Notes to Consolidated Financial Statements
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization and Basis of Presentation
AlumiFuel Power Corporation (the “Company”)
was incorporated on January 19, 2000 under the laws of the state of Nevada as Organicsoils.com, Inc. The Company operates primarily
through its subsidiaries, AlumiFuel Power, Inc., a Colorado corporation ("API"), AlumiFuel Power Technologies, Inc.,
a Colorado corporation ("APTI") and AlumiFuel Power International, Inc. ("AFPI"), a Canadian corporation. The
Company is a an early production stage alternative energy company producing products that generate hydrogen gas and steam for multiple
niche applications requiring on-site, on-demand fuel sources. Our hydrogen drives fuel cells for back-up, remote, and portable
power, fills inflatable devices such as weather balloons, and can replace costly, hard-to-handle and high pressure K-Cylinders.
Its steam/hydrogen output is also being designed to drive turbine-based underwater propulsion systems and auxiliary power systems.
Our technology has significant differentiators in performance, adaptability, safety and cost-effectiveness in its target market
applications, with no external power required and no toxic chemicals or by-products. AFPI was formed as the international marketing
arm of the Company.
The financial statements contained herein for the
years ended December 31, 2012 and 2011 comprise the consolidated financial statement of the Company and its subsidiaries API, APTI,
AFPI, and HPI Partners, LLC ("HPI").
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
December 31, 2012 was 62,411,864.
During the year ended December 31, 2011, AFPI sold
133,333 shares of its common stock in private placements in exchange for $20,000. AFPI also issued 500,000 shares to a consultant
valued at $50,000 in 2011. The Company sold a total of 139,135 shares of its AFPI on the Deutsche Börse for total proceeds
of $60,268, which is reflected on the statements of changes in stockholders' deficit. As a result, the Company owned 47,360,865
shares of AFPI common stock at December 31, 2011.
During the year ended December 31, 2012, the Company
sold a total of 8,373,271 shares of AFPI in both private and public transactions for total proceeds of Euro 131,461 or approximately
$171,997 and recorded expense on the transfer of 20,048 shares to consultants for fees valued at $7,516, which is reflected on
the statements of changes in stockholders' deficit. In addition, the Company purchased 1,016,978 shares at a cost of $106,001.
As a result, the Company owned 39,984,494 shares of AFPI common stock at December 31, 2012. We maintain a custody account for our
cash and securities in Germany that had a cash balance of $245 at December 31, 2012 and is reflected as Cash on our balance sheet.
In December 2012, the Deutsche Börse Frankfurt
Stock Exchange closed the First Quotation Board, the exchange on which AFPI's common stock traded. The Company is planning to apply
for listing on the GXG Markets during the early part of the second quarter 2013. The Company's application will seek admission
to the GXG Markets' First Quote segment, which is the new European stock exchange catering to early stage growth companies.
The value of all shares of AFPI held by the Company
have been eliminated on consolidation of the financial statements at December 31, 2012 and 2011 as intercompany accounts. At December
31, 2012 there were 22,427,370 shares held by shareholders other than the Company representing 35.9% of the outstanding common
shares of AFPI as of that date. This represents a non-controlling interest in AFPI that totaled $3,526,880 based on AFPI's outstanding
total equity of $9,814,756 at December 31, 2012. In addition, $55,177 in the net loss of AFPI of $153,552 for the year ended December
31, 2012 has been attributed to the non-controlling interest of those stockholders. At December 31, 2011 there were 15,050,99 held
by shareholders other than the Company representing 24.1% of the outstanding common shares of AFPI as of that date. That represented
a non-controlling interest in AFPI that totaled $2,403,918 based on AFPI's outstanding total equity of $9,968,308 at December 31,
2011. In addition, $76,524 in the net loss of AFPI for the year ended December 31, 2011 has been attributed to the non-controlling
interest of those stockholders.
Going Concern
Inherent in the Company’s business are various risks and uncertainties,
including its limited operating history. The Company’s future success will be dependent upon its ability to market its products
including its portable balloon inflation devices including the PBIS-1000 (of which the Company sold three units in 2010) and the
PBIS-2000 (of which the Company delivered one unit to the U.S. Air Force in 2012, which unit the Air Force returned to the Company
in the fourth quarter of 2012 to make certain paid improvements).
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 has incurred operating losses since inception, used significant
cash in support of its operating activities and, based upon current operating levels, requires additional capital or significant
restructuring to sustain its operations for the foreseeable future. These factors, among others, may indicate that the Company
will be unable to continue as a going concern for a reasonable period of time.
The financial statements do not include any adjustments relating
to the recoverability and classification of assets and liabilities that might be necessary should the Company be unable to continue
as a going concern. The Company’s continuation as a going concern is dependent on its ability to raise capital through equity
offerings and debt borrowings to meet its obligations on a timely basis and ultimately to attain profitability through the successful
commercialization of its products.
Principals of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries HPI, API, APTI and AFPI. All intercompany balances and transactions have been eliminated.
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 December 31, 2012 and 2011 were $-0-.
Income Taxes
The Company accounts for income taxes under the provisions of ASC
Topic 740, formerly known as SFAS No. 109, “Accounting for Income Taxes”. ASC Topic 740 requires recognition of
deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between
the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences
are expected to reverse. A valuation allowance for net deferred taxes is provided unless the ability to realize the deferred amount
is judged by management to be more likely than not. The effect on deferred taxes from a change in tax rates is recognized in income
in the period that includes the enactment date. More information on the Company’s income taxes is available in Note 6. Income
Taxes in these financial statements.
The Company has analyzed filing positions in all of the federal
and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions.
The Company has identified its federal tax return and its state tax return in Colorado as “major” tax jurisdictions,
as defined. We are not currently under examination by the Internal Revenue Service or any other jurisdiction.
The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any
adjustments that will result in a material adverse effect on the Company’s financial condition, results of operations, or
cash flow. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740.
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.
Property, equipment and leaseholds
Property, equipment and leaseholds
are stated at cost, and depreciation is provided by use of accelerated and straight-line methods over the estimated useful lives
of the assets. The cost of leasehold improvements is depreciated over the estimated useful life of the assets or the length of
the respective leases, whichever period is shorter. The estimated useful lives of property, equipment and leaseholds are as follows:
Office equipment,
furniture and vehicles 5 years
Computer hardware
and software 3 years
Leasehold improvements 7
years
The Company's property and equipment consisted of the following at
December 31, 2012 and 2011:
|
Cost
|
Accumulated
Depreciation
|
Balance
|
|
2012
|
2011
|
2012
|
2011
|
2012
|
2011
|
Equipment
|
$5,799
|
$5,799
|
$5,220
|
$3,204
|
$2,595
|
$2,595
|
Furniture
|
1,680
|
1,680
|
1,148
|
812
|
868
|
868
|
|
|
|
|
|
|
|
Total
|
$7,479
|
$7,479
|
$6,368
|
$4,016
|
$1,111
|
$3,463
|
During the year ended December 31, 2011, the Company recorded a loss
on disposition of assets of $6,389 including $2,238 for equipment installed in the Philadelphia offices of API that remained in
the facility upon API's move in November 2011 as well as $4,151 for certain cases provided to customers upon delivery of PBIS units
in 2010 and 2011. These amounts are included in "other" operating costs and expenses for the year ended December 31,
2011.
Investment Securities
The
Company accounts for its ownership of the common stock of FastFunds Financial Corporation ("FFFC") in accordance with
APB Opinion No. 18 (APB 18),
The Equity Method of Accounting for Investments in Common Stock
, which provides that the equity
method of accounting should be used by an investor whose investment in voting stock gives it the ability to exercise significant
influence over operating and financial policies of an investee even though the investor holds less than a majority of the voting
stock. Because the Company owned approximately 34% of FFFC's common stock in 2011, but not a majority of the shares, the Company
has the ability to exercise significant control over FFFC's operations.
Under
the equity method, the investment account is adjusted quarterly to recognize the Company's share of the income or losses of FastFunds.
Accordingly, since FastFunds has recorded significant net losses in each of its last two fiscal years, the investment has been
written down and remains at zero.
