Note 1:
Basis of presentation
The interim unaudited financial statements presented herein have
been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and for the three
and nine month periods ended September 30, 2012 and 2011 include the financial statements of AlumiFuel Power Corporation (the “Company”)
and its subsidiaries HPI Partners, LLC (“HPI”), AlumiFuel Power, Inc. (“API”), AlumiFuel Power Technologies,
Inc. ("APTI") and 76% owned subsidiary AlumiFuel Power International, Inc. ("AFPI").
Certain information and footnote disclosures
normally included in unaudited financial statements prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. All of the intercompany accounts have been eliminated in consolidation.
The interim unaudited financial statements should be read in conjunction with the Company’s
annual financial statements for the year ended December 31, 2011, notes and accounting policies thereto included in the Company’s
Annual Report on Form 10-K.
In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) which are necessary to provide a fair presentation of operating results for the interim periods presented
have been made. The results of operations for the periods presented are not necessarily indicative of the results to be expected
for the year.
The accompanying financial statements have been
prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal
course of business. As shown in the accompanying financial statements, the Company had minimal revenue during the nine months ended
September 30, 2012, and has an accumulated deficit of $21,061,599 from its inception through that date. These factors, among others,
may indicate that the Company will be unable to continue as a going concern for a reasonable period of time.
Interim
financial data presented herein are unaudited.
Formation of AlumiFuel Power International,
Inc.
In February 2010,
the Company formed its subsidiary, AFPI. In connection with the formation of the AFPI, the Company and AFPI executed a License
Agreement through which AFPI received certain international marketing rights and the rights to utilize certain intellectual property
from the Company for exploitation in countries and territories outside of North America in exchange for 25,000,000 shares of the
Company's $0.001 par value common stock. In addition, the Company purchased 15,000,000 shares of AFPI common stock at $0.01 per
share. On July 31, 2011, the Company and AFPI executed a Patent Purchase Agreement through which the Company sold AFPI the international
patent rights to certain of the Company's intellectual property. In exchange for the sale of these rights, the Company received
7,500,000 shares of AFPI common stock valued at $10,275,000, the market value of the stock on the Deutsche Börse Frankfurt
Stock Exchange on the agreement date.
As of December 31, 2011, AFPI had issued a total of
13,911,864 shares of its common stock in the private placements, warrant exercises, stock issued to consultants and stock issued
to officers and directors in exchange for fees. As a result, the total number of AFPI shares outstanding at December 31, 2011 and
September 30, 2012 was 62,411,864.
During the nine month period ended September 30,
2012, the Company sold a total of 890,000 shares of AFPI to a private investors for a total of Euro 47,300 or approximately $62,300
and recorded expense on the transfer of 3,000 shares to a consultant valued at $1,383 which is reflected on the statements of changes
in stockholders' deficit. In addition, the Company purchased 15,378 shares at a cost of $23,000. As a result, the Company owned
46,484,813 shares of AFPI common stock at September 30, 2012. We maintain a custody account for our cash and securities in Germany
that had a cash balance of $4,425 at September 30, 2012 and is reflected as Cash on our balance sheet.
F-6
The Deutsche Börse Exchange recently announced
the closing in December 2012 of the First Quotation Board, the exchange on which AFPI's common stock currently trades. The Company
is exploring its options with respect to qualifying for the Entry Standard level of the Deutsche Börse, which has higher entry
and trading standards. There is no assurance that AFPI will qualify for or be successful in listing on the Entry Standard. Accordingly,
the Company is also exploring the feasibility of listing AFPI's common stock one or more foreign junior stock exchanges should
listing on the Deutsche Börse not be available.
The value of all shares of AFPI held by the Company
have been eliminated on consolidation of the financial statements at September 30, 2012 as intercompany accounts with 15,927,051
held by shareholders other than the Company representing 25.5% of the outstanding common shares of AFPI as of that date. This represents
a non-controlling interest in AFPI that totaled $2,514,150 based on AFPI's outstanding total equity of $9,851,967 at September
30, 2012. In addition, $29,689 in the net loss of AFPI of $116,341 for the nine month period ended September 30, 2012 has been
attributed to the non-controlling interest of those stockholders.
Formation of AlumiFuel Power Technologies,
Inc.
In December 2011, we formed a new wholly owned
subsidiary, AlumiFuel Power Technologies, Inc. ("APTI"), but didn't begin significant operations until February 2012.
APTI was formed as a separate entity to leverage the Company's hydrogen generation technology to take advantage of potential complimentary
technologies.
Note 2:
Summary of Significant Accounting
Policies
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid securities with original
maturities of three months or less when acquired to be cash equivalents. Cash equivalents at September 30, 2012 were $-0-.
Stock-based Compensation
The Company has certain stock
option plans approved by its stockholders, and also grants options and warrants to consultants outside of its stock option plan
pursuant to individual agreements.
The Company accounts for compensation expense for its stock-based
employee compensation plans and issuances of options and warrants to consultants in accordance with ASC Topic 718, formerly known
as SFAS No. 123R "Share Based Payment" which replaced SFAS No. 123, "Accounting for Stock-Based Compensation"
(“SFAS No. 123”) and supersedes Opinion No. 25 of the Accounting Principles Board, "Accounting for Stock Issued
to Employees" (APB 25). The Company has elected the modified-prospective method, under which prior periods are not revised
for comparative purposes. See Note 5. Capital Stock for further information on the Company's stock options plans and other warrant/option
issuances.
F-7
Debt Issue Costs
The costs related to the issuance of debt are capitalized and amortized
to interest expense using the straight-line method over the lives of the related debt. The straight-line method results in amortization
that is not materially different from that calculated under the effective interest method.
Financial Instruments
At September 30, 2012, the fair value of the Company’s financial
instruments approximate their carrying value based on their terms and interest rates.
Loss per Common Share
Loss per share of common stock
is computed based on the weighted average number of common shares outstanding during the period. Stock options, warrants, and common
stock underlying convertible promissory notes are not considered in the calculations for the periods ended September 30, 2012 and
September 30, 2011, as the impact of the potential common shares, which totaled approximately 4,675,000,000 (September 30, 2012)
and 221,179,000 (September 30, 2011), would be anti-dilutive and decrease loss per share. Therefore, diluted loss per share presented
for the three and nine month periods ended September 30, 2012 and September 30, 2011 is equal to basic loss per share.
Accounting for obligations and instruments potentially settled
in the Company’s common stock
In connection with any obligations and instruments potentially to
be settled in the Company's stock, the Company accounts for the instruments in accordance with ASC Topic 815, "Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company’s Own Stock"
.
This issue
addresses the initial balance sheet classification and measurement of contracts that
are indexed to, and potentially settled
in, the Company's stock.
