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EX-31.1 - EXHIBIT 31.1 - CYCLONE POWER TECHNOLOGIES INCex31-1.htm
EX-31.2 - EXHIBIT 31.2 - CYCLONE POWER TECHNOLOGIES INCex31-2.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K 

(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
 
Or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from to
Commission file number 000-54449 

Cyclone Power Technologies, Inc.
(Exact name of registrant as specified in its charter)

 
Florida
26-0519058
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
   
601 NE 26th Ct, Pompano Beach, Florida
33064
(Address of principal executive offices)
(Zip Code)
 
Registrant’s telephone number (954) 943-8721

  Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Name of each exchange on which registered
None
None
 
Securities registered pursuant to Section 12(g) of the Act:
 
Common Stock, $0.0001 par value
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ¨  Yes      x  No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ¨  Yes    x  No
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for a shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     x  Yes    ¨   No
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, “non-accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
¨
Accelerated filer
¨
       
Non-accelerated filer
¨
Smaller reporting company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.)    ¨  Yes    x  No
 
 

 
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of the closing price of such shares on the last business day of the registrant’s most recently completed fiscal year was approximately $30,000,000.
 
The number of shares outstanding of the registrant’s common stock as of March 31, 2012 is 227,419,682.
RDGPreambleEnd
DOCUMENTS INCORPORATED BY REFERENCE—NONE
RDGXBRLParseBegin
 
 

 
 
TABLE OF CONTENTS
FORM 10-K
 
   
Page
Part I
Item 1.
BUSINESS
1
Item 1A.
RISK FACTORS
7
Item 1B.
UNRESOLVED STAFF COMMENTS
7
Item 2.
PROPERTIES
7
Item 3.
LEGAL PROCEEDINGS
7
Item 4.
(REMOVED AND RESERVED)
7
     
Part II
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
8
Item 6.
SELECTED FINANCIAL DATA
9
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
9
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
14
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
14
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
14
Item 9A.
CONTROLS AND PROCEDURES
14
Item 9B.
OTHER INFORMATION
15
     
Part III
Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
15
Item 11.
EXECUTIVE COMPENSATION
19
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
22
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
22
Item 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
23
     
Part IV
Item 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
24
 
SIGNATURES
26
 
 
i

 
 
Part I
 
Item  1.           BUSINESS.
 
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 we believe 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 cycle engine. A Rankine cycle refers to the thermal dynamic steam cycle which is used to generate approximately 80% of the world’s electrical output at coal and nuclear power plants. The Cyclone Engine works on the same principles, but in a compact, self-contained package.  The engine creates superheated steam in a combustion chamber or external heat exchanger, which is then pumped to the cylinders under high pressures. The steam in the cylinders expands rapidly, pushing pistons and turning a crank shaft. Steam escaping from the cylinders enters a condenser, where it is cooled and returned to the combustion chamber for reheating in a closed-loop process.
 
Based on testing completed by Cyclone to date, we believe that the benefits of the Cyclone Engine are many, including:
 
Fuel-Flexibility: 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. In testing, it has also run on heat generated from solar thermal collectors and waste heat from industrial processes, including furnaces and other engines.
 
Low Emissions: By burning fuel at lower temperatures and lower pressures in a centrifugal chamber that fully incinerates particulate matters, we believe based on preliminary in-house environmental testing that the Cyclone Engine emits far fewer toxic and greenhouse gases than current internal combustion (I/C) engines.
 
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).  We believe that this has potential to create greater “well to wheel” efficiencies than gas or diesel powered I/C engines.
 
Powerful and Compact: Unlike batteries or fuel cells, we believe that 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 may never need its working fluid (de-ionized 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, we anticipate Cyclone Engines to cost less to manufacture, operate and maintain than current gas and diesel powered I/C engines.
 
Currently four Cyclone Engine models are in different stages of development, with the first engine slated for commencement of production in early 2013. These four engines and the major characteristics of each are as follows:
 
 
Mark V Engine
Solar “S-1” Engine
Military “S-2” Engine
Waste Heat “WHE-25” Engine
Power Output
100 hp
5 hp
15 hp
10 - 16 hp
Size / Weight
26” x 24”; 125 lbs
8” x 6” ; 18 lbs
9” x 7” ; 25 lbs
14” x 8”; 34 lbs
Applications
Automotive, marine power. distributed power and CHP*
Solar thermal dishes; micro-CHP*
Auxiliary power unit for military vehicles, portable
Waste heat recovery; biomass combustion
* CHP stands for combined heat and power, otherwise known as co-generation  
 
Cyclone has several important contracts and purchase orders with customers that include Raytheon Company, the U.S. Army/Tank Command, Phoenix Power Group, and our supplier, leading U.S. auto parts manufacturer TopLine Automotive Engineering.
 
 
1

 

We received our first patent in the U.S. for the Cyclone Engine in 2006, and since then have been issued or allowed nine other U.S. patents and 20 international patents. Cyclone has also received numerous awards, including two Tech Awards from the Society of Automotive Engineers and Popular Science’s 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:
 
 
·
Development and engineering fees from customers and licensees;
 
 
·
Direct sales revenue from engines we manufacture in-house or through contractors;
 
 
·
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 power generation systems (inclusive of our engine and an electric generator), which could be sold to customers or provided to customers through a Power Purchase Agreement (PPA). Waste heat recovery is the process of using heat generated from another source, such as an industrial furnace, to power our steam engine which, in turn, drives an electric motor.  We have established a specialized subsidiary company – Cyclone-WHE LLC, of which we own 82.5% of its equity – to pursue these opportunities.
 
Since inception, much of our efforts have been focused on development of our technology and engine prototypes. As a result, we have limited revenue – approximately $250,000 in recognized income in 2011 and $262,000 in 2010, and $860,811 in deferred revenue as of the end of 2011, from several license and development agreements. These agreements include:
 
Raytheon Company: We successfully completed in 2010 two Independent Research & Development contracts with this $23 billion defense contractor, which involved engine testing funded by Raytheon. In April 2011, we received our first purchase order for multiple engines worth approximately $400,000. This purchase order, which was amended in December 2011, requires us to deliver engine prototypes to Raytheon by the end of May 2012. These engines are expected to be used to test new propulsion systems for unmanned underwater vehicles (UUVs) for the U.S. military.
 
Phoenix Power Group: Our license with Phoenix Power provides them with the exclusive, worldwide rights for 10 years with a 5-year renewal term to utilize Cyclone Engines for power generators combusting waste automotive motor oil. Under its license Phoenix has paid us $440,000 in license and development fees, and will pay us on-going royalties from their generator system sales. Per the terms of their license, Phoenix is expected to pay us royalties averaging $150 per engine sold, with minimum quotas over the first 10 years exceeding $4 million in royalties in order to maintain their exclusive rights. Phoenix also receives a penalty payment equal to $25,000 per month, payable in stock at the current market price, for each month that we are delayed in delivering the first two tested prototype engine systems. We have issued 1,309,306 shares of common stock to Phoenix as of December 31, 2011. We expect to deliver prototypes in the second quarter of 2012.

 Combilift: We recently signed a license agreement with Combilift, a materials handling and lift equipment manufacturer based in Ireland. Pursuant to the agreement, Combilift has the exclusive, worldwide rights to use the Cyclone Mark V engine to drive their lift equipment. For these rights, Combilift has paid $100,000 to date, and will pay another $300,000 in fees as development and delivery of two prototype engines progresses over the next six to nine months. During of the term of the agreement, Combilift is expected to purchase engines from Cyclone, based on their requirements and on pricing terms to be determined by the parties upon the completion of the initial prototype engines. This is a 15 year license, with a 15 year renewal term, and is terminable after 30 days if either party fails to cure a material breach of the agreement, or immediately by Cyclone if Combilift is dissolved, liquidated or is bankruptcy.

Advent Power Systems: In July 2011, Advent Power Systems, our licensee, received a $1.4 million contract from the U.S. Army / TARDAC division, to develop a prototype auxiliary power unit for the Abrams M1 Main Battle Tank, Bradley Fighting Vehicle and Stryker Armored Vehicle. Cyclone is developing for this project the S-2 engine, a 15hp compact power plant to drive the electric generator for this unit.

In February 2012, we completed an acquisition of all of the material assets of Advent, which included this contract with the Army, which is currently in the novation process. Upon the formal change of the contract into Cyclone’s name, we will assume the rights and responsibilities to collect the $1.4 million contract proceeds, as the prime contractor, for which approximately $400,000 will be payable to sub-contractors for electronics, control systems and other similar services and products.
 
 
2

 
 
Great Wall Alternative Power Systems: GWAPS is licensed to develop in China and sell only in China a production model of Cyclone’s biomass-to-power generator system, based on the WHE and Mark V engines. GWAPS has paid Cyclone $125,000 in development fees, $62,500 of which has been previously recognized as revenue, and has agreed to pay an additional $400,000 in licensing fees and then on-going royalties (price to be determined) from the sale of Cyclone engines for use in electric power production in China. Additionally, GWAPS has invested 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 2012.

Renovalia Energy: Renovalia is a leading renewable energy company based in Spain with over 500 MW of alternative power currently in its portfolio. Our license with Renovalia provides them with non-exclusive, worldwide rights to manufacture Cyclone Engines for their solar thermal solutions, for which Cyclone has received $250,000 in development fees, and then will receive on-going royalties averaging approximately $100 per engine on each engine produced. The term is 10 years with two 5-year renewal periods. Cyclone delivered completed prototype drawings for the “Solar 1” engine in the third quarter of 2011, in completion of our obligations under the license agreement, and recognized $250,000 of revenue.  Renovalia must now determine whether it plans to move ahead with the field testing and ultimate manufacturing of this product.
 