Research and Development
Research and development costs are expensed as incurred. In each
of the years ended December 31, 2011 and 2011, the Company incurred $593 and $10,357 in direct research and development costs,
identified as "product development expense" on our statements of operations. Of this amount, $0 and $937 were laboratory
equipment and supplies for the years ended December 31, 2012 and 2011, respectively. These expenses include laboratory supplies,
design and development costs not directly related to the manufacturing process of our products.
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 December 31, 2012 and 2011, 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 December 31, 2012 and
2011, as the impact of the potential common shares, which totaled approximately 7,052,758,000 (December 31, 2012) and 579,869,000
(December 31, 2011), would be anti-dilutive, but not decrease loss per share. Therefore, diluted loss per share presented for the
years ended December 31, 2012 and 2010 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.
During the fiscal year ended December 31, 2011 the Company recorded
revenue totaling $2,574 from fees related to subcontracting on a U.S. Navy Unmanned Underwater Vehicle development project.
During the fiscal year ended December 31, 2012 the Company recorded
revenue totaling $61,134 an order from the U.S. Air Force Strategic Operations Command to produce one PBIS-2000 portable balloon
inflation device. In the fourth quarter ended December 31, 2012, the U.S. Air Force returned the PBIS-2000 unit to the Company
to make certain paid design improvements. The work was completed in the first quarter of 2013 and the unit was returned to the
Air Force at that time. Expenditures made during the fourth quarter of 2013 on this project is reflected as "Work in progress"
on our balance sheets and will be offset against the revenue received in the first quarter of 2013.
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".
Recent 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 2.
RELATED PARTY TRANSACTIONS
Related Party Accounts Payable
The Board of Directors has estimated the value of management services
for the Company at the monthly rate of $8,000 and $2,000 for the president and secretary/treasurer, respectively. The estimates
were determined by comparing the level of effort to the cost of similar labor in the local market and this expense totaled $120,000
for each of the years ended December 31, 2012 and 2011. In addition, beginning October 1, 2010 the Company's president and treasurer
were accruing a management fee of $7,500 and $3,500, respectively, for their services as managers of AFPI. This amount totaled
$132,000 for the years ended December 31, 2012 and 2011. In December 2012, the Company awarded a one-time management fee to its
officers totaling $100,000. As of December 31, 2012 and 2011, the Company owed $276,792 and $49,192, respectively 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 years ended December 31, 2012 and 2011, the Company recorded $3,510 and $6,338,respectively to a corporation
owned by Messrs. Fong and Olson under this bonus program. At December 31, 2012 and 2011, respectively, there was $964 and $6,174
payable under the bonus plan.
In 2011 API, and in 2012 APTI, paid a management fee of $6,500 per
month to a company owned by the Company’s officers for services related to its bookkeeping, accounting and corporate governance
functions. For each of the years ended December 31, 2011 and 2011, these management fees totaled $78,000. As of December 31, 2012
and 2011, the Company owed $33,319 and $39,065 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 $1,200 per month. This fee is month-to-month
and is based on the amount of space occupied by the Company and includes the use of certain office equipment and services. Rent
expense totaled $14,400 for each of the years ended December 31, 2011 and 2010, respectively. A total of $0 and $550 in rent expense
was accrued but unpaid at December 31, 2012 and 2011.
Accounts payable to related parties consisted of the following at
December 31, 2012 and 2011:
|
|
2012
|
|
2011
|
Management fees and related expenses payable to officers
|
|
$
|
313,611
|
|
$
|
88,257
|
|
|
|
|
|
|
|
|
Bonus payable to officers
|
|
|
984
|
|
|
6,174
|
|
|
|
|
|
|
|
Rent payable to affiliate of officers
|
|
|
-
|
|
|
550
|
|
|
|
|
|
|
|
|
Accrued other expenses payable to officers
|
|
|
22,044
|
|
|
16,721
|
|
|
|
|
|
|
|
|
|
Total accounts payable, related party
|
|
$
|
336,639
|
|
$
|
111,702
|
Related Party Notes Payable
AlumiFuel Power Corporation
The Company has issued promissory notes to its president for loans
made to it from time-to-time including $34,300 loaned during the year ended December 31, 2011 and $2,200 loaned during the year
ended December 31, 2012. The notes bear an interest rate of 8% per annum and are due on demand. During the year ended December
31, 2011, $35,163 in principal and $1,026 in accrued interest was paid on these notes leaving $854 in principal and $6 in accrued
interest due at December 31, 2011. During the year ended December 31, 2012, $3,055 in principal and $116 in accrued interest was
paid on these notes leaving no balance due at December 31, 2012.
Prior to the year ended December 31, 2011, the president of API loaned
the Company $4,500 in promissory notes bearing interest at 8% and due on demand of which $1,511 was outstanding at the end of 2010.
No further loans or payments were made during the years ended December 31, 2012 or 2011 leaving a principal balance of $1,512 in
both years with accrued interest of $245 and $123 payable at December 31, 2012 and 2011, respectively.
From time to time, the Company has issued promissory notes to a company
owned by its president which at December 31, 2010 had a balance due of $17,345. The notes bear an interest rate of 8% per annum
and are due on demand. An additional $92,500 was loaned by the company during 2011. During the year ended December 31, 2011, $31,728
in principal and $2,472 in interest was repaid on these notes. In addition, $78,000 of these notes were converted to $78,000 of
our Series B Preferred Stock in July 2011 as explained more fully in Note 6 Capital Stock below. Accordingly as of December 31,
2011, $118 in principal and $1 in accrued interest was payable on these notes. During the year ended December 31, 2012, an additional
$18,550 was loaned and a total of $18,365 in principal and $185 in interest leaving balances due of $302 in principal and $7 in
interest.
The Company has executed two promissory notes with a company affiliated
with a Company’s officer. These notes carry an interest rate of 8% per annum and are due on demand. As of December 31, 2010,
$1,800 in principal was payable on these notes. During the year ended December 31, 2011, and additional $40,135 in notes was issued
to this company. In July 2011, $41,000 of the amount due was converted to $41,000 of our Series B Preferred Stock as explained
more fully in Note 6 Capital Stock below. This left a balance due at December 31, 2011 of $935 in principal and $339 in accrued
interest payable. During the year ended December 31, 2012, an additional $4,500 was loaned and no principal or interest was repaid
leaving balances due at that date of $5,435 in principal and $628 in interest.
At December 31, 2010, the Company owed $2,165 in principal and $108
in accrued on a promissory note issued to a partnership affiliated with the Company’s president. These notes carry an interest
rate of 8% and are due on demand. There were no further transactions with this partnership during the years ended December 31,
2012 or 2011 leaving $2,165 in principal payable in both years along with $456 and $282 in accrued interest payable, respectively.
Prior to 2011, the Company issued a promissory note to a partnership
affiliated with its president and secretary in the amount of $5,000. This note carries and interest rate of 8% per annum and is
due on demand. There have been no payments of principal or interest on this note. At the years ended December 31, 2012 and 2011,
$5,000 in principal with $1,489 and $1,087, respectively, in accrued interest remained outstanding on this note.
During the year ended December 31, 2011, the Company borrowed $10,700
from a Corporation owned by its Secretary. During the year ended December 31, 2012, an additional $9,770 was loaned. These notes
carried an interest rate of 8% per annum and were due on demand. All of the respective notes were repaid in the years issued with
$4 in accrued interest paid in 2011 and $6 in accrued interest paid during 2012.
From time to time, a company owned by the Company's officers has
loaned the Company funds that at December 31, 2010 totaled $201 in principal. These notes are due on demand and carry an interest
rate of 8%. During the year ended December 31, 2011, an additional $6,500 was loaned. During the year ended December 31, 2011,
$5,433 in principal and $128 in interest was paid on the notes leaving a principal balance of $1,268 and accrued interest payable
of $26 as of that date. During the year ended December 31, 2012, an additional $15,950 was loaned and $17,218 in principal with
$269 in interest was repaid leaving no amounts due at year end.
As of December 31, 2010, the company owed a corporation affiliated
with the Company's officers $19,800. During the year ended December 31, 2011, an additional $28,600 was loaned to the Company.
All of the loans are due on demand and carry and interest rate of 8% per annum. During the year ended December 31, 2011, $28,817
in principal and $2,933 in interest was repaid on these notes leaving a principal balance of $19,583 and accrued interest payable
of $527 at that date. During the year ended December 31, 2012, $9,993 in principal and $607 in interest was repaid on these notes
leaving balances due of $9,590 in principal and $1,050 in interest due at that date.
