation shall be fixed from time to time by the Board of Directors.
ARTICLE 5
CERTIFICATES OF STOCK
5.1 Certificates for Shares. The Board of Directors shall determine whether shares of the corporation shall be uncertificated or certificated. If certificated shares are issued, certificates representing shares in the corporation shall be signed (either manually or by facsimile) by the president or secretary and may be sealed with the seal of the corporation or a facsimile thereof. A certificate that has been signed by an officer or officers who later cease to be such officers shall be valid.
5.2 Transfer of Shares: Ownership of Shares. Transfers of shares of stock of the corporation shall be made only on the stock transfer books of the corporation, and only after the surrender to the corporation of the certificates representing such shares. Except as provided by Florida Statutes, the person in whose name shares stand on the books of the corporation shall not be bound to recognize any equitable or other claim to, or interest in, such shares on the part of any other person, whether or not it shall have express or other notice thereof.
5.3 Lost Certificates. The corporation shall issue a new stock certificate in the place of any certificate previously issued if the holder of record of the certificate (a) makes proof in affidavit form that the certificate has been lost, destroyed, or wrongfully taken; (b) requests the issuance of a new certificate before the corporation has notice that the lost, destroyed, or wrongfully taken certificate has been acquired by a purchaser for value in good faith and without notice of any adverse claim; (c) at the discretion of the Board of Directors, gives bond in such form and amount as the corporation may direct, to indemnify the corporation, the transfer agent and registrar against any claim that may be made on account of the alleged loss, destruction, or theft of a certificate; and (d) satisfies any other reasonable requirements imposed by the corporation.
ARTICLE 6
ACTIONS WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS
Unless otherwise directed by the Board of Directors, the president or a designee of the president shall have power to vote and otherwise act on behalf of the corporation, in person or by proxy, at any meeting of shareholders of, or with respect to any action of shareholders of, any other corporation in which this corporation may hold securities and to otherwise exercise any and all rights and powers that the corporation may possess by reason of its ownership of securities in other corporations.
ARTICLE 7
AMENDMENTS
These by-laws may be altered, amended, or repealed and new by-laws may be adopted, by action of the Board of Directors, subject to the limitations of Florida Statutes. The shareholders of the corporation may alter, amend, or repeal these by-laws or adopt new by-laws even though these by-laws may also be amended or repealed by the Board of Directors.
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ARTICLE 8
CORPORATE SEAL
The Board of Directors shall provide for a seal, which shall have the name of the corporation, the year of its incorporation, and the state of incorporation inscribed on it.
The foregoing By-Laws were duly adopted by the
Directors of the Company on the 30th day of June, 2007.
/s/ Robin Moody
Secretary
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Exhibit 10.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (Agreement) is made and entered into as of the 30th day of June, 2007 by and between Cyclone Power Technologies, Inc., a Florida corporation (hereinafter called the Company), and Frankie Fruge (hereinafter called the Executive).
1.
Employment.
1.1
Employment and Term. The Company shall employ the Executive and the Executive shall serve the Company, on the terms and conditions set forth herein, for the period commencing on the date hereof (the Effective Date) and expiring three (3) years from the Effective Date (the Term) unless sooner terminated as hereinafter set forth. The Term of this Agreement shall automatically be extended for successive one (1) year periods, starting on the end of the second anniversary of the Effective Date, unless at least 90 days prior to such anniversary date, either the Board or the Executive gives written notice of her/its desire not to extend the Term hereof for the additional year.
1.2
Duties of Executive. The Executive shall serve as COO, Secretary and Treasurer of the Company and shall have powers and authority commensurate with such position, shall diligently perform all services as may be reasonably assigned to her by the Board and shall exercise such power and authority as may from time to time be delegated to her by the Board.
1.3
Founders Status. Regardless of the termination of this Agreement, the Executive shall at all times be referred to as a Founder of the Company in any documents listing her bio, or otherwise warranting such mention.
2.
Compensation.
2.1
Base Salary. The Executive shall receive a base salary of $120,000 per annum (the Base Salary) during the Term, such Base Salary to be payable in substantially equal installments consistent with the Companys normal payroll schedule, subject to applicable withholding and other taxes. The Base Salary shall be subject to annual increases at the discretion of the Board.
2.2
Deferred Salary. Until the later to occur of November 11, 2009 or such time that the Company has consistent revenues or has sufficient funding to carry on it operations, the Executives Base Salary shall be deferred, but shall continue to accrue on the books of the Company. Terms for repayment of the Executives deferred salary shall be reasonably agreed to by the Board and the Executive when the Company has available funds.
2.3
Benefits. During the Term of this Agreement, the Executive shall be entitled to insurance programs, sick leave, stock option plans, bonus plans, pension plans and other fringe benefit plans and programs as are from time-to-time established and maintained for the benefit of the Companys executive officers subject to the provisions of such plans and programs in accordance with the Companys policies and plans from time to time in effect for executive officers of the Company.
2.4
Stock Options. The Executive shall receive options to acquire 500,000 shares of the Companys common stock, which options shall vest on the following terms and at the following exercise prices:
Number of Options |
| Term |
| Vesting |
| Exercise Price |
|
|
|
|
|
|
|
250,000 |
| 10 yrs |
| Immediately |
| $0.25 |
125,000 |
| 10 yrs |
| 6/30/08 |
| $0.35 |
125,000 |
| 10 yrs |
| 6/30/09 |
| $0.45 |
2.5
Management Incentives. The Executive shall be eligible to participate in the Companys Stock Incentive Plan, which shall provide that the management of the Company as a group shall have the right to earn shares of the Companys common stock equal to an additional 7.5% ownership of the Company, based upon performance and incentive accomplishments set forth therein.
3.
Expense Reimbursement and Office.
3.1
Expense Reimbursement. During the Term, the Company shall reimburse the Executive for all reasonable expenses actually paid or incurred by the Executive in the course of and pursuant to the business of the Company, including expenses for travel and entertainment.
1
3.2
Working Facilities. The Company shall furnish the Executive with an office and such other facilities and services suitable to her position and adequate for the performance of her duties hereunder.
4.
Termination.
4.1
Termination for Cause. Notwithstanding anything contained to the contrary in this Agreement, this Agreement may be terminated by the Company for Cause. As used in this Agreement, Cause shall only mean (i) subject to the following sentences, any action or omission of the Executive which constitutes a willful and material breach of this Agreement which is not cured or as to which diligent attempts to cure have not commenced within thirty (30) business days after receipt by the Executive of notice of same, which notice specifies the conduct necessary to cure such breach, (ii) fraud, embezzlement or misappropriation as against the Company or (iii) the conviction of the Executive for any criminal act which reasonably injures the Company. Upon any determination by the Board that Cause exists under clause (i) of the preceding sentence, the Company shall cause a special meeting of the Board to be called and held at a time mutually convenient to the Board and the Executive, but in no event later than ten (10) business days after the Executives receipt of the notice contemplated by clause (i). The Executive shall have the right to appear before such special meeting of the Board with legal counsel of her choosing to refute any determination of Cause specified in such notice, and any termination of the Executives employment by reason of such Cause determination shall not be effective until the Executive is afforded such opportunity to appear. Any termination for Cause pursuant to clause (ii) or (iii) of the first sentence of this Section 4.1 shall be made in writing to the Executive, which notice shall set forth in detail all acts or omissions upon which the Company is relying for such termination.
Upon any termination pursuant to this Section 4.1, the Company shall pay to the Executive any unpaid Base Salary accrued through the effective date of termination specified in such notice. Except as provided above, the Company shall have no further liability hereunder (other than for reimbursement for reasonable business expenses incurred prior to the date of termination, subject, however, to the provisions of Section 3.1).
4.2
Termination Without Cause. The Company shall have the right to terminate the Executives employment hereunder for any reason other than as set forth in Section 4.1 upon thirty (30) days written notice to the Executive; provided, however, that the Company shall pay to the Executive (i) any unpaid Base Salary accrued through the effective date of termination specified in such notice, (ii) the Executives Base Salary at the rate prevailing at such termination through 12 months from the date of termination or the end of her Term then in effect, whichever is longer, and (iii) any Performance Bonus that would otherwise be payable to the Executive were he not terminated, during the 12 months following her termination. Upon termination with cause, all of the Executives stock options shall vest immediately.
4.3
Termination Upon Change in Control.
(a)
Upon the termination of the Executives employment hereunder (i) by the Company other than for Cause, as specified in Section 4.1 hereof, or (ii) by the Executive for Good Reason, as specified in Section 4.3(c) hereof, within 180 days after the occurrence of a Change in Control as specified in Section 4.3(b) hereof, the Company shall pay to the Executive (i) any unpaid Base Salary accrued through the effective date of termination specified in such notice, (ii) the Executives Base Salary at the rate prevailing at such termination through 12 months from the date of termination or the end of her Term then in effect, whichever is longer, and (iii) any Performance Bonus that would otherwise be payable to the Executive were he not terminated, during the 12 months following her termination. Upon termination upon a change in control, all of the Executives stock options shall vest immediately.
(b)
For purposes of this Agreement, a Change in Control shall mean:
(i)
The acquisition (other than by the Company), at any time after the date hereof, by any person, entity or group, within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the Exchange Act), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either the then outstanding shares of common stock or the combined voting power of the Companys then outstanding voting securities entitled to vote generally in the election of directors (together with such common stock, Voting Securities); or
(ii)
The individual(s) who, as of the date hereof, constitute the Board (as of the date hereof the Incumbent Board) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Companys shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of this Agreement, considered as though such person were a member of the Incumbent Board; or
2
(iii)
Approval by the shareholders of the Company of (A) a reorganization, merger or consolidation with respect to which persons who were the shareholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50% of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated companys then outstanding voting securities, (B) a liquidation or dissolution of the Company or (C) the sale of all or substantially all of the assets of the Company, unless the approved reorganization, merger, consolidation, liquidation, dissolution or sale is subsequently abandoned.