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. Stage Completion
Mark II
18 HP
Portable & aux. power, light equipment
Alpha Test Engine(1)
Completed, not in active development
WHE
Waste Heat Engine
16 HP
Waste heat recovery, waste fuels, biomass-to-power
Production
Model (2)
Q3 2012
Solar-1 (S-1)
5 HP
Solar thermal, small scale power, Combined heat and power, military
Pre-Production
Beta (3)
Project re-focused on larger S-2 version; development to resume
S-2
15 HP
Auxiliary power for military vehicles, portable power
Design Stage
Q2 2013
for pre-production betas
Mark V
100 HP
Transportation, commercial power, military
Pre-production
Beta  (3)
Q3 2012
 
Mark VI
330 HP
Heavy transport, power plant, heavy equipment
Design
Not yet in active development

 
(1)
“Alpha test” engine refers to a working bench model engine, which demonstrates proof of concept.
 
(2)
“Production model” refers to the final prototype prior to production that has undergone full testing with the customer or a third-party, and is ready for commercial manufacturing, which may include additional production engineering/testing.
 
(3)
“Pre-production Beta” refers to a second generation prototype engine, which has undergone significant durability and performance testing at Cyclone’s facility.
 
 
3

 
 
Our engines have not yet undergone customer testing, and there is no guarantee that they will successfully meet customer expectations when completed.
 
Research and Development Activities
 
As a technology research and development company, much of our annual expenses are dedicated towards R&D, including labor costs, material costs, tooling and equipment and other expenses required to run our business.  Our R&D expenditures for 2011 and 2010 were $983,276 and $842,425, respectively.
 
We actively pursue development agreements with customers, whereby we will develop an engine, design plans or other products for this customer at the customer’s 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 Cyclone’s WHE-25 model engines, and manufacture production prototypes of these units. As of the date of this filing the first 4 engines have been produced, and testing has commenced at Cyclone’s facility. The prices for these first engines are based upon TopLine’s actual costs (i.e., materials and labor hours), without mark-up. Given the successful completion and review of this first stage, Cyclone may grant TopLine a three-year period of time to exclusively manufacture Cyclone’s WHE model engines, subject to agreement on pricing and other contractual terms to be subsequently agreed by the parties.
 
Competitive Business Conditions
 
We believe that our technology, which is a small-scale heat-regenerative, Rankine cycle external combustion engine, has little direct competition. However, depending on the industry in which these engines are applied, indirect competitors utilizing different technologies do exist.
 
Currently, there are several companies which have developed and commercialized other types of external heat engines, such as Stirling engines. Stirling engines are similar to our technology and are used in overlapping applications (such as solar thermal power generation), however, the two engine technologies have several major differences, including size and power-density. Based on preliminary testing and analysis, we believe that our engine technology may be superior to the Stirling engines in these aspects; and as a result, has more applications in mobile uses (i.e., cars, trucks and ships). We have not yet commercialized our engine technology, and these claims are still to be proven. Also, several Stirling engine companies such as Infinia Corp. have greater capital resources than we do, which could help establish their technology in the marketplace quicker than we can.
 
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 in their technological infancy and currently are too expensive for many practical applications. For instants, the Bloom Box 100kW fuel cell costs over $700,000, weighs over 20,000 lbs and is over 24 ft. in length, according to their marketing materials. The 100hp Cyclone engine we are currently developing, which would produce approximately 75kW of electric output, weighs just 125lbs, is 2 ft in diameter and height, and is expected to cost 10 times less to produce. Once again, these claims are based on our current beliefs and developmental testing, as we have not yet produced commercial products.
 
 
4

 
 
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 currently suitable only for light load carrying small passenger vehicles. 
  
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 economically-viable due in part to government subsidies, may not ultimately be the types of cars that most Americans want to drive.
 
The following table summarizes the primary industries in which we plan to complete, and the competitive technologies in those industries, as well as some of the leading companies.  We cannot provide any assurances that we will be able to compete successfully with these technologies or companies.
 
 
Competition
Companies
Distributed Power Generation
-Mini-turbines
-Fuel cells
-Capstone Turbine
-Bloom Energy
Waste Heat  Recovery
-Organic Rankine Cycle
-Thermal-electrics
-Calnetix (now GE)
- Caterpillar
- Voith Turbo
Solar Thermal
-Stirling engines
-Infinia Solar
-Stirling Energy Systems
Automotive
-Clean diesel
-Hybrid/plug-in electric
-Major auto manufacturers
-Tesla
 
Patents and IP Protection
 
We currently have the following patents issued or allowed 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)
Spider Bearing (US Patent No. 7,900,454)
Waste Heat Engine (US Patent No. 7,992,386)
Engine Shrouding with Air to Air Exchanger (Ser. No. 11/879,586)
  
International Patents on Heat Regenerative Engine
European Union (10)
Australia
South Africa
Canada
Russia
China
Korea
Indonesia
Mexico
Japan
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.
 
 
5

 
 
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, Combilift, and Great Wall Alternative Power Systems and other development customers, such as Raytheon Company and the U.S. Army / TACOM. Each of our licensees and 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 and the U.S. Army / TACOM, which collectively may prove to constitute a considerable portion of our revenue for 2012. A loss of these relationships moving forward could be detrimental to us and our results of operations.
 
Governmental regulation
 
Our Products
 
Power systems generally are subject to extensive statutory and regulatory requirements that directly or indirectly impose standards governing emissions and noise. Our engines, when they will ultimately be installed in power systems, will be subject to compliance with all current emissions standards imposed by the EPA, state regulatory agencies in the United States, including CARB, and other regulatory agencies around the world and established for power systems utilized in applications such as electric generators or off-highway industrial equipment. EPA and CARB regulations imposed on engines utilized in industrial off-highway equipment generally serve to restrict emissions, with a primary focus on oxides of nitrogen, particulate matter and hydrocarbons. Emission regulations for engines utilized in off-highway industrial equipment vary based upon the use of the equipment into which the engine is incorporated (such as stationary power generation or mobile off-highway industrial equipment), and the type of fuel used to drive the power system. Further, applicable emission thresholds differ based upon the gross power of an engine utilized in industrial off-highway equipment. Additionally, most emissions thresholds are designed for gasoline and diesel-powered “spark-ignited” internal combustion engines, and not external combustion engines like Cyclone’s engines. Therefore, we are not entirely certain as to how the EPA and other regulatory agencies will apply these rules to our technology.
  
Pursuant to the regulations of the EPA and CARB, we may be required to obtain emission compliance certification from the EPA and CARB to sell certain of our engines throughout the United States and in California. We may also be required to meet foreign emission regulations standards to sell certain of our engines internationally. Currently, the emission certification process with the EPA and CARB includes, among other requirements, durability testing of the engine emission system at zero and 5,000 hours, production line testing on a quarterly basis and field compliance audit testing. It is possible that each of our power systems could require this emission-certification before it can be introduced into commerce. We have not yet performed this testing on our engines to meet any existing emission standards of the EPA and CARB. Compliance with these regulations, as we find them to be applicable to our engines, will require considerable funds which the company does not currently have.  Failure to comply with these standards could result in adverse effects on our future financial results.
 
Our markets can be positively or negatively impacted by the effects of governmental and regulatory matters. We are affected not only by energy policy, laws, regulations and incentives of governments in the markets into which we sell, but also by rules, regulations and costs imposed by utilities. Utility companies or governmental entities could place barriers on the installation of our product or the interconnection of the product with the electric grid. Further, utility companies may charge additional fees to customers who install on-site power generation, thereby reducing the electricity they take from the utility, or for having the capacity to use power from the grid for back-up or standby purposes. These types of restrictions, fees or charges could hamper the ability to install or effectively use our products or increase the cost to our potential customers for using our systems in the future. This could make our systems less desirable, thereby adversely affecting our revenue and profitability potential. In addition, utility rate reductions can make our products less competitive which would have a material adverse effect on our future operations. These costs, incentives and rules are not always the same as those faced by technologies with which we compete. However, rules, regulations, laws and incentives could also provide an advantage to our distributed generation solutions as compared with competing technologies if we are able to achieve required compliance at a lower cost when our engines are commercialized. Additionally, reduced emissions and higher fuel efficiency could help our future customers combat the effects of global warming. Accordingly, we may benefit from increased government regulations that impose tighter emission and fuel efficiency standards.
 
 
6

 
 
Our Operations
 
Our operations are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. We may be required to incur significant costs to comply with such laws and regulations in the future, and any failure to comply with such laws or regulations could have a material adverse effect upon our ability to do business.
 
In February 2009, the President of the United States signed into law the American Recovery and Reinvestment Act of 2009 ("ARRA"). ARRA has dedicated billions of dollars towards clean energy research and deployment. Members of Congress introduced legislation in calendar 2009 and 2010 that may benefit us in the future. In addition, certain proposed changes to the Internal Revenue Code of 1986 may result in positive tax benefits for our end users. This proposed legislation targets combined heat and power and waste heat (CHP, otherwise called co-generation) and solar power. Government funding can impact the rate of development of new technologies. While we continue to seek government development funding, we have not received any to date and have no assurances that we will receive any in the future. Competing new technologies generally receive larger incentives and development funding than do Rankine cycle steam engines.
 
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 December 31, 2011, we had 20 full-time employees, including management, and no part-time employees. We consider our relations with our employees to be good. None of our employees are covered under any labor union or collective bargaining agreement.

Item  1A.        Risk Factors.

Not required for smaller reporting companies.

Item 1B.         Unresolved Staff Comments.

None.

