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EX-32.1 - EXHIBIT 32.1 SECTION 906 CERTIFICATION - AlumiFuel Power Corpf10k123111_ex32z1.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K


   X .   ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended: DECEMBER 31, 2010


       .   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For transition period from            to           .


Commission File Number 333-57946


ALUMIFUEL POWER CORPORATION

(Name of small business issuer in its charter)


NEVADA

88-0448626

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification Number)


7315 EAST PEAKVIEW AVENUE, ENGLEWOOD, COLORADO 80111

(Address of principal executive offices)(Zip Code)


Issuer's telephone number, including area code: (303) 796-8940


Securities registered pursuant to Section 12(b) of the Exchange Act: None


Securities registered under Section 12(g) of the Exchange Act: None


Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes      . No  X .


Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.       .   


Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Exchange during the past 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  X . No      .


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in this form, and will not be contained, to the best of the 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:   X .   


Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer:


Large accelerated filer

      .

Accelerated filer

      .

Non-accelerated filer

      . (Do not check if a smaller reporting company)

Smaller reporting company

  X .


Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes      . No  X .


The aggregate market value of the voting common equity held by non-affiliates of the issuer as of March 31, 2012 was $1,497,100, based on the last sale price of the issuers common stock ($0.0012 per share) as reported by the OTC Bulletin Board.


The Registrant had 1,323,255,736 shares of common stock outstanding as of March 31, 2012.


Documents incorporated by reference: None





ALUMIFUEL POWER CORPORATION

FORM 10-K


THIS REPORT MAY CONTAIN CERTAIN “FORWARD-LOOKING” STATEMENTS AS SUCH TERM IS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 OR BY THE SECURITIES AND EXCHANGE COMMISSION IN ITS RULES, REGULATIONS AND RELEASES, WHICH REPRESENT THE REGISTRANT’S EXPECTATIONS OR BELIEFS, INCLUDING BUT NOT LIMITED TO, STATEMENTS CONCERNING THE REGISTRANT’S OPERATIONS, ECONOMIC PERFORMANCE, FINANCIAL CONDITION, GROWTH AND ACQUISITION STRATEGIES, INVESTMENTS, AND FUTURE OPERATIONAL PLANS.  FOR THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS.  WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, WORDS SUCH AS “MAY”, “EXPECT”, “BELIEVE”, “ANTICIPATE”, “INTENT”, “COULD”, “ESTIMATE”, “MIGHT”, OR “CONTINUE” OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.  THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES, CERTAIN OF WHICH ARE BEYOND THE REGISTRANT’S CONTROL, AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON A VARIETY OF IMPORTANT FACTORS, INCLUDING UNCERTAINTY RELATED TO ACQUISITIONS, GOVERNMENTAL REGULATION, MANAGING AND MAINTAINING GROWTH, THE OPERATIONS OF THE COMPANY AND ITS SUBSIDIARIES, VOLATILITY OF STOCK PRICE AND ANY OTHER FACTORS DISCUSSED IN THIS AND OTHER REGISTRANT FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.


PART I


ITEM 1.

DESCRIPTION OF BUSINESS


(a)

General development of business.


We were incorporated in the state of Nevada on January 19, 2000 under the name Organic Soils.Com, Inc.


Pursuant to an Agreement and Plan of Reorganization dated as of March 24, 2005 (the “Share Exchange Agreement”), by and between Organic Soils.com, Inc. and Inhibetex Therapeutics, Inc., a Colorado corporation (“Inhibetex”), Organic Soils.com, Inc. and Inhibetex entered into a share exchange whereby all of the issued and outstanding capital stock of Inhibetex, on a fully-diluted basis, were exchanged for like securities of Organic Soils.com, Inc., and whereby Inhibetex became a wholly owned subsidiary of Organic Soils.com, Inc. (the “Share Exchange”).  The Share Exchange was effective as of May 19, 2005 at which time we also changed our name to Inhibiton Therapeutics, Inc. (the “Registrant” or the “Company”).


Pursuant to an Agreement Concerning the Exchange of Securities by and among the Company, HPI Partners, LLC (“HPI”), a Colorado Limited Liability Company, and the Security Holders of HPI Partners, LLC (the “HPI Members”) dated March 4, 2009, (the “Share Exchange Agreement”), the parties entered into a share exchange whereby all of the issued and outstanding membership interests of HPI were exchanged for 171,123,297 shares of the Company’s $0.001 par value common stock and 418,500 shares of the Company’s $0.001 par value Series A Preferred Stock, through which HPI and its wholly-owned subsidiary AlumiFuel Power, Inc. ("API") became a wholly owned subsidiaries of the Company (the “Share Exchange”).  The 418,500 shares of the Company’s Series A Preferred Stock automatically converted to 34,397,261 shares of the Company’s $0.001 par value common stock upon approval by the Company’s stockholders of an increase in the number of authorized common shares effective on May 28, 2009.  In addition, the HPI Members received warrants to purchase up to 14,302,500 shares of the Company’s $0.001 par value common stock, in exchange for a like number of HPI warrants that are exercisable until March 4, 2012 at an exercise price of $0.12 per share.  The Share Exchange was effective as of May 5, 2009, upon closing of the transaction among the parties.


This acquisition was treated as a reverse-merger with HPI being the accounting acquirer including a recapitalization of its equity with Inhibiton Therapeutics, Inc. as the legal surviving entity.  Effective on May 28, 2009, the Company changed its name from Inhibiton Therapeutics, Inc. to AlumiFuel Power Corporation.   As a result of this transaction, the Company has ceased any further operations related to its previous cancer therapy research and development business.


In February 2010, the Company formed its new subsidiary, AlumiFuel Power International, Inc. ("AFPI").  In connection with the formation of the AFPI, the Company and AFPI executed a License Agreement through which AFPI received certain international marketing rights and the rights to utilize certain intellectual property from the Company for exploitation in countries and territories outside of North America in exchange for 25,000,000 shares of the Company's $0.001 par value common stock.  The Company also purchased 15,000,000 shares of AFPI common stock at $0.01 per share.  On July 31, 2011, the Company and AFPI executed a Patent Purchase Agreement through which the Company sold AFPI the international patent rights to certain of the Company's intellectual property.  In exchange for the sale of these rights, the Company received 7,500,000 shares of AFPI common stock.



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(b)

Financial information about segments.


Through December 31, 2011, we operated in only one industry segment.


(c)

Narrative description of business.


AlumiFuel Power Corporation is a company that during 2011 operated primarily through its subsidiaries API and AFPI.   We are an early production stage alternative energy company that generates hydrogen gas and superheated steam through the chemical reaction of aluminum, water, and proprietary additives.  This technology is ideally suited for multiple niche applications requiring on-site, on-demand fuel sources, serving National Security and commercial customers.  Hydrogen generated by our products can fill inflatable devices such as weather balloons, feed fuel cells for portable and back-up power, and can replace costly, hard-to-handle and high pressure K-Cylinders. Our hydrogen/heat output is also being designed and developed to drive turbine-based underwater propulsion systems and auxiliary power systems, and as the fuel for Flameless Ration Heaters.  Our technology has significant differentiators in performance, adaptability, safety and cost-effectiveness in its target market applications, with no external power required and no toxic chemicals or by-products.  This unique technology is based on the exothermic chemical reaction of aluminum powder and water.  The Company intends to operate as much as possible utilizing path-to-market partners for each target application to help keep its overhead and infrastructure costs down.


The Company's first commercially available product was the PBIS-1000 portable balloon inflation device.  Existing technologies for balloon inflation include: hydrogen and helium cylinders;  assorted toxic solid fuel systems; expensive on-site electrolysis; and unwieldy chemical hydrogen generators.  Our technology utilizes a unique, simple portable generation/launching system that is:


·

Field deployable

·

Can be launched at remote locations

·

Is a cost-effective total system solution

·

Is portable and easy to use

·

Is made of non-toxic materials


As a result of input from the initial customer, the Company has worked to produce a quieter more rugged next generation PBIS-1000 unit that is a significant upgrade over the system produced and sold in 2010.  The production unit has a simpler design with fewer components, and is lighter, more compact, more ruggedized for military applications, more user-friendly, quieter and more cost effective.  Using a higher grade stainless steel construction with better corrosion properties and durable fluorocarbon rubber for all seals, the upgraded unit can better withstand required pressures and temperatures over its long expected lifetime.  The reactor and water tanks, as well as all plumbing lines and connectors, have been optimized for weight, simplicity, and cost, and are stamped and certified with the ASME code – a standard requirement for commercial pressure vessels.  The unit meets military specification requirements for vibration, environmental and drop tests, and is housed in a molded polyethylene carrying case used regularly by the military.  


In addition, a more effective packaging configuration of the company’s proprietary AlumiFuel fuel cartridges increases the speed of the reaction and the hydrogen yield, while reducing cartridge cost.  The versatile PBIS-1000 unit can produce 1,000 liters of hydrogen in 20 minutes at ambient temperature and atmospheric pressure using only two 32oz AlumiFuel cartridges.  


In 2011, we were awarded a contract with the United States Air Force Special Operations Command to deliver a PBIS-2000 Portable Balloon Inflation System.  Originally slated for delivery in late February 2012, working with the customer the Company delivered the unit in April 2012.  


The PBIS-2000 expands the capability of our current family of hydrogen generators, which includes the PBIS-1000 (for 100g balloons) and the PBIS-lite (designed for 30g pieball balloons).  The PBIS-2000 generates sufficient hydrogen to inflate a 200g weather balloon within 20 minutes using up to 6 AlumiFuel Cartridges contained in a single reactor vessel; this represents significantly more hydrogen than is required for the PBIS-1000.  While the footprint, weight and safety features of the PBIS-2000 are similar to the PBIS-1000, the configuration has been modified such that the system operates at ambient (atmospheric) pressure (below 10 psig) so that the user never has to deal with a high pressure system such as the industry standard K-Cylinder (2265 psig).



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The PBIS series of man-portable reactor and launching units use our proprietary AlumiFuel technology to produce hydrogen through the powerful chemical reaction of powdered aluminum, water and proprietary additives. The devices require only a simple water hand pump and two to six small AlumiFuel cartridges to propagate the reaction and generate sufficient lift gas to launch a 5-foot diameter weather balloon. This innovation, which enables on the spot generation of hydrogen without any external energy or toxic chemicals, is easier to use and is cheaper than current lift gas solutions.  Traditionally, helium has been used as the primary lift gas, but with the increasing scarcity and cost of helium, users are realizing the benefits of switching to hydrogen.  These portable launching units are far more mobile and cost effective than other on-site hydrogen generation systems.  The Company estimates the current weather balloon lift gas market is $150-$200 million per year and encompasses military as well as civil government meteorological users worldwide; with more than 1,000,000 weather balloons and special purpose balloons launched annually for telecom relay, cloud height measurement and military/national security applications.  the customer base for the PBIS units includes various governmental users both civil and military.  


Our AlumiFuel cartridges utilize standard 32 oz aluminum drink cans and our "stuffing" has been outsourced to ActionPak, a Philadelphia area volume packager/assembler with industrial scale packaging techniques & processes.  ActionPak supports all product applications and provides shipping/distribution/supply chain logistics while we control our proprietary additives.


We intend to focus or commercial activities on several “here-and-now” market driven & addressable applications:


·

Team with major path-to-market partners for each target application

·

Target early adopters of advanced hydrogen technology – government and commercial

·

Engage production partners on outsourcing basis

·

Position AlumiFuel cartridges as “razor blades” and reactors as “razors”

·

Leverage our cheaper and more efficient logistics chain vs. bulky hydrogen K-cylinders

·

Emphasize our safe “dry hydrogen” product profile


We believe our technology is different because:


·

Aluminum-water chemical reaction – no external energy required

·

Novel packaging of aluminum powder/reactants/initiators into drop-in cartridges

·

Contents of AlumiFuel cartridges are safe to handle

·

Inserting cartridge and water into reactor generates high purity hydrogen on-demand

·

Safe, clean, non-toxic, environmentally benign by-products

·

Abundant, low cost materials – long shelf life

·

Highly mobile and compact system products with modular components

·

Basic R&D and engineering development complete – in early production stage

·

Very high energy densities – 9.2kWh/l and 8.9kWh/kg

·

New patent filings embody unique and independent technology

·

Significant proprietary know-how

·

Reactor units consistently generate 95%+ yields

·

Practical ability to engineer reactions at required scales and durations

·

Can displace current technologies/products


Other potential products include hydrogen/steam generators including turbine-based underwater propulsion systems, drop-in recyclable cartridges and flameless heater packs.  Ours is an enabling technology that can deliver up to five times the energy density (runtime) of lithium batteries, which can open up doors for new power applications.


Of equal importance to the weather balloon market, the PBIS product family can easily be tailored to feed fuel cells to generate electricity for back-up, stand-by, auxiliary and portable power.  We have had ongoing discussions with major fuel cell companies regarding technology collaboration for other applications.


During 2010, the Company partnered with Ingenium Technologies and was awarded a U.S. Navy R&D contract for developing a novel new hydrogen fuel delivery system to power future fuel cell driven Unmanned Underwater Vehicles UUVs, with Ingenium as the prime contractor.  The hydrogen generator is based on the same powerful chemical reaction currently used in the PBIS hydrogen generators. In this application, however, the hydrogen is used to power a fuel cell instead of filling a weather balloon.  The prototype UUV hydrogen generator will be sized very similar to the superheated steam generator, and can be used to power a 100W fuel cell for several days.  It will also demonstrate the start and stop capabilities of the system, similar to the steam generator.  Our plan is to ultimately integrate these two generators as a hybrid power source on board an underwater platform to further advance AlumiFuel’s already high energy density, which it believes will equate to significant increases in range and operating time for underwater missions.



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As the prime contractor, Ingenium will develop the overall system design, with API’s hydrogen generation technology as the key fuel source component of the proposed design. In addition to subcontracting power source tasks to API, Ingenium will use Drexel University as its research institution partner. Drexel was included in the proposal because of the relevant AlumiFuel powder research that API conducts at the Drexel Nanotechnology Institute, and the world-class microscopy equipment, facilities and technical personnel at the Institute will add significant contributions to the development effort.


In February 2010 we formed AFPI, a Canadian corporation and our majority owned subsidiary, to be our marketing and sales arm for countries outside of North America.  In July 2011, we executed a Patent Purchase Agreement through which we sold AFPI the international patent rights to certain of our intellectual property.  We intend to use AFPI to leverage our already developed products and processes in markets outside of the United States.  AFPI began trading on the Deutsche Börse Frankfurt First Quotation Board in 2011 under the symbol "9AP".  Although the market for the 9AP has been light and sporadic, the Company recently announced that in light of a recent announcement by the Deutsche Börse Group to close the First Quotation Board on the Frankfurt Stock Exchange in late 2012, the Company is making plans to file for listing on the Entry Standard Level.  AFPI is currently reviewing the enhanced listing requirements and intends to file a prospectus as soon as possible to move forward with the Entry Standard Level listing process.


The Hydrogen Economy


The Company estimates the hydrogen market currently represents approximately $2.3 billion globally and is expanding.  In addition, the generator and battery replacement market for mobile and portable fuel cell systems is estimated to be in excess of $7 billion.  It is anticipated the hydrogen market will experience a annual growth rate in excess of 10% over the next five years.  


Current market segments include


·

H2 generation

·

H2 storage

·

H2 distribution/delivery/dispensing methods & devices

·

Users (Fuel cell companies, vehicular, military, weather balloons, etc.)


Current applications include selected utility vehicles, and back-up, auxiliary, portable and remote power generation.  Although Honda Motor Corporation currently produces a vehicle for lease in California, it is anticipated a mass market for automotive applications won't occur until later in this decade.  Current public perception is that the hydrogen economy is tied to the automotive market.  The Company believes the following must occur to commercialize automotive applications: volume manufacturing, lower cost and increased reliability of hydrogen fuel cells must be achieved; automakers must adopt the increased use of fuel cells; a new fuel distribution infrastructure including bulk hydrogen production plants near dispersed customers, (e.g. service stations) must be built.  


The Company believes there is limited public awareness of substantial and growing pre-automotive markets being driven by early adopters of hydrogen technology.  These technologies include hydrogen fuel cells for back-up, portable and auxiliary power applications as well as the delivery of longer run-times, lower emissions, cheaper operations than present battery, generator sets, diesel, and other technologies.


The Company also believes its technology can impact the hydrogen economy through the favorable economics of supply and demand and a push for “green” energy to drive the hydrogen industry to evolve on many scales for many applications.  As the increased demand for pre-automotive fuel cells will decrease cost of components and create viable supplier base for automotive fuel cells, API believes it is in the forefront of the transition to the hydrogen economy.  Our technology and products will help accelerate the transition including “sweet spot” applications (back-up, portable, auxiliary and remote power) to facilitate increased usage and capability of hydrogen fuel cells.  We believe we can leverage our cheaper logistics chain to replace delivery of hard-to-handle K-cylinders for hydrogen storage.  API’s unique non-fuel cell applications can facilitate early market entry and a providing a source of revenue while fuel cell applications mature.


In addition, the Company intends to pursue longer range plans to support UUV and other potential military applications including land-based auxiliary power systems with estimated potential spending from 2012 to 2016 in excess of $10 billion for both U.S. and Allied applications.



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Competition


Since hydrogen power generation technologies have the potential to replace existing power products, competition will come from improvements to current power technologies and from new alternative energy technologies.  Each potential target market is currently serviced by existing manufacturers with existing customers and suppliers.  These manufacturers use proven and widely accepted technologies such as internal combustion engines and turbines as well as coal, oil, electricity and nuclear powered generators.


There are a number of companies using reforming technologies for hydrogen generation, including, Airgas, H2Gen, Harvest Energy Technology (which was recently acquired by Air Products), HyGear, and others. While many of these companies are further down the commercialization and production road, we believe our hydrogen generation technology is less expensive than a reformer-based approach for potential target applications, and that the technology is superior to other non-reforming hydrogen generation technologies in terms of cost, weight, safety and use of non-toxic materials.


Additionally, there are competitors working on developing technologies using other than hydrogen power generation systems (such as fuel cells, advanced Lithium-ion batteries, battery/fuel cell hybrids and hybrid battery/ICEs) in certain targeted markets.  


There are many different individuals, institutions and companies across the United States, Canada, Europe and Japan, including corporations, national laboratories and universities that are actively engaged in the development and manufacture of alternative energy technologies including hydrogen generation technologies.  Each of these competitors has the potential to capture market share in any potential future target markets.


Many of these competitors have substantial financial resources, customer bases, strategic alliances, manufacturing, marketing and sales capabilities, and businesses or other resources which give them significant competitive advantages over us.


Government Regulation


We are not currently subject to any specific governmental regulations other than those common to any operating business. While we believe our hydrogen power generation products are environmentally benign, we may be subject to national or local environmental laws regarding the disposal or recycling of aluminum or water waste or other unforeseen by-products from our developing technologies. Additionally, we may be subject to customary regulations related to the shipment of hazardous materials for our AlumiFuel cartridges.


It is possible that we will encounter industry-specific government regulations in the future in any jurisdictions in which we may operate. Regulatory approvals may be required for the design, installation and operation of stationary and mobile hydrogen fuel stations and other fuel cell systems should we successfully develop and implement those products. It is our intention to comply with all necessary governmental regulations that may be imposed on products or services we develop for commercial use. Any delay in gaining necessary regulatory approval for future products or services could cause a delay in our development and growth.


Research and Development


We have expensed $22,319 on direct research and development costs during the past two years including $10,357 and $11,962 expensed in the fiscal years ended December 31, 2011 and 2010, respectively.  All of these costs were borne by us.  These amounts do not include the day-to-day operating costs associated with our operations but do include expenses for laboratory supplies, design and development costs not directly related to the manufacturing process of our products.


Employees


We currently have one full-time employee located in the Philadelphia area.  This does not include our corporate officers who each devote at least thirty hours per week on the operations of the Company, outsourced administrative personnel or our Chief Technical Officer who works as a consultant on an as needed basis.


ITEM 1A. RISK FACTORS


The purchase of shares of our common stock is very speculative and involves a very high degree of risk.  An investment in our stock is suitable only for the persons who can afford the loss of their entire investment.  Accordingly, investors should carefully consider the following risk factors, as well as other information set forth herein, in making an investment decision with respect to securities of Inhibiton.



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The market price of our common stock fluctuates significantly.


The market price of our common shares fluctuates significantly in response to factors, some of which are beyond our control, such as:


·

the announcement of new products or product enhancements by us or our competitors;

·

developments concerning intellectual property rights and regulatory approvals;

·

quarterly variations in our and our competitors’ results of operations;

·

changes in earnings estimates or recommendations by securities analysts;

·

developments in our industry; and

·

general market conditions and other factors, including factors unrelated to our own operating performance.

·

dilution and increases in our shares outstanding including issuances under convertible notes and debentures


Further, the stock market in general has recently experienced extreme price and volume fluctuations.  Continued market fluctuations could result in extreme volatility in the price of our common shares, which could cause a decline in the value of our common shares.  You should also be aware that price volatility might be worse if the trading volume of our common shares is low.


Because we gained access to the public markets pursuant to a share exchange, we may not be able to attract the attention of major brokerage firms.


Additional risks may exist since we gained access to the public markets through a share exchange.  Security analysts of major brokerage firms may not cover us since there is no incentive to brokerage firms to recommend the purchase of our common stock.  No assurance can be given that brokerage firms will want to conduct any secondary offerings on our behalf in the future.


Trading of our common stock is limited.


Trading of our common stock is conducted on the National Association of Securities Dealers’ Over-the-Counter Bulletin Board, or “OTC Bulletin Board.”  This has adversely effected the liquidity of our securities, not only in terms of the number of securities that can be bought and sold at a given price, but also through delays in the timing of transactions and reduction in security analysts' and the media's coverage of us.  This may result in lower prices for our common stock than might otherwise be obtained and could also result in a larger spread between the bid and asked prices for our common stock.


Because it is a “penny stock,” it will be more difficult for you to sell shares of our common stock.