During the year ended December 31, 2011, the Company borrowed $20,700
from a company affiliated with a Company officer. In July 2011, the entire $20,700 of these notes was converted to $20,700 shares
of our Series B Preferred Stock as explained more fully in Note 6 Capital Stock below. There was no principal balance but accrued
interest of $536 outstanding at December 31, 2011.
During the year ended December 31, 2011, the Company borrowed $29,850
from a company affiliated with the Company's officers. In July 2011, $29,500 of these notes was converted to $29,500 shares of
our Series B Preferred Stock as explained more fully in Note 6 Capital Stock below. The principal balance of $350 along with accrued
interest of $279 and $251 remained outstanding at December 31, 2012 and 2011, respectively.
As of December 31, 2010, the Company had borrowed $29,616 from a
third party who became an affiliate of the Company's president during the fourth quarter of 2011. These notes are due on demand
and bear interest at 8% per annum. During the year ended December 31, 2011, an additional $24,300 was loaned under the same terms.
During the year ended December 31, 2011, $4,147 in principal and $2,553 in accrued interest was repaid on these notes leaving a
principal balance due of $2,853 with accrued interest payable of $25 as of that date. In addition, in 2011 prior to becoming an
affiliate of the Company, $25,300 in principal on these notes was sold to unaffiliated third parties and converted to common stock
of the Corporation. Please see note Note 6 Capital Stock below for further information on these transactions. During the year ended
December 31, 2012, no further transactions took place leaving $2,853 in principal and $255 in interest due at that date.
During the year ended December 31, 2010, the Company borrowed $25,000
from a third party corporation that became an affiliate of the Company's president during the fourth quarter of 2011. These notes
are due on demand and bear interest at 8% per annum. During the year ended December 31, 2011, an additional $18,500 was loaned
under the same terms. In the March and July 2011 a total of $25,000 of these notes was sold to a unaffiliated third parties and
converted to common stock of the Corporation. Please see note Note 6 Capital Stock below for further information on these transactions.
In addition, in November 2011 the $18,500 principal balance on these notes was converted to $18,500 shares of our Series B Preferred
Stock as explained more fully in Note 6 Capital Stock below. As of December 31, 2012 and 2011, $1,829 in accrued interest remained
payable on these notes.
During the year ended December 31, 2011, a company affiliated with
the Company's officers loaned the Company $20,700. In July 2011 the $20,700 principal balance on these notes was converted to $20,700
shares of our Series B Preferred Stock as explained more fully in Note 6 Capital Stock below leaving interest payable of $535.
HPI Partners, LLC
In periods prior to December 31, 2010, HPI received
loans from Company officers or their affiliates that were repaid in prior periods. Accrued interest due totaling $235 remained
unpaid on these paid notes as of both December 31, 2012 and 2011.
Notes and interest payable to related parties consisted of the following
at December 31, 2012 and 2011:
|
|
2012
|
|
2011
|
Notes payable to officers; interest at 8% and due on demand
|
|
$
|
1,512
|
|
$
|
854
|
|
|
|
|
|
|
|
|
Notes payable to affiliates of Company officers; interest at 8% and due on demand
|
|
|
25,695
|
|
|
33,783
|
|
|
|
|
|
|
|
|
|
Notes payable, related party
|
|
|
27,207
|
|
|
34,637
|
|
|
|
|
|
|
|
|
Interest payable related party
|
|
|
7,008
|
|
|
5,267
|
|
|
|
|
|
|
|
|
|
Total principal and interest payable, related party
|
|
$
|
34,215
|
|
$
|
39,904
|
NOTE 3. NOTES PAYABLE
AlumiFuel Power Corporation
From time to time the Company has issued various promissory notes
payable to an unaffiliated trust which totaled $78,999 at December 31, 2010. During the year ended December 31, 2011, the trust
loaned an additional $25,525. All notes bear an interest rate of 8% and are due on demand. During the year ended December 31, 2011,
the trust converted $58,349 in principal to 32,867,089 shares of our common stock. In addition, during the year ended December
31, 2011, the trust sold $33,150 in principal on these notes to unaffiliated third parties and converted to common stock of the
Company. Of the balance due, the Company repaid $3,240 in principal and $11,720 in interest on these notes. As of December 31,
2011, $9,785 in principal with $110 in accrued interest remained outstanding on all notes payable to the trust. During the year
ended December 31, 2012, and additional $376,150 in principal was loaned by the trust and a total of $3,835 in principal and $915
in interest was repaid in cash. In addition, during the year ended December 31, 2012, the trust sold $227,250 in principal on these
notes to unaffiliated third parties that were converted to common stock of the Company. Please see note Note 6 Capital Stock below
for further information on the note conversion transactions. As of December 31, 2012, $154,850 in principal and $9,301 in interest
remained unpaid on these notes.
As of December 31, 2010, $16,558 in principal was outstanding on
a demand promissory note from an unaffiliated third party with interest payable at 8%. During the year ended December 31, 2011,
an additional $48,050 was loaned under the same terms while $30,500 was loaned at an interest rate of 8% with a term of six months
and convertible at $0.01. During the year ended December 31, 2011, $8,926 in principal and $3,074 in accrued interest was repaid
on these notes. In addition, a total of $53,450 in principal on these notes was sold in various transactions to unaffiliated third
parties and converted to common stock of the Company. Please see note Note 6 Capital Stock below for further information on these
transactions. Following these transactions there was a principal balance due of $32,732 along with $334 in interest due at December
31, 2011. During the year ended December 31, 2012, no further transactions occurred leaving a principal balance of $32,732 with
interest due of $2,962 as of that date.
In December 2011, an unaffiliated third party loaned the Company
$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 $52 remained outstanding at December 31, 2011. In the year ended December 31, 2012, a total of $118,351 in debt due this party
from our affiliate API was converted to two promissory notes of the Company under the same terms. As a result of these transactions
there was $144,351 in principal and $3,325 in interest payable at December 31, 2012.
During the year ended December 31, 2012, the Company borrowed a total
of $26,440 from an unaffiliated third party. These notes carried interest rates of 60% for $13,000 and 36% for $13,440 of the principal
balance. The $13,000 note was due on April 1, 2012 on November 1, 2012 the terms of the note were changed to make it convertible
at market at which time the interest rate was lowered to 8%. The $13,440 loan is due upon receipt of payment by the U.S. Air Force
on the design improvements being made to the PBIS-2000 unit shipped during 2012. In addition, in November 2012, the Company purchased
1,000,000 shares of AFPI stock from this entity and issued them a promissory note of $100,000 in payment. This note is due in November
2013 and carries an interest rate of 8%. Interest payments of $806 were made during the year ended December 31, 2012 on these notes.
As a result of these transactions, the principal balance on these notes was $126,440 with interest payable of $6,920 at December
31, 2012.
During the year ended December 31, 2012, the Company borrowed $6,000
from an unaffiliated third party. This note carries interest at a rate of 8% and is due on demand. No principal or interest was
repaid on this note during the year ended December 31, 2012 leaving a principal balance of $6,000 and interest payable of $467
as of that date.
In years previous to 2011, the Company borrowed $20,000 from an unaffiliated
third party. This note was due on demand and carried interest rate of 8% per annum. The entire principal balance of this note was
repaid at June 30, 2010 with accrued interest payable balance of $57 due as of December 31, 2011 and 2010.
Many of the Company's notes issued to unaffiliated third parties
contain provisions allowing them to be converted to common stock of the Company at market price on the date of conversion.
AlumiFuel Power, Inc.
In November and December 2011, 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, 2011 and accrued loan funding and administration fees equal to $20 per $1,000 loaned, which equates to an effective interest
rate of 24% per annum, are payable monthly. This loan is to be 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 $600 in funding and administration fees were paid during the quarter ended December 31, 2011. As of December
31, 2011, the entire principal balance on this note of $60,000 along with $1,050 in unpaid administration fees were due and payable.
During the year ended December 31, 2012 the entire principal balance of these loans was repaid along with $5,400 in accrued interest
leaving no principal balance due and interest payable of $1,050.
AlumiFuel Power International, Inc.