Item  2.           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 around market rates for industrial space in the area. Our address is 601 NE 26th Ct., Pompano Beach, FL 33064.  In 2011, we also signed a year-to-year lease with an unaffiliated third party for an additional 2,000 sf adjacent to our facility, for which we pay $2,000 per month in rent. We believe these facilities are in good condition, but we still may need to expand our operating space further as our research and development efforts expand.

Item 3.            Legal Proceedings.

None.

Item  4.           Removed and Reserved
 
 
7

 
 
Part II

Item  5.           Market for the registrant’s common equity, related stockholder matters and Issuer purchases of equity securities.

Our common stock is currently traded on the OTCQB Marketplace.  The following table represents the high and low bid information for our common stock for each quarterly period within the two most recent fiscal years, as regularly quoted on the OTCQB. 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 March 31, 2012, there were approximately 4,000 shareholders of record of our common stock, and two shareholders of record of our Series B Preferred Stock.

Year Ended December 31, 2011
     
 
High Bid Price
Low Bid Price
First Quarter
0.48
0.10
Second Quarter
0.40
0.20
Third Quarter
0.39
0.27
Fourth Quarter
0.29
0.18

Year ended December 31, 2010
     
 
High Bid Price
Low Bid Price
First Quarter
0.17
0.13
Second Quarter
0.15
0.08
Third Quarter
0.15
0.08
Fourth Quarter
0.16
0.09

Dividend Policy

We have not paid any dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. We intend to retain any earnings to finance the growth of our business. We cannot assure you that we will ever pay cash dividends. Whether we pay cash dividends in the future will be at the discretion of our Board of Directors and will depend upon our financial condition, results of operations, capital requirements and any other factors that the Board of Directors decides are relevant. See Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Issuance of Unregistered Securities

In the fourth quarter of 2011, the Company issued 600,000 shares of common stock for an aggregate purchase price of $120,000, and warrants to purchase an aggregate of 600,000 shares of common stock exercisable at $.20 per share, to three investors.  These warrants are currently vested and terminate in December 2014. Both warrants and common shares have a price protection feature, whereby if the Company issues within 12 months shares below $.20/share (excluding shares subject to an option plan, a limited number of shares issued to service providers not subject to a plan, a merger or acquisition, or pursuant to previously outstanding securities), the Company will issue more shares of common stock to the purchasers to reflect the lower price, and the warrants’ exercise price will be adjusted to the lower amount.  All these securities were offered to accredited investors pursuant to an exemption under Section 4(2) of the Securities Act and Regulation D thereunder. Each of the purchasers of the shares completed Accredited Investor Questionnaires and Subscription Agreements, and received a copy of the Company’s Annual Report in connection with the issuances. Also issued to these three investors were an additional 190,228 shares of common stock pursuant to previous stock purchase agreements that had a price adjustment from $.24 per share to $.20 per share.

In the fourth quarter of 2011, the Company issued an aggregate of 891,282 shares of common stock to employees and service providers of the Company, with an aggregate value of $210,114.  The securities were offered pursuant to an exemption under Section 4(2) of the Securities Act of 1933, amended. The shareholders were either accredited or sophisticated investors who received copies of the Company’s Annual Report, which contained audited financial statements as well as unaudited financials for the applicable quarterly period.  Each party had an opportunity to ask questions of the Company and understood the risks of investment in the Company.
 
 
8

 
 
In the fourth quarter of 2011, the Company issued an aggregate of 785,000 common stock options at an exercise price of $.19 per share to approximately 22 officers, directors and employees of the Company. These options vest December 2012, and have termination dates between December 2016 and 2021. The Company also terminated 775,000 common stock options in the fourth quarter that were issued to officers, directors and employees of the Company in September 2011 at an exercise price of $.30 per share, and re-issued to all but two of these employees (whose employment had been terminated) a total of 755,000 common stock options at an exercise price of $.19 per share.
 
In the fourth quarter of 2011, the Company issued 310,184 shares of Common stock to a corporate customer as a penalty payment on a contract. The value of these shares was $75,000. The securities were offered pursuant to an exemption under Section 4(2) of the Securities Act of 1933, amended. The customer received a copy of the Company’s Annual Report in connection with the issuance.
 
EQUITY COMPENSATION PLAN INFORMATION
 
   
Number of securities
to be issued upon
exercise of outstanding
options, warrants and
rights
   
Weighted – average
exercise price of
outstanding options,
warrants and rights
   
Number of securities
remaining available
for future issuances
under equity
compensation plans
(excluding securities
reflected in column (a))
 
   
(a)
   
(b)
   
(c)
 
Equity Compensation Plans Approved by Security Holders (1)
    4,615,000     $ 0.188       385,000  

           (1) Equity compensation plans approved by our stockholders consist of our 2010 Stock Option Plan.

Item  6.           Selected Financial Data.

Not required for smaller reporting companies.

Item  7.           Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Special Note Regarding Forward-Looking Statements
 
Certain statements in this Form 10-K under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” constitute “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such statements are indicated by words or phrases such as “anticipates,” “projects,” “management believes,” “we believe,” “intends,” “expects,” and similar words or phrases. Such factors include, among others, the following: competition; success of operating initiatives; new product development and introduction schedules; acceptance of new product offerings; adverse publicity; changes in business strategy or development plans; availability and terms of capital; labor and employee benefit costs; changes in government regulations; and other factors particular to the Company.
 
Should one or more of these risks, uncertainties or other factors materialize, or should underlying assumptions prove incorrect, our actual results, performance, or achievements may vary materially from any future results, performance or achievements expressed or implied by such forward-looking statements. All subsequent written and oral forward-looking statements attributable to Cyclone or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this paragraph. We disclaim any obligation to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.
 
Management Overview
 
The Company is 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 in late 2012 or early 2013. While the Company started to generate revenue from its operations as early as 2008, it has not had material or consistent revenue in each of the last two fiscal years. In order for the Company to maintain and expand its operations through the next 12 months, it 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 the Company.
 
 
9

 
 
With respect to these endeavors, in 2011 the Company completed a $1 million offering of Series A Preferred Stock, and completed other offerings of common stock and common stock/warrants equivalent to approximately $1.68 million in total funding. Management believes that becoming a fully reporting company under the Securities and Exchange Act of 1934, has provided greater transparency to the Company’s operations, and has allowed the Company to pursue stock offerings with a broader range of possible investors.
 
In 2011 the Company received two major contracts. The first was a purchase order for multiple Mark V engines (named the Manta-Ray) from Raytheon Company worth $400,000. These engines are expected to be delivered in the second quarter of 2012. Then in July 2011, the Company’s licensee Advent Power Systems, was awarded a $1.4 million contract from the U.S. Army, TACOM division, to develop a compact 10kW auxiliary power unit (APU) designed to increase operating efficiencies and decrease fuel usage of the Abrams M1 Main Battle Tank, the Stryker Armored Vehicle and the Bradley Fighting Vehicle. The first prototype engine systems are scheduled to be developed, tested and delivered in early 2013.

In February 2012, the Company completed an acquisition of all of the assets of Advent, which included the $1.4 million contract with the Army. Under the terms of the acquisition agreement, Advent received 1.5 million shares of Cyclone common stock, of which 1.2 million shares are subject to a two-year leak-out, and up to 1.1 million shares are subject to forfeiture if there are any negative changes in value to the acquired assets over the next twelve months.  These shares are also being held in escrow pending the formal novation (approval of change in control) of the U.S. Army contract. In completing this acquisition, the Company expects to receive an additional $450,000 in revenue and higher profits (in addition to the $700,000 in revenue originally payable to the Company as a sub-contractor under Advent). The Company will also assume the position as prime contractor, which it believes will assist the Company in acquiring new defense contracts in the future.
 
In September 2011, the Company signed a license agreement with Combilift, an equipment manufacturing company based in Ireland, to use Mark V engines to operate Combilift’s hydraulic materials lift equipment. Combilift has paid $100,000 as of the date of this filing, and management expects additional development funding payable to Cyclone of $300,000 over the next 6 to 9 months.
 
Between these three most recent projects, the Company has approximately $2.2 million in current orders for development engines (approximately $400,000 has been paid already pursuant to these contracts, and approximately $400,000 will be payable to sub-contractors under the Army contract). Additionally, the Company has an additional $860,000 in backlog from previous contracts, of which proceeds have been paid and classified as deferred revenue on Cyclone’s balance sheet. All these engines are deliverable within the next 12 months. As a result of these current and new contracts, the Company is in the process of hiring more engineers and mechanics/technicians, and is looking at additional facility space to expand its engineering and production capabilities.

As shown in the accompanying financial statements, the Company incurred substantial operating losses in 2011 of approximately $3.8 million. Cumulative operating losses since inception are approximately $15.7 million.  The Company has a working capital deficit at December 31, 2011 of approximately $2.6 million. There is no guarantee whether the Company will be able to support its operations on a long term basis. This raises doubt about the Company’s ability to continue as a going concern. If additional funds cannot be raised or otherwise generated, the Company may be forced to reduce staff, minimize its research and development activities, or in a worst case scenario, shut-down operations.
 
Private Placements. In 2011 the Company sold a total of 8,511,764 shares of restricted common stock, including warrants to purchase an additional 3,611,251 shares of 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 $1,680,513.
 
