AlumiFuel Power Corp - Quarter Report: 2012 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Commission File No. 333-57946

ALUMIFUEL POWER CORPORATION

(Exact Name of Registrant as Specified in its Charter)

7315 East Peakview Avenue

Englewood, Colorado 80111

(Address of principal executive offices) (Zip code)

(303) 796-8940

(Registrant's telephone number including area code)

(Former name, address and fiscal year)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by a check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

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

Number of shares of common stock outstanding at August 1, 2012: 2,123,847,187

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Index to Financial Statements

(Unaudited)

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Statement of Changes in Shareholders’ Deficit

Six months ended June 30, 2012

(Unaudited)

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

Note 1: Basis of presentation

The interim unaudited financial statements presented herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and for the three and six month periods ended June 30, 2012 and 2011 include the financial statements of AlumiFuel Power Corporation (the “Company”) and its subsidiaries HPI Partners, LLC (“HPI”), AlumiFuel Power, Inc. (“API”), AlumiFuel Power Technologies, Inc. ("APTI") and 76% owned subsidiary AlumiFuel Power International, Inc. ("AFPI").

Certain information and footnote disclosures normally included in unaudited financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. All of the intercompany accounts have been eliminated in consolidation. The interim unaudited financial statements should be read in conjunction with the Company’s annual financial statements for the year ended December 31, 2011, notes and accounting policies thereto included in the Company’s Annual Report on Form 10-K.

In the opinion of management, all adjustments (consisting only of normal recurring adjustments) which are necessary to provide a fair presentation of operating results for the interim periods presented have been made. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the year.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements, the Company had minimal revenue during the six months ended June 30, 2012, and has an accumulated deficit of $20,702,820 from its inception through that date. These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time.

Interim financial data presented herein are unaudited.

Formation of AlumiFuel Power International, Inc.

In February 2010, the Company formed its subsidiary, AFPI. In connection with the formation of the AFPI, the Company and AFPI executed a License Agreement through which AFPI received certain international marketing rights and the rights to utilize certain intellectual property from the Company for exploitation in countries and territories outside of North America in exchange for 25,000,000 shares of the Company's $0.001 par value common stock. In addition, the Company purchased 15,000,000 shares of AFPI common stock at $0.01 per share. On July 31, 2011, the Company and AFPI executed a Patent Purchase Agreement through which the Company sold AFPI the international patent rights to certain of the Company's intellectual property. In exchange for the sale of these rights, the Company received 7,500,000 shares of AFPI common stock valued at $10,275,000, the market value of the stock on the Deutsche Börse Frankfurt Stock Exchange on the agreement date. As of December 31, 2011, AFPI had issued a total of 13,911,864 shares of its common stock in the private placements, warrant exercises, stock issued to consultants and stock issued to officers and directors in exchange for fees. As a result, the total number of AFPI shares outstanding at December 31, 2011 and June 30, 2012 was 62,411,864.

During the six month period ended June 30, 2012, the Company sold a total of 300,000 shares of AFPI to a private investors for a total of Euro 30,000 or approximately $40,000 and recorded expense on the transfer of 3,000 shares to a consultant valued at $1,383 which is reflected on the statements of changes in stockholders' deficit. In addition, the Company purchased 15,378 shares at a cost of $5,676. As a result, the Company owned 47,073,213 shares of AFPI common stock at June 30, 2012. We maintain a custody account for our cash and securities in Germany which had a cash balance of $497 that is reflected as Cash on our balance sheet.

The Deutsche Börse Exchange recently announced the closing in December 2012 of the First Quotation Board, the exchange on which AFPI's common stock currently trades. The Company is exploring its options with respect to qualifying for the Entry Standard level of the Deutsche Börse, which has higher entry and trading standards. There is no assurance that AFPI will qualify for or be successful in listing on the Entry Standard. Accordingly, the Company is also exploring the feasibility of listing AFPI's common stock one or more foreign junior stock exchanges should listing on the Deutsche Börse not be available.