Our common stock is a “penny stock.”  Broker-dealers who sell penny stocks must provide purchasers of these stocks with a standardized risk-disclosure document prepared by the SEC.  This document provides information about penny stocks and the nature and level of risks involved in investing in the penny-stock market.  A broker must also give a purchaser, orally or in writing, bid and offer quotations and information regarding broker and salesperson compensation, make a written determination that the penny stock is a suitable investment for the purchaser, and obtain the purchaser’s written agreement to the purchase.  The penny stock rules may make it difficult for you to sell your shares of our stock.  Because of the rules, there is less trading in penny stocks.  Also, many brokers choose not to participate in penny-stock transactions.  Those brokers that do accept penny stocks are applying more stringent rules and requiring significant documentation for depositing stock certificates into brokerage accounts.   Accordingly, you may not always be able to deposit and resell shares of our common stock publicly at times and prices that you feel are appropriate.  In addition, restrictions placed on electronic transfer of our common stock may significantly increase the time it takes for stockholders to collect on stock sales transactions once their shares are sold.   



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Risks Related to Our Business


We currently have limited product revenues and will need to raise additional capital to operate our business.


We generated only $2,574 and $58,444 in fee revenues in 2011 and 2010.  While we anticipate we will generate further revenues from the sale of our PBIS portable balloon inflation devices including the US Air Force order and may have further R&D income from other projects in the future, the revenues generated from those sales in the fiscal year ending December 31, 2012 will not be sufficient to fund our operating needs during 2012 and there is no assurance any revenues in future periods will be sufficient to fund our operating needs.  Therefore, for the foreseeable future, we will have to fund a majority of our operations and capital expenditures from additional financing, which may not be available on favorable terms, if at all.  If we are unable to raise additional funds on acceptable terms, or at all, we may be unable to complete further product development or have the funds necessary to buy the raw materials for future orders.  Any additional sources of financing will likely involve the sale of our equity securities or issuance of debt instruments convertible into shares of our common stock, which will have a substantial dilutive effect on our stockholders.  During 2011, our primary source of financing was from the issuance of convertible debt that resulted in a significant increase in our shares outstanding.  This trend is expected to continue for the foreseeable future.


We are not currently profitable and may never become profitable.


We have a history of significant losses and expect to incur substantial losses and negative operating cash flow for the foreseeable future, and we may never achieve or maintain profitability.  Even if we succeed in developing and commercializing one or more products, we expect to incur substantial losses for the foreseeable future and may never become profitable.  We also expect to continue to incur significant operating and capital expenditures and anticipate that our expenses will not be offset by our revenues in any substantial way.


We also expect to experience negative cash flow for the foreseeable future as we work to commercialize our technology while funding our operating losses and capital expenditures.  As a result, we will need to generate significant revenues or raise additional capital in order to achieve and maintain profitability.  We may not be able to generate these revenues or achieve profitability in the future.  Our failure to achieve or maintain profitability could negatively impact the value of our stock.


We have raised capital through the use of convertible debt instruments that causes substantial dilution to our stockholders.


Because of the size of our Company and its status as a "penny stock" as well as the current economy and difficulties in companies our size finding adequate sources of funding, we have been forced to raise capital through the issuance of convertible notes and other debt instruments.  These debt instruments carry favorable conversion terms to their holders of up to 50% discounts to the market price of our common stock on conversion and in many cases provide for the immediate sale of our securities into the open market.  Accordingly, this has caused significant dilution to our stockholders and will continue to do so in 2012 and the foreseeable future.  As of December 31, 2012, we had approximately $395,000 in convertible debt outstanding.  This convertible debt balance as well as additional convertible debt we incur in the future will cause substantial dilution to our stockholders.


The hydrogen power technology development business has a limited operating history on which to evaluate our business plan and currently possesses unproven hydrogen generation technology.  


We will be required to continue engineering development on our hydrogen power generation technology against specific target applications and products.   Our business plan is subject to further product development and there is a lack of meaningful historical financial data that makes it difficult to evaluate its prospects.   To the extent that we are able to implement our business plan, our business will be subject to all of the problems that typically affect a business with a limited operating history, such as unanticipated expenses, capital shortfalls, delays in technology development and possible cost overruns.   


We may not be able to achieve commercialization of any new products on the timetable we anticipate, or at all.  


We cannot guarantee that we will be able to continue to develop commercially viable hydrogen power generation products on the timetable we anticipate, or at all.  The continued commercialization of hydrogen power generation products require substantial technological advances to improve the efficiency, functionality, durability, reliability, cost and performance of these products and to develop commercial volume manufacturing processes for these products.   Developing the technology for high-volume commercialization may require substantial capital, and we cannot assure you that we will be able to generate or secure sufficient funding on acceptable terms to pursue commercialization plans on a larger scale.   In addition, before any new product can be released to market, it must be subjected to numerous field tests.  These field tests may encounter problems and delays for a number of reasons, many of which are beyond our control.  If these field tests reveal technical defects or reveal that our potential products do not meet performance goals, including useful life, reliability, and durability, our commercialization schedule could be delayed, and potential purchasers may decline to purchase future systems and products.   



8




The commercialization of hydrogen power generation systems also may depend on our ability to significantly reduce the costs of future systems and products.   We cannot assure you that we will be able to sufficiently reduce the cost of these products versus existing technologies without reducing performance, reliability and durability, which would adversely affect consumers’ willingness to buy future products.   


We cannot assure you that we will be able to successfully execute our business plan.  


The execution of our business plan poses many challenges and is based on a number of assumptions.   We cannot assure you that we will be able to execute our business plan.  Narrowing the scope of our development activities may not accelerate product commercialization.   If we experience significant cost overruns on any of our product development programs, or if our business plan is more costly than anticipated, certain research and development activities may be delayed or eliminated, resulting in changes or delays to our commercialization plans.   


Potential fluctuations in our financial and business results makes forecasting difficult and may restrict our access to funding for our commercialization plan.  


We expect our operating results to vary significantly from quarter to quarter and even year to year.   As a result, quarter to quarter or year to year comparisons of these operating results are not expected to be meaningful.   Due to our hydrogen power technology business’ stage of development, it is difficult to predict potential future revenues if any or results of operations accurately.   It is likely that in one or more future quarters our operating results will fall below the expectations of investors or securities analysts, if any, who follow our Company.   In addition, investors or security analysts may misunderstand our business decisions or have expectations that are inconsistent with our business plan.   This may result in our business activities not meeting their expectations.   Not meeting investor or security analyst expectations may materially and adversely impact the trading price of our common shares, and increase the cost and restrict our ability to secure required funding to pursue our commercialization plans.  


A mass market for our products may never develop or may take longer to develop than we anticipate.  


The hydrogen power generation systems we currently market and intend to market are sold in markets that are still emerging or may be subject to governmental spending cutbacks.  As a result, we do not know whether end-users will want to use those products.  The development of a mass market for the hydrogen power generation technology may be affected by many factors, some of which are beyond our control, including the emergence of newer, more competitive technologies and products, the future cost of raw materials used by our systems, regulatory requirements, consumer perceptions of the safety of any developed products and related fuels, and consumer reluctance to buy a new product.  


If a mass market fails to develop or develops more slowly than anticipated, we may be unable to recover the losses it will have incurred in the development of our current and potential future products and may never achieve profitability. In addition, we cannot guarantee that we will be able to develop, manufacture or market any products if sales levels do not support the continuation of those products.  


Regulatory changes could hurt the market for our products.  


Changes in existing government regulations and the emergence of new regulations with respect to hydrogen generation systems may hurt the market for any developed products.   Environmental laws and regulations in the U.S. and other countries have driven interest in alternate energy systems.  We cannot guarantee that these laws and policies will not change.   Changes in these laws and other laws and policies or the failure of these laws and policies to become more widespread could result in consumers abandoning their interest in hydrogen generation systems in favor of alternative technologies.   In addition, as alternative energy products are introduced into the market, the governments in countries we intend to market our products may impose burdensome requirements and restrictions on the use of these technologies that could reduce or eliminate demand for some or all of our potential products.  


If we fail to protect our intellectual property rights, competitors may be able to use our technology, which could weaken our competitive position, eliminate the potential for future revenue and increase costs.  


We believe that our long-term success will depend to a large degree on our ability to protect the proprietary technology that we have developed or any other technology that we may develop or acquire in the future.  Although we intend to aggressively pursue anyone we reasonably believe is infringing upon our intellectual property rights, initiating and maintaining suits against third parties that may infringe upon those intellectual property rights will require substantial financial resources.  In addition, significant financial resources could be required to defend against any suits brought against us claiming our infringement of others’ intellectual property rights.  We may not have the financial resources to bring or defend such suits and if it such suits emerge, we may not prevail.  Regardless of our success in any such actions, we could incur significant expenses in connection with such suits.  



9




Failure to protect any intellectual property rights could seriously harm our business and prospects because we believe that developing new systems and products that are unique to us is critical to our success.  We will rely on patent, trade secret, trademark and copyright law to protect our intellectual property.  However, some of the intellectual property may not be covered by any patent or patent application, and certain patents will eventually expire.  We cannot assure that any present or future issued patents will protect the technology.  Moreover, our patent position is subject to complex factual and legal issues that may give rise to uncertainty as to the validity, scope and enforceability of a particular patent.  Accordingly, there is no assurance that:


·

any of the patents or patent applications developed, acquired or licensed by us will not be invalidated, circumvented, challenged, rendered unenforceable, or licensed to others; or

·

any potential future patent applications will be issued with the breadth of claim coverage sought by us, if issued at all.  


In addition, effective patent, trademark, copyright and trade secret protection may be unavailable, limited or not applied for in certain countries.  


We may also seek to protect any proprietary intellectual property, including intellectual property that may not be patented or patentable, in part by confidentiality agreements and, if applicable, inventors’ rights agreements with strategic partners and employees.   We can provide no assurance that these agreements will not be breached, that we will have adequate remedies for any breach or that such persons or institutions will not assert rights to intellectual property arising out of these relationships.  


Future intellectual property may be acquired without typical representations and warranties.  If necessary or desirable, we may seek further licenses under the patents or other intellectual property rights of others.  However, we can give no assurances that we will obtain such licenses or that the terms of any offered licenses will be acceptable to us.   The failure to obtain a license from a third party for intellectual property we use could cause us to incur substantial liabilities and to suspend the development, manufacture or shipment of products or our use of processes requiring the use of such intellectual property.  


We may be involved in intellectual property litigation that causes us to incur significant expenses or prevents us from selling any developed products.  


We may become subject to lawsuits in which it is alleged that we have infringed the intellectual property rights of others or commence lawsuits against others who we believe are infringing upon our rights.   Involvement in intellectual property litigation could result in significant expense, adversely affecting the development of the challenged product or intellectual property and diverting the efforts of our technical and management personnel, whether or not such litigation is resolved in its favor.   In the event of an adverse outcome as a defendant in any such litigation, we may, among other things, be required to:


·

pay substantial damages;

·

cease the development, manufacture, use, sale or importation of any developed products that infringe upon other patented intellectual property;

·

expend significant resources to develop or acquire non-infringing intellectual property;

·

discontinue processes incorporating infringing technology; or

·

obtain licenses to the infringing intellectual property.  


We can provide no assurance that we would be successful in such development or acquisition, or that such licenses would be available upon reasonable terms.   Any such development, acquisition or license could require the expenditure of substantial time and other resources and could have a material adverse effect on our business and financial results.  


We will face significant competition.  


As alternative energy technologies including hydrogen power generation technologies have the potential to replace existing power products, competition for those products will come from current power technologies, from improvements to current power technologies and from new alternative power technologies, including other types of alternative energy technologies.  Each of our target markets is currently serviced by existing manufacturers with existing customers and suppliers.  These manufacturers use proven and widely accepted technologies such as internal combustions engines and turbines as well as coal, oil and nuclear powered generators.  


Additionally, there are competitors working on developing technologies other than hydrogen power generation systems (such as fuel cells, advanced Lithium-ion batteries and battery/fuel cell hybrids) in each of our targeted markets.   Some of these technologies are as capable of fulfilling existing and proposed regulatory requirements as our technology.



10




There are many different individuals, institutions and companies across the United States, Canada, Europe and Japan, including corporations, national laboratories and universities that are actively engaged in the development and manufacture of alternative energy technologies including hydrogen generation technologies.  Each of these competitors has the potential to capture market share in any of our future target markets.  


Many of these competitors have substantial financial resources, customer bases, strategic alliances, manufacturing, marketing and sales capabilities, and businesses or other resources which give them significant competitive advantages over the Company.  


The loss of the services of certain key employees, or the failure to attract additional key individuals, would materially adversely affect our business.  


Our success will depend on the continued services of certain technology development and marketing personnel.  In addition, our success depends in large part on our ability in the future to attract and retain key management, engineering, scientific, manufacturing and operating personnel.   Recruiting personnel for the alternative energy industries is highly competitive.   We cannot guarantee that we will be able to attract and retain qualified executive, managerial and technical personnel needed for the development of potential products business.  Our failure to attract or retain qualified personnel could have a material adverse effect on our business.  Liquidity issues, discussed earlier, could severely impact our ability to attract qualified key personnel or retain existing personnel.  


Hydrogen products use inherently dangerous, flammable fuels, which could subject our business to product liability claims.  


Hydrogen technology exposes us to potential product liability claims that are inherent in hydrogen and products that use hydrogen.  Our products utilize fuel canisters to be sold by us that may be considered hazardous materials and subject us to certain rules and regulations for the manufacture, sale and transport of hazardous materials.   Hydrogen is a flammable gas and therefore a potentially dangerous product.   Any accidents involving our technology or products could materially impede widespread market acceptance and demand for hydrogen energy products.   In addition, we may be held responsible for damages beyond the scope of any insurance coverage.   We also cannot predict whether we will be able to maintain any necessary insurance coverage on acceptable terms.  


Our business may  be concentrated in countries outside of the United States.


We intend to market our hydrogen generation products to countries outside of the United States both through our operating subsidiary AFPI and potentially through partners.  We will be subject to the risks and uncertainties inherent in doing business outside of the United States including varied governmental laws, rules and regulations as well as  import and export restrictions.  There is no assurance we will be successful in complying those laws, rule or regulations or that we will not inadvertently fail to comply.  Failure to comply with the laws, rule and/or regulations in the various countries we intend to market our products could put us at risk for governmental actions that could inhibit our ability to transaction business in those countries.  This could also expose us to significant costs for fines, tariffs, litigation, or other risks related to governmental actions.


Restrictions on currency exchange and fluctuations in foreign currency rates may limit our ability to receive and use our revenues effectively.


Foreign exchange transactions subject us to significant foreign exchange controls and may require the approval of governmental authorities both in and outside the Unites States.  In addition, foreign currency fluctuations expose us to certain risks and uncertainties of doing business in foreign currencies and we may incur substantial losses as a result of those fluctuations.

 

Changes in regulations for both inclusion in, and listing on, the Deutsche Börse Frankfurt Stock Exchange are changing and our subsidiary, AFPI may not be able to maintain its listing.


The Company's subsidiary AFPI is traded on the Deutsche Börse Frankfurt First Quotation Board in 2011 under the symbol "9AP".  The Deutsche Börse Group has made several changes to its requirements for listing on the First Quotation board in the past year, which AFPI met.  However,  the Deutsche Börse Group has announced its intention to close the First Quotation Board on the Frankfurt Stock Exchange in late 2012 and the Company is making plans to file for listing on the Entry Standard Level, a higher level of trading.  If AFPI is unable to meet the new requirements it may be unable to maintain its listing on the Deutsche Börse Frankfurt Stock Exchange and therefore cease trading.  In the event the AFPI meets the new requirements for continued listing, there is no assurance that the Deutsche Börse Group may not implement further changes to the listing requirements that AFPI cannot meet and therefore be delisted.  




11




ITEM 2.

PROPERTIES.


Our executive offices are located at 7315 East Peakview Avenue, Englewood, Colorado 80111 and are provided to us on a month to month basis by a corporation in which our officers and director are affiliated.  We pay $1,200 per month for these facilities, which the use of office space as well as the use of business machines, telephone equipment and other office equipment and supplies.  The Company does not currently paid rent for office space and facilities of our President in West Palm Beach, Florida, but anticipates such payments may be required in 2012.


Effective on July 1, 2009, API entered into a lease for its primary office and laboratory space in the University City Science Center in Philadelphia, Pennsylvania.  Totaling approximately 2,511 square feet, the term of the agreement is for five years and six months expiring on December 31, 2014. In November 2011, API vacated these premises.  Terms of the lease call for the following payments: months one through three $0; months four through nine at half rent of $3,871; months ten through twelve at $7,742; months thirteen through twenty-four at $7,936; and increasing at the rate of 2.5% until the least term ends in 2014.  In addition, the Company is obligated to pay certain common area maintenance fees that were $1,886 per month in 2011.  Please see legal proceedings below for more information on a judgment against API for back rent, fees and future payments on this lease.


The Company is currently exploring its options with respect to office space in the Philadelphia area and has not made any determinations as to its plans.


ITEM 3.

LEGAL PROCEEDINGS.


On November 30, 2011, API was notified that a Judgment by Confession had been entered against it in the Court of Common Pleas Philadelphia County in Philadelphia, Pennsylvania by Wexford-UCSC II, L.P., its former landlord.  The Judgment by Confession assesses total damages of $428,232, which is comprised of the following: $73,995 for unpaid monthly rent, maintenance fees, interest and late charges for the period through November 30, 2011; attorney's fees of $5,000; rent and maintenance charges of $10,020 for December 2011; and the value of future rent payments for the period from January 1, 2012 to December 31, 2014 of $339,217.  The complaint alleges a breach of contract and event of default for API related to this lease.  The Company intends to negotiate with the landlord to settle the judgment as expeditiously as possible.  As of December 31, 2011, the Company had recorded $67,429 in rent expense that is included in "accounts payable, other" as of that date.  The additional judgment amount totaling $360,803 has been expensed as "litigation contingency" on our statements of operations and is recorded under the same name as a liability on balance sheets and at December 31, 2011.


ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.


Effective November 23, 2011, the stockholders of the Company through a written consent executed by stockholders holding 737,690,538 or 52% of the Company’s common stock outstanding and entitled to vote, adopted and approved the Amended and Restated Articles of Incorporation, which were adopted by the Company’s board of directors on November 23, 2011.


PART II


ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.


(a)

Market information


Our common stock is not listed on any exchange; however, market quotes for the Company’s common stock (under the symbol “AFPW”) may be obtained from the OTC Bulletin Board (“OTCBB”).  The OTCBB is a regulated quotation service that displays real-time quotes, last-sale prices and volume information in over-the-counter (“OTC”) securities.  The following table sets forth, for the indicated fiscal periods, the high and low bid prices (as reported by the OTCBB) for the Company’s common stock.



12




 

Bid Price

 

High

 

Low

Fiscal year ended December 31, 2011

 

 

 

Quarter ended December 31, 2011

$0.009

 

$0.001

Quarter ended September 30, 201

$0.003

 

$0.001

Quarter ended June 30, 2011

$0.013

 

$0.003

Quarter ended March 30, 2011

$0.013

 

$0.004

 

 

 

 

Fiscal year ended December 31, 2010

 

 

 

Quarter ended December 31, 2010

$0.014

 

$0.001

Quarter ended September 30, 2010

$0.018

 

$0.007

Quarter ended June 30, 2010

$0.052

 

$0.014

Quarter ended March 30, 2010

$0.074

 

$0.031


The prices set forth in this table represent quotes between dealers and do not include commissions, mark-ups or mark-downs, and may not represent actual transactions.  


 (b)

Holders


The number of record holders of our common stock as of March 31, 2012, was 155 according to our transfer agent.  This amount excludes an indeterminate number of shareholders whose shares are held in “street” or “nominee” name at a brokerage firm.


(c)

Dividends


We have never declared or paid a cash dividend on our common stock and do not anticipate paying any cash dividends in the foreseeable future.


(d)

Securities authorized for issuance under equity compensation plans


We have the following securities authorized for issuance under our equity compensation plans as of December 31, 2011, including options available for future issuance under our 2005 Stock Incentive Plan approved by our security holders on March 31, 2005 and our 2009 Stock Incentive Plan approve by our security holders effective May 26, 2009.


Equity Compensation Plan Information

 

Number of securities to be issued upon exercise of outstanding options, warrants and rights

 

Weighted-average exercise price of outstanding options, warrants and rights

 

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))

Plan category

(a)

 

(b)

 

(c)

Equity compensation plans approved by security holders

20,425,000

 

$0.08

 

-0-

Equity compensation plans not approved by security holders

-0-

 

$-0-

 

-0-

  Total

20,425,000

 

$0.08

 

-0-


Recent Sales of Unregistered Equity Securities


During the three month period from October 1, 2011 to December 31, 2011 we issued 143,537,799 shares of our common stock to noteholders upon conversion of $136,150 in promissory notes or $0.0009 per share.  In addition to the face value of the notes, the Company recorded $436,964 in additional expense for the discounts to the market price for a total cost to the Company of $573,114.  


During the three month period from October 1, 2011 to December 30, 2011 we issued 197,005,734 shares of our common stock upon the conversion of $174,000 in principal and $1,400 in accrued interest on our Convertible Debentures, 2011 Convertible Notes and Converted AFPI Notes and November 2011 Notes.  In addition, $151,907 was recorded for additional derivative liability and interest expense for a total cost to the Company of $327,807 or $0.0017 per share.



13




In December 2011, we conducted a private placement and sold 80,000,000 shares of our common stock for $40,000, or $0.0005 per share.  These shares had a total value of $209,600 based on the market price for the common stock on each date of issuance therefore we recorded $185,600 as stock-based compensation cost on our statement operations to reflect the discount on these shares.


We offered and sold the securities in reliance on an exemption from federal registration under Section 4(2) of the Securities Act of 1933 and Rule 506 promulgated thereunder. We relied on this exemption and rule based on the fact that there were a limited number of investors, all of whom were accredited investors and (i) either alone or through a purchaser representative, had knowledge and experience in financial and business matters such that each was capable of evaluating the risks of the investment, and (ii) we had obtained subscription agreements from such investors indicating that they were purchasing for investment purposes only. The securities were not registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The disclosure contained herein does not constitute an offer to sell or a solicitation of an offer to buy any securities of the Company, and is made only as permitted by Rule 135c under the Securities Act.