In fourth quarter of 2011 and first quarter of 2012, the Company engaged in two private placements. The first was a common stock and warrant "Unit", whereby for $24,000, investors received 120,000 shares of common stock and warrants to purchase an additional 120,000 shares of common stock within three years of issuance at a strike price of $.27 per share. The strike price for these warrants was reduced to $.20 in February 2012.  The warrant may be exercised by means of a cashless option if they are not registered within six months of issuance. Also, the investors have certain price adjustment rights which will reduce the purchase price of the common stock and the strike price of the warrants if the Company issues common stock or equities convertible into common stock below a $.20 per share price, subject to exclusions for issuances under stock option plans, a limited number of shares issued for services, and other specific transactions set forth in the purchase documents.  The total amount of funding raised pursuant to this offering was $266,000 as of March 31, 2012.

The second placement in 2012 was for a 12 month secured Promissory Note, bearing interest at the rate of 18% per annum, of which 12% was paid in common stock up front, and the balance of the interest is payable at maturity when the principal is paid. The Notes are secured by the accounts receivable under the Company’s contract with the U.S. Army (acquired from Advent), and the principal and interest maturity date is advanced proportionally when those receivables are collected by the Company.  A total of $310,000 has been raised under this private placement as of March 31, 2012. These are non-recourse notes.
 
 
10

 
 
As of May 12, 2011, all outstanding 750,000 shares of Series A Preferred stock were converted by vote of the holders of a majority of those shares into approximately 95.1 million shares of common stock. Of these converted shares of common stock, approximately 55 million (58%) are held by affiliates, employees and control persons of the Company, and approximately 24 million more (25%) are subject to a two-year hold back from the date of issuance (which occurred between July 2010 and March 2011). In both cases, the resale of these common shares (83% of the total) is restricted, either pursuant to Rule 144 of the Securities Act of 1933 (“Rule 144”), or by additional contractual provisions.  No additional consideration was paid by the shareholders and the Company did not offer any inducement in connection with this conversion.
 
Stock for Services. Despite its limited cash resources, the Company is able to retain engineering, consulting, legal and accounting personnel partially through the issuance of Rule 144 restricted common stock. In 2011, the Company issued 4,441,060 shares of restricted common stock and 3,045,000 common stock options in lieu of $1,592,485 in cash compensation.
 
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. The Company’s R&D expenditures were $983,276 for 2011.
 
Commitments for Capital Expenditures. The Company does 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 its technology. The Company anticipates increasing 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 the Company’s monthly operational expenses.
 
Critical Accounting Policies

The financial statements of Cyclone Power Technologies Inc. are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), which requires management to make estimates, assumptions and related expectations. Management believes that these estimates, assumptions and related expectations upon which we depended at the time are reasonable based upon information then available.   These estimates, assumptions and related expectations affect the reported amounts of the balance sheet and income statement for the timeframe of the financial statements presented. To the degree that there are significant variances between these estimates and assumptions and actual results, there would be an effect on the financial statements. GAAP mandates specific accounting handling in numerous situations and does not require management’s estimates and judgment in its application. Alternative accounting treatments, where available, based on management’s estimates and judgments would not produce a materially different result. The following should be read in conjunction with our consolidated financial statements and related notes.
 
The Company’s audited financial statements for the periods ended December 31, 2010 and 2009, and unaudited financial statements for the periods ended June 30, 2011 and 2010 were restated as of October 2011 in connection with the filing of the Company's Form 10 with the SEC, as follows:  
 
1)  The Company restated the value used to record expenses during the period when it issued common stock for services, which was restricted from resale pursuant to Rule 144 of the Securities Act of 1933.  Previously, the Company recorded these shares at a discount which was equal to the discount that the Company used when it sold Rule 144 restricted common stock to unaffiliated accredited investors in private placement transactions. The revised valuation prices the stock for services at market prices with no discount. The effect of this revision was to increase non-cash expenses in the applicable periods.
 
2)  The Company restated the financial statements listed above to reflect an imbedded convertible function in the Company’s Series A Convertible Preferred stock, which is subject to derivative liability presentation. These were shares initially issued to the founding partners of Cyclone in the Company’s 2007 reverse merger. In 2010 and 2011, additional shares of Series A Preferred stock were sold to investors. Using a binomial lattice model, the Company was required to record the estimated value of the Series A Preferred stock as a long term liability on its balance sheet, with a matching credit to accumulated deficit.  Dependent on the market price of the Company’s common stock at the end of each reporting period, this valuation method either created a non-cash expense or non-cash income, recorded on the Company’s statement of operations for such period. The total net effect of this accounting was to increase the Company’s additional paid-in capital and accumulated deficit by approximately $30 million at the time of conversion in May 2011, but there were no effects on the Company’s cash flow or results of operations.

3)  As part of the Company’s license agreement with Phoenix Power, in 2009 the Company issued to Phoenix common stock purchase warrants at a price of $.19 per share, equal to two (2%) percent of the fully-diluted issued and outstanding common stock and common stock equivalents 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 exercised. Because the number of shares issuable upon exercise of the warrants will be unknown until the time of exercise, the common stock warrants are required to be accounted for as a derivative liability. The Company restated its financial statements to reflect this accounting in the same manner as required for the Series A Preferred stock, noted above, however, in this case, the fair value of the warrants has been calculated using the Black Scholes model. This warrant was converted to 2 million shares of the Company's common stock in March 2012, and as a result, will not be recorded as a derivative liability at the end of the first quarter of 2012.
 
 
11

 
 
Intangible assets, consisting primarily of patents, are deemed to be critical for the furtherance of the business objectives of the Company and its engine products. Impairment is not currently reflective, as the Company is developing its products and obtaining new contracts based on these engine patents.
 
Inventory for engine manufacturing is reviewed on an ongoing basis for obsolescence as engine designs are revised, with resultant charges to R&D.
 
For purposes of valuing stock based compensation, the Company uses market prices of its common stock as of the time of issuance. For purposes of valuing stock based compensation from common stock options, the Company uses the Black Scholes valuation method. This method requires the Company to make estimates and assumptions regarding stock prices, stock volatility, dividend yields, expected exercise term and risk-free interest rates.
 
In the opinion of management, all adjustments considered necessary for a fair presentation for interim financial statements have been included and such adjustments are of a normal recurring nature. 
 
Results of Operations
 
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
 
Revenues. For the year ended December 31, 2011, revenues were $250,000, from delivery of design plans, bill of materials and successful test data in fulfillment of the Company’s obligations under the Renovalia license agreement. For the same period in the prior year, revenues were $261,525, a decrease of $11,525 or 4%. The 2010 revenues were attributable to delivery of the Company’s biomass-to-power beta system to Robotic Technologies Inc., a waste heat engine (WHE) system, and engineering blueprints and specifications for the WHE to Great Wall Alternative Power.

Gross (Loss) Profit. Gross (loss) profit for the year ending December 31, 2011 was ($149,801), as compared to $151,132 for the same period in the previous year. The loss in 2011 was due to the Company recording a $350,000 charge against a license agreement for current and subsequent penalty payments, payable in restricted common stock, net of profits recognized from the Renovalia contract.  Management does not place great weight on these gross profit (loss) results at this time as sales revenues and cost of goods sold amounts are in the early stage of developing and refinement.

Operating Expenses. Operating expenses incurred for the year ending December 31, 2011 were $3,678,112 as compared to $2,417,180 for the same period in the previous year, an increase of $1,260,932 (52%). Increased general and administrative expenses of $1,105,918 (73%) are reflective of the amortization of employee stock options previously issued, increased payment of common stock for services (to conserve cash), higher professional fees for public company filings, and the amortization of services provided to the WHE subsidiary, paid with related equity. R&D expenses increased by $140,851 (17%) as increased engineering resources and additional material purchases were allocated to product development, as well as to WIP inventory for contracted deliverables.

Operating Loss. The operating losses for the years ending December 31, 2011 and 2010 were $3,827,913 and $2,266,048, respectively, a higher loss of $1,561,865 (69%) in the current year period resulting from the factors outlined above.

Other Income (Expenses). For the year ended December 31, 2011, the Company recognized a non-cash loss attributable to an increase in derivative liabilities from warrants of ($35,089) and a non-cash loss from derivative liability convertibility feature of the Series A Preferred stock of ($19,771,086). Conversely, for the year ended December 31, 2010, the Company recognized non-cash income attributable to a decrease in derivative liabilities from warrants of $106,616 and non-cash income from Series A Preferred stock of $333,681. The Company converted and retired the Series A Preferred stock in May 2011, and therefore, will not incur derivative expenses or income from this source in the future. Derivative liabilities are calculated and are significantly affected by volatility of the Company’s stock price. In 2010 we also recognized a loss of $159,050 pursuant to converting debt into common stock.
 
Net Loss and Loss per Share. The net loss for the year ending December 31, 2011 was $23,704,727 compared to net loss of $2,024,464 for the same period in the previous year. This increase of $21,680,263 is due to the factors outlined above, notably the non-cash loss recorded from the Series A Preferred stock derivative liability. Net (loss) per weighted average share was ($0.15) for 2011 and ($0.02) in 2010.

 
12

 

Liquidity and Capital Resources

At December 31, 2011, the Company’s net working capital deficiency was $2,635,120, as compared to a deficiency of $2,322,199 at December 31, 2010, an increase of deficiency of $312,921 or 13%. For the year ended December 31, 2011, funds were primarily used by the net loss of ($23,704,727), an increase in inventory of $246,762, and expenditures for patents of $80,793 and fixed assets of $45,356. Funds were provided by the net sale of 8,511,764 shares of common stock and 44,547 shares of Series A Preferred stock for $1,680,513, an  increase in deferred revenues of $150,811, and an increase in related party payables and accrued expenses and deferred salary of $314,503.