The value of all shares of AFPI held by the Company have been eliminated on consolidation of the financial statements at June 30, 2012 as intercompany accounts with 15,338,651 held by shareholders other than the Company representing 24.6% of the outstanding common shares of AFPI as of that date. This represents a non-controlling interest in AFPI that totaled $2,431,972 based on AFPI's outstanding total equity of $9,895,518 at June 30, 2012. In addition, $72,789 in the net loss of AFPI for the six month period ended June 30, 2012 has been attributed to the non-controlling interest of those stockholders.

Formation of AlumiFuel Power Technologies, Inc.

In December 2011, we formed a new wholly owned subsidiary, AlumiFuel Power Technologies, Inc. ("APTI"), but didn't begin significant operations until February 2012. APTI was formed as a separate entity to leverage the Company's hydrogen generation technology to take advantage of potential complimentary technologies.

Note 2: Summary of Significant Accounting Policies

Use of Estimates

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

Cash and Cash Equivalents

The Company considers all highly liquid securities with original maturities of three months or less when acquired to be cash equivalents. Cash equivalents at June 30, 2012 were $-0-.

Stock-based Compensation

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

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

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 June 30, 2012, the fair value of the Company’s financial instruments approximate their carrying value based on their terms and interest rates.

Loss per Common Share

Loss per share of common stock is computed based on the weighted average number of common shares outstanding during the period. Stock options, warrants, and common stock underlying convertible promissory notes are not considered in the calculations for the periods ended June 30, 2012 and June 30, 2011, as the impact of the potential common shares, which totaled approximately 2,510,140,000 (June 30, 2012) and 221,179,000 (June 30, 2011), would be anti-dilutive and decrease loss per share. Therefore, diluted loss per share presented for the three and six month periods ended June 30, 2012 and June 30, 2011 is equal to basic loss per share.

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

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

Revenue Recognition

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

Derivative Instruments

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

Recently issued accounting pronouncements

In June 2011, the FASB issued ASU 2011-05 to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of equity.  ASU 2011-05 will be effective for the Company beginning February 1, 2012, and the Company will be required to apply it retrospectively. The adoption of this standard may only impact the presentation of our financial statements and will have no impact on the reported results.

In May 2011, the FASB issued new authoritative guidance to provide a consistent definition of fair value and ensure that fair value measurements and disclosure requirements are similar between GAAP and International Financial Reporting Standards. This guidance changes certain fair value measurement principles and enhances the disclosure requirements for fair value measurements. This guidance is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The Company does not expect that the adoption of this guidance will have a material impact on its financial statements.

Note 3: Related Party

Related Party Accounts Payable

The Company's president and treasurer accrue a monthly management fee from the Company of $8,000 and 2,000 and from AFPI of $7,500 and $3,500, respectively, for their services as managers. This amount totaled $126,000 for the six month period ended June 30, 2012. As of June 30, 2012, the Company owed $129,293 to its officers for management services.

In September 2009, the Company's board directors authorized a bonus program for the Company's officers related to their efforts raising capital to fund the Company's operations. Accordingly, the Company's president and secretary are eligible to receive a bonus based on 50% of the traditional "Lehman Formula" whereby they will receive 2.5% of the total proceeds of the first $1,000,000 in capital raised by the Company, 2.0% of the next $1,000,000, 1.5% of the next $1,000,000, 1% of the next $1,000,000 and .5% of any proceeds above $4,000,000. The amount is capped at $150,000 per fiscal year. During the six month period ended June 30, 2012, the Company expensed $2,835 under this bonus plan, and of that $2,309 remained unpaid at that date.

API and/or AFTI pay a management fee of $6,500 per month to a company owned by the Company’s officers for services related to their bookkeeping, accounting and corporate governance functions. For the six months ended June 30, 2012, these management fees totaled $39,000. As of June 30, 2012, the Company owed $51,350 in accrued fees and related expenses.

The Company rents office space, including the use of certain office machines, phone systems and long distance fees, from a company owned by its officers at the rate of $1,200 per month, based on the amount of space occupied by the Company and use of the office equipment and services. Rent expense totaled $7,200 for the six months ended June 30, 2012.

