10-K 1 americanpowergroupcorpsept.htm 10-K AmericanPowerGroupCorpSept2013.10-K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
 
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2013
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ to ______________________
 
Commission File Number: 1-13776 
 
American Power Group Corporation
(Exact name of registrant as specified in its charter)
 
Delaware
 
71-0724248
 (State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
7 Kimball Lane, Lynnfield MA
 
01940
(Address of principal executive offices)
 
(Zip Code)
(781) 224-2411
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes q  No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes q  No ý
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý  No q

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes q No ý 

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form. 10-K. q
 
 

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and smaller reporting company” in Rule 12b-2 of the Exchange Act.
q Large Accelerated Filer
q Accelerated Filer
q Non-accelerated Filer
x Smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes q  No ý
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of March 31, 2013, the last business day of the registrant's most recent completed second quarter, was approximately $30,423,656.

As of December 18, 2013, there were 48,380,316 shares of the registrant’s Common Stock outstanding.


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American Power Group Corporation
 
TABLE OF CONTENTS
 
 
 
 
Page
PART I.
 
 
 
 
 
Item 1.
Business
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 1B.
Unresolved Staff Comments
 
 
 
Item 2.
Properties
 
 
 
Item 3.
Legal Proceedings
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
PART II.
 
 
 
 
 
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
 
 
Item 6.
Selected Financial Data
 
 
 
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 8.
Financial Statements and Supplementary Data
 
 
 
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
 
 
Item 9A.
Controls and Procedures
 
 
 
Item 9B.
Other Information
 
 
 
PART III.
 
 
 
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
 
 
 
Item 11.
Executive Compensation
 
 
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
 
 
Item 13.
Certain Relationships and Related Transactions, and Director Independence
 
 
 
Item 14.
Principal Accounting Fees and Services
PART IV.
 
 
 
 
 
Item 15.
Exhibits, Financial Statement Schedules
 
 
 
Signatures
 
 
 
 
Exhibits
 
 
 


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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements regarding future events and the future results of American Power Group Corporation, within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of our management. Words such as “expect,” “anticipate,” “target,” “goal,” “project,” “intend,” “plan,” “believe,” “seek,” “estimate,” “will,” “likely,” “may,” “designed,” “would,” “future,” “can,” “could” and other similar expressions that are predictions of or indicate future events and trends or which do not relate to historical matters are intended to identify such forward-looking statements. These statements are based on management's current expectations and beliefs and involve a number of risks, uncertainties, and assumptions that are difficult to predict. Consequently, actual results may differ materially from those projected, anticipated, or implied.

Part I

Item 1.    Business
General
Effective August 1, 2012, GreenMan Technologies, Inc. (the “Company”) changed its name to American Power Group Corporation. In connection with the corporate name change, the Company’s stock trading symbol on the OTCQB has changed from “GMTI” to “APGI”.
The Company (together with its subsidiaries “we”, “us” or “our”) was originally founded in 1992 and has operated as a Delaware corporation since 1995.
Recent Developments
In November 2012, we signed a National Distributor and Master Marketing Agreement with WheelTime Network LLC, a truck service network with 18 member companies providing installation and warranty support through nearly 200 service centers, 2,800 service bays, 3,500 factory-trained technicians and 30 training facilities located across the United States and Canada. Under the agreement, WheelTime endorsed American Power Group's dual fuel conversion technology to its 18 member companies and encouraged each member to become a certified installer and authorized dealer of American Power Group's Vehicular Turbocharged Natural Gas Systems. As of September 30, 2013, all of WheelTime's 18 member companies have agreed to become non-exclusive dealers and installers of our dual fuel technology. We believe that this relationship provides us the opportunity to accelerate the national rollout of our vehicular dual fuel through access to a large national network of qualified diesel engine personnel as well as testing/installation equipment.
In addition, we issued WheelTime a warrant to purchase 1,540,000 shares of our Common Stock at an exercise price of $.55 per share. The warrant is immediately exercisable with respect to 100,000 shares of Common Stock with the remaining shares becoming exercisable in increments of 50,000 shares upon the execution of a certified installer agreement and a dealer agreement by each of the 18 members during the first year after the original issue date of the Warrant. An additional 30,000 warrants become exercisable for each member that agrees to become an exclusive dealer by December 31, 2013. As of December 18, 2013, no member has chosen to become exclusive. The warrant will expire on December 31, 2017.
During fiscal 2013, we were notified by the Environmental Protection Agency ("EPA") of an additional 360 approvals for various outside useful life ("OUL") vehicular engine families. As of September 30, 2013, we had an industry-leading 449 OUL vehicular engine family approvals. See "Business-Government Regulation", below).
In March 2013, we introduced the nation’s first natural gas dual fuel glider kit. The term glider kit refers to a truck that is built from the “ground up” with a new frame, cab, electrical system and front axle but utilizing two of the following three rebuilt components: (1) engine, (2) transmission, or (3) rear axle. As a result, the initial purchase price is typically 25% lower than a new diesel truck and maintenance costs are typically 70% less compared to new truck. In August 2013 we received an $800,000 order from Ervin Equipment of which approximately 70% is for anticipated glider conversions.
In December 2013, Iowa State Bank extended the maturity of our $2,250,000 credit facility from December 31, 2013 to April 1, 2015, increased our borrowing limit to $2.5 million and expanded our collateral base to include certain fixed assets which will provide more working capital availability under the credit facility.
Products and Services
Our American Power Group's patented dual fuel conversion system is a unique external fuel delivery enhancement system that converts existing diesel engines into more efficient and environmentally friendly engines that have the flexibility, depending on the circumstances, to run on:
·
Diesel fuel and compressed natural gas (CNG) or liquefied natural gas (LNG);

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·
Diesel fuel and pipeline gas, well-head gas or approved bio-methane; or
·
100% diesel fuel.
Our proprietary technology seamlessly displaces up to 75% of normal diesel fuel consumption with various forms of natural gas with the average displacement ranging from 40% to 65%. The energized fuel balance between the two fuels is maintained with a patented control system ensuring the engines operate to Original Equipment Manufacturers' (OEM) specified temperatures and pressures with no loss of horsepower. Installation requires no engine modification, unlike the more expensive fuel injected alternative fuel systems in the market.
By displacing highly polluting and expensive diesel fuel with inexpensive, abundant and cleaner burning natural gas, a user can:
·
Reduce fuel and operating costs by 15% to 35%;
·
Reduce toxic emissions such as nitrogen oxide (NOX), carbon monoxide (CO) and fine particulate emissions; and
·
Enhance the engine's operating life, since natural gas is a cleaner burning fuel source.
 Primary end market applications include both primary and back-up diesel generators as well as heavy-duty vehicular diesel engines.
Manufacturing/Processing
Our dual fuel conversion enhancement system is configured by our internal engineering staff based on customer engine specifications and then modeled through Computational Fluid Dynamics Analysis to scientifically determine the optimum mixture of diesel and natural gas prior to final installation. All components, including several proprietary patented components, are purchased from external sources and currently assembled into installation kits at our Algona, Iowa location and then delivered on site for installation. All installations are managed by an American Power Group lead team or certified installers that completes final testing and commissioning of the diesel engines.
Raw Materials
Our dual fuel conversion components, including several proprietary components, are purchased from well known automotive parts suppliers as off-the-shelf components. We believe these suppliers are able to support the scalability of our business. While we believe our dual fuel conversion operations have access to sufficient components for the foreseeable future, management is currently identifying multiple potential sources for critical components to reduce the likelihood that supply issues could negatively impact our business.
Customers
Our dual fuel technology upgrade is ideally suited for the large domestic and international installed base of both stationary and vehicular diesel engines. The stationary market includes primary and backup diesel power generators for oil & gas drilling rigs, shale gas recovery pumps, hospitals, cold storage warehouses, data management centers, government and manufacturing facility applications. Vehicular applications include corporate and private route fleets, long haul logistics fleets, refuse haulers, public transit and government vehicles.
The EPA estimates there are 20 million diesel engines operating in the U.S., with an estimated 13 million used in vehicular applications and 7 million used in stationary generator applications. Today our primary vehicular market is the Class 8 Heavy Duty vehicles operating in the U.S. which is estimated to be 3.5 million vehicles. We believe the number of available international stationary and vehicular diesel engines is significantly higher than the U.S. market.
Sales and Marketing
Our dual fuel conversion operations address the alternative fuel market in three distinct segments: (1) North American stationary, (2) North American vehicular and (3) international. To address these markets, we have put in place a sales organization consisting of direct sales, exclusive dealers/certified installers, non-exclusive dealer/installer agreements with the 18 WheelTime members, sales representatives, and in-country international distributors, which in most instances are large, well-known companies. We currently have two domestic exclusive dealers/certified installers, and exclusive distributors in four countries that market and distribute our products. We are continuously seeking additional international distribution partners to expand our distribution network.  
Competition
Under certain conditions it is not cost effective or technologically feasible to convert a diesel engine to operate either entirely or partially on an alternative fuel.  Emission standards sometimes dictate the use of highly sophisticated technology that sometimes cannot be easily retrofitted onto an engine and/or are cost prohibitive.  Under those situations, American Power Group offers customers a cost effective solution which can be used in heavy duty trucks, generators and other stationary industrial engines.

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As described above, our patented dual fuel conversion system is an external fuel delivery enhancement system that requires no engine modifications and can run on a combination of diesel fuel and natural gas or only diesel fuel, depending on the circumstances.
The primary alternative fuel solutions available to existing diesel engine operators are:
New Engines - replace existing diesel engines with new 100% dedicated natural gas burning engines. This is usually a more expensive solution and available in only new engines.
Invasive retrofits - an existing diesel engine can be converted to run exclusively on natural gas or some other type of fuel such as propane. The invasive solution tends to be a higher priced solution than dual fuel because the engine must be totally disassembled and re-configured to run exclusive on the new fuel.
Non-Invasive retrofits - are solutions, similar to ours, where no major changes to the existing diesel engine are required.
Our solution uses software to manage the introduction of natural gas under negative pressure to the engine's turbo charger, thus eliminating the need for costly and maintenance-prone fuel injectors and therefore making our solution more cost effective than others. In addition, we believe that our solution has a more universal design than others and therefore is applicable to a wider range of engine models and sizes than our competitor's solutions currently are. Today, our primary focus is on upgrading the installed base of existing diesel engines. We believe our dual fuel conversion technology upgrade is ideally suited for the large domestic and international installed base of both stationary and vehicular diesel engines, which is estimated to be in the millions of units.
Government Regulation
Our dual fuel conversion business and operations are affected by various federal, regional, state, local and foreign laws, rules, regulations and authorities. The primary domestic governing body is the EPA, which is responsible for monitoring and enforcing emissions standards and safety issues. All domestic dual fuel conversion systems are subject to the rules of the EPA, with the primary requirement being the addition of our dual fuel conversion system to an existing diesel engine does not negatively impact the current emission profile of the engine or the engine's original emission profile.
All vehicles and components on vehicles that operate on public highways must comply with the Federal Clean Air Act and meet specific EPA emission and safety guidelines. Because our vehicular dual fuel system has not been previously EPA certified as a new system, due to the unique nature of our dual fuel technology and the fact our primary initial target market is older, out-of-warranty diesel vehicles, we had to demonstrate to the EPA that our technology has sound engineering design and does not degrade the emissions level of the model year that would be requested for commercialization.
In April 2011, the EPA announced it had amended its alternative fuel conversion regulations for light, medium and heavy-duty vehicles. The new regulations introduced new flexibilities for all clean alternative fuel converters and expand compliance options for certain categories of conversions building upon the concept that it is appropriate to treat conversions differently based on the age of the vehicle or engine being converted. Previously, EPA regulations required vehicle and engine conversion systems to be installed after receiving a certificate of conformity which provided a regulatory exemption from potential tampering charges. Under the new regulations, testing and compliance procedures differ based on the age category of the vehicle or engine that is being converted: 1) new or relatively new; 2) intermediate age (“IUL”), or 3) outside useful life (“OUL”). All conversion manufacturers seeking exemption must demonstrate compliance, but the requirements differ among age categories. Our initial focus has been on obtaining approval for vehicle families within the OUL category, as the testing requirements are less stringent than those for IUL category.
In fiscal 2012, we obtained 89 EPA approvals for various OUL vehicular engine families. During fiscal 2013 we were notified by the EPA of an additional 360 EPA approvals for various OUL vehicular engine families. As of September 30, 2013, we had an industry leading 449 OUL vehicular engine family approvals covering what we believe are six of the top seven OUL engine families on the road in the U.S. In addition, during fiscal 2013, we initiated testing efforts for obtaining IUL approval on several select engine families.
Failure to comply with applicable regulatory requirements can result in, among other things, fines, suspensions of approvals, seizure or recall of products, operating restrictions and criminal prosecutions. Furthermore, changes in existing regulations or adoption of new regulations could impose costly new procedures for compliance, or prevent us from obtaining, or affect the timing of, regulatory approvals. We use our best efforts to keep abreast of changed or new regulations for immediate implementation.
Protection of Intellectual Property Rights and Proprietary Rights
Our American Power Group subsidiary has an exclusive, worldwide license under one U.S. patent for dual fuel conversion technology owned by M&R Development, Inc.
We use the name American Power Group in interstate commerce and assert a common law right in and to that name.

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Employees
As of September 30, 2013, we had 20 full time employees and no part-time employees. We are not a party to any collective bargaining agreements and consider the relationship with our employees to be satisfactory.

Item 1A.    Risk Factors

An investment in our Common Stock involves a high degree of risk. Investors should carefully consider the following risk factors in evaluating our Company and our business. If any of these risks, or other risks not presently known to us or that we currently believe are not significant, develops into an actual event, then our business, financial condition and results of operations could be adversely affected. If that happens, the market price of our Common Stock could decline.

Risks Related to our Business
Our dual fuel conversion business has lost money in the last five consecutive fiscal years and we may need additional working capital if we do not obtain sustained profitability. If additional capital is not received, it may force us to adjust operations accordingly.
Since the July 2009 acquisition of American Power Group's dual fuel conversion operations, we have invested over $13 million to enhance our dual fuel products and support dual fuel sales and marketing initiatives intended to promote American Power Group's dual fuel conversion technology and establish broader market presence worldwide. Despite these efforts and increasing quarterly revenue, American Power Group's business has incurred significant operating losses and experienced negative cash flow from operations.
Our continued existence is dependent on our ability to generate positive operating cash flow, achieve profitability on a sustained basis and generate improved performance. If American Power Group is unable to achieve sustained profitability, our ability to maintain our current level of operations could be materially and adversely affected. There is no guarantee we will be able to achieve profitability.
We may require additional funding to grow our business, which funding may not be available to us on favorable terms or at all. If we do not obtain funding when we need it, our business will be adversely affected. In addition, if we have to sell securities in order to obtain financing, the rights of our current holders may be adversely affected.
Substantial expenditures have been required and may be required in the future to enable us to obtain the necessary additional vehicular engine family approvals from the EPA to accelerate our ability to sell our vehicular dual fuel solution in the United States. In addition, we may need additional capital to continue operations. There can be no assurance that we will generate revenues from operations or obtain sufficient capital on acceptable terms, if at all. Failure to generate such operating revenues or obtain such capital, if needed, would have an adverse impact on our financial position, our results of operations and our ability to continue as a going concern. We may also seek funding for the manufacturing and marketing of our products through strategic partnerships and other arrangements with corporate partners.  There can be no assurance that such collaborative arrangements or additional funds will be available when needed, or on terms acceptable to us if at all. Operating and capital requirements during the next fiscal year and thereafter will vary based on a number of factors, including the level of sales and marketing activities for services and products. There can be no assurance that additional private or public finances, including debt or equity financing, will be available as needed, or, if available, on terms favorable to us. Any additional equity financing may be dilutive to stockholders and such additional equity securities may have rights, preferences or privileges that are senior to those of our existing Common Stock and/or Preferred Stock.
Improvement in our business depends on our ability to increase demand for our products and services.
We must substantially increase revenues from our American Power Group's business. Factors that could limit demand for our products and services include potential changes in the regulatory environment. If, for example, the EPA withdraws support for our domestic vehicular dual fuel testing initiative, further development of the domestic market for our vehicular products could be materially delayed. Other adverse events or economic or other conditions affecting markets for our products and services, potential delays in product development, product and service flaws, changes in technology and the availability of competitive products and services could also delay or limit demand for our products and services. There can be no assurance that our efforts will be successful, that all of our products will prove to meet the anticipated levels of approval or effectiveness, or that we will be able to obtain and sustain customers as well as distribution approval.