Under this pronouncement, contracts are initially classified as equity or as either assets or liabilities,
depending on the situation. All contracts are initially measured at fair value and subsequently
accounted for based on the
then current classification. Contracts initially classified as equity do not recognize subsequent changes in fair value as long
as the contracts continue to be classified as
equity. For contracts classified as assets or liabilities, the Company reports
changes in fair value in earnings and discloses these changes in the financial statements as long as the contracts remain
classified
as assets or liabilities. If contracts classified as assets or liabilities are ultimately settled in shares, any previously reported
gains or losses on those contracts continue to be included in
earnings. The classification of a contract is reassessed at
each balance sheet date.
Revenue Recognition
Revenues on product sales are recognized upon shipment of the product
to the customer. Payment terms are typically 30 to 60 days net due following order delivery, depending on the customer. Fee revenues
for research and development contracts are typically recognized on milestone dates outlined in the contracts. In instances where
definable dates are not outlined, fee revenue is recognized when received.
Derivative Instruments
In connection with the issuances of equity instruments or debt, the
Company may issue options or warrants to purchase common stock. In certain circumstances, these options or warrants may be classified
as liabilities, rather than as equity. In addition, the equity instrument or debt may contain embedded derivative instruments,
such as conversion options or listing requirements, which in certain circumstances may be required to be bifurcated from the associated
host instrument and accounted for separately as a derivative liability instrument. The Company accounts for derivative instruments
under the provisions of ASC Topic 815, “Derivatives and Hedging”, formerly known as, SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities".
F-8
Recently issued accounting pronouncements
In June 2011, the FASB issued ASU 2011-05 to
require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive
income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements. ASU 2011-05
eliminates the option to present components of other comprehensive income as part of the statement of equity. ASU 2011-05
will be effective for the Company beginning February 1, 2012, and the Company will be required to apply it retrospectively. The
adoption of this standard may only impact the presentation of our financial statements and will have no impact on the reported
results.
In May 2011, the FASB issued new authoritative
guidance to provide a consistent definition of fair value and ensure that fair value measurements and disclosure requirements are
similar between GAAP and International Financial Reporting Standards. This guidance changes certain fair value measurement principles
and enhances the disclosure requirements for fair value measurements. This guidance is effective for interim and annual periods
beginning after December 15, 2011 and is applied prospectively. The Company does not expect that the adoption of this guidance
will have a material impact on its financial statements.
Note 3:
Related Party
Related Party Accounts Payable
The Company's president and treasurer accrue a monthly management
fee from the Company of $8,000 and 2,000 and from AFPI of $7,500 and $3,500, respectively, for their services as managers. This
amount totaled $189,000 for the nine month period ended September 30, 2012. As of September 30, 2012, the Company owed $176,293
to its officers for management services.
In September 2009, the Company's board directors authorized a bonus
program for the Company's officers related to their efforts raising capital to fund the Company's operations. Accordingly, the
Company's president and secretary are eligible to receive a bonus based on 50% of the traditional "Lehman Formula" whereby
they will receive 2.5% of the total proceeds of the first $1,000,000 in capital raised by the Company, 2.0% of the next $1,000,000,
1.5% of the next $1,000,000, 1% of the next $1,000,000 and .5% of any proceeds above $4,000,000. The amount is capped at $150,000
per fiscal year. During the nine month period ended September 30, 2012, the Company expensed $3,360 under this bonus plan, and
of that $834 remained unpaid at that date.
API and/or AFTI pay a management fee of $6,500 per month to a company
owned by the Company’s officers for services related to their bookkeeping, accounting and corporate governance functions.
For the nine months ended September 30, 2012, these management fees totaled $58,500. As of September 30, 2012, the Company owed
$49,950 in accrued fees and related expenses.
The Company rents office space, including the use of certain office
machines, phone systems and long distance fees, from a company owned by its officers at the rate of $1,200 per month, based on
the amount of space occupied by the Company and use of the office equipment and services. Rent expense totaled $10,800 for the
nine months ended September 30, 2012.
Accounts payable to related parties consisted of the following at
September 30, 2012:
Management fees, rent and bonus payable to officers
|
$
|
228,460
|
Accrued expenses payable to subsidiary officer
|
|
19,276
|
|
Total accounts payable, related party
|
$
|
247,736
|
F-9
Related Party Notes Payable
AlumiFuel Power Corporation
At September 30, 2012 and 2011, the Company owed $3,055 and $12,888,
respectively, to its president for loans made to it from time-to-time on demand notes with 8% interest. These amounts include $2,200
and $34,300 loaned during the nine month periods ended September 30, 2012 and 2011, respectively, along with payments of $23,129
in principal and $570 in accrued interest during the 2011 period. There was $102 and $370 in accrued interest payable at September
30, 2012 and 2011, respectively.
At both September 30, 2012 and 2011, the Company owed the president
of API $1,511 in loans on demand notes with 8% interest. A payment of $2,988 in principal and $12 in accrued interest was made
during the nine months ended September 30, 2011. As of September 30, 2012 and 2011 there was accrued interest payable of $214 and
$92, respectively.
During the nine month period ended September 30, 2012, the Company's
secretary loaned the Company $2,000 on a demand note with 8% interest. The entire principal balance on this note along with $1
in interest was repaid during the period leaving no balance due.
At September 30 2012 and 2011, the Company owed $303 and $6,200,
respectively, to a company owned by its president on demand notes with 8% interest. These amounts include $18,550 and $92,500 loaned
during the nine month periods ended September 30, 2012 and 2011, respectively, along with payments of $18,365 in principal and
$185 in accrued interest during the 2012 period and $25,646 in principal and $2,354 in interest during the 2011 period. There was
$1 and $49 in accrued interest payable at September 30, 2012 and 2011, respectively.
At September 30 2012 and 2011, the Company owed $5,435 and $41,935,
respectively, to a company affiliated with its Secretary on demand notes with 8% interest. These amounts include $4,500 and $40,135
loaned during the nine month periods ended September 30, 2012 and 2011, respectively. There was $517 and $331 in accrued interest
payable at September 30, 2012 and 2011, respectively.
At both September 30, 2012 and 2011, the Company owed $2,165 in principal
on certain promissory notes issued to a partnership affiliated with the Company’s president with interest rate of 8% and
due on demand. As of September 30, 2012 and 2011, the Company owed $412 and $237, respectively, in accrued interest on these notes.
At both September 30, 2012 and 2011, the Company owed a partnership
affiliated with its president and secretary $5,000 on a note with an interest rate of 8% per annum and due on demand. As of both
September 30, 2012 and 2011, $5,000 in principal with $1,388 (2012) and $986 (2011) in accrued interest was payable at those dates.
At September 30, 2012 and 2012, the Company owed $869 and $1,268,
respectively, to a company owned by the Company's officers on demand notes with an interest rate of 8%. These amounts include $15,940
and $6,500 loaned during the nine month periods ended September 30, 2012 and 2011, respectively, along with payments of $16,349
in principal and $231 in accrued interest during the 2012 period and $5,433 in principal and $102 in interest during the 2011 period.