In September 2010, the Company issued a promissory note totaling
$100,000 to an unaffiliated third party. This note was due the earlier of 90 days from its issuance or upon the Company receiving
proceeds from its planned European financing and carried an interest rate of 12% per annum. As of December 31, 2010, the entire
principal balance of this note remained unpaid with accrued interest due of $3,033. This note was not paid on its due date and
as a result a default interest rate of 2% per month plus an administrative fee of 2% per month, an effective interest rate of 48%
per annum, became payable. In the fourth quarter of 2011, the entire balance of this note was sold to two unaffiliated third parties
and of that amount $90,000 was converted to common stock of the Company. Please see note Note 6 Capital Stock below for further
information on these transactions. During the year ended December 31, 2011, the Company accrued interest and fees totaling $39,867
prior to the note sale with payments made to the outstanding fees of $25,222 leaving total fees due of $17,678 as of December 31,
2011 that was changed to a derivative convertible note in January 2012. The remaining balances due on this note are derivative
convertible notes as explained more fully under the section "AlumiFuel Power Corporation Convertible Promissory Notes"
below.
In September 2010, the Company issued a promissory note totaling
$50,000 to an unaffiliated third party. This note was due the earlier of 90 days from its issuance or upon the Company receiving
proceeds from its planned European financing and carried an interest rate of 12% per annum. As of December 31, 2010, the entire
principal balance of this note remained unpaid with accrued interest due of $1,549. This note was not paid on its due date and
as a result a default interest rate of 2% per month plus an administrative fee of 2% per month, an effective interest rate of 48%
per annum, became payable. In the fourth quarter of 2011, the entire balance of this note was sold to an unaffiliated third party
and the entire $50,000 balance due on this note is now a derivative convertible note as explained more fully under the section
"Convertible Promissory Notes" below. During the year ended December 31, 2011, the Company accrued interest and fees
totaling $22,000 prior to the note sale with no payments made to the outstanding fees leaving total fees due of $23,549 as of that
date.
In February 2011, the above noteholder loaned the Company an additional
$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 nine months ended September 30, 2011 leaving a balance
due on this note of $25,000 at September 30, 2011 with interest due of $2,054. In December 31, 2011, the $25,000 balance on this
note was sold with the above note to the same unaffiliated third party becoming a derivative convertible note as explained more
fully under the section "Convertible Promissory Notes" below. As of December 31, 2011 there was $2,556 in accrued interest
payable for the period prior to the note sale.
In January 2012, the Company converted $26,100 of the above fees
from the September 2010 and February 2011 notes to a convertible promissory note as explained more fully under the section "Convertible
Promissory Notes" below leaving total interest due on these notes of $5.
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 nine month period ended September 30, 2011. As of
December 31, 2011 there was a balance due on this note of $25,000 at with interest payable of $2,778. No further payments were
made in 2012 leaving a balance due at December 31, 2012 of $25,000 with accrued interest payable of $5,787
HPI Partners, LLC
In periods prior to 2011, the Company issued various
a notes payable to unaffiliated third parties through HPI. These notes were also repaid in the periods prior to December 31, 2011
leaving interest payable of $647 at December 31, 2012 and 2011.
Notes and interest payable to others consisted of the following at
December 31, 2012 and 2011:
|
|
2012
|
|
2011
|
Notes payable, non-affiliates; interest at 8% and due on demand
|
|
$
|
489,373
|
|
$
|
153,517
|
|
|
|
|
|
|
|
|
Interest payable, non-affiliates
|
|
|
30,521
|
|
|
48,811
|
|
|
|
|
|
|
|
|
|
Total principal and interest payable, other
|
|
$
|
519,894
|
|
$
|
202,328
|
AlumiFuel Power Corporation Convertible
Promissory Notes
September 2009 Convertible Note
In September 2009, we issued a note payable to an accredited
investor for a $30,000 12% unsecured convertible note (the “September Note”). The September Note was due and payable
on December 4, 2009 and was convertible into the Company’s common stock at $0.05 per share. The Company determined that the
conversion feature did 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 September Note based on the difference between
the conversion price of $0.05 and the market price of the Company’s common stock on the note issue date and recorded as interest
expense $30,000 with an offset to additional paid-in capital. As the September Note was not repaid by its due date, a default interest
rate of 18% per annum began to accrue as of December 4, 2009. On April 27, 2011, the Company agreed to lower the conversion price
to $0.0035 and the entire principal balance of this note along with accrued interest of $8,472 was converted to 10,914,043 shares
of our common stock. The exercise price represented a 25% discount to the market price of our common stock and therefore additional
expense of $12,824 representing the beneficial conversion feature for these shares was recorded during the six month period ended
June 30, 2011. In August 2011, due to the fact we had been unable to deliver a certificate for the converted shares as we did not
have enough shares of stock available for issuance from our authorized shares of common stock, we agreed to re-price the conversion
of the note to $0.0017 and issue an additional 11,388,566 shares. This resulted in an additional beneficial conversion feature
of $31,888 which was recorded as interest expense in our statements of operations at September 30, 2011.
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 EITF 00-19 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 (formerly SFAS 133 and EITF 00-19), and should be accounted
for 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 capitalized and amortized over the life of the 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.
2009/2010 Convertible Debentures
In September 2009 through January 2010 we issued $435,000 of 6% unsecured
convertible debentures in transactions with private investors (the “Debentures”). We received net proceeds from the
Debentures of $363,190 after debt issuance costs of $71,810 paid to the placement agent. Additionally, the placement agent received
a one-time issuance of 900,000 shares of our $0.001 par value common stock valued at $117,000 or $0.13 per share, the market price
for our common stock on the date of issuance.
Among other terms of the offering, the Debentures were originally
due in January 2013, but have been extended to December 31, 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 agent 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 approved, but not completed, a reverse stock split.
The debt issuance costs of $188,810 are being amortized over the
three year term 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 December 31, 2012, $188,080 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
.
The fair value of the Debentures were 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
|
9/29/2009
|
$207,429
|
3 years
|
$0.105
|
$0.13
|
195%
|
1.38%
|
10/15/2009
|
$117,800
|
3 years
|
$0.075
|
$0.12
|
196%
|
1.38%
|
11/15/2009
|
$77,778
|
3 years
|
$0.045
|
$0.09
|
193%
|
1.38%
|
12/15/2009
|
$15,200
|
3
years
|
$0.038
|
$0.05
|
192%
|
1.13%
|
1/19/2010
|
$67,667
|
3
years
|
$0.03
|
$0.04
|
195%
|
1.38%
|
1/28/2010
|
$20,317
|
3
years
|
$0.04
|
$0.05
|
195%
|
1.38%
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, the total face value of the Debentures outstanding
was $295,000 following conversions during that year.
During the year ended December 31, 2011, a total of $285,000 in total
face value of the remaining $295,000 in debentures was assigned from the original purchasers to an unaffiliated institutional investor
with no changes in the terms or conditions. Additionally, a total face value of $50,000 of the assigned debentures were purchased
by a two third party unaffiliated investors.
During the year ended December 31, 2011, the debenture holders converted
an additional $141,500 in face value of the debentures and $4,625 in accrued interest to 120,679,224 shares of our common stock,
or $0.0012 per share. As a result of these transactions, the Company recorded a decrease to the derivative liability of $163,515
and as of December 31, 2011, the total face value of the Debentures outstanding was $153,500.
During the year ended December 31, 2012, the debenture holders converted
a total of $106,500 in face value of the debentures to 486,333,333 shares of our common stock, or $0.00022 per share. As a result
of these transactions, the Company recorded a decrease to the derivative liability of $143,929 and as of December 31, 2012, the
total face value of the Debentures outstanding was $47,000.
At December 31, 2012, the Company revalued the derivative liability
balance of the remaining outstanding Debentures. Therefore, for the period from their issuance to December 31, 2012, the Company
has recorded an expense and decreased the previously recorded liabilities by $443,524 resulting in a derivative liability balance
of $62,667 at December 31, 2012.