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We rely on significant customers and relationships, the loss of one or more of which could adversely affect our operating results, financial condition and business prospects.
During the fiscal years ended September 30, 2013 and 2012, approximately 80% of our sales were derived from our dual fuel stationary solution for oil and gas applications and 20% was derived from our dual fuel vehicular applications. Three oil and gas stationary customers accounted for 34%, 21% and 12%, respectively, of our consolidated net sales in the fiscal year ended September 30, 2013, and one of those customers accounted for 54% of our consolidated net sales in the fiscal year ended September 30, 2012. The loss of that customer could, at least on a short-term basis, have a material adverse effect on our operating results, financial condition and business prospects. Revenue in fiscal 2013 from the other two customers related to specific one-time conversions of multiple oil and gas high pressure fracturing engines as the result of new engine family approvals received during fiscal 2013. Therefore, we do not expect to receive significant recurring revenue from these two customers. Our operating plans assume significant growth in North American vehicular revenues, based in part on our relationship with WheelTime and its 18 members companies. The loss of our relationship with WheelTime and its members could, at least on a short-term basis, have a material adverse effect on our operating results, financial condition and business prospects.
We are exposed to risks related to technological obsolescence and competition.
We operate in competitive and evolving markets locally, nationally and globally.  These markets are subject to rapid technological change and changes in demand.  In seeking market acceptance, we will encounter competition from many sources, including other well-established and larger dominant original equipment providers such as CAT, Cummings, Detroit Diesel, Volvo and Mercedes as well as several other companies who offer dual fuel conversion solutions on both an invasive as well as non-invasive basis. Many of these competitors have substantially greater financial resources as well as substantially greater experience in conducting testing, manufacturing and marketing of products than we do. As a result, they may be able to adapt more quickly to new or emerging technologies, changes in customer requirements, or devote greater resources to the promotion and sale of their products and services. In addition, our competitors might succeed in developing or purchasing technologies and products that are more effective than those that we are developing or that would render our technology and products obsolete or noncompetitive. Competition could increase if new companies enter the markets in which we operate or our existing competitors expand their service lines.
We may not be able to protect our intellectual property rights adequately.
Our ability to compete is affected by our ability to protect our intellectual property rights. We rely on a single licensed patent, as well as on trademarks, copyrights, trade secrets, confidentiality procedures and licensing arrangements to protect our intellectual property rights. Despite these efforts, we cannot be certain that the steps we take to protect our proprietary information will be adequate to prevent misappropriation of our technology or protect that proprietary information. Companies in our industry often own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. As we gain increasing market share, the possibility of intellectual property rights claims against our licensed dual fuel technology could grow. Although the licensor is responsible for defending all claims against the licensed dual fuel technology, it may not have the resources to defend such claims adequately. Such claims, whether having merit or otherwise, could be time consuming and expensive to litigate or settle and could divert management resources and attention. No assurance can be given that, if challenged, our licensed patent or any other patents we may obtain will be found to be valid or enforceable, or that the patents of others will not have an adverse effect on our ability to do business.
Although our dual fuel technology is licensed from a related party, M&R Development, Inc., if we should default on the payment of royalties or other material terms of that license, the license can be terminated. Such termination would have a material adverse effect on our business and on our results of operations.
In addition, many of our distribution agreements require us to indemnify the distributor for third-party intellectual property infringement claims and may require that we pay the damages if there were an adverse ruling in any such claims and the licensor was unable to adequately indemnify us. If litigation is successfully brought by a third party against us and/or our licensor in respect of intellectual property, we may be required to cease distributing or marketing certain products or obtain licenses from the holders of the intellectual property at material cost, redesign affected products in such a way as to avoid infringing intellectual property rights, any or all of which could materially adversely affect our business, financial condition and results of operations. If those intellectual property rights are held by a competitor, we or the licensor may be unable to obtain the intellectual property at any price, which could also adversely affect our competitive position.  
There is uncertainty relating to our ability to enforce our rights under the content partner agreements.
Several of our exclusive distribution agreements are with foreign entities and are governed by the laws of foreign jurisdictions.  If a partner breaches such agreement, then we may incur the additional costs of determining our rights and obligations under the agreement and under applicable foreign laws, and enforcing the agreement in a foreign jurisdiction.   In addition, some of the exclusive distribution agreements contain arbitration provisions that govern disputes under the agreements and there is

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uncertainty with respect to the enforceability of such arbitration provisions under the laws of certain foreign jurisdictions.  If a dispute were to arise under an exclusive distribution agreement and the related arbitration provision was not effective, then we would be exposed to the additional costs of resolving the dispute through traditional legal avenues rather than through an arbitration process.
The creditworthiness of our distributors maybe an ongoing concern.
We may not always be able to collect all funds owed to us by our distributors.  Some distributors may experience financial difficulties which may adversely impact our collection of accounts receivable.  We regularly review the collectability and creditworthiness of our distributors to determine an appropriate allowance for credit to such distributors.  If our uncollectible accounts exceed that amount for which we have planned, this would adversely impact our operating results. We intend to minimize this concern with international customers by selling most of our products by way of advanced deposits and letters of credit or similar payment methods.
We depend on the manufacture and installation capabilities of third parties.
An important element of our strategy for the marketing and release of our products is to enter into various arrangements with distribution and installation entities such as our relationships with WheelTime and its member companies.  The success and commercialization of our dual fuel products will be dependent, in part, upon our ability to enter into additional similar arrangements and upon the ability of these third parties to perform their responsibilities.  Although we believe that parties to any such arrangements would have an economic motivation to succeed in performing their contractual responsibilities, the amount and timing of resources to be devoted to these activities may not be within our control.  There can be no assurance that any such arrangements will be available on terms acceptable to us, if any at all, and that such parties will perform their obligations as expected, or that any revenue will be derived from such arrangements.  If we are not able to enter into such arrangements, we could encounter delays in introducing our products into the market.
We assemble our dual fuel installation kits in-house after receiving components from outside vendors. The assembled kits are then installed by independent certified installers. Therefore, we may be dependent on contract manufacturers for the production of certain critical components for products as well as their installation.  In the event that we are unable to obtain or retain the necessary components and services on acceptable terms, we may not be able to continue to commercialize and market our products as planned.   There can be no assurance that we will be able to obtain adequate supplies of our products in a timely fashion at acceptable quality and prices, enter into arrangements for the manufacture of our products with manufacturers whose facilities and procedures comply with our requirements. There can be no assurance that such manufacturers will be able to adequately supply us with our product needs.  Our dependence upon others for the manufacture of certain critical components may adversely affect our ability to develop and deliver products on a timely and competitive basis.
We are subject to federal, regional, state, local and foreign regulations which may impair our ability to sell our products in
different jurisdictions, and more stringent regulations in the future may impair our ability to market our products.
Our dual fuel conversion business and operations are affected by various federal, regional, state, local and foreign laws, rules, regulations and authorities. The primary domestic governing body is the EPA which is responsible for monitoring and enforcing emissions standards and safety issues. All domestic dual fuel conversion systems are subject to the rules of the EPA, with the primary requirement being the addition of our dual fuel conversion system to an existing diesel engine does not negatively impact the current emission profile of the engine or the engine's original emission profile.
All vehicles and components on vehicles that operate on public highways must comply with the Federal Clean Air Act and meet specific EPA emission and safety guidelines or face anti-tampering infractions. Because our vehicular dual fuel system has not been previously EPA certified as a new system, due to the unique nature of our dual fuel technology and the fact our primary initial target market is older, out-of-warranty diesel vehicles, we had to demonstrate to the EPA that our technology has sound engineering design and does not degrade the emissions level of the model year that would be requested for commercialization.
In addition to our operations in the United States, we currently have in-country distributors in Africa, Australia, Canada and are intending to market our products and technologies in other international markets, including both industrialized and developing countries. Prior to marketing our dual fuel solution in countries outside the United States, we must ensure our technology is compliant with the appropriate in-country rules and regulations and there is no assurance our technology will comply with such rules and regulations.
Any new or revised government regulation that affects our dual fuel conversion business, whether at the foreign, federal, state, or local level, may increase our costs and the price of our products. As a result, these regulations could have a significant negative impact on our business, financial condition and results of operations.
Our success depends on the retention of our senior management and other key personnel.
Our success depends largely on the skills, experience and performance of our senior management. Our senior management consists of only two officers, our President/Chief Executive Officer, who has held that position for seven years, and our Chief

9



Financial Officer, who has held that position for fifteen years. The loss of either member of our senior management could have a material adverse effect on our business. We maintain a key man insurance policy only on our President/Chief Executive Officer. In addition, in the event that either our President or Chief Financial Officer is terminated by us without cause, the officer will be entitled to receive severance payments equal to twelve months' salary and certain benefits. In the event we are required to make these severance payments to our officers, it could have a material adverse effect on our results of operations for the fiscal period in which such payments are made.
In addition, to increase revenues, we will be required to hire additional sales and marketing officers and to develop a larger and more effective sales force. There can be no assurance that we will be able to hire, motivate and retain skilled marketing and sales personnel.
Seasonal factors may affect our quarterly operating results.
Seasonality may cause our total revenues to fluctuate. We may experience some seasonality in the winter months for the oil & gas industry and in the Hurricane Belt located in the Southeastern U.S., where critical care installations are usually not scheduled during the July-October time frame.
Inflation and changing prices may hurt our business.
We are generally exposed to the effects of inflation and changing prices. Because our dual fuel conversion technology replaces a certain percentage of diesel fuel with natural gas, we would be impacted by any material change in the net fuel savings between the two fuels (such as a decrease in diesel fuel prices and an increase in natural gas prices).
If we acquire other companies or businesses we will be subject to risks that could hurt our business.
A part of our business strategy may be based on future acquisitions or significant investments in businesses that offer complementary products and services.  Promising acquisitions are difficult to identify and complete for a number of reasons. Any acquisitions we may complete may be made at a premium over the fair value of the net assets of the acquired companies and competition may cause us to pay more for an acquired business than its long-term fair market value. There can be no assurance that we will be able to complete future acquisitions on terms favorable to us or at all. In addition, we may not be able to integrate any future acquired businesses, at all or without significant distraction of management into our ongoing business. In order to finance acquisitions, it may be necessary for us to issue shares of our capital stock to the sellers of the acquired businesses and/or to seek additional funds through public or private financings. Any equity or debt financing, if available at all, may be on terms which are not favorable to us and, in the case of an equity financing or the use of our stock to pay for an acquisition, may result in dilution to our existing stockholders.
As we grow, we are subject to growth related risks.
We are subject to growth-related risks, including capacity constraints and pressure on our internal systems and personnel. In order to manage current operations and any future growth effectively, we will need to continue to implement and improve our operational, financial and management information systems and to hire, train, motivate, manage and retain employees. We may be unable to manage such growth effectively. Our management, personnel or systems may be inadequate to support our operations, and we may be unable to achieve the increased levels of revenue commensurate with the increased levels of operating expenses associated with this growth. Any such failure could have a material adverse impact on our business, operations and prospects. In addition, the cost of opening new facilities and the hiring of new personnel for those facilities could significantly decrease our profitability, if the new facilities do not generate sufficient additional revenue.
We incur substantial costs to operate as a public reporting company.
We incur substantial legal, financial, accounting and other costs and expenses to operate as a public reporting company. We believe that these costs are a disproportionately larger percentage of our revenues than they are for many larger companies, and they contribute significantly to our operating losses. In addition, the rules and regulations of the Securities and Exchange Commission impose significant requirements on public companies, including ongoing disclosure obligations and mandatory corporate governance practices. Our limited senior management and other personnel need to devote a substantial amount of time to ensure ongoing compliance with these requirements. Our Common Stock is currently quoted on the OTC Markets Group's OTCQB tier. OTC Markets Group imposes no specific quotation requirements for its OTCQB tier other than that issuers must be current in their reporting to the Securities and Exchange Commission. If we are successful in listing our stock for trading on a national securities exchange or having our stock quoted on the Nasdaq Stock Market, we will be subject to additional disclosure and governance obligations. There can be no assurance that we will continue to meet all of the public company requirements to which we are subject on a timely basis, or at all, or that our compliance costs will not continue to be material.



10



Risks Related to the Securities Market and our Common Stock
Our stock price may be volatile, which could result in substantial losses for our shareholders.
Our Common Stock is thinly traded and an active public market for our stock may not develop. Consequently, the market price of our Common Stock may be highly volatile. Additionally, the market price of our Common Stock could fluctuate significantly in response to the following factors, some of which are beyond our control:
we are traded on the OTC Market's Group's OTCQB;
changes in market valuations of similar companies;
announcements by us or by our competitors of new or enhanced products, technologies or services or significant contracts, acquisitions, strategic relationships, joint ventures or capital commitments;
regulatory developments;
additions or departures of senior management and other key personnel;
deviations in our results of operations from the estimates of securities analysts; and
future issuances of our Common Stock or other securities.
We have options, warrants and Convertible Preferred Stock currently outstanding. Their exercise and/or conversion will cause dilution to existing and new shareholders.
As of September 30, 2013, we had options and warrants outstanding to purchase 34,201,803 additional shares of Common Stock. These reserved shares relate to the following: 4,180,000 shares for issuance upon exercise of awards granted under our 1996 Non-Employee Director Stock Option Plan and 2005 Stock Option Plan, and 30,021,803 shares for issuance upon exercise of other stock options and stock purchase warrants. In addition, at that date ,we had Convertible Preferred Stock which is convertible into 23,544,990 shares of Common Stock
The exercise of these options and warrants and the conversion of the Convertible Preferred Stock will cause additional shares of Common Stock to be issued, resulting in dilution to investors and our existing stockholders. As of September 30, 2013, approximately 45 million shares of our common stock were eligible for sale in the public market exclusive of the options, warrants and Convertible Preferred Stock noted above.
Our directors, executive officers and principal stockholders own a significant percentage of our shares, which will limit the ability of other shareholders to influence corporate matters.
Our directors, executive officers and other principal stockholders owned approximately 33 percent of our outstanding Common Stock on an as-converted basis as of September 30, 2013. Accordingly, these stockholders could have a significant influence over the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets and also could prevent or cause a change in control. The interests of these stockholders may differ from the interests of our other stockholders. Third parties may be discouraged from making a tender offer or bid to acquire us because of this concentration of ownership.
We have never paid dividends on our Common Stock and we do not anticipate paying any cash dividends in the foreseeable future.
We have paid no cash dividends on our Common Stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. As a result, capital appreciation, if any, of our Common Stock will be the shareholders' sole source of gain for the foreseeable future. The terms of the 10% Convertible Preferred Stock restrict our ability to pay dividends on our Common Stock if the dividends due on the 10% Convertible Preferred Stock are unpaid.
Anti-takeover provisions in our charter documents and Delaware law could discourage potential acquisition proposals and could prevent, deter or delay a change in control of our company.
Certain provisions of our Restated Certificate of Incorporation and By-Laws could have the effect, either alone or in combination with each other, of preventing, deterring or delaying a change in control of our company, even if a change in control would be beneficial to our stockholders. Delaware law may also discourage, delay or prevent someone from acquiring or merging with us.

Item 1B.     Unresolved Staff Comments
Not Applicable.

Item 2.      Properties

We rent approximately 1,100 square feet of office space in Lynnfield, Massachusetts, on a rolling six-month basis at $1,250 per month.


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Our dual fuel conversion subsidiary leases office and warehousing space in Iowa from M&R Development (“M&R”), a company co-owned by an American Power Group employee. On October 1, 2011, we executed a two year lease agreement requiring monthly rental payments of $10,000 on a triple net basis. On May 1, 2012, we executed a new three year lease with M&R. Under the terms of the lease, monthly rental payments of $10,000 on a triple net basis are required for the first year and then increasing in years two and three by the percentage growth in the Greater Des Moines Consumer Price Index (or equivalent index) for the latest available twelve months prior to the date of the increase. We have the option to renew this lease for an additional two year term at a mutually agreed upon rate.
We believe that these facilities are suitable for our current and anticipated requirements.

Item 3.    Legal Proceedings
From time to time we are subject to ordinary routine litigation and claims incidental to our business. We are not currently involved in any legal proceeds that we believe are material.

Item 4.    Mine Safety Disclosures
Not Applicable.

Part II

Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer's Purchases of Equity Securities

Our Common Stock has traded on the OTC Market Group's OTCQB tier under the symbol “GMTI” from February 2011 until August 2012. Prior to that time our stock was traded on the OTC Bulletin Board. On August 1, 2012, we changed our name to American Power Group Corporation and begin trading under the symbol "APGI" on August 7, 2012. The following table sets forth the high and low bid quotations for our Common Stock for the periods indicated. Quotations from the OTC Markets and the OTC Bulletin Board reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
 
Common Stock
 
High
Low
Fiscal Year 2012
 
 
 
 
Quarter Ended December 31, 2011
$
0.79

 
$
0.48

 
Quarter Ended March 31, 2012
0.84

 
0.45

 
Quarter Ended June 30, 2012
0.78

 
0.58

 
Quarter Ended September 30, 2012
0.85

 
0.47

 
                                            
Fiscal Year 2013
 
 
 
 
Quarter Ended December 31, 2012
$
0.66

 
$
0.49

 
Quarter Ended March 31, 2013
0.78

 
0.64

 
Quarter Ended June 30, 2013
0.70

 
0.53

 
Quarter Ended September 30, 2013
0.85

 
0.56

 
On December 18, 2013 the closing price of our Common Stock was $0.78 per share.
As of September 30, 2013, we estimate the approximate number of stockholders of record of our common stock to be 1,600. This number excludes individual stockholders holding stock under nominee security position listings.
We have not paid any cash dividends on our Common Stock since inception and do not anticipate paying any cash dividends on Common Stock in the foreseeable future. Our 10% Convertible Preferred Stock has a 10% annual dividend, payable quarterly in cash or in shares of Common Stock. The terms of the 10% Convertible Preferred Stock restrict our ability to pay dividends on our Common Stock if the dividends due on the 10% Convertible Preferred Stock are unpaid.


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Securities Authorized for Issuance under Equity Compensation Plans as of the End of Fiscal Year 2013 Equity Compensation Plan Information

The table below sets forth certain information as of September 30, 2013 with respect to equity compensation plans under which our common stock is authorized for issuance:
Plan Category
 


Number of securities to be issued upon exercise of outstanding options
 
Weighted average exercise price of outstanding options
 
Number of securities remaining available for future issuance
Equity compensation plans approved by stockholders (1)
 
4,172,000

 
$
.37

 
1,495,000

Equity compensation plans not approved by stockholders (2)
 
8,000

 
$
.81

 
-
 
 
4,180,000

 
 
 
1,495,000


(1)
This total includes shares to be issued upon exercise of outstanding options under the equity compensation plans that have been approved by shareholders (i.e., our 2005 Plan).
(2)
This total includes shares to be issued upon exercise of outstanding options under the equity compensation plan that has not been approved by shareholders (our 1996 Non-Employee Director Plan).