 Additionally, to conserve cash, in 2011 the Company issued 4,441,060 shares of common stock and 3,045,000 common stock options for services. This non-cash charge to the Income Statement was $1,592,485. Also, the Company incurred a non-cash charge of $350,000 (paid with common stock and accrued expenses) as a penalty for late product delivery. The non-cash charges to the income statement were from derivative liabilities for the convertibility feature of the Series A Preferred Stock of $19,771,086 and the derivative liability for warrants of $35,089.

For the year ended December 31, 2010, net cash flows increased by $6,557. This is reflective of the net loss of $2,024,464, spending for inventory of $87,997, patents of $85,968 and fixed assets of $31,184.

In 2010, funds were provided by proceeds from the sale of common stock of $163,578, and preferred stock of $720,600, an increase in deferred revenue of $122,525, and a net increase in related party notes, payables and deferred salary of $461,508. Non cash charges for the year were from the issuance of common stock and options for services of $816,131, and a loss related to debt and liability conversion of $159,050. Non cash derivative liability related income for the period was $440,297.

The Company needs to obtain capital; however, no assurance can be given that it 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 the Company’s business, operating results and financial condition. If the need arises, the Company may attempt to obtain funding or pay expenses through the continued sale or issuance of restricted stock. The Company may also use various types of short term funding, related party advances and expenses payment deferrals and external loans. The Company’s auditors have issued a going concern opinion for the year ended December 31, 2011.
 
We believe that our cash requirements over the next 12 months will be approximately $250,000 per month, or about $3 million in total, inclusive of the following contracts. Management anticipates that cash (net of sub-contractor fees) of approximately $1.1 million will be provided through the U.S. Army contract. On this contract, payments are based on the invoicing to the customers of our material costs, man hours and overhead/fringe rates on a monthly basis. We expect to get paid within 30 to 60 days of invoicing. The Army contract is currently in the novation process (formal acknowledgement of a change in control) with the military contracting office, DCMA, and as a result, the Company is not receiving payments under this contract until the process has been completed. We cannot be assured when this will occur, and whether there will be any modifications to the contract requirement by DCMA or the Army.  If there are further delays or modifications to the contract, we could experience a loss of revenue that could be detrimental to the company.
 
An additional $400,000 in revenue will be provided from Combilift, pursuant to a recently signed license agreement. Of this amount, $100,000 has already been paid, and $300,000 is payable over the following 9 months as prototype engines are delivered, and final bill of materials and designs are rendered. Should we be unable to fulfill this order, the additional $300,000 in development fees would not be payable, despite the possibility that we could have considerable expenses in connection with our efforts.

In total, the Company expects approximately $2.2 million in revenue being recorded by the Company over the next 12 months from current contracts (of which approximately $400,000 has been paid as of the date of this filing, and another $400,000 is expected to be payable to sub-contractors under the Army contract). This leaves a shortfall of at least $1.5 million to continue operations at our current pace. In the short term, management may sell common stock in private offerings to accredited investors and pursue short-term debt up to $1 million. The Company will also seek additional long term financing of up to $5 to $6 million. The terms of such offering have not been decided, and management makes no assurances that it can be successful in raising these funds.
 
Recent Accounting Pronouncements.  

Our significant accounting policies are described in Note 1 to the accompanying financial statements, and above in “Critical Accounting Policies”.

 
13

 
 
Off-Balance Sheet Arrangements.
 
We do not have any off-balance sheet arrangements at this time.
 
Item 7A.       Quantitative and Qualitative Disclosures About Market Risk.

Not required for smaller reporting companies.

Item 8.           Financial Statements and Supplementary Data.

The financial statements required by this Item 8 are included at the end of this Report beginning on page F-1 as follows:
 
 
Page
   
Report of Independent Registered Public Accounting Firm
F-2
   
Consolidated Balance Sheets as of December 31, 2011 and December 31, 2010
F-3
   
Consolidated Statements of Operations for the year ended December 31, 2011 and the year ended December 31, 2010
F-4
   
Consolidated Statement of changes in Stockholders Equity for the year ended December 31, 2011 and the year ended December 31, 2010.
F-5
   
Consolidated Statement of Cash Flows for the year ended December 31, 2011 and the year ended December 31, 2010.
F-6
   
Notes to Consolidated Audited Financial Statements
F-7
 
Item 9.           Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item  9A.       Controls and Procedures.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

We carried out an evaluation as required by paragraph (b) of Rule 13a-15 and 15d-15 of the Exchange Act, under the supervision and with the participation of our management, including our Audit Committee Chairman and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of December 31, 2011. Based upon that evaluation, and given reference to the restatements made as of October 2011, described above, our Audit Committee Chairman and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

Report of Management on Internal Controls over Financial Reporting.

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011, utilizing the framework established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2011, is effective.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Management necessarily applied its judgment in assessing the benefits of controls relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and may not be detected.

 
14

 
 
Changes in Internal Control over Financial Reporting.

There have been no changes in our internal controls over financial reporting that occurred during the fourth fiscal quarter of 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.         Other Information.

None.

Part III

Item 10.         Directors, Executive Officers and Corporate Governance.

The names, ages, positions and dates appointed of our current directors and executive officers are set forth in the table below:
 
Name
Age
Position
Date of Appointment
Harry Schoell
69
Chairman and Chief Executive Officer
June 2004
Frankie Fruge
67
Director and Chief Operating Officer
June 2004
James C. Landon
68
Director
December 2008
Christopher Nelson
42
President and General Counsel
March 2011*
Bruce Schames
65
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.

Harry Schoell, Chairman and Chief Executive Officer, is a life-long entrepreneur and inventor. He is a native Floridian, born in Miami, and a third generation inventor and engineer. Mr. Schoell has worked for years to realize his dream to create an environmentally-friendly engine, and has 30 patents issued and allowed to date on the Schoell Cycle heat regenerative external combustion engine, now called the Cyclone Engine.

Mr. Schoell is well versed in all facets of manufacturing procedures, including, appropriate foundry protocol, castings, machining, production design and manufacturing, and plastic and fiberglass laminates.  He also has experience in designing, inventing and building unique boat hull designs and patented marine propulsion systems, through Schoell Marine, a company he founded in 1966 and still exists today.
 
Mr. Schoell built Schoell Marine and its reputation based on his original ideas, trained engineers, and prototype and production specialists – the same as he is doing now for Cyclone. Over these 40+ years, his efforts resulted in over 40 specialized patents and patent applications, including a Jet Drive System, a trimmable surface drive, a “Ground Effect Craft”, and a lightweight internal engine that he designed and built in 1990.  Mr. Schoell belongs to SAE (Society of Automotive Engineers), the ASME (American Society of Marine Engineers), and The Society of Naval Architects and Marine Engineers.
 
Mr. Schoell’s qualifications to be a director of the Company, in addition to his business  background (as described above), include his intimate involvement in the development of the Cyclone Engine as well as the business plan for its commercialization. Mr. Schoell has no other Board of Directors affiliations with public companies other than with the Company. He is a director of Schoell Marine, Inc.

Frankie Fruge serves as 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.
 
 
15

 
 
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’s qualification to be a director of the Company, in addition to her general business background (as described above), include her extensive engineering technology experience. Ms. Fruge has no other Board of Directors affiliations.
 
James Landon, a CPA and CFE, serves as Director of Cyclone. As President of Landon & Associates P.A., Mr. Landon was previously the company’s 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 was a 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 Landon’s qualifications to be a director of the Company include his extensive accounting and business experience.

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 four years, he has assisted and overseen all aspects of the Company’s 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 17 years, and since 2001, has represented many start-up, early stage and established businesses seeking financing, acquisitions and general growth management counseling. Such companies recently included Dental Practice Management, a management company based in Ft. Lauderdale, Florida; UMT International, an industrial machine manufacturing company, based in Dania Beach, Florida; and InfoLink, an 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 Company’s general risk management strategy, and also ensures that risks undertaken by our Company are consistent with the Board’s appetite for risk.  While the Board oversees our Company’s 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.
 
 
16

 
 
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. The Audit Committee is responsible for monitoring and reviewing our financial statements and internal controls over financial reporting. In addition, they recommend the selection of the independent auditors and consult with management and our independent auditors prior to the presentation of financial statements to shareholders and the filing of our forms 10-Q and 10-K. Our Board has determined that Mr. Landon qualifies as an “audit committee financial expert” as defined under the federal securities laws. The Audit Committee’s responsibilities are set forth in the Company’s Charter of Corporate Governance, a copy of which is currently available from the Company and is posted on our web site.

The Company does 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. Advisors do not have voting or observatory powers over the Board of Directors or management. The Company’s CEO interacts with these advisors from time to time on matters related to the Company’s technological development. There are no formalized Board of Advisor meetings, and members have no other special powers or functions. Each individual on the Board works part-time with the Company as requested.  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.
 
Mr. Crank also has over 50 years of 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.
 
            Robert Edwards is a retired senior engineer from Lockheed Martin. Mr. Edwards served at Lockheed Martin for over 30 years, working on different projects including the Apollo Moon Project and other space programs. His area of expertise is in energy conversion systems, including thermoelectric, steam, internal combustion and external combustion engines.  Mr. Edwards has also spent over 20 years working with experimental steam cars and other steam systems, and is an officer of the Mobile Steam Society in Tennessee. He has published over 40 scientific papers and now gives talks on the subjects of alternative fuels and heat transfer systems.  He holds a B.S. from the University of Tennessee.

George Nutz is technology consultant with almost 50 years of experience working with external combustion and steam engines. He is the founder of Millennium Engineering Systems and Millennium Energy Systems, through which he has provided engineering guidance and expertise to multiple external combustion engine projects over the last twenty years.
 
 
17

 
 
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, Cyclone’s 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.
 
