History of the Mark 5 engine production
Phoenix Power ordered the first two Mark 5s that Harry tried to build. Because of all the PRs announcing a continuous stream of Great Things Coming, it took some careful reading of the SEC filings to actually figure out what happened and what didn't.
The pieces fit together like this:
July 30, 2009 (source: SEC filings Exhibit 10.8)
- License agreement with Phoenix for used oil generation. Includes:
1) $150K payment to Cyclone for license immediately
2) $150K payment when Mark 5 is measured at 60% rated output on dyno, expected in 3-5 months
3) $100K payment when two Mark 5s delivered to Phoenix
- Delivery of the Mark 5s in 6 months (i.e., January 31, 2010)
- Late delivery penalties of $25K in stock per month starting after 9 months, with a maximum of $400K
- Remaining $250K to be held in escrow by a lawyer until Cyclone meets milestones 2 and 3.
- Cyclone books this $250K as Deferred Earnings, and it becomes Income only when milestones met.
- Cyclone also provides stock warrants to Phoenix
(Note: the Q3, 2013 10-Q says that only then was the first $150K payment converted from Deferred Revenue to Income, so it also must have been held in escrow.)
March 20, 2010 (SEC Exhibit 10.8.1)
- Amendment to agreement
- Phoenix had paid in $225K and agrees to pay in remaining $175K by September 1, 2010
- If Cyclone delivers the two Mark 5s before then, Phoenix pays balance immediately
- Milestone 2 and 3 not met yet.
October 18, 2010 (SEC Exhibit 10.8.2)
- Second amendment to agreement
- Mark 5 delivery deadline before late penalties start is extended by Phoenix
- In return, Cyclone now required to deliver 2 WHE-25s that meet certain performance requirements by a deadline.
Q2, 2012 (SEC 10-Q)
- Agreement changed January 1, 2012 to substitute the WHE 25s for the Mark 5s, but Cyclone is still required to deliver the Mark 5s at a later date.
- For the year ended December 31, 2011, Cyclone paid Phoenix $350K in stock for late delivery
- In Q1 2012, Cyclone paid Phoenix $50K in stock for late delivery. This was the maximum of $400K in late delivery penalties in the original agreement.
- In March 2012, Cyclone paid Phoenix $380K in stock to cancel Phoenix's stock warrants.
Q3, 2012 (SEC 10-Q)
- Ran the Phoenix boiler and WHE 25 for the first time together and generated 7kW.
- Claim "Over the following several months, the two partners will be optimizing the performance and durability of this system, with the goal of commencing pilot programs and limited run production in 2013. "
Q4, 2012 (SEC 10-K), Q1, 2013 (SEC 10-Q)
- Repeats above sentence about expected production in 2013.
Q2, 2013 (SEC 10-Q)
- Above sentence deleted, but rest of paragraph about Phoenix WHE remains. (Later reports also have the paragraph without this sentence.)
September 30, 2013 (SEC Exhibit 10.25)
- Agreement with Phoenix is rewritten. New milestones are:
1) $150K for completion of Phase 1 of project between Cyclone and Ohio State University, consisting of analysis of Cyclone WHE and design and construction of OSU WHE. The $150K payment made in 2009 was applied to this milestone.
2) $150K when the OSU WHE completes 200 hours operation under load.
3) $100K upon delivery of 10 working prototype WHEs to Phoenix (each having passed the 200 hour test).
- Phoenix no longer wants any Mark 5s.
Q3, 2013 (SEC 10-Q)
- Cyclone books $150K from Deferred Revenue to Income for completing milestone 1 of the new agreement.
- The related Cost of Goods Sold was $133K.
Q4, 2013 (SEC 10-K)
- Cost of Goods Sold for Phoenix contract was $184,464
====Summary====
- Phoenix put $400K into escrow starting in 2009. They paid out $150K after OSU redesigned the WHE. $250K is still in escrow.
- Phoenix received $400K in stock for late delivery penalties and $380K in stock for their warrants. If they sold this stock when they got it, it would have been very profitable for them.
- The Mark 5 never met any contract performance milestones.
- The Cyclone WHE-25 design never met any contract performance milestones.
- Phoenix is done with Cyclone engineering.
The Mark 5 was originally promised for January 31, 2010 delivery. Although Cyclone stopped working on it for Phoenix by September 2013, Cyclone has been working on the Mark 5 for delivery to Combilift since 2011. This now puts the Mark 5 four years and nine months behind its promised delivery.
(About the time Phoenix ordered two Mark 5s, Great Wall paid some $62K for the PLANS to the Mark 5, with the idea they would manufacturer them for China. I wonder if Harry told them he himself hadn't yet tried to build a Mark 5 from those plans?)
The Cost of Goods Sold for the Phoenix contract in 2013 was $184,464. This appears to be the money Cyclone paid to OSU.
It sure looks like Phoenix was the driver in this deal. It could be they demanded WHE become a subsidiary headed by Chris Nelson so they wouldn't have to deal with Harry Schoell any more. They must have put in the 2013 contract revision that the engineering be moved from Harry to OSU. Harry's ego sure wouldn't have allowed that to happen voluntarily.
The original Phoenix plan for the "Phoenix 40" generator using a Mark 5 made a lot more economic sense than using a WHE. The potential efficiency of the Mark 5 (assuming it worked) would be about 4 times that of the WHE. Customers would have much better payback and would be more likely to buy the Phoenix equipment. Given the fact that Phoenix no longer even wants a Mark 5, they obviously don't believe it will ever work.
Phoenix has already made so much money from the late penalties and warrants that the $150K they've spent was a great investment. They won't pay more until the OSU WHE survives 200 hours of testing, and the next 10 prototypes have an engineering design life of at least 5000 hours. If that happens, Phoenix can make money selling them. If it doesn't happen, they walk away from the deal with the existing profits.
But the bigger picture is that the people inside Cyclone know the Mark 5 is seriously flawed, and have decided to keep quiet.
AI