Item 6.
Selected Financial Data
Not Applicable.

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Annual Report on Form 10-K contains certain statements that are “forward-looking” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Litigation Reform Act”). These forward looking statements and other information are based on our beliefs as well as assumptions made by us using information currently available.
The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events, are subject to certain risks, uncertainties and assumptions, and are not guaranties of future performance. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, intended or using other similar expressions.
In accordance with the provisions of the Litigation Reform Act, we are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this Annual Report on Form 10-K. Important factors that could cause actual results to differ from our predictions include those discussed under “Risk Factors,” this “Management's Discussion and Analysis” and “Business.” Although we have sought to identify the most significant risks to our business, we cannot predict whether, or to what extent, any of such risks may be realized, nor can there be any assurance that we have identified all possible issues which we might face. In addition, assumptions relating to budgeting, marketing, product development and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause us to alter our marketing, capital expenditure or other budgets, which may in turn affect our financial position and results of operations. For all of these reasons, the reader is cautioned not to place undue reliance on forward-looking statements contained herein, which speak only as of the date hereof. We assume no responsibility to update any forward-looking statements as a result of new information, future events, or otherwise except as required by law.
Fiscal Year ended September 30, 2013 Compared to Fiscal Year ended September 30, 2012
Net sales from continuing operations for the fiscal year ended September 30, 2013 increased $4,383,242 or 166% to $7,017,122 as compared to net sales of $2,633,880 for the fiscal year ended September 30, 2012. The increase was attributable to stronger North American stationary revenues which accounted for approximately 74% of overall revenue, especially in the area of oil and gas conversion revenue which increased approximately $3.4 million. This increase was primarily due to orders from three customers which accounted for approximately 67% of overall revenue as well as numerous follow-on orders from existing customers. North American vehicular revenues for the fiscal year ended September 30, 2013 increased approximately $816,000

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or approximately 300% to approximately $1.1 million as a result of our ability to actively solicit customer orders due to the increased number of vehicular EPA approvals received to date.
During the fiscal year ended September 30, 2013, our gross profit was $2,726,127 or 39% of net sales as compared to a gross profit of $698,113 or 27% for the fiscal year ended September 30, 2012. The increase is attributable to higher revenue and lower manufacturing overhead costs during the fiscal year ended September 30, 2013. The gross profit for the fiscal year ended September 30, 2013 also included approximately $350,000 of costs associated with our successful effort to complete the necessary EPA emissions testing procedures required to legally sell our dual fuel for an additional popular engine family used in the drilling and horizontal fracturing industry. Approximately $1.5 million of our oil and gas revenue increase was attributable to our ability to sell into this new engine family.
Selling, general and administrative expenses for the fiscal year ended September 30, 2013 increased $1,670,029 or 57% to $4,597,311 as compared to $2,927,282 for the fiscal year ended September 30, 2012. The increase was primarily attributable to increased sales and marketing costs of approximately $610,000, the inclusion of $424,549 of non-cash amortization expense associated with the vested WheelTime member incentive warrants and to a lesser extent, increased wages of approximately $389,000 associated with an increased number of employees and commissions.
During the fiscal year ended September 30, 2013, interest and financing expense decreased $1,453,213 to $158,839 as compared to $1,612,052 for the fiscal year ended September 30, 2012. The decrease was primarily attributable to decreased borrowings and the absence of accelerated amortization of debt discounts and financing costs of approximately $1.25 million incurred in fiscal year September 30, 2012. In addition, we recorded a non-cash incentive conversion expense of $582,143 during the fiscal year ended September 30, 2012 associated with the repricing of certain convertible debentures.
Our loss from continuing operations decreased $2,387,324 to $2,109,841 for the fiscal year ended September 30, 2013 as compared to a loss of $4,497,165 for the fiscal year ended September 30, 2012.
The gain from discontinued operations for the fiscal year ended September 30, 2013 of $66,922 relates to a refund of prior amounts paid and the loss on disposal of discontinued operations for the fiscal year ended September 30, 2012 of $63,085 relates to our former molded rubber products operations which were sold in August 2011.
Our net loss for the fiscal year ended September 30, 2013 was $2,042,919 or $(0.04) per basic share as compared to a net loss of $4,560,250 or ( $0.11) per basic share for the fiscal year ended September 30, 2012. The calculation of net loss per share attributable to Common stockholders of $(0.06) for the fiscal year ended September 30, 2013 reflects the inclusion of $883,370 of 10% Convertible Preferred Stock dividends paid. The loss per share attributable to Common stockholders of $14,666,827 or $(0.37) for the fiscal year ended September 30, 2012, reflects the inclusion of $358,460 of 10% Convertible Preferred Stock dividends paid and a beneficial conversion feature of $9,748,127 associated with the issuance of the 10% Convertible Preferred Stock on April 30, 2012.
Liquidity and Capital Resources
As of September 30, 2013, we had $1,984,169 in cash, cash equivalents and restricted certificates of deposit and working capital of $2,113,825. As of September 30, 2013, under the terms of our working capital line as extended in December 2013, we had sufficient collateral to borrow an additional $992,339 above the then outstanding balance. Based on our fiscal 2014 operating budget, cash on hand at September 30, 2013 and anticipated availability under our bank working capital line, we believe we will be able to satisfy our cash requirements through at least the end of calendar 2014 without the need to materially modify our operating plan.We understand our continued existence is dependent on our ability to generate positive operating cash flow, achieve profitability on a sustained basis and generate improved performance. If we are unable to achieve and sustain profitability and we are unable to obtain additional financing to supplement our cash position, our ability to maintain our current level of operations could be materially and adversely affected. There is no guarantee we will be able to achieve profitability.
Our Consolidated Statements of Cash Flows reflect events for the fiscal year ended September 30, 2013 and 2012 as they affect our liquidity. During the fiscal year ended September 30, 2013, net cash used by operations was $1,797,928. Our net loss for the fiscal year ended September 30, 2013 was $2,042,919 with our cash flow being positively impacted by the following non-cash expenses and changes to our working capital: $794,800 of depreciation, stock compensation expense and amortization. During the fiscal year ended September 30, 2012, net cash used in operating activities was $2,216,086. Our net loss for the fiscal year ended September 30, 2012 was $4,560,250 while our cash flow was positively impacted by the following additional non-cash expenses: $2,282,314 of depreciation, amortization, stock compensation expense and deferred financing costs.
Net cash used in investing activities was $2,948,900 and $1,451,497, for fiscal years ending September 30, 2013 and September 30, 2012, respectively, reflecting the capitalized costs associated with our dual fuel electronic control unit engine family software applications.
Net cash provided by financing activities was $2,007,512 for the fiscal year ended September 30, 2013 reflecting the net proceeds of $2,646,279 from the sale of our 10% Convertible Preferred Stock. Net cash provided by financing activities was

14



$7,937,411 during the fiscal year ended September 30, 2012, reflecting the proceeds of approximately $7,410,343 from the sale of our 10% Convertible Preferred Stock, $1,185,000 of new convertible debentures and $436,000 of notes payable proceeds.
Effects of Inflation and Changing Prices
We are generally exposed to the effects of inflation and changing prices. Given that our dual fuel conversion technology replaces a certain percentage of diesel fuel with natural gas, we would be impacted by any material change in the net fuel savings between the two fuels (such as a decrease in diesel fuel prices and an increase in natural gas prices). We have generally been unaffected by interest rate changes because we no longer maintain any floating-rate debt.
Off-Balance Sheet Arrangements
We lease our Iowa facilities under a non-cancelable short term operating lease which are described in Note 7 to our Consolidated Financial Statements.
Environmental Liability
There are no known material environmental violations or assessments.

Critical Accounting Policies
Revenue Recognition
Our dual fuel conversion operations derive revenue from (1) product revenue which is earned from the sale and installation of dual fuel conversion equipment and (2) maintenance and service agreements. All components are purchased from external sources including several proprietary patented components which are configured by our internal engineering staff to a customer's specific diesel engine family. The components are assembled into installation kits by us and then delivered on site for installation. All installations are managed by American Power Group led team or certified third party installer.
Overall, our services and dual fuel conversion equipment for both vehicular and stationary are generally sold based upon purchase orders or contracts with our customers that include fixed or determinable prices but do not include right of return provisions or other significant post-delivery obligations. We recognize revenue from product sales when title passes to the customer, the customer assumes risks and rewards of ownership, collectability is reasonably assured, and delivery occurs as directed by our customer. Service revenue, including engineering services, is recognized when the services are rendered and collectability is reasonably assured.
Percentage of Completion. Revenue from certain long-term, integrated project management contracts to provide and install our dual fuel conversion equipment for stationary power generation is reported on the percentage-of-completion method of accounting. Progress is generally based upon costs incurred to date in relation to the total estimated costs for each contract. Revisions in costs and earnings during the course of the contract are reflected in the accounting period in which facts requiring revisions become known. At the time a loss on a contract becomes know, the entire amount of the estimated loss is accrued.
Multiple-Element Arrangements. We also enter into Multiple-Element Arrangements to sell our dual fuel conversion equipment with engineering and installation services in both the stationary and vehicular applications. We recognize the revenue associated with the dual fuel conversion equipment when title and risk passes to our customer and recognize the service revenue when the service is complete using parameters specified in the first paragraph of this Revenue Recognition Policy.
Recent Accounting Pronouncements
ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities
This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet, and instruments and transactions subject to an agreement similar to a master netting arrangement. The requirements are effective for annual periods beginning on or after January 1, 2013, and interim periods within those annual periods. We are currently evaluating the prospective effects, if any, of adopting this guidance.

15



ASU 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment
This ASU gives an entity the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test for indefinite-lived intangible assets other than goodwill. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity's financial statements for the most recent annual or interim period have not yet been issued.We are currently evaluating the prospective effects, if any, of adopting this guidance.
ASU 2012-04, Technical Corrections and Improvements
This ASU makes certain incremental improvements to U.S. generally accepted accounting principles (GAAP) including, among other revisions, conforming amendments that identify when the use of fair value should be linked to the definition of fair value in ASC 820. The majority of the amendments in ASU 2012-04 were effective upon issuance on October 1, 2012, for both public entities and nonpublic entities. For public entities, the more substantive amendments that are subject to transition guidance are effective for fiscal years beginning after December 15, 2012. We are currently evaluating the prospective effects, if any, of adopting this guidance.
ASU 2013-02 Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
This ASU requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. Public companies are required to comply with the requirements of ASU 2013-02 for all reporting periods (interim and annual) beginning after December 15, 2012. We are currently evaluating the prospective effects, if any, of adopting this guidance.

ASU 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for which the Total Amount of the Obligation is Fixed at the Reporting Date (a consensus of the FASB Emerging Issues Task Force)
This ASU requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date, as the sum of the following:
    The amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors
        Any additional amount the reporting entity expects to pay on behalf of its co-obligors

The amendments in ASU 2013-04 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We are currently evaluating the prospective effects, if any, of adopting this guidance.

ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force)
Per this ASU, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We are currently evaluating the prospective effects, if any, of adopting this guidance.


16



Item 7A.    Quantitative and Qualitative Disclosures About Market Risk
Not applicable.

Item 8.        Financial Statements and Supplementary Data
For information required with respect to this Item 8, see “Consolidated Financial Statements” on pages 31 through 56 of this report.

Item 9.        Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.

Item 9A.    Controls and Procedures
As required by paragraph (b) of Rules 13a-15 or 15d-15 under the Securities Exchange Act of 1934, as amended, our chief executive officer and chief financial officer evaluated our company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our company's reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our company's reports filed under the Exchange Act is accumulated and communicated to our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Based on its evaluation, our management concluded that as of the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were effective.

Management's Report on Internal Control Over Financial Reporting
Our Company's management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) for our company. Our Company's internal control over financial reporting is designed to provide reasonable assurance, not absolute assurance, regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our company's assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that our company's receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.
As required by Rule 13a-15(c) promulgated under the Exchange Act, our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our internal control over financial reporting as of September 30, 2013. Management's assessment was based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control over Financial Reporting - Guidance for Smaller Public Companies. Management, under the supervision and with the participation of the Company's chief executive officer and chief financial officer, assessed the effectiveness of the company's internal control over financial reporting as of September 30, 2013 and concluded that it is effective.
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that permit the Company to provide only management's report in this Annual Report.


17



Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the fourth quarter of our fiscal year ended September 30, 2013 that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.    Other Information
None.



Part III

Item 10.    Directors, Executive Officers and Corporate Governance

Our directors and executive officers are as follows:
Maurice E. Needham
73
Chairman of the Board of Directors
Lyle Jensen
62
Chief Executive Officer; President; Director
Charles E. Coppa
50
Chief Financial Officer; Treasurer; Secretary
Lew F. Boyd
68
Director
Neil Braverman
74
Director
Jamie Weston
48
Director
Raymond L.M. Wong
60
Director
Each director is elected for a period of one year at the annual meeting of stockholders and serves until his or her successor is duly elected by the stockholders. The holders of the Common Stock have the right to elect three members of the Board of Directors and the holders of the Common Stock and the 10% Convertible Preferred Stock, voting together as a single class, have the right to elect the balance of the total number of directors. The officers are appointed by and serve at the discretion of the Board of Directors. All outside directors receive $5,000 per quarter as board compensation. Messrs. Weston and Wong and former director Dr. Faliks have agreed to forgo their quarterly retainers.
On January 10, 2013, Kevin Tierney, Sr., resigned from the Board of Directors in anticipation of the requirement set forth in the Company’s Restated Certificate of Incorporation, as amended, that the number of directors elected by the holders of our Common Stock, voting as a separate class, be reduced from four to three effective on and after March 31, 2013. Mr. Tierney’s resignation was not due to any disagreement known to the Company’s executive officers with respect to any matter relating to the Company’s operations, policies or practices.
On October 30, 2013, Raymond L. M. Wong, Managing Director of Spring Mountain Capital, LP, joined the Company’s Board of Directors replacing Dr. Faliks as one of Spring Mountain’s two Board of Director designees as well as replacing Dr. Faliks on the Audit Committee.
We have established an Audit Committee consisting of Mr. Weston (Chair) and Mr. Wong, and a Compensation Committee consisting of Messrs. Boyd (Chair), Needham,Weston and Braverman. Our Board of Directors has determined that Mr. Weston is an “audit committee financial expert” within the meaning given that term by Item 407(d)(5) of Regulation S-K.
MAURICE E. NEEDHAM has been Chairman since June 1993. From June 1993 to July 21, 1997, Mr. Needham also served as Chief Executive Officer. He previously served as a Director of Comtel Holdings, an electronics contract manufacturer since April 1999. He previously served as Chairman of Dynaco Corporation, a manufacturer of electronic components which he founded in 1987. Prior to 1987, Mr. Needham spent 17 years at Hadco Corporation, a manufacturer of electronic components, where he served as President, Chief Operating Officer and Director. We believe that Mr. Needham's extensive business, operational and management experience, including his over eighteen years with our company give him the qualifications and skills to serve as a director and member of the Compensation Committee.
LYLE JENSEN has been a Director since May 2002. On April 12, 2006, Mr. Jensen became our Chief Executive Officer. Mr. Jensen previously was Executive Vice President/Chief Operations Officer of Auto Life Acquisition Corporation, an automotive aftermarket dealer of fluid maintenance equipment. Prior to that, he was a Business Development and Operations consultant after holding executive roles as Chief Executive Officer and minority owner of Comtel and Corlund Electronics, Inc. He served as President of Dynaco Corporation from 1988 to 1997; General Manager of Interconics from 1984 to 1988; and various financial