Karl Petersen, has over 45 years of experience in product development, engineering, manufacturing, and quality systems. He currently works directly with Cyclone’s engineering team to assist in the commercialization of its external combustion engine technology.  Mr. Petersen also runs Petersen Product Development in Boise, ID, which has provided mechanical, chemical and manufacturing process development for clients that include Caterpillar and John Deere. Previously, Mr. Petersen spent over 25 years in various engineering and management positions at Preco (purchased by Vansco Electronics in 2005), which provided critical product development for Caterpillar and AGCO. He also served several Lockheed divisions as a Senior Mechanical Engineer. Having worked on steam systems since the 1960’s, Mr. Petersen has built numerous engines throughout his career and has vast knowledge of their mechanical and thermodynamic operations.

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.  Both Allen Brown and Karl Petersen also receive cash compensation for their services which are performed at the Company's facility.

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.
 
Compliance With Section 16(a) of the Exchange Act
 
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Company under Rule 16a-3(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) during twelve months ended December 31, 2011, the Company is not aware of any person that failed to file on a timely basis, as disclosed in the aforementioned Forms, reports required by Section 16(a) of the Exchange Act during the year ended December 31, 2011.
 
 
18

 
 
Item  11.         Executive Compensation.

Summary Compensation Table

The following table sets forth certain information concerning the annual and long-term compensation of our Chief Executive Officer and our other executive officers during the last two fiscal years.

 
Current
Officers
Name &
Principal
Position
 
Year
   
Salary
($)
   
Bonus
($)
   
Stock
Awards
(S)
   
All Other
Compensation
($)
   
Option Awards
($)(5)
   
Total
($)
 
Harry Schoell
 
2011
   
$
150,000
(1)
 
 
0
   
$
0
     
0
   
$
60,385
   
$
210,384
 
Chairman & CEO
 
2010
   
$
150,000
(1)
 
 
0
   
$
0
     
0
   
$
11,900
   
$
161,900
 
                                                       
Frankie Fruge
 
2011
   
$
120,000
(2)
 
 
0
   
$
0
     
0
   
$
60,385
   
$
180,383
 
Director & COO
 
2010
   
$
120,000
(2)
 
 
0
   
$
0
     
0
   
$
11,900
   
$
131,900
 
                                                       
Bruce Schames
 
2011
   
$
72,000
(3)
 
 
0
   
$
0
     
0
   
$
127,202
   
$
199,199
 
CFO
 
2010
   
$
42,156
(3)
 
 
0
   
$
26,700
     
0
   
$
70,408
   
$
139,264
 
                                                       
Christopher Nelson
 
2011
   
$
130,000
(4)
 
 
0
   
$
0
     
0
   
$
60,385
   
$
190,831
 
President & General Counsel
 
2010
   
$
120,000
(4)
 
 
0
   
$
14,500
    $
30,000
(4)  
$
35,957
   
$
200,457
 

 
(1)
 
All of Mr. Schoell’s salary in 2011 and 2010, 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. Fruge’s salary in 2011 and 2010, 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)
 
As of December 31, 2011, Mr. Schames had $39,864 of deferred salary, which will be paid when determined by the Board of Directors that the Company can afford to pay such salary.
 
(4)
 
As of December 31, 2011, Mr. Nelson had $83,197 of deferred salary. Other Compensation of $30,000 was comprised of a 5% equity interest in the Company’s subsidiary, Cyclone-WHE, LLC. See Note 14 to the Financial Statements for the assumptions in the valuation.
 
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. Mr. Schoell’s agreement commenced June 30, 2007, and was amended on January 1, 2011. Mr. Schoell received 500,000 common stock options in 2007 pursuant to the original agreement, and is to receive 600,000 options per year pursuant to the amendment.  If Mr. Schoell is terminated for “cause,” he shall receive any unpaid base salary due to him as of the date of termination. If he is terminated without “cause” or upon a change in control, he shall receive (i) any unpaid base salary accrued through the effective date of termination, (ii) his base salary at the rate prevailing at such termination through 12 months from the date of termination or the end of his term then in effect, whichever is longer, and (iii) any performance bonus that would otherwise be payable to him were he not terminated, during the 12 months following his termination.  Upon termination without cause, all of his stock options shall vest immediately. As of December 31, 2011, Mr. Schoell had $668,844 in unpaid, deferred salary due to him.
 
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. Ms. Fruge’s agreement commenced June 30, 2007, and was amended on January 1, 2011. Ms. Fruge received 500,000 common stock options in 2007 pursuant to the original agreement, and is to receive 600,000 options per year pursuant to the amendment. If Ms. Fruge is terminated for “cause,” she shall receive any unpaid base salary due to her as of the date of termination. If she is terminated without “cause” or upon a change in control, she shall receive (i) any unpaid base salary accrued through the effective date of termination, (ii) her base salary at the rate prevailing at such termination through 12 months from the date of termination or the end of her term then in effect, whichever is longer, and (iii) any performance bonus that would otherwise be payable to her were she not terminated, during the 12 months following her termination. Upon termination without cause, all of her stock options shall vest immediately. As of December 31, 2011, Ms. Fruge had $512,740 in unpaid, deferred salary due to her.
   
 
19

 
 
Mr. Nelson has an Employment Agreement with the Company providing for a base salary of $130,000 per year plus standard benefits, and 600,000 common stock options per year. He has deferred salary of $83,197 as of December 31, 2011.  Mr. Nelson’s agreement is for three years from August 2011, and is automatically renewed for successive one-year periods unless either party provides notice of a desire not to renew at least 90 days prior to the agreement’s anniversary date.  If Mr. Nelson is terminated for “cause,” he shall receive any unpaid base salary due to him as of the date of termination. If he is terminated without “cause” or upon a change in control, he shall receive (i) any unpaid base salary accrued through the effective date of termination, (ii) his base salary at the rate prevailing at such termination through 12 months from the date of termination or the end of his term then in effect, whichever is longer, and (iii) any performance bonus that would otherwise be payable to him were he not terminated, during the 12 months following his termination. Upon termination without cause, all of his stock options shall vest immediately.
 
Mr. Schames has an agreement with the Company providing for cash compensation of $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 1, 2010. Either Mr. Schames or the Company may terminate his employment on 60 days’ notice.  If the Company terminates other than for “cause”, he shall receive his base compensation due through the date of termination plus a good faith repayment plan for any deferred and unpaid compensation. If Mr. Schames leaves or is terminated for “cause, he shall not be paid any deferred compensation and any unvested options shall terminate immediately. “Cause” is defined as gross negligence or willful misconduct that injures or may reasonably injure the Company.  As of December 31, 2011, Mr. Schames had $39,864 in unpaid, deferred salary due to him.

Outstanding Equity Awards at December 31, 2011
 
The following table sets forth information concerning all stock option grants held by our named executive officers as of December 31, 2011.  All outstanding equity awards are options to purchase shares of common stock.
 
 
20

 
 
All Option Awards
 
Name and Position
   
Option
Grant Date
   
Number
Granted
(1) (2)
   
Number Exercisable
   
Number Unexercisable
   
Exercise or Base Price of Option Awards
($/Share)
   
Grant Date Fair Value of Stock in Option Awards
($) (3)
   