The fair value of the Debentures was calculated at December 31, 2012
utilizing the following assumptions:
Fair Value
|
Term
|
Assumed
Conversion
Price
|
Volatility
Percentage
|
Interest
Rate
|
$62,667
|
3 years
|
$0.000075
|
276%
|
0.25%
|
2010 Convertible Notes
In May, June, and August 2010, the Company entered into three separate
note agreements with an institutional investor for the issuance of three convertible promissory notes in the amounts of $60,000
(the "May Note"), $30,000 (the "June Note') and $30,000 (the "August Note"), respectively, for a total
at September 30, 2010 of $120,000 in principal outstanding (together, the “2010 Convertible Notes”).
Among other terms, the May Note is due on November 26, 2010, the
June Note is due on February 28, 2011, and the August Note is due on May 26, 2011 (together, the “Maturity Dates”),
unless prepayment of the 2010 Convertible Notes is required in certain events, as called for in the agreements. The 2010 Convertible
Notes are convertible at a conversion price (the “Conversion Price”) for each share of common stock equal to 58% (May
Note) and 55% (June Note and August Note) 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 2010 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 of each Debenture bears 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 2010 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 Holders may at their option declare the 2010 Convertible Notes, together with
all accrued and unpaid interest, to be immediately due and payable.
The Company may at its option prepay the May Note and August Note
in full during the first ninety days following their issuance in an amount equal to 150% of the outstanding principal and interest.
There is no such term in the June Note. Further terms call for the Company to maintain sufficient authorized shares reserved for
issuance under the agreement 2010 Convertible Notes.
We received net proceeds from the 2010 Convertible Notes of $112,000
after debt issuance costs of $8,000 paid for lender legal fees. These debt issuance costs will be amortized over the terms of the
2010 Convertible Notes or such shorter period as the 2010 Convertible Notes may be outstanding. Accordingly, as the 2010 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, 2010, $3,111 of these costs
had been expensed as debt issuance costs.
The beneficial conversion feature (an embedded derivative) included
in the 2010 Convertible Notes resulted in an initial debt discount of $120,000 and an initial loss on the valuation of derivative
liabilities of $13,500 for a derivative liability balance of $133,500 at issuance
.
The fair value of the 2010 Convertible 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
|
5/26/2010
|
$53,292
|
6 months
|
$0.019
|
$0.035
|
95%
|
0.22%
|
6/30/2010
|
$42,026
|
9 months
|
$0.009
|
$0.022
|
107%
|
0.22%
|
8/24/2010
|
$38,182
|
9 months
|
$0.006
|
$0.011
|
143%
|
0.22%
|
In December 2010, the note holders converted $10,000 in face value
of the notes to 1,724,138 shares of our common stock, or $0.0058 per share. During the six month period ended June 30, 2011, the
note holders converted $110,000 in face value of the notes plus $4,800 in interest to 39,471,754 shares of our common stock, or
$0.0028 per share. This fully converted and extinguished all of the outstanding 2010 Convertible Notes. As a result of these transactions,
the Company recorded a decrease to the derivative liability of $129,376 for the year ended December 31, 2011 related to these notes,
and the total face value of the Debentures outstanding was $-0-.
March 2011 Convertible Notes
In March 2011, three holders of certain demand promissory notes issued
by the Company totaling $54,116 sold them to an unaffiliated third party investor. As part of this transaction, the Company agreed
to re-issue new one-year convertible notes to the new holder (the "March 2011 Notes"). These notes in the amounts of
$21,616, $16,500 and $16,000 were to mature in March 2012, carry an interest rate of 12% and were 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 March 2011 Notes resulted in an initial debt discount of $54,115 and an initial loss on the valuation of derivative liabilities
of $30,772 for a derivative liability balance of $84,888 at issuance
.
The fair value of the March 2011 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
|
3/11/2011
|
$84,888
|
1 year
|
$0.0026
|
$0.006
|
152%
|
0.27%
|
During the six month period ended June 30, 2011, the note holders
converted the entire $54,115 face value of the notes to 26,210,414 shares of our common stock, or $0.002 per share. As a result
of these transactions, the Company recorded a decrease to the derivative liability of $84,888 for these notes and as of June 30,
2011, and the total face value of the Debentures outstanding was $-0-.
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 nine months
from issuance 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 fair value of the 2011 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
|
5/13/2011
|
$111,364
|
9 months
|
$0.0022
|
$0.0089
|
163%
|
0.19%
|
9/2/2011
|
$33,333
|
9 months
|
$0.002
|
$0.001
|
155%
|
0.09%
|
10/24/2011
|
$48,485
|
9 months
|
$.0017
|
$.0033
|
210%
|
0.09%
|
12/12/2011
|
$42,500
|
9 months
|
$.001
|
$.002
|
218%
|
0.08%
|
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 three month period ended December 31, 2011, the note holders
converted $35,000 in face value and $1,400 in accrued interest of the 2011 Convertible Notes to 40,969,697 shares of our common
stock, or $0.0009 per share. As a result of these transactions, the Company recorded a decrease to the derivative liability of
$111,364 for the converted notes and as of December 31, 2011, and the total face value of the 2011 Convertible Notes outstanding
was $117,500.
During the year ended December 31, 2012, the note holders converted
the entire remaining balance of $117,500 in face value and $3,300 in accrued interest to 478,043,745 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 December 31, 2012.
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, 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.
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 three month period ended December 31, 2011, the note holders
converted $40,000 face value of the notes to 47,379,032 shares of our common stock, or $0.0008 per share. As a result of these
transactions, the Company recorded a decrease to the derivative liability of $47,059 for the converted notes and as of December
31, 2011, and the total face value of the Converted AFPI Notes outstanding was $85,000.
During the year ended December 31, 2012, the note holders converted
$107,500 face value and $1,144 in interest payable on the notes to 609,151,021 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 $210,574 for the converted notes
and as of December 31, 2012, and the total face value of the Converted AFPI Notes outstanding was $0.
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
matured 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
.
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
|
11/23/11
|
$138,667
|
12 months
|
$0.0008
|
$0.0026
|
241%
|
0.1%
|
During December 2011, the note holder converted $13,000 face value
of the notes to 17,333,334 shares of our common stock, or $0.00075 per share. As a result of these transactions, the Company recorded
a decrease to the derivative liability of $34,667 for the converted notes and as of December 31, 2011, and the total face value
of the Converted AFPI Notes outstanding was $39,000.
During the year ended December 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 December 31, 2012,
the total face value of the Debentures outstanding was $-0-.
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 December 31, 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 December 31,
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 December 31, 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
|
$0.00005
|
263%
|
0.16%
|
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.
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 December 31, 2012, $958 of these costs had been expensed as debt issuance
costs.
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
|
$0.00005
|
$0.0002
|
271%
|
0.33%
|
At December 31, 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 December 31,
2012, the Company recorded no adjustment to the the previously recorded liabilities resulting in a derivative liability balance
of $70,000 at December 31, 2012.
The fair value of the convertible note was calculated at December
31, 2012 utilizing the following assumptions:
Fair Value
|
Term
|
Assumed
Conversion
Price
|
Volatility
Percentage
|
Interest
Rate
|
$70,000
|
3 years
|
$0.00005
|
276%
|
0.25%
|
October 2012 Convertible Notes
In October 2012 we issued $10,000 of 8% unsecured convertible debenture
with a private investor at which time the investor also purchased $50,000 in existing notes from one of our third party note holders
(together the “October Notes”).
Among other terms of the offering, the October Notes are due in October
2013 (the “Maturity Date”), unless prepayment is required in certain events, as called for in the agreements. The October
Notes are convertible at a conversion price (the “Conversion Price”) for each share of common stock equal to 50% of
the lowest closing price per share of the Company’s common stock for the thirty (30) trading days immediately preceding the
date of conversion. In addition, the October Notes provides for adjustments in the case of certain corporate actions.
The October Notes bear interest at eight percent (8%) 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 to twenty-two percent (18%-22%) per annum. The Company may redeem the October Notes for an amount
equal to 140% within 180 days of 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 October Notes.
Debt issuance costs totaling $1,000 are being amortized over the
three year term of the October Notes or such shorter period as the October Notes may be outstanding. Accordingly, as the October
Notes 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 December 31, 2012, $208 of these costs had been expensed as debt issuance
costs.