18



and general management roles within Rockwell International from 1973 to 1984. The Board of Directors believes Mr. Jensen has the necessary qualifications and skills to serve as Chief Executive Officer and as a director based on his financial and operational background and the management expertise he has cultivated during his nearly nine year tenure with our company.
CHARLES E. COPPA has served as Chief Financial Officer, Treasurer and Secretary since March 1998. From October 1995 to March 1998, he served as Corporate Controller. Mr. Coppa was Chief Financial Officer and Treasurer of Food Integrated Technologies, a publicly-traded development stage company from July 1994 to October 1995. Prior to joining Food Integrated Technologies, Inc., Mr. Coppa served as Corporate Controller for Boston Pacific Medical, Inc., a manufacturer and distributor of disposable medical products, and Corporate Controller for Avatar Technologies, Inc., a computer networking company. From 1985 to 1990 Mr. Coppa was as an auditor with Grant Thornton where he obtained his CPA designation. The Board of Directors believes Mr. Coppa has the necessary qualifications and skills to serve as Chief Financial Officer based on his financial and management expertise he has cultivated during his nearly seventeen year tenure with the company.
LEW F. BOYD has been a Director since August 1994. Mr. Boyd is the founder and since 1985 has been the Chief Executive Officer of Coastal International, Inc., an international business development and executive search firm, specializing in the energy and environmental sectors. Previously, Mr. Boyd had been Vice President/General Manager of the Renewable Energy Division of Butler Manufacturing Corporation and had served in academic administration at Harvard and Massachusetts Institute of Technology. The Board of Directors believes that Mr. Boyd's extensive business and executive recruitment experience, including his over seventeen years with our company, give him the qualifications and skills to serve as a director and Chairman of the Compensation Committee.
NEIL BRAVERMAN has been a Director since April 30, 2012. Mr. Braverman is the founder of Associated Private Equity. He previously founded and was co-Chairman of Safeskin Corporation, the leading manufacturer of latex/synthetic gloves to the healthcare and electronic markets, which was sold to Kimberly Clark Corporation in 1999. Prior to Safeskin Corporation, Mr. Braverman founded Paramount Oil Corporation, a manufacturer of motor and industrial oils. During his career, Mr. Braverman founded and managed numerous real estate investments and manufacturing firms. He began his entrepreneur career founding and building the largest wig company in the U.S., which sold to U.S. Industries. The Board of Directors believes Mr. Braverman's extensive business and management experience give him the qualifications and skills to serve as a director.
JAMIE WESTON has been a Director since April 30, 2012. Since April 2011, Mr. Weston has served as a Managing Director of Spring Mountain Capital. From July 1995 to October 2010, he was a Partner at The Wicks Group of Companies, a private equity firm with close to $1 billion under management, focused on selected segments of the information, education, and media industries. During his 15 years at Wicks, Mr. Weston was an integral part of its investment and management activities and served on the board of directors of many of its portfolio companies. While at Wicks, he directly structured and negotiated more than 20 acquisitions and divestitures and worked on more than 40 additional closed transactions. Prior to Wicks, Mr. Weston worked at IBJ Whitehall Bank & Trust Company and National Westminster Bancorp, where he completed leveraged financings. He received an M.B.A. from Fordham University and a B.A. in Economics from Drew University. The Board of Directors believes that Mr. Weston's extensive business and financial experience give him the qualifications and skills to serve as a director.
RAYMOND L.M. WONG has been a Director since October 2013. Since 2007, Mr. Wong has been a Managing Director of Spring Mountain Capital’s private equity group. Mr. Wong was previously a senior Managing Director in the Investment Banking Division of Merrill Lynch & Co., Inc. While at Merrill Lynch, Mr. Wong served on the Investment Banking Operating Committee and as Chairman of the Corporate Finance Committee. During his 25 years at Merrill Lynch, he had responsibility for the corporate finance relationships for many of the firm's largest corporate clients. Before joining Spring Mountain Capital, Mr. Wong was the Managing Member of DeFee Lee Pond Capital LLC, a financial advisory and investment firm. Mr. Wong serves on the board of directors of several companies, including Alleghany Corporation and Merrill Lynch Ventures, LLC. Mr. Wong received his M.B.A. with honors from Harvard Business School and graduated summa cum laude from Yale College with a B.A. in Political Science.The Board of Directors believes that Mr. Wong's extensive business and financial experience give him the qualifications and skills to serve as a director.
Compliance with Section 16(a) of the Securities Exchange Act of 1934

Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than 10% of our common stock, to file with the Securities and Exchange Commission initial reports of ownership of our common stock and other equity securities on Form 3 and reports of changes in such ownership on Form 4 and Form 5. Officers, directors and 10% stockholders are required by the Securities and Exchange Commission regulations to furnish us with copies of all Section 16(a) forms they file.
To the best of management's knowledge, based solely on review of the copies of such reports furnished to us during and with respect to our most recent fiscal year, and written representations that no other reports were required, all Section 16(a) filing requirements applicable to our officers and directors have been complied with the following exceptions:


19



Dr. Kahn filed a Form 5 on October 16, 2012 with respect to the exercise of an option granted by the Company to purchase 69,000 shares of Common Stock on June 1, 2012.

Mr. Galvin filed a Form 5 on October 16, 2012 with respect to the exercise of an option granted by the Company to purchase 10,000 shares of Common Stock on June 1, 2012.

Mr. Braverman filed an amendment on December 31, 2012 to the Form 3 originally filed on May 10, 2012, to disclose the beneficial ownership of 875,000 shares of Common Stock issuable upon conversion of 10% Convertible Preferred Stock and 875,000 shares of Common Stock issuable upon exercise of warrants to purchase Common Stock which Associated Private Equity, LLC (“Associated”) had the right to acquire pursuant to an additional investment right granted in connection with the Company’s private placement on April 30, 2012. Mr. Braverman filed a Form 4 on March 27, 2013 to disclose a change in the form of beneficial ownership of such shares of Common Stock in connection with the exercise of the additional investment right by Associated on March 19, 2013. Mr. Braverman is a member of Associated and, pursuant to Rule 16a-1 of the Securities Exchange Act of 1934, as amended, Mr. Braverman may be deemed to be the beneficial owner of any securities reported herein that may be deemed to be beneficially owned by Associated. Mr. Braverman disclaims beneficial ownership with respect to any shares of Common Stock except to the extent of his pecuniary interest therein.

On April 11, 2013, Spring Mountain Capital, LLC (“Spring Mountain”) and several of its affiliates filed a Form 4 to report (i) the receipt on March 31, 2013 of an aggregate of 97,277 shares of Common Stock as a payment-in-kind dividend on 366.66 shares of 10% Convertible Preferred Stock owned by Spring Mountain and such affiliates on the dividend payment date, and (ii) a change in the form of beneficial ownership of an aggregate of 2,166,666 shares of Common Stock issuable upon conversion of 10% Convertible Preferred Stock and an aggregate of 2,166,666 shares of Common Stock issuable upon exercise of warrants to purchase Common Stock which Spring Mountain and such affiliates acquired in connection with the exercise on March 28, 2013 of additional investment rights granted in connection with the Company’s private placement on April 30, 2012.

On April 11, 2013, Dr. Faliks and Mr. Weston each filed a Form 4 to report (i) the beneficial ownership of 18,332 shares of Common Stock issued on March 31, 2013 as a payment-in-kind dividend on 65.33 shares of 10% Convertible Preferred Stock owned by SMC Employees Partnership (“SMC EP”), an affiliate of Spring Mountain, on the dividend payment date, and (ii) a change in the form of beneficial ownership of 408,333 shares of Common Stock issuable upon conversion of 10% Convertible Preferred Stock and 408,333 shares of Common Stock issuable upon exercise of warrants to purchase Common Stock which SMC EP acquired in connection with the exercise on March 28, 2013 of an additional investment right granted in connection with the Company’s private placement on April 30, 2012.

On July 16, 2013, Spring Mountain and several of its affiliates filed a Form 4 to report the receipt on July 10, 2013 of an aggregate of 50,821shares of Common Stock as a payment-in-kind dividend on 133.33 shares of 10% Convertible Preferred Stock owned by Spring Mountain and such affiliates on the dividend payment date.

On July 16, 2013, Dr. Faliks and Mr. Weston each filed a Form 4 to report the beneficial ownership of 24,902 shares of Common Stock issued on July 10, 2013 as a payment-in-kind dividend on 65.33 shares of 10% Convertible Preferred Stock owned by SMC EP on the dividend payment date.

On October 4, 2013, Spring Mountain and several of its affiliates filed a Form 4 to report the receipt on October 1, 2013 of an aggregate of 44,649 shares of Common Stock as a payment-in-kind dividend on 133.33 shares of 10% Convertible Preferred Stock owned by Spring Mountain and such affiliates on the dividend payment date.

On October 4, 2013, Dr. Faliks and Mr. Weston each filed a Form 4 to report the beneficial ownership of 21,883 shares of Common Stock issued on October 1, 2013 as a payment-in-kind dividend paid on 65.33 shares of 10% Convertible Preferred Stock owned by SMC EP on the dividend payment date.

At the time of the transactions reported above, Dr. Faliks and Mr. Weston were each partners in SMC EP and pursuant to Rule 16a-1 of the Securities Exchange Act of 1934, as amended, they may each be deemed to be the beneficial owner of any securities reported herein that are beneficially owned by SMC EP. Dr. Faliks and Mr. Weston each disclaim beneficial ownership with respect to any shares of Common Stock except to the extent of his respective pecuniary interest therein.

On August 20, 2013, the Allen Kahn MD Revocable Trust dated January 15, 1996 (the “Trust”) and its trustee, Marc J. Chalfen, filed a Form 3 to report the acquisition of 5,031,250 shares of Common Stock by the Trust on November 28, 2012, upon the death of Dr. Kahn. Pursuant to Rule 16a-1 of the Securities Exchange Act of 1934, as amended, Mr. Chalfen may be deemed to be the beneficial owner of any securities reported herein that may be deemed to be beneficially owned by the Trust. Mr. Chalfen disclaims beneficial ownership of the shares of Common Stock owned by the Trust.

20




Code of Ethics
We adopted a code of ethics which applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We have posted our code of ethics on our corporate website, www.americanpowergroupinc.com.

Item 11.    Executive Compensation

Summary Compensation Table

The following table summarizes the compensation paid or accrued for services rendered during the fiscal years ended September 30, 2013 and 2012, to our Chief Executive Officer and our Chief Financial Officer. We did not grant any stock appreciation rights or make any long-term plan payouts during the fiscal years ended September 30, 2013 and 2012.
 
                Annual Compensation
Option
All Other
 
Name and Principal Position
Fiscal Year
Salary
Bonus
Awards (1)(2)
Compensation(3)
Total
Lyle Jensen, Chief Executive Officer
2013
$262,500
$—
$—
$25,882
$288,382
 
2012
250,000
9,000
25,679
284,679
 
 
 
 
 
 
 
Charles Coppa, Chief Financial Officer
2013
$170,000
$—
$—
$22,095
$192,095
 
2012
161,500
9,000
25,544
196,044
(1) Amounts shown do not reflect compensation actually received by the named executive officer. The amounts in the Option Awards column reflect the dollar amount recognized as compensation cost for financial statement reporting purposes for the fiscal year ended September 30, 2012, in accordance with ASC 718 for all stock options granted in such fiscal years. The calculation in the table above excludes all assumptions with respect to forfeitures. There can be no assurance that the amounts set forth in the Option Awards column will ever be realized. A forfeiture rate of zero was used in the expense calculation in the financial statements.
(2)
During fiscal year 2012, Messrs. Jensen and Coppa were each granted options to purchase 50,000 shares of Common Stock which vested immediately on the date of grant and have a ten-year term.
(3)
Represents payments made to or on behalf of Messrs. Jensen and Coppa for health and life insurance and auto allowances.
Employment Agreements
Mr. Jensen has a five-year employment agreement pursuant to which he receives a base salary to $262,500 per year. The agreement automatically renews for one additional year upon each anniversary, unless notice of non-renewal is given by either party. We may terminate the agreement without cause on 30 days' prior notice. The agreement provides for payment of twelve months' salary and certain benefits as a severance payment for termination without cause. Any increases in Mr. Jensen's base salary will be made in the discretion of the Board of Directors upon the recommendation of the Compensation Committee. Mr. Jensen's employment agreement provides for cash incentive compensation in respect of any fiscal year of up to the lesser of (x) 20% of our audited annual profit after tax, as reported in the financial statements included in our Annual Report on Form 10-K for such fiscal year or (y) $150,000 and stock options based on (i) non-financial criteria which may be established by the Board of Directors and (ii) upon a calculation of our annual audited earnings before interest, taxes, depreciation and amortization (“EBITDA”) as a percentage of our revenue, as follows:
 
EBITDA as a % of Revenue
 
Stock Option Performance Incentive Earned
Base:
<11.0%
 
None
Level I:
 11.1% - 11.99%
 
Options to purchase 20,000 shares of the Company's common stock.
Level II:
 12.0% - 12.99%
 
Options to purchase 40,000 shares of the Company's common stock.
Level III:
13.0% - 13.99%
 
Options to purchase 60,000 shares of the Company's common stock.
Level IV:
14.0% - 14.99%
 
Options to purchase 80,000 shares of the Company's common stock.
Level V:
> 15.0%
 
Options to purchase 100,000 shares of the Company's common stock.

21



Mr. Jensen did not receive any incentive compensation during fiscal years 2013 or 2012.
Mr. Coppa has a two-year employment agreement pursuant to which he receives a base salary to $170,000 per year. The agreement automatically renews for two additional years upon each anniversary, unless notice of non-renewal is given by either party. We may terminate the agreement without cause on 30 days' prior notice. The agreement provides for payment of twelve months' salary and certain benefits as a severance payment for termination without cause. Any increases in Mr. Coppa's base salary will be made in the discretion of the Board of Directors upon the recommendation of the Compensation Committee. Mr. Coppa's employment agreement also provides for incentive compensation in respect of any fiscal year based on mutually agreed performance measures as determined our Compensation Committee. Any increases or bonuses will be made at the discretion of our Board of Directors upon the recommendation of the Compensation Committee. Mr. Coppa did not receive any incentive compensation during fiscal years 2013 or 2012
Outstanding Equity Awards
The following table sets forth information concerning outstanding stock options for each named executive officer as of September 30, 2013:
Name
Date of Grant
Number of Securities Underlying
Unexercised Options
     Exercisable            Unexercisable
Exercise
Price
Per Share
            Option
         Expiration
              Date  
Lyle Jensen
April 24, 2004 (1)
2,000
$1.10
April 24, 2014
 
June 15, 2005 (1)
2,000
$0.51
June 15, 2015
 
April 12, 2006 (2)
500,000
$0.28
April 12, 2016
 
December 18, 2006 (2)
100,000
$0.35
December 18, 2016
 
December 29, 2006 (3)
25,000
$0.36
December 29, 2016
 
February 8, 2008 (3)
100,000
$0.34
February 8, 2018
 
September 30, 2008 (3)
100,000
$0.33
September 30, 2018
 
November 17, 2008 (2)
80,000
20,000
$0.33
November 17, 2018
 
June 8, 2009 (3)
100,000
$0.22
June 8, 2019
 
June 27, 2011 (3)
15,000
$0.80
June 27, 2021
 
January 18, 2012 (3)
50,000
$0.48
January 18, 2022
 
 
 
 
 
 
Charles Coppa
June 6, 2006 (2)
137,000
$0.36
June 6, 2016
 
September 28, 2007 (2)
45,000
$0.35
September 28, 2017
 
November 18, 2008 (2)
80,000
20,000
$0.35
November 18, 2018
 
June 8, 2009 (2)
160,000
40,000
$0.22
June 8, 2019
 
March 4, 2010 (2)
60,000
40,000
$0.36
March 4, 2020
 
December 16, 2010 (3)
25,000
$0.45
December 16, 2020
 
June 27, 2011 (3)
50,000
$0.80
June 27, 2021
 
January 18, 2012 (3)
50,000
$0.48
January 18, 2022
 
 
 
 
 
 

(1)
These options were granted under the 1996 Non Employee Stock Option Plan, have a ten-year term and vested immediately on the date of grant.
(2)
These options were granted under the 2005 Stock Option Plan, have a ten-year term and vest at an annual rate of 20% over a five-year period from the date of grant.
(3)
These options were granted under the 2005 Stock Option Plan, have a ten-year term and vested immediately on the date of grant.
Director Compensation
The following table sets forth information concerning the compensation of our Directors who are not named executive officers for the fiscal year ended September 30, 2013:

22



Name
Fees Earned or Paid in
Cash or Common Stock (1)
Option Awards
All Other
Compensation(2)
Total
Maurice Needham
$—
$—
$112,117
$112,117
Lew Boyd
20,000
 
20,000
Kevin Tierney, Sr
5,000
 
5,000
Neil Braverman
20,000
20,000
Aviel Faliks
 
Jamie Weston
 

(1)
All non-employee directors receive a quarterly board fee of $5,000 per quarter with the exception of Messrs. Faliks and Weston who have agreed to forgo their quarterly retainers. Mr. Tierney resigned from the Board on December 8, 2012.
(2)
During fiscal year 2013, we paid Mr. Needham $112,117 relating to salary ($92,000), health and life insurance ($11,117) and auto allowance ($9,000).
As of September 30, 2013, each Director who is not a named executive officer for the fiscal year ended September 30, 2013 holds the following aggregate number of shares under outstanding stock options:
Name
Number of Shares Underlying Outstanding Stock Options
Maury Needham
850,000
Lew Boyd
344,000
Neil Braverman
50,000
Aviel Faliks
Jamie Weston
Stock Option Plans
Our 1993 Stock Option Plan (the “1993 Plan”) was established to provide options to purchase shares of common stock to our employees, officers, directors and consultants. The 1993 Plan expired on June 10, 2004 as it related to new grants. During the fiscal year ended September 30, 2012, the remaining 22,500 options outstanding under the 1993 plan expired unexercised.
On June 16, 2005, our shareholders approved the 2005 Stock Option Plan (the “2005 Plan”) and in March 2010 approved an increase to the number of shares authorized under the 2005 Plan from 3,500,000 to 6,000,000 shares. Options granted under the 2005 Plan may be either options intended to qualify as “incentive stock options” under Section 422 of the Internal Revenue Code of 1986, as amended; or non-qualified stock options.
Incentive stock options may be granted under the 2005 Plan to employees, including officers and directors who are employees. Non-qualified options may be granted to our employees, directors and consultants. The 2005 Plan is administered by our Board of Directors, which has the authority to determine:
the persons to whom options will be granted;
the number of shares to be covered by each option;
whether the options granted are intended to be incentive stock options;
the manner of exercise; and
the time, manner and form of payment upon exercise of an option.
Incentive stock options granted under the 2005 Plan may not be granted at a price less than the fair market value of our common stock on the date of grant (or less than 110% of fair market value in the case of persons holding 10% or more of our voting stock). Non-qualified stock options may be granted at an exercise price established by our Board which may not be less than 85% of fair market value of our shares on the date of grant. Current tax laws adversely impact recipients of non-qualified stock options granted at less than fair market value; however, we do not expect to make such grants. Incentive stock options granted under the 2005 Plan must expire no more than ten years from the date of grant, and no more than five years from the date of grant in the case of incentive stock options granted to an employee holding 10% or more of our voting stock.
During the year ended September 30, 2013, 200,000 options were granted under the 2005 Plan at an exercise price ranging from $.54. As of September 30, 2013, there were 4,172,000 options granted and outstanding under the 2005 Plan which are exercisable at prices ranging from $0.23 to $0.80.
During the year ended September 30, 2012, 500,000 options were granted under the 2005 Plan at exercise prices ranging from $.48 to $.60 per share.