ITEM 6.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.


General:


The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the years ended December 31, 2011 and 2010.


The independent auditors’ reports on our financial statements for the years ended December 31, 2011 and 2010 include a “going concern” explanatory paragraph that describes substantial doubt about our ability to continue as a going concern.  Management’s plans in regard to the factors prompting the explanatory paragraph are discussed below and also in Note 1 to the audited consolidated financial statements for the year ended December 31, 2011.


While our independent auditor has presented our financial statements on the basis that we are a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time, they have raised a substantial doubt about our ability to continue as a going concern.


Acquisition of HPI Partners LLC and Subsidiary


Pursuant to an Agreement Concerning the Exchange of Securities by and among the Company, HPI and the Security Holders of HPI (the “HPI Members”) dated March 4, 2009, (the “Share Exchange Agreement”), the parties entered into a share exchange whereby all of the issued and outstanding membership interests of HPI were exchanged for common and preferred shares in the Company.  The Share Exchange was effective as of May 5, 2009, upon closing of the transaction among the parties.  


For the fiscal year ended December 31, 2011, the financial statements include the results of the Company and its subsidiaries API, HPI as well as AFPI.  For the fiscal year ended December 31, 2010, the financial statements include audited results of the Company, API and HPI as well as AFPI beginning with its formation in February 2010.  


The Company is a an early production stage alternative energy company that generates hydrogen gas and steam for multiple niche applications requiring on-site, on-demand fuel sources.  Our hydrogen drives fuel cells for back-up, remote, and portable power, fills inflatable devices such as weather balloons, and can replace costly, hard-to-handle and high pressure K-Cylinders. Its steam/hydrogen output is also being designed to drive turbine-based underwater propulsion systems and auxiliary power systems.  We feel we have significant differentiators in performance, adaptability, safety and cost-effectiveness in its target market applications, with no external power required and no toxic chemicals or by-products.  


Our technology is based on the exothermic reaction of aluminum powder and water, combined with proprietary additives which act as catalysts, initiators and reactants. Novel packaging of the aluminum powder and additives into cartridges enables them to be inserted into a generator/reactor, where an infusion of water results in the rapid generation of highly pure hydrogen and superheated steam.  


We have a seasoned management team and close working relationships with major industry players as path-to-market partners, including major defense contractors and commercial fabricators of the company’s reactors and cartridge products on an outsourcing basis.



14




We have completed the design and engineering modifications necessary and begun limited production of our Portable Balloon Inflation Systems.  During the year ended December 31, 2010, we sold three PBIS-1000 units totaling $38,940 to Kaymont Consolidated for an unspecified military customer along with $4,080 in revenue from the sale of PBIS-1000 Reactor Cans to fuel those reactors.  In addition, the Company received a total of $15,424 in fee revenue related to a U.S. Department of the Navy R&D contract for a new hydrogen source to power future Unmanned Undersea Vehicles as a subcontractor to Ingenium Technologies, Inc.  During the year ended December 31, 2011, we had $2,574 from fees related to subcontracting on a U.S. Navy Unmanned Underwater Vehicle development project.


In September 2011, we received an order from the United State Air Force Strategic Operations Command to produce one PBIS-2000 portable balloon inflation device.  This order, originally scheduled for delivery in the first quarter of 2012, is currently scheduled for delivery in April 2012.  Accordingly, the Company will not recognize the revenue from this sale until delivery of the unit early in the second quarter of 2012.


Formation of AlumiFuel Power International, Inc.


In February 2010, the Company formed AFPI and has subscribed for 15,000,000 shares of common stock in AFPI for $150,000 and received 25,000,000 shares of AFPI common stock pursuant to a license agreement executed between the companies.  The license agreement licenses the Company's intellectual property and trademarks for use by AFPI  giving AFPI the right to utilize that intellectual property and market the Company's products to all countries outside of North America.  As part of the agreement, AFPI will reimburse the Company, from time-to-time, for reasonable costs and expenses related to the past, present and future development costs of the IP in an amount to be determined by the parties.  On July 31, 2011, the Company and AFPI executed a Patent Purchase Agreement through which the Company sold AFPI the international patent rights to certain of the Company's intellectual property.  In exchange for the sale of these rights, the Company received 7,500,000 shares of AFPI common stock valued at $10,275,000, the market value of the stock on the Deutsche Börse Frankfurt Stock Exchange on the agreement date. The value of these shares eliminates on consolidation of the Company's financial statements as an intercompany transaction.  


LIQUIDITY AND CAPITAL RESOURCES


To address the going concern situation addressed in our financial statements at December 31, 2011 and 2010, we anticipate we will require over the next twelve months approximately $1,200,000 of additional capital to fund the Company’s operations.  This amount does not include any amounts that may be necessary to pay off existing debt or accrued expenses.  We presently believe the source of funds will primarily consist of several components that include: debt financing, which may include further loans from our officers or directors as detailed more fully in the accompanying financial statements; the sale of our equity securities in private placements or other equity offerings or instruments; as well as minimal cash flows from operations through the production of PBIS reactors and the resultant sales of AlumiFuel cartridges.  As in 2011, during 2012 we anticipate a significant amount of capital resources will come from convertible debt instruments.  These instruments typically contain a significant discount to the market value of our common stock of up to 50% causing the issuance of shares below market value prices causing substantial dilution to our stockholders.  


During the year ended December 31, 2011, we received a net of approximately $679,183 from our financing activities, primarily from the issuance of convertible and other notes payable totaling $811,000.  This is compared to cash provided by financing activities of $1,180,570 in the year ended December 31, 2010 primarily from the sale of shares of our common stock and the common stock of AFPI as well as the issuance of debentures and notes payable.


In the year ended December 31, 2011, net cash used in operating activities was $667,768.  This compared to net cash used in operating activities of $1,093,247 for same period in 2010.  The 2011 amount included a $2,880,023 net loss that included approximately $1,164,100 in non-cash charges and credits to operating assets and liabilities primarily from non-cash stock-based compensation expense on the issuance of warrants and stock issued for services as well as the issuance of common stock below market prices upon the conversion notes or sale of stock in private placements in 2011.  This compares in 2010 to a net loss of $5,689,493 that included approximately $4,111,000 in non-cash charges and credits to operating assets and liabilities primarily from non-cash stock-based compensation expense on the issuance of warrants and stock options in 2010 as well as stock issued for services including $750,000 for shares issued to AFPI consultants.   


We can make no assurance that we will be successful in raising the funds necessary for our working capital requirements as suitable financing may not be available and we may not have the ability to sell either equity or debt securities under acceptable terms or in amounts sufficient to fund our needs. Our inability to access various capital markets or acceptable financing could have a material effect on our commercialization efforts, results of operations and deployment of our business strategies and severely threaten our ability to operate as a going concern.




15




During the remainder of our fiscal year and for the foreseeable future, we will be concentrating on raising the necessary working capital through debt instruments and equity financing to insure our ability to continue our development and implement other business strategies.  This plan includes the potential sale of some of our shares in AFPI through a private placement of those shares on the Frankfurt Deutsche Börse stock exchange.  The Company's plans to raise additional capital through the sale of equity or equity related securities including those in the form of convertible debt will result in the issuance of Company securities and significant dilution to our current shareholders.


(b)

Results of Operations


The Company’s results of operations for the periods ended December 31, 2011 and 2010 reported include the consolidated operations of the Company and its subsidiaries HPI, API and AFPI with the elimination of applicable intercompany accounts.


Year ended December 31, 2011


For the year ended December 31, 2011, our total revenue was $2,574 from fees related to subcontracting on a U.S. Navy Unmanned Underwater Vehicle development project.  For the year ended December 31, 2010, our total revenue was $58,444 from the sales of our first three PBIS-1000 production units, Reactor Cans to fuel those units, and fees related to subcontracting on a U.S. Navy Unmanned Underwater Vehicle development project.  Our total operating costs and expenses were $1,901,371.  Reactor production costs were $4,151 for the year ended December 31, 2011 as compared to expense of $4,925,501 with reactor production costs for the year ended December 31, 2010 of $139,382.  The 2011 loss included $336,338 comprised of related party expense that included officer and key employee management fees as well as rent and bonuses paid to related parties as compared to $411,057 in the 2010 period.  Product development expense was $10,357 for the year ended December 31, 2011 versus $11,962 for the year ended December 31, 2010.  These expenses include laboratory supplies, design and development costs not directly related to the manufacturing process of our products.  The 2011 expense also includes $640,600 in stock based compensation primarily for costs related to the issuance of stock to consultants, the issuance of stock below market prices in private placements as well as the issuances of warrants to subsidiary officers, consultants and employees in 2011.  Stock based compensation expense for the year ended December 31,2010 totaled $2,350,350 primarily for costs related to the issuances of warrants to subsidiary officers and consultants in 2009 and 2010 that vested during the period as well as stock options granted in the first quarter of 2010.


The balance of $962,298 and $2,010,170 for “other” SG&A expenses in the periods ended December 31, 2011 and December 31, 2010 was comprised of the following:


 

 

Year ended

December 31,

2011

 

Year ended

December 31,

2010

General and administrative

$

366,382

$

386,619

Legal and accounting

 

64,107

 

139,297

Professional services

 

190,263

 

1,011,183

Bad debt expense

 

3,175

 

45,188

Salaries

 

338,371

 

427,883

 

$

962,298

$

2,010,170


The “other” SG&A expense during the year ended December 31, 2011 included a significant decrease in general and administrative expenses as the Company saw a substantial decrease in professional services fees.  During 2010, the Company issued AFPI stock valued at $750,000 to a consultant related to the Company's Frankfurt Stock Exchange Deutsche Börse listing with no similar expense recorded in 2011. Bad debt expense decreased significantly as the Company funded its affiliate FastFunds Financial Corp ("FFFC") to a much lesser degree. Legal and accounting costs were lower in 2011 primarily as legal costs were higher in 2010 with post acquisition costs. Salaries and employee benefits decreased in 2010 due to personnel changes at API.


The company recorded $(981,226) in “other income (expense)” during the year ended December 31, 2011 as compared to $(822,435) in the year ended December 31, 2010.  This increase is primarily attributed to a significant increase in interest expense during 2011 of $(710,077) in 2011 as compared to $(210,451) in 2010.  This increase is due to note conversions at below market prices and the resultant beneficial conversion feature representing the difference in the actual price for the shares issued versus the market price on the issuance date.  The amortization of convertible note discount related to the Company's convertible notes and debentures of $(357,409) in 2011 versus $(304,305) in 2010.   Fair value adjustment of derivative liabilities also changed significantly in 2011 at $447,063 as compared to expense of $(307,679) in 2010 due to changes in the mix of those derivatives including conversions of older notes and issuances of new notes with much lower stock prices.




16




Year ended December 31, 2010


For the year ended December 31, 2010, our total revenue was $58,444 from the sales of our first three PBIS-1000 production units, Reactor Cans to fuel those units, and fees related to subcontracting on a U.S. Navy Unmanned Underwater Vehicle development project.  There was no revenue in the 2009 period.  Our total operating costs and expenses were $4,925,501.  Reactor production costs were $139,382 for the year ended December 31, 2010 as compared to expense of $6,735,359 with no reactor production costs for the year ended December 31, 2009.  The 2010 loss included $411,057 comprised of related party expense that included officer and key employee management fees as well as rent paid to related parties as compared to $387,175 in the 2009 period.  Product development expense was $11,962 for the year ended December 31, 2010 versus $30,671 for the year ended December 31, 2009, a significant decrease as the Company concentrated more on production.  The 2010 expense also includes $2,350,350 in stock based compensation primarily for costs related to the issuances of warrants in 2009 and 2010 that vested during the period as well as stock options granted in the first quarter of 2010.  Stock based compensation expense for the year ended December 31,2009 totaled $5,331,053 primarily from the issuances of warrants in 2009 related to the acquisition of HPI and API.


The balance of $2,010,170 and $1,187,427 for “other” SG&A expenses in the periods ended December 31, 2010 and December 31, 2009 was comprised of the following:


 

 

Year ended

December 31,

2010

 

Year ended

December 31,

2009

General and administrative

$

386,619

$

208,730

Legal and accounting

 

139,297

 

118,034

Professional services

 

1,011,183

 

300,337

Bad debt expense

 

45,188

 

220,790

Salaries

 

427,883

 

339,536

 

$

2,010,170

$

1,187,427


The “other” SG&A expense during the year ended December 31, 2010 included a significant increase in general and administrative expenses as the Company's API subsidiary was fully operational and began production of the Company's PBIS-1000 product in the 2010 period but had primarily developmental operations in 2009.  In addition, expenses related to the Company's convertible debentures as well as the addition of AFPI also added to the 2010 increase.  Bad debt expense decreased significantly as the Company funded its affiliate FastFunds Financial Corp ("FFFC") to a much lesser degree. Legal and accounting costs remained relatively stable while salaries and employee benefits increased with addition of personnel at API's Philadelphia facility.  The single largest increase was to professional services as a result of AFPI stock valued at $750,000 that was issued to a consultant related to the Company's Frankfurt Stock Exchange Deutsche Börse listing.


The company recorded $(822,435) in “other income (expense)” during the year ended December 31, 2010 as compared to $(377,683) in the year ended December 31, 2009.  This decrease is primarily attributed to interest expense, amortization of convertible note discount related to the Company's convertible notes and debentures of $(304,305) as well as fair value adjustments to those derivatives of $(307,679) added to interest expense of ($210,451).  For the 2009 period, the Company had $(35,000) in unrealized loss on investment related to FFFC, $(222,767) in fair value adjustments to derivatives with interest expense, amortization of convertible note discount expense on those derivatives of $(26,295) and interest expense of $93,621.  Decreases in the value of the Company's common stock were the primary factor in the increased derivative expenses related to the debentures and convertible notes while increases in notes payable in 2010 versus 2009 as well as a $60,000 expense related to warrants issued to a note holder accounted for the increase in interest expense.


(c)

Off-Balance sheet arrangements


During the fiscal year ended December 31, 2011, the Company did not engage in any off-balance sheet arrangements as defined in Item 303(c) of the SEC’s Regulation S-B.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and a decline in the stock market. We do not enter into derivatives or other financial instruments for trading or speculative purposes. We have limited exposure to market risks related to changes in interest rates. We do not currently invest in equity instruments of public or private companies for business or strategic purposes.



17




The principal risks of loss arising from adverse changes in market rates and prices to which we are exposed relate to interest rates on debt. We have only fixed rate debt. We had $483,154 of debt outstanding as of December 31, 2011 including convertible debentures and notes with a face value totaling $295,000, which has been borrowed at fixed rates ranging from 6% to 48%. Of this fixed rate debt, $329,654 is due on demand or is due during the current fiscal year while $153,500 is long term debt due in 2013.


ITEM 8.

FINANCIAL STATEMENTS.


The financial statements and related information required to be filed are indexed and begin on page F-1 and are incorporated herein.


ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.


Not applicable.


ITEM 9A.

CONTROLS AND PROCEDURES.


Evaluation of Disclosure Controls and Procedures


A review and evaluation was performed by the Company's management, including the Company's Chief Executive Officer (the "CEO") who is also the Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that review and evaluation, the CEO /CFO has concluded that as of December 31, 2011, disclosure controls and procedures, were effective at ensuring that the material information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported as required in the application of SEC rules and forms.


Management’s Report on Internal Controls over Financial Reporting


Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a set of processes designed by, or under the supervision of, a company’s principal executive and principal financial officers, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:


·

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets;

·

Provide reasonable assurance our transactions are recorded as necessary to permit preparation of our financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

·

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 statement.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. It should be noted that any system of internal control, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


Our CEO/CFO has evaluated the effectiveness of our internal control over financial reporting as described in Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this report based upon criteria established in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to the extent possible given the limited personnel resources and technological infrastructure in place to perform the evaluation.  Based upon our management’s discussions with our auditors and other advisors, our CEO/CFO believe that, during the period covered by this report, such internal controls and procedures were not effective as described below.  


Due to the small size and limited financial resources, our administrative assistant, corporate secretary and chief executive officer are the only individuals involved in the accounting and financial reporting.  As a result, there is limited segregation of duties in the accounting function, leaving all aspects of financial reporting and physical control of cash in the hands of two individuals. This limited segregation of duties represents a material weakness.  We will continue periodically review our disclosure controls and procedures and internal control over financial reporting and make modifications from time to time considered necessary or desirable.



18




This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this annual report.


Changes in Internal Control over Financial Reporting


There have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.


ITEM 9B.

OTHER INFORMATION.


Not applicable.


PART III


ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.


(a)(b)(c)

Identification of directors and executive officers


The following table sets forth the name, age, position and office term of each executive officer and director of the Company.


NAME

AGE

POSITION

SINCE

Henry Fong

76

President, Principal Executive Officer, Principal Accounting Officer and Director

May 2005

 

 

 

 

Thomas B. Olson

46

Secretary

May 2005


(c)

Significant employees


Not applicable.


(d)

Family relationships


None.


 (e)

Business experience


HENRY FONG


Mr. Fong has been the president and a director of the Company since May 2005. Mr. Fong has been a director of FastFunds Financial Corporation, a publicly traded company with limited business operations, since June 2004.  Mr. Fong has been a Director of SurgLine International, Inc. (f/k/a China Nuvo Solar Energy, Inc.) since March 2002 and was its president from March 2002 through September 1, 2011. SurgLine is a publicly traded company that sources and distributes high quality FDA approved medical and surgical products at discount prices. Mr. Fong has been the Chief Executive Officer of Techs Loanstar, Inc., a publicly traded Company that provides software technology solutions to the healthcare market, since February 2010 when it merged with ZenZuu USA (“ZZUSA”).  Mr. Fong was the Chief Executive Officer of ZZUSA since its inception in June 2009 and the Chief Executive Officer of ZZPartners, Inc. from its inception (April 2008) through its merger with ZZUSA.   Mr. Fong is currently the sole director, President and Chief Financial Officer of PB Capital International, Inc. (“PBIC”), a blank check shell company. PBIC is seeking to merge with a target company. PBIC filed a Form 10 registration statement which went effective in October 2009. From 1959 to 1982 Mr. Fong served in various accounting, finance and budgeting positions with the Department of the Air Force. During the period from 1972 to 1981 he was assigned to senior supervisory positions at the Department of the Air Force headquarters in the Pentagon. In 1978, he was selected to participate in the Federal Executive Development Program and in 1981, he was appointed to the Senior Executive Service. In 1970 and 1971, he attended the Woodrow Wilson School, Princeton University and was a Princeton Fellow in Public Affairs. Mr. Fong received the Air Force Meritorious Civilian Service Award in 1982.  Mr. Fong has passed the uniform certified public accountant exam. In March 1994, Mr. Fong was one of twelve CEOs selected as Silver Award winners in FINANCIAL WORLD magazine's corporate American "Dream Team."



19




THOMAS B. OLSON  


Mr. Olson has been secretary of the Company since May 2005.  From March 2002 until December 2010, Mr. Olson was the secretary of China Nuvo Solar Energy, Inc., a publicly traded company developing alternative energy solutions.  From June 2004 to September 2011, Mr. Olson was the Secretary of FastFunds Financial Corporation, a publicly traded company with limited business operations.  Mr. Olson has been Secretary of Equitex 2000, Inc., a privately held entity since its inception in 2001.  Mr. Olson has attended Arizona State University and the University of Colorado at Denver.


(f)

Involvement in certain legal proceedings


Not applicable.


(g)

Promoters and control persons


Not applicable.


(h)

Audit committee financial expert.


See (i) below.


(i)

Identification of the audit committee


The Company does not currently have an audit committee of the board of directors, as none is required, and the board believes it can effectively serve in that function and, therefore, currently does.  Management believes that certain individuals on the board of directors may have the necessary attributes to serve as a financial expert on an audit committee, if required.


Code of Ethics


We have adopted a Code of Ethics for our senior financial management, which includes our chief executive officer and chief financial officer as principal executive and accounting officers, that has been filed as exhibit 14.1 to this report.


ITEM 11.

EXECUTIVE COMPENSATION.


(a)

General


We currently have two executive officers including our President, Mr. Henry Fong, who is also our principal executive officer and our principal financial officer; and Mr. Thomas B. Olson, who is our Secretary.


(b)

Compensation discussion and analysis


The Board of Directors has estimated the value of management services for the Company at the monthly rate of $8,000 and $2,000 for the president and secretary/treasurer, respectively.  The estimates were determined by comparing the level of effort to the cost of similar labor in the local market and this expense totaled $120,000 for the years ended December 31, 20111 and 2010. In addition, beginning October 1, 2010 the Company's president and treasurer were accruing a management fee of $7,500 and $3,500, respectively, for their services as managers of AFPI.  This amount totaled $132,000 for the year ended December 31, 2011 and $33,000 for the year ended December 31, 2010.   As of December 31, 2010, the Company owed $49,192 to its officers for management services.  


In September 2009, the Company's board directors authorized a bonus program for the Company's officers related to their efforts raising capital to fund the Company's operations.  Accordingly, the Company's president and secretary are eligible to receive a bonus based on 50% of the traditional "Lehman Formula" whereby they will receive 2.5% of the total proceeds of the first $1,000,000 in capital raised by the Company, 2.0% of the next $1,000,000, 1.5% of the next $1,000,000, 1% of the next $1,000,000 and .5% of any proceeds above $4,000,000.  The amount is capped at $150,000 per fiscal year.  During the years ended December 31, 2011 and 2010, the Company recorded $6,338 and $19,607,respectively to a corporation owned by Messrs. Fong and Olson under this bonus program.  At December 31, 2011 there was $6,174 payable under the bonus plan.


Periodically, the board of directors awards stock options to officers, directors and employees as incentive to attract and maintain their employment with us. During the year ended December 31, 2010 the Company awarded 8,650,000 in stock options from its 2009 Stock Option Plan to officers and directors.   