There was $6 and $1 in accrued interest payable at September 30, 2012 and 2011, respectively.
At September 30, 2012 and 2011, the Company owed $11,008 and $40,647,
respectively, to a corporation affiliated with the Company's officers on demand notes with interest at 8%. The 2011 amount included
$28,600 loaned in the nine month period ended September 30, 2011. These amounts include payments of $7,121 in principal and $526
in accrued interest during the 2012 period and $7,743 in principal and $997 in interest during the 2011 period. There was $947
and $527 in accrued interest payable on these notes at September 30, 2012 and 2011, respectively.
F-10
At both September 30, 2012 and 2011, the Company owed $350 to a corporation
affiliated with the Company's officers on demand notes with an interest rate of 8%. During the nine month period ended September
30, 2011, this company loaned $29,850 to the Company. These notes carry an interest rate of 8% and are due on demand. During the
quarter ended September 30, 2011, $29,500 in principal of these notes was converted to 29,500 shares of our Series B Preferred
Stock. No further loans or payments were made on these notes after September 30, 2011. There was $272 and $244 in accrued interest
payable on these notes at September 30, 2012 and 2011, respectively.
During the nine month period ended September 30, 2012, a corporation
owned by the Company's secretary loaned the Company a total of $9,270 in various demand notes with interest of 8%. During the nine
month period ended September 30, 2012 a total of $9,270 in principal and $6 in interest was repaid leaving an interest balance
due at September 30, 2012 of $2.
At September 30, 2012 and 2011, the Company owed $2,853 and $17,300,
respectively, to an affiliate of the Company's president on notes carrying an interest rate of 8% per annum and due on demand.
No additional loans or payments were made on these notes in 2012. During the nine month period ended September 30, 2011, the noteholder
sold the principal balance on $29,616 of these notes to an unaffiliated third party at which time the Company agreed to reissue
new convertible notes for that amount. Also during the nine month period ended September 30, 2011, $17,300 in additional loans
were received from this entity. There was $197 and $2,428 in accrued interest payable on these notes at September 30, 2012 and
2011, respectively.
At September 30, 2012 and 2011, the Company owed $0 and $18,500 to
an affiliate of the Company's president on notes due on demand at 8% interest. During the nine month period ended September 30,
2011, this entity sold the principal balance on $25,000 of these notes to an unaffiliated third party at which time the Company
agreed to reissue new convertible notes for that amount. During the nine month period ended September 30, 2011, $18,500 in additional
loans were received from this entity. There was $1,829 in accrued interest payable on these notes at both September 30, 2012 and
2011.
During the nine months ended September 30, 2011, a corporation affiliated
with the Company's officers loaned $20,700 to the Company. These loans had an interest rate of 8% and were due on demand. The entire
balance of these notes totaling $20,700 was repaid during the nine month period ended September 30, 2011 leaving an interest balance
due of $536 on these notes at both September 30, 2012 and 2011.
12.
HPI Partners, LLC
In 2009, various notes issued by HPI were converted
to equity by its officers. Following those conversions, $235 in interest remained due and payable, which was outstanding at both
September 30, 2012 and 2011.
Total
Total notes and interest payable to related parties consisted of
the following at September 30, 2012:
Notes payable to officers; interest at 8% and due on demand
|
$
|
4,566
|
Notes payable to affiliates of Company officers; interest at 8% and due on demand
|
|
27,983
|
|
Notes payable, related party
|
|
32,549
|
Interest payable related party
|
|
6,659
|
|
Total principal and interest payable, related party
|
$
|
39,208
|
F-11
Note 4:
Notes Payable
AlumiFuel Power Corporation
At September 30, 2012 and 2011, the Company owed $254,350 and $51,675,
respectively, to an unaffiliated trust at an interest rate of 8% and due on demand. During the nine months ended September 30,
2012, the trust loaned the Company $281,550 and sold $33,150 in principal on these notes to an unaffiliated third party that converted
that balance to common stock of the Company. Please see Note 9 Capital Stock below for further information on this transaction.
During the nine month period ended September 30, 2011, the trust made $15,525 in additional loans on these notes. The Company made
payments on these notes during the nine month period ended September 30, 2012 totaling $3,785 in principal and $915 in accrued
interest with $1,460 in accrued interest paid during the same period in 2011. During the nine month period ended September 30,
2011, $42,849 of these notes were converted to 9,020,935 shares of our common stock. There was $6,356 and $10,003 in accrued interest
payable on these notes at September 30, 2012 and 2011, respectively.
At September 30, 2012 and 2011, the Company owed $32,732 and $20,458,
respectively, to an unaffiliated third party with interest payable at 8% and due on demand. During the nine month period ended
September 30, 2012, no payments of principal or interest were made on these notes. During the nine month period ended September
30, 2011, $37,150 in additional loans were received from this entity and the entity sold the principal balance on $33,250 of these
notes to an unaffiliated third party at which time the Company agreed to reissue new convertible notes for that amount. There was
$2,299 and $2,762 in accrued interest payable on these notes at September 30, 2012 and 2011, respectively.
At September 30, 2012 the Company owed an unaffiliated third party
$26,000. This note is due on demand and bears interest at 8% per annum. The entire principal balance of $26,000 and accrued interest
of $1,613 remained outstanding at September 30, 2012.
During the nine month period ended September 30, 2012, an unaffiliated
third party loaned us a total of $26,440. This includes one note due on April 1, 2012 that carries an interest rate of 60% per
annum and another note for $13,440 with an interest rate of 36%. As of September 30, 2012, the entire $26,440 balance of these
notes were due with $4,332 in accrued interest payable.
During the nine month period ended September 30, 2012, an unaffiliated
third party loaned us $6,000 on a demand note with 8% interest. The entire principal balance of $6,000 with $345 in unpaid interest
remained payable on these notes at September 30, 2012.
During the year ended December 31, 2010 a note payable in the amount
of $30,000 was issued and repaid to an unaffiliated third party leaving an interest balance due of $57. This amount remained unpaid
as of both September 30, 2012 and 2011.
AlumiFuel Power, Inc.
In November and December 2011, the API issued three promissory
notes payable to an unaffiliated third party for a total of $60,000 in accounts receivable financing. These notes were due on
or before April 1, 2012 accrued loan funding and administration fees equal to $20 per $1,000 loaned, which is equates to an
effective interest rate of 24% per annum; payable monthly. These loans were repaid from proceeds received on accounts
receivable related to the sale of the Company's PBIS-2000 portable balloon inflation system and related AlumiFuel cartridge
sales to the United State Air Force. A total of $2,400 in funding and administration fees were paid during the nine months
ended September 30, 2012. As of September 30, 2012, the entire principal balance had been repaid but $3,450 in unpaid
administration fees were due and payable.
F-12
AlumiFuel Power International, Inc.