(c)
For purposes of this Agreement, Good Reason shall mean:
(i)
The occurrence of any of the following events which is not consented to in writing by the Executive prior to its occurrence or which is not cured by the Company within thirty (30) days after its receipt of written notice of the Executives objection to such occurrence: (a) the Executive is assigned to any position, duties or responsibilities that are significantly diminished when compared with the position, duties or responsibilities of the Executive on the date of this Agreement, (b) the Executives Base Salary or other compensation is reduced or (c) the Executive is requested to engage in conduct that is reasonably likely to result in a violation of law; but excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of written notice thereof given by the Executive;
(ii)
Any failure by the Company to comply with any of the provisions of Sections 1.3, 2 or 3 of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of written notice thereof given by the Executive;
(iii)
The Companys requiring the Executive to be based at any office or location other than the Companys offices in South Florida, except for travel reasonably required in connection with the performance of the Executives responsibilities hereunder; or
(iv)
Any purported termination by the Company of the Executives employment other than as expressly permitted by this Agreement.
4.4
Voluntary Resignation. In the event the Executive resigns as an employee of the Company, he shall be entitled to receive the same payment as if he had been terminated pursuant to Section 4.2 of this Agreement.
4.5
Full Settlement. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement. The Company agrees to pay, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to Section 6 of this Agreement), plus in each case interest at the applicable Federal rate provided for in Section 7872(f)(2) of the Internal Revenue Code of 1986, as amended (the Code).
5.
Indemnification. The Company shall indemnify and hold harmless the Executive from and against any and all claims, damages, expenses (including attorneys' fees) and amounts paid in settlement, litigation, arbitration or otherwise (a Claim) actually and reasonably incurred by her in connection with the investigation, defense, settlement or appeal of any threatened, pending or completed Claim to which the Executive was or is a party or is threatened to be made a party by reason of the fact that the Executive is or was an officer, director, employee or agent of the Company or its predecessor company, or is or was serving at the request of the Company, or its predecessor company, as an officer, director, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, or by reason of anything done or not done by the Executive in such capacity or capacities, provided that the Executive acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Company or its predecessor company. Such indemnification shall include, but not be limited to, any Claim made by shareholders of the Companys predecessor company for demand of the Executive equity holdings in the Company or its predecessor company.
6.
Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Florida without regard to any conflict of law rule or principle that would give effect to the laws of another jurisdiction. In the event that any dispute shall arise with respect to this Agreement, then such dispute shall be submitted for resolution to arbitration in Broward County, Florida in accordance with the rules of the American Arbitration Association then in effect. The non-prevailing party in such arbitration shall pay all reasonable fees and expenses of the prevailing party, including fees and expenses of counsel for the prevailing party.
3
7.
Notices. Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given when delivered by hand or when deposited in the United States mail, by registered or certified mail, return receipt requested, postage prepaid, addressed to the Companys executive office, or to the last address known for the Executive.
8.
Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and, upon its effectiveness, shall supersede all prior agreements, understandings and arrangements, both oral and written, between the Executive and the Company with respect to such subject matter.
9.
Benefits; Binding Effect. This Agreement shall be for the benefit of and binding upon the parties hereto and their respective heirs, personal representatives, legal representatives, successors and, where applicable, assigns. Notwithstanding the foregoing, neither party may assign its rights or benefits hereunder without the prior written consent of the other party hereto.
10.
Severability. The invalidity of any one or more of the words, phrases, sentences, clauses or sections contained in this Agreement shall not affect the enforceability of the remaining portions of this Agreement or any part thereof, all of which are inserted conditionally on their being valid in law, and, in the event that any one or more of the words, phrases, sentences, clauses or sections contained in this Agreement shall be declared invalid, this Agreement shall be construed as if such invalid word or words, phrase or phrases, sentence or sentences, clause or clauses, or section or sections had not been inserted. If such invalidity is caused by duration, geographic scope or both, the otherwise invalid provision will be considered to be reduced to a period or area which would cure such invalidity.
11.
Waivers. The waiver by either party hereto of a breach or violation of any term or provision of this Agreement shall not operate nor be construed as a waiver of any subsequent breach or violation.
12.
Damages. Nothing contained herein shall be construed to prevent the Company or the Executive from seeking and recovering from the other damages sustained by either or both of them as a result of its or her breach of any term or provision of this Agreement.
13.
No Third Party Beneficiary. Nothing expressed or implied in this Agreement is intended, or shall be construed, to confer upon or give any person (other than the parties hereto and, in the case of the Executive, her heirs, personal representative(s) and/or legal representative) any rights or remedies under or by reason of this Agreement.
(Signatures on following page)
4
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written.
CYCLONE POWER TECHNOLOGIES, INC.
By: /s/ Harry Schoell
Name: Harry Schoell
Title: CEO
EXECUTIVE
/s/ Frankie Fruge
Frankie Fruge
5
Further Terms and Conditions of Employment
The following terms and conditions are applicable to all of the Company's employees, and by accepting employment, you (referred to herein as "Employee") agree to be bound by these terms and conditions, as well as the terms and conditions separately agreed between you and the Company regarding duties, compensation, benefits, etc. These terms are not intended to limit the Company's rights under general principles of law regarding the matters described below. Employee and the Company agree that if the terms contained herein conflict with the terms of the employment agreement to which this is annexed, the employment agreement shall govern.
1. Disclosure of Information.
1.1
In the course of Employee's employment hereunder, Employee will receive, contribute to the production of, or become privy to the Company's Confidential Information (as hereinafter defined).
1.2
Employee agrees that during Employees employment by Company and for a period of three (3) years thereafter, Employee shall hold in confidence and shall not directly or indirectly reveal, report, publish, copy, duplicate, disclose or transfer any of the Confidential Information to any person or entity, or utilize any of the Confidential Information for any purpose, except in the course of Employees work for Company. Employee agrees that during Employees employment by Company and in perpetuity thereafter, Employee shall hold in confidence and shall not directly or indirectly reveal report, publish, copy, duplicate, disclose, transfer or otherwise misappropriate any Confidential Information to any person or entity, or utilize such Confidential Information for any purpose, except within the course of Employees employment with Company.
1.3
All notes, data, reference materials, sketches, drawings, memoranda, documentation and records in any form or media in any way incorporating or reflecting any Confidential Information of Company shall belong exclusively to Company. Upon termination of her employment for any reason, or at any time Company may request prior thereto, Employee shall immediately surrender and turn over to Company any of Companys property whatsoever and all Confidential Information of Company, whether the same be in writing, print, copy, audio or video tape, computer program or disc, picture, or any other medium whatsoever, and whether appearing in original documents, summaries, excerpts, abstracts or other formats, and shall provide Company with all information necessary to access and use said Confidential Information. Employee shall have no right to retain any originals or copies of the foregoing for any reason whatsoever after termination of her employment hereunder without the express prior written consent of Company and, upon termination, Employee shall certify in writing that he no longer possesses and has not distributed or retained any Confidential Information of Company or any of Companys property whatsoever.
1.4
Notwithstanding the terms of this Agreement, the obligation of Employee to protect the confidentiality of any Confidential Information shall terminate as to any information or materials which: (i) are, or become, public knowledge through no act or failure to act of Employee; (ii) are publicly disclosed by the proprietor thereof; (iii) are lawfully obtained without obligations of confidentiality by Employee from a third party after reasonable inquiry regarding the authority of such third party to possess and divulge the same; (iv) are independently developed by Employee from sources or through persons that Employee can demonstrate had no access to Confidential Information; or (v) are lawfully known by Employee at the time of disclosure other than by reason of discussions with or disclosures by Company.
1.5
As used in this Agreement, Confidential Information means information or material, whether oral or written, that is proprietary to Company or designated (either expressly or by virtue of the manner in which such information or material is traditionally treated in business settings) as Confidential Information by Company and not generally known by non-Company personnel, which Employee may develop or which Employee may receive, obtain knowledge of or become privy to through or as a result of Employees relationship with Company (including information conceived, originated, discovered or developed in whole or in part by Employee). Confidential Information includes, but is not limited to, the following types of information and other information of a similar nature (whether or not reduced to writing): trade secrets, discoveries, ideas, concepts, software in various stages of development, designs, drawings, specifications, techniques, models, data, source code, object code, documentation, diagrams, flow charts, research, development, processes, procedures, know-how, marketing techniques and materials, marketing and development plans, names of employees and information related to them, customer names, contacts, and other information related to customers, price lists, pricing policies, and financial data, information and projections. Confidential Information also includes any information described above which Company obtains from another party and which Company treats as proprietary or designates as Confidential Information, whether or not owned or developed by Company. Information that is publicly known and that is generally employed by the trade or generic information or knowledge which Employee would have learned in the course of similar work elsewhere in the trade is not intended to and shall be deemed not to be a part of the Confidential Information.
6
2.
Agreement Not to Solicit Customers. Employee agrees that during her employment by Company and for a period of one (1) year following termination of such employment for any reason whatsoever, Employee shall not, either directly or indirectly, on her own behalf or in the service of or on behalf of others actively solicit, or attempt to solicit, initiate contact with, or call upon any clients or actively sought prospective clients of Company with whom Employee had material contact during her employment with Company, for the purpose of soliciting, selling, diverting to or otherwise providing services on behalf of any business entity which engages in the business of oil and gas exploration, unless agreed to in writing by both parties.