20




In June 2010, the Company agreed to issue a warrant to Mr. Cade with the condition that he agreed to cancel certain warrants issued in 2009.  Accordingly, the previously issued warrants were cancelled and a warrant to purchase a total of 15,000,000 shares of common stock was issued.  This warrant vested immediately, was exercisable for a period of five years, and was exercisable at $0.05 per share.  This warrants were valued at $465,000 based upon the Black Scholes option pricing model, which amount is included in "stock based compensation" in statements of operations at December 31, 2010.


In July 2012, agreed to issue a warrant to Mr. Cade with the condition that he agreed to cancel the above warrant issued in 2010.  Accordingly, the previously issued warrant was cancelled and a warrant to purchase a total of 15,000,000 shares of common stock was issued.  This warrant vested immediately, is exercisable for a period of five years, and is exercisable at $0.01 per share.  This warrant was valued at $45,000 based upon the Black Scholes option pricing model, which amount is included in "stock based compensation" in statements of operations at December 31, 2011.


(c)

Summary compensation table


The following table summarizes the compensation accrued to our principal executive officer, principal financial officer and any other executive officers for the years ended December 31, 2011 and 2010, whose total compensation exceeded $100,000.

  

Name and

Principal Position

Fiscal Year


Salary


Bonus

Option Awards

All Other Compensation


Total

Henry Fong

President & Director; Principal Executive Officer & Principal Accounting Officer


2011


2010


$96,000


$96,000


$5,070


$15,686


0


$159,593


$90,000


$22,500


$191,070


$293,779

 

 

 

 

 

 

 

Thomas B. Olson

Secretary & Treasurer

2011


2010

$24,000


$24,000

$1,268


$3,921

0


$78,023

$42,000


$10,500

$67,268


$116,144

 

 

 

 

 

 

 

David J. Cade

President,

AlumiFuel Power, Inc.

2011


2010

$200,000


$200,000

0


0

0


0

$45,000


$465,000

$245,000


$645,000


 (d)

Grants of plan based awards table


Name

Grant Date

All Other Stock Awards; Number of Shares of Stock or Units


Exercise or Base Price of Option Awards

Grant Date Fair Value of Stock and Option Awards

Henry Fong (1)

President & Director; Principal Executive Officer & Principal Accounting Officer


2011


2010


0


3,892,500


0


$0.041


0


$159,593

 

 

 

 

 

Thomas B. Olson (2)

Secretary & Treasurer

2011


2010

0


1,903,000

0


$0.041

0


$78,023


(e)

Narrative disclosure to summary compensation table and grants


For Mr. Fong in 2011, in addition to management fees and bonus as discussed above, other compensation represents management fees to Mr. Fong from AFPI.  In 2010 Options awards include 3,892,500 options granted Mr. Fong from the Company's 2009 Stock Option Plan.  This amount represents their value ($0.041) on the grant date based upon the Black-Scholes option pricing model.  These warrants are exercisable at $0.041 per share, the market value on the date of grant, until March 15, 2015.  Other compensation represents management fees to Mr. Fong from AFPI.



21




For Mr. Olson in 2011, in addition to management fees and bonus as discussed above, other compensation represents management fees to Mr. Olson from AFPI.  In 2010, Options awards include 1,903,000 options granted Mr. Olson from the Company's 2009 Stock Option Plan.  This amount represents their value ($0.041) on the grant date based upon the Black-Scholes option pricing model.  These warrants are exercisable at $0.041 per share, the market value on the date of grant, until March 15, 2015.  Other compensation represents management fees to Mr. Olson from AFPI.


For Mr. Cade in 2011, in addition to salary, Other compensation represents the value, at issuance, of 15,000,000 warrants granted Mr. Cade during 2011.  This amount represents their value ($0.003) on the grant date based upon the Black-Scholes option pricing model.  These warrants are exercisable at $0.01 per share, until July 12, 2016.  In 2010, Other compensation represents the value, at issuance, of 15,000,000 warrants granted Mr. Cade during 2010.  This amount represents their value ($0.031) on the grant date based upon the Black-Scholes option pricing model.  These warrants were exercisable at $0.05 per share, the market value on the date of grant, until June 2, 2015, but have now been cancelled.


(f)

Outstanding equity awards at fiscal year end table


 

Option Awards

Stock Awards

Name

Number of Securities Underlying Unexer-cised Options

(#)

Exer-cisable

Number of Securities Under-lying Unexer-cised Options

(#)

Unexer-cisable

Equity Incentive Plan Awards: Number of Securities Under-lying Unexer-cised Unearned Options

(#)

Option Exercise Price

($)

Option Expiration

Date

Number of Securities That Have Not Vested

(#)

Market Value of Securities That Have Not Vested

($)

Equity Incentive Plan Awards: Number of Unearned Securities or Other Rights That Have Not Vested

(#)

Equity Incentive Plan Awards: Market or Payout Value of Unearned Securities or Other Rights That Have Not Vested

($)

(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

(j)

Henry Fong

300,000

600,000

4,500,000

3,892,500

0

0

$0.34

$0.07

$0.10

$0.04

12/21/2012

3/4/2014

10/5/2014

3/11/2015

0

$0

0

$0


(g)

Option exercises and stock vested table


Not applicable.


(h)

Pension benefits


Not applicable.


(i)

Nonqualified defined contribution and other nonqualified deferred compensation plans


Not applicable.


(j)

Potential payments upon termination or change-in-control


Not applicable.


(k)

Compensation of directors


Prior to his resignation in November 2011, Mr. Grunfeld received no compensation for his services to the Company in 2011.  


ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.


(a)

Security ownership of certain beneficial owners.



22




(b)

Security ownership of management.


The following table sets forth information known to the Company with respect to the beneficial ownership (as such term is defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of the outstanding common stock of the Company as of March 31, 2012 by: (1) each person known by the Company to beneficially own 5% or more of the Company’s outstanding common stock; (2) each of the named executive officers as defined in Item 402(a)(3); (3) each of the Company’s directors; and (4) all of the Company’s named executive officers and directors as a group. The number of shares beneficially owned is determined under rules promulgated by the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose.  Including those shares in the tables does not, however, constitute an admission that the named stockholder is a direct or indirect beneficial owner of those shares.



Name of

Beneficial Owner

Number of Shares

Beneficially

Owned(1)

Preferred Stock(2)

Number of Options

Warrants Beneficially

Owned



Total Shares Beneficially

Owned

Percent of

Class

 

 

 

 

 

 

Joseph Bushman

715 St Hwy 49

Wittenberg, WI 54499

66,521,787

0

700,000

67,221,787

5.1%

 

 

 

 

 

 

Henry Fong (3)

7315 East Peakview Ave

Englewood, CO  80111

8,606,807

123,100

11,226,076

19,832,883

1.6%

Thomas B. Olson (4)

7315 East Peakview Ave

Englewood, CO  80111

448,345

37,000

4,811,644

5,259,989

0.4%

David J. Cade (5)

3611 Market St, Ste 950

Philadelphia, PA 19104

80,500

138,462

15,000,000

15,080,500

1.1

All Executive Officers and

Directors as a Group

(4 persons)  (3)(4)(5)

9,135,652

298,562

31,037,720

40,173,372

3.0%


__________

(1)

As of March 31, 2012, 1,323,255,736 shares of our common stock were outstanding. Beneficial ownership is determined in accordance with the rules of the SEC, and includes general voting power and/or investment power with respect to securities.  Shares of common stock subject to options or warrants currently exercisable or exercisable within 60 days of the record date are deemed outstanding for computing the beneficial ownership percentage of the person holding such options or warrants but are not deemed outstanding for computing the beneficial ownership percentage of any other person.  Except as indicated by footnote, the persons named in the table above have the sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.


(2)

In August 2011, the Company authorized the issuance of up to 750,000 shares of $0.001 par value Series B Preferred Stock (the "Series B Preferred").  The Series B Preferred has a stated value of $1.00 and pays a dividend of 8% payable quarterly in our common stock.  In the event of a liquidation of the Company, the holders of Series B Preferred then outstanding will be entitled to receive a liquidation preference, before any distribution is made to the holders of our common stock, in an aggregate amount equal to the par value of their shares of Series B Preferred. Each share of Series B Preferred is convertible into that number of shares of common stock on terms that are equal to (i) 100% of the Stated Value divided by (ii) 52% of the average of the three lowest day closing bid prices of the Company’s common stock for the 10 trading days immediately preceding the conversion.  There is a Mandatory Conversion Date of July 12, 2016.  At any time after the date of issuance of the Series B Preferred until the Mandatory Conversion Date, we may redeem, in cash, the Series B Preferred in accordance with the following: (a) if prior to or on the first anniversary of the date of issue at 105% of the Stated Value thereof and (b) if after the first anniversary of the date of issue and prior to the Mandatory Conversion Date at 110% of the Stated Value thereof.



23




(3)

Consists of: 8,013,425 common shares and 699,000 warrants held by Gulfstream Financial Partners, LLC, of which Mr. Fong is the majority member; 593,382 common shares and 1,234,576 warrants held by HF Services, LLC of which Mr. Fong is managing member, which represents his portion of the membership interest; 300,000 shares exercisable under our 1995 Stock Incentive Plan; and 8,992,500 shares exercisable under our 2009 Stock Incentive Plan.  These shares do not include any shares held by Mr. Fong's spouse of which he disclaims any beneficial ownership.


(4)

Consists of: 300,000 common shares held by Cresthill Associates, Inc., of which Mr. Olson is the sole member; 148,345 common shares and 308,644 warrants held by HF Services, LLC of which Mr. Olson is a member, which represents his portion of the membership interest; 100,000 shares exercisable under our 1995 Stock Incentive Plan; and 4,403,000 shares exercisable under our 2009 Stock Incentive Plan.


(5)

Includes a warrant to purchase up to 15,000,000 shares of common stock.


(c)

Changes in control


We are not aware of any arrangements that could result in a change in control of the Company.


ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.


(a)

Transactions with related persons


Our offices are provided to us on a month to month basis by a corporation in which our officers and director are affiliated. We pay $1,200 per month for use of office space and the use of business machines, telephone equipment and other office equipment. The Company also pays a management fee to this corporation of $6,500 per month for services related to the bookkeeping, accounting and corporate governance functions of its subsidiaries.


 (b)

Review, approval or ratification of transactions with related persons


Our entire board of directors is responsible for the review, approval or ratification of transactions with related persons.  The board routinely reviews material related party transactions to ensure such transactions are reasonable, appropriate, and in the best interests of the Corporation.  We have no written policies with respect to the review and approval of related party transactions and records of such reviews are contained in the minutes and/or reports of the board of directors as appropriate.


Director Independence


Our board of directors has one director and has no standing sub-committees at this time due to the associated expenses and the small size of our board.  We are not currently listed on a national securities exchange that has requirements that a majority of the board of directors be independent and have no members of our board considered “independent” under the definition set forth in the listing standards of the NASDAQ Stock Market, Inc., which is the definition that our board has chosen to use for the purposes of the determining independence.  

 

In performing the functions of the audit committee, our board oversees our accounting and financial reporting process.  In this function, our board performs several functions.  Our board, among other duties, evaluates and assesses the qualifications of the Company’s independent auditors; determines whether to retain or terminate the existing independent auditors; meets with the independent auditors and financial management of the Company to review the scope of the proposed audit and audit procedures on an annual basis; reviews and approves the retention of independent auditors for any non-audit services; reviews the independence of the independent auditors; reviews with the independent auditors and with the Company’s financial accounting personnel the adequacy and effectiveness of accounting and financial controls and considers recommendations for improvement of such controls; reviews the financial statements to be included in our annual and quarterly reports filed with the Securities and Exchange Commission; and discusses with the Company’s management and the independent auditors the results of the annual audit and the results of our quarterly financial statements.


We do not currently have a standing compensation committee or non-employee directors.  When we have non-employee directors on our board, those non-employee directors consider executive officer compensation, and our entire board participates in the consideration of director compensation.  Non-employee board members would oversee would compensation policies, plans and programs.  Our non-employee board members would further review and approve corporate performance goals and objectives relevant to the compensation of our executive officers; review the compensation and other terms of employment of our Chief Executive Officer and our other executive officers; and administer our equity incentive and stock option plans.  



24




Each of our directors participates in the consideration of director nominees.  In addition to nominees recommended by directors, our board will consider nominees recommended by shareholders if submitted in writing to our secretary.  Our board believes that any candidate for director, whether recommended by shareholders or by the board, should be considered on the basis of all factors relevant to our needs and the credentials of the candidate at the time the candidate is proposed.  Such factors include relevant business and industry experience and demonstrated character and judgment.


ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES


R.R. Hawkins & Associates International served as the Company's certifying accountant for the fiscal years ended December 31, 2011 and 2010.  

  

Audit Fees


Fees for audit services billed in fiscal year ended December 31, 2011 totaled $12,000 and consisted of audit of the Company’s annual financial statements.  Fees for audit services billed in fiscal year ended December 31, 2010 totaled $10,000 and consisted of audit of the Company’s annual financial statements.


Audit-Related Fees


There were no other aggregate fees billed in the year ended December 31, 2011 or 2010 for assurance and related services by the principal accountants that were reasonably related to the performance of the audit or review of the financial statements that were not reported above.


Tax Fees


There were no aggregate fees billed the year ended December 31, 2011 or 2010 for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning.


All Other Fees


There were no other aggregate fees billed in the year ended December 31, 2011 and 2010 for products and services provided by the principal accountant, other than the services reported above.



25




PART IV


ITEM 15.

EXHIBITS


Exhibits


2.1

Agreement and Plan of Reorganization by and between the Registrant and Inhibetex Therapeutics, Inc. dated March 24, 2005 (incorporated by reference to Exhibit No. 1 of Registrant’s Current Report on Form 8-K filed on March 29, 2005).

2.2

Articles of Exchange relating to the share exchange by and between Inhibiton Therapeutics, Inc. (formerly known as Organic Soils.com, Inc.) and Inhibetex Therapeutics, Inc. as filed with the Nevada Secretary of State on May 19, 2005 (incorporated by reference to the like numbered exhibit of Registrant’s Current Report on Form 8-K filed on May 25, 2005).

2.3

Statement of Share Exchange relating to the share exchange by and between Inhibiton Therapeutics, Inc. (formerly known as Organic Soils.com, Inc.) and Inhibetex Therapeutics, Inc. as filed with the Colorado Secretary of State on May 19, 2005 (incorporated by reference to the like numbered exhibit of Registrant’s Current Report on Form 8-K filed on May 25, 2005).

2.4

Agreement Concerning the Exchange of Securities by and among Inhibiton Therapeutics, Inc. , HPI Partners, LLC, and the Security Holders of HPI Partners, LLC dated March 4, 2009 (incorporated by reference to exhibit number 2.1 of Registrant’s Current Report on Form 8-K filed on May 11, 2009)

3.1

Amended and Restated Articles of Incorporation of Inhibiton Therapeutics, Inc (incorporated by reference to the like numbered exhibit of Registrant’s Current Report on Form 8-K filed on June 3, 2009).

3.2

Amended and Restated Articles of Incorporation of AlumiFuel Power Corporation filed August 24, 2011 (incorporated by reference to exhibit 3.1 of Registrant’s Current Report on Form 8-K filed on August 30, 2011)

3.3

Amended and Restated Articles of Incorporation of AlumiFuel Power Corporation filed December 7, 2011 (incorporated by reference to exhibit 3.1 of Registrant’s Current Report on Form 8-K filed on December 12, 2011)

3.4

Bylaws (incorporated by reference to the like numbered exhibit of Registrant’s Registration Statement on Form SB-2 filed on March 30, 2001).

3.5

Certificate of Designation of Series B Preferred Stock (incorporated by reference to exhibit number 3.1 of Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2011, filed on August 19, 2011).

4.1

Form of Warrant issued by Company to HPI Members (incorporated by reference to exhibit number 4.1 of Registrant’s Current Report on Form 8-K filed on May 11, 2009).

10.1

Cooperative Research and Development Agreement by and between Inhibetex Therapeutics, Inc. and the VA Medical Center, Tampa, Florida (incorporated by reference to exhibit number 3.1 of Registrant’s Annual Report on Form 10-K for the fiscal year ended January 31, 2007, filed on May 15, 2007).

10.2

License Agreement between AlumiFuel Power Corporation and AlumiFuel Power International, Inc. dated March 26, 2010.  (incorporated by reference to exhibit number 10.1 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, filed on May 24, 2010).

14.1

Code of Ethics (filed herewith).

21.1

List of Subsidiaries (filed herewith).

31.1

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32.1

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).



26



SIGNATURES


In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



 

ALUMIFUEL POWER CORPORATION

 

(Registrant)

 

 

 

 

Date: April 16, 2012

By: /s/ Henry Fong                   

 

Henry Fong

 

President, Principal Executive Officer and

Principal Financial Officer




In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.




Date: April 16, 2012

/s/ Henry Fong                    

 

Henry Fong

 

Director

 

 

 

 

Date: April 16, 2012

/s/ Aaron A. Grunfeld          

 

Aaron A. Grunfeld

 

Director





27





ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Index to Consolidated Financial Statements


 

 

Page

 

 

 

Reports of Independent Registered Public Accounting Firms

F-2

 

 

 

Consolidated Balance Sheets at December 31, 2011 and 2010

F-3

 

 

 

Consolidated Statement of Operations for the years ended December 31, 2011

 

 

and 2010

F-4

 

 

 

Consolidated Statement of Changes in Shareholders' Deficit for the years ended

 

 

December 31, 2011 and 2010

F-5

 

 

 

Consolidated Statement of Cash Flows for the years ended December 31, 2011

 

 

and 2010

F-7

 

 

 

Notes to Consolidated Financial Statements

F-8




F-1





[f10k123111_10k001.jpg]




Board of Directors

AlumiFuel Power Corporation

Denver, CO


Report of Independent Registered Public Accounting Firm


We have audited the accompanying balance sheets of AlumiFuel Power Corporation as of December 31, 2011 and 2010, and the related statements of operations, stockholders’ deficit, and cash flows for each of the two years in the period ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.


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.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides reasonable basis for our opinion.


In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AlumiFuel Power Corporation as of December 31, 2011 and 2010, and the results of its operations, and its cash flows for each of the two years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.


The accompanying financial statements have been prepared assuming the Company will continue as a going concern.  As discussed in Note 1 to the financial statements, the Company has incurred net losses since inception, which raise substantial doubt about its ability to continue as a going concern.  The financial statements do not include any adjustment that might result from the outcome of this uncertainty.


/s/ R.R. Hawkins & Associates International, a PC

Los Angeles, CA

April 12, 2012







[f10k123111_10k002.jpg]





F-1





ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets



 

 

December 31,

 

December 31,

 

 

2011

 

2010

Assets

 

 

 

 

Cash

$

2,628

$

11,213

Accounts receivable

 

 

Deposits

 

472

 

Prepaid expenses

 

 

588

Notes receivable (Note 5)

 

8,000

 

Other current assets

 

102

 

 

 

 

Total current assets

 

11,202

 

11,801

Property and equipment, less accumulated depreciation of $4,016 (2011) and $3,881 (2010) (Note 1)

 

3,463

 

10,226

Deferred debt issuance costs (Note 3)

 

36,376

 

80,988

 

 

 

Total long-term assets

 

39,839

 

91,214

 

 

 

 

 

 

Total assets

$

51,041

$

103,015

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Deficit

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts and notes payable:

 

 

 

 

 

 

Accounts payable, related party (Note 2)

$

111,702

$

290,661

 

 

Accounts payable, other

 

736,935

 

463,916

 

 

Derivative liability, convertible notes payable (Note 3)

 

491,191

 

955,222

 

 

Notes payable, related party (Note 3)

 

34,637

 

128,541

 

 

Notes payable, other (Note 3)

 

153,517

 

221,174

 

 

Convertible notes payable, net of discount of 189,916 (2011) and 33,333 (2010) (Note 3)

 

51,584

 

106,667

 

 

Litigation contingency (Note 7)

 

360,803

 

-

 

 

Payroll liabilities (Note 6)

 

103,787

 

80,874

 

 

Accrued expenses (Note 7)

 

104,231

 

44,324

 

 

Dividends payable (Note 6)

 

12,402

 

 

 

Accrued interest payable:

 

 

 

 

 

 

Interest payable, convertible notes (Note 3)

 

46,697

 

37,607

 

 

Interest payable, related party notes (Note 3)

 

5,267

 

10,010

 

 

Interest payable, notes payable other (Note 3)

 

48,811

 

7,940

 

 

 

 

 

 

Total current liabilities

 

2,261,564

 

2,346,936

Capital leases (Note 7)

 

1,944

 

-

Long-term convertible notes payable net of current portion, net of discount of $61,569 (2011) and $191,944 (2010) (Note 3)

 

91,931

 

103,056

 

 

 

 

 

 

Total long-term liabilities

 

93,875

 

103,056

 

 

 

 

 

 

 

Total liabilities

 

2,355,439

 

2,449,992

Commitments and contingencies

 

 

Shareholders’ deficit: (Notes 1 & 6)

 

 

 

 

 

Preferred stock, $.001 par value; 10,000,000 shares authorized,521,162 (2011) and -0- (2010) shares issued and outstanding

 

521,162

 

 

Common stock, $.001 par value; 3,000,000,000 shares authorized,927,629,201 (2011) and 333,259,019 (2010) shares issued and outstanding

 

927,629

 

333,259

 

Additional paid-in capital

 

13,283,712

 

13,908,015

 

Accumulated deficit

 

(19,440,819)

 

(16,560,796)

 

 

 

 

Total shareholders' deficit of the Company

 

(4,708,316)

 

(2,319,522)

 

Non-controlling interest (Note 1)

 

2,403,918

 

(27,455)

 

 

 

 

 

 

Total shareholders' deficit

 

(2,304,398)

 

(2,346,977)

 

 

 

 

 

 

Total liabilities and shareholders' deficit

$

51,041

$

103,015


See accompanying notes to consolidated financial statements.