In February 2011, an unaffiliated third party
loaned the Company $75,000. This note called for a payment of $50,000 in thirty days with a balance due no later than 90 days from
its issuance and carries and interest rate of 12% per annum. The $50,000 was repaid during the quarter ended June 30, 2011. No
further payments have been made on this note leaving a balance due at both September 30, 2012 and 2011 of $25,000 with interest
payable of $5,030 (2012) and $2,023 (2011).
During the quarter ended March 31, 2012, $26,100
in accrued interest payable to an unaffiliated third party was converted to a convertible promissory note leaving an interest balance
due on September 30, 2012 of $5.
HPI Partners, LLC
In 2009, various notes issued by HPI were converted
to equity by third parties. Following those conversions, $647 in interest remained due and payable, which was outstanding at both
September 30, 2012 and 2011.
Total
Notes and interest payable to others consisted of the following at
September 30, 2012:
No
tes
payable, non-affiliates; interest at 8% and due on demand
|
$
|
319,082
|
Notes
payable, non-affiliates; interest at 60% and due on demand
|
|
13,000
|
Notes
payable, non-affiliates; interest at 36% and due on demand
|
|
13,440
|
Notes
payable, non-affiliates; interest at 12% and due on demand
|
|
25,000
|
|
Notes payable
|
|
370,522
|
Interest
payable, non-affiliates
|
|
24,134
|
|
Total principal and
interest payable, other
|
$
|
394,656
|
Certain of our demand promissory notes contain
provisions for conversion to common stock at market price on the date of conversion.
AlumiFuel Power Corporation Convertible
Promissory Notes and Debentures
Convertible Notes and Debentures with Embedded Derivatives:
From time-to-time, we issue convertible promissory notes and
debentures with conversion features that we have determined represent an embedded derivative as they are convertible into a variable
number of shares upon conversion. Accordingly, these notes are not considered to be conventional debt under ASC 815 and the embedded
conversion feature must be bifurcated from the debt host and accounted for as a derivative liability. The Company believes that
the aforementioned embedded derivatives meet the criteria of ASC 815, and should be accounted separately as derivatives with a
corresponding value recorded as a liability. Accordingly, the fair value of these derivative instruments are recorded as a liability
on the consolidated balance sheet with the corresponding amount recorded as a discount to the notes in the period in which they
are issued. Such discount is accreted from the date of issuance to the maturity dates corresponding notes. The change in the fair
value of the liability for derivative contracts is credited to other income (expense) in the consolidated statements of operations
at the end of each quarter. The face amount of the corresponding notes are stripped of their conversion feature due to the accounting
for the conversion feature as a derivative, which is recorded using the residual proceeds to the conversion option attributed to
the debt.
F-13
Convertible Debentures
In September 2009 through January 2010 we issued $435,000 of 6% unsecured
convertible debentures in transactions with private investors (the “Debentures”).
Among other terms of the offering, the Debentures are due in January
2013 (the “Maturity Date”), unless prepayment of the Debentures is required in certain events, as called for in the
agreements. The Debentures are convertible at a conversion price (the “Conversion Price”) for each share of common
stock equal to 75% of the lowest closing bid price per share (as reported by Bloomberg, LP) of the Company’s common stock
for the twenty (20) trading days immediately preceding the date of conversion. In addition, the Debentures provide for adjustments
in the case of certain corporate actions.
Each Debenture bears interest, in arrears, at six percent (6%) per
annum, payable (i) upon conversion, or (ii) on the Maturity Date, in cash or shares of our common stock at the Conversion Price
with a default interest rate of eighteen percent (18%) per annum.
The Company may redeem the Debentures for an amount now equal to
131%.
Further terms call for the Company to maintain sufficient authorized
shares reserved for issuance under the agreement equal to 300% of the number of shares issuable upon conversion of the debentures.
In addition, if the closing bid price of the Common Stock is below $0.05 on three (3) consecutive trading days, then the Company
shall seek to implement a reverse stock split in a ratio of at least one-for-five. On March 10, 2010, the Company was notified
by the placement that the closing bid price of the Common Stock was below $0.05 on three (3) consecutive trading days and made
demand under the agreement that the Company seek shareholder approval for a reverse stock split. As of the filing of this report,
the Company has not convened a meeting of stockholders to consider the reverse split.
Debt issuance costs totaling $188,810 are being amortized over the
three year terms of the Debentures or such shorter period as the debentures may be outstanding. Accordingly, as the debentures
are converted to common stock, that amount of debt issuance costs attributable to the amounts converted will be accelerated and
expensed as of the applicable conversion dates. As of September 30, 2012, $176,228 of these costs had been expensed as debt issuance
costs.
The beneficial conversion feature (an embedded derivative) included
in the Debentures resulted in an initial debt discount of $435,000 and an initial loss on the valuation of derivative liabilities
of $71,190 for a derivative liability balance of $506,190 at issuance
.
During the nine months ended September 30, 2012, the debenture holders
have converted a total of $99,000 in face value of the debentures to 386,333,333 shares of our common stock, or $0.00025 per share.
As a result of these transactions, the Company recorded a decrease to the derivative liability of $123,929 and as of September
30,2012, the total face value of the Debentures outstanding was $54,500.
The fair value of the Debentures was calculated at September 30,
2012 utilizing the following assumptions:
Fair Value
|
Term
|
Assumed
Conversion
Price
|
Volatility
Percentage
|
Interest
Rate
|
$72,667
|
3 years
|
$0.000075
|
271%
|
0.33%
|
F-14
2011 Convertible Notes
During the year ended December 31, 2011, the Company entered into
four separate note agreements from September through December with an institutional investor for the issuance of a convertible
promissory notes in the aggregate amount of $152,500. These notes were completely repaid as of September 30, 2012. We received
net proceeds from the 2011 Convertible Notes of $142,500 after debt issuance costs of $10,000 paid for lender legal fees. These
debt issuance costs were amortized over the period the Notes were outstanding.
Among other terms, the 2011 Convertible Notes were due on the dates
above and were convertible at a conversion price (the “Conversion Price”) for each share of common stock equal to 50%
of the average of the lowest three trading prices per share of the Company’s common stock for the ten (10) trading days immediately
preceding the date of conversion. The outstanding principal balance the 2011 Convertible Notes carried an interest rate of 8% per
annum, payable in cash or shares of our common stock at the Conversion Price.
The beneficial conversion feature (an embedded derivative) included
in the 2011 Convertible Notes resulted in total initial debt discounts of $142,500 and a total initial loss on the valuation of
derivative liabilities of $83,182 for a derivative liability balance of $235,682 total for their issuances
.
During the nine month period ended September 30, 2012, the note holders converted the entire $152,500 in face value and
$4,700 in accrued interest to 572,043,746 shares of our common stock, or $0.0003 per share. As a result of these transactions,
the entire derivative liability of $235,682 for the converted notes was extinguished as of September 30, 2012.
