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Stock Ideas Wall Street Stock Ideas Cyclone Power Technologies INC. Beacon Equity Research Report 
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| Cyclone Power Technologies INC. Beacon Equity Research Report |
| Wednesday, 05 September 2007 | ||||||||
Cyclone Power Technologies INC. Company OverviewCyclone Power Technologies Inc. (CYPW) based in Florida, designs and licenses green engine technology.The Company has recently completed its initial research and design of a new, environmentally-friendly engine known as the Green Revolution EngineTM. Its patented Cyclone Engine is a multi-fuel capable, highly efficient external combustion, heat-regenerative engine. The Company has one US issued patent on the engine and a total of 48 patents pending in the US and around the world on this engine and its components. The Company has successfully completed bench-testing of single and twin cylinder versions of this engine in the smaller power range and is currently assembling four six-cylinder engines. It is also planning to bench-test medium scale engines. The Company has licensing agreements with investment groups for the manufacturing rights to this engine and has begun discussions with automobile manufacturers, generator manufacturers and diesel engine builders. It is creating visibility for its innovative technology by participating in various engineering trade shows. The Company was initially known as Cyclone Technologies LLLP, was acquired by Coastal Technologies, Inc. in July, 2007 and subsequently changed its name to Cyclone Power Technologies Inc. The predecessor business was awarded an AEI 2006 Tech Award at the 2006 World Congress in Detroit, Michigan and was also voted state winner of the 2005 “Pitching across America” venture capital competition. Cyclone Power Technologies Investment HighlightsSuperior Product PerformanceThe Cyclone engine is an environmentally-friendly, more efficient external combustion engine. It is compact, highly efficient, and can be operated using multiple fuels. The engine has been tested successfully in smaller power ranges, and will soon be bench tested in medium power ranges. It offers superior efficiency and performance compared to traditional internal combustion (IC) engines which are comparatively larger and also emit significant heat and noise. Promising “green” technology The Cyclone engine can efficiently use any liquid or gaseous fuels to generate power with fewer emissions. Traditional IC engines are limited to using gasoline or diesel fuels. The Cyclone engine is also cleaner to operate since it uses de-ionized water rather than oil as a lubricant. The engine’s external combustion technology results in fewer harmful carbon monoxide emissions. Also, the engine’s combustion chamber temperature is about 2,200 degrees. As a result, emissions of nitrogen oxide (NOx), a major source of urban smog which forms at temperatures above 2,500 degrees, are eliminated. Its exhaust discharge meets upcoming US Environmental Protection Agency (EPA) emission standards for 2007 through 2010. Technology potential recognized by venture capital investors The Company expects to commercialize its technology and generate $4 million in revenues next year and to reach operating break even in 2009. Over 100 venture capital firms and angel investors have recognized the immense revenue potential of its technology by selecting Cyclone Power Technologies as the 2005 state winner of the “Pitching Across America” venture capital competition. Multiple market opportunities The Company’s multi-purpose engine has a wide variety of commercial and industrial applications. The engines can be used in generators, lawn care equipment, commercial boats, buses, trucks and passenger automobiles, refrigeration units, appliances, power tools and many other applications.
The versatility of the technology and its ability to address various market segments will provide the Company with multiple revenue streams, and tremendous sales opportunities. Few Competitors The Company has no direct competitors in the external combustion engine segment. The Cyclone Engine is unique in that it is environmentally-friendly and can be operated using a variety of bio-fuels. The Company’s innovative technology provides a sustainable advantage over indirect competitors in the engine manufacturing segment. Experienced Management The Company’s management team consists of seasoned executives with engineering backgrounds and substantial experience in the marine industry. CEO Harry Schoell has more than 35 years marine industry experience and is the founder of Schoell Marine Inc, a marine and nautical engineering business. His engineering expertise plays a key role in helping the Company to further refine and eventually commercialize its technology. Cyclone Power Technologies External combustion engine – A next generation technologyRobust industry growthThe engine manufacturing industry consists primarily of internal combustion engines such as diesel, semi diesel, gasoline and external combustion engines used for stationary, marine, transportation and other uses. Engine manufacturers generated revenue of around $63 billion in 2006. The transporation industry is the largest consumer of engines. The US transportation industry grew 5% annually between 2002 and 2006 to $599.3 billion. Analysts expect this industry to grow 4.3% annually between 2006 and 2011 and generate revenues of $739 billion by year-end 2011. More vehicles increase pollution Motor vehicles are the major cause of air pollution as they emit carbon monoxide, volatile organic compounds (due to partly burnt