2.1
Material Contact. For purposes of this Agreement, material contact exists between Employee and each client or actively sought prospective client of Company with whom Employee personally interacts on behalf of Company, whether such interaction is conducted in person, in writing, by telephone or by other form of communication.
3.
Agreement Not to Solicit Employees. Employee agrees that during her employment by Company and for a period of two (2) years following termination of such employment for any reason, he will not, either directly or indirectly, on her own behalf or in the service of, or on behalf of others, actively encourage or induce the voluntary termination of, or recruit or hire, or attempt to recruit or hire, any person(s) then employed by or associated with Company as an employee, independent contractor or consultant, whether or not such recruit or hiree is a full-time, part-time or temporary employee, independent contractor or consultant of said entities, and whether or not such employment is for a determined period or is at-will, for the purpose of employment, consultancy, or serving as an independent contractor for, directly or indirectly, any business entity which engages in the business of design, manufacture and sale of information security technology.
4.
Work Product.
4.1
Employee agrees that any inventions, ideas, Confidential Information, or copyrightable or patentable subject matter in whole or in part conceived or made by employee during or after the term of her employment with Company which are made through the use of any of Companys Confidential Information or any of Companys equipment, facilities or time, or which result from any work performed by Employee for Company (collectively, Work Product), shall belong exclusively to Company and shall be considered part of the Confidential Information (as the case may be) for purposes of this Agreement.
4.2
Company, its designees, and its assigns shall have the right to use and/or to apply for patents, copyrights or other statutory or common law protections for such Work Product in any and all countries. Employee shall provide reasonable assistance to Company (at Companys expense) to obtain and from time to time enforce patents, copyrights, and other statutory or common law protections for such Work Product in any and all countries. To that end, Employee shall execute, during and after her engagement with Company, all documents reasonably related to the application, procurement, and enforcement of patents, copyrights, and other statutory or common law protections, as Company or its counsel may request, together with any assignments thereof to Company or its designee.
4.3
All copyrightable subject matter generated or developed by Employee under this Agreement shall be deemed to be work made for hire, and exclusively the Company shall upon creation, own all such copyrightable subject matter. In the event that any such copyrightable subject matter may not be considered work made for hire, then to the fullest extent permitted by law, Employee hereby assigns to Company or its designee all ownership of all copyrights in all such copyrightable subject matter, and Company or its designee shall have the right to obtain and hold in its own name copyrights, registrations and similar protections related thereto to the extent available.
5.
Conflicts of Interest. During the term of her employment Employee shall not engage in activities or practices involving any possible conflict of interest. These activities or practices may subject Employee to disciplinary action, up to and including termination of employment. Employee should avoid at all times the appearance of, as well as an actual, conflict of interest.
5.1
Conflicts of interest activities or practices include, but are not limited to: engaging in business conduct that is damaging to the reputation of the Company, accepting outside employment in any organization that does business with the Company or is a competitor of the Company, investing or having a financial interest in a private company which does business with the Company or having stock ownership in a publicly traded company which does business with the Company if the relationship(s) may influence Employees business decisions (this applies to Employee and to close relatives and is applicable at the time of hire and at any time during the course of employment). If an individual does own stock in a company that does business with the Company, the relationship should be disclosed upon employment and all significant business dealings with that company will be reviewed.
5.2
Employee may not accept gifts from any person or company doing or seeking to do business with the Company. Employees are allowed to accept advertising novelties and other gifts of nominal value.
7
5.3
Employee may not give, offer, or promise, directly or indirectly, anything of value to any representative of any company doing business with the Company.
5.4
Employee may not select vendors on the basis of anything other than the merit of their products or services or prices for such products or services.
5.5
Discussing company information with the press without prior authorization from management is also a conflict of interest.
5.6
This entire Section 5 shall specifically exclude any and all dealings, employment, ownership or other activity performed for or on behalf of Schoell Marine.
EMPLOYEE ACKNOWLEDGES THAT HE HAS READ AND UNDERSTANDS THESE TERMS AND CONDITIONS OF EMPLOYMENT AND AGREES THAT THESE TERMS AND CONDITIONS ARE NECESSARY FOR THE REASONABLE AND PROPER PROTECTION OF THE COMPANY'S BUSINESS. EMPLOYEE FURTHER ACKNOWLEDGES THAT THE COMPANY HAS ADVISED HER THAT HE IS ENTITLED TO HAVE THIS AGREEMENT REVIEWED BY AN ATTORNEY OF HER SELECTION PRIOR TO SIGNING, AND HE HAS EITHER DONE SO OR ELECTED TO FOREGO THAT RIGHT.
/s/ Frankie Fruge
Frankie Fruge
8
Exhibit 10.2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (Agreement) is made and entered into as of the 30th day of June, 2007 by and between Cyclone Power Technologies, Inc., a Florida corporation (hereinafter called the Company), and Harry Schoell (hereinafter called the Executive).
1.
Employment.
1.1
Employment and Term. The Company shall employ the Executive and the Executive shall serve the Company, on the terms and conditions set forth herein, for the period commencing on the date hereof (the Effective Date) and expiring three (3) years from the Effective Date (the Term) unless sooner terminated as hereinafter set forth. The Term of this Agreement shall automatically be extended for successive one (1) year periods, starting on the end of the second anniversary of the Effective Date, unless at least 90 days prior to such anniversary date, either the Board or the Executive gives written notice of his/its desire not to extend the Term hereof for the additional year.
1.2
Duties of Executive. The Executive shall serve as CEO and President of the Company and shall have powers and authority commensurate with such position, shall diligently perform all services as may be reasonably assigned to him by the Board and shall exercise such power and authority as may from time to time be delegated to him by the Board.
1.3
Founders Status. Regardless of the termination of this Agreement, the Executive shall at all times be referred to as a Founder of the Company in any documents listing his bio, or otherwise warranting such mention.
2.
Compensation.
2.1
Base Salary. The Executive shall receive a base salary of $150,000 per annum (the Base Salary) during the Term, such Base Salary to be payable in substantially equal installments consistent with the Companys normal payroll schedule, subject to applicable withholding and other taxes. The Base Salary shall be subject to annual increases at the discretion of the Board.
2.2
Deferred Salary. Until such time that the Company has consistent revenues or has sufficient funding to carry on it operations, the Executives Base Salary, or that portion of it that the Executive and the Board reasonably determine, shall be deferred, but shall continue to accrue on the books of the Company. Terms for repayment of the Executives deferred salary shall be reasonably agreed to by the Board and the Executive when the Company has available funds.
2.3
Benefits. During the Term of this Agreement, the Executive shall be entitled to insurance programs, sick leave, stock option plans, bonus plans, pension plans and other fringe benefit plans and programs as are from time-to-time established and maintained for the benefit of the Companys executive officers subject to the provisions of such plans and programs in accordance with the Companys policies and plans from time to time in effect for executive officers of the Company.
2.4
Stock Options. The Executive shall receive options to acquire 500,000 shares of the Companys common stock, which options shall vest on the following terms and at the following exercise prices:
Number of Options |
| Term |
| Vesting |
| Exercise Price |
|
|
|
|
|
|
|
250,000 |
| 10 yrs |
| Immediately |
| $0.25 |
125,000 |
| 10 yrs |
| 6/30/08 |
| $0.35 |
125,000 |
| 10 yrs |
| 6/30/09 |
| $0.45 |
2.5
Management Incentives. The Executive shall be eligible to participate in the Companys Stock Incentive Plan, which shall provide that the management of the Company as a group shall have the right to earn shares of the Companys common stock equal to an additional 7.5% ownership of the Company, based upon performance and incentive accomplishments set forth therein.
3.
Expense Reimbursement and Office.
3.1
Expense Reimbursement. During the Term, the Company shall reimburse the Executive for all reasonable expenses actually paid or incurred by the Executive in the course of and pursuant to the business of the Company, including expenses for travel and entertainment.
1
3.2
Working Facilities. The Company shall furnish the Executive with an office and such other facilities and services suitable to his position and adequate for the performance of his duties hereunder.
4.
Termination.
4.1
Termination for Cause. Notwithstanding anything contained to the contrary in this Agreement, this Agreement may be terminated by the Company for Cause. As used in this Agreement, Cause shall only mean (i) subject to the following sentences, any action or omission of the Executive which constitutes a willful and material breach of this Agreement which is not cured or as to which diligent attempts to cure have not commenced within thirty (30) business days after receipt by the Executive of notice of same, which notice specifies the conduct necessary to cure such breach, (ii) fraud, embezzlement or misappropriation as against the Company or (iii) the conviction of the Executive for any criminal act which reasonably injures the Company. Upon any determination by the Board that Cause exists under clause (i) of the preceding sentence, the Company shall cause a special meeting of the Board to be called and held at a time mutually convenient to the Board and the Executive, but in no event later than ten (10) business days after the Executives receipt of the notice contemplated by clause (i). The Executive shall have the right to appear before such special meeting of the Board with legal counsel of his choosing to refute any determination of Cause specified in such notice, and any termination of the Executives employment by reason of such Cause determination shall not be effective until the Executive is afforded such opportunity to appear. Any termination for Cause pursuant to clause (ii) or (iii) of the first sentence of this Section 4.1 shall be made in writing to the Executive, which notice shall set forth in detail all acts or omissions upon which the Company is relying for such termination.
Upon any termination pursuant to this Section 4.1, the Company shall pay to the Executive any unpaid Base Salary accrued through the effective date of termination specified in such notice. Except as provided above, the Company shall have no further liability hereunder (other than for reimbursement for reasonable business expenses incurred prior to the date of termination, subject, however, to the provisions of Section 3.1).