The beneficial conversion feature (an embedded derivative) included
in the October Notes resulted in an initial debt discount of $60,000 and an initial loss on the valuation of derivative liabilities
of $60,000 for a derivative liability balance of $120,000 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/12/12
|
$50,000
|
1 year
|
$0.00005
|
$0.0002
|
236%
|
0.18%
|
10/17/12
|
$10,000
|
1 year
|
$0.00005
|
$0.0002
|
236%
|
0.18%
|
During the year ended December 31, 2012, the debenture holders converted
a total of $32,500 in face value of the debentures to 650,000,000 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 $65,000 and as of December 31, 2012, the
total face value of the Debentures outstanding was $27,500.
At December 31, 2012, the Company revalued the derivative liability
balance of the remaining outstanding Debentures. Therefore, for the period from their issuance to December 31, 2012, the Company
has recorded an expense and decreased the previously recorded liabilities by $0 resulting in a derivative liability balance of
$55,000 at December 31, 2012.
The fair value of the Debentures was calculated at December 31, 2012
utilizing the following assumptions:
Fair Value
|
Term
|
Assumed
Conversion
Price
|
Volatility
Percentage
|
Interest
Rate
|
$55,000
|
1 year
|
$0.00005
|
263%
|
0.16%
|
October/November Convertible Notes
In October and November 2012 a private investor purchased a total
of $139,600 in existing notes from one of our third party note holders (together the “October/November Notes”). The
notes were amended to include a maturity date that is nine months from the amendment date or July/August 2013 and have an 8% interest
rate.
The October/November Notes are convertible at a conversion price
(the “Conversion Price”) for each share of common stock equal to 50% ($124,300) and 45% ($15,300) of the lowest closing
bid price per share of the Company’s common stock for the ten (10) trading days immediately preceding the date of conversion.
The October/November Notes bear interest, in arrears, at eight percent
(8%) per annum, payable (i) upon conversion, or (ii) on the Maturity Date, in cash or shares of our common stock at the Conversion
Price.
The beneficial conversion feature (an embedded derivative) included
in the October/November Notes resulted in an initial debt discount of $139,600 and an initial loss on the valuation of derivative
liabilities of $143,000 for a derivative liability balance of $282,600 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/11/12
|
$13,000
|
9 months
|
$0.00005
|
$0.0002
|
208%
|
0.06%
|
11/15/12
|
$15,300
|
9 months
|
$0.000045
|
$0.0001
|
255%
|
0.16%
|
11/29/12
|
$50,000
|
9 months
|
$0.00005
|
$0.0001
|
255%
|
0.16%
|
11/30/12
|
$61,300
|
9 months
|
$0.00005
|
$0.0001
|
255%
|
0.16%
|
During the year ended December 31, 2012, the debenture holders converted
a total of $14,600 in face value of the debentures to 650,000,000 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 $31,000 and as of December 31, 2012, the
total face value of the Debentures outstanding was $125,000.
At December 31, 2012, the Company revalued the derivative liability
balance of the remaining outstanding Debentures. For the period from their issuance to December 31, 2012, there was no change in
the previously recorded liabilities resulting in a derivative liability balance of $251,600 at December 31, 2012.
The fair value of the Debentures was calculated at December 31, 2012
utilizing the following assumptions:
Fair Value
|
Term
|
Assumed
Conversion
Price
|
Volatility
Percentage
|
Interest
Rate
|
$251,600
|
9 months
|
$0.00005
|
251%
|
0.15%
|
Debentures and convertible notes and interest payable consisted of
the following at December 31, 2012 and 2011:
Short-term liabilities:
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
2011 Convertible Notes; non-affiliate; interest at 8%; due May through September 2012; $117,500 face value net of discount of 88,333
|
|
$
|
-
|
|
$
|
29,167
|
Converted AFPI Notes; non-affiliate; interest at 48% ($60,000) and 12% ($25,000); currently due; $85,000 face value net of discount of $65,833
|
|
|
-
|
|
|
19,167
|
November 2011 Note; non-affiliate; interest at 12%; due November 2012; $39,000 face value net of discount of $35,750
|
|
|
-
|
|
|
3,250
|
Convertible debentures; non-affiliates; interest at 6% and due January 2013; outstanding principal of $47,000 face value; net of discount of $2,605
|
|
|
44,395
|
|
|
-
|
2012 Convertible Notes; non-affiliate, interest at 8%; due May 2012; $105,900 face value net of discount of $3,611
|
|
|
102,289
|
|
|
-
|
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 $0
|
|
|
26,100
|
|
|
-
|
October 2012 Convertible Notes; non-affiliate; interest at 8%; due October 2013; $27,500 face value net of discount of $21,771
|
|
|
5,729
|
|
|
|
October/November Convertible Notes; non-affiliate; interest at 8%; $125,000 face value net of discount of $109,266
|
|
|
15,734
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term convertible notes
|
|
$
|
244,247
|
|
$
|
51,584
|
|
|
|
|
|
|
|
Interest payable, short-term convertible notes
|
|
|
68,476
|
|
|
10,718
|
|
|
|
|
|
|
|
|
|
Total principal and interest payable, short-term convertible notes
|
|
$
|
315,640
|
|
$
|
62,302
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible debentures; non-affiliates; interest at 6% and due January 2013; outstanding principal of $153,500 face value; net of discount of $61,569
|
|
$
|
-
|
|
$
|
91,931
|
|
|
|
|
|
|
|
Convertible debentures; non-affiliates; interest at 6% and due September 2015; outstanding principal of $35,000 face value; net of discount of $32,083
|
|
|
2,917
|
|
|
-
|
|
|
|
|
|
|
|
Interest payable, long-term convertible notes
|
|
|
729
|
|
|
35,979
|
|
|
|
|
|
|
|
|
|
Total principal and interest payable, other
|
|
$
|
3,646
|
|
$
|
127,910
|
NOTE 4. OTHER SELLING GENERAL AND ADMINISTRATIVE
EXPENSES
Other selling general and administrative expense
for the years ended December 31, 2012 and 2011 consisted of the following:
|
|
Year ended December 31, 2012
|
|
Year ended December 31, 2011
|
General and administrative
|
$
|
197,952
|
$
|
366,383
|
Legal and accounting
|
|
32,600
|
|
64,107
|
Professional services
|
|
191,471
|
|
190,263
|
Bad debt expense
|
|
8,780
|
|
3,175
|
Salaries
|
|
227,533
|
|
338,371
|
|
$
|
658,336
|
$
|
962,299
|
NOTE 5. NOTES RECEIVABLE
At December 31, 2012 and 2011, there were $271,203
and $307,578 in loans due the Company from FastFunds Financial Corporation (“FFFC”), an affiliate in which the Company
is a minority stockholder, to assist FFFC in payment of its ongoing payment obligations and protect the Company's investment. Of
this amount, $7,995 was advanced in 2011 and $9,880 was loaned in 2012. Of the amounts loaned in 2011, $4,820 were short-term loans
that were repaid. During the year ended December 31, 2012, FFFC was able to repay $46,255 in principal and $17,325 in interest
on these loans. Each of these 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 of $9,880 the year ended December 31, 2012 and $3,175 in the year ended December 31, 2011
that is included in other selling, general and administrative expenses on the Company’s statement of operations for each
period. The Company has allowed for all interest due on these notes and did not record any interest receivable during the years
ended December 31, 2011 and 2012. Given the uncertainty of payments on these notes, if payments are received they are considered
recovery of allowed for debt in the case of principal and recorded in "other income (expense)" in our statements of operations
while interest income is offset against interest expense.
As of December 31, 2012 and 2011, 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 $743 and $102 in accrued interest remained receivable at December 31, 2012 and 2011, respectively.
NOTE 6. CAPITAL STOCK
On August 24, 2011, we filed Amended and Restated Articles of Incorporation
with the Secretary of State of Nevada, pursuant to which we increased the authorized capital stock of the Company from 510,000,000
shares to 1,510,000,000 shares, of which 10,000,000 shares may be preferred stock having the voting powers, designations, preferences,
limitations, restrictions and relative rights as determined by the board of directors from time to time. Effective August 9, 2011,
the stockholders of the Company through a written consent executed by stockholders holding a majority of the outstanding shares
of the Company’s common stock entitled to vote, adopted and approved the Amended and Restated Articles of Incorporation,
which were adopted by the Company’s board of directors on July 12, 2011.