23



Non-Employee Director Stock Option Plan
Our 1996 Non-Employee Director Stock Option Plan was intended to promote our interests by providing an inducement to obtain and retain the services of qualified persons who are not officers or employees to serve as members of our Board of Directors. During fiscal year 2006, the Compensation Committee agreed to discontinue future option grants made under the Non-Employee Director Stock Option Plan.
As of September 30, 2013 and 2012, options to purchase 8,000 are outstanding and exercisable at prices ranging from $0.51 to $1.10.
Employee Benefit Plan
We have implemented a Section 401(k) plan for all eligible employees. Employees are permitted to make elective deferrals of up to 75% of employee compensation up to the maximum contribution allowed by law and employee contributions to the 401(k) plan are fully vested at all times. We may make discretionary contributions to the 401(k) plan which become vested over a period of five years. We did not make any discretionary contributions to the 401(k) plan during the fiscal years ended September 30, 2013 and 2012.


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

The following tables set forth certain information regarding beneficial ownership of our common stock as of September 30, 2013:
by each of our directors and executive officers;
by all of our directors and executive officers as a group; and
by each person (including any “group” as used in Section 13(d) of the Securities Exchange Act of 1934) who is known by us to own beneficially 5% or more of the outstanding shares of common stock.
Unless otherwise indicated below, to the best of our knowledge, all persons listed below have sole voting and investment power with respect to their shares of common stock, except to the extent authority is shared by spouses under applicable law. As of September 30, 2013, 48,375,316 shares of our common stock were issued and outstanding.
Security Ownership of Management and Directors
Name (1)
 
Number of Shares
 Beneficially Owned (2)
 
Percentage
of Class (2)
Maurice E. Needham (3)
 
2,158,339

 
4.39
%
Lyle Jensen (4)
 
1,829,022

 
3.70
%
Charles E. Coppa (5)
 
1,225,595

 
2.50
%
Lew F. Boyd (6)
 
690,178

 
1.42
%
Neil Braverman (7)
 
6,725,356

 
12.21
%
Jamie Weston (8) (10)
 
3,389,054

 
6.55
%
Dr. Aviel Faliks (9) (10)
 
3,389,054

 
6.55
%


Security Ownership of Certain Beneficial Owners
Name (1)
 
Number of Shares Beneficially Owned (2)
 

Percentage
of Class (2)
SMC Reserve Fund II (11)
 
10,913,536

 
18.48
%
SMC Select Co-Investment Fund I (12)
 
6,916,438

 
12.57
%
Associated Private Equity (13)
 
6,690,352

 
12.15
%
Allen Kahn MD Revocable Trust (14)
 
4,427,502

 
9.15
%
Ronald H. Muhlenkamp (15)
 
4,841,125

 
9.13
%
Next View Capital (16)
 
4,856,666

 
9.12
%
SMC Employee Partnership (17)
 
3,389,054

 
6.56
%
SMC Reserve Fund II Offshore (18)
 
2,728,383

 
5.35
%

24



_____________________________

(1)
Except as noted, each person's address is care of American Power Group Corporation, Building A, Lynnfield, MA 01940.
(2)
Pursuant to the rules of the Securities and Exchange Commission, shares of common stock that an individual or group has a right to acquire within 60 days pursuant to the exercise of options or warrants are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table.
(3)
Includes 770,000 shares of common stock issuable pursuant to immediately exercisable stock options. Also includes 59,556 shares of common stock owned by Mr. Needham's wife.
(4)
Includes 1,094,000 shares of common stock issuable pursuant to immediately exercisable stock options.
(5)
Includes 627,000 shares of common stock issuable pursuant to immediately exercisable stock options.
(6)
Includes 324,000 shares of common stock issuable pursuant to immediately exercisable stock options.
(7)
Mr. Braverman is a member of Associated Private Equity, LLC, a Delaware limited liability company (“Associated”), an entity that beneficially owns 6,690,352 shares of Common Stock which includes 3,333,333 shares of Common Stock issuable upon conversion of shares of 10% Convertible Preferred Stock beneficially owned by Associated, 3,333,333 shares of Common Stock issuable upon exercise of warrants beneficially owned by Associated and 23,686 shares of Common Stock issued for Preferred Stock dividends. Pursuant to Rule 16a-1 of the Securities Exchange Act of 1934, as amended, Mr. Braverman may be deemed to be the beneficial owner of any securities that may be deemed to be beneficially owned by Associated. Mr. Braverman disclaims beneficial ownership with respect to any shares of Common Stock except to the extent of his pecuniary interest therein. Excludes an indeterminate number of shares of Common Stock which the Company may issue to Associated in lieu of cash dividends on the 10% Convertible Preferred Stock. Mr. Braverman's address is 4454 Wayside Drive, Naples, FL 34119.
(8)
Mr. Weston is a partner of SMC EP, an entity that beneficially owns 3,389,054 shares of Common Stock which includes 1,633,333 shares of Common Stock issuable upon conversion of shares of 10% Convertible Preferred Stock beneficially owned by SMC EP, 1,633,333 shares of Common Stock issuable upon exercise of warrants beneficially owned by SMC EP and 122,388 shares of Common Stock issued for Preferred Stock dividends. Pursuant to Rule 16a-1 of the Securities Exchange Act of 1934, as amended, Mr. Weston may be deemed to be the beneficial owner of any securities that may be deemed to be beneficially owned by SMC EP. Mr. Weston disclaims beneficial ownership with respect to any shares of Common Stock except to the extent of his pecuniary interest therein. Excludes an indeterminate number of shares of Common Stock which the Company may issue to SMC EP in lieu of cash dividends on the 10% Convertible Preferred Stock. Mr. Weston's address is care of Spring Mountain Capital, LLC, 65 East 55th Street, 33rd Floor, New York, New York 10022.
(9)
Dr. Faliks is a partner of SMC Employees Partnership, a New York limited partnership (“SMC EP”), an entity that beneficially owns 3,389,054 shares of Common Stock which includes 1,633,333 shares of Common Stock issuable upon conversion of shares of 10% Convertible Preferred Stock beneficially owned by SMC EP, 1,633,333 shares of Common Stock issuable upon exercise of warrants beneficially owned by SMC EP and 122,388 shares of Common Stock issued for Preferred Stock dividends. Pursuant to Rule 16a-1 of the Securities Exchange Act of 1934, as amended, Dr. Faliks may be deemed to be the beneficial owner of any securities that may be deemed to be beneficially owned by SMC EP. Dr. Faliks disclaims beneficial ownership with respect to any shares of Common Stock except to the extent of his pecuniary interest therein. Excludes an indeterminate number of shares of Common Stock which the Company may issue to SMC EP in lieu of cash dividends on the 10% Convertible Preferred Stock. Dr. Faliks' address is care of Spring Mountain Capital, LLC, 65 East 55th Street, 33rd Floor, New York, New York 10022.
(10)
The shares held by SMC EP and considered to be beneficially owned by both Dr. Faliks and Mr. Weston are included once for purposes of calculating the total shares beneficially owned by all officers and directors as a group.
(11)
Includes 10,913,536 shares of Common Stock issuable upon conversion of shares of 10% Convertible Preferred Stock, 5,333,333 shares of Common Stock issuable upon conversion of shares of 10% Convertible Preferred Stock, 5,333,333 shares of Common Stock issuable upon exercise of warrants and 246,870 shares of Common Stock issued for Preferred Stock dividends. Excludes an indeterminate number of shares of Common Stock which the Company may issue to the stockholder in lieu of cash dividends on the 10% Convertible Preferred Stock. The stockholder's address is care of Spring Mountain Capital, LLC, 65 East 55th Street, 33rd Floor, New York, New York 10022.
(12)
Includes 6,916,438 shares of Common Stock issuable upon conversion of shares of 10% Convertible Preferred Stock, 3,333,333 shares of Common Stock issuable upon conversion of shares of 10% Convertible Preferred Stock, 3,333,333 shares of Common Stock issuable upon exercise of warrants and 249,772 shares of Common Stock issued for Preferred Stock dividends. Excludes an indeterminate number of shares of Common Stock which the Company may issue to the stockholder in lieu of cash dividends on the 10% Convertible Preferred Stock. The stockholder's address is care of Spring Mountain Capital, LLC, 65 East 55th Street, 33rd Floor, New York, New York 10022.



(13)
Includes 6,691,535 shares of Common Stock issuable upon conversion of shares of 10% Convertible Preferred Stock, 3,333,333 shares of Common Stock issuable upon conversion of shares of 10% Convertible Preferred Stock, 3,333,333 shares of Common Stock issuable upon exercise of warrants and 23,686 shares of Common Stock issued for Preferred Stock dividends. Excludes an indeterminate number of shares of Common Stock which the Company may issue to the stockholder in lieu of cash dividends on the 10% Convertible Preferred Stock. The stockholder's address is 4454 Wayside Drive, Naples, Florida 34119.
(14) Dr. Kahn resigned from the Board of Directors on April 30, 2012 and passed away in November 2012 at which time the shares were transfered to his trust. The trust's address is Marc J. Chalfen, Esq. Successor Trustee of the Allen Kahn, MD Revocable Trust c/o Kelly Olson Michod Dehaan & Richter, LLC, 333 West Wacker Dr. , Suite 2000 Chicago, IL 60606-1288.
(15)
Includes 4,841,125 shares of Common Stock issuable upon conversion of shares of 10% Convertible Preferred Stock, 2,333,333 shares of Common Stock issuable upon conversion of shares of 10% Convertible Preferred Stock, 2,333,333 shares of Common Stock issuable upon exercise of warrants and 174,459 shares of Common Stock issued for Preferred Stock dividends. Excludes an indeterminate number of shares of Common Stock which the Company may issue to the stockholder in lieu of cash dividends on the 10% Convertible Preferred Stock. Excludes an indeterminate number of shares of Common Stock which the Company may issue to the stockholder in lieu of cash dividends on the 10% Convertible Preferred Stock. The stockholder's address is 725 Three Degree Road, Butler, Pennsylvania 16002.
(16)
Includes 4,856,666 shares of Common Stock issuable upon conversion of shares of 10% Convertible Preferred Stock, 2,753,333 shares of Common Stock issuable upon conversion of shares of 10% Convertible Preferred Stock and 2,753,333 shares of Common Stock issuable upon exercise of warrants. Excludes an indeterminate number of shares of Common Stock which the Company may issue to the stockholder in lieu of cash dividends on the 10% Convertible Preferred Stock. The stockholder's address is c/o JAN Management 600 N. Central Ave, Suite 365,Highland Park, IL 60035.
(17)
Includes 3,389,054 shares of Common Stock issuable upon conversion of shares of 10% Convertible Preferred Stock, 1,633,333 shares of Common Stock issuable upon conversion of shares of 10% Convertible Preferred Stock, 1,633,333 shares of Common Stock issuable upon exercise of warrants and 122,388 shares of Common Stock issued for Preferred Stock dividends. Excludes an indeterminate number of shares of Common Stock which the Company may issue to the stockholder in lieu of cash dividends on the 10% Convertible Preferred Stock. The stockholder's address is care of Spring Mountain Capital, LLC, 65 East 55th Street, 33rd Floor, New York, New York 10022.
(18)
Includes 2,728,383 shares of Common Stock issuable upon conversion of shares of 10% Convertible Preferred Stock, 1,333,333 shares of Common Stock issuable upon conversion of shares of 10% Convertible Preferred Stock, 1,333,333 shares of Common Stock issuable upon exercise of warrants and 61,717 shares of Common Stock issued for Preferred Stock dividends. Excludes an indeterminate number of shares of Common Stock which the Company may issue to the stockholder in lieu of cash dividends on the 10% Convertible Preferred Stock. The stockholder's address is care of Spring Mountain Capital, LLC, 65 East 55th Street, 33rd Floor, New York, New York 10022.

Common Stock Authorized for Issuance Under Equity Compensation Plans
For descriptions of equity compensation plans under which our common stock is authorized for issuance as of September 30, 2013, see Note 8 (“Stockholders' Equity”) of the Consolidated Financial Statements contained herein. For additional information concerning certain compensation arrangements, not approved by stockholders, under which options to purchase common stock may be issued, see “Executive Compensation - Employment Agreements", above, and “Certain Relationships and Related Transactions and Director Independence”, below.

Item 13.    Certain Relationships and Related Transactions, and Director Independence
Related Party Transactions
On November 18, 2008, we entered into a month-to-month consulting agreement at a rate of $7,500 per month with a company owned by Mr. Boyd, who also serves as the Chairman of our Compensation committee. The consulting firm provided assistance in the areas of due diligence support as well as market opportunity identification and evaluation, Board of Director candidate identification and evaluation and other services as our Board may determine. During the fiscal years ended September 30, 2013 and 2012 we paid $22,937 and $97,978, respectively relating to this contract. The agreement was terminated in December 2012. In addition, during the fiscal year ended September 30, 2013, we paid the firm an additional $8,138 for support services on an "as needed" basis relating to certain employee searches.
On June 17, 2009 we entered into an Exclusive Patent License Agreement between our company and M & R Development Inc., (“M&R”) which is currently co-owned by one of our American Power Group employees. Pursuant to the license, we acquired the exclusive worldwide right to commercialize M&R's patented dual fuel alternative energy technology.
On April 27, 2012, we entered into amendment to the patent license agreement. The amendment amends the royalty provisions in the license to modify the calculation of the royalty payments and to amend the timing of the royalty payments. Under the




provisions of this amendment, effective April 1, 2012 the monthly royalty amount due to M&R will be the lesser of 10% of net sales or 30% of pre-royalty EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). No royalties will be due if cumulative EBITDA is less than zero. During the fiscal years ended September 30, 2013 and 2012 we incurred license fees to M&R of $0 and $120,404, respectively. M&R also agreed to waive any prior defaults under the license. In addition, we amended the amended and restated promissory note dated December 1, 2009 to extend the maturity of the note until February 15, 2015 and to defer all interest and principal payments due under the note during calendar 2012. Thereafter, the aggregate principal amount due under the note will be paid in eight equal quarterly payments plus interest.
In conjunction with the July 2009 acquisition we acquired a promissory note from the previous owners of M&R, payable to American Power Group Corporation, in the principal amount of $800,000. Per our agreement, 25% of any royalties due from time to time to M&R under a technology license agreement will be applied against outstanding interest and principal due under the terms of the note rather than be paid to M&R. In conjunction with the 10% Convertible Preferred Stock financing, on April 27, 2012, we amended the note to extend the maturity of the note from July 2013 to February 2015 and defer all interest and principal payments due under the note during calendar 2012. Thereafter, the aggregate principal amount due under the note will be paid in eight equal quarterly payments plus interest. During the fiscal years ended September 30, 2013 and 2012 we applied $0 and $31,923 of license fees due against accrued interest due under the note. As of September 30, 2013, accrued interest due under the note was $63,022.
Our dual fuel conversion subsidiary leases office and warehousing space in Iowa from M&R. On October 1, 2011, we executed a new two year lease agreement requiring monthly rental payments of $10,000 on a triple net basis. On May 1, 2012, we executed a new three year lease with M&R. Under the terms of the lease, monthly rental payments of $10,000 on a triple net basis are required for the first year and then increasing in years two and three by the percentage growth in the Greater Des Moines Consumer Price Index (or equivalent index) for the latest available twelve months prior to the date of the increase. We have the option to renew this lease for an additional two year term at a mutually agreed upon rate. For the fiscal years ended September 30, 2013 and 2012, total related party rental expense in connection with non-cancellable real estate leases amounted to $142,297 and $143,248, respectively.
On October 12, 2011 Mr. Jensen loaned us $150,000 pursuant to the terms of a 10% promissory note due April 30, 2014.
On April 27, 2012, we entered into amendments to promissory notes in the aggregate principal amount of $473,500 held by Charles Coppa, our Chief Financial Officer; Lyle Jensen, a member of our Board of Directors and our President and Chief Executive Officer; and Dr. Allen Kahn, a former member of our Board of Directors. These amendments reduced the interest rates of the promissory notes to 8% per annum and extended the maturity dates of the notes to April 30, 2014.
All transactions, including loans, between us and our officers, directors, principal stockholders, and their affiliates are approved by a majority of the independent and disinterested outside directors on the Board of Directors. Management believes these transactions were consummated on terms no less favorable to us than could be obtained from unaffiliated third parties.
Independence of the Board of Directors
 The Board of Directors has adopted director independence guidelines that are consistent with the definitions of “independence” as set forth in Section 301 of the Sarbanes-Oxley Act of 2002 and Rule 10A-3 under the Securities Exchange Act of 1934. In accordance with these guidelines, the Board of Directors has reviewed and considered facts and circumstances relevant to the independence of each of our directors and has determined that, each of Messrs. Needham, Boyd, Braverman,Weston and Faliks qualified as “independent" as of September 30, 2013.
The Board of Directors has determined that each of Messrs. Needham, Boyd, Braverman,Weston and Faliks were independent as of September 30, 2013 as defined under the NYSE Alternext US Rules, including, in the case of members of the Audit Committee, the independence requirements contemplated by Rule 10A-3, under the Exchange Act.