4.2
Termination Without Cause. The Company shall have the right to terminate the Executives employment hereunder for any reason other than as set forth in Section 4.1 upon thirty (30) days written notice to the Executive; provided, however, that the Company shall pay to the Executive (i) any unpaid Base Salary accrued through the effective date of termination specified in such notice, (ii) the Executives 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 not terminated, during the 12 months following his termination. Upon termination with cause, all of the Executives stock options shall vest immediately.
4.3
Termination Upon Change in Control.
(a)
Upon the termination of the Executives employment hereunder (i) by the Company other than for Cause, as specified in Section 4.1 hereof, or (ii) by the Executive for Good Reason, as specified in Section 4.3(c) hereof, within 180 days after the occurrence of a Change in Control as specified in Section 4.3(b) hereof, the Company shall pay to the Executive (i) any unpaid Base Salary accrued through the effective date of termination specified in such notice, (ii) the Executives 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 not terminated, during the 12 months following his termination. Upon termination upon a change in control, all of the Executives stock options shall vest immediately.
(b)
For purposes of this Agreement, a Change in Control shall mean:
(i)
The acquisition (other than by the Company), at any time after the date hereof, by any person, entity or group, within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the Exchange Act), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either the then outstanding shares of common stock or the combined voting power of the Companys then outstanding voting securities entitled to vote generally in the election of directors (together with such common stock, Voting Securities); or
(ii)
The individual(s) who, as of the date hereof, constitute the Board (as of the date hereof the Incumbent Board) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Companys shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of this Agreement, considered as though such person were a member of the Incumbent Board; or
2
(iii)
Approval by the shareholders of the Company of (A) a reorganization, merger or consolidation with respect to which persons who were the shareholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50% of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated companys then outstanding voting securities, (B) a liquidation or dissolution of the Company or (C) the sale of all or substantially all of the assets of the Company, unless the approved reorganization, merger, consolidation, liquidation, dissolution or sale is subsequently abandoned.
(c)
For purposes of this Agreement, Good Reason shall mean:
(i)
The occurrence of any of the following events which is not consented to in writing by the Executive prior to its occurrence or which is not cured by the Company within thirty (30) days after its receipt of written notice of the Executives objection to such occurrence: (a) the Executive is assigned to any position, duties or responsibilities that are significantly diminished when compared with the position, duties or responsibilities of the Executive on the date of this Agreement, (b) the Executives Base Salary or other compensation is reduced or (c) the Executive is requested to engage in conduct that is reasonably likely to result in a violation of law; but excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of written notice thereof given by the Executive;
(ii)
Any failure by the Company to comply with any of the provisions of Sections 1.3, 2 or 3 of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of written notice thereof given by the Executive;
(iii)
The Companys requiring the Executive to be based at any office or location other than the Companys offices in South Florida, except for travel reasonably required in connection with the performance of the Executives responsibilities hereunder; or
(iv)
Any purported termination by the Company of the Executives employment other than as expressly permitted by this Agreement.
4.4
Voluntary Resignation. In the event the Executive resigns as an employee of the Company, he shall be entitled to receive the same payment as if he had been terminated pursuant to Section 4.2 of this Agreement.
4.5
Full Settlement. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement. The Company agrees to pay, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to Section 6 of this Agreement), plus in each case interest at the applicable Federal rate provided for in Section 7872(f)(2) of the Internal Revenue Code of 1986, as amended (the Code).
5.
Indemnification. The Company shall indemnify and hold harmless the Executive from and against any and all claims, damages, expenses (including attorneys' fees) and amounts paid in settlement, litigation, arbitration or otherwise (a Claim) actually and reasonably incurred by him in connection with the investigation, defense, settlement or appeal of any threatened, pending or completed Claim to which the Executive was or is a party or is threatened to be made a party by reason of the fact that the Executive is or was an officer, director, employee or agent of the Company or its predecessor company, or is or was serving at the request of the Company, or its predecessor company, as an officer, director, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, or by reason of anything done or not done by the Executive in such capacity or capacities, provided that the Executive acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Company or its predecessor company. Such indemnification shall include, but not be limited to, any Claim made by shareholders of the Companys predecessor company for demand of the Executive equity holdings in the Company or its predecessor company.
6.
Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Florida without regard to any conflict of law rule or principle that would give effect to the laws of another jurisdiction. In the event that any dispute shall arise with respect to this Agreement, then such dispute shall be submitted for resolution to arbitration in Broward County, Florida in accordance with the rules of the American Arbitration Association then in effect. The non-prevailing party in such arbitration shall pay all reasonable fees and expenses of the prevailing party, including fees and expenses of counsel for the prevailing party.
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7.
Notices. Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given when delivered by hand or when deposited in the United States mail, by registered or certified mail, return receipt requested, postage prepaid, addressed to the Companys executive office, or to the last address known for the Executive.
8.
Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and, upon its effectiveness, shall supersede all prior agreements, understandings and arrangements, both oral and written, between the Executive and the Company with respect to such subject matter.
9.
Benefits; Binding Effect. This Agreement shall be for the benefit of and binding upon the parties hereto and their respective heirs, personal representatives, legal representatives, successors and, where applicable, assigns. Notwithstanding the foregoing, neither party may assign its rights or benefits hereunder without the prior written consent of the other party hereto.
10.
Severability. The invalidity of any one or more of the words, phrases, sentences, clauses or sections contained in this Agreement shall not affect the enforceability of the remaining portions of this Agreement or any part thereof, all of which are inserted conditionally on their being valid in law, and, in the event that any one or more of the words, phrases, sentences, clauses or sections contained in this Agreement shall be declared invalid, this Agreement shall be construed as if such invalid word or words, phrase or phrases, sentence or sentences, clause or clauses, or section or sections had not been inserted. If such invalidity is caused by duration, geographic scope or both, the otherwise invalid provision will be considered to be reduced to a period or area which would cure such invalidity.
11.
Waivers. The waiver by either party hereto of a breach or violation of any term or provision of this Agreement shall not operate nor be construed as a waiver of any subsequent breach or violation.
12.
Damages. Nothing contained herein shall be construed to prevent the Company or the Executive from seeking and recovering from the other damages sustained by either or both of them as a result of its or his breach of any term or provision of this Agreement.
13.
No Third Party Beneficiary. Nothing expressed or implied in this Agreement is intended, or shall be construed, to confer upon or give any person (other than the parties hereto and, in the case of the Executive, his heirs, personal representative(s) and/or legal representative) any rights or remedies under or by reason of this Agreement.
(Signatures on following page)
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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written.
CYCLONE POWER TECHNOLOGIES, INC.
By: /s/ Frankie Fruge
Name: Frankie Fruge
Title: COO
EXECUTIVE
/s/ Harry Schoell
Harry Schoell
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Further Terms and Conditions of Employment
The following terms and conditions are applicable to all of the Company's employees, and by accepting employment, you (referred to herein as "Employee") agree to be bound by these terms and conditions, as well as the terms and conditions separately agreed between you and the Company regarding duties, compensation, benefits, etc. These terms are not intended to limit the Company's rights under general principles of law regarding the matters described below. Employee and the Company agree that if the terms contained herein conflict with the terms of the employment agreement to which this is annexed, the employment agreement shall govern.
1. Disclosure of Information.
1.1
In the course of Employee's employment hereunder, Employee will receive, contribute to the production of, or become privy to the Company's Confidential Information (as hereinafter defined).
1.2
Employee agrees that during Employees employment by Company and for a period of three (3) years thereafter, Employee shall hold in confidence and shall not directly or indirectly reveal, report, publish, copy, duplicate, disclose or transfer any of the Confidential Information to any person or entity, or utilize any of the Confidential Information for any purpose, except in the course of Employees work for Company. Employee agrees that during Employees employment by Company and in perpetuity thereafter, Employee shall hold in confidence and shall not directly or indirectly reveal report, publish, copy, duplicate, disclose, transfer or otherwise misappropriate any Confidential Information to any person or entity, or utilize such Confidential Information for any purpose, except within the course of Employees employment with Company.
1.3
All notes, data, reference materials, sketches, drawings, memoranda, documentation and records in any form or media in any way incorporating or reflecting any Confidential Information of Company shall belong exclusively to Company. Upon termination of his employment for any reason, or at any time Company may request prior thereto, Employee shall immediately surrender and turn over to Company any of Companys property whatsoever and all Confidential Information of Company, whether the same be in writing, print, copy, audio or video tape, computer program or disc, picture, or any other medium whatsoever, and whether appearing in original documents, summaries, excerpts, abstracts or other formats, and shall provide Company with all information necessary to access and use said Confidential Information. Employee shall have no right to retain any originals or copies of the foregoing for any reason whatsoever after termination of his employment hereunder without the express prior written consent of Company and, upon termination, Employee shall certify in writing that he no longer possesses and has not distributed or retained any Confidential Information of Company or any of Companys property whatsoever.
1.4
Notwithstanding the terms of this Agreement, the obligation of Employee to protect the confidentiality of any Confidential Information shall terminate as to any information or materials which: (i) are, or become, public knowledge through no act or failure to act of Employee; (ii) are publicly disclosed by the proprietor thereof; (iii) are lawfully obtained without obligations of confidentiality by Employee from a third party after reasonable inquiry regarding the authority of such third party to possess and divulge the same; (iv) are independently developed by Employee from sources or through persons that Employee can demonstrate had no access to Confidential Information; or (v) are lawfully known by Employee at the time of disclosure other than by reason of discussions with or disclosures by Company.