Accounts payable to related parties consisted of the following at June 30, 2012:

Related Party Notes Payable

AlumiFuel Power Corporation

At June 30, 2012 and 2011, the Company owed $1,555 and $15,910, respectively, to its president for loans made to it from time-to-time on demand notes with 8% interest. These amounts include $700 and $30,200 loaned during the six month periods ended June 30, 2012 and 2011, respectively, along with payments of $16,007 in principal and $191 in accrued interest during the 2011 period. There was $44 and $462 in accrued interest payable at June 30, 2012 and 2011, respectively.

At both June 30, 2012 and 2011, the Company owed the president of API $1,511 in loans on demand notes with 8% interest. A payment of $2,988 in principal and $12 in accrued interest was made during the six months ended June 30, 2011. As of June 30, 2012 and 2011 there was accrued interest payable of $184 and $61, respectively.

During the six month period ended June 30, 2012, the Company's secretary loaned the Company $2,000 on a demand note with 8% interest. The entire principal balance on this note along with $1 in interest was repaid during the quarter leaving no balance due.

At June 30 2012 and 2011, the Company owed $531 and $78,698, respectively, to a company owned by its president on demand notes with 8% interest. These amounts include $12,160 and $83,600 loaned during the six month periods ended June 30, 2012 and 2011, respectively, along with payments of $11,736 in principal and $113 in accrued interest during the 2012 period and $22,248 in principal and $302 in interest during the 2011 period. There was $13 and $1,425 in accrued interest payable at June 30, 2012 and 2011, respectively.

At June 30 2012 and 2011, the Company owed $5,435 and $1,800, respectively, to a company affiliated with its Secretary on demand notes with 8% interest. These amounts include $4,500 loaned during the six month periods ended June 30, 2012. There was $408 and $121 in accrued interest payable at June 30, 2012 and 2011, respectively.

At both June 30, 2012 and 2011, the Company owed $2,165 in principal on certain promissory notes issued to a partnership affiliated with the Company’s president with interest rate of 8% and due on demand. As of June 30, 2012 and 2011, the Company owed $368 and 194, respectively, in accrued interest on these notes.

At both June 30, 2012 and 2011, the Company owed a partnership affiliated with its president and secretary $5,000 on a note with an interest rate of 8% per annum and due on demand. As of both June 30, 2012 and 2011, $5,000 in principal with $1,287 (2012) and $885 (2011) in accrued interest was payable at those dates.

At June 30, 2012 and 2012, the Company owed $3,976 and $1,681, respectively, to a company owned by the Company's officers on demand notes with an interest rate of 8%. These amounts include $15,950 and $1,500 loaned during the six month periods ended June 30, 2012 and 2011, respectively, along with payments of $13,242 in principal and $158 in accrued interest during the 2012 period and $20 in principal and $5 in interest during the 2011 period. There was $41 and $15 in accrued interest payable at June 30, 2012 and 2011, respectively.

At June 30, 2012 and 2012, the Company owed $12,476 and $41,266, respectively, to a corporation affiliated with the Company's officers on demand notes with interest at 8%. These amounts include payments of $7,107 in principal and $493 in accrued interest during the 2012 period and $7,134 in principal and $616 in interest during the 2011 period. There was $751 and $1,271 in accrued interest payable on these notes at June 30, 2012 and 2011, respectively.

At June 30, 2012 and 2011, the Company owed $350 and $19,500, respectively, to a corporation affiliated with the Company's officers on demand notes with an interest rate of 8%. No further loans or payments were made on these notes during either the 2012 or 2011 six month periods. There was $265 and $11 in accrued interest payable on these notes at June 30, 2012 and 2011, respectively.

During the six month period ended June 30, 2012, a corporation owned by the Company's secretary loaned the Company a total of $9,270 in various demand notes with interest of 8%. During the six month period ended June 30, 2012 a total of $6,270 in principal and $2 in interest was repaid leaving a balance of $3,000 in principal and $3 in accrued interest payable at June 30, 2012.