Item 14.     Principal Accounting Fees and Services
The firm of Schechter, Dokken, Kanter, Andrews & Selcer, Ltd. (“SDKAS”) is our independent auditors for the fiscal years ending September 30, 2013 and 2012.
In addition to audit services, SDKAS also provided certain non-audit services to us during the fiscal years ended September 30, 2013 and 2012. The Audit Committee has considered whether the provision of these additional services is compatible with maintaining the independence of SDKAS.
         Audit Fees. The aggregate fees billed for professional services rendered by SDKAS for (1) the audit of our financial statements as of and for the fiscal years ended September 30, 2013 and 2012 and (2) the review of the financial statements included in our company's Form 10-Q filings for fiscal years 2013 and 2012 were $129,911 and $147,715, respectively.

27



          Audit-Related Fees. There were no audit-related fees billed in fiscal years 2013 and 2012 for assurance and related services rendered by SDKAS that are reasonably related to the performance of the audit or review of our financial statements. Services rendered in this category may consist of financial accounting and reporting consultations and assurance services on specific transactions.
          Tax Fees. The aggregate fees billed in fiscal years 2013 and 2012 for professional services rendered by SDKAS for tax compliance, tax advice and tax planning was $24,050 and $22,500, respectively.
          All Other Fees. There were no other fees billed during fiscal years 2013 and 2012 by SDKAS.
Pre-Approval Policies and Procedures. The Audit Committee has adopted policies which provide that our independent auditors may only provide those audit and non-audit services that have been pre-approved by the Audit Committee, subject, with respect to non-audit services, to a de minimis exception (discussed below) and to the following additional requirements: (1) such services must not be prohibited under applicable federal securities rules and regulations, and (2) the Audit Committee must make a determination that such services would be consistent with the principles that the independent auditor should not audit its own work, function as part of management, act as an advocate of our company, or be a promoter of our company's stock or other financial interests. The chairman of the Audit Committee has the authority to grant pre-approvals of permitted non-audit services between meetings, provided that any such pre-approval must be presented to the full Audit Committee at its next scheduled meeting.
During fiscal years 2013 and 2012, all of the non-audit services provided by SDKAS were pre-approved by the Audit Committee. Accordingly, the Audit Committee did not rely on the de minimis exception noted above. This exception waives the pre-approval requirements for non-audit services if certain conditions are satisfied, including, among others, that such services are promptly brought to the attention of and approved by the Audit Committee prior to the completion of the audit.

PART IV        
    
Item 15.     Exhibits, Financial Statement Schedules

(a)
Financial Statements: For a list of financial statements filed with this report, see page 29.
(b)     The following exhibits are filed with this report:

Exhibit No.

Description
2.1 (1)
Asset Purchase Agreement dated as of June 13, 2011, between Green Tech Products, Inc. and Irish Knight Holdings, L.L.C.
2.2 (2)
Promissory Note dated August 1, 2011, issued by Irish Knight Holdings, L.L.C.
2.3 (2) †
Indemnification Agreement dated August 1, 2011, between GreenMan Technologies, Inc. and Timothy Mahoney
2.4 (3)
Exclusive Patent License Agreement dated as of June 17, 2009, by and between GreenMan Technologies, Inc. and M & R Development, Inc. (formerly known as American Power Group, Inc.)
2.5 (4)
Amendment No. 2 dated June 30, 2011, to Exclusive Patent License dated as of June 17, 2009, by and between GreenMan Technologies, Inc. and M & R Development, Inc. (formerly known as American Power Group, Inc.)
2.6 (5)
Amendment No. 3 dated April 27, 2012, to Exclusive Patent License dated as of June 17, 2009, by and between GreenMan Technologies, Inc. and M & R Development, Inc. (formerly known as American Power Group, Inc.)
2.7 (6)
Amended and Restated Promissory Note dated as of December 1, 2009, in the principal amount of $800,000, issued by M & R Development, Inc. (formerly known as American Power Group, Inc.) to American Power Group (formerly known as GreenMan Alternative Energy, Inc.)

28



2.8 (5)
Amendment No. 1 dated April 27, 2012, to Amended and Restated Promissory Note dated as of December 1, 2009, issued by M & R Development, Inc. (formerly known as American Power Group, Inc.) to American Power Group, Inc. (formerly known as GreenMan Alternative Energy, Inc.)
3.1 (7)
Restated Certificate of Incorporation of GreenMan Technologies, Inc., as amended
3.2 (6)
By-laws of GreenMan Technologies, Inc.
4.1 (8)
Specimen certificate for Common Stock of GreenMan Technologies, Inc.
10.1 (9)
Employment Agreement dated April 1, 2003, between GreenMan Technologies, Inc. and Maurice E. Needham*
10.2 (10)
Employment Agreement dated April 12, 2006, between GreenMan Technologies, Inc. and Lyle E. Jensen*
10.3 (11)
Addendum dated January 30, 2008, to the Employment Agreement dated April 12, 2006, between GreenMan Technologies, Inc. and Lyle E. Jensen*
10.4 (12)
Employment Agreement dated June 1, 1999, between GreenMan Technologies, Inc. and Charles E. Coppa*
10.5 (11)
Addendum dated January 30, 2008, to the Employment Agreement dated June 1, 1999, between GreenMan Technologies, Inc. and Charles E. Coppa*
10.6 (13)
Consulting Agreement dated November 18, 2008, between Coastal International, Inc. and GreenMan Technologies, Inc.
10.7 (8)
1993 Stock Option Plan*
10.8 (14)
2005 Stock Option Plan, as amended*
10.9 (8)
Form of confidentiality and non-disclosure agreement for executive employees
10.10 (15)
Lease Agreement dated April 2, 2001, between WTN Realty Trust and GreenMan Technologies of Georgia, Inc.
10.11 (16)

Amendment No. 1, dated February 28, 2006, to Lease Agreement dated April 2, 2001, between GreenMan Technologies of Georgia, Inc. and Mart Management, Inc.
10.12 (17)
Commercial Loan Agreement dated as of November 9, 2010, between American Power Group, Inc. and Iowa State Bank
10.13 (17)
Asset Based Financing Agreement dated as of November 9, 2010, between American Power Group, Inc. and Iowa State Bank
10.14 (17)
Promissory Note dated as of November 9, 2010, issued by American Power Group, Inc. in favor of Iowa State Bank
10.15 (17)
Commercial Security Agreement dated as of November 9, 2010, between American Power Group, Inc. and Iowa State Bank
10.16 (17)
Guaranty dated as of November 9, 2010, issued by GreenMan Technologies, Inc., in favor of Iowa State Bank
10.17 (17)
Assignment of Deposit or Share Account dated as of November 9, 2010, issued by GreenMan Technologies, Inc., in favor of Iowa State Bank
10.18 (18)
Change in Terms Agreement, dated as of December 19, 2011, between American Power Group, Inc. and Iowa State Bank with regard to a $2,000,000 line of credit
10.19 (18)
Change in Terms Agreement, dated as of December 19, 2011, between American Power Group, Inc. and Iowa State Bank with regard to a $250,000 promissory note
10.20 (19)
Stock Transfer Agreement, dated as of December 19, 2011, between GreenMan Technologies, Inc. and Iowa State Bank

29



10.21 (20)
Change in Terms Agreement, dated April 3, 2012, between American Power Group, Inc. and Iowa State Bank with regard to a $2,000,000 line of credit
10.22 (20)
Change in Terms Agreement, dated April 3, 2012, between American Power Group, Inc. and Iowa State Bank with regard to a $250,000 promissory note
10.23 (5)
Business Loan Agreement, dated as of April 25, 2012, between American Power Group, Inc. and Iowa State Bank with regard to a $2,250,000 line of credit
10.24 (5)
Promissory dated as of April 25, 2012, issued by American Power Group, Inc. in favor of Iowa State Bank
10.25 (21)

Change in Terms Agreement, dated December 12, 2012, between American Power Group, Inc. and Iowa State Bank with regard to a $2,250,000 line of credit
10.26 **
Business Loan Agreement, dated December 19, 2013, between American Power Group, Inc. and Iowa State Bank with regard to a $2,500,000 line of credit
10.27**
 
Promissory Note dated as of December 19, 2013, issued by American Power Group, Inc. in favor of Iowa State Bank
10.28 (22)
Subscription Agreement dated September 17, 2010, between Dr. Allen Kahn and GreenMan Technologies, Inc.
10.29 (22)
Unsecured Promissory Note dated as of September 17, 2010, issued by GreenMan Technologies, Inc. in favor of Dr. Allen Kahn
10.30 (23)
Extension Agreement dated March 11, 2011, between GreenMan Technologies, Inc. and Dr. Allen Kahn, with respect to an unsecured promissory note
10.31 (19)
Extension Agreement dated October 27, 2011, between GreenMan Technologies, Inc. and Dr. Allen Kahn, with respect to an unsecured promissory note
10.32 (5)
Amendment No. 1 dated April 27, 2012, to Unsecured Promissory Note dated as of September 17, 2010, issued by GreenMan Technologies, Inc. in favor of Dr. Allen Kahn
10.33 (22)
Subscription Agreement dated September 17, 2010, between Charles E. Coppa and GreenMan Technologies, Inc. in favor of Charles E. Coppa
10.34 (22)
Unsecured Promissory Note dated as of September 17, 2010, issued by GreenMan Technologies, Inc. in favor of Charles E. Coppa
10.35 (23)
Extension Agreement dated March 11, 2011, between GreenMan Technologies, Inc. and Charles Coppa, with respect to an unsecured promissory note
10.36 (19)
Extension Agreement dated October 27, 2011, between GreenMan Technologies, Inc. and Charles Coppa, with respect to an unsecured promissory note
10.37 (5)
Amendment No. 1 dated April 27, 2012, to Unsecured Promissory Note dated as of September 17, 2010, issued by GreenMan Technologies, Inc. in favor of Charles E. Coppa
10.38 (23)
Subscription Agreement dated February 11, 2011, between Lew Boyd and GreenMan Technologies, Inc.
10.39 (23)
Unsecured Promissory Note dated as of February 11, 2011, issued by GreenMan Technologies, Inc. in favor of Lew Boyd
10.40 (19)
Extension Agreement dated October 27, 2011, between GreenMan Technologies, Inc. and Lew Boyd, with respect to an unsecured promissory note
10.41 (19)
Promissory Note dated October 12, 2011 between American Power Group, Inc. and Lyle Jensen
10.42 (19)
Extension Agreement dated November 27, 2011 between American Power Group, Inc. and Lyle Jensen
10.43 (5)
Amendment No. 1 dated April 27, 2012, to Promissory Note dated as of October 12, 2011, issued by GreenMan Technologies, Inc. in favor of Lyle Jensen
10.44 (24)
Form of Subscription Agreement between GreenMan Technologies, Inc. and certain investors, with respect to convertible promissory notes and warrants issued in April 2011
10.45 (2)
Form of Convertible Promissory Note issued by GreenMan Technologies, Inc. in April 2011

30



10.46 (24)
Form of Common Stock Purchase Warrant issued by GreenMan Technologies, Inc. in April 2011
10.47 (24)
Form of Registration Rights Agreement between GreenMan Technologies, Inc. and the purchasers of certain convertible promissory note and warrants
10.48 (19)
Form of Convertible Promissory Note issued by GreenMan Technologies, Inc. in November 2011
10.49 (19)
Form of Common Stock Purchase Warrant issued by GreenMan Technologies, Inc. in November 2011
10.50 (19)
Form of Registration Rights Agreement between GreenMan Technologies, Inc. and the purchasers of certain convertible promissory note and warrants
10.51 (25)
Securities Purchase Agreement between GreenMan Technologies, Inc. and the investors named therein, dated April 30, 2012
10.52 (5)
Form of Warrant issued to investors named in the Securities Purchase Agreement, dated April 30, 2012
10.53 (5)
Form of Additional Investment Right, dated April 30, 2012
10.54 (25)
Registration Rights Agreement between GreenMan Technologies, Inc. and the investors named therein, dated April 30, 2012
10.55 (25)
Voting Agreement between GreenMan Technologies, Inc. and the investors named therein, dated April 30, 2012
10.56 (25)
Form of Warrant issued to the placement agent in connection with the private placement of April 30, 2012
10.57 (26)
National Distributor and Master Marketing Agreement between American Power Group, Inc. and WheelTime Network LLC, dated as of November 27, 2012
10.58 (26)
Common Stock Purchase Warrant issued to WheelTime Network LLC, dated November 27, 2012
10.59 (27)
Lease - Business Property dated May 1, 2012, between M & R Development, Inc. and American Power Group, Inc.
21.1**
List of All Subsidiaries
31.1**
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)
31.2**
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)
32.1***
Certification of Chief Executive Officer under 18 U.S.C. Section 1350
32.1***
Certification of Chief Financial Officer under 18 U.S.C. Section 1350
101.INS****
XBRL Instance Document
101.SCH****
XBRL Taxonomy Extension Schema Document
101.CAL****
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB****
XBRL Taxonomy Extension Label Linkbase Document
101.PRE****
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF****
XBRL Taxonomy Extension Definition Document

31



________________________


(1)
Filed as an Exhibit to GreenMan Technologies, Inc.’s Form 8-K dated June 13, 2011 and filed June 15, 2011, and incorporated herein by reference.
(2)
Filed as an Exhibit to GreenMan Technologies, Inc.’s Form 8-K dated July 29, 2011 and filed August 4, 2011, and incorporated herein by reference.
(3)
Filed as an Exhibit to GreenMan Technologies, Inc.’s Form 8-K dated June 17, 2009 and filed June 23, 2009, and incorporated herein by reference.
(4)
Filed as an Exhibit to GreenMan Technologies, Inc.’s Form 8-K dated June 30, 2011 and filed July 7, 2011, and incorporated herein by reference.
(5)
Filed as an Exhibit to GreenMan Technologies, Inc.’s Form 8-K dated April 25, 2011 and filed May 2, 2012, and incorporated herein by reference.
(6)
Filed as an Exhibit to GreenMan Technologies, Inc.’s Form 10-K for the Fiscal Year Ended September 30, 2011 and incorporated herein by reference.
(7)
Filed as an Exhibit to GreenMan Technologies, Inc.’s Form 10-Q for the Quarter Ended June 30, 2012 and incorporated herein by reference.
(8)
Filed as an Exhibit to GreenMan Technologies, Inc.’s Registration Statement on Form SB-2 No. 33-86138 and incorporated herein by reference.
(9)
Filed as an Exhibit to GreenMan Technologies, Inc.’s Form 10-KSB for the Fiscal Year Ended September 30, 2003 and incorporated herein by reference.
(10)
Filed as an Exhibit to GreenMan Technologies, Inc.’s Form 8-K dated April 12, 2006 and filed April 17, 2006, and incorporated herein by reference.
(11)
Filed as an Exhibit to GreenMan Technologies, Inc.’s Form 8-K dated January 28, 2008 and filed January 31, 2008, and incorporated herein by reference.
(12)
Filed as an Exhibit to GreenMan Technologies, Inc.’s Form 10-QSB for the Quarter Ended December 31, 2000 and incorporated herein by reference.
(13)
Filed as an Exhibit to GreenMan Technologies, Inc.’s Form 10-Q for the Quarter Ended December 31, 2008 and incorporated herein by reference.
(14)
Filed as an Exhibit to GreenMan Technologies, Inc.’s Form 10-Q for the Quarter Ended March 31, 2010 and incorporated herein by reference.
(15)
Filed as an Exhibit to GreenMan Technologies, Inc.’s Form 10-QSB for the Quarter Ended June 30, 2001 and incorporated herein by reference.
(16)
Filed as an Exhibit to GreenMan Technologies, Inc.’s Form 8-K dated February 17, 2006 and filed March 6, 2006, and incorporated herein by reference.
(17)
Filed as an Exhibit to GreenMan Technologies, Inc.’s Form 8-K dated November 9, 2010 and filed November 15, 2010, and incorporated herein by reference.
(18)
Filed as an Exhibit to GreenMan Technologies, Inc.’s Form 8-K dated December 19, 2011 and filed December 23, 2011, and incorporated herein by reference.
(19)
Filed as an Exhibit to GreenMan Technologies, Inc.’s Form 10-Q for the Quarter Ended December 31, 2011 and incorporated herein by reference.
(20)
Filed as an Exhibit to GreenMan Technologies, Inc.’s Form 8-K dated April 3, 2012 and filed April 5, 2012, and incorporated herein by reference.
(21)
Filed as an Exhibit to American Power Group Corporation’s Form 8-K dated December 12, 2012 and filed December 17, 2012, and incorporated herein by reference.
(22)
Filed as an Exhibit to GreenMan Technologies, Inc.’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010, and incorporated herein by reference.
(23)
Filed as an Exhibit to GreenMan Technologies, Inc.’s Registration Statement on Form S-1, No. 333-173264, and incorporated herein by reference.
(24)
Filed as an Exhibit to GreenMan Technologies, Inc.’s Form 10-Q for the Quarter ended March 31, 2011.
(25)
Filed as an Exhibit to Amendment No. 1 to GreenMan Technologies, Inc.’s Registration Statement on Form S-1/A, No. 333-181773, and incorporated herein by reference.
(26)
Filed as an Exhibit to American Power Group Corporation’s Form 8-K dated November 27, 2012 and filed November 30, 2012, and incorporated herein by reference.

32



(27)
Filed as an Exhibit to American Power Group Corporation’s Annual Report on Form 10-K for the fiscal year ended September 30, 2012, and incorporated herein by reference.
GreenMan Technologies, Inc. changed its name to American Power Group Corporation effect August 1, 2012.
*
Indicates a management contract or compensatory plan or arrangement.
**
Filed herewith.
***
In accordance with Item 601(b)(32)(ii) of Regulation S-K, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-K and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
****
In accordance with Rule 406T of Regulation S-T, the XBRL (eXtensible Business Reporting Language) information is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act, is deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise is not subject to liability under these sections, is not part of any registration statement or prospectus to which it relates and is not incorporated by reference into any registration statement, prospectus or other document.