1.5
As used in this Agreement, Confidential Information means information or material, whether oral or written, that is proprietary to Company or designated (either expressly or by virtue of the manner in which such information or material is traditionally treated in business settings) as Confidential Information by Company and not generally known by non-Company personnel, which Employee may develop or which Employee may receive, obtain knowledge of or become privy to through or as a result of Employees relationship with Company (including information conceived, originated, discovered or developed in whole or in part by Employee). Confidential Information includes, but is not limited to, the following types of information and other information of a similar nature (whether or not reduced to writing): trade secrets, discoveries, ideas, concepts, software in various stages of development, designs, drawings, specifications, techniques, models, data, source code, object code, documentation, diagrams, flow charts, research, development, processes, procedures, know-how, marketing techniques and materials, marketing and development plans, names of employees and information related to them, customer names, contacts, and other information related to customers, price lists, pricing policies, and financial data, information and projections. Confidential Information also includes any information described above which Company obtains from another party and which Company treats as proprietary or designates as Confidential Information, whether or not owned or developed by Company. Information that is publicly known and that is generally employed by the trade or generic information or knowledge which Employee would have learned in the course of similar work elsewhere in the trade is not intended to and shall be deemed not to be a part of the Confidential Information.
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2.
Agreement Not to Solicit Customers. Employee agrees that during his employment by Company and for a period of one (1) year following termination of such employment for any reason whatsoever, Employee shall not, either directly or indirectly, on his own behalf or in the service of or on behalf of others actively solicit, or attempt to solicit, initiate contact with, or call upon any clients or actively sought prospective clients of Company with whom Employee had material contact during his employment with Company, for the purpose of soliciting, selling, diverting to or otherwise providing services on behalf of any business entity which engages in the business of oil and gas exploration, unless agreed to in writing by both parties.
2.1
Material Contact. For purposes of this Agreement, material contact exists between Employee and each client or actively sought prospective client of Company with whom Employee personally interacts on behalf of Company, whether such interaction is conducted in person, in writing, by telephone or by other form of communication.
3.
Agreement Not to Solicit Employees. Employee agrees that during his employment by Company and for a period of two (2) years following termination of such employment for any reason, he will not, either directly or indirectly, on his own behalf or in the service of, or on behalf of others, actively encourage or induce the voluntary termination of, or recruit or hire, or attempt to recruit or hire, any person(s) then employed by or associated with Company as an employee, independent contractor or consultant, whether or not such recruit or hiree is a full-time, part-time or temporary employee, independent contractor or consultant of said entities, and whether or not such employment is for a determined period or is at-will, for the purpose of employment, consultancy, or serving as an independent contractor for, directly or indirectly, any business entity which engages in the business of design, manufacture and sale of information security technology.
4.
Work Product.
4.1
Employee agrees that any inventions, ideas, Confidential Information, or copyrightable or patentable subject matter in whole or in part conceived or made by employee during or after the term of his employment with Company which are made through the use of any of Companys Confidential Information or any of Companys equipment, facilities or time, or which result from any work performed by Employee for Company (collectively, Work Product), shall belong exclusively to Company and shall be considered part of the Confidential Information (as the case may be) for purposes of this Agreement.
4.2
Company, its designees, and its assigns shall have the right to use and/or to apply for patents, copyrights or other statutory or common law protections for such Work Product in any and all countries. Employee shall provide reasonable assistance to Company (at Companys expense) to obtain and from time to time enforce patents, copyrights, and other statutory or common law protections for such Work Product in any and all countries. To that end, Employee shall execute, during and after his engagement with Company, all documents reasonably related to the application, procurement, and enforcement of patents, copyrights, and other statutory or common law protections, as Company or its counsel may request, together with any assignments thereof to Company or its designee.
4.3
All copyrightable subject matter generated or developed by Employee under this Agreement shall be deemed to be work made for hire, and exclusively the Company shall upon creation, own all such copyrightable subject matter. In the event that any such copyrightable subject matter may not be considered work made for hire, then to the fullest extent permitted by law, Employee hereby assigns to Company or its designee all ownership of all copyrights in all such copyrightable subject matter, and Company or its designee shall have the right to obtain and hold in its own name copyrights, registrations and similar protections related thereto to the extent available.
5.
Conflicts of Interest. During the term of his employment Employee shall not engage in activities or practices involving any possible conflict of interest. These activities or practices may subject Employee to disciplinary action, up to and including termination of employment. Employee should avoid at all times the appearance of, as well as an actual, conflict of interest.
5.1
Conflicts of interest activities or practices include, but are not limited to: engaging in business conduct that is damaging to the reputation of the Company, accepting outside employment in any organization that does business with the Company or is a competitor of the Company, investing or having a financial interest in a private company which does business with the Company or having stock ownership in a publicly traded company which does business with the Company if the relationship(s) may influence Employees business decisions (this applies to Employee and to close relatives and is applicable at the time of hire and at any time during the course of employment). If an individual does own stock in a company that does business with the Company, the relationship should be disclosed upon employment and all significant business dealings with that company will be reviewed.
5.2
Employee may not accept gifts from any person or company doing or seeking to do business with the Company. Employees are allowed to accept advertising novelties and other gifts of nominal value.
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5.3
Employee may not give, offer, or promise, directly or indirectly, anything of value to any representative of any company doing business with the Company.
5.4
Employee may not select vendors on the basis of anything other than the merit of their products or services or prices for such products or services.
5.5
Discussing company information with the press without prior authorization from management is also a conflict of interest.
5.6
This entire Section 5 shall specifically exclude any and all dealings, employment, ownership or other activity performed for or on behalf of Schoell Marine.
EMPLOYEE ACKNOWLEDGES THAT HE HAS READ AND UNDERSTANDS THESE TERMS AND CONDITIONS OF EMPLOYMENT AND AGREES THAT THESE TERMS AND CONDITIONS ARE NECESSARY FOR THE REASONABLE AND PROPER PROTECTION OF THE COMPANY'S BUSINESS. EMPLOYEE FURTHER ACKNOWLEDGES THAT THE COMPANY HAS ADVISED HIM THAT HE IS ENTITLED TO HAVE THIS AGREEMENT REVIEWED BY AN ATTORNEY OF HIS SELECTION PRIOR TO SIGNING, AND HE HAS EITHER DONE SO OR ELECTED TO FOREGO THAT RIGHT.
/s/ Harry Schoell
Harry Schoell
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Exhibit 10.3
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
Cyclone Power Technologies, Inc.
COMMON STOCK PURCHASE WARRANT
Issue Date: July 30, 2009
CYCLONE POWER TECHNOLOGIES, INC, a corporation organized and existing under the laws of the State of Florida (the Company), hereby certifies that, for value received, PHOENIX POWER GROUP , LLC , a limited liability company organized and existing under the laws of the State of Tennessee, or assigns (the Holder), is entitled, subject to the terms set forth below, to purchase from the Company from and after the Release Date (as defined below) and at anytime or from time to time before 5:00 p.m. EST through the close of business on the date which is Twenty-Four (24) Months following the Release Date (such date being the Expiration Date), the number of fully paid and nonassessable shares of Common Stock, $0.001 par value per share (the Common Stock) , equal to Two Percent (2%) of the total issued and outstanding shares of Common Stock on a fully-diluted basis (assuming the exercise of all options, warrants, or any other securities convertible or exchangeable into Common Stock) at the time of exercise, at the price of $.19 per share (the Exercise Price). The number and character of such shares of Common Stock and the applicable Exercise Price per share are subject to adjustment as provided herein.
As used herein, the term Common Stock includes (i) the Companys Common Stock, par value $0.001 per share; and (ii) any other securities into which or for which any of the securities described in the preceding clause (i) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise.
As used herein, Release Date shall be the day that the first two (2) Prototype Cyclone Mark V engines (as such terms are defined in that certain Systems Application License Agreement between the Company and Holder , dated as of July 30, 2009) are delivered to the Holder.
1.
Procedure for Exercise.
1.1.
Exercise. To exercise this Warrant in whole or in part, the Holder shall deliver to the Company, (a) this Warrant, (b) a written notice of such Holders election to exercise this Warrant (the Exercise Notice), which notice shall specify the number of shares of Common Stock to be purchased, the denominations of the share certificate or share certificates desired and the name or names in which such certificates are to be registered, and (c) payment of the Exercise Price with respect to such shares. Payment may be made in cash, wire transfer, or by certified or official bank check payable to the order of the Company equal to the applicable aggregate Exercise Price for the number of shares of Common Stock specified in such Exercise Notice (as such exercise number shall be adjusted to reflect any adjustment in the total number of shares of Common Stock issuable to the Holder per the terms of this Warrant) and the Holder (or its designee, as set forth in the Exercise Notice) shall thereupon be entitled to receive the number of duly authorized, validly issued, fully-paid and non-assessable shares of Common Stock (or other securities) determined as provided herein. Upon exercise in whole or in part, this Warrant shall terminate.
1.2.
Delivery of Stock Certificates, Etc., on Exercise. The Company agrees that the shares of Common Stock purchased upon exercise of this Warrant shall be deemed to be issued to the Holder (or its designee) as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares in accordance herewith. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within five (5) business days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the Holder, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct in compliance with applicable securities laws, a certificate or certificates for the number of duly and validly issued, fully paid and nonassessable shares of Common Stock to which such Holder (or its designee) shall be entitled on such exercise, plus, in lieu of any fractional share to which such Holder would otherwise be entitled, cash equal to such fraction multiplied by the then Fair Market Value (defined as the average closing market price on the previous five trading days) of one full share, together with any other stock or other securities and property (including cash, where applicable) to which such Holder is entitled upon such exercise pursuant to Section 1 or otherwise.
1
1.3.