At June 30, 2012 and 2011, the Company owed $2,853 and $25,300, respectively, to an affiliate of the Company's president on notes carrying an interest rate of 8% per annum and due on demand. No additional loans or payments were made on these notes in 2012. During the six month period ended June 30, 2011, the noteholder sold the principal balance on $21,616 of these notes to an unaffiliated third party at which time the Company agreed to reissue new convertible notes for that amount. Also during the six month period ended June 30, 2011, $17,300 in additional loans were received from this entity. There was $139 and $1,932 in accrued interest payable on these notes at June 30, 2012 and 2011, respectively.

At June 30, 2012 and 2011, the Company owed $0 and $16,000 to an affiliate of the Company's president on notes due on demand at 8% interest. During the six month period ended June 30, 2011, this entity sold the principal balance on $16,000 of these notes to an unaffiliated third party at which time the Company agreed to reissue new convertible notes for that amount. During the six month period ended June 30, 2011, $7,000 in additional loans were received from this entity. There was $1,829 and $1,528 in accrued interest payable on these notes at June 30, 2012 and 2011, respectively.

During the six months ended June 30, 2011, a corporation affiliated with the Company's officers loaned $19,500 to the Company. These had an interest rate of 8% and were due on demand. The entire balance of these notes totaling $19,500 along with accrued interest of $11 remained unpaid at June 30, 2011. The entire balance of these notes was repaid in the third quarter of 2011 leaving an interest balance due of $536 on these notes at June 30, 2012.

HPI Partners, LLC

In 2009, various notes issued by HPI were converted to equity by its officers. Following those conversions, $235 in interest remained due and payable, which was outstanding at both June 30, 2012 and 2011.

Total

Total notes and interest payable to related parties consisted of the following at June 30, 2012:

Note 4: Notes Payable

AlumiFuel Power Corporation

At June 30, 2012 and 2011, the Company owed $209,050 and $48,650, respectively, to an unaffiliated trust at an interest rate of 8% and due on demand. During the six months ended June 30, 2012, the trust loaned the Company$236,250 and sold $33,150 in principal on these notes to an unaffiliated third party that converted that balance to common stock of the Company. Please see note Note 9 Capital Stock below for further information on this transaction. The Company made payments on these notes during the six month period ended June 30, 2012 totaling $3,785 in principal and $915 in accrued interest. During the six month period ended June 30, 2011, $42,849 of these notes were converted to 9,020,935 shares of our common stock and $900 in accrued interest was paid on these notes. There was $3,016 and $9,552 in accrued interest payable on these notes at June 30, 2012 and 2011, respectively.

At June 30, 2012 and 2011, the Company owed $32,732 and $37,208, respectively, to an unaffiliated third party with interest payable at 8% and due on demand. During the six month period ended June 30, 2012, no payments of principal or interest were made on these notes. During the six month period ended June 30, 2011, $37,150 in additional loans were received from this entity and the entity sold the principal balance on $16,500 of these notes to an unaffiliated third party at which time the Company agreed to reissue new convertible notes for that amount. There was $1,638 and $2,227 in accrued interest payable on these notes at June 30, 2012 and 2011, respectively.

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 $1,088 remained outstanding at June 30, 2012.

During the six month period ended June 30, 2012, an unaffiliated third party loaned us $13,000. This note was due on April 1, 2012 and carries an interest rate of 60% per annum. As of June 30, 2012, the entire $13,000 balance of this note was due with $2,286 in accrued interest payable.

During the six month period ended June 30, 2012, an unaffiliated third party loaned us $6,000 on a demand note with 8% interest. The entire principal balance of $6,000 with $225 in unpaid interest remained payable on these notes at June 30, 2012.

During the year ended December 31, 2010 a note payable in the amount of $30,000 was issued and repaid to an unaffiliated third party leaving an interest balance due of $57. This amount remained unpaid as of both June 30, 2012 and 2011.

AlumiFuel Power, Inc.

In November and December 2011, the API issued three promissory notes payable to an unaffiliated third party for a total of $60,000 in accounts receivable financing. These notes are due on or before April 1, 2012 and accrue 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 was repaid from proceeds received on accounts receivable related to the sale of the Company's PBIS-2000 portable balloon inflation system and related AlumiFuel cartridge sales to the United State Air Force. A total of $2,400 in funding and administration fees were paid during the six months ended June 30, 2012. As of June 30, 2012, the entire principal balance had been repaid but $3,450 in unpaid administration fees were due and payable.