Option
Expiration Date
                                           
Harry Schoell
   
6/30/2007
     
250,000
     
250,000
     
0
     
0.25
     
0.25
   
6/30/2017
Chairman & CEO
   
6/30/2007
     
125,000
     
125,000
     
0
     
0.35
     
0.25
   
6/30/2017
     
6/30/2007
     
125,000
     
125,000
     
0
     
0.45
     
0.25
   
6/30/2017
     
12/31/2010
     
100,000
     
100,000
     
0
     
0.12
     
0.12
   
12/31/2015
     
4/15/2011
     
50,000
     
50,000
     
0
     
0.22
     
0.22
   
12/31/2021
     
6/30/2011
     
50,000
     
0
     
50,000
     
0.30
     
0.30
   
6/30/2021
     
12/22/2011
     
150,000
     
  0
     
150,000 
     
0.19 
     
0.19 
   
9/30/2021 
     
12/22/2011
     
150,000
     
  0
     
150,000 
     
0.19 
     
0.19 
   
12/22/2021 
                                                     
Frankie Fruge
   
6/30/2007
     
250,000
     
250,000
     
0
     
0.25
     
0.25
   
6/30/2017
Director & COO
   
6/30/2007
     
125,000
     
125,000
     
0
     
0.35
     
0.25
   
6/30/2017
     
6/30/2007
     
125,000
     
125,000
     
0
     
0.45
     
0.25
   
6/30/2017
     
12/31/2010
     
100,000
     
100,000
     
0
     
0.12
     
0.12
   
12/31/2015
     
4/15/2011
     
50,000
     
50,000
     
0
     
0.22
     
0.22
   
12/31/2015
     
6/30/2011
     
50,000
     
0
     
50,000
     
0.30
     
0.30
   
6/30/2016
     
12/22/2011
     
150,000
     
  0
     
150,000 
     
0.19 
     
0.19 
   
9/30/2021 
     
12/22/2011
     
150,000
     
  0
     
150,000 
     
0.19 
     
0.19 
   
12/22/2021 
                                                     
Bruce Schames
   
4/5/2010
     
100,000
     
100,000
     
0
     
0.15
     
0.14
   
4/5/2012
CFO
   
6/30/2010
     
150,000
     
150,000
     
0
     
0.10
     
0.10
   
6/30/2020
     
9/30/2010
     
150,000
     
150,000
     
0
     
0.09
     
0.09
   
9/30/2020
     
12/31/2010
     
150,000
     
150,000
     
0
     
0.12
     
0.12
   
12/31/2020
     
12/31/2010
     
75,000
     
75,000
     
0
     
0.12
     
0.12
   
12/31/2015
     
3/31/2011
     
150,000
     
150,000
     
0
     
0.33
     
0.33
   
3/31/2021
     
4/15/2011
     
20,000
     
20,000
     
0
     
0.22
     
0.22
   
4/15/2016
     
6/30/2011
     
150,000
     
0
     
150,000
     
0.32
     
0.32
   
6/30/2021
     
6/30/2011
     
20,000
     
0
     
20,000
     
0.30
     
0.30
   
6/30/2016
     
12/22/2011
     
150,000
     
  0
     
150,000 
     
0.19 
     
0.19 
   
9/30/2021 
     
12/22/2011
     
150,000
     
  0
     
150,000 
     
0.19 
     
0.19 
   
12/22/2021 
                                                     
Christopher Nelson
   
4/5/2010
     
250,000
     
250,000
     
0
     
0.15
     
0.14
   
4/5/2022
President & GC
   
12/31/2010
     
100,000
     
100,000
     
0
     
0.12
     
0.12
   
12/31/2015
     
4/15/2011
     
50,000
     
50,000
     
0
     
0.22
     
0.22
   
4/15/2016
     
6/30/2011
     
50,000
     
0
     
50,000
     
0.30
     
0.30
   
6/30/2016
     
12/22/2011
     
150,000
     
  0
     
150,000 
     
0.19 
     
0.19 
   
9/30/2021 
     
12/22/2011
     
150,000
     
  0
     
150,000 
     
0.19 
     
0.19 
   
12/22/2021 
                                                     
James Landon
   
4/5/2010
     
50,000
     
50,000
     
0
     
0.15
     
0.14
   
4/5/2012
Director
   
12/31/2010
     
100,000
     
100,000
     
0
     
0.12
     
0.12
   
12/31/2015
     
4/15/2011
     
25,000
     
25,000
     
0
     
0.22
     
0.22
   
4/15/2016
     
6/30/2011
     
200,000
     
0
     
200,000
     
0.30
     
0.30
   
6/30/2016
     
6/30/2011
     
25,000
     
0
     
25,000
     
0.30
     
0.30
   
6/30/2016
     
12/22/2011
     
150,000
     
  0
     
150,000 
     
0.19
     
0.19
   
9/30/2016 
     
12/22/2011
     
150,000
     
  0
     
150,000 
     
0.19
     
0.19
   
12/22/2016 
 
(1)
Any performance conditions with respect to the listed options have been satisfied, and therefore, each such option has been earned.
(2)
Each of the listed options vest one year from the date of grant.
(3)
We determined the grant date fair value of stock option awards using the methodology set forth in Footnote 10 to our Consolidated Financial Statements for the years ended December 31, 2011 and 2010.

Option Exercise and Stock Vesting
 
During 2011, none of the named executive officers exercised any options. 1,450,000 executive officer and director options vested in 2011.
 
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, 2011.
 
 
 
Name
 
Fees earned
or paid
in cash
($)
   
 
Option
awards
($)
   
Stock
Awards
   
Nonqualified deferred
compensation earnings
($)
   
All other
compensation
($)
   
 
Total
($)
 
James Landon
   
12,000
     
94,508
     
17,500
     
-
     
-
     
124,008
 
 
 
21

 

 Item 12.         Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table sets forth information regarding the beneficial ownership of our Common Stock and Series B Preferred Stock by each of our named Executive Officers and Board of Directors, and each shareholder who is known by us to own beneficially five percent (5%) or more of the outstanding stock of such class as of March 31, 2012. On March 31, 2012, there were 227,419,682 shares of common and 1,000 shares of Series B Preferred stock issued and outstanding.
 
 
 
Name and Address
Common
Shares
Beneficially
Owned
%
Series B Pref.
Shares
Beneficially
Owned
%
Harry Schoell, Chairman & CEO
601 NE 26th Ct.
Pompano Beach, FL 33064
 
45,645,552 (1)
 
19.82 %
 
797
 
80%
Frankie Fruge, COO & Director
601 NE 26th Ct.
Pompano Beach, FL 33064
 
12,242,714 (2)
 
5.32 %
 
203
 
20%
James Landon, Director
4401 N Federal Hwy
Boca Raton, FL 33431
 
2,351,800 (3)
 
1.02 %
 
-
 
-
Christopher Nelson,
President, General Counsel
601 NE 26th Ct.
Pompano Beach, FL 33064
 
5,695,400  (4)
 
2.47 %
 
 
 
-
 
-
Bruce Schames, CFO
601 NE 26th Ct.
Pompano Beach, FL 33064
 
957,025 (5)
 
0.42 %
 
-
 
-
All Executive Officers
as a Group (5 persons)
 
66,892,491
 
29.05 %
 
-
 
-
 
TOTALS:
 
66,892,491
 
29.05 %
 
1,000 *
 
100%
 
*
The 1,000 shares of Series B Preferred stock provide their holders a majority vote on all matters brought before the common stock shareholders.
(1)
Mr. Schoell’s total includes 650,000 vested common stock options, but excludes 350,000 unvested options awarded in 2011.
(2)
Ms. Fruge’s total includes 650,000 vested common stock options, but excludes 350,000 unvested options awarded in 2011.
(3)
Mr. Landon’s total includes 375,000 vested common stock options, but excludes 525,000 unvested options awarded in 2011.
(4)
Mr. Nelson’s total includes 400,000 vested common stock options, and 634,000 shares of common stock owned by a company controlled by Mr. Nelson’s wife. The total excludes 350,000 unvested options awarded in 2011.
(5)
Mr. Schames’ total includes 795,000 vested common stock options, but excludes 470,000 unvested options awarded in 2011.


Item 13.         Certain Relationships and Related Transactions, and Director Independence.

Our Board of Directors (excluding any interested director) is charged with reviewing and approving all related-person transactions, and a special committee of our Board of Directors is established to negotiate the terms of such transactions. In considering related-person transactions, our Board of Directors takes into account all relevant available facts and circumstances.
 
We have an Operations Agreement dated July 2, 2007, with Schoell Marine, a company owned 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, 2011, we owed to Schoell Marine $608,489, 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 at market rates.

 
22

 

As of December 31, 2011, the Company also had on its books $1,181,584 of accrued and deferred officer’s 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. At the end of 2011, an additional $123,061 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  14.         Principal Accountant Fees and Services

The following table shows what Mallah Furman billed for the audit and other services for the years ended December 31, 2011 and December 31, 2010.


   
Year Ended
12/31/ 2011
   
Year Ended
12/31/10
 
Audit Fees
  $ 52,542     $ 23,100  
Audit-Related Fees
    --       --  
Tax Fees
    --       --  
All Other Fees
    --       --  
                 
Total
  $ 52,542     $ 23,100  

Audit Fees—This category includes the audit of the Company’s annual financial statements, review of financial statements included in the Company’s Form 10-Q Quarterly Reports and services that are normally provided by the independent auditors in connection with engagements for those years.

Audit-Related Fees —N/A

Tax Fees—N/A

Overview —The Company’s Audit Committee, reviews, and in its sole discretion pre-approves, our independent auditors’ annual engagement letter including proposed fees and all audit and non-audit services provided by the independent auditors. Accordingly, all services described under “Audit Fees,” “Audit-Related Fees,” and “Tax Fees” were pre-approved by our Company’s Audit Committee. The Audit Committee may not engage the independent auditors to perform the non-audit services proscribed by law or regulation. The Company’s Audit Committee may delegate pre-approval authority to a member of the Board of Directors, and authority delegated in such manner must be reported at the next scheduled meeting of the Board of Directors.
 
 
23

 
 
Part IV
 
Item 15.         Exhibits and Financial Statement Schedules.
 
(a) Financial Statements.
 
 
Financial Statements Included in this Report
 
Page
 
Report of Independent Registered Public Accounting Firm
F-2
   
Consolidated Balance Sheets as of December 31, 2011 and December 31, 2010
F-3
   
Consolidated Statements of Operations for the year ended December 31, 2011 and the year ended December 31, 2010
F-4
   
Consolidated Statements of Changes in Stockholders Deficit for the year ended December 31, 2011 and the year ended December 31, 2010.
F-5
   
Consolidated Statements of Cash Flows for the year ended December 31, 2011 and the year ended December 31, 2010
F-6
   
Notes to Consolidated Audited Financial Statements
F-7
 
 
(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 containing Certificates of Designation for Series A Convertible Preferred Stock and Series B Preferred Stock, dated July 17, 2011
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
10.5 *
 
Employment Agreement, dated August 1, 2011, between the Company and Christopher Nelson
10.6 *
 
Employment Agreement, dated June 10, 2010, between the Company and Bruce Schames
10.7 *
 
Operations Agreement, dated July 2, 2007, between the Company and Schoell Marine, Inc.
10.8 *
 
Systems Application License Agreement, dated July 30, 2009, between the Company and Phoenix Power Group LLC
10.9 *
 
Technology License Agreement, dated December 11, 2009, between the Company and Great Wall Alternative Power Systems, Ltd.
10.10**
 
Amended and Restated technology License Agreement, dated Jun 15, 2011, between the Company and Renovalia Energy, S.A.
10.11 *
 
Subcontractor Contract for Development of a Rankine Cycle Engine, dated December 20, 2010, between the Company and Advent Power Systems, Inc.
10.12 *
 
Technology License Agreement, dated March 24, 2006, between the Company and Advent Power Systems, Inc., including Amendments thereto.
10.13 *
 
Letter of Understanding, dated March 1, 2011, between the Company and TopLine Energy Systems, LLC
10.14 *
 
Security Agreement, dated August 1, 2007, between the Company and Schoell Marine, Inc.
10.15 *
 
Systems Application License Agreement, dated September 12, 2011, between the Company and Combilift.
21 *
 
Subsidiaries of the Company
 
 
24

 
 
31.1
 
Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 
Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed incorporated by reference into any other filing under the Security Act of 1933, as amended, or by the Security Exchange Act of 1934, as amended.)
32.2
 
Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 as amended or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed incorporated by reference into any other filing under the Security Act of 1933, as amended, or by the Security Exchange Act of 1934, as amended.)
 101.INS   XBRL Instance Document.
 101.SCH   XBRL Taxonomy Extension Schema Document.
 101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document.
 101.DEF   XBRL Taxonomy Extension Definition Linkbase Document.
 101.LAB   XBRL Taxonomy Extension Label Linkbase Document.
 101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document.
 