Number of Exercises .. The Holder may exercise this Warrant in whole or in part; however, only one exercise shall be allowable. Should the Holder transfer this Warrant to multiple parties allowable hereunder, all such parties must exercise their rights at the same time. Should the Holder(s) choose to exercise this Warrant for less than the total number of shares allowable, then the balance of such shares shall be forfeited. Upon exercise in whole or in part, this Warrant shall terminate.
2.
Anti-dilution Provisions. It is intended that this Warrant and the right to acquire two percent (2%) of the Common Stock at the Exercise Price will be non-dilutable and have anti-dilution protection until the sooner of the exercise hereof or the Expiration Date. In furtherance thereof, the Company agrees as follows:
2.1.
Common Stock Reorganization. In the event that the Company shall (a) subdivide its outstanding shares of Common Stock into a greater number of shares of the Commons Stock, or (b) combine its outstanding shares of the Common Stock into a smaller number of shares of the Common Stock (any such event being herein called a Common Stock Reorganization), then, on the occurrence of each such Common Stock Reorganization, the number of shares of Common Stock that the Holder shall thereafter be entitled to receive, on the exercise hereof as provided in Section 1, shall be increased or decreased accordingly. As the number of shares issuable by the Warrant is a percentage of the total issued and outstanding shares at such time on a fully diluted basis, such adjustment shall occur automatically upon the combination or division of the Companys Common Stock. Upon such a Common Stock Reorganization, the Exercise Price for the Warrant shall be similarly adjusted to account for the greater or lesser number of shares of Common Stock then outstanding.
2.2.
Reorganization, Consolidation, Merger, Etc. In case at any time or from time to time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company (any such event being called a Capital Reorganization), then, in each such case, as a condition to the consummation of such Capital Reorganization, proper and adequate provision shall be made by the Company whereby the Holder of this Warrant, on the exercise hereof as provided in Section 1 at any time after the consummation of such Capital Reorganization or the effective date of such Capital Reorganization, as the case may be, shall receive, in lieu of the Common Stock issuable on such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which such Holder would have been entitled upon such consummation or in connection with such Capital Reorganization, as the case may be, if such Holder had so exercised this Warrant, immediately prior thereto, all subject to further adjustment thereafter as provided in this Article 2.
2.3.
Dissolution. In the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets, the Company, concurrently with any distributions made to holders of its Common Stock, shall, upon exercise of this Warrant, at its expense deliver or cause to be delivered to the Holder the stock and other securities and property (including cash, where applicable) receivable by the Holder of this Warrant pursuant to Section 2.1, or, if the Holder shall so instruct the Company, to a bank or trust company specified by the Holder and having its principal office in Broward County, Florida as trustee for the Holder of this Warrant (the Trustee).
2.4.
Continuation of Terms. Upon any Capital Reorganization (and any dissolution following any transfer) referred to in this Article 2, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and other securities and property receivable on the exercise of this Warrant after the consummation of such Capital Reorganization or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any such stock or other securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant as provided in Section 5. In the event this Warrant does not continue in full force and effect after the consummation of the transactions described in this Article 2, then, upon exercise of this Warrant, the Companys securities and property (including cash, where applicable) receivable by the Holder of this Warrant will be delivered to the Holder or the Trustee as contemplated by Section 2.3.
2.5.
Proceedings Prior to Any Action Requiring Adjustment. As a condition precedent to the taking of any action which would require an adjustment pursuant to this Article 2, the Company shall take any action which may be necessary, including obtaining regulatory approvals or exemptions, in order that the Company may thereafter validly and legally issue as fully paid and nonassessable all shares of Common Stock which Holder is entitled to receive upon exercise thereof.
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2.6.
Notice of Adjustment. Not less than ten (10) nor more than thirty (30) days prior to the record date or effective date, as the case may be, of any action which requires or might require an adjustment or readjustment pursuant to this Article 2, the Company shall give notice to Holder of such event, describing such event in reasonable detail and specifying the record date or effective date, as the case may be, and, if determinable, the required adjustment and the computation thereof. If the required adjustment is not determinable at the time of such notice, the Company shall give notice to Holder of such adjustment and computation promptly after such adjustment becomes determinable.
3.
Reservation of Stock, Etc., Issuable on Exercise of Warrant. The Company has duly reserved and will at all times reserve and keep available, solely for issuance and delivery on the exercise of this Warrant, shares of Common Stock from time to time issuable on the exercise of this Warrant.
4.
Registration Rights.
4.1.
Incidental Piggy Back Registration.
(a)
If Company at any time proposes to register any of its securities under the Securities Act (other than by a registration on Form S-4 or S-8 or any successor or similar forms) for the account of Harry Schoell, Frankie Frugie or any other executive officers or directors of the Company (such shares being held by such affiliates of the Company being referred to as the Other Shares), it will each such time give prompt written notice to Holder of its intention to do so and of Holders rights under this Section 4.1. Upon the written request of Holder made within ten (10) days after the receipt of any such notice (which request shall specify the Registrable Securities intended to be disposed of by Holder and the intended method of disposition thereof), Company will use its best efforts to effect the registration under the Securities Act of all Registrable Securities which Company has been so requested to register by Holder thereof, to the extent requisite to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Securities so to be registered, by inclusion of such Registrable Securities in the registration statement which covers the securities which Company proposes to register; provided that if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, Company shall determine for any reason either not to register or to delay registration of such securities, Company may, at its election, give written notice of such determination to Holder and, thereupon, (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Securities in connection with such registration, and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Securities, for the same period as the delay in registering such Other Shares. Company will pay all Registration Expenses in connection with each registration of Registrable Securities pursuant to this Section 4.1.
(b)
If Company at any time proposes to register any of the Other Shares under the Securities Act as contemplated by Section 4.1 and such securities are to be distributed by or through one or more underwriters, Company will, if requested by Holder as provided in this Section 4.1, use its best efforts to arrange for such underwriters to include all the Registrable Securities to be offered and sold by Holder among the securities to be distributed by such underwriters, provided that if the managing underwriter of such underwritten offering shall inform Company and Holder requesting such registration and all other holders of any Other Shares of Common Stock which shall have exercised, in respect of such underwritten offering, registration rights comparable to the rights under this Section 4.1 of its belief that inclusion in such distribution of all or a specified number of such securities proposed to be distributed by such underwriters would interfere with the successful marketing of the securities being distributed by such underwriters (such letter to state the basis of such belief and the approximate number of such Registrable Securities and such Other Shares proposed so to be registered which may be distributed without such effect), then Company may, upon written notice to all holders of such Registrable Securities and holders of such Other Shares, reduce pro rata (if and to be extent stated by such managing underwriter to be necessary to eliminate such effect) the number of such Registrable Securities and Other Shares the registration of which shall have been requested by each holder thereof so that the resultant aggregate number of such Registrable Securities and Other Shares so included in such registration, together with the number of securities to be included in such registration for the account of Company, shall be equal to the number of shares stated in such managing underwriters letter.
4.2.
Indemnification.
(a)
Company agrees to indemnify and hold harmless Holder whose Registrable Securities are covered by any registration statement, its directors and officers and each other person, if any, who controls Holder within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which any such indemnified party may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether
3
commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and Company will reimburse each such indemnified party for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding; provided that Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to Company by or on behalf of such holder specifically for use in the preparation thereof. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such holder or any such director, officer, underwriter or controlling person and shall survive the transfer of such securities by Holder.
(b)
Holder agrees to indemnify and hold harmless (in the same manner and to the same extent as set forth in subdivision (a) of this Section 4.2) Company, each director of Company, each officer of Company and each other person, if any, who controls Company within the meaning of the Securities Act, with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereof, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to Company by or on behalf of Holder specifically for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement. In addition, if requested to do so by such person, Holder shall indemnify any underwriter of such offering and each other person, if any, who controls any such underwriter within the meaning of the Securities Act in substantially the same manner and to substantially the same extent as the indemnity herein provided to Company and each other indemnified party herein described. Any such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of Company or any such director, officer or controlling person and shall survive the transfer of such securities by such seller.
4.3.
Definitions Used in Article 4. Unless otherwise defined herein, the following terms used in this Article 4 shall have the meanings specified below:
Commission means the Securities and Exchange Commission or any other Federal agency at the time administering the Securities Act.
Registrable Securities means any shares of the Company Common Stock which have been duly exercised pursuant to this Warrant, and are still held by the original Holders thereof, or their duly authorized assignees.
Securities Act means the Securities Act of 1933, or any similar Federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Reference to a particular section of the Securities Act of 1933 shall include a reference to the comparable section, if any, of any such similar Federal statute ..
5.
Assignment; Exchange of Warrant. Subject to compliance with applicable securities laws, this Warrant, and the rights evidenced hereby, may be transferred by any registered Holder hereof (a Transferor) in whole or in part only to a subsidiary or affiliated company, or owner, of the Holder. On the surrender for exchange of this Warrant, with the Transferors endorsement in the form of Exhibit B attached hereto (the Transferor Endorsement Form) and together with evidence reasonably satisfactory to the Company demonstrating compliance with applicable securities laws, which shall include, without limitation, the provision of a legal opinion from the Transferors counsel (at the Companys expense) that such transfer is exempt from the registration requirements of applicable securities laws, the Company at its expense (but with payment by the Transferor of any applicable transfer taxes) will issue and deliver to or on the order of the Transferor thereof a new Warrant of like tenor, in the name of the Transferor and/or the transferee(s) specified in such Transferor Endorsement Form (each a Transferee), calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant so surrendered by the Transferor.
6.
Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
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Warrant Agent. The Company may, by written notice to the Holder of the Warrant, appoint an agent for the purpose of issuing Common Stock on the exercise of this Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section 5, and replacing this Warrant pursuant to Section 6, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent.