AlumiFuel Power International, Inc.

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 during the quarter ended June 30, 2011. No further payments have been made on this note leaving a balance due at both June 30, 2012 and 2011 of $25,000 with interest payable of $4,274 (2012) and $1,298 (2011).

During the quarter ended March 31, 2012, $26,100 in accrued interest payable to an unaffiliated third party was converted to a convertible promissory note leaving an interest balance due on June 30, 2012 of $5.

HPI Partners, LLC

In 2009, various notes issued by HPI were converted to equity by third parties. Following those conversions, $647 in interest remained due and payable, which was outstanding at both June 30, 2012 and 2011.

Total

Notes and interest payable to others consisted of the following at June 30, 2012:

Certain of our demand promissory notes contain provisions for conversion to common stock at market price on the date of conversion.

AlumiFuel Power Corporation Convertible Promissory Notes and Debentures

Convertible Notes and Debentures with Embedded Derivatives:

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

Convertible Debentures

In September 2009 through January 2010 we issued $435,000 of 6% unsecured convertible debentures in transactions with private investors (the “Debentures”).

Among other terms of the offering, the Debentures are due in January 2013 (the “Maturity Date”), unless prepayment of the Debentures is required in certain events, as called for in the agreements. The Debentures are convertible at a conversion price (the “Conversion Price”) for each share of common stock equal to 75% of the lowest closing bid price per share (as reported by Bloomberg, LP) of the Company’s common stock for the twenty (20) trading days immediately preceding the date of conversion. In addition, the Debentures provide for adjustments in the case of certain corporate actions.

Each Debenture bears interest, in arrears, at six percent (6%) per annum, payable (i) upon conversion, or (ii) on the Maturity Date, in cash or shares of our common stock at the Conversion Price with a default interest rate of eighteen percent (18%) per annum.

The Company may redeem the Debentures for an amount now equal to 131%.

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

Debt issuance costs totaling $188,810 are being amortized over the three year terms of the Debentures or such shorter period as the debentures may be outstanding. Accordingly, as the debentures are converted to common stock, that amount of debt issuance costs attributable to the amounts converted will be accelerated and expensed as of the applicable conversion dates. As of June 30, 2012, $173,270 of these costs had been expensed as debt issuance costs.

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

During the six months ended June 30, 2012, the debenture holders have converted a total of $84,000 in face value of the debentures to 186,333,333 shares of our common stock, or $0.00045 per share. As a result of these transactions, the Company recorded a decrease to the derivative liability of $113,929 and as of June 30,2012, the total face value of the Debentures outstanding was $69,500.

The fair value of the Debentures was calculated at June 30, 2012 utilizing the following assumptions:

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"):

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.

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 $142,500 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 June 30, 2012, $9,822 of these costs had been expensed as debt issuance costs. At December 30, 2011, the unpaid principal balance on these notes was $117,500.

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

During the six month period ended June 30, 2012, the note holders converted the entire $139,000 in face value and $3,000 in accrued interest to 338,043,746 shares of our common stock, or $0.0004 per share. As a result of these transactions, the Company recorded a decrease to the derivative liability of $225,500 for the converted notes as of June 30, 2012, and the total face value of the 2011 Convertible Notes outstanding was $13,500.

At June 30, 2012, the Company revalued the derivative liability balance of the remaining outstanding 2011 Convertible Notes. As a result, for the period from their issuance to June 30, 2012, the Company has recorded an adjustment and reduced the previously recorded liabilities by $208,682 resulting in a derivative liability balance of $27,000 at June 30, 2012.

The fair value of the Debentures was calculated at June 30, 2012 utilizing the following assumptions:

2012 Convertible Notes

During the six month period ended June 30, 2012, the Company entered into four separate note agreements with an institutional investor for the issuance of a convertible promissory notes in the aggregate amount of $134,000 on the following dates and in the following amounts (together the "2012 Convertible Notes"):

Among other terms, the 2012 Convertible Notes are due on the dates above, unless prepayment is required in certain events, as called for in the agreements. The 2012 Convertible Notes are convertible at a conversion price (the “Conversion Price”) for each share of common stock equal to 50% of the average of the lowest three trading prices per share of the Company’s common stock for the ten (10) trading days immediately preceding the date of conversion. In addition, the 2012 Convertible Notes provide for adjustments for dividends payable other than in shares of common stock, for reclassification, exchange or substitution of the common stock for another security or securities of the Company or pursuant to a reorganization, merger, consolidation, or sale of assets, where there is a change in control of the Company.