2012 Convertible Notes
During the nine month period ended September 30, 2012, the Company
entered into four separate note agreements with an institutional investor for the issuance of a convertible promissory notes in
the aggregate amount of $134,000 on the following dates and in the following amounts (together the "2012 Convertible Notes"):
Date of Issue
|
Amount
|
Due Date
|
1/24/12
|
$36,000
|
October 19, 2012
|
3/7/12
|
$33,000
|
December 5, 2012
|
4/12/12
|
$32,500
|
January 16, 2013
|
5/10/12
|
$32,500
|
February 13, 2013
|
Among other terms, the 2012 Convertible Notes are due on the dates
above, unless prepayment is required in certain events, as called for in the agreements. The 2012 Convertible Notes are convertible
at a conversion price (the “Conversion Price”) for each share of common stock equal to 50% of the average of the lowest
three trading prices per share of the Company’s common stock for the ten (10) trading days immediately preceding the date
of conversion. In addition, the 2012 Convertible Notes provide for adjustments for dividends payable other than in shares of common
stock, for reclassification, exchange or substitution of the common stock for another security or securities of the Company or
pursuant to a reorganization, merger, consolidation, or sale of assets, where there is a change in control of the Company.
The outstanding principal balance the 2012 Convertible Notes bear
interest at eight percent (8%) per annum, payable in cash or shares of our common stock at the Conversion Price. Upon the occurrence
of an Event of Default (as defined in the 2012 Convertible Notes), the Company is required to pay interest to the Holder of each
outstanding note at twenty-two percent (22%) per annum and the Holder may at its option declare the 2012 Convertible Notes, together
with all accrued and unpaid interest, to be immediately due and payable.
The Company is able at its option to prepay the 2012 Convertible
Notes beginning ninety-one days following their issuance until 180 days following their issuance in an amount equal to 150% of
the outstanding principal and interest. Further terms called for the Company to maintain sufficient authorized shares reserved
for issuance under the 2012 Convertible Notes.
F-15
We received net proceeds from the 2012 Convertible Notes of $124,000
after debt issuance costs of $10,000 paid for lender legal fees. These debt issuance costs will be amortized over the terms of
the 2012 Convertible Notes or such shorter period as the Notes may be outstanding. Accordingly, as the 2012 Convertible Notes are
converted to common stock prior to their expiration date, that amount of debt issuance costs attributable to the amounts converted
will be accelerated and expensed as of the applicable conversion dates. As of September 30, 2012, $7,289 of these costs had been
expensed as debt issuance costs.
The beneficial conversion feature (an embedded derivative) included
in the 2012 Convertible Notes resulted in total initial debt discounts of $134,000 and a total initial loss on the valuation of
derivative liabilities of $96,167 for a derivative liability balance of $230,167 total for their issuances
.
During the nine months ended September 30, 2012, the debenture holders
converted a total of $8,700 in face value of the debentures to 174,000,000 shares of our common stock, or $0.00005 per share. As
a result of these transactions, the Company recorded a decrease to the derivative liability of $8,640 and as of September 30, 2012,
the total face value of the Debentures outstanding was $125,300.
The fair value of the 2012 Convertible Notes was calculated at each
issue date utilizing the following assumptions:
Issuance
Date
|
Fair Value
|
Term
|
Assumed
Conversion
Price
|
Market Price on
Grant Date
|
Volatility
Percentage
|
Interest
Rate
|
1/24/12
|
$60,000
|
9 months
|
$0.0006
|
$0.0014
|
220%
|
0.09%
|
3/7/12
|
$66,000
|
9 months
|
$0.0005
|
$0.0011
|
133%
|
0.14%
|
4/12/12
|
$66,667
|
9 months
|
$0.00045
|
$0.0014
|
140%
|
0.17%
|
5/10/12
|
$37,500
|
9 months
|
$0.0004
|
$0.0009
|
112%
|
0.17%
|
At September 30, 2012, the Company revalued the derivative liability
balance of the remaining outstanding 2011 Convertible Notes. As a result, for the period from their issuance to September 30, 2012,
the Company has recorded an adjustment and increased the previously recorded liabilities by $10,433 resulting in a derivative liability
balance of $240,600 at September 30, 2012.
The fair value of the Debentures was calculated at September 30,
2012 utilizing the following assumptions:
Fair Value
|
Term
|
Assumed
Conversion
Price
|
Volatility
Percentage
|
Interest
Rate
|
$240,600
|
9 months
|
$0.00005
|
208%
|
0.15%
|
Converted AFPI Notes
In November and December 2011, two holders of certain demand promissory
notes issued by AFPI totaling $125,000 sold them to an unaffiliated third party investor. As part of this transaction, the Company
agreed to amend the terms of the convertible notes for the new holder (the "Converted AFPI Notes"). These notes in the
amounts of $50,000, $50,000 and $25,000 were past due, carry had an effective interest rate of 48% in the case of the two $50,000
notes, and 12% in the case of the $25,000 note. We agreed to allow conversion of the Converted AFPI Notes into shares of our common
stock at a 50% discount to the lowest three trading prices in the ten days prior to conversion. The principal balance on these
notes was $85,000 at December 31, 2011. In addition, in January 2012, we agreed to convert $22,500 in accrued interest on these
notes to a convertible note with the same conversion terms, interest at a rate of 8% and due in 12 months.
F-16
The beneficial conversion feature (an embedded derivative) included
in the Converted AFPI Notes resulted in an initial debt discount of $147,500 and an initial loss on the valuation of derivative
liabilities of $110,133 for a derivative liability balance of $257,633 at issuance
.
.
The fair value of the Converted AFPI Notes was calculated at issue
date utilizing the following assumptions:
Issuance
Date
|
Fair Value
|
Term
|
Assumed
Conversion
Price
|
Market Price on
Grant Date
|
Volatility
Percentage
|
Interest
Rate
|
4/4/2011
|
$58,824
|
3 months
|
$0.0009
|
$0.0021
|
179%
|
0.25%
|
12/1/2011
|
$83,333
|
6 months
|
$0.0006
|
$0.0021
|
199%
|
0.07%
|
12/1/2011
|
$83,333
|
6 months
|
$0.0006
|
$0.0021
|
199%
|
0.07%
|
1/2/12
|
$32,143
|
12 months
|
$0.0007
|
$0.0015
|
226%
|
0.11%
|
During the nine month period ended September 30, 2012, the note holders
converted $104,000 face value of the notes to 516,271,021 shares of our common stock, or $0.0002 per share. As a result of these
transactions, the Company recorded a decrease to the derivative liability of $196,929 for the converted notes and as of September
30, 2012, and the total face value of the Converted AFPI Notes outstanding was $3,500.
At September 30, 2012, the Company revalued the derivative liability
balance of the remaining outstanding Converted AFPI Notes. As a result, for the period from their issuance to September 30, 2012,
the Company has recorded an adjustment and decreased the previously recorded liabilities by $250,633 resulting in a derivative
liability balance of $7,000 at September 30, 2012.