* Previously filed with the Securities and Exchange Commission as an exhibit to the Company’s Form 10 Registration Statement, and incorporated herein by reference.

 
25

 
 
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
   
Cyclone Power Technologies, Inc.
       
 
 
By:
/S/ HARRY SCHOELL
     
Harry Schoell
     
Chairman and Chief Executive Officer
       
   
Dated: April 13, 2012
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
 
 
 
 
By:
/S/    HARRY SCHOELL
     
Harry Schoell
     
Chairman and Chief Executive Officer
     
(principal executive officer)
     
   
Dated: April 13, 2012
 
 
 
 
By:
/S/    FRANKIE FRUGE
     
Frankie Fruge
     
Chief Operating Officer and Director
     
   
Dated: April 13, 2012
 
 
 
 
By:
/S/    CHRISTOPHER NELSON
     
Christopher Nelson
     
President and General Counsel
     
   
Dated: April 13, 2012
 
 
 
 
By:
/S/    BRUCE SCHAMES
     
Bruce Schames
     
Chief Financial Officer
     
(principal accounting and financial officer)
     
   
Dated: April 13, 2012
 
 
 
 
By:
/S/    JAMES C. LANDON
     
James C. Landon
     
Director
     
   
Dated: April 13, 2012
 
 
26

 
 
Cyclone Power Technologies, Inc.
Consolidated Financial Statements and Footnotes
December 31, 2011 and 2010


 
   
Page
 
Report of Independent Registered Public Accounting Firm
F-2
   
Consolidated Balance Sheets as of December 31, 2011 and December 31, 2010
F-3
   
Consolidated Statements of Operations for the year ended December 31, 2011 and the year ended December 31, 2010
F-4
   
Consolidated Statements of Changes in Stockholders Deficit for the year ended December 31, 2011 and the year ended December 31, 2010.
F-5
   
Consolidated Statements of Cash Flows for the year ended December 31, 2011 and the year ended December 31, 2010
F-6
   
Notes to Consolidated Audited Financial Statements
F-7
 
 
F-1

 
 
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, 2011 and 2010, and the related consolidated statements of operations, changes in 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 company’s 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, 2011 and 2010, 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 Company’s 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 13, 2012
 
 
 
F-2

 
Cyclone Power Technologies, Inc.
Consolidated Balance Sheets
December 31, 2011 and 2010
 
   
December 31,
   
December 31,
 
   
2011
   
2010
 
   
 
   
 
 
ASSETS
           
             
CURRENT ASSETS
           
Cash
  $ 66,486     $ 6,557  
Accounts receivable
    -       4,200  
Inventory
    475,600       228,838  
Other current assets
    4,846       828  
Total current assets
    546,932       240,423  
                 
PROPERTY AND EQUIPMENT
               
Furniture, fixtures, and equipment
    184,784       139,428  
Less: Accumulated depreciation
    (76,541 )     (55,644 )
Net property and equipment
    108,243       83,784  
                 
OTHER ASSETS
               
Patents, trademarks and copyrights
    557,847       486,466  
Less: Accumulated amortization
    (117,846 )     (81,115 )
Net patents, trademarks and copyrights
    440,001       405,351  
Other assets
    2,422       1,156  
Total other assets
    442,423       406,507  
                 
Total Assets
  $ 1,097,598     $ 730,714  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
                 
CURRENT LIABILITIES
               
Accounts payable and accrued expenses
  $ 262,947     $ 187,887  
Factored receivables     43,169       -  
Accounts payable and accrued expenses-related parties
    1,305,772       991,269  
Notes and other loans payable
    30,000       5,000  
Notes and other loans payable-related parties
    678,271       659,577  
Capitalized lease obligations-current portion
    898       6,565  
Deferred revenue and license deposits
    860,811       710,000  
Warranty provision
    184       2,324  
                 
Total current liabilities
    3,182,052       2,562,622  
                 
NON CURRENT LIABILITIES
               
Capitalized lease obligations-net of current portion
    2,155       2,451  
Derivative Liabilities-Warrant
    494,626       459,537  
Derivative Liabilities-Series A Convertible Preferred Stock
    -       10,623,624  
Total non-current liabilities
    496,781       11,085,612  
                 
Total liabilities
    3,678,833       13,648,234  
                 
Commitments and contingencies     -       -  
                 
STOCKHOLDERS' DEFICIT
               
Series A convertible preferred stock, $.0001 par value, 750,000 shares authorized, 705,453 shares issued and outstanding at December 30, 2010
    -       71  
                 
Series B preferred stock, $.0001 par value, 1,000 shares authorized, 1,000 shares issued and outstanding at December 31, 2011 and 2010
    -       -  
                 
Common stock, $.0001 par value, 300,000,000 shares authorized, 223,635,129 and 114,020,135 shares issued and outstanding at December 31, 2011 and December 31, 2010, respectively.
    22,361       11,402  
Additional paid-in capital
    43,001,171       9,004,547  
Prepaid expenses from equity contribution
    -       (27,500 )
Preferred stock subscription receivable
    (12,000 )     (18,000 )
Accumulated deficit
    (45,722,829 )     (22,022,915 )
Total stockholders' deficit-Cyclone Power Technologies Inc.
    (2,711,297 )     (13,052,395 )
Non controlling interest in consolidated subsidiary-Cyclone WHE LLC
    130,062       134,875  
Total Stockholders Deficit
    (2,581,235 )     (12,917,520 )
                 
Total Liabilities and Stockholders' Deficit
  $ 1,097,598     $ 730,714  
 
See the accompanying notes to consolidated financial statements
 
 
F-3

 
 
Cyclone Power Technologies, Inc.
Consolidated Statements of Operations
For Years Ended December 31, 2011 and 2010

   
2011
   
2010
 
             
REVENUES
  $ 250,000     $ 261,525  
                 
COST OF GOODS SOLD
    399,801       110,393  
                 
Gross profit (loss)
    (149,801 )     151,132  
                 
OPERATING EXPENSES
               
Advertising and promotion
    66,001       51,838  
General and administrative
    2,628,835       1,522,917  
Research and development
    983,276       842,425  
                 
Total operating expenses
    3,678,112       2,417,180  
                 
Operating loss
    (3,827,913 )     (2,266,048 )
                 
OTHER INCOME (EXPENSE)
               
Other (expense)
    (26,964 )     (159,050 )
Derivative Income (Expense) -Warrants
    (35,089 )     106,616  
Derivative Income (Expense) -Series A Preferred Stock:
               
Founders Stock
    (13,238,033 )     331,859  
New Investors' stock
    (6,533,053 )     1,822  
Interest (expense)
    (43,675 )     (39,663 )
                 
Total other income (expense)
    (19,876,814 )     241,584  
                 
Loss before income taxes
    (23,704,727 )     (2,024,464 )
Income taxes
    -       -  
                 
Net loss
  $ (23,704,727 )   $ (2,024,464 )
                 
Net loss per common share, basic
  $ (0.15 )   $ (0.02 )
                 
Weighted average number of common shares outstanding
    156,324,933       107,100,629  

See the accompanying notes to consolidated financial statements
 
 
F-4

 
Cyclone Power Technologies, Inc.
Consolidated Statements of Changes in Stockholders’ Deficit
For Years Ended December 31, 2011 and 2010

   
Preferred Stock A
   
Preferred Stock B
   
Common Stock
   
Additional
Paid In
   
Treasury
   
Prepaid
Expenses
From Equity
   
PreferredStock
Subscription
   
Accumulated
   
Total Stockholders'
(Deficit)Cyclone
Power
   
Non Controlling
Interest
In Consol.
   
Total
Stockholders'
 
   
Shares
   
Value
   
Shares
   
Value
   
Shares
   
Value
   
Capital
   
Stock
   
Contribution
   
Receivable
   
( Deficit)
   
Tech. Inc.
   
Subsidiary
   
(Deficit)
 
Balance, December 31, 2009
    540,000     $ 54       1,000     $ -       103,699,133     $ 10,369     $ 7,033,973     $ -     $ -     $ (18,000 )   $ (20,003,576 )   $ (12,977,180 )   $ -     $ (12,977,180 )
                                                                                                                 
Issuance of restricted shares for outside services
    2,000       -       -       -       4,077,280       409       608,278       -       -       -       -       608,687       -       608,687  
                                                                                                                 
Issuance of restricted shares and options for employee services
    2,500       1       -       -       1,681,500       168       207,275       -       -       -       -       207,444       -       207,444  
                                                                                                                 
Sale of common stock
    -       -       -       -       2,062,222       206       163,372       -       -       -       -       163,578       -       163,578  
                                                                                                                 
Sale of preferred stock
    141,000       14       -       -       -       -       635,997       -       -       -       -       636,011       -       636,011  
                                                                                                                 
Warrants issued pursuant to preferred stock sale
    -