The outstanding principal balance the 2012 Convertible Notes bear interest at eight percent (8%) per annum, payable in cash or shares of our common stock at the Conversion Price. Upon the occurrence of an Event of Default (as defined in the 2012 Convertible Notes), the Company is required to pay interest to the Holder of each outstanding note at twenty-two percent (22%) per annum and the Holder may at its option declare the 2012 Convertible Notes, together with all accrued and unpaid interest, to be immediately due and payable.

The Company is able at its option to prepay the 2012 Convertible Notes beginning ninety-one days following their issuance until 180 days following their issuance in an amount equal to 150% of the outstanding principal and interest. Further terms called for the Company to maintain sufficient authorized shares reserved for issuance under the 2012 Convertible Notes.

We received net proceeds from the 2012 Convertible Notes of $124,000 after debt issuance costs of $10,000 paid for lender legal fees. These debt issuance costs will be amortized over the terms of the 2012 Convertible Notes or such shorter period as the Notes may be outstanding. Accordingly, as the 2012 Convertible Notes are converted to common stock prior to their expiration date, that amount of debt issuance costs attributable to the amounts converted will be accelerated and expensed as of the applicable conversion dates. As of June 30, 2012, $3,889 of these costs had been expensed as debt issuance costs.

The beneficial conversion feature (an embedded derivative) included in the 2012 Convertible Notes resulted in total initial debt discounts of $134,000 and a total initial loss on the valuation of derivative liabilities of $96,167 for a derivative liability balance of $230,167 total for their issuances.

The fair value of the 2012 Convertible Notes was calculated at each issue date utilizing the following assumptions:

At June 30, 2012, the Company revalued the derivative liability balance of the remaining outstanding 2011 Convertible Notes. As a result, for the period from their issuance to June 30, 2012, the Company has recorded an adjustment and increased the previously recorded liabilities by $27,833 resulting in a derivative liability balance of $258,000 at June 30, 2012.

The fair value of the Debentures was calculated at June 30, 2012 utilizing the following assumptions:

Converted AFPI Notes

In November and December 2011, two holders of certain demand promissory notes issued by AFPI totaling $125,000 sold them to an unaffiliated third party investor. As part of this transaction, the Company agreed to amend the terms of the convertible notes for the new holder (the "Converted AFPI Notes"). These notes in the amounts of $50,000, $50,000 and $25,000 were past due, carry had an effective interest rate of 48% in the case of the two $50,000 notes, and 12% in the case of the $25,000 note. We agreed to allow conversion of the Converted AFPI Notes into shares of our common stock at a 50% discount to the lowest three trading prices in the ten days prior to conversion. The principal balance on these notes was $85,000 at December 31, 2011. In addition, in January 2012, we agreed to convert $22,500 in accrued interest on these notes to a convertible note with the same conversion terms, interest at a rate of 8% and due in 12 months.

The beneficial conversion feature (an embedded derivative) included in the Converted AFPI Notes resulted in an initial debt discount of $147,500 and an initial loss on the valuation of derivative liabilities of $110,133 for a derivative liability balance of $257,633 at issuance.

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

During the six month period ended June 30, 2012, the note holders converted $85,000 face value of the notes to 201,271,021 shares of our common stock, or $0.0004 per share. As a result of these transactions, the Company recorded a decrease to the derivative liability of $158,929 for the converted notes and as of June 30, 2012, and the total face value of the Converted AFPI Notes outstanding was $22,500.

At June 30, 2012, the Company revalued the derivative liability balance of the remaining outstanding Converted AFPI Notes. As a result, for the period from their issuance to June 30, 2012, the Company has recorded an adjustment and decreased the previously recorded liabilities by $212,633 resulting in a derivative liability balance of $45,000 at June 30, 2012.