33




American Power Group Corporation 
Index to Consolidated Financial Statements

 
Page
Report of Independent Registered Public Accounting Firm
 
 
Consolidated Balance Sheets as of September 30, 2013 and 2012
 
 
Consolidated Statements of Operations for the Years Ended September 30, 2013 and 2012
 
 
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended September 30, 2013 and 2012
 
 
Consolidated Statements of Cash Flows for the Years Ended September 30, 2013 and 2012
 
 
Notes to Consolidated Financial Statements

34





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
American Power Group Corporation
Lynnfield, Massachusetts

We have audited the accompanying consolidated balance sheets of American Power Group Corporation and subsidiaries (the “Company”) as of September 30, 2013 and 2012 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Power Group Corporation and subsidiaries as of September 30, 2013 and 2012 and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ Schechter Dokken Kanter Andrews & Selcer, Ltd.
Minneapolis, Minnesota
December 23, 2013


35



American Power Group Corporation
Consolidated Balance Sheets
 
September 30,
2013
 
September 30, 2012
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
1,684,169

 
$
4,423,485

Certificates of deposit, restricted
300,000

 
300,000

Accounts receivable, trade, less allowance for doubtful accounts of $120,393 and $162,887 as of September 30, 2013 and September 30, 2012
1,612,280

 
432,078

Inventory
908,059

 
463,553

Costs in excess of billings

 
62,667

Seller’s note, related party, current portion

 
164,038

Prepaid expenses
150,816

 
120,405

Other current assets
48,472

 
87,702

Assets related to discontinued operations
66,922

 

Total current assets
4,770,718

 
6,053,928

Property, plant and equipment, net
929,821

 
338,922

Other assets:
 

 
 

Seller’s note, related party, non-current
797,387

 
633,349

Long term contracts, net
291,667

 
341,666

Purchased technology, net
291,667

 
341,666

Software development costs, net
3,180,804

 
1,309,601

Other
134,469

 
70,567

Total other assets
4,695,994

 
2,696,849

 
$
10,396,533

 
$
9,089,699

LIABILITIES AND STOCKHOLDERS'  EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
1,086,347

 
$
763,515

Accrued expenses
914,023

 
604,406

Billings in excess of cost
7,533

 
1,808

Notes payable, current
106,972

 
90,484

Notes payable, related parties, current
473,500

 

Obligations due under lease settlement, current
68,518

 
68,518

Total current liabilities
2,656,893

 
1,528,731

Notes payable, net of current portion
1,490,160

 
1,605,037

Notes payable, related parties, net of current portion

 
473,500

Obligations due under lease settlement, net of current portion
505,540

 
505,540

Total liabilities
4,652,593

 
4,112,808

 
 
 
 
Stockholders' equity:
 

 
 

Preferred stock, $1.00 par value, 998,854 shares authorized, 0 shares issued and outstanding

 

10% Convertible Preferred stock, $1.00 par value, 1,146 shares authorized, 942 shares and 759 shares issued and outstanding at September 30, 2013 and 2012
942

 
759

Common stock, $.01 par value, 150 million shares authorized, 48,375,316 shares and 44,920,180 issued and outstanding at September 30, 2013 and 2012
483,753

 
449,201

Additional paid-in capital
66,570,909

 
62,912,306

Accumulated deficit
(61,311,664
)
 
(58,385,375
)
Total stockholders’ equity
5,743,940

 
4,976,891

 
$
10,396,533

 
$
9,089,699

 



See accompanying notes to consolidated financial statements.

36



American Power Group Corporation
Consolidated Statements of Operations
 
 
Years Ended September 30,
 
2013
 
2012
Net sales
$
7,017,122

 
$
2,633,880

Cost of sales
4,290,995

 
1,935,767

Gross profit
2,726,127

 
698,113

Operating expenses
 

 
 

Selling, general and administrative
4,597,311

 
2,927,282

Operating loss from continuing operations
(1,871,184
)
 
(2,229,169
)
Non operating (expense) income
 

 
 

Interest and financing costs
(158,839
)
 
(1,612,052
)
Loss on induced conversion incentive

 
(582,143
)
Interest income
46,688

 
53,977

Other, net
(126,506
)
 
(127,778
)
Non operating expense, net
(238,657
)
 
(2,267,996
)
Loss from continuing operations
(2,109,841
)
 
(4,497,165
)
Discontinued operations
 

 
 

Income (loss) from discontinued operations, net of taxes
66,922

 
(63,085
)
 
66,922

 
(63,085
)
Net loss
(2,042,919
)
 
(4,560,250
)
10% Convertible Preferred stock dividends
(883,370
)
 
(358,460
)
10% Convertible Preferred stock beneficial conversion feature

 
(9,748,127
)
Net loss available to common stockholders
$
(2,926,289
)
 
$
(14,666,837
)
 
 
 
 
Loss from continuing operations per share – basic and diluted
$
(0.04
)
 
$
(0.11
)
Income from discontinued operations per share – basic and diluted

 

Net loss per Common share - 10% Preferred Stock dividend
(0.02
)
 
(0.01
)
Net loss per Common share - Preferred Stock beneficial conversion feature

 
(0.25
)
Net loss attributable to Common stockholders - basic and diluted
$
(0.06
)
 
$
(0.37
)
 
 
 
 
Weighted average Common shares outstanding - basic and diluted
46,480,848

 
39,352,340

 
















 See accompanying notes to consolidated financial statements.

37



American Power Group Corporation
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended September 30, 2013 and 2012
 
10% Convertible Preferred Stock
 
Common Stock
 
Additional Paid In
 
Accumulated
 
Common Shares Held As
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Deficit
 
Collateral
 
Total
Balance, October 1, 2011

 

 
36,173,033

 
$
361,730

 
$
40,297,853

 
$
(43,718,538
)
 
$
(20,000
)
 
$
(3,078,955
)
Compensation expense associated with stock options

 

 

 

 
169,418

 

 

 
169,418

Common stock issued upon option exercise

 

 
115,856

 
1,158

 
29,697

 

 

 
30,855

Common stock issued with promissory notes

 

 
421,750

 
4,218

 
206,658

 

 

 
210,876

Common stock issued for services rendered

 

 
288,757

 
2,888

 
141,011

 

 

 
143,899

Common stock issued upon convertible debt exercise

 

 
7,510,151

 
75,101

 
3,338,655

 

 

 
3,413,756

Common stock issued for convertible debt interest

 

 
454,734

 
4,547

 
294,723

 

 

 
299,270

Beneficial conversion discount on convertible notes payable

 

 

 

 
325,949

 

 

 
325,949

Induced conversion incentive on convertible notes payable

 

 

 

 
582,143

 

 

 
582,143

Value of warrants issued for financing

 

 

 

 
122,834

 

 

 
122,834

Sale of 10% Convertible Preferred stock unit:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sale of 10% Convertible Preferred stock, net of fees
822

 
$
822

 

 

 
3,823,397

 

 

 
3,824,219

Value of warrants issued with 10% Convertible Preferred stock

 

 
 
 
 
 
2,219,758

 
 
 
 
 
2,219,758

Value of additional investment right issued with 10% Convertible Preferred stock

 

 

 

 
1,366,369

 

 

 
1,366,369

10% Convertible Preferred stock beneficial conversion feature

 

 

 

 
9,748,127

 
(9,748,127
)
 

 

Common Stock issued upon Preferred Stock conversion
(63
)
 
(63
)
 
1,557,705

 
15,577

 
(15,514
)
 

 

 

Common stock issued for 10% Convertible Preferred stock dividend

 

 
398,194

 
3,982

 
261,228

 
(265,210
)
 

 

10% Convertible Preferred stock dividend paid in cash

 

 

 

 

 
(93,250
)
 

 
(93,250
)
Return of collateral shares

 

 
(2,000,000
)
 
(20,000
)
 

 

 
20,000

 

Net loss for fiscal year ended September 30, 2012

 

 

 

 

 
(4,560,250
)
 

 
(4,560,250
)
Balance, September 30, 2012
759

 
$
759

 
44,920,180

 
$
449,201

 
$
62,912,306

 
$
(58,385,375
)
 
$

 
$
4,976,891

Compensation expense associated with stock options

 

 

 

 
127,000

 

 

 
127,000

Common stock issued upon option exercise
 
 
 
 
507,275

 
5,073

 
24,405

 
 
 
 
 
29,478

Common stock issued for services rendered
 
 
 
 
 
 
 
 
441,422

 
 
 
 
 
441,422

Sale of 10% Convertible Preferred stock, net of fees
274

 
274

 
 
 
 
 
2,646,005

 
 
 
 
 
2,646,279

Common Stock issued upon Preferred Stock conversion
(91
)
 
(91
)
 
2,283,960

 
22,840

 
(22,749
)
 
 
 
 
 

Common stock issued for 10% Convertible Preferred stock dividend
 
 
 
 
663,901

 
6,639

 
442,520

 
(449,159
)
 
 
 

10% Convertible Preferred stock dividend paid in cash
 
 
 
 
 
 
 
 
 
 
(434,211
)
 
 
 
(434,211
)
Net loss for fiscal year ended September 30, 2013
 
 
 
 
 
 
 
 
 
 
(2,042,919
)
 
 
 
(2,042,919
)
Balance, September 30, 2013
942

 
$
942

 
48,375,316

 
$
483,753

 
$
66,570,909

 
$
(61,311,664
)
 
$

 
$
5,743,940





See accompanying notes to consolidated financial statements.

38



American Power Group Corporation
Consolidated Statements of Cash Flows
 
Years Ended September 30,
 
2013
 
2012
Cash flows from operating activities:
 

 
 

Net loss
$
(2,042,919
)
 
$
(4,560,250
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Inventory valuation allowance
44,073

 

Loss on disposal of property, plant, and equipment
680

 
7,622

(Gain) loss on discontinued operations
(66,922
)
 
63,085

Warrants and shares issued for services rendered
441,422

 
143,899

Amortization of stock issued with debt

 
210,876

Amortization of beneficial conversion feature and warrants

 
934,327

Amortization of debt incentive conversion

 
582,143

Depreciation expense
268,418

 
135,710

Amortization of deferred financing costs
25,685

 
105,941

Stock compensation expense
127,000

 
169,418

Provision for bad debts
120,393

 
162,887

Amortization of software development costs
273,700

 
43,182

Amortization of long term contracts
49,999

 
50,006

Amortization of purchased technology
49,999

 
50,006

(Increase) decrease in assets:
 

 
 

Accounts receivable
(1,300,595
)
 
(223,390
)
Inventory
(488,579
)
 
(115,374
)
Costs in excess of billings
62,667

 
81,103

Prepaid and other current assets
118,779

 
169,945

Other assets
(63,902
)
 
30,138

(Decrease) increase in liabilities:
 

 
 

Accounts payable
322,832

 
(205,909
)
Billings in excess of costs
5,725

 
(40,899
)
Accrued expenses
253,617

 
(10,552
)
Net cash used in operating activities
(1,797,928
)
 
(2,216,086
)
Cash flows from investing activities:
 

 
 

Proceeds from disposal of property, plant and equipment
400

 

Purchase of property and equipment
(860,397
)
 
(98,714
)
Software development costs
(2,088,903
)
 
(1,352,783
)
Net cash used in investing activities
(2,948,900
)
 
(1,451,497
)
Cash flows from financing activities:
 

 
 

Proceeds from convertible notes payable

 
1,185,000

Proceeds from notes payable
467,250

 
280,000

Proceeds from notes payable, related party

 
156,000

Repayment of notes payable, related party

 
(52,638
)
Repayment of notes payable
(667,534
)
 
(936,678
)
Proceeds from exercise of stock options
29,478

 
30,855

Deferred financing costs
(33,750
)
 
(44,834
)
Proceeds from Seller's note

 
2,613

Payment of cash dividend on 10% convertible preferred stock
(434,211
)
 
(93,250
)
Net proceeds on issuance of 10% convertible preferred stock
2,646,279

 
7,410,343

Net cash provided by financing activities
2,007,512

 
7,937,411

Net (decrease) increase in cash and cash equivalents
(2,739,316
)
 
4,269,828

Cash and cash equivalents at beginning of year
4,423,485

 
153,657

Cash and cash equivalents at end of year
$
1,684,169

 
$
4,423,485

  






See accompanying notes to consolidated financial statements.

39



American Power Group Corporation
Consolidated Statements of Cash Flows

 
Years Ended September 30,
 
2013
 
2012
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Interest paid
$
151,030

 
$
237,500

 
 
 
 
Supplemental disclosure of non-cash financing activities:
 
 
 
Shares issued and returned as additional collateral
$

 
$
(20,000
)
Shares issued with debt extensions

 
210,875

Shares issued for converted debt

 
3,713,026

Beneficial conversion feature attributable to convertible debt

 
325,949

Software development costs included in accounts payable and accrued expenses
56,000

 

Insurance premiums financed with short-term debt
101,895

 
100,219

Warrants issued

 
122,834

Dividends paid on preferred stock through issuance of common stock
449,159

 
265,210

Beneficial conversion feature attributable to 10% convertible preferred stock

 
9,748,127


































See accompanying notes to consolidated financial statements.

40






American Power Group Corporation
Notes to Consolidated Financial Statements

1.    Summary of Significant Accounting Policies
Effective August 1, 2012, GreenMan Technologies, Inc. (the “Company”) changed its name to American Power Group Corporation ("APG"). In connection with the corporate name change, the Company’s stock trading symbol on the OTCQB has changed from “GMTI” to “APGI”.
APG (together with its subsidiaries “we”, “us” or “our”) was originally founded in 1992 and has operated as a Delaware corporation since 1995.
Recent Developments
In November 2012, we signed a National Distributor and Master Marketing Agreement with WheelTime Network LLC, a truck service network with 18 member companies providing installation and warranty support through nearly 200 service centers, 2,800 service bays, 3,500 factory-trained technicians and 30 training facilities located across the United States and Canada. Under the agreement, WheelTime endorsed American Power Group's dual fuel conversion technology to its 18 member companies and encouraged each member to become a certified installer and authorized dealer of American Power Group's Vehicular Turbocharged Natural Gas Systems. As of September 30, 2013, all of WheelTime's 18 member companies have agreed to become non-exclusive dealers and installers of our dual fuel technology. We believe that this relationship provides us the opportunity to accelerate the national rollout of our vehicular dual fuel through access to a large national network of qualified diesel engine personnel as well as testing/installation equipment.
In addition, we issued WheelTime warrants to purchase 1,540,000 shares of our Common Stock at an exercise price of $.55 per share. The warrant is immediately exercisable with respect to 100,000 shares of Common Stock with the remaining shares becoming exercisable in increments of 50,000 shares upon the execution of a certified installer agreement and a dealer agreement by each of the 18 members during the first year after the original issue date of the Warrant. An additional 30,000 warrants become exercisable for each member that agrees to become an exclusive dealer by December 31, 2013. As of December 18, 2013, no member has chosen to become exclusive. The warrant will expire on December 31, 2017.
During fiscal 2013, we were notified by the Environmental Protection Agency ("EPA") of an additional 360 approvals for various Outside Useful Life ("OUL") vehicular engine families. As of September 30, 2013, we had an industry leading 449 OUL vehicular engine family approvals.
In March 2013, we introduced the nation’s first natural gas dual fuel glider kit. The term glider kit refers to a truck that is built from the “ground up” with a new frame, cab, electrical system and front axle but utilizing two of the following three rebuilt components: (1) engine, (2) transmission, or (3) rear axle. As a result, the initial purchase price is typically 25% lower than a new diesel truck and maintenance costs are typically 70% less compared to new truck.
In December 2013, Iowa State Bank agreed to extend the maturity of our $2,250,000 credit facility from December 31, 2013 to April 1, 2015, increase our borrowing limit to $2.5 million and expand our collateral base to include certain fixed assets which will provide more working capital availability under the credit facility.
Nature of Operations, Risks, and Uncertainties
Our patented dual fuel conversion system is a unique external fuel delivery enhancement system that converts existing diesel engines into more efficient and environmentally friendly engines that have the flexibility, depending on the circumstances, to run on:
Diesel fuel and compressed natural gas (CNG) or liquefied natural gas (LNG);
Diesel fuel and pipeline gas, well-head gas or approved bio-methane; or
100% diesel.
Our proprietary technology seamlessly displaces up to 75% (average displacement ranges from 40% to 65%) of the normal diesel fuel consumption with various forms of natural gas. Installation requires no engine modification, unlike the more expensive fuel injected alternative fuel systems in the market.
By displacing highly polluting and expensive diesel fuel with inexpensive, abundant and cleaner burning natural gas, a user can:
Reduce fuel and operating costs by 15% to 35%;

41



Reduce toxic emissions such as nitrogen oxide (NOX), carbon monoxide (CO) and fine particulate emissions; and
Enhance the engine’s operating life, since natural gas is a cleaner burning fuel source.
Primary end market applications include both primary and back-up diesel generators as well as mid- to heavy-duty vehicular diesel engines.
As of September 30, 2013, we had $1,984,169 in cash, cash equivalents and restricted certificates of deposit and working capital of $2,113,825. Based on our fiscal 2014 operating budget, cash on hand at September 30, 2013 and anticipated availability under our bank working capital line, we believe we will be able to satisfy our cash requirements through at least the end of calendar 2014 without the need to materially modify our operating plan.We understand our continued existence is dependent on our ability to generate positive operating cash flow, achieve profitability on a sustained basis and generate improved performance. If we are unable to achieve and sustain profitability and we are unable to obtain additional financing to supplement our cash position, our ability to maintain our current level of operations could be materially and adversely affected. There is no guarantee we will be able to achieve profitability.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of APG and our wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Management Estimates
The preparation of financial statements in conformity with the United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of revenues and expenses recorded during the reporting period. Actual results could differ from those estimates. Such estimates relate primarily to the estimated lives of property and equipment, other intangible assets, the valuation reserve on deferred taxes, the value of our lease settlement obligation, the value of equity instruments issued and percentage of completion on contracts. The amount that may be ultimately realized from assets and liabilities could differ materially from the values recorded in the accompanying financial statements as of September 30, 2013.
Cash Equivalents
Cash equivalents include short-term investments with original maturities of three months or less.
Certificates of Deposit
All certificate of deposit investments have an original maturity of more than three months but less than three years and are stated at original purchase price which approximates fair value. As of September 30, 2013 and 2012, we have pledged a $300,000 certificate of deposit as collateral for two loans currently outstanding with Iowa State Bank.
Concentration of Credit Risk
Financial instruments which potentially subject us to a concentration of credit risk are cash and cash equivalents. We maintain our bank accounts at multiple banks which at times such balances may exceed FDIC insured limits. We have not experienced any losses as a result of this practice.
Accounts Receivable
Accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts. Management determines the allowance for doubtful accounts by regularly evaluating past due individual customer receivables and considering a customer's financial condition, credit history, and the current economic conditions. Individual accounts receivable are written off when deemed uncollectible, with any future recoveries recorded as income when received.
Inventory
Raw material inventory primarily consists of dual fuel conversion components. Work in progress includes materials, labor and direct overhead associated with incomplete dual fuel conversion projects. All inventory is valued at the lower of cost or market on the first-in first-out (FIFO) method. As of September 30, 2013, we recorded an inventory valuation allowance of $44,073. There was no allowance as of September 30, 2012.