F-2





ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

Years Ended December 31, 2011 and 2010


 

 

 

 

 

 

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

Revenue (Note 1)

$

2,574

$

58,444

 

 

 

 

 

Total Revenue

 

2,574

 

58,444

 

 

 

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

Reactor production

 

4,151

 

139,382

 

Product development expense (Note 1)

 

10,357

 

11,962

 

Selling, general and administrative expenses

 

 

 

 

 

 

Related party (Note 2)

 

336,338

 

411,057

 

 

Stock-based compensation (Note 6)

 

640,600

 

2,350,350

 

 

(Gain) loss on debt extinguishment (Note 1)

 

(56,247)

 

-

 

 

Depreciation (Note 1)

 

3,873

 

2,580

 

 

Other (Note 4)

 

962,298

 

2,010,170

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating costs and expenses

 

(1,901,371)

 

(4,925,501)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(1,898,797)

 

(4,867,057)

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

Litigation contingency (Note 7)

 

(360,803)

 

-

 

Interest (expense) income, amortization of convertible note discount (Note 3)

 

(357,409)

 

(304,305)

 

Interest expense (Note 3)

 

(710,077)

 

(210,451)

 

Fair value adjustment of derivative liabilities (Note 3)

 

447,063

 

(307,679)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(981,226)

 

(822,435)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

(2,880,023)

 

(5,689,492)

 

 

 

 

 

 

 

 

 

 

Income tax provision (Note 8)

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

(2,880,023)

 

(5,689,492)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to non-controlling interest (Note 1)

 

76,524

 

465,030

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to Company

 

(2,803,499)

$

(5,224,462)

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per common share

$

(0.01)

$

(0.02)

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding (Notes 1 & 6)

 

426,019,193

 

309,636,173


See accompanying notes to consolidated financial statements.



F-3





ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Deficit

Years Ended December 31, 2011 and 2010


 

Common stock

Preferred stock

Additional

 

Non-

Total

 

Shares

Par

value

Shares

Par

value

paid-in

capital

Accumulated

deficit

controlling

interest

shareholders

deficit

 

 

 

 

 

 

 

 

 

Balance at December 31, 2009

289,936,993

$289,937

-

$            -

$ 9,459,316

$ (10,871,303)

$               -

$ (1,122,049)

January through December 2010, issuance of common stock in private placements (Note 6)

17,037,500

17,038

-

-

217,763

-

-

234,801

March 2010, issuance of stock options to officers, directors & consultants (Note 6)

-

-

-

-

354,650

-

-

354,650

March 2010, issuance of common stock for consulting agreements (Note 6)

2,875,000

2,875

-

-

115,000

-

-

117,875

March 2010, issuance of common stock to convertible note holders (Note 6)

1,378,488

1,379

-

-

61,798

-

-

63,177

March 2010, issuance of warrants to subsidiary officers and consultants in May 2009 (Note 6)

-

-

-

-

516,825

-

-

516,825

May 2010, issuance of common stock to debenture holders (Notes 3 & 6)

6,222,216

6,222

-

-

297,111

-

-

303,333

June 2010, issuance of warrants to subsidiary officers and consultants (Note 6)

-

-

-

-

1,085,000

-

-

1,085,000

May 2010, issuance of warrants to note holder (Note 6)

-

-

-

-

3,500

-

-

3,500

Issuance of equity by AlumiFuel Power International, Inc. subsidiary, net of non-controlling interest (Note 1)

-

-

-

-

1,452,354

-

(492,485)

959,869

July 2010, issuance of common stock for consulting agreements (Note 6)

13,800,000

13,800

-

-

262,200

-

-

276,000

August 2010, issuance of common stock for loan extension (Notes 3 & 6)

284,684

284

-

-

6,264

-

-

6,548

September 2010, issuance of warrants to subsidiary note holders (Note 6)

-

-

-

-

60,000

-

-

60,000

December 2010, issuance of common stock to convertible note holders (Notes 3 & 6 )

1,724,138

1,724

-

-

16,234

-

-

17,958

Net loss

-

-

-

-

-

(5,689,493)

465,030

(5,224,463)

Balance at December 31, 2010

333,259,019

333,259

-

            -

13,908,015

(16,560,796)

(27,455)

(2,346,977)


(Continued)

See accompanying notes to consolidated financial statements.





F-4





ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Deficit

Years Ended December 31, 2011 and 2010


 

Common stock

Preferred stock

Additional

 

Non-

Total

 

Shares

Par

value

Shares

Par

value

paid-in

capital

Accumulated

deficit

controlling

interest

shareholders

deficit

 

 

 

 

 

 

 

 

 

January through March 2011, issuance of common stock to convertible note holders (Notes 3 & 6)

16,081,183

16,081

-

-

162,874

-

-

178,955

February 2011, issuance of common stock for consulting agreements (Note 6)

6,000,000

6,000

-

-

294,000

-

-

300,000

February 2011, issuance of common stock on conversion of debt (Note 3 & 6)

9,020,935

9,021

-

-

48,112

-

-

57,133

February 2011, issuance of subsidiary warrants upon issuance of notes payable (Notes 3 & 6)

-

-

-

-

45,000

-

-

45,000

April through June 2011, issuance of common stock to convertible note holders (notes 3 & 6)

89,870,581

89,871

-

-

259,688

-

-

349,559

Issuance of equity by AlumiFuel Power International, Inc. subsidiary, net of non-controlling interest (Note 1)

-

-

-

-

(2,361,374)

-

2,354,849

(6,525)

July 2011, issuance of warrants to subsidiary officers and consultants (Note 6)

-

-

-

-

105,000

-

-

105,000

July 2011, issuance of preferred stock on conversion of debt (Note 6)

-

-

329,662

329,662

-

-

-

329,662

July through August 2011, issuance of common stock on conversion of debt (Note 3 & 6)

52,853,950

52,854

-

-

56,151

-

-

109,005

October through December 2011, sale of subsidiary

 

 

 

 

 

 

 

 

common stock by Parent (Note 1)

-

-

-

-

60,268

-

-

60,268

October through December 2011, issuance of common stock to convertible note holders (notes 3 & 6)

143,537,799

143,537

-

-

429,577

-

-

573,114

October through December 2011, issuance of common stock on conversion of debt (Note 3 & 6)

197,005,734

197,006

-

-

130,801

-

-

327,807

November 2011, issuance of preferred stock on conversion of debt (Note 6)

-

-

191,500

191,500

-

-

-

191,500

December 2011, issuance of warrants to subsidiary employees (Note 6)

-

-

-

-

16,000

-

-

16,000

December 2011, issuance of common stock in private placement (Note 6)

80,000,000

80,000

-

-

129,600

-

-

209,600

Net loss

-

-

-

-

-

(2,880,023)

76,254

(2,803,499)

Balance at December 31, 2011

927,629,201

$927,629

521,162

$521,162

$13,283,712

$(19,440,819)

$2,403,918

$(2,304,398)


See accompanying notes to consolidated financial statements.



F-5





ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Consolidated Statements Cash Flows

Years Ended December 31, 2011 and 2010


 

 

 

 

 

 

 

 

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

$

(2,880,023)

$

(5,689,493)

 

Adjustments to reconcile net loss to net cash used by operating activities:

 

 

 

 

 

 

 

Non-cash interest expense (Note 6)

 

45,000

 

-

 

 

 

Stock based compensation (Note 6)

 

640,600

 

2,350,350

 

 

 

Shares issued for services (Note 6)

 

-

 

986,225

 

 

 

Debt issuance costs (Note 3)

 

54,612

 

-

 

 

 

Beneficial conversion feature (Note 6)

 

506,699

 

-

 

 

 

Allowance for bad debt (Note 1)

 

-

 

88,503

 

 

 

Disposal of property (Note 1)

 

2,238

 

-

 

 

 

Depreciation and amortization

 

3,873

 

103,834

 

 

 

(Decrease) increase in derivative liability (Note 3)

 

(446,327)

 

307,679

 

 

 

Amortization of discount on debentures payable (Note 3)

 

357,409

 

304,305

 

 

 

Write-off of note payable (Note 3)

 

-

 

(30,000)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts and other receivables

 

(8,102)

 

492

 

 

 

 

 

Prepaid expenses and other assets

 

117

 

24,133

 

 

 

 

 

Accounts payable and accrued expenses

 

892,513

 

9,857

 

 

 

 

 

Related party payables (Note 2)

 

34,819

 

246,104

 

 

 

 

 

Interest payable

 

108,804

 

204,764

 

 

 

 

 

 

 

Net cash used in operating activities

 

(687,768)

 

(1,093,247)

Cash flows from investing activities:

 

 

 

 

 

Purchase of equipment (Note 7)

 

-

 

(4,869)

 

Issuance of notes receivable (Note 5)

 

-

 

(88,503)

 

 

 

 

 

 

 

Net cash used in investing activities

 

-

 

(93,372)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from convertible notes (Note 3)

 

152,500

 

175,000

 

Proceeds from notes payable, related (Note 3)

 

308,485

 

170,900

 

Proceeds from notes payable, other (Note 3)

 

350,075

 

317,000

 

Proceeds from sales of common stock (Note 6)

 

40,000

 

234,801

 

Proceeds from sales of subsidiary equity (Note 1)

 

20,000

 

571,900

 

Proceeds from sale of subsidiary stock by parent (Notes 1 & 6)

 

60,268

 

-

 

Payments under capital leases (Note 7)

 

(1,592)

 

-

 

Payments on notes payable (Note 3)

 

(122,166)

 

(98,817)

 

Payments on notes payable, related (Note 3)

 

(118,387)

 

(174,894)

 

Payments to placement agents (Note 3)

 

(10,000)

 

(15,320)

 

 

 

 

 

 

 

Net cash provided by financing activities

 

679,183

 

1,180,570

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(8,585)

 

(6,049)

Cash and cash equivalents:

 

 

 

 

 

Beginning of period

 

11,213

 

17,262

 

End of period

$

2,628

$

11,213

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Income taxes

$

-

$

-

 

 

Interest

$

35,895

$

42,947

 

Noncash financing transactions:

 

 

 

 

 

 

Notes and interest payable converted to stock

$

687,550

$

150,000

 

 

Notes and interest payable converted to stock, related

$

-

$

-

 

 

Accrued expenses converted to preferred stock

$

138,462

$

-

 

 

Accounts payable related converted to preferred stock

$

195,000

$

-

 

 

Notes payable related converted to preferred stock

$

187,700

$

-


See accompanying notes to consolidated financial statements.




F-6



ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements



NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization and Basis of Presentation

 

AlumiFuel Power Corporation (the “Company”) was incorporated on January 19, 2000 under the laws of the state of Nevada as Organicsoils.com, Inc. The Company operates primarily through its subsidiaries, AlumiFuel Power, Inc., a Colorado corporation ("API") and AlumiFuel Power International, Inc. ("AFPI"), a Canadian corporation.  The Company is a an early production stage alternative energy company producing products that generate hydrogen gas and steam for multiple niche applications requiring on-site, on-demand fuel sources.  Our hydrogen drives fuel cells for back-up, remote, and portable power, fills inflatable devices such as weather balloons, and can replace costly, hard-to-handle and high pressure K-Cylinders. Its steam/hydrogen output is also being designed to drive turbine-based underwater propulsion systems and auxiliary power systems.  Our technology has significant differentiators in performance, adaptability, safety and cost-effectiveness in its target market applications, with no external power required and no toxic chemicals or by-products.  AFPI was formed as the international marketing arm of the Company.


The financial statements contained herein for the years ended December 31, 2011 and 2010 comprise the consolidated financial statement of the Company and its subsidiaries API, AFPI, and HPI Partners, LLC ("HPI").


Formation of AlumiFuel Power International, Inc.


In February 2010, the Company formed its new subsidiary, AFPI.  In connection with the formation of the AFPI, the Company and AFPI executed a License Agreement through which AFPI received certain international marketing rights and the rights to utilize certain intellectual property from the Company for exploitation in countries and territories outside of North America in exchange for 25,000,000 shares of the Company's $0.001 par value common stock.  As part of the agreement, AFPI will reimburse the Company, from time-to-time, for reasonable costs and expenses related to the past, present and future development costs of the IP in an amount to be determined by the parties.  For the year ended December 31, 2010, that amount totaled $700,000, which has been eliminated as an intercompany account in the December 31, 2010 financial statements.  In addition, the Company purchased 15,000,000 shares of AFPI common stock at $0.01 per share.  AFPI conducted a private placement of common stock at $0.10 per share.  As of December 31, 2010, AFPI sold 5,719,000 shares of its common stock in the private placement in exchange for $571,900.  AFPI also issued 29,531 shares of common stock upon the cashless exercise of 35,000 warrants and 1,000,000 shares issued to officers, directors and consultants for $100,000 in management fees due them.  In addition, AFPI issued 7,500,000 shares to a consultant valued at $750,000 and 30,000 shares were issued upon the conversion of debt totaling $3,000.  As a result, the total number of AFPI shares outstanding at December 31, 2010 was 54,278,531, of which 14,278,531 is held by shareholders other than the Company representing 26.3% of the outstanding common shares of AFPI as of that date.  This represented a non-controlling interest in AFPI that totaled $(27,455) based on AFPI's outstanding total equity of $(104,369) at December 31, 2010.  In addition, $465,030 in the net loss of AFPI for the year ended December 31, 2010 was attributed to the non-controlling interest of those stockholders.


During the year ended December 31, 2011, AFPI sold an additional 133,333 shares of its common stock in private placements in exchange for $20,000.    AFPI also issued 500,000 shares to a consultant valued at $50,000 in 2011.


On July 31, 2011, the Company and AFPI executed a Patent Purchase Agreement through which the Company sold AFPI the international patent rights to certain of the Company's intellectual property.  In exchange for the sale of these rights, the Company received 7,500,000 shares of AFPI common stock valued at $10,275,000, the market value of the stock on the Deutsche Börse Frankfurt Stock Exchange on the agreement date.  As a result of these transactions, the total number of AFPI shares outstanding at December 31, 2011 was 62,411,864.


In the fourth quarter ended December 31, 2011, the Company sold a total of 139,135 shares of its AFPI on the Deutsche Börse for total proceeds of $60,268, which is reflected on the statements of changes in stockholders' deficit. As a result, the Company owned 47,360,865 shares of AFPI common stock at December 31, 2011. The value of all shares of AFPI held by the Company have been eliminated on consolidation of the financial statements at December 31, 2011 as intercompany accounts with 15,050,99 held by shareholders other than the Company representing 24.1% of the outstanding common shares of AFPI as of that date.  This represents a non-controlling interest in AFPI that totaled $2,403,918 based on AFPI's outstanding total equity of $9,968,308 at December 31, 2011.  In addition, $76,524 in the net loss of AFPI for the year ended December 31, 2011 has been attributed to the non-controlling interest of those stockholders.


Going Concern

 

Inherent in the Company’s business are various risks and uncertainties, including its limited operating history.  The Company’s future success will be dependent upon its ability to market its products including its portable balloon inflation devices including the PBIS-1000 (of which the Company sold three units in 2010) and the PBIS-2000 (which the Company is working during the first quarter of 2012 to deliver one unit).

 



F-8



ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements



The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  As shown in the accompanying financial statements, the Company has incurred operating losses since inception, used significant cash in support of its operating activities and, based upon current operating levels, requires additional capital or significant restructuring to sustain its operations for the foreseeable future.  These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time.


The financial statements do not include any adjustments relating to the recoverability and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.  The Company’s continuation as a going concern is dependent on its ability to raise capital through equity offerings and debt borrowings to meet its obligations on a timely basis and ultimately to attain profitability through the successful commercialization of its products.


Principals of Consolidation


The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries HPI, API and AFPI.  All intercompany balances and transactions have been eliminated.


Use of Estimates

 

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid securities with original maturities of three months or less when acquired to be cash equivalents.  Cash equivalents at December 31, 2011 and 2010 were $-0-.


Income Taxes

 

The Company accounts for income taxes under the provisions of ASC Topic 740, formerly known as SFAS No. 109, “Accounting for Income Taxes”.  ASC Topic 740 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns.  Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  A valuation allowance for net deferred taxes is provided unless the ability to realize the deferred amount is judged by management to be more likely than not.  The effect on deferred taxes from a change in tax rates is recognized in income in the period that includes the enactment date.  More information on the Company’s income taxes is available in Note 6. Income Taxes in these financial statements.


The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions.  The Company has identified its federal tax return and its state tax return in Colorado as “major” tax jurisdictions, as defined.  We are not currently under examination by the Internal Revenue Service or any other jurisdiction.  The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect on the Company’s financial condition, results of operations, or cash flow.  Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740. 


Stock-based Compensation

 

The Company has certain stock option plans approved by its stockholders, and also grants options and warrants to consultants outside of its stock option plan pursuant to individual agreements.


The Company accounts for compensation expense for its stock-based employee compensation plans and issuances of options and warrants to consultants in accordance with ASC Topic 718, formerly known as SFAS No. 123R "Share Based Payment" which replaced SFAS No. 123, "Accounting for Stock-Based Compensation" (“SFAS No. 123”) and supersedes Opinion No. 25 of the Accounting Principles Board, "Accounting for Stock Issued to Employees" (APB 25). The Company has elected the modified-prospective method, under which prior periods are not revised for comparative purposes. See Note 5. Capital Stock for further information on the Company's stock options plans and other warrant/option issuances.

 



F-9



ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements



Property, equipment and leaseholds


Property, equipment and leaseholds are stated at cost, and depreciation is provided by use of accelerated and straight-line methods over the estimated useful lives of the assets. The cost of leasehold improvements is depreciated over the estimated useful life of the assets or the length of the respective leases, whichever period is shorter. The estimated useful lives of property, equipment and leaseholds are as follows:


   Office equipment, furniture and vehicles

 

5 years

   Computer hardware and software

 

3 years

   Leasehold improvements

 

7 years


The Company's property and equipment consisted of the following at December 31, 2011 and 2010:


 

Cost

Accumulated

Depreciation

Balance

 

2011

2010

2011

2010

2011

2010

Equipment

$5,540

$6,365

$3,204

$2,406

$2,595

$3,959

Furniture

1,680

7,742

812

1,475

868

6,267

 

 

 

 

 

 

 

Total

$7,220

$14,107

$4,016

$3,881

$3,463

$10,226


During the year ended December 31, 2011, the Company recorded a loss on disposition of assets of $6,389 including $2,238 for equipment installed in the Philadelphia offices of API that remained in the facility upon API's move in November 2011 as well as $4,151 for certain cases provided to customers upon delivery of PBIS units in 2010 and 2011. These amounts are included in "other" operating costs and expenses for the year ended December 31, 2011.


Investment Securities


The Company accounts for its ownership of the common stock of FastFunds Financial Corporation (“FFFC”) in accordance with APB Opinion No. 18 (APB 18), The Equity Method of Accounting for Investments in Common Stock, which provides that the equity method of accounting should be used by an investor whose investment in voting stock gives it the ability to exercise significant influence over operating and financial policies of an investee even though the investor holds less than a majority of the voting stock. Because the Company owns approximately 34% of FFFC's common stock, but not a majority of the shares, the Company has the ability to exercise significant control over FFFC's operations.  Under the equity method, the investment account is adjusted quarterly to recognize the Company's share of the income or losses of FastFunds.  Accordingly, since FastFunds has recorded significant net losses in each of its last two fiscal years, the investment has been written down to zero.  


Research and Development

 

Research and development costs are expensed as incurred.  In each of the years ended December 31, 2011 and 2010, the Company incurred $10,357 and $11,962 in direct research and development costs, identified as "product development expense" on our statements of operations.  If this amount, $937 and $7,920 were laboratory equipment and supplies for the years ended December 31, 2011 and 2010, respectively.  These expenses include laboratory supplies, design and development costs not directly related to the manufacturing process of our products.

 

Debt Issue Costs

 

The costs related to the issuance of debt are capitalized and amortized to interest expense using the straight-line method over the lives of the related debt.  The straight-line method results in amortization that is not materially different from that calculated under the effective interest method.

 

Financial Instruments

 

At December 31, 2011 and 2010, the fair value of the Company’s financial instruments approximate their carrying value based on their terms and interest rates.

 



F-10



ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements



Loss per Common Share

 

Loss per share of common stock is computed based on the weighted average number of common shares outstanding during the period. Stock options, warrants, and common stock underlying convertible promissory notes are not considered in the calculations for the periods ended December 31, 2011 and 2010, as the impact of the potential common shares, which totaled approximately 579,869,000 (December 31, 2011) and 165,104,000 (December 31, 2010), would be anti-dilutive and decrease loss per share. Therefore, diluted loss per share presented for the years ended December 31, 2011 and 2010 is equal to basic loss per share.


Accounting for obligations and instruments potentially settled in the Company’s common stock


In connection with any obligations and instruments potentially to be settled in the Company's stock, the Company accounts for the instruments in accordance with ASC Topic 815, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company’s Own Stock". This issue addresses the initial balance sheet classification and measurement of contracts that are indexed to, and potentially settled in, the Company's stock.  Under this pronouncement, contracts are initially classified as equity or as either assets or liabilities, depending on the situation. All contracts are initially measured at fair value and subsequently accounted for based on the then current classification. Contracts initially classified as equity do not recognize subsequent changes in fair value as long as the contracts continue to be classified as equity. For contracts classified as assets or liabilities, the Company reports changes in fair value in earnings and discloses these changes in the financial statements as long as the contracts remain classified as assets or liabilities. If contracts classified as assets or liabilities are ultimately settled in shares, any previously reported gains or losses on those contracts continue to be included in earnings. The classification of a contract is reassessed at each balance sheet date.


Revenue Recognition


Revenues on product sales are recognized upon shipment of the product to the customer. Payment terms are typically 30 to 60 days net due following order delivery, depending on the customer.  Fee revenues for research and development contracts are typically recognized on milestone dates outlined in the contracts.  In instances where definable dates are not outlined, fee revenue is recognized when received.


During the fiscal year ended December 31, 2010 the Company recorded revenue totaling $58,444 consisting of $43,020 for the sale of three PBIS-1000 units and AlumiFuel reactor cans as well as $15,424 as part of a U.S. Navy research contract.  During the fiscal year ended December 31, 2011 the Company recorded revenue totaling $2,574 from fees related to subcontracting on a U.S. Navy Unmanned Underwater Vehicle development project.