The fair value of the Debentures was calculated at June 30, 2012 utilizing the following assumptions:

November 2011 Note

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

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

During the three month period ended March 31, 2012, the note holders converted the entire $39,000 face value of the notes to 73,666,667 shares of our common stock, or $0.0005 per share. As a result of these transactions, the Company recorded a decrease to the derivative liability of $55,714 for these notes and as of March 31, 2012 and June 30, 2012, the total face value of the Debentures outstanding was $-0-.

January 2012 Convertible Notes

In January 2012 we issued two convertible notes of $25,000 each for a total of $50,000 to an unaffiliated third party investor. These notes are due six months from issuance, carry interest at 10% per annum and are convertible at $0.0012 per share. The Company has determined that the conversion feature does not represent an embedded derivative as the conversion price was known and was not variable making it conventional. The Company determined there was a beneficial conversion feature related to the January 2012 Convertible Notes based on the difference between the conversion price of $0.0012 and the market price of the Company’s common stock on the issue dates and recorded as interest expense $4,167 with an offset to additional paid-in capital.

January 2012 Interest Note

In January 2012, we converted a total of $26,100 in interest payable on $75,000 in notes of the Company and AFPI to a unaffiliated note holder to a convertible note. This note is due in January 2013 and carries an interest rate of 8% per annum. The note is convertible into shares of our common stock at a 50% discount to the lowest three trading prices in the ten days prior to conversion.

The beneficial conversion feature (an embedded derivative) included in the January 2012 Interest Note resulted in an initial debt discount of $26,100 and an initial loss on the valuation of derivative liabilities of $11,186 for a derivative liability balance of $37,286 at issuance.

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

At June 30, 2012, the Company revalued the derivative liability balance of the remaining outstanding January 2012 Interest Note. As a result, for the period from their issuance to June 30, 2012, the Company has recorded an adjustment and increased the previously recorded liabilities by $37,286 resulting in a derivative liability balance of $52,200 at June 30, 2012.

The fair value of the convertible note was calculated at June 30, 2012 utilizing the following assumptions:

Total

Total debentures and convertible notes and interest payable consisted of the following at June 30, 2012:

Note 5: Notes Receivable

From time-to-time beginning in 2008, the Company has loaned funds to FastFunds Financial Corporation (“FFFC”), an affiliate in which the Company is a 35% stockholder, to assist FFFC in payment of its ongoing payment obligations. This amount totaled $307,578 at December 31, 2011. An additional $8,780 in loans were made during the six months ended June 30, 2012 Each of these outstanding loans carries an interest rate of 8% per annum and are due on demand. Management of the Company evaluated the likelihood of payment on these notes and has determined that an allowance of the entire balance due is appropriate. Accordingly, the Company recorded bad debt expense totaling $307,578 including $8,780 in the six month period ended June 30, 2012. The Company has allowed for all interest due on these notes and did not record any interest receivable during the six month period ended June 30, 2012. During the six month period ended June 30, 2012, however, FFFC made interest payments totaling $31,680 which was recorded against interest expense during the quarter.

As of June 30, 2012, the Company had $8,000 due from an affiliated publicly traded company. This note carries interest at 8% per annum and is due on demand. The entire principal balance of $8,000 plus $421 in accrued interest remained receivable at June 30, 2012.

Note 6: Other Expense

Other expense for the three and six month periods ended June 30, 2012 and 2011 consisted of the following:

Note 7: Commitments and Contingencies

Payroll Liabilities

Following the formation of API in May 2008, the HPI hired certain former employees of Hydrogen Power, Inc. and maintained an office in Seattle, Washington for a period of approximately five months. During that time, the HPI paid wages to these employees without the benefit of a payroll management service. Upon the HPI’s move from Seattle to Philadelphia, Pennsylvania in October 2008, the Company retained the services of a payroll management service to handle its payroll functions. As a result, the Company recorded $52,576 in payroll liabilities due from wages paid to its employees and has increased that amount quarterly for penalties and interest leaving a total due of $95,158 at December 31, 2011. The company recorded additional expense of $7,358 during the six months ended June 30, 2012 leaving a balance due of $102,518 as of that date. This amount is included on the balance sheets at June 30, 2012 as “payroll liabilities”. In addition, the president of API converted $138,462 in wages payable to him to shares of the Company's Series B Preferred Stock in August 2011. We have recorded a total of $8,629 for payroll liabilities due by the Company on this conversion for total payroll liabilities of $111,147.