8.
Transfer on the Companys Books. Until this Warrant is transferred on the books of the Company, the Company may treat the registered Holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary.
9.
Notices, Etc. All notices and other communications from the Company to the Holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such Holder or, untilHolder furnishes to the Company an address, then to, and at the address of, the last Holder of this Warrant who has so furnished an address to the Company.
10.
Representation Regarding Transferability. The Company herein represents and warrants that, other than restrictions imposed by any applicable federal or state securities laws, there are no, and will be no, restrictions imposed upon the transferability of the Common Stock with may be purchased pursuant to the terms of this Warrant, including, but not limited to, a shareholders agreement among the shareholders of the Company.
11.
Severability. In case any one or more of the provisions contained in this Warrant shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. The parties shall endeavor in good faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions.
12.
Section Headings. The section headings used herein are for convenience of reference only, are not part of this Warrant and are not to affect the construction of or be taken into consideration in interpreting this Warrant.
13.
Right to Specific Performance. The Company acknowledges and agrees that in the event of any breach of the foregoing covenants and agreements, the Holder would be irreparably harmed and could not be made whole only by the award of monetary damages. Accordingly, the Company agrees that the Holder, in addition to any other remedy to which the Holder may be entitled at law or equity, will be entitled to seek and obtain an award of specific performance of any of the foregoing covenants and agreements.
14.
Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be governed by and construed in accordance with the laws of State of Florida without regard to principles of conflicts of laws.
IN WITNESS WHEREOF, the Company has executed this Warrant as of the date first written above.
| CYCLONE POWER TECHNOLOGIES, INC. | |
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| Harry Schoell, Chairman and CEO |
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| PHOENIX POWER GROUP , LLC | |
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| By: | Thomas V. Thillen |
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Exhibit A
FORM OF SUBSCRIPTION
(Signed Only on Exercise of Warrant)
Cyclone Power Technologies, Inc.
601 NE 26th Court
Pompano Beach, FL 33064
Ladies and Gentlemen:
The undersigned, pursuant to the provisions set forth in the attached Warrant, hereby irrevocably elects to purchase shares of the Common Stock covered by such Warrant.
The undersigned herewith makes payment of the full Exercise Price for such shares at the price per share provided for in such Warrant, which is $ .
The undersigned requests that the certificates for such shares be issued in the name of, and delivered to whose address is .
The undersigned represents and warrants that all offers and sales by the undersigned of the securities issuable upon exercise of the within Warrant shall be made pursuant to registration of the Common Stock under the Securities Act of 1933, as amended (the Securities Act) or pursuant to an exemption from registration under the Securities Act.
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Exhibit B
FORM OF TRANSFEROR ENDORSEMENT
(Signed Only on Transfer of Warrant)
For value received, the undersigned hereby sells, assigns, and transfers unto the person(s) named below under the heading Transferees the right represented by the within Warrant to purchase the percentage and number of shares of Common Stock of Cyclone Power Technologies, Inc. (the Company) into which the within Warrant relates specified under the headings Percentage Transferred and Number Transferred, respectively, opposite the name(s) of such person(s) and appoints each such person Attorney to transfer its respective right on the books of the Company with full power of substitution in the premises.
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Exhibit 10.4
CYCLONE POWER TECHNOLOGIES, INC.
2010 STOCK OPTION PLAN
1. Purpose
The purpose of the Cyclone 2010 Stock Option Plan (the "Plan") is to provide an incentive to certain employees of Cyclone Power Technologies, Inc., a Florida corporation (the "Company"), and its subsidiaries, by granting to such employees: (i) incentive stock options ("ISOs"), within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and (ii) options not constituting ISOs ("NQSOs"), in either case to acquire common stock, ($.01) par value of the Company ("Stock"). Non-employee consultants and directors may also be granted NQSOs. Options granted under this Plan may be either ISO's or NQSO's, as determined at the discretion of the Committee (as defined below) and as reflected in the terms of the written option agreements.
2. Effective Date and Term of the Plan.
(a)
The Plan is effective as of July 1, 2010 (the "Effective Date"), subject to subsequent approval, within 12 months of its adoption by the Board of Directors of the Company (the "Board"), by shareholders of the Company eligible to vote in the election of directors, by a vote sufficient to meet the requirements of Code Sections 162(m) (if applicable) and 422, Rule 16b-3 under the Exchange Act (if applicable), applicable requirements under the rules of any stock exchange or automated quotation system on which the Stock may be listed or quoted, and other laws, regulations, and obligations of the Company applicable to the Plan. ISO Options may be granted subject to shareholder approval, but may not be exercised in the event the shareholder approval is not obtained. NQSOs shall not require shareholder approval and may be granted and exercised after the Effective Date of this Plan.
(b)
Unless sooner terminated, the Plan shall continue in effect from the Effective Date until the day before the tenth anniversary of the Effective Date (the "Termination Date"). In no event shall an ISO or NQSO (collectively "Options") be granted after the Termination Date. Options granted prior to the Termination Date shall remain in effect until their exercise, surrender, cancellation or expiration in accordance with the terms of the written option agreement.
3. Stock Subject to the Plan.
(a)
Subject to adjustment as provided for in Section 10 below, the aggregate number of shares of Stock ("Shares") reserved and available to delivery under the Plan shall be 5,000,000.
(b)
If any Option granted under the Plan expires, terminates or is canceled without having been exercised in full, the number of Shares as to which the Option has not been exercised shall become available for future grants under the Plan.
(c)
Upon exercise of an Option, the Company may issue authorized but unissued Shares, Shares held in its treasury, or both.
(d)
Shares issued upon the exercise of an Option shall be fully paid and nonassessable.
(e)
Unless otherwise determined by the Committee, no fractional Share shall be issued or transferred upon exercise of an Option under the Plan.
4. Administration of the Plan.
(a)
Committee. The Plan shall be administered by a Committee of the Board (the "Committee"). The Committee shall initially consist of the entire Board. However, the Board may elect at any time to provide that the Committee shall consist of not less than two members, each of whom shall be a Director who is (i) a "Non-Employee Director" within the meaning of Rule 16b-3 under the Exchange Act, and (ii) "Independent" within the meaning of the rules of the Nasdaq Stock Market or any other national securities exchange on which the Stock is listed for trading, is applicable. The Committee shall be appointed by, and serve at the pleasure of, the Board.
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(b)
Authority. Subject to the specific limitations and restrictions set forth in the Plan, the Committee shall have the authority: (i) to grant ISOs to employees whom the Committee determines are key to the success of the Company ("Key Employees"); (ii) to grant NQSOs to such employees, consultants or directors as the Committee shall select (the grantee of an ISO or NQSO being hereinafter referred to as an "Optionee"); (iii) to make all determinations necessary or desirable for the administration of the Plan including, within any applicable limits specifically set out in the Plan, the number of Shares that may be purchased under an Option, the price at which an Option may be exercisable, and the period during which an Optionee must remain in the employ of the Company or a subsidiary of the Company prior to the exercise of an Option; (iv) to construe the respective Option agreements and the Plan; (v) to prescribe, amend and rescind rules and regulations relating to the Plan; (vi) to determine the terms and provisions of the respective Option agreements, which need not be identical, (vii) to correct any defect, supply any omission or reconcile any inconsistency in the Plan or in any Option granted under the Plan, in a manner that the Committee deems necessary or desirable; (viii) to amend any Option granted under the Plan, subject to the provisions of the Plan; (ix) to grant to Optionees in exchange for their surrender of Options, new Options containing such other terms and conditions as the Committee shall determine; and (x) to make other determinations that, in the judgment of the Committee, are necessary or desirable for the administration of the Plan. Any interpretation or decision of the Committee shall be final and conclusive. Nothing in this Section 4(b) shall give the Committee the right to increase the total number of Shares that may be purchased on exercise of Options (except as provided in Section 10 below), to extend the term of the Plan, or to extend the period during which an ISO is exercisable beyond ten years from the date of grant thereof. The Committee may delegate to officers of the Company and its subsidiaries, or committees thereof, the authority, subject to such terms as the Committee shall determine, to perform such functions, including administrative functions as the Committee may determine to the extent that such delegation will not result in the loss of an exemption under Rule 16b-3(d)(1) for Options granted to Optionees subject to Section 16 of the Exchange Act in respect of the Company and will not cause Options intended to qualify as "performance-based compensation" under Code Section 162(m) to fail to so qualify. The Committee may appoint agents to assist it in administering the Plan.
(c)
Liability/Protection. The Committee, and each member thereof, shall be entitled to, in good faith, rely or act upon any report or other information furnished to him or her by any officer or employee, the Company's independent auditors or any other consultants or agents assisting in the administration of the Plan. No member of the Committee shall be liable, in the absence of bad faith, for any act or omission with respect to serving as a member of the Committee. Service as a member of the Committee shall constitute service as a member of the Board of Directors, so that members of the Committee shall be entitled to indemnification for their service on the Committee to the full extent provided for service as members of the Board of Directors.
5. Option Grants
(a)
Option Agreement. The Committee shall have sole authority to grant Options under this Plan. Each Option granted under the Plan shall be evidenced by a stock option agreement (the "Option Agreement"). The Option Agreement shall be subject to the terms and conditions of the Plan and may contain additional terms and conditions (which may vary from Optionee to Optionee) not inconsistent with the Plan, as the Committee may deem necessary or desirable.