In September 2011, the Company received an order from the United State Air Force Strategic Operations Command to produce one PBIS-2000 portable balloon inflation device.  This order, originally scheduled for delivery in the first quarter of 2012, is currently scheduled for delivery in April 2012.  Accordingly, the Company will not recognize the revenue from this sale until delivery of the unit early in the second quarter of 2012.


Derivative Instruments


In connection with the issuances of equity instruments or debt, the Company may issue options or warrants to purchase common stock. In certain circumstances, these options or warrants may be classified as liabilities, rather than as equity. In addition, the equity instrument or debt may contain embedded derivative instruments, such as conversion options or listing requirements, which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative liability instrument. The Company accounts for derivative instruments under the provisions of ASC Topic 815, “Derivatives and Hedging”, formerly known as, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities".


Recent Accounting Pronouncements


There are no recently issued accounting standards that are expected to have a material effect on our financial condition, results of operations or cash flows.



F-11



ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements



NOTE 2. RELATED PARTY TRANSACTIONS


Related Party Accounts Payable


The Board of Directors has estimated the value of management services for the Company at the monthly rate of $8,000 and $2,000 for the president and secretary/treasurer, respectively.  The estimates were determined by comparing the level of effort to the cost of similar labor in the local market and this expense totaled $120,000 for each of the years ended December 31, 2011 and 2010.  In addition, beginning October 1, 2010 the Company's president and treasurer were accruing a management fee of $7,500 and $3,500, respectively, for their services as managers of AFPI.  This amount totaled $132,000 for the year ended December 31, 2011 and $33,000 for the year ended December 31, 2010.   As of December 31, 2011 and 2010, the Company owed $49,192 and $50,542, respectively to its officers for management services.  


In September 2009, the Company's board directors authorized a bonus program for the Company's officers related to their efforts raising capital to fund the Company's operations.  Accordingly, the Company's president and secretary are eligible to receive a bonus based on 50% of the traditional "Lehman Formula" whereby they will receive 2.5% of the total proceeds of the first $1,000,000 in capital raised by the Company, 2.0% of the next $1,000,000, 1.5% of the next $1,000,000, 1% of the next $1,000,000 and .5% of any proceeds above $4,000,000.  The amount is capped at $150,000 per fiscal year.  During the years ended December 31, 2011 and 2010, the Company recorded $6,338 and $19,607,respectively to a corporation owned by Messrs. Fong and Olson under this bonus program.  At December 31, 2011 and 2010, respectively there was $6,174 and $6,927 payable under the bonus plan.


API paid a management fee of $6,500 to a company owned by the Company’s officers for services related to its bookkeeping, accounting and corporate governance functions.  For each of the years ended December 31, 2011 and 2010, these management fees totaled $78,000.  As of December 31, 2011 and 2010, the Company owed $39,065 and $31,300 in accrued fees and related expenses.


The Company rents office space, including the use of certain office machines, phone systems and long distance fees, from a company owned by its officers at $1,200 per month. This fee is month-to-month and is based on the amount of space occupied by the Company and includes the use of certain office equipment and services.  Rent expense totaled $14,400 for each of the years ended December 31, 2011 and 2010, respectively.  A total of $550 and $3,600 in rent expense was accrued but unpaid at December 31, 2011.


During the year ended December 31, 2010, The Company’s subsidiary, API, paid its part-time chief technology officer and its part-time vice president/general counsel each $6,500 per month in management fees.  For the year ended December 31, 2011, the Company's management evaluated the amount of time devoted to API by both of these persons as well as the scope of their work for the Company and determined that they should no longer be considered related parties.  Therefore, amounts accrued and/or paid to them during 2011 has not been recorded as a related party payable.  For the year ended December 31, 2010 these management fees totaled $156,000, $78,000 of which was recorded as legal and accounting expense during the period.  At December 31, 2010, the Company owed $186,434 in accrued fees and related expenses to these individuals.


Accounts payable to related parties consisted of the following at December 31, 2011:


Management fees and related expenses payable to officers

$

88,257

 

 

 

 

Bonus payable to officers

 

6,174

 

 

 

Rent payable to affiliate of officers

 

550

 

 

 

 

Accrued other expenses payable to officers

 

16,721

 

 

 

 

 

Total accounts payable, related party

$

111,702




F-12



ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements



Related Party Notes Payable


AlumiFuel Power Corporation


The Company has issued promissory notes to its president for loans made to it from time-to-time including $4,700 loaned during the year ended December 31, 2010 and $34,300 loaned during the year ended December 31, 2011.  The notes bear an interest rate of 8% per annum and are due on demand.  During the year ended December 31, 2010, $3,017 in principal and $21 in accrued was paid on these notes leaving $1,718 in principal and $13 in accrued interest due at December 31, 2010.  During the year ended December 31, 2011, $35,163 in principal and $1,026 in accrued interest was paid on these notes leaving $854 in principal and $6 in accrued interest payable at December 31, 2011.


During the year ended December 31, 2010, the president of API loaned the Company $4,500 in promissory notes bearing interest at 8% and due on demand.  Of this amount, $2,988 in principal and $12 in accrued interest was repaid during the year leaving a principal balance of $1,512 with accrued interest of $1 payable at December 31, 2010.  No further loans or payments were made during the year ended December 31, 2011 leaving a principal balance of $1,511 with accrued interest of $123 payable at that date.


During the year ended December 31, 2010, Company issued promissory notes to a company owned by its president totaling $57,250.  An additional $92,500 was loaned by the company during 2011.  The notes bear an interest rate of 8% per annum and are due on demand.  Of the amount loaned, $39,904 in principal and $253 in interest was repaid during the year ended December 31, 2010 leaving a principal balance of $17,346 on these notes and $19 in accrued interest payable at that date.  During the year ended December 31, 2011, $31,728.19 in principal and $2,472 in interest was repaid on these notes.  In addition, $78,000 of these notes were converted to $78,000 of our Series B Preferred Stock in July 2011 as explained more fully in Note 6 Capital Stock below.  Accordingly as of December 31, 2011, $118 in principal and $1 in accrued interest was payable on these notes.


The Company has executed two promissory notes with a company affiliated with the Company’s officers.  These note carry an interest rate of 8% per annum and are due on demand.  As of December 31, 2010 all  $1,800 in principal and $50 in accrued interest was payable on these notes.  During the year ended December 31, 2011, and additional $40,135 in notes was issued to this company.  In July 2011, $41,000 of the amount due was converted to $41,000 of our Series B Preferred Stock as explained more fully in Note 6 Capital Stock below.  This left a balance due at December 31, 2011 of $935 in principal and $339 in accrued interest payable.


At December 31, 2009, the Company owed $5,500 in principal and $1,081 in accrued on a promissory note issued to a partnership affiliated with the Company’s president. These notes carry an interest rate of 8% and are due on demand.  During the nine months ended September 30, 2010, the Company borrowed and additional $4,000 and paid $7,335 in principal and $1,365 in accrued interest to the partnership.   As of December 31, 2010, the Company owed $2,165 in principal and $108 in accrued interest on these notes.  There were no further transaction with this partnership during the year ended December 31, 2011 leaving $2,165 in principal and $282 in accrued interest payable.


In 2009 the Company issued a promissory note to a partnership affiliated with its president and secretary in the amount of $5,000.  This note carries and interest rate of 8% per annum and is due on demand.  There have been no payments of principal or interest on this note.  At the years ended December 31, 2010 and 2011, $5,000 in principal with $687 and $1,087, respectively, in accrued interest remained outstanding on this note.


During the year ended December 31, 2010, the Company borrowed $5,000 from a Corporation owned by its Secretary. During the year ended December 31, 2011, an additional $10,700 was loaned.  These notes carried and interest rate of 8% per annum and were due on demand.  All of the respective notes were repaid in the years issued with $15 in accrued interest paid in 2010 and $4 in accrued interest paid during 2011.


During the year ended December 31, 2010, a company owned by the Company's officers loaned a total $38,100 in various promissory notes that are due on demand and carry an interest rate of 8%.  During the year ended December 31, 2011, an additional $6,500 was loaned. During the year ended December 31, 2010, $37,899 in principal and $321 in accrued interest was repaid on these notes leaving a principal balance due of $201 with no accrued interest as of that date.  During the year ended December 31, 2011, $5,433 in principal and $128 in interest was paid on the notes leaving a principal balance of $1,268 and accrued interest payable of $26 as of that date.



F-13



ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements



During the year ended December 31, 2010, a corporation affiliated with the Company's officers loaned $19,800 to the Company that is due on demand and carries and interest rate of 8% per annum.  During the year ended December 31, 2011, an additional $28,600 was loaned under the same terms.  As of December 31, 2010, the entire principal balance of these notes along with $441 in accrued interest was due and payable. During the year ended December 31, 2011, $28,817 in principal and $2,933 in interest was repaid on these notes leaving a principal balance of $19,583 and accrued interest payable of $527 at that date.


During the year ended December 31, 2011, the Company borrowed $20,700 from a company affiliated with a Company officer.  In July 2011, the entire $20,700 of these notes was converted to $20,700 shares of our Series B Preferred Stock as explained more fully in Note 6 Capital Stock below.  There was no principal balance but accrued interest of $536 outstanding at December 31, 2011.


During the year ended December 31, 2011, the Company borrowed $29,850 from a company affiliated with the Company's officers.  In July 2011, $29,500 of these notes was converted to $29,500 shares of our Series B Preferred Stock as explained more fully in Note 6 Capital Stock below.  The principal balance of $350 along with accrued interest of $251 remained outstanding at December 31, 2011.


During the year ended December 31, 2010, the Company borrowed $30,500 from an third party who became an affiliate of the Company's president during the fourth quarter of 2011.  These notes are due on demand and bear interest at 8% per annum.  During the year ended December 31, 2011, an additional $24,300 was loaned under the same terms.  During the year ended December 31, 2010, $884 in principal and $116 in accrued interest was repaid on these notes leaving a principal balance of $29,616 with interest payable of $1,075 at December 31, 2010.  During the year ended December 31, 2011, $4,147 in principal and $2,553 in accrued interest was repaid on these notes leaving a principal balance due of $2,853 with accrued interest payable of $25 as of that date.  In addition, prior to becoming an affiliate of the Company, $25,300 in principal on these notes was sold to unaffiliated third parties and converted to common stock of the Corporation.  Please see note Note 6 Capital Stock below for further information on these transactions.


During the year ended December 31, 2010, the Company borrowed $25,000 from an third party corporation that became an affiliate of the Company's president during the fourth quarter of 2011.  These notes are due on demand and bear interest at 8% per annum. During the year ended December 31, 2011, an additional $18,500 was loaned under the same terms.  The entire principal balance of these notes remained unpaid at December 31, 2010 with accrued interest payable of $876 at that date.  In the March and July 2011 a total of $25,000 of these notes was sold to a unaffiliated third parties and converted to common stock of the Corporation.  Please see note Note 6 Capital Stock below for further information on these transactions.  In addition, in November 2011 the $18,500 principal balance on these notes was converted to $18,500 shares of our Series B Preferred Stock as explained more fully in Note 6 Capital Stock below.  As of December 31, 2011, $1,829 in accrued interest remained payable on these notes.


HPI Partners, LLC


In periods prior to December 31, 2009, HPI received loans from Company officers or their affiliates that were repaid as of that date.  Accrued interest due totaling $235 remained unpaid on these paid notes as of both December 31, 2011 and 2010.


At December 31, 2009 of $2,052 in loans was payable by HPI to a company owned by one of its managers.  During the year ended December 31, 2010, the entire principal balance of this note was repaid along with $285 in accrued interest leaving no balance due.


Notes and interest payable to related parties consisted of the following at December 31, 2011:


Notes payable to officers; interest at 8% and due on demand

$

854

 

 

 

 

Notes payable to affiliates of Company officers; interest at 8% and due on demand

 

33,783

 

 

 

 

 

Notes payable, related party

 

34,637

 

 

 

 

Interest payable related party

 

5,267

 

 

 

 

 

Total principal and interest payable, related party

$

39,904




F-14



ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements



NOTE 3. NOTES PAYABLE


AlumiFuel Power Corporation


In 2006, the Company received proceeds of $30,000, in exchange for a promissory note from an unaffiliated third party.  The entire balance of this note remained outstanding at December 31, 2009.  The promissory note was issued at an interest rate of 8% per annum and is due on demand.  Accrued interest payable on the note totaled $11,520 at December 31, 2009. As a result of certain litigation and a resulting settlement related to this note, all principal and interest due totaling $43,315 was written-off and recorded as a credit to "bad debt expense" included in "other" expense on our statements of operations at December 31, 2010.


From time to time the Company has issued various promissory notes payable to an unaffiliated trust which totaled $119,549 at December 31, 2009.   During the year ended December 31, 2010, the trust loaned an additional $36,150 and the Company repaid $76,699 in principal and $23,301 in interest on these notes leaving a balance due of $78,999 in principal and $23,301 in interest payable at that date.  During the year ended December 31, 2011, the trust loaned an additional $25,525.   All notes bear an interest rate of 8% and are due on demand.  During the year ended December 31, 2011, the trust converted $58,349 in principal to 32,867,089 shares of our common stock.  In addition, during the year ended December 31, 2011, the trust sold $33,150 in principal on these notes was sold to unaffiliated third parties and converted to common stock of the Company.  Please see note Note 6 Capital Stock below for further information on these transactions.    Of the balance due, the Company repaid $3,240 in principal and $11,720 in interest on these notes.  As of December 31, 2011, $9,785 in principal with $110 in accrued interest remained outstanding on all notes payable to the trust.


As of December 31, 2009, $2991 in principal and $16 in accrued interest was outstanding on a demand promissory note from an unaffiliated third party with interest payable at 8%.  During the year ended December 31, 2010, $16,500 in additional loans were received from this entity and $2,933 was repaid leaving a principal balance of $16,558 and accrued interest of $1,164 payable at December 31, 2010. During the year ended December 31, 2011, an additional $48,050 was loaned under the same terms while $30,500 was loaned at an interest rate of 8% with a term of six months and convertible at $0.01.  During the year ended December 31, 2011, $8,926 in principal and $3,074 in accrued interest was repaid on these notes.  In addition, a total of $53,450 in principal on these notes was sold in various transactions to unaffiliated third parties and converted to common stock of the Company.  Please see note Note 6 Capital Stock below for further information on these transactions.  Following these transactions there was a principal balance due of $32,732 along with $334 in interest due at December 31, 2011.


In December 2011, an unaffiliated third party loaned the Company $26,000.  This note is due on demand and bears interest at 8% per annum.  The entire principal balance of $26,000 and accrued interest of $52 remained outstanding at December 31, 2011.


During the quarter ended June 30, 2010, the Company borrowed $20,000 from an unaffiliated third party.  This note was due on demand and carried interest rate of 8% per annum.  The entire principal balance of this note was repaid at June 30, 2010 with accrued interest payable balance of $57 due as of December 31, 2011 and 2010.


In February 2010, the Company issued a promissory note payable to an unaffiliated third party for $75,000 in accounts receivable financing.  This note was due on or before August 1, 2010 and accrued loan funding and administration fees equal to $50 per $1,000 loaned, payable monthly.  This loan was to be repaid from proceeds received on accounts receivable related to the sales of the Company's PBIS-1000 portable balloon inflation system and related AlumiFuel cartridge sales.  In August 2010, the Company negotiated an extension of the due date on this note for 60 days in return for 284,684 shares of the Company's common stock valued at $6,548.  As of September 30, 2010, the entire principal balance on this note was repaid along with $17,489 for administration fees leaving no balance due as of that date.


AlumiFuel Power, Inc.


In November and December 2011, the API issued three promissory notes payable to an unaffiliated third party for a total of $60,000 in accounts receivable financing.  These notes are due on or before April 1, 2011 and accrued loan funding and administration fees equal to $20 per $1,000 loaned, which is equates to an effective interest rate of 24% per annum, are payable monthly.  This loan is to be repaid from proceeds received on accounts receivable related to the sale of the Company's PBIS-2000 portable balloon inflation system and related AlumiFuel cartridge sales to the United State Air Force.  A total of $600 in funding and administration fees were paid during the quarter ended December 31, 2011.  As of December 31, 2011, the entire principal balance on this note of $60,000 along with $1,050 in unpaid administration fees were due and payable.




F-15



ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements



AlumiFuel Power International, Inc.


In September 2010, the Company issued a promissory note totaling $100,000 to an unaffiliated third party.  This notes was due the earlier of 90 days from its issuance or upon the Company receiving proceeds from its planned European financing and carried an interest rate of 12% per annum. As of December 31, 2010, the entire principal balance of this note remained unpaid with accrued interest due of $3,033.  This note was not paid on its due date and as a result a default interest rate of 2% per month plus an administrative fee of 2% per month, an effective interest rate of 48% per annum, became payable.  In the fourth quarter of 2011, the entire balance of this note was sold to two unaffiliated third parties and of that amount $90,000 was converted to common stock of the Company.  Please see note Note 6 Capital Stock below for further information on these transactions. During the year ended December 30, 2011, the Company accrued interest and fees totaling $39,867 prior to the note sale with payments made to the outstanding fees of $25,222 leaving total fees due of $17,678 as of that date.  The remaining balance due on this note is now a derivative convertible note as explained more fully under the section "Convertible Promissory Notes" below.


In September 2010, the Company issued a promissory note totaling $50,000 to an unaffiliated third party.  This note was due the earlier of 90 days from its issuance or upon the Company receiving proceeds from its planned European financing and carried an interest rate of 12% per annum. As of December 31, 2010, the entire principal balance of this note remained unpaid with accrued interest due of $1,549.  This note was not paid on its due date and as a result a default interest rate of 2% per month plus an administrative fee of 2% per month, an effective interest rate of 48% per annum, became payable.  In the fourth quarter of 2011, the entire balance of this note was sold to an unaffiliated third party and the entire $50,000 balance due on this note is now a derivative convertible note as explained more fully under the section "Convertible Promissory Notes" below.  During the year ended December 30, 2011, the Company accrued interest and fees totaling $22,000 prior to the note sale with no payments made to the outstanding fees leaving total fees due of $23,549 as of that date.


In February 2011, the above noteholder loaned the Company an additional $75,000.  This note called for a payment of $50,000 in thirty days with a balance due no later than 90 days from its issuance and carries and interest rate of 12% per annum.  The $50,000 was repaid during the nine months ended September 30, 2011 leaving a balance due on this note of $25,000 at September 30, 2011 with interest due of $2,054.  In December 31, 2011, the $25,000 balance on this note was sold with the above note to the same unaffiliated third party becoming a derivative convertible note as explained more fully under the section "Convertible Promissory Notes" below. As of December 31, 2011 there was $2,556 in accrued interest payable for the period prior to the note sale


In February 2011, an unaffiliated third party loaned the Company $75,000.  This note calls for a payment of $50,000 in thirty days with a balance due no later than 90 days from its issuance and carries and interest rate of 12% per annum.  The $50,000 was repaid during the nine month period ended September 30, 2011. As of December 31, 2011 there is a balance due on this note of $25,000 at with interest payable of $2,778.


HPI Partners, LLC


In periods prior to 2010, the Company issued various a notes payable to unaffiliated third parties through HPI.  These notes were also repaid in the periods prior to December 31, 2010 leaving interest payable of $647 at December 31, 2011 and 2011.  


Notes and interest payable to others consisted of the following at December 31, 2011:


Notes payable, non-affiliates; interest at 8% and due on demand

$

153,517

 

 

 

 

Interest payable, non-affiliates

 

48,811

 

 

 

 

 

Total principal and interest payable, other

$

202,328




F-16



ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements



AlumiFuel Power Corporation Convertible Promissory Notes


May 2008 Notes


In May 2008, the Company issued notes payable to two accredited investors for the issuance of $55,000 of 10% unsecured convertible notes in private transactions (the “May Notes”).  The May Notes were convertible at 75% of the average closing bid price per share of the Company’s common stock for the twenty days immediately preceding the date of conversion subject to a floor of $0.05 per share. In September 2009, the Company received conversion notices for all principal and accrued interest totaling $7,426, which was converted to 607,996 shares of our $0.001 par value common stock at a conversion price of $0.103 per share.  However, due to delays in issuing the shares, on March 31, 2010 the Company agreed to issue an additional 1,378,488 shares valued at $63,177 to the holders of the notes.  These shares were valued at $0.046 per share, the market price for our common stock on the date of issuance.


September 2009 Convertible Note


In September 2009, we issued a note payable to an accredited investor for a $30,000 12% unsecured convertible note (the “September Note”).  The September Note was due and payable on December 4, 2009 and was convertible into the Company’s common stock at $0.05 per share. The Company determined that the conversion feature did not represent an embedded derivative as the conversion price was known and was not variable making it conventional.  The Company determined there was a beneficial conversion feature related to the September Note based on the difference between the conversion price of $0.05 and the market price of the Company’s common stock on the note issue date and recorded as interest expense $30,000 with an offset to additional paid-in capital.  As the September Note was not repaid by its due date, a default interest rate of 18% per annum began to accrue as of December 4, 2009.  On April 27, 2011, the Company agreed to lower the conversion price to $0.0035 and the entire principal balance of this note along with accrued interest of $8,472 was converted to 10,914,043 shares of our common stock.  The exercise price represented a 25% discount to the market price of our common stock and therefore additional expense of $12,824 representing the beneficial conversion feature for these shares was recorded during the six month period ended June 30, 2011.  In August 2011, due to the fact we had been unable to deliver a certificate for the converted shares as we did not have enough shares of stock available for issuance from our authorized shares of common stock, we agreed to re-price the conversion of the note to $0.0017 and issue an additional 11,388,566 shares.  This resulted in an additional beneficial conversion feature of $31,888 which was recorded as interest expense in our statements of operations at September 30, 2011.