fuel), sulfur oxides and nitrogen oxides. The ever increasing number of vehicles on the road is exaberbating air quality problems. Exhibit 2 shows the increasing volume of CO2 emissions resulting from more vehicles on the road and projects future CO2 emissions. Although the internal combustion engine is more efficient than the diesel engine, much of the hydrocarbon fuel it uses passes through the process unconsumed and is emmited into the atmosphere along with other exhaust fumes. Although the internal combustion engine is more efficient than the diesel engine, much of the hydrocarbon fuel it uses passes through the process unconsumed and is emmited into the atmosphere along with other exhaust fumes. The following exhibit shows the evolution in the types of fuels used in engine-driven power plants installations over a period of 40 years (1970-2010). The trend shows a movement towards engines capable of using multiple fuels and efforts to minimize the environmental impact. Growing concerns about global warming Average global air temperatures have increased by 0.74 ± 0.18 °C (1.33 ± 0.32 °F) during the 20th century mainly due to greenhouse gas emissions. Global warming is expected to result in extreme weather conditions, with more rain during rainy seasons, longer droughts and more powerful storms. The use of fossil fuels, resulting in polluted exhausts from industrial and vehicle engines is increasing air pollutants and creating serious health risks. Environmental concerns are fueling demand for technology remedies that can help reduce emissions. One of these new technologies is the external combustion engine. According to a survey conducted by MIT’s Laboratory for Energy and the Environment (LFEE) and scientists and professors at Cambridge, global warming is the most important enviromental issue facing the global population. Enforcement of EPA emission requirements Due to the increasing health risks associated with air pollution, the US Environmental Protection Agency (EPA) is enforcing more stringent emission standards applicable to all vehicles sold and operated within the US. Manufacturers of gasoline and diesel engines are struggling to make their products comply with EPA requirements and are also experimenting with alternative fuels and engines. Emission standards, stated in grams per horsepower per hour (g/hp/hr), have become much tighter since 1991 and with new standards will take effect between 2007 and 2010. Diesel engines manufactured after December 31, 2006, are required to meet the new EPA 2007 emissions standards which include a reduction in nitrogen oxides (NOx) emissions to 1.1 g/bhp-hr (over 50% reduction) and a reduction of particulate matter emissions to .01 g/bhp-hr (90% reduction). Market opportunity for external combustion engine External combustion engines offer an environmentally-friendly, multi-fueled and highly-efficient alternative vehicle manufacturers can use to meet emission standards. Rising prices for fossil fuels, growing environmental concerns and more stringent EPA standards create a large market opportunity for the Company’s patented Cyclone engine. Cyclone Power Technologies Product StrategiesThe Company’s novel “Green Revolution Engine™” , also known as the “Cyclone Engine”, is an environmentally- friendly, multi-fueled and highly-efficient external combustion engine. It is an engine which regenerates (or recycles) heat, thereby buring fuel more efficiently than traditional internal combustion(IC) engines. This highperformance engine can run on a variety of liquid or gaseous fuels, including diesel, gasoline, ethanol, propane and powdered coal.Cyclone Power Technologies "Green" TechnologyThe Cyclone engine incorporates a heat-regeneration process that creates more power and reduces emission and leakages Unlike the motor oil used in traditional IC engines, the multi-fueled Cyclone engine is lubricated with de-ionized water. Heat from fuel combustion is harnessed by a heat exchanger system.The fuel burns for a longer period of time, allowing less heat emission into the environment and coverting heat to rotational torque. Internally, the engine temperatures stays around 2,000 degrees. The external temperature is about 350 Fahrenheit, which is put to use in a Combined Heat-Power (CHP) application. The Cyclone Engine has a piston configuration of the high compression uniflow type with a unique valve mechanism that allows it to operate at fluid pressures that result in enhanced power generation. The self-starting one-piece engine contains three or more cylinders, one cam and six valves, and requires no separate radiator, catalytic converter, exhaust valves, transmission or muffler. The engine’s highest torque is at 1 rpm. The compact Cyclone engine combines a small size with the ability to generate high pressure, enabling small cubic capacity engine motors. It develops 2.5 horsepower per cubic inch, approximately twice the power of traditional IC engines which typically develop around 1 horsepower per 1.5 cubis inches of displacement. There is no exhaust noise and the noise level in general is lower than traditional IC engines. The engine’s innovative design helps reduce heat losses and increase efficiency. According to Cyclone Power Technologies, the Cyclone engine will also have greater longevity than traditional IC Engines. The Company recently tested a bio-fuel made from orange peels for use in its Green Revolution Engine™. This 100% natural bio-fuel, d-Limonene, atomized efficiently through the fuel injector, produced a clean burning flame, and registered a BTU level almost 500 units greater than kerosene. The fuel injector is based on High Turbulence Siphon-Type Air Atomization technmology, igniting bio-fuels hotter and cleaner than kerosene and emitting a small micron gasified particle. The Company has also successfully tested other alternative fuels in its fuel injector, including bio-diesels produced from palm oil, cotton seed oil and chicken fat, as well as three grades of ethanol produced from corn. Cyclone Power Technologies Product ApplicationThe multi-purpose Cyclone engine has applications in lawn equipments, small home generators, large standalone generators, cars, trucks, buses, RV’s, boats and ships, earth moving equipment and locomotives.Applications for the engine are listed below:
Cyclone Power Technology PatentsCyclone’s Green Revolution Engine(tm) is currently protected under US Patent No. 7,080,512, with patents pending for the engine around the world. The Company has an additional 48 patents pending in the US and internationally on the Cyclone engine and its components.Cyclone Power Technologies filed US patent applications for 11 major components of the engine this year, which are also covered by an international Patent CooperationTreaty (PCT) filing. Also, 14 patents have been filed to protect the ‘package’ of individual inventions that comprise the components of the Cyclone engine. Cyclone Power Technologies Revenue & Distribution StrategyThe Company expects to generate revenues by selling its technology to manufacturers under licensing agreements. It has already negotiated a licensing agreement with Advent Power Systems, Inc., giving that company exclusive rights to pursue commercial applications for Cyclone’s Green Revolution Engine with the US Postal Service and for generator applications with the US military. The Company also is in discussions with generator manufacturers, lawn equipment manufacturers, and automobile and engine manufacturers.Cyclone Power Technologies Competative AnalysisThe Company is not aware of any direct competitors in the “green revolution” engine segment. However, there are several other engine manufacturers who may be considered indirect competitors:Cyclone Power Technologies Finanacial AnalysisCyclone Power Technologies was still in the process of refining its technology last year and did not generate revenues in FY 2006. Future revenues will come from royalty income and licensing fees relating to its proprietary technology.The Company has already negotiated a licensing agreement with Advent Technologies potentially worth $1 million upfront and 10% royalties and will focus in the second half of 2007 and in 2008 on commercializing its technology and securing licensing agreements across multiple industries. We anticipate the Company may generate revenues from royalties and licensing fees approaching $4 million in FY 2008 and project revenues increasing to a $12 million range in FY 2009 and $20 million by FY 2010. Assuming FY 2008 revenues of FY 2008, we expect the Company to reach operating breakeven in the first quarter of FY 2009. Million in financing from its founders, angel investors and private equity. The Company will likely need to raise additional capital estimated at between $5 million and $7 million in FY 2007 and FY 2008 to implement its business plan and commercialize its technology. It expects to raise capital through private placements of equity. Cyclone Power Technologies Valuation AnalysisCyclone Power Technologies’ more mature peers in the engine manufacturing segment trade at Price/Sales multiples ranging around one time revenues. These companies have been growing in line with the market’s 5% annual growth. As a technology innovator starting from a very modest sales base, we expect Cyclone Power Technologies to grow several times faster than its industry peers.We expect the Company to generate revenues of approximately $4 million in FY 2008 and to triple revenues in the following year. As a result, we believe a much higher valuation, comparable to what is typical for a technology company, is warranted and suggest a target price for these shares based on a 25 times multiple of projected FY 2008 revenues, suggesting a $100 million market capitalization and a $1.82 share price target. We caution investors that, although Cyclone Power Technologies has impressive growth potential, there are many risks and uncertainties associated with commercializing its technologies. As a result, we advice investors to carefully consider the risk factors outlined in the Risk Analysis section of this report. Cyclone Power Technologies Risk AnalysisTechnology RiskThe Company is in the early stages of commercializing its technology and is subjecting its engine to various bench testings and trials. If the engine preforms poorly in tests or if a competitor introduces a similar product with superior performance features, Cyclone Power Technologies may be unsuccessful in commercializing its engine. Market Acceptance The product’s success also depends on its acceptance by consumers and manufacturers who purchase licensing rights for commercial and industrial applications. Because the technology is new, Cyclone Power Technologies must educate potential customers about the advantages of its product. Significant marketing expenditures may be required to support initial product sales and persuade customers that the Cyclone Engine has cost and environmental advantages compared to traditional IC engines. Environment Legislation Although the Cyclone engine is more environmentally-friendly than IC engines, the risk exists that more stringent environmental regulations could adversely impact the Company by requiring a redesign of the engine. Source : Beacon Equity Research
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