The fair value of the Debentures was calculated at September 30,
2012 utilizing the following assumptions:
Fair Value
|
Term
|
Assumed
Conversion
Price
|
Volatility
Percentage
|
Interest
Rate
|
$7,000
|
12 months
|
$0.0001
|
212%
|
0.17%
|
November 2011 Note
In November 2011, a holder of debt issued by AFPI totaling $52,000
sold that debt to an unaffiliated third party investor. As part of this transaction, the Company agreed to amend the terms of the
debt for the new holder in the form of an amended promissory note (the "November 2011 Note"). The November 2011 Note
matures in November 2012, carries an interest rate of 12% and is convertible into shares of our common stock at a 50% discount
to the lowest trading price in the three days prior to conversion. The Company may prepay the notes at any time they remain outstanding
at 150% of the outstanding principal balance, however, the holder may convert the notes to stock within three days of such notice.
The beneficial conversion feature (an embedded derivative) included
in the November 2011 Note resulted in an initial debt discount of $52,000 and an initial loss on the valuation of derivative liabilities
of $86,667 for a derivative liability balance of $138,667 at issuance
.
During the three month period ended March 31, 2012, the note holders
converted the entire $39,000 face value of the notes to 73,666,667 shares of our common stock, or $0.0005 per share. As a result
of these transactions, the Company recorded a decrease to the derivative liability of $55,714 for these notes and as of September
30, 2012, the total face value of the Debentures outstanding was $-0-.
F-17
January 2012 Convertible Notes
In January 2012 we issued two convertible notes of $25,000 each for
a total of $50,000 to an unaffiliated third party investor. These notes are due six months from issuance, carry interest at 10%
per annum and are convertible at $0.0012 per share. The Company has determined that the conversion feature does not represent an
embedded derivative as the conversion price was known and was not variable making it conventional. The Company determined there
was a beneficial conversion feature related to the January 2012 Convertible Notes based on the difference between the conversion
price of $0.0012 and the market price of the Company’s common stock on the issue dates and recorded as interest expense $4,167
with an offset to additional paid-in capital.
January 2012 Interest Note
In January 2012, we converted a total of $26,100 in interest payable
on $75,000 in notes of the Company and AFPI to a unaffiliated note holder to a convertible note. This note is due in January 2013
and carries an interest rate of 8% per annum. The note is convertible into shares of our common stock at a 50% discount to the
lowest three trading prices in the ten days prior to conversion.
The beneficial conversion feature (an embedded derivative) included
in the January 2012 Interest Note resulted in an initial debt discount of $26,100 and an initial loss on the valuation of derivative
liabilities of $11,186 for a derivative liability balance of $37,286 at issuance
.
The fair value of the Converted AFPI Notes was calculated at issue
date utilizing the following assumptions:
Issuance
Date
|
Fair Value
|
Term
|
Assumed
Conversion
Price
|
Market Price on
Grant Date
|
Volatility
Percentage
|
Interest
Rate
|
1/2/12
|
$37,286
|
12 months
|
$0.0007
|
$0.0014
|
226%
|
0.11%
|
At September 30, 2012, the Company revalued the derivative liability
balance of the remaining outstanding January 2012 Interest Note. As a result, for the period from their issuance to September 30,
2012, the Company has recorded an adjustment and increased the previously recorded liabilities by $14,914 resulting in a derivative
liability balance of $52,200 at September 30, 2012.
The fair value of the convertible note was calculated at September
30, 2012 utilizing the following assumptions:
Fair Value
|
Term
|
Assumed
Conversion
Price
|
Volatility
Percentage
|
Interest
Rate
|
$52,200
|
6 months
|
$0.0001
|
212%
|
0.17%
|
September 2012 Convertible Note
In September 2012 we issued $35,000 of 6% unsecured convertible debenture
with a private investor (the “Sept Debenture”).
Among other terms of the offering, the Sept Debenture is due in September
2015 (the “Maturity Date”), unless prepayment of the Sept Debenture is required in certain events, as called for in
the agreements. The Sept Debenture is convertible at a conversion price (the “Conversion Price”) for each share of
common stock equal to 50% of the lowest closing bid price per share (as reported by Bloomberg, LP) of the Company’s common
stock for the twenty (20) trading days immediately preceding the date of conversion. In addition, the Sept Debenture provides for
adjustments in the case of certain corporate actions.
F-18
The Sept Debenture bears interest, in arrears, at six percent (6%)
per annum, payable (i) upon conversion, or (ii) on the Maturity Date, in cash or shares of our common stock at the Conversion Price
with a default interest rate of eighteen percent (18%) per annum. The Company may redeem the Sept Debenture for an amount equal
to 120% within 90 days of issuance, 130% between 91 and 120 days of issuance, and 140% if 121 days or more after issuance. Further
terms call for the Company to maintain sufficient authorized shares reserved for issuance under the agreement equal to 300% of
the number of shares issuable upon conversion of the Sept Debenture.
Debt issuance costs totaling $11,500 are being amortized over the
three year term of the Sept Debenture or such shorter period as the Sept Debenture may be outstanding. Accordingly, as the Sept
Debenture is converted to common stock, that amount of debt issuance costs attributable to the amounts converted will be accelerated
and expensed as of the applicable conversion dates. As of September 30, 2012, none of these costs had been expensed as debt issuance
costs as the Sept Debenture was issued on September 27, 2012 and only three days had elapsed from its issuance to the end of the
quarter.
The beneficial conversion feature (an embedded derivative) included
in the Sept Debenture resulted in an initial debt discount of $35,000 and an initial loss on the valuation of derivative liabilities
of $35,000 for a derivative liability balance of $70,000 at issuance
.
The fair value of the Converted AFPI Notes was calculated at issue
date utilizing the following assumptions:
Issuance
Date
|
Fair Value
|
Term
|
Assumed
Conversion
Price
|
Market Price on
Grant Date
|
Volatility
Percentage
|
Interest
Rate
|
9/27/12
|
$70,000
|
3 years
|
$0.0001
|
$0.0002
|
271%
|
0.33%
|
At September 30, 2012, the Company revalued the derivative liability
balance of the remaining outstanding January 2012 Interest Note. As a result, for the period from their issuance to September 30,
2012, the Company has recorded an adjustment and increased the previously recorded liabilities by $14,914 resulting in a derivative
liability balance of $52,200 at September 30, 2012.