Convertible Notes and Debentures with Embedded Derivatives:


From time-to-time, we issue convertible promissory notes and debentures with conversion features that we have determined represent an embedded derivative as they are convertible into a variable number of shares upon conversion. Accordingly, these notes are not considered to be conventional debt under EITF 00-19 and the embedded conversion feature must be bifurcated from the debt host and accounted for as a derivative liability. The Company believes that the aforementioned embedded derivatives meet the criteria of ASC 815 (formerly SFAS 133 and EITF 00-19), and should be accounted separately as derivatives with a corresponding value recorded as a liability. Accordingly, the fair value of these derivative instruments are recorded as a liability on the consolidated balance sheet with the corresponding amount recorded as a discount to the notes in the period in which they are issued. Such discount is accreted from the date of issuance to the maturity dates corresponding notes. The change in the fair value of the liability for derivative contracts is credited to other income (expense) in the consolidated statements of operations at the end of each quarter. The face amount of the corresponding notes are stripped of their conversion feature due to the accounting for the conversion feature as a derivative, which is recorded using the residual proceeds to the conversion option attributed to the debt.


Convertible Debentures


In September, 2009, the Company engaged a placement agent to act as its agent in the offer and sale of up to $700,000 of 6% unsecured convertible debentures in transactions with private investors (the “Debentures”).  


Among other terms of the offering, the Debentures are due three years from the final Closing Date for each Debenture under the securities purchase agreement (the “Maturity Date”), unless prepayment of the Debentures is required in certain events, as called for in the agreements.  The Debentures are convertible at a conversion price (the “Conversion Price”) for each share of common stock equal to 75% of the lowest closing bid price per share (as reported by Bloomberg, LP) of the Company’s common stock for the twenty (20) trading days immediately preceding the date of conversion.  In addition, the Debentures provide for adjustments for dividends payable other than in shares of common stock, for reclassification, exchange or substitution of the common stock for another security or securities of the Company or pursuant to a reorganization, merger, consolidation, or sale of assets, where there is a change in control of the Company.



F-17



ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements



The outstanding principal balance of each Debenture bears interest, in arrears, at six percent (6%) per annum, payable (i) upon conversion, or (ii) on the Maturity Date, in cash or shares of our common stock at the Conversion Price.  Upon the occurrence of an Event of Default (as defined in the offering documents), the Company is required to pay interest to the Holder of each outstanding Debenture, at the option of the Holders (i) at the rate of lesser of eighteen percent (18%) per annum and the maximum interest rate allowance under applicable law, and (ii) the Holders may at their option declare the Debentures, together with all accrued and unpaid interest, to be immediately due and payable.


The Company may at its option call for redemption all or part of the Debentures prior to the Maturity Date.  The Debentures called for redemption shall be redeemable for an amount equal to 120% of the outstanding principal and interest if called for redemption prior to the date that is six months from the date of issuance, or 131%, if called for redemption on or after the date that is six months after the date of issuance.  If fewer than all of the outstanding Debentures are redeemed, then all of the Debentures shall be partially redeemed on a pro rata basis.


Further terms call for the Company to maintain sufficient authorized shares reserved for issuance under the agreement equal to 300% of the number of shares issuable upon conversion of the debentures.  In addition, if the closing bid price of the Common Stock is below $0.05 on three (3) consecutive trading days, then the Company shall seek to implement a reverse stock split in a ratio of at least one-for-five.  On March 10, 2010, the Company was notified by the placement that the closing bid price of the Common Stock was below $0.05 on three (3) consecutive trading days and made demand under the agreement that the Company seek shareholder approval for a reverse stock split.  As of the filing of this report, the Company has not convened a meeting of stockholders to consider the reverse split, but the holder has not asserted any further rights under this provision of the agreement.


During the year ended December 31, 2009, the Company executed Securities Purchase Agreements (the "Purchase Agreements") with various accredited investors (the "Holder" or "Holders") for an aggregate of $380,000 in Debentures.  During the year ended December 31, 2009, we received net proceeds from the Debenture closings of $315,420 after debt issuance costs of $64,580 paid to the placement agent.  In January 2010, an additional $55,000 in principal was received in two closings from which the Company received net proceeds of $47,770 after debt issuance costs of $7,230 paid at closing.  Additionally, the placement agent received a one-time issuance of 900,000 shares of our $0.001 par value common stock valued at $117,000 or $0.13 per share, the market price for our common stock on the date of issuance.  These debt issuance costs totaling $188,810 will be amortized over the three year terms of the Debentures or such shorter period as the debentures may be outstanding.  Accordingly, as the debentures are converted to common stock over the three year life, that amount of debt issuance costs attributable to the amounts converted will be accelerated and expensed as of the applicable conversion dates. As of December 31, 2010, $134,388 of these costs had been expensed as debt issuance costs.


The beneficial conversion feature (an embedded derivative) included in the Debentures resulted in an initial debt discount of $435,000 and an initial loss on the valuation of derivative liabilities of $71,190 for a derivative liability balance of $506,190 at issuance.


The fair value of the Debentures was calculated at issue date utilizing the following assumptions:


Issuance Date

Fair Value

Term

Assumed

Conversion Price

Market Price on

Grant Date

Volatility Percentage

Interest Rate

9/29/2009

$207,429

3 years

$0.105

$0.13

195%

1.38%

10/15/2009

$117,800

3 years

$0.075

$0.12

196%

1.38%

11/15/2009

$77,778

3 years

$0.045

$0.09

193%

1.38%

12/15/2009

$15,200

3 years

$0.038

$0.05

192%

1.13%

1/19/2010

$67,667

3 years

$0.03

$0.04

195%

1.38%

1/28/2010

$20,317

3 years

$0.04

$0.05

195%

1.38%


In May 2010, the debenture holders converted $140,000 in face value of the debentures to 6,222,216 shares of our common stock, or $0.022 per share.  As a result of this transaction, the Company recorded a decrease to the derivative liability of $163,333 and as of December 31, 2010, the total face value of the Debentures outstanding was $295,000.


During the year ended December 31, 2011, a total of $285,000 in total face value of the remaining $295,000 in debentures was assigned from the original purchasers to an unaffiliated institutional investor with no changes in the terms or conditions.  Additionally, a total face value of $50,000 of the assigned debentures were purchased by a two third party unaffiliated investors.  



F-18



ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements



During the year ended December 30, 2011, the debenture holders converted an additional $141,500 in face value of the debentures and $4,625 in accrued interest to 120,679,224 shares of our common stock, or $0.0012 per share.  As a result of these transactions, the Company recorded a decrease to the derivative liability of $163,515 and as of December 31, 2011, the total face value of the Debentures outstanding was $153,500.


At December 31, 2011, the Company revalued the derivative liability balance of the remaining outstanding Debentures.  Therefore, for the period from their issuance to December 31, 2011, the Company has recorded an expense and decreased the previously recorded liabilities by $360,000 resulting in a derivative liability balance of $146,190 at December 31, 2011.


The fair value of the Debentures was calculated at December 30, 2011 utilizing the following assumptions:


Fair Value

Term

Assumed

Conversion

Price

Volatility

Percentage

Interest

Rate

$146,190

3 years

$0.0038

189%

1.3%


2010 Convertible Notes


In May, June, and August 2010, the Company entered into three separate note agreements with an institutional investor for the issuance of three convertible promissory notes in the amounts of $60,000 (the "May Note"), $30,000 (the "June Note') and $30,000 (the "August Note"), respectively, for a total at September 30, 2010 of $120,000 in principal outstanding (together, the “2010 Convertible Notes”).  


Among other terms, the May Note is due on November 26, 2010, the June Note is due on February 28, 2011, and the August Note is due on May 26, 2011 (together, the “Maturity Dates”), unless prepayment of the 2010 Convertible Notes is required in certain events, as called for in the agreements.  The 2010 Convertible Notes are convertible at a conversion price (the “Conversion Price”) for each share of common stock equal to 58% (May Note) and 55% (June Note and August Note) of the average of the lowest three trading prices per share of the Company’s common stock for the ten (10) trading days immediately preceding the date of conversion.  In addition, the 2010 Convertible Notes provide for adjustments for dividends payable other than in shares of common stock, for reclassification, exchange or substitution of the common stock for another security or securities of the Company or pursuant to a reorganization, merger, consolidation, or sale of assets, where there is a change in control of the Company.


The outstanding principal balance of each Debenture bears interest at eight percent (8%) per annum, payable in cash or shares of our common stock at the Conversion Price.  Upon the occurrence of an Event of Default (as defined in the 2010 Convertible Notes), the Company is required to pay interest to the Holder of each outstanding note at twenty-two percent (22%) per annum and the Holders may at their option declare the 2010 Convertible Notes, together with all accrued and unpaid interest, to be immediately due and payable.


The Company may at its option prepay the May Note and August Note in full during the first ninety days following their issuance in an amount equal to 150% of the outstanding principal and interest.  There is no such term in the June Note.  Further terms call for the Company to maintain sufficient authorized shares reserved for issuance under the agreement 2010 Convertible Notes.


We received net proceeds from the 2010 Convertible Notes of $112,000 after debt issuance costs of $8,000 paid for lender legal fees.  These debt issuance costs will be amortized over the terms of the 2010 Convertible Notes or such shorter period as the 2010 Convertible Notes may be outstanding.  Accordingly, as the 2010 Convertible Notes are converted to common stock prior to their expiration date, that amount of debt issuance costs attributable to the amounts converted will be accelerated and expensed as of the applicable conversion dates. As of September 30, 2010, $3,111 of these costs had been expensed as debt issuance costs.


The beneficial conversion feature (an embedded derivative) included in the 2010 Convertible Notes resulted in an initial debt discount of $120,000 and an initial loss on the valuation of derivative liabilities of $13,500 for a derivative liability balance of $133,500 at issuance.



F-19



ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements



The fair value of the 2010 Convertible Notes was calculated at issue date utilizing the following assumptions:


Issuance Date

Fair Value

Term

Assumed

Conversion

Price

Market Price on

Grant Date

Volatility Percentage

Interest Rate

5/26/2010

$53,292

6 months

$0.019

$0.035

95%

0.22%

6/30/2010

$42,026

9 months

$0.009

$0.022

107%

0.22%

8/24/2010

$38,182

9 months

$0.006

$0.011

143%

0.22%


In December 2010, the note holders converted $10,000 in face value of the notes to 1,724,138 shares of our common stock, or $0.0058 per share.  During the six month period ended June 30, 2011, the note holders converted $110,000 in face value of the notes plus $4,800 in interest to 39,471,754 shares of our common stock, or $0.0028 per share. This fully converted and extinguished all of the outstanding 2010 Convertible Notes. As a result of these transactions, the Company recorded a decrease to the derivative liability of $129,376 for the year ended December 31, 2011 related to these notes, and the total face value of the Debentures outstanding was $-0-.


March 2011 Convertible Notes


In March 2011, three holders of certain demand promissory notes issued by the Company totaling $54,116 sold them to an unaffiliated third party investor.  As part of this transaction, the Company agreed to re-issue new one-year convertible notes to the new holder (the "March 2011 Notes").  These notes in the amounts of $21,616, $16,500 and $16,000 mature in March 2012, carry an interest rate of 12% and are convertible into shares of our common stock at a 50% discount to the lowest trading price in the three days prior to conversion.  The Company may prepay the notes at any time they remain outstanding at 150% of the outstanding principal balance, however, the holder may convert the notes to stock within three days of such notice.  


The beneficial conversion feature (an embedded derivative) included in the March 2011 Notes resulted in an initial debt discount of $54,115 and an initial loss on the valuation of derivative liabilities of $30,772 for a derivative liability balance of $84,888 at issuance.


The fair value of the March 2011 Notes was calculated at issue date utilizing the following assumptions:


Issuance Date

Fair Value

Term

Assumed

Conversion

Price

Market Price on

Grant Date

Volatility Percentage

Interest Rate

3/11/2011

$84,888

1 year

$0.0026

$0.006

152%

0.27%


During the six month period ended June 30, 2011, the note holders converted the entire $54,115 face value of the notes to 26,210,414 shares of our common stock, or $0.002 per share.  As a result of these transactions, the Company recorded a decrease to the derivative liability of $84,888 for these notes and as of June 30, 2011, and the total face value of the Debentures outstanding was $-0-.


2011 Convertible Notes


During the year ended December 31, 2011, the Company entered into four separate note agreements with an institutional investor for the issuance of a convertible promissory notes in the aggregate amount of $152,500 on the following dates and in the following amounts (together the "2011 Convertible Notes"):


Date of Issue

Amount

Due Date

May 13, 2011

$35,000

February 13, 2012

September 2, 2011

$35,000

May 30, 2012

October 24, 2011

$40,000

July 20, 2012

December 12, 2011

$42,500

September 7, 2012


Among other terms, the 2011 Convertible Notes are due on the dates above, unless prepayment is required in certain events, as called for in the agreements.  The 2011 Convertible Notes are convertible at a conversion price (the “Conversion Price”) for each share of common stock equal to 50% of the average of the lowest three trading prices per share of the Company’s common stock for the ten (10) trading days immediately preceding the date of conversion.  In addition, the 2011 Convertible Notes provide for adjustments for dividends payable other than in shares of common stock, for reclassification, exchange or substitution of the common stock for another security or securities of the Company or pursuant to a reorganization, merger, consolidation, or sale of assets, where there is a change in control of the Company.



F-20



ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements



The outstanding principal balance the 2011 Convertible Notes bear interest at eight percent (8%) per annum, payable in cash or shares of our common stock at the Conversion Price.  Upon the occurrence of an Event of Default (as defined in the 2011 Convertible Notes), the Company is required to pay interest to the Holder of each outstanding note at twenty-two percent (22%) per annum and the Holder may at its option declare the 2011 Convertible Notes, together with all accrued and unpaid interest, to be immediately due and payable.


The Company is able at its option to prepay the 2011 Convertible Notes beginning ninety-one days following their issuance until 180 days following their issuance in an amount equal to 150% of the outstanding principal and interest.  Further terms called for the Company to maintain sufficient authorized shares reserved for issuance under the 2011 Convertible Notes.


We received net proceeds from the 2011 Convertible Notes of $140,000 after debt issuance costs of $10,000 paid for lender legal fees. These debt issuance costs will be amortized over the terms of the 2011 Convertible Notes or such shorter period as the Notes may be outstanding.  Accordingly, as the 2011 Convertible Notes are converted to common stock prior to their expiration date, that amount of debt issuance costs attributable to the amounts converted will be accelerated and expensed as of the applicable conversion dates. As of December 31, 2011, $4,444 of these costs had been expensed as debt issuance costs.


The beneficial conversion feature (an embedded derivative) included in the 2011 Convertible Notes resulted in total initial debt discounts of $142,500 and a total initial loss on the valuation of derivative liabilities of $83,182 for a derivative liability balance of $235,682 total for their issuances.


The fair value of the 2011 Convertible Notes was calculated at each issue date utilizing the following assumptions:


Issuance Date

Fair Value

Term

Assumed

Conversion

Price

Market Price on

Grant Date

Volatility Percentage

Interest Rate

5/13/2011

$111,364

9 months

$0.0022

$0.0089

163%

0.19%

9/2/2011

$33,333

9 months

$0.002

$0.001

155%

0.09%

10/24/2011

$48,485

9 months

$.0017

$.0033

210%

0.09%

12/12/2011

$42,500

9 months

$.001

$.002

218%

0.08%


During the three month period ended December 31, 2011, the note holders converted the entire $35,000 in face value and $1,400 in accrued interest of the May 13, 2011 notes to 40,969,697 shares of our common stock, or $0.0009 per share.  As a result of these transactions, the Company recorded a decrease to the derivative liability of $111,364 for the converted notes and as of December 31, 2011, and the total face value of the 2011 Convertible Notes outstanding was $117,500.


At December 31, 2011, the Company revalued the derivative liability balance of the remaining outstanding 2011 Convertible Notes.  As a result, for the period from their issuance to December 31, 2011, the Company has recorded an adjustment and increased the previously recorded liabilities by $43,539 resulting in a derivative liability balance of $167,857 at December 31, 2011.


The fair value of the Debentures was calculated at December 31, 2011 utilizing the following assumptions:


Fair Value

Term

Assumed

Conversion Price

Volatility Percentage

Interest Rate

$167,857

9 months

$0.0007

219%

0.08%


Converted AFPI Notes


In November and December 2011, two holders of certain demand promissory notes issued by AFPI totaling $75,000 sold them to an unaffiliated third party investor.  As part of this transaction, the Company agreed to amend the terms of the convertible notes for the new holder (the "Converted AFPI Notes").  These notes in the amounts of $50,000, $50,000 and $25,000 were due past due, carry had an effective interest rate of 48% in the case of the $50,000 notes, and 12% in the case of the $25,000 note.  We agree to allow conversion of the Converted AFPI Notes into shares of our common stock at a 50% discount to the lowest three trading prices in the ten days prior to conversion.    


The beneficial conversion feature (an embedded derivative) included in the Converted AFPI Notes resulted in an initial debt discount of $125,000 and an initial loss on the valuation of derivative liabilities of $100,490 for a derivative liability balance of $225,490 at issuance.



F-21



ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements



The fair value of the Converted AFPI Notes was calculated at issue date utilizing the following assumptions:


Issuance Date

Fair Value

Term

Assumed

Conversion

Price

Market Price on

Grant Date

Volatility Percentage

Interest Rate

4/4/2011

$58,824

3 months

$0.0009

$0.0021

179%

0.25%

12/1/2011

$83,333

6 months

$0.0006

$0.0021

199%

0.07%

12/1/2011

$83,333

6 months

$0.0006

$0.0021

199%

0.07%


During the three month period ended December 31, 2011, the note holders converted $40,000 face value of the notes to 47,379,032 shares of our common stock, or $0.0008 per share.  As a result of these transactions, the Company recorded a decrease to the derivative liability of $47,059 for the converted notes and as of December 31, 2011, and the total face value of the Converted AFPI Notes outstanding was $85,000.

  

At December 31, 2011, the Company revalued the derivative liability balance of the remaining outstanding Converted AFPI Notes.  As a result, for the period from their issuance to December 31, 2011, the Company has recorded an adjustment and decreased the previously recorded liabilities by $57,001 resulting in a derivative liability balance of $121,429 at December 31, 2011.


The fair value of the Debentures was calculated at December 31, 2011 utilizing the following assumptions:


Fair Value

Term

Assumed

Conversion Price

Volatility Percentage

Interest Rate

$121,429

3 months

$0.0007

108%

0.03%

 

6 months

$0.0007

195%

0.06%


November 2011 Note


In November 2011, a holder of debt issued by AFPI totaling $52,000 sold that debt to an unaffiliated third party investor.  As part of this transaction, the Company agreed to amend the terms of the debt for the new holder in the form of an amended promissory note (the "November 2011 Note").  The November 2011 Note matures in November 2012, carries an interest rate of 12% and is convertible into shares of our common stock at a 50% discount to the lowest trading price in the three days prior to conversion.  The Company may prepay the notes at any time they remain outstanding at 150% of the outstanding principal balance, however, the holder may convert the notes to stock within three days of such notice.   


The beneficial conversion feature (an embedded derivative) included in the November 2011 Note resulted in an initial debt discount of $52,000 and an initial loss on the valuation of derivative liabilities of $86,667 for a derivative liability balance of $138,667 at issuance.


The fair value of the Converted AFPI Notes was calculated at issue date utilizing the following assumptions:


Issuance Date

Fair Value

Term

Assumed

Conversion

Price

Market Price on

Grant Date

Volatility Percentage

Interest Rate

11/23/11

$138,667

12 months

$0.0008

$0.0026

241%

0.1%


During December 2011, the note holder converted $13,000 face value of the notes to 17,333,334 shares of our common stock, or $0.00075 per share.  As a result of these transactions, the Company recorded a decrease to the derivative liability of $34,667 for the converted notes and as of December 31, 2011, and the total face value of the Converted AFPI Notes outstanding was $39,000.


At December 31, 2011, the Company revalued the derivative liability balance of the remaining outstanding Converted AFPI Notes. As a result, for the period from their issuance to December 31, 2011, the Company has recorded an adjustment and decreased the previously recorded liabilities by $48,286 resulting in a derivative liability balance of $55,714 at December 31, 2011.


The fair value of the Debentures was calculated at December 31, 2011 utilizing the following assumptions:



F-22



ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements



Fair Value

Term

Assumed

Conversion Price

Volatility Percentage

Interest Rate

$55,714

12 months

$0.0007

226%

0.11%


Debentures and convertible notes and interest payable consisted of the following at December 31, 2011:


Short-term liabilities:

 

 

 

 

 

2011 Convertible Notes; non-affiliate; interest at 8%; due May through September 2012; $117,500 face value net of discount of 88,333

$

29,167

 

 

 

Converted AFPI Notes; non-affiliate; interest at 48% ($60,000) and 12% ($25,000); currently due; $85,000 face value net of discount of $65,833

 

19,167

 

 

 

November 2011 Note; non-affiliate; interest at 12%; due November 2012; $39,000 face value net of discount of $35,750

 

3,250

 

 

 

 

Total short-term convertible notes

$

51,584

 

 

 

Interest payable, short-term convertible notes

 

10,718

 

Total principal and interest payable, short-term convertible notes

$

62,302

 

 

 

Long-term liabilities:

 

 

 

 

 

Convertible debentures; non-affiliates; interest at 7% and due January 2013; outstanding principal of $153,500 face value; net of discount of $61,569

$

91,931

 

 

 

Interest payable, long-term convertible notes

 

35,979

 

 

 

 

 

Total principal and interest payable, other

$

127,910


NOTE 4. OTHER SELLING GENERAL AND ADMINISTRATIVE EXPENSES


Other selling general and administrative expense for the years ended December 31, 2011 and 2010 consisted of the following:


 

 

Year ended

December 31,

2011

 

Year ended

December 31,

2010

General and administrative

$

366,382

$

386,619

Legal and accounting

 

64,107

 

139,297

Professional services

 

190,263

 

1,011,183

Bad debt expense

 

3,175

 

45,188

Salaries

 

338,371

 

427,883

 

$

962,298

$

2,010,170


NOTE 5. NOTES RECEIVABLE


At December 31, 2011, there were $307,578 in loans due the Company from FastFunds Financial Corporation (“FFFC”), an affiliate in which the Company is a 34% stockholder, to assist FFFC in payment of its ongoing payment obligations and protect the Company's investment.  Of this amount, $88,503 was advanced in 2010 and $7,995 was loaned in 2011.  Of the amounts loaned in 2011, $4,820 were short-term loans that were repaid.  Each of these loans carries an interest rate of 8% per annum and are due on demand.  Management of the Company evaluated the likelihood of payment on these notes and has determined that an allowance of the entire balance due is appropriate.  Accordingly, the Company recorded bad debt expense of $88,503 the year ended December 31, 2010 and $3,175 in the year ended December 31, 2011 that is included in other selling, general and administrative expenses on the Company’s statement of operations for each period.  The Company has allowed for all interest due on these notes and did not record any interest receivable during the year ended December 31, 2011.