On December 7, 2011, we filed Amended and Restated Articles of Incorporation
with the Secretary of State of Nevada, pursuant to which the Company increased the authorized capital stock of the Company from
1,510,000,000 shares to 3,010,000,000 shares, of which 10,000,000 shares may be preferred stock having the voting powers, designations,
preferences, limitations, restrictions and relative rights as determined by the board of directors from time to time. Effective
November 23, 2011, the stockholders of the Company through a written consent executed by stockholders holding a majority of the
shares of the Company’s common stock outstanding and entitled to vote, adopted and approved the Amended and Restated Articles
of Incorporation, which were adopted by the Company’s board of directors on November 23, 2011.
On September 12, 2012, we filed Amended and Restated Articles of
Incorporation with the Secretary of State of Nevada, pursuant to which the Company increased the authorized capital stock of the
Company from 3,010,000,000 shares to 7,510,000,000 shares, of which 10,000,000 shares may be preferred stock having the voting
powers, designations, preferences, limitations, restrictions and relative rights as determined by the board of directors from time
to time. Effective September 6, 2012, the stockholders of the Company through a written consent executed by stockholders holding
a majority of the shares of the Company’s common stock outstanding and entitled to vote, adopted and approved the Amended
and Restated Articles of Incorporation, which were adopted by the Company’s board of directors on September 6, 2012.
Common Stock
In February 2011, we issued 6,000,000 shares valued at $300,000 to
a third party pursuant to shares issued in a consulting agreement. These shares were valued at $0.005 per share, the market price
for our common stock on the date of issuance and this amount was recorded as stock based compensation.
In February 2011, we issued 9,020,935 shares of our common stock
to a noteholder upon conversion of $42,849 in promissory notes. In addition to the face value of the notes, the Company recorded
$14,283 in additional expense for a 25% discount to the market price for a total cost to the Company of $57,132 or a price equaling
$0.006 per share.
During the period three month period ended March 31, 2011, the Company
issued 15,281,183 shares of our common stock upon the conversion of $52,400 in principal and interest on our 2010 Convertible Notes.
In addition to the face value of the notes, the Company recorded $121,418 in additional expense for the derivative liability for
a total cost to the Company of $173,818 or a price equaling $0.011 per share.
In March 2011, the Company issued 800,000 shares of our common stock
upon the conversion of $2,000 in principal and interest on our March 2011 Notes. In addition to the face value of the notes, the
Company recorded $3,137 in additional expense for the derivative liability for a total cost to the Company of $5,137 or a price
equaling $0.006 per share.
During the three month period from April 1, 2011 to June 30, 2011
we issued 89,870,581 shares of our common stock upon the conversion of $205,588 in principal and $7,025 in accrued interest on
our Convertible Debentures, 2010 Convertible Notes and March 2011 Notes. In addition, $136,946 was recorded for additional derivative
liability and interest expense for a total cost to the Company of $349,599 or $0.0039 per share.
During the three month period from July 1, 2011 to September 30,
2011 we issued 52,853,950 shares of our common stock to noteholders upon conversion of $33,750 in promissory notes. In addition
to the face value of the notes, the Company recorded $43,368 in additional expense for the discounts to the market price for a
total cost to the Company of $77,118.
During the three month period from October 1, 2011 to December 31,
2011 we issued 143,537,799 shares of our common stock to noteholders upon conversion of $136,150 in promissory notes. In addition
to the face value of the notes, the Company recorded $436,964 in additional expense for the discounts to the market price for a
total cost to the Company of $573,114.
During the three month period from October 1, 2011 to December 31,
2011 we issued 197,005,734 shares of our common stock upon the conversion of $174,000 in principal and $1,400 in accrued interest
on our Convertible Debentures, 2011 Convertible Notes and Converted AFPI Notes and November 2011 Notes as explained more fully
in Note 3 above. In addition, $151,907 was recorded for additional derivative liability and interest expense for a total cost to
the Company of $327,807 or $0.0017 per share.
In December 2011, we conducted
a private placement and sold 80,000,000 shares of our common stock for $40,000, or $0.0005 per share. These shares had a total
value of $209,600 based on the market price for the common stock on each date of issuance therefore we recorded $185,600 as stock-based
compensation cost on our statement operations to reflect the discount on these shares.
During the year ended December 31, 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 year ended December 31, 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 year ended December 31, 2012, we issued a total of 3,353,204,766
shares of our common stock on the conversion of $493,893 in principal and interest on our various convertible promissory notes.
In addition to the face value of the notes, the Company recorded $711,709 in additional expense for the derivative liability for
a total cost to the Company of $1,205,602 or $0.00036 per share.
During the year ended December 31, 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.
During the year ended December 31, 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.
During the year ended December 31, 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.
During the year ended December 31, 2012, 6,250 shares ($6,250) of
our Series B Preferred Stock were converted to 10,593,220 shares of our common stock.
Preferred Stock
In August 2011, the Company authorized the issuance of up to 750,000
shares of $0.001 par value Series B Preferred Stock (the "Series B Preferred"). The Series B Preferred has a stated value
of $1.00 and pays a dividend of 8% payable quarterly in our common stock. In the event of a liquidation of the Company, the holders
of Series B Preferred then outstanding will be entitled to receive a liquidation preference, before any distribution is made to
the holders of our common stock, in an aggregate amount equal to the par value of their shares of Series B Preferred. Each share
of Series B Preferred is convertible into that number of shares of common stock on terms that are equal to (i) 100% of the Stated
Value divided by (ii) 52% of the average of the three lowest day closing bid prices of the Company’s common stock for the
10 trading days immediately preceding the conversion. There is a Mandatory Conversion Date of July 12, 2016. At any time after
the date of issuance of the Series B Preferred until the Mandatory Conversion Date, we may redeem, in cash, the Series B Preferred
in accordance with the following: (a) if prior to or on the first anniversary of the date of issue at 105% of the Stated Value
thereof and (b) if after the first anniversary of the date of issue and prior to the Mandatory Conversion Date at 110% of the Stated
Value thereof (the “Redemption Price”).
In August 2011, 329,662 shares of Series B Preferred were issued
upon: the conversion of $63,000 in management fees payable to our president; and the conversion of $78,000 in notes payable to
a partnership controlled by our president; and $50,200 in notes payable to two companies affiliated with our president and secretary;
and $138,462 in wages due to the president of our operating subsidiary, API.
In November 2011, an additional 191,500 shares of Series B Preferred
were issued upon: the conversion of $90,000 in management fees payable to our president from AFPI; and $42,000 in management fees
payable to our secretary from AFPI; and $41,000 in notes payable to a corporation affiliated with our president and secretary;
and $18,500 in notes payable to an affiliate of our president.
As a result of these transactions, there were 521,162 shares of our
Series B Preferred outstanding at December 31, 2011 with dividends payable of $12,402 at that date.
During the year ended December 31, 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 year ended December 31, 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 in the year ended December 31, 2012.
As a result of these transactions there were 404,055 shares of our
Series B Preferred Stock outstanding at December 31, 2012. There were $45,747 in dividends payable on our Series B Preferred stock
at December 31, 2012, including $33,344 in dividends accrued for the year then ended.
Warrants
In July 2011, the Company issued warrants to certain warrant holders
that were officers and or consultants to API upon the condition that each holder agree to cancel the 35,000,000 warrants issued
in June 2010 exercisable at $0.05 per share. Accordingly, the previously issued warrants were cancelled and a total of 35,000,000
new warrants were issued. These warrants vested immediately, were exercisable for a period of five years, and were exercisable
at $0.01 per share. These shares were valued at $105,000 based upon the Black Scholes option pricing model, which amount was included
in "stock based compensation" at December 31, 2011.