(b)
Appropriate officers of the Company are hereby authorized to execute and deliver Option Agreements, and amendments thereto, in the name of the Company, but only to the extent consistent with this Plan
6. Exercise Price. The Exercise Price of each Share subject to an Option granted under the Plan shall be determined by the Committee at the time the Option is granted, and shall be specified in the Option Agreement. The Exercise Price shall not be less than (i) in the case of a grant of an ISO to a Key Employee who, at the time of the grant, is not a Ten Percent Shareholder, as defined below, one hundred percent (100%) of the fair market value of a Share as determined on the date the Option is granted; (ii) in the case of a grant of an ISO to a Key Employee who, at the time of grant, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any subsidiary (a "Ten Percent Shareholder"), one hundred ten percent (110%) of the fair market value of a Share, as determined on the date the Option is granted; or (iii) in the case of a NQSO, the price determined by the Committee. The fair market value of the Stock for purposes of determining the Exercise Price shall be determined by the Committee in accordance with any reasonable method of valuation consistent with applicable requirements of Federal tax law, including, as applicable, the provisions of Code Section 422(c)(8). The Exercise Price shall be subject to adjustment in accordance with Section 10 hereof
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7. Number of Shares. Each Option Agreement shall specify the number of Shares which the Optionee may purchase. The aggregate fair market value (determined at the time the Option is granted), of Shares with respect to which ISOs granted to any Key Employee are to become exercisable for the first time during any calendar year (under the Plan and any other plan of the Company and its subsidiaries) shall not exceed One Hundred Thousand Dollars ($100,000). The application of the limitation set forth in the preceding sentence to any individual Option shall be determined by the Committee subject to applicable rules and regulations under Code Section 422.
8. Option Term. The Committee shall determine the length of the Option term, except that no Option term shall extend for a period greater than ten (10) years from the date of grant.
9. Exercise of Options
Subject to applicable law and the terms and conditions of the Plan, an Option granted under the Plan shall be exercisable at such time, or times, upon the occurrence of such event or events, for such period or periods, in such amount or amounts, and upon the satisfaction of such terms and conditions including, without limitation, terms and conditions relating to notice of exercise, date the Option is deemed exercised, delivery and transferability of Shares and withholding of taxes, as the Committee shall determine and specify in the Option Agreement. The Committee shall have the authority to allow a form of payment other than cash (such as Stock or the withholding of Shares otherwise deliverable pursuant to an Option) to the extent consistent with applicable requirements of Federal tax law.
10. Expiration of Options.
The unexercised portion of any Option granted under the Plan shall automatically and without notice expire at the earlier to occur of the following:
(a) the expiration of ten (10) years from the date on which the Option is granted, or such shorter term as may be specified in the Option Agreement; or
(b) the expiration of the period specified in the Option Agreement following the termination of the Optionee's employment with the Company. Anything to the contrary notwithstanding, in the case of an ISO, such Option shall by its terms not be exercisable after the expiration of ten (10) years (or, in the case of an Option granted to a Ten Percent Stockholder, five (5) years) from the date such Option is granted.
11. Non-Transferability of Options
(a) No Option granted under the Plan shall be transferable by an Optionee other than by will or the laws of descent or distribution. During the lifetime of an Optionee, an Option shall be exercisable only by the Optionee. Except as otherwise determined by the Committee, any attempt to transfer, assign, pledge, hypothecate, or otherwise dispose of, or to subject to execution, attachment or similar process, any Option other than as permitted above shall be null and void and of no effect, and shall result in the forfeiture of all rights as to such Option.
(b) The Company may require any person to whom an Option is granted, as a condition of exercising such Option, to give written assurances in substance and form satisfactory to the Company to the effect that such person is acquiring the Stock subject to the Option for his or her own account for investment and not with any present intention of selling or otherwise distributing the same, and to such other effects as the Company deems necessary or appropriate in order to comply with applicable Federal and state securities laws.
(c) Notwithstanding any provision of the Plan or the terms of any Option granted pursuant to the Plan, the Company shall not be required to issue any Shares if such issue or transfer would, in the judgment of the Committee, constitute a violation of any state or Federal law or the rules or regulations of any governmental regulatory body or any securities exchange. Each Option may be subject to the requirement that if, at any time, counsel to the Company shall determine that the listing, registration, or qualification of the Shares subject to such Option upon any securities exchange or under any state or Federal law, or the consent, or approval of any governmental or regulatory body, is necessary as a condition of, or in connection with, the issuance or purchase of Shares thereunder, such Option may not be exercised, in whole or in part, unless such listing, registration, qualification, consent or approval shall have been effected or obtained on conditions acceptable to the Board. Nothing herein shall be deemed to require the Company to apply for or to obtain such listing, registration, or qualification.
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12. No Special Rights
Until an Optionee has made payment of the Exercise Price, has paid or has had satisfied any applicable withholding taxes, and has had issued to him a certificate or certificates for the Shares so acquired, the Optionee shall have no rights as a stockholder of the Company with respect to the Stock. No Option granted under the Plan shall confer upon an Optionee any right to continued employment with the Company or its subsidiaries, nor shall it interfere in any way with the right of the Company or its subsidiaries to terminate an Optionee's employment at any time.
13. Adjustments for Change in Capital Structure and Special Transactions
(a) Recapitalization, etc. In the event of a stock dividend, stock split, or recapitalization, or a corporate reorganization in which the Company is a surviving corporation (and the shareholders of the Company prior to such transaction continue to own at least 50% of the capital stock of the Company after such transaction), including without limitation a merger, consolidation, split-up or spin-off, or a liquidation, or distribution of securities or assets other than cash dividends (a "Restructuring Event"), the number or kinds of Shares subject to the Plan or to any Option previously granted, and the Exercise Price, shall be adjusted proportionately by the Committee to reflect such Restructuring Event. For example, in the case of a two for one stock split, the number of Shares issuable upon exercise of an option would be doubled and the exercise price of such option would be decreased by one half.
(b) Special Transactions. In the event of a merger, consolidation, or other form of reorganization of the Company with or into another corporation (other than a merger, consolidation, or other form of reorganization in which the Company is the surviving corporation and the shareholders of the Company prior to such transaction continue to own at least 50% of the capital stock of the Company after such transaction), a sale or transfer of all or substantially all of the assets of the Company or a tender or exchange offer made by any corporation, person or entity (other than an offer made by the Company), all Options held by any Optionee shall be fully vested and exercisable by the Optionee.
Furthermore, the Committee, either before or after the merger, consolidation or other form of reorganization, may take such action as it determines in its sole discretion with respect to the number or kinds of Shares subject to the Plan or any Option under the Plan. Such action by the Committee may include (but shall not be limited to) the following:
(i) permitting an Optionee at any time during such period as the Committee shall prescribe in connection with such merger, consolidation, other form of reorganization, sale or transfer of assets, or tender or exchange offer, to surrender his Option (or any portion thereof), to the Company in exchange for a cash payment in an amount and in a manner determined by the Committee; or
(ii) requiring an Optionee, at any time in connection with such merger, consolidation, other form of reorganization, sale or transfer of assets, or tender or exchange offer, to surrender his Option (or any portion thereof) to the Company (A) in exchange for a cash payment as described in clause (i) above, or (B) in exchange for, and subject to shareholder approval of, a substitute Option or other award issued by the corporation surviving such merger, consolidation or other form of reorganization (or an affiliate of such corporation), or the corporation acquiring such assets (or an affiliate of such corporation), which the Committee, in its sole discretion, determines to have a value substantially equivalent to the value of the Option surrendered.)
14. Amendment, Suspension, or Termination of the Plan
The Committee may at any time amend, suspend, or terminate any and all parts of the Plan, any Option granted under the Plan, or both in such respects as the Committee shall deem necessary or desirable, except that no such action may be taken which would impair the rights of any Optionee with respect to any Option previously granted under the Plan without the Optionee's consent.
15. Governing Law
The Plan shall be governed by the laws of the State of Florida without regard to the principles of conflict of laws. In case any one or more of the provisions contained herein are for any reason deemed to be invalid, illegal or unenforceable in any respect by a judicial body, such illegality, invalidity or unenforceability shall not affect any other provision of this Plan, and this Plan shall be construed as if such invalid, unenforceable or illegal provision had never been contained herein.
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13. References.
In the event of an Optionee's death or a judicial determination of his physical or mental incompetence, reference in the Plan to the Optionee shall be deemed, where appropriate, to refer to his beneficiary or his legal representative.
15. Exemptions from Section 16(b) Liability.
It is the intent of the Company that the grant of Options to an Optionee who is subject to Section 16 of the Exchange Act shall be exempt from Section 16 pursuant to an applicable exemption (except for transactions acknowledged in writing to be non-exempt by such Optionee). Accordingly, if any provision of this Plan or any Option Agreement does not comply with the requirements of Rule 16b-3 then applicable to any such transaction, such provision shall be construed or deemed amended to the extent necessary to conform to the applicable requirements of Rule 16b-3 so that such Optionee shall avoid liability under Section 16(b).
16. Code Section 409A.
If and to the extent that the Committee believes that any Option grants may constitute a "nonqualified deferred compensation plan" under Code Section 409A, the terms and conditions set forth in the Option Agreement for that Option shall be drafted in a manner that is intended to comply with, and those provisions (and /or the provisions of the Plan applicable thereto) shall be interpreted in a manner consistent with, the applicable requirements of Code Section 409A, and the Committee, in its sole discretion and without the consent of any Optionee, may amend any Option Agreement (and the provisions of the Plan applicable thereto) if and to the extent that the Committee determines necessary or appropriate to comply with the applicable requirements of Section 409A of the Code.
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Exhibit 21
SUBSIDIARIES
OF
CYCLONE POWER TECHNOLOGIES, INC.
1. Cyclone-WHE LLC