F-23



ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements



As of December 31, 2009, the Company had $467 notes receivable from a non-affiliate.  This amount was due on demand, carried an interest rate of 8% and had accrued interest payable of $25.  This amount plus total accrued interest of $34 was repaid during the year ended December 31, 2010 leaving no balance due.  


As of December 31, 2011, the Company had $8,000 due from an affiliated publicly traded company.  This note carries interest at 8% per annum and is due on demand.  The entire principal balance of $8,000 plus $102 in accrued interest remained receivable at December 31, 2011.


NOTE 6. CAPITAL STOCK


On August 24, 2011, we filed Amended and Restated Articles of Incorporation with the Secretary of State of Nevada, pursuant to which we increased the authorized capital stock of the Company from 510,000,000 shares to 1,510,000,000 shares, of which 10,000,000 shares may be preferred stock having the voting powers, designations, preferences, limitations, restrictions and relative rights as determined by the board of directors from time to time.


Effective August 9, 2011, the stockholders of the Company through a written consent executed by stockholders holding a majority of the outstanding shares of the Company’s common stock entitled to vote, adopted and approved the Amended and Restated Articles of Incorporation, which were adopted by the Company’s board of directors on July 12, 2011.


On December 7, 2011, we filed Amended and Restated Articles of Incorporation with the Secretary of State of Nevada, pursuant to which the Company increased the authorized capital stock of the Company from 1,510,000,000 shares to 3,010,000,000 shares, of which 10,000,000 shares may be preferred stock having the voting powers, designations, preferences, limitations, restrictions and relative rights as determined by the board of directors from time to time.


Effective November 23, 2011, the stockholders of the Company through a written consent executed by stockholders holding a majority of the shares of the Company’s common stock outstanding and entitled to vote, adopted and approved the Amended and Restated Articles of Incorporation, which were adopted by the Company’s board of directors on November 23, 2011.


Common Stock


During the year ended December 31, 2010, the Company sold 17,037,500 shares of its common stock to accredited investors for total proceeds of $234,801, or the equivalent of $0.014 per share.  


In March 2010, we issued 2,875,000 shares valued at $117,875 to a third party pursuant to shares issued in two consulting agreements.  These shares were valued at $0.041 per share, the market price for our common stock on the date of issuance and this amount was recorded as stock based compensation.


As discussed more fully in Note 3 above, in March 2010 we issued 1,378,488 shares valued at $63,177 to the holders of our May 2008 convertible notes.  These shares were valued at $0.046 per share, the market price for our common stock on the date of issuance.


In May 2010, the Company issued 6,222,216 shares of our common stock upon the conversion of $140,000 of our Convertible Debentures.  In addition to the face value of the notes, the Company recorded $163,333 in additional expense for the derivative liability for a total cost to the Company of $303,333 or a price equaling $0.048 per share.  


In July 2010, we issued 13,800,000 shares valued at $276,000 to a third party pursuant to shares issued in a consulting agreement.  These shares were valued at $0.02 per share, the market price for our common stock on the date of issuance and this amount was recorded as stock based compensation.


In August 2010, we issued 284,684 shares of our common stock to a lender as compensation for the extension of the due date on a promissory note.  These shares were valued at $6,548 or $0.023 per share, the market price of our common stock on the date of issuance.


In December 2010, we issued 1,724,138 shares of our common stock upon the conversion of $10,000 of our 2010 Convertible Notes.  In addition to the face value of the notes, the Company recorded $7,958 in additional expense for the derivative liability for a total cost to the Company of $17,958 or a price equaling $0.01 per share.  



F-24



ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements



During the period three month period ended March 31, 2011, the Company issued 15,281,183 shares of our common stock upon the conversion of $52,400 in principal and interest on our 2010 Convertible Notes.  In addition to the face value of the notes, the Company recorded $121,418 in additional expense for the derivative liability for a total cost to the Company of $173,818 or a price equaling $0.011 per share.  


In March 2011, the Company issued 800,000 shares of our common stock upon the conversion of $2,000 in principal and interest on our March 2011 Notes.  In addition to the face value of the notes, the Company recorded $3,137 in additional expense for the derivative liability for a total cost to the Company of $5,137 or a price equaling $0.006 per share.  


In February 2011, we issued 6,000,000 shares valued at $300,000 to a third party pursuant to shares issued in a consulting agreement. These shares were valued at $0.005 per share, the market price for our common stock on the date of issuance and this amount was recorded as stock based compensation.


In February 2011, we issued 9,020,935 shares of our common stock to a noteholder upon conversion of $42,849 in promissory notes. In addition to the face value of the notes, the Company recorded $14,283 in additional expense for a 25% discount to the market price for a total cost to the Company of $57,132 or a price equaling $0.006 per share.


During the three month period from April 1, 2011 to June 30, 2011 we issued 89,870,581 shares of our common stock upon the conversion of $205,588 in principal and $7,025 in accrued interest on our Convertible Debentures, 2010 Convertible Notes and March 2011 Notes.  In addition, $136,946 was recorded for additional derivative liability and interest expense for a total cost to the Company of $349,599 or $0.0039 per share.


During the three month period from July 1, 2011 to September 30, 2011 we issued 52,853,950 shares of our common stock to noteholders upon conversion of $33,750 in promissory notes.  In addition to the face value of the notes, the Company recorded $43,368 in additional expense for the discounts to the market price for a total cost to the Company of $77,118.  


During the three month period from October 1, 2011 to December 31, 2011 we issued 143,537,799 shares of our common stock to noteholders upon conversion of $136,150 in promissory notes.  In addition to the face value of the notes, the Company recorded $436,964 in additional expense for the discounts to the market price for a total cost to the Company of $573,114.  


During the three month period from October 1, 2011 to December 30, 2011 we issued 197,005,734 shares of our common stock upon the conversion of $174,000 in principal and $1,400 in accrued interest on our Convertible Debentures, 2011 Convertible Notes and Converted AFPI Notes and November 2011 Notes as explained more fully in Note 3 above.  In addition, $151,907 was recorded for additional derivative liability and interest expense for a total cost to the Company of $327,807 or $0.0017 per share.


In December 2011, we conducted a private placement and sold 80,000,000 shares of our common stock for $40,000, or $0.0005 per share.  These shares had a total value of $209,600 based on the market price for the common stock on each date of issuance therefore we recorded $185,600 as stock-based compensation cost on our statement operations to reflect the discount on these shares.


Preferred Stock


In August 2011, the Company authorized the issuance of up to 750,000 shares of $0.001 par value Series B Preferred Stock (the "Series B Preferred").  The Series B Preferred has a stated value of $1.00 and pays a dividend of 8% payable quarterly in our common stock.  In the event of a liquidation of the Company, the holders of Series B Preferred then outstanding will be entitled to receive a liquidation preference, before any distribution is made to the holders of our common stock, in an aggregate amount equal to the par value of their shares of Series B Preferred. Each share of Series B Preferred is convertible into that number of shares of common stock on terms that are equal to (i) 100% of the Stated Value divided by (ii) 52% of the average of the three lowest day closing bid prices of the Company’s common stock for the 10 trading days immediately preceding the conversion.  There is a Mandatory Conversion Date of July 12, 2016.  At any time after the date of issuance of the Series B Preferred until the Mandatory Conversion Date, we may redeem, in cash, the Series B Preferred in accordance with the following: (a) if prior to or on the first anniversary of the date of issue at 105% of the Stated Value thereof and (b) if after the first anniversary of the date of issue and prior to the Mandatory Conversion Date at 110% of the Stated Value thereof (the “Redemption Price”).  


In August 2011, 329,662 shares of Series B Preferred were issued upon: the conversion of $63,000 in management fees payable to our president; and the conversion of $78,000 in notes payable to a partnership controlled by our president; and $50,200 in notes payable to two companies affiliated with our president and secretary; and $138,462 in wages due to the president of our operating subsidiary, API.



F-25



ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements



In November 2011, an additional 191,500 shares of Series B Preferred were issued upon: the conversion of $90,000 in management fees payable to our president from AFPI; and $42,000 in management fees payable to our secretary from AFPI; and $41,000 in notes payable to a corporation affiliated with our president and secretary; and $18,500 in notes payable to an affiliate of our president.


As a result of these transactions, there were 521,162 shares of our Series B Preferred outstanding at December 31, 2011 with dividends payable of $12,402 at that date.


Warrants


On May 5, 2009, the Company issued warrants to purchase 31,968,515 shares of common stock of the Company to officers and consultants of API.  These warrants were valued at $4,134,595 based upon the Black Scholes option pricing model and were to be expensed over their three year vesting period.  Prior to 2010, 195,500 of these warrants were exercised.  For the nine months ended September 30, 2010, $516,825 was expensed on these warrants and recorded as "stock based compensation expense".


In September 2010, the Company issued warrants to purchase up to 600,000 shares of common stock in its operating subsidiary, AFPI, to two unaffiliated investors in connection with the issuance notes payable to AFPI in the amount of 250,000.  The warrants are exercisable for a period of three years at an exercise price of $0.25 per share.  Because there is no trading market for AFPI's common stock at the issue date, the Company valued these warrants at the price of the most recent private placement sales of AFPI's common stock, or $0.10 per share.  Accordingly, additional interest expense of $60,000 was recorded for the value of these warrants at issuance in the year ended December 31, 2010.


In June 2010, the Company agreed to issue new warrants to these warrant holders upon  the condition that each holder agreed to cancel the previously issued warrants.  Accordingly, the previously issued warrants were cancelled and a total of 35,000,000 new warrants were issued.  These warrants vested immediately, were exercisable for a period of five years, and were exercisable at $0.05 per share.  These shares were valued at $1,085,000 based upon the Black Scholes option pricing model, which amount is included in "stock based compensation" in statements of operations at December 31, 2010.


The fair value of the warrants was calculated at issue date utilizing the following assumptions:


Issuance Date

Fair Value

Term

Conversion Price

Market Price on

Grant Date

Volatility Percentage

Interest Rate

6/2/2010

$1,085,000

5 years

$0.05

$0.03

238%

2.13%


In July 2011, the Company issued warrants to these warrant holders upon  the condition that each holder agree to cancel the 35,000,000 warrants issued in June 2010 exercisable at $0.05 per share.  Accordingly, the previously issued warrants were cancelled and a total of 35,000,000 new warrants were issued.  These warrants vested immediately, are exercisable for a period of five years, and are exercisable at $0.01 per share.  These shares were valued at $105,000 based upon the Black Scholes option pricing model, which amount is included in "stock based compensation" at December 31, 2011.


Issuance Date

Fair Value

Term

Conversion Price

Market Price on

Grant Date

Volatility Percentage

Interest Rate

7/12/2011

$105,000

5 years

$0.01

$0.003

197%

1.4%


In December 2011, the Company issued warrants to purchase 8,000,000 shares of our common stock to two employees of API.  These warrants vested immediately, are exercisable for a period of five years, and are exercisable at $0.01 per share.  These shares were valued at $16,000 based upon the Black Scholes option pricing model, which amount is included in "stock based compensation" as of December 31, 2011.


Issuance Date

Fair Value

Term

Conversion Price

Market Price on

Grant Date

Volatility Percentage

Interest Rate

12/15/2011

$16,000

5 years

$0.01

$0.002

204%

0.9%




F-26



ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements



A summary of the activity of the Company’s outstanding warrants at December 31, 2010 and December 31, 2011 is as follows:


 

 

Warrants

 

Weighted-average exercise price

 

Weighted-average grant date fair value

Outstanding and exercisable at December 31, 2010

 

61,173,028

$

0.09

$

0.13

 

 

 

 

 

 

 

Granted

 

43,000,000

 

0.01

 

0.03

Expired/Cancelled

 

35,919,500

 

0.25

 

0.06

Exercised

 

-

 

-

 

-

 

 

 

 

 

 

 

Outstanding and exercisable at December 31, 2011

 

68,253,528

$

0.05

$

0.05


The following table sets forth the exercise price range, number of shares, weighted average exercise price and remaining contractual lives of the warrants by groups as of December 31, 2011:


Exercise price range

 

Number of options outstanding

 

Weighted-average exercise price

 

Weighted-average remaining life

 

 

 

 

 

 

 

$0.10 to $0.18

 

24,603,528

 

0.13

 

0.6 years

 

 

 

 

 

 

 

$0.05 to $0.06

 

650,000

 

      0.06

 

0.7 years

 

 

 

 

 

 

 

$0.01

 

43,000,000

 

0.01

 

4.7 years

 

 

 

 

 

 

 

 

 

68,253,528

$

       0.05

 

3.7 years


In February 2011, the Company issued warrants to purchase up to 300,000 shares of common stock in its operating subsidiary, AFPI, to three unaffiliated investors in connection with the issuance of notes payable to AFPI.  The warrants are exercisable for a period of three years at an exercise price of $0.15 per share.  Because there was no trading market for AFPI's common stock at the issue date, the Company valued these warrants at the price of the most recent private placement sales of AFPI's common stock, or $0.15 per share.  Accordingly, additional interest expense of $45,000 was recorded for the value of these warrants at issuance.


Stock Options


On March 4, 2009, our board of directors authorized the Inhibiton Therapeutics, Inc. 2009 Stock Incentive Plan which was amended on May 6, 2009 and approved by our stockholders effective on May 26, 2009.  The plan allows for the issuance of up to 20,000,000 shares of our common stock through one or more incentive grants including stock options, stock appreciation rights, stock awards, restricted stock issuances and performance shares to officers, directors, employees and consultants of the Company.  The plan is administered by our board of directors.


During the three months ended March 31, 2010, the Company granted officers, directors and consultants 8,650,000 options to purchase shares of common stock at an exercise price of $0.041 per share (the market value of the common stock on the date of each grant).  The options were valued at $354,650 based upon the Black-Scholes option pricing model.  The options were fully-vested at the date of the grant and therefore the Company recorded $354,650 of stock based compensation expense as of the issue date.  



F-27



ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements



The fair value of the stock options was calculated at issue date utilizing the following assumptions:


Issuance Date

Fair Value

Term

Exercise Price

Market Price on

Grant Date

Volatility Percentage

Interest Rate

March 2010

$354,650

5 years

$0.041

$0.041

236%

2.38%


All options outstanding at December 31, 2011 are fully vested and exercisable.  A summary of outstanding stock option balances under the 2005 Stock Incentive Plan and the 2009 Stock Incentive Plan at December 31, 2010 and at December 31, 2011 is as follows:


2005 Stock Incentive Plan


 

Options

 

Weighted-average exercise price

 

Weighted-average remaining contractual life (years)

 

Aggregate intrinsic value

Outstanding at December 31, 2010

425,000

 

$0.35

 

2.00

 

$0

 

 

 

 

 

 

 

 

Options granted

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

Outstanding at December 31, 2011

425,000

 

$0.35

 

1.00

 

$0


2009 Stock Incentive Plan


 

Options

 

Weighted-average exercise price

 

Weighted-average remaining contractual life (years)

 

Aggregate intrinsic value

Outstanding at December 31, 2010

20,000,000

 

$0.075

 

3.7

 

$0

 

 

 

 

 

 

 

 

Options granted

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

Outstanding at

December 31, 2011

20,000,000

 

$0.075

 

2.7

 

$0


NOTE 7. COMMITMENTS AND CONTINGENCIES


Payroll Liabilities


Following the formation of API in May 2008, HPI hired certain former employees of Hydrogen Power, Inc. and maintained an office in Seattle, Washington for a period of approximately five months.  During that time, the HPI paid wages to these employees without the benefit of a payroll management service.  Upon the HPI’s move from Seattle to Philadelphia, Pennsylvania in October 2008, the Company retained the services of a payroll management service to handle its payroll functions.  During the period from May to October 2008, the Company recorded $52,576 in payroll liabilities due from wages paid to its employees and has been recording estimated penalties and interest quarterly on the balance.  During the year ended December 31, 2010, the Company recorded additional estimated penalty and interest expense of $13,708 for an estimated balance due at that date of $80,874.  During the year ended December 31, 2010, the Company recorded additional estimated penalty and interest expense of $14,284 for an estimated balance due at that date of $95,158.  This amount is included on the balance sheets at December 31, 2011 and 2010 as “payroll liabilities”.  In addition, the president of API converted $138,462 in wages payable to him to shares of the Company's Series B Preferred Stock in August 2011.  We have recorded a total of $8,629 for payroll liabilities due by the Company on this conversion.



F-28



ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements



License Agreement


In August 2008, the Company executed a License Agreement between the Company, the University of South Florida Research Foundation, Inc. and the University of Florida Research Foundation, Inc. (“License Agreement”) through which the Company was to acquire the exclusive right and license to make, have made, use, import, sublicense and offer for sale any products or processes derived from the ICA-1 process the Company had been funding from September 2004 until the acquisition of HPI and API.  As of March 1, 2010, the Company had failed to pay the technology access fee and related expenses totaling $56,247.  As a result, on March 1, 2010 the licensors declared a default under the License Agreement and gave the Company until April 1, 2010 to cure the default.  The Company did not cure the default therefore as of April 1, 2010, the license agreement was terminated.  Given the license was terminated by the University, the Company is no longer the licensor of the technology and is not required to pay any license fees under the contract.  Accordingly, during the year ended December 31, 2011, the Company wrote-off the amount due and recorded $56,247 as a "gain on debt extinguishment" on the statements of operations at December 31, 2011.


Office Lease Agreement


Effective on July 1, 2009, API entered into a lease for office and laboratory space in the University City Science Center in Philadelphia, Pennsylvania.  Totaling approximately 2,511 square feet, the term of the agreement was for five years and six months expiring on December 31, 2014.  In addition, the Company was obligated to pay certain common area maintenance fees that was $1,886 per month during 2011.


In November 2011, the Company determined it could no longer sustain the significant payments under the lease and vacated the premises.  On November 30, 2011, API was notified that a Judgment by Confession had been entered against it in the Court of Common Pleas Philadelphia County in Philadelphia, Pennsylvania by Wexford-UCSC II, L.P., its former landlord.  The Judgment by Confession assesses total damages of $428,232, which is comprised of the following: $73,995 for unpaid monthly rent, maintenance fees, interest and late charges for the period through November 30, 2011; attorney's fees of $5,000; rent and maintenance charges of $10,020 for December 2011; and the value of future rent payments for the period from January 1, 2012 to December 31, 2014 of $339,217.  The complaint alleges a breach of contract and event of default for API related to this lease.  The Company intends to negotiate with the landlord to settle the judgment as expeditiously as possible.  As of December 31, 2011, the Company had recorded $67,429 in rent expense that is included in "accounts payable, other" as of that date.  The additional judgment amount totaling $360,803 has been expensed as "litigation contingency" on our statements of operations and is recorded under the same name as a liability on balance sheets and at December 31, 2011.


Capital Leases


In April 2010 we leased a copier for a period of three years at $120 per month.  The contract includes a buyout at lease end for $1 at which time we will own the machine.  We have capitalized the value of this machine at January 1, 2011 in the amount of $3,240 based on the then current value with an expected life of 5 years from the lease date and are depreciating this asset over that period.  That amount was included in "property and equipment" under the assets portion of our balance sheet with the corresponding liability for future payments placed under "capital leases" in our liabilities.  As each monthly payment is made, the amount under capital leases is reduced to reflect the balance due under the lease.  Accordingly, a total of $1,440 was reduced in the "capital leases" account for payments made in 2011.  Our future liabilities under this capital lease includes: $1,440 for the year ending December 31, 2012; and $360 for the year ending December 31, 2013 as the lease will be complete following payment of the March 2013 payment.


NOTE 8. INCOME TAXES


A reconciliation of U.S. statutory federal income tax rate to the effective rate follows for the years ended December 31, 2011 and 2010:


 

 

For the

 year ended December 31,

 

For the

year ended December 31

 

 

2011

 

2010

 

 

 

 

 

U.S. statutory federal rate

34.00%

 

34.00%

State income tax rate

4.63%

 

4.63%

Net operating loss for which no tax

 

 

 

 

  benefit is currently available

-38.63%

 

-38.63%

 

 

0.00%

 

0.00%



F-29



ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements



At December 31, 2011, deferred tax assets consisted of a net tax asset of $7,483,400, due to operating loss carry forwards of $19,372,060, which was fully allowed for, in the valuation allowance of $7,483,400.  The valuation allowance offsets the net deferred tax asset for which there is no assurance of recovery.  The increase in the deferred tax assets and the corresponding valuation allowance during the year ended December 31, 2011 was $1,375,700 based on the $6,107,710 reported by the Company at December 31, 2010.  The net operating loss carry forward expires through the year 2031.


The valuation allowance is evaluated at the end of each year, considering positive and negative evidence about whether the deferred tax asset will be realized.  At that time, the allowance will either be increased or reduced; reduction could result in the complete elimination of the allowance if positive evidence indicates that the value of the deferred tax assets is no longer impaired and the allowance is no longer required.


Should the Company undergo an ownership change as defined in Section 382 of the Internal Revenue Code, the Company's tax net operating loss carry forwards generated prior to the ownership change will be subject to an annual limitation, which could reduce or defer the utilization of these losses.


NOTE 9. SUBSEQUENT EVENTS


In September 2011, we were awarded a contract with the United States Air Force Special Operations Command to deliver a PBIS-2000 Portable Balloon Inflation System.  Originally stated for delivery in late February 2012, working with the customer the Company delivered the unit in April 2012.  As per the Company's policies on revenue recognition, the total value of this contract approximately $61,000 will be recorded when shipment is made.


Management has determined that there are no further events subsequent to the balance sheet date that should be disclosed in these financial statements.




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