Issuance
Date
|
Fair Value
|
Term
|
Conversion
Price
|
Market Price on
Grant Date
|
Volatility
Percentage
|
Interest
Rate
|
7/12/2011
|
$105,000
|
5 years
|
$0.01
|
$0.003
|
197%
|
1.4%
|
In August 2012, the Company issued a total of 150,000,000 warrants
to these same warrant holders upon the condition that each holder agreed to cancel the 35,000,000 warrants issued in July 2011
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 year ended December 31, 2012 using the following assumptions:
Issuance
Date
|
Fair Value
|
Term
|
Conversion
Price
|
Market Price on
Grant Date
|
Volatility
Percentage
|
Interest
Rate
|
8/1/2012
|
$15,000
|
5 years
|
$0.002
|
$0.0001
|
241%
|
0.5%
|
In December 2011, the Company issued warrants to purchase 8,000,000
shares of our common stock to two employees of API. These warrants vested immediately, are exercisable for a period of five years,
and are exercisable at $0.01 per share. These shares were valued at $16,000 based upon the Black Scholes option pricing model,
which amount is included in "stock based compensation" as of December 31, 2011 using the following assumptions:
Issuance
Date
|
Fair Value
|
Term
|
Conversion
Price
|
Market Price on
Grant Date
|
Volatility
Percentage
|
Interest
Rate
|
12/15/2011
|
$16,000
|
5 years
|
$0.01
|
$0.002
|
204%
|
0.9%
|
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 was expensed over that six month term of the agreement and is included in "stock-based compensation" at December
31, 2012. The value was determined using the Black Scholes option pricing model using the following assumptions:
Issuance
Date
|
Fair Value
|
Term
|
Conversion
Price
|
Market Price on
Grant Date
|
Volatility
Percentage
|
Interest
Rate
|
5/1/2012
|
$25,000
|
3 years
|
$0.0015 - $.0040
|
$0.001
|
181%
|
0.25%
|
A summary of the activity of the Company’s outstanding
warrants at December 31, 2011 and December 31, 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
|
|
0.002
|
|
0.001
|
Expired/Cancelled
|
|
60,253,528
|
|
0.06
|
|
0.06
|
Exercised
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
|
Outstanding and exercisable at
December 31, 2012
|
|
188,000,000
|
|
$ 0.002
|
|
$ 0.001
|
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 December 31, 2012:
Exercise price range
|
|
Number of options outstanding
|
|
Weighted-average exercise price
|
|
Weighted-average remaining life
|
|
|
|
|
|
|
|
$0.01
|
|
8,000,000
|
|
0.01
|
|
4.2 years
|
|
|
|
|
|
|
|
$0.0015 - $0.004
|
|
180,000,000
|
|
0.002
|
|
3.2 years
|
|
|
|
|
|
|
|
|
|
188,000,000
|
|
$ 0.002
|
|
3.4 years
|
In February 2011, the Company issued warrants to purchase up to 300,000
shares of common stock in its operating subsidiary, AFPI, to three unaffiliated investors in connection with the issuance of notes
payable to AFPI. The warrants are exercisable for a period of three years at an exercise price of $0.15 per share. Because there
was no trading market for AFPI's common stock at the issue date, the Company valued these warrants at the price of the most recent
private placement sales of AFPI's common stock, or $0.15 per share. Accordingly, additional interest expense of $45,000 was recorded
for the value of these warrants at issuance.
Stock Options
On March 4, 2009, our board of directors authorized our 2009 Stock
Incentive Plan which was amended on May 6, 2009 and approved by our stockholders effective on May 26, 2009. The plan allows for
the issuance of up to 20,000,000 shares of our common stock through one or more incentive grants including stock options, stock
appreciation rights, stock awards, restricted stock issuances and performance shares to officers, directors, employees and consultants
of the Company. The plan is administered by our board of directors.
All options outstanding at December 31, 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 December 31, 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 expired
|
425,000
|
|
0.35
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
Outstanding at
December 31, 2012
|
0
|
|
$-
|
|
-
|
|
$-
|
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
December 31, 2012
|
20,000,000
|
|
$0.075
|
|
1.7
|
|
$0
|
NOTE 7. COMMITMENTS AND CONTINGENCIES
Payroll Liabilities
Following the formation of API in May 2008, 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, API paid wages to these employees without the benefit of a payroll management service. Upon API'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. During the period from May to October 2008, the Company recorded $52,576 in payroll liabilities
due from wages paid to its employees and has been recording estimated penalties and interest quarterly on the balance. During the
year ended December 31, 2011, the Company recorded additional estimated penalty and interest expense of $14,284 for an estimated
balance due at that date of $95,158. During the year ended December 31, 2012, the Company recorded additional estimated penalty
and interest expense of $14,860 for an estimated balance due at that date of $110,018. This amount is included on the balance sheets
at December 31, 2012 and 2011 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 recorded a total of $8,629 for payroll liabilities
due by the Company on this conversion in 2011.
License Agreement
In August 2008, the Company executed a License Agreement between
the Company, the University of South Florida Research Foundation, Inc. and the University of Florida Research Foundation, Inc.
(“License Agreement”) through which the Company was to acquire the exclusive right and license to make, have made,
use, import, sublicense and offer for sale any products or processes derived from the ICA-1 process the Company had been funding
from September 2004 until the acquisition of HPI and API. As of March 1, 2010, the Company had failed to pay the technology access
fee and related expenses totaling $56,247. As a result, on March 1, 2010 the licensors declared a default under the License Agreement
and gave the Company until April 1, 2010 to cure the default. The Company did not cure the default therefore as of April 1, 2010,
the license agreement was terminated. Given the license was terminated by the University, the Company is no longer the licensor
of the technology and is not required to pay any license fees under the contract. Accordingly, during the year ended December 31,
2011, the Company wrote-off the amount due and recorded $56,247 as a "gain on debt extinguishment" on the statements
of operations at December 31, 2011.
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 of $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.
As of December 31, 2012, the Company had recorded $67,429 in rent expense that is included in "accounts payable, other"
as of that date. The additional judgment amount totaling $360,803 has been expensed as "litigation contingency" on our
statements of operations and is recorded under the same name as a liability on balance sheets and at December 31, 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 $3,499 based on the then current value with an expected life of 5 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 $1,556 was reduced in the "capital leases" account for payments made in both 2012
and 2011. Our future liabilities under this capital lease is $387 for the year ending December 31, 2013 as the lease will be complete
after the March 2013 payment.
NOTE 8. INCOME TAXES
A reconciliation of U.S. statutory federal income tax rate to the
effective rate follows for the years ended December 31, 2012 and 2011:
|
|
For the
year ended December 31,
|
|
For the
year ended December 31
|
|
|
2012
|
|
2011
|
U.S. statutory federal rate
|
34.00%
|
|
34.00%
|
State income tax rate
|
4.63%
|
|
4.63%
|
Net operating loss for which no tax
|
|
|
|
|
benefit is currently available
|
-38.63%
|
|
-38.63%
|
|
|
0.00%
|
|
0.00%
|
At December 31, 2011, deferred tax assets consisted of a net tax
asset of $8,403,800, due to operating loss carry forwards of $21,754,665, which was fully allowed for, in the valuation allowance
of $8,403,800. The valuation allowance offsets the net deferred tax asset for which there is no assurance of recovery. The increase
in the deferred tax assets and the corresponding valuation allowance during the year ended December 31, 2012 was $920,400 based
on the $7,483,400 reported by the Company at December 31, 2011. The net operating loss carry forward expires through the year 2032.
The valuation allowance is evaluated at the end of each year, considering
positive and negative evidence about whether the deferred tax asset will be realized. At that time, the allowance will either be
increased or reduced; reduction could result in the complete elimination of the allowance if positive evidence indicates that the
value of the deferred tax assets is no longer impaired and the allowance is no longer required.
Should the Company undergo an ownership change as defined in Section
382 of the Internal Revenue Code, the Company's tax net operating loss carry forwards generated prior to the ownership change will
be subject to an annual limitation, which could reduce or defer the utilization of these losses.
NOTE 9. SUBSEQUENT EVENTS
In February 2013, the Company announced that it has signed a Term
Sheet with Genport, srl of Italy, which would merge its hydrogen generation business and Genport into a new U.S. corporate entity,
NovoFuel, Inc. This term sheet will be the basis for, and the parties are moving forward toward completion of, a definitive agreement
through which each party will own 50% of NovoFuel before any future financings. The merger would combine and integrate the synergistic
technologies, Intellectual Property, products, revenues, engineering staffs, manufacturing operations, marketing, sales and services
activities of both companies, including a new lab facility in the Philadelphia area. The focus of NovoFuel would be to pursue and
capture backup and portable power applications and business opportunities in the U.S., Europe, and other market areas – multi-billion
dollar markets. The new entity would pursue the engineering development of an integrated 5kW backup power system for telecom facilities.
Management has determined that there
are no further events subsequent to the balance sheet date that should be disclosed in these financial statements.