42



Inventory consists of the following: 
 
September 30,
2013
 
September 30, 2012
Raw materials, net of valuation allowance
$
895,905

 
$
448,212

Work in progress
11,423

 

Finished goods
731

 
15,341

Total inventory
$
908,059

 
$
463,553

Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and amortization expense is provided on the straight-line method. Expenditures for maintenance, repairs and minor renewals are charged to expense as incurred. Significant improvements and major renewals that extend the useful life of equipment are capitalized.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs were $171,362 and $40,142 for the fiscal years ended September 30, 2013 and 2012, respectively.
Revenue Recognition
Our dual fuel conversion operations derive revenue from (1) product revenue which is earned from the sale and installation of dual fuel conversion equipment and (2) maintenance and service agreements. All components are purchased from external sources including several proprietary patented components which are configured by our internal engineering staff to a customer's specific diesel engine family. The components are assembled into installation kits by us and then delivered on site for installation. All installations are managed by an American Power Group led team or certified third party installer.
Overall, our services and dual fuel conversion equipment for both vehicular and stationary are generally sold based upon purchase orders or contracts with our customers that include fixed or determinable prices but do not include right of return provisions or other significant post-delivery obligations. We recognize revenue from product sales when title passes to the customer, the customer assumes risks and rewards of ownership, collectability is reasonably assured, and delivery occurs as directed by our customer. Service revenue, including engineering services, is recognized when the services are rendered and collectability is reasonably assured.
Percentage of Completion. Revenue from certain long-term, integrated project management contracts to provide and install our dual fuel conversion equipment for stationary power generation is reported on the percentage-of-completion method of accounting. Progress is generally based upon costs incurred to date in relation to the total estimated costs for each contract. Revisions in costs and earnings during the course of the contract are reflected in the accounting period in which facts requiring revisions become known. At the time a loss on a contract becomes known, the entire amount of the estimated loss is accrued.
Multiple-Element Arrangements. We also enter into Multiple-Element Arrangements to sell our dual fuel conversion equipment with engineering and installation services in both the stationary and vehicular applications. We recognize the revenue associated with the dual fuel conversion equipment when title and risk passes to our customer and recognize the service revenue when the service is complete using parameters specified in the first paragraph of this Revenue Recognition Policy.
Shipping and Handling Fees and Costs
Shipping and handling fees and costs billed to customers and incurred by the Company are reported on a net basis in cost of sales in the consolidated statements of operations.
Income Taxes
Deferred tax assets and liabilities are recorded for temporary differences between the financial statement and tax basis of assets and liabilities using the currently enacted income tax rates expected to be in effect when the taxes are actually paid or recovered. A deferred tax asset is also recorded for net operating loss and tax credit carryforwards to the extent their realization is more likely than not. The deferred tax benefit for the period represents the change in the net deferred tax asset or liability from the beginning to the end of the period. As of September 30, 2013, the Company had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements and has approximately $24,000 of accrued interest and penalties relating to state income taxes associated with an inactive subsidiary. The Company with few exceptions, is no longer subject to U.S. Federal, state or local income tax examinations by authorities for years before fiscal 2010.
Stock-Based Compensation
The Company measures and recognizes compensation cost for all share-based awards based on the grant-date fair value estimated using the Black-Scholes option pricing model. We have estimated for forfeitures in determining expected terms on stock

43



options for calculating expense. Amortization of stock compensation expense was $127,000 and $169,418 for the fiscal years ended September 30, 2013 and 2012, respectively. The unamortized compensation expense at September 30, 2013 was $137,289 and will be amortized over a weighted average remaining amortizable life of approximately 2.4 years.
The fair value of each option grant during the year ended September 30, 2013 under the 2005 Stock Option Plan was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions; dividend yield of 0%; risk-free interest rate of approximately 1%; expected volatility based on historical trading information of approximately 66% and expected terms of 4 years.
The fair value of each option grant during the year ended September 30, 2012 under the 2005 Stock Option Plan was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions; dividend yield of 0%; risk-free interest rate of approximately 1%; expected volatility based on historical trading information of approximately 67% and expected terms of 5 years.
Intangible Assets
We review intangibles for impairment annually, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of our intangible assets below their carrying value.
In conjunction with the American Power Group acquisition and license agreement, we recognized $500,000 associated with the execution of a long term technology license agreement and $500,000 associated with the purchase of the dual fuel conversion technology. Both values are being amortized on a straight line basis over an estimated useful life of 120 months. Amortization expenses associated with the long term technology license agreement and the purchased dual fuel conversion technology amounted to $99,999 for the fiscal years ended September 30, 2013 and 2012. Accumulated amortization was $416,666 and $316,667 at September 30, 2013 and 2012, respectively.
A critical component of our dual fuel aftermarket conversion solution is the internally developed software component of our electronic control unit. The software allows us to seamlessly and constantly monitor and control the various gaseous fuels to maximize performance and emission reduction while remaining within all original OEM diesel engine performance parameters. We have developed a base software application and EPA testing protocol for both our OUL and IUL engine applications, which will be customized for each engine family approved in order to maximize the performance of the respective engine family.
 
During fiscal year 2011, we incurred costs to develop these software applications that were recorded as research and development costs and expensed as incurred until we were able to establish technological feasibility, which we did in September 2011 with our first EPA engine family approval. As a result, we began capitalizing costs associated with our software application development. We will cease capitalization of additional costs when each engine family is available for general release to customers. As of September 30, 2013, we have capitalized $3,497,686 of development costs associated with our Outside Useful Life ("OUL") ($1,801,506) and Inside Useful Life ("IUL") ($1,696,180) applications, which will be amortized on a straight line basis over an estimated useful life of 60 months for OUL applications and 84 months for IUL applications. Amortization costs for the fiscal years ended September 30, 2013 and 2012, respectively, were $273,700 and $43,182.
 
Amortization expense associated with related intangibles during the next five years is anticipated to be:
 
Years ending September 30:
 
Contracts
 
Technology
 
Software Development
 
Total
2014
 
$
50,000

 
$
50,000

 
$
561,448

 
$
661,448

2015
 
50,000

 
50,000

 
602,613

 
702,613

2016
 
50,000

 
50,000

 
602,613

 
702,613

2017
 
50,000

 
50,000

 
581,909

 
681,909

2018
 
50,000

 
50,000

 
400,976

 
500,976

2019 and thereafter
 
41,667

 
41,667

 
431,245

 
514,579

 
 
$
291,667

 
$
291,667

 
$
3,180,804

 
$
3,764,138


On June 30, 2011, we amended the Exclusive Patent License Agreement dated as of June 17, 2009 between our company and M&R. Pursuant to the amendment:
The royalties payable to M&R will be reduced from 10% to 6% for sales as defined in the license from and after the date (the “Royalty Modification Date”) that the sum of all royalties paid to M&R under the license equals $15 million on a cumulative basis, and will be eliminated altogether from and after the date that the sum of all royalties paid to M&R equals $36 million on a cumulative basis (the “Technology Transfer Date”);

44



Prior to the Royalty Modification Date, neither M&R nor any of its stockholders, directors, officers or other representatives may (i) sell, license or otherwise transfer any of the patent rights licensed by us or any other proprietary technology or information owned by M&R which relate to the licensed patent rights (together, the “Technology Rights”), (ii) sell or otherwise transfer a majority of M&R’s outstanding capital stock or (iii) enter into any agreement or commitment contemplating either of the foregoing;
M&R has assigned all of its right, title and interest in and to the Technology Rights to us, such assignment to be effective on the Technology Transfer Date, and subject only to the prior receipt by M&R of $36 million in cumulative royalty payments on or before such date;
At any time during the period beginning on the Royalty Modification Date and ending on the first anniversary of the Royalty Modification Date, the Company may purchase the Technology Rights from M&R for an additional payment of $17.5 million; and
If we do not exercise the foregoing purchase right prior to the first anniversary of the Royalty Modification Date, and if M&R subsequently receives a bona fide offer from a third party to purchase some or all of the Technology Rights, we will have the right, exercisable at any time within 30 days after the receipt of such an offer, to purchase the Technology Rights from M&R for a purchase price equal to 110% of the price offered by such third party less the sum of all royalties paid to M&R on or before the date we give notice of our election to purchase the Technology Rights.
In conjunction with the 10% Convertible Preferred Stock financing, on April 27, 2012, we again amended the Exclusive Patent License Agreement to modify the calculation of the royalty payments and the timing of the royalty payments. Under the provisions of this amendment, effective April 27, 2012 the monthly royalty due shall be the lesser of 10% of net sales (or 6% of net sales when we have paid $15 million in cumulative royalties) or 30% of pre-royalty EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). No royalties will be due if cumulative EBITDA is less than zero. During the fiscal years ended September 30, 2013 and 2012, we incurred license fees to M&R of $0 and $120,404, respectively.
Product Warranty Costs
We provide for the estimated cost of product warranties for our dual fuel products at the time product revenue is recognized. Factors that affect our warranty reserves include the number of units sold, historical and anticipated rates of warranty repairs, and the cost per repair. We assess the adequacy of the warranty provision on a quarterly basis and we may adjust this provision if necessary. The increase in warranty reserve at September 30, 2013 is attributable to the increase in revenue during fiscal 2013.
The following table provides the detail of the change in our product warranty accrual relating to dual fuel products as of:
 
September 30,
2013
 
September 30, 2012
Warranty accrual at the beginning of the period
$
18,306

 
$
27,620

Charged to costs and expenses relating to new sales
146,594

 
23,814

Costs of product warranty claims
(46,309
)
 
(33,128
)
Warranty accrual at the end of period
$
118,591

 
$
18,306

Long-Lived Assets
Long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. We evaluate at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, we use future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are fully recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value of asset less the cost to sell.
Recent Accounting Pronouncements
ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities
This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet, and instruments and transactions subject to an agreement similar to a master netting arrangement. The requirements are effective for annual periods beginning on or after January 1, 2013, and interim periods within those annual periods.The Company is currently evaluating the prospective effects, if any, of adopting this guidance.

45



ASU 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment
This ASU gives an entity the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test for indefinite-lived intangible assets other than goodwill. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity's financial statements for the most recent annual or interim period have not yet been issued.The Company is currently evaluating the prospective effects, if any, of adopting this guidance.
ASU 2012-04, Technical Corrections and Improvements
This ASU makes certain incremental improvements to U.S. generally accepted accounting principles (GAAP) including, among other revisions, conforming amendments that identify when the use of fair value should be linked to the definition of fair value in ASC 820. The majority of the amendments in ASU 2012-04 were effective upon issuance on October 1, 2012, for both public entities and nonpublic entities. For public entities, the more substantive amendments that are subject to transition guidance are effective for fiscal periods beginning after December 15, 2012. The Company is currently evaluating the prospective effects, if any, of adopting this guidance.
ASU 2013-02 Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
This ASU requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. Public companies are required to comply with the requirements of ASU 2013-02 for all reporting periods (interim and annual) beginning after December 15, 2012. The Company is currently evaluating the prospective effects, if any, of adopting this guidance.

ASU 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for which the Total Amount of the Obligation is Fixed at the Reporting Date (a consensus of the FASB Emerging Issues Task Force)
This ASU requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date, as the sum of the following:
    The amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors
        Any additional amount the reporting entity expects to pay on behalf of its co-obligors

The amendments in ASU 2013-04 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company is currently evaluating the prospective effects, if any, of adopting this guidance.

ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force)
Per this ASU, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company is currently evaluating the prospective effects, if any, of adopting this guidance.


46



Reclassification
Certain amounts in the 2012 financial statements have been reclassified to conform to the 2013 presentation. These reclassifications had no effect on previously reported results of operations or retained earnings.
Net Loss Per Share
Basic net loss per share is calculated by dividing the net loss less the sum of 10% Convertible Preferred Stock dividends declared and the deemed-dividend from the beneficial conversion feature recorded by the weighted average number of common shares outstanding during the period. The beneficial conversion feature recorded resulted from the issuance of 10% Convertible Preferred Stock, warrants and an additional investment right with conversion prices less than the fair value of the as-converted common shares. The beneficial conversion feature is the difference between the conversion prices of the 10% Convertible Preferred Stock, warrants and additional investment right and the fair value of the common stock into which they are convertible (as calculated under the Black-Scholes pricing model), multiplied by the number of common shares they are convertible into. The result has no impact on our cash, net loss or total stockholders' equity. However, it does increase the net loss per common share for purposes of presenting net loss per share. Diluted earnings per share reflects additional common shares that would have been outstanding if potentially dilutive common shares had been issued, as well as any adjustment to income that would result from the assumed conversion. Potential common shares that may be issued by us relate to outstanding 10% Convertible Preferred Stock, stock options and warrants. Basic and diluted net loss per share is ($.06) and ($0.37) for the years ended September 30, 2013 and 2012, respectively, do not include the effect of the inclusion of 10% Convertible Preferred Stock, outstanding options and warrants since their inclusion would be anti-dilutive. The calculation of diluted net loss per share above excludes 34,201,803 and 26,831,223 options and warrants that are outstanding at September 30, 2013 and 2012, respectively, and 23,544,990 and 18,982,500 shares issuable upon conversion of Preferred Stock at September 30, 2013 and 2012, respectively. Due to our operating at a loss, these options and warrants are deemed to be anti-dilutive as their exercise price exceeds the average closing price used in the calculation of fully diluted shares.
2.     Discontinued Operations
On August 1, 2011, we completed the sale of substantially all of the assets of of our former recycled products subsidiary, Green Tech Products to Irish Knight Holdings, L.L.C., a company co-owned by two of Green Tech Products’ senior managers. The consideration for the purchase of the assets was (i) the assumption of substantially all of Green Tech Products’ liabilities, which were approximately $1.2 million; (ii) a $50,000 stock inventory credit toward the purchase of products and services from the buyer, which credit may be applied during the first nine months after completion of the sale; and (iii) a promissory note in the principal amount of $100,000, which is payable in increasing monthly installments over a period of 60 months.
In March 2012, Irish Knight Holdings agreed, in consideration of a $25,000 reduction in the stock inventory credit and a $38,000 reduction in the then outstanding balance of the promissory note, to pay us a total of $80,000 by December 31, 2012 in full satisfaction of the inventory credit and note, which they did. As a result, we recorded an additional loss on disposal of discontinued assets of $63,000 during the twelve months ended September 30, 2012.
During September 2013, we were notified we were to receive a refund of previously paid insurance premiums associated with former discontinued operations and as a result recorded income from discontinued operations of $66,922 for the twelve months ended September 30, 2013.
Net gain or loss from our discontinued operations for the twelve months ended September 30 were as follows:
 
September 30, 2013
 
September 30, 2012
Income (loss) from discontinued operations, net of taxes
$
66,922

 
$
(63,085
)
3.     Property, Plant and Equipment
Property, plant and equipment consist of the following: 
 
September 30,
2013
 
September 30, 2012
 
Estimated
Useful Lives
Leasehold improvements
$
127,087

 
$

 
5 years
Machinery and equipment
1,431,871

 
719,474

 
3 – 7 years
Less accumulated depreciation
(629,137
)
 
(380,552
)
 
 
Machinery and equipment, net
$
929,821

 
$
338,922

 
 

47



4. Contracts in Progress
Contracts in progress consist of the following: 
 
September 30,
2013
 
September 30, 2012
Costs incurred on uncompleted contracts
$
14,572

 
$
419,396

Estimated earnings on contracts in progress
25,387

 
126,564

 
39,959

 
545,960

Less billings on contracts in progress
47,492

 
485,101

 
$
(7,533
)
 
$
60,859

Costs and estimated earnings in excess of billings
$

 
$
62,667