The fair value of the convertible note was calculated at September
30, 2012 utilizing the following assumptions:
Fair Value
|
Term
|
Assumed
Conversion
Price
|
Volatility
Percentage
|
Interest
Rate
|
$70,000
|
3 years
|
$0.0001
|
271%
|
0.33%
|
F-19
Total
Total debentures and convertible notes and interest payable consisted
of the following at September 30, 2012:
Short-term liabilities:
|
|
|
|
|
|
|
|
Convertible Debentures; non-affiliates; interest at 6% and due three years from issue date; outstanding principal of $54,500 face value; net of discount of $20,888
|
|
$
|
33,612
|
2012 Convertible Notes; non-affiliate, interest at 8%; due May 2012; $125,300 face value net of discount of $35,651
|
|
|
89,649
|
Converted AFPI Notes; non-affiliate; interest at 8%; currently due; $3,500 face value net of discount of $875
|
|
|
2,625
|
January 2012 Convertible Notes; non-affiliate; interest at 8%; due January 2013
|
|
|
50,000
|
January 2012 Interest Note; non-affiliate; interest at 8%; due January 2013; $26,100 face value net of discount of $6,525
|
|
|
19,575
|
|
|
|
|
|
Total short-term convertible notes
|
|
$
|
195,461
|
Interest payable, short-term convertible notes
|
|
|
63,250
|
|
Total principal and interest payable, short-term convertible notes
|
|
$
|
258,710
|
Long-term liabilities:
|
|
|
|
|
|
|
|
Convertible debentures; non-affiliates; interest at 6% and due September 2015; outstanding principal of $35,000 face value; net of discount of $35,000
|
|
$
|
-0-
|
Interest payable, long-term convertible notes
|
|
|
24
|
|
|
|
|
|
|
Total principal and interest payable, long-term convertible notes
|
|
$
|
24
|
F-20
Note 5:
Notes Receivable
From time-to-time beginning in 2008, the Company
has loaned funds to FastFunds Financial Corporation (“FFFC”), an affiliate in which the Company is a 35% stockholder,
to assist FFFC in payment of its ongoing payment obligations. This amount totaled $307,578 at December 31, 2011. An additional
$8,780 in loans were made during the nine months ended September 30, 2012 Each of these outstanding loans carries an interest rate
of 8% per annum and are due on demand. Management of the Company evaluated the likelihood of payment on these notes and has determined
that an allowance of the entire balance due is appropriate. Accordingly, the Company recorded bad debt expense totaling $307,578
including $8,780 in the nine month period ended September 30, 2012. The Company has allowed for all interest due on these notes
and did not record any interest receivable during the nine month period ended September 30, 2012. During the nine month period
ended September 30, 2012, however, FFFC made interest payments totaling $44,580 which was recorded against interest expense during
the quarter.
As of September 30, 2012, the Company had $8,000
due from an affiliated publicly traded company. This note carries interest at 8% per annum and is due on demand. The entire principal
balance of $8,000 plus $581 in accrued interest remained receivable at September 30, 2012.
Note 6:
Other Expense
Other expense for the three and nine month periods ended September
30, 2012 and 2011 consisted of the following:
|
|
Three months ended September 30, 2012
|
|
Three months ended September 30, 2011
|
|
Nine months ended September 30, 2012
|
|
Nine months ended September 30, 2011
|
General and administrative
|
$
|
39,177
|
$
|
63,111
|
$
|
141,234
|
$
|
206,748
|
Salaries and employee benefits
|
|
52,716
|
|
93,683
|
|
204,114
|
|
300,892
|
Legal and accounting
|
|
9,450
|
|
19,500
|
|
29,088
|
|
75,374
|
Professional services
|
|
16,792
|
|
5,764
|
|
119,803
|
|
49,831
|
|
$
|
118,135
|
$
|
182,058
|
$
|
494,239
|
$
|
632,845
|
Note 7:
Commitments and Contingencies
Payroll Liabilities
Following the formation of API in May 2008, the
HPI hired certain former employees of Hydrogen Power, Inc. and maintained an office in Seattle, Washington for a period of approximately
five months. During that time, the HPI paid wages to these employees without the benefit of a payroll management service. Upon
the HPI’s move from Seattle to Philadelphia, Pennsylvania in October 2008, the Company retained the services of a payroll
management service to handle its payroll functions. As a result, the Company recorded $52,576 in payroll liabilities due from wages
paid to its employees and has increased that amount quarterly for penalties and interest leaving a total due of $95,158 at December
31, 2011. The company recorded additional expense of $11,091 during the nine months ended September 30, 2012 leaving a balance
due of $106,252 as of that date. This amount is included on the balance sheets at September 30, 2012 as “payroll liabilities”.
In addition, the president of API converted $138,462 in wages payable to him to shares of the Company's Series B Preferred Stock
in August 2011. We have recorded a total of $8,629 for payroll liabilities due by the Company on this conversion for total payroll
liabilities of $114,878.
F-21
Office Lease Agreement
Effective on July 1, 2009, API entered into a lease for office and
laboratory space in the University City Science Center in Philadelphia, Pennsylvania. Totaling approximately 2,511 square feet,
the term of the agreement was for five years and six months expiring on December 31, 2014. In addition, the Company was obligated
to pay certain common area maintenance fees that was $1,886 per month during 2011.
In November 2011, the Company determined it could no longer sustain
the significant payments under the lease and vacated the premises. On November 30, 2011, API was notified that a Judgment by Confession
had been entered against it in the Court of Common Pleas Philadelphia County in Philadelphia, Pennsylvania by Wexford-UCSC II,
L.P., its former landlord. The Judgment by Confession assesses total damages of $428,232, which is comprised of the following:
$73,995 for unpaid monthly rent, maintenance fees, interest and late charges for the period through November 30, 2011; attorney's
fees of $5,000; rent and maintenance charges of $10,020 for December 2011; and the value of future rent payments for the period
from January 1, 2012 to December 31, 2014 of $339,217. The complaint alleges a breach of contract and event of default for API
related to this lease. The Company intends to negotiate with the landlord to settle the judgment as expeditiously as possible.
The judgment amount totaling $360,803 in addition to rent amounts already contained in "accounts payable, other" is recorded
as "litigation contingency" on our balance sheets at September 30, 2012.
Capital Leases
In April 2010 we leased a copier for a period of three years at $129
per month. The contract includes a buyout at lease end for $1 at which time we will own the machine. We have capitalized the value
of this machine at January 1, 2011 in the amount of $3,240 based on the then current value with an expected life of 3 years from
the lease date and are depreciating this asset over that period. That amount was included in "property and equipment"
under the assets portion of our balance sheet with the corresponding liability for future payments placed under "capital leases"
in our liabilities. As each monthly payment is made, the amount under capital leases is reduced to reflect the balance due under
the lease. Accordingly, a total of $1,166 was reduced in the "capital leases" account for payments made in the nine month
period ended September 30, 2012, leaving a balance of $648 as of that date.
Note 8:
Income Tax
The Company records its income taxes in accordance with Statement
of Financial Accounting Standard No. 109, “Accounting for Income Taxes”. The Company has incurred significant net operating
losses since inception resulting in a deferred tax asset, which was fully allowed for; therefore, the net benefit and expense resulted
in $-0- income taxes.
Note 9:
Capital Stock
Preferred Stock
During the nine months ended September 30, 2012, 6,250 shares ($6,250)
of our Series B Preferred Stock were converted to 10,593,220 shares of our common stock. We recorded an expense of $8,580 for the
difference in the conversion price ($0.00059) and the market price on the conversion date. This amount is included in "stock
based compensation" on our statements of operations.
Also during the nine month period ended September 30, 2012, we redeemed
a total of 110,857 shares ($110,857) of our Series B Preferred Stock. The Series B Preferred includes a redemption premium of 5%
during the first year of issuance therefore the total redemption amount was $116,400. The balance of $5,543 for the redemption
premium was recorded as interest expense on our statements of operations for the period ended September 30, 2012.
F-22
As a result of these transactions there were 404,055 shares of our
Series B Preferred Stock outstanding at September 30, 2012. There were $37,600 in dividends payable on our Series B Preferred stock
at September 30, 2012, including $25,297 in dividend expense for the nine month period then ended.
Common Stock
During the period nine month period ended September 30, 2012, the
Company issued 10,000,000 shares of common stock in a private placement to unaffiliated investors for total proceeds of $5,000
or $0.0005 per share. We recorded $6,000 in "stock compensation cost" in our statements of operations for the nine months
ended September 30, 2012 to record the beneficial conversion feature relating to the difference between the market price and the
sales price on the date of issuance.
During the nine month period ended September 30, 2012, we issued
a total of 1,722,324,766 shares of our common stock on the conversion of $410,749 in principal and interest on our various convertible
promissory notes. In addition to the face value of the notes, the Company recorded $495,358 in additional expense for the derivative
liability for a total cost to the Company of $597,758 or $0.00035 per share.
During the nine month period ended September 30, 2012, we issued
66,300,000 shares of our common stock to a noteholder upon conversion of $33,150 in promissory notes. In addition to the face value
of the notes, the Company recorded $58,410 in additional expense for the difference between the conversion price ($0.0005) and
the market price on the issuance dates for a total cost to the Company of $91,560 or $0.0014 per share.
In May 2012, we executed a consulting agreement with an unaffiliated
third party through which we paid the consultant 20,000,000 shares of our common stock valued at $20,000 reflecting the market
price on the date of issuance. In addition, we issued three year warrants to purchase up to 30,000,000 shares of our common stock
at exercise prices of $0.0015 (10,000,000 shares), $0.002 (10,000,000 shares) and $0.004 (10,000,000 shares). These warrants were
valued at $25,000 using the Black-Scholes option pricing model. As the consulting agreement carries a six month term, the value
of the shares and warrants totaling $45,000 will be expensed over that six month term. Accordingly, the Company recorded $9,000
in "stock-based compensation" expense in the nine month period ended September 30, 2012.
In May 2012, we issued 60,000,000 shares to three unaffiliated purchasers
of common stock that participated in private placements of our common stock in the previous six months. Due to delays in issuing
the stock to these investors, the Company agreed to lower the purchase price for the shares to $0.003 per share. We recorded a
total of $60,000 as "stock compensation cost" in our statements of operations for the nine months ended September 30,
2012 based on the market value of these shares on the date of issuance.
Warrants
In May 2012, we executed a consulting agreement with an unaffiliated
third party through which we issued three year warrants to purchase up to 30,000,000 shares of our common stock at exercise prices
of $0.0015 (10,000,000 shares), $0.002 (10,000,000 shares) and $0.004 (10,000,000 shares). These warrants were valued at $25,000
using the Black-Scholes option pricing model. As the consulting agreement carries a six month term, the value of the warrants totaling
$25,000 will be expensed over that six month term of the agreement.
In August 2012, the Company issued a total of 150,000,000 warrants
to David Cade, the Chief Executive Officer of APTI, and two consultants upon the condition that each holder agreed to cancel 35,000,000
warrants issued in July 2011 and exercisable at $0.01 per share held by them. Accordingly, the previously issued warrants were
cancelled and a total of 150,000,000 new warrants were issued. These warrants vested immediately, are exercisable for a period
of five years, and are exercisable at $0.002 per share. These shares were valued at $15,000 based upon the Black Scholes option
pricing model, which amount is included in "stock based compensation" in the three and nine month period ended September
30, 2012.
F-23
A summary of the activity of the Company’s outstanding warrants at December 31, 2011 and September 30, 2012 is as follows:
|
|
Warrants
|
|
Weighted-average exercise price
|
|
Weighted-average grant date fair value
|
Outstanding and exercisable at December 31, 2011
|
|
68,253,528
|
|
$ 0.05
|
|
$ 0.05
|
|
|
|
|
|
|
|
Granted
|
|
180,000,000
|
|
0.0021
|
|
0.00044
|
Expired/Cancelled
|
|
60,228,528
|
|
0.059
|
|
0.046
|
Exercised
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
|
Outstanding and exercisable at September 30, 2012
|
|
188,025,000
|
|
$ 0.0024
|
|
$ 0.0004
|
The following table sets forth the exercise price range, number
of shares, weighted average exercise price and remaining contractual lives of the warrants by groups as of September 30, 2012:
Exercise
price range
|
|
Number
of options outstanding
|
|
Weighted-average
exercise price
|
|
Weighted-average
remaining life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.10 to $0.18
|
|
25,000
|
|
0.12
|
|
0.2 years
|
|
|
|
|
|
|
|
$0.01
to $0.01
|
|
8,000,000
|
|
0.01
|
|
4.2
years
|
|
|
|
|
|
|
|
$0.0015
to $0.0004
|
|
180,000,000
|
|
0.0021
|
|
3.4
years
|
|
|
|
|
|
|
|
|
|
188,025,000
|
|
$
0.06
|
|
3.6
years
|
Stock Options
All options outstanding at September 30, 2012 are fully vested and
exercisable. A summary of outstanding stock option balances under the 2005 Stock Incentive Plan and the 2009 Stock Incentive Plan
at December 31, 2011 and at September 30, 2012 is as follows:
2005 Stock Incentive Plan
|
Options
|
|
Weighted-average exercise price
|
|
Weighted-average remaining contractual life (years)
|
|
Aggregate intrinsic value
|
Outstanding at December 31, 2011
|
425,000
|
|
$0.35
|
|
1.00
|
|
$0
|
Options granted
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
Outstanding at
September 30, 2012
|
425,000
|
|
$0.35
|
|
0.25
|
|
$0
|
F-24
2009 Stock Incentive Plan
|
Options
|
|
Weighted-average exercise price
|
|
Weighted-average remaining contractual life (years)
|
|
Aggregate intrinsic value
|
Outstanding at December 31, 2011
|
20,000,000
|
|
$0.075
|
|
2.7
|
|
$0
|
Options granted
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
Outstanding at
September 30, 2012
|
20,000,000
|
|
$0.075
|
|
2.0
|
|
$0
|
Note 10:
Subsequent Events
During the month October 31, 2012, we issued an additional 990,000,000
shares of our common stock upon the conversion of a total of $49,500 principal value of various promissory notes.
Management has determined that there are no further events subsequent
to the balance sheet date that should be disclosed in these financial statements.
F-25