Office Lease Agreement

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

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

Capital Leases

In April 2010 we leased a copier for a period of three years at $129 per month. The contract includes a buyout at lease end for $1 at which time we will own the machine. We have capitalized the value of this machine at January 1, 2011 in the amount of $3,240 based on the then current value with an expected life of 3 years from the lease date and are depreciating this asset over that period. That amount was included in "property and equipment" under the assets portion of our balance sheet with the corresponding liability for future payments placed under "capital leases" in our liabilities. As each monthly payment is made, the amount under capital leases is reduced to reflect the balance due under the lease. Accordingly, a total of $389 was reduced in the "capital leases" account for payments made in the six month period ended June 30, 2012, leaving a balance of $1,166 as of that date.

Note 8: Income Tax

The Company records its income taxes in accordance with Statement of Financial Accounting Standard No. 109, “Accounting for Income Taxes”. The Company has incurred significant net operating losses since inception resulting in a deferred tax asset, which was fully allowed for; therefore, the net benefit and expense resulted in $-0- income taxes.

Note 9: Capital Stock

Preferred Stock

During the six months ended June 30, 2012, 6,250 shares ($6,250) of our Series B Preferred Stock were converted to 10,593,220 shares of our common stock. We recorded an expense of $8,580 for the difference in the conversion price ($0.00059) and the market price on the conversion date. This amount is included in "stock based compensation" on our statements of operations.

Also during the six month period ended June 30, 2012, we redeemed a total of 110,857 shares ($110,857) of our Series B Preferred Stock. The Series B Preferred includes a redemption premium of 5% during the first year of issuance therefore the total redemption amount was $116,400. The balance of $5,543 for the redemption premium was recorded as interest expense on our statements of operations for the period ended June 30, 2012.

As a result of these transactions there were 404,055 shares of our Series B Preferred Stock outstanding at June 30, 2012. There were $29,452 in dividends payable on our Series B Preferred stock at June 30, 2012, including $17,049 in dividend expense for the six month period then ended.

Common Stock

During the period six month period ended June 30, 2012, the Company issued 10,000,000 shares of common stock in a private placement to unaffiliated investors for total proceeds of $5,000 or $0.0005 per share. We recorded $6,000 in "stock compensation cost" in our statements of operations for the six months ended June 30, 2012 to record the beneficial conversion feature relating to the difference between the market price and the sales price on the date of issuance.

During the six month period ended June 30, 2012, we issued a total of 799,324,766 shares of our common stock on the conversion of $352,849 in principal and interest on our various convertible promissory notes. In addition to the face value of the notes, the Company recorded $495,358 in additional expense for the derivative liability for a total cost to the Company of $848,207 or $0.001 per share.

During the six month period ended June 30, 2012, we issued 66,300,000 shares of our common stock to a noteholder upon conversion of $33,150 in promissory notes. In addition to the face value of the notes, the Company recorded $58,410 in additional expense for the difference between the conversion price ($0.0005) and the market price on the issuance dates for a total cost to the Company of $91,560 or $0.0014 per share.

In May 2012, we executed a consulting agreement with an unaffiliated third party through which we paid the consultant 20,000,000 shares of our common stock valued at $20,000 reflecting the market price on the date of issuance. In addition, we issued three year warrants to purchase up to 30,000,000 shares of our common stock at exercise prices of $0.0015 (10,000,000 shares), $0.002 (10,000,000 shares) and $0.004 (10,000,000 shares). These warrants were valued at $25,000 using the Black-Scholes option pricing model. As the consulting agreement carries a six month term, the value of the shares and warrants totaling $45,000 will be expensed over that six month term. Accordingly, the Company recorded $9,000 in "stock-based compensation" expense in the six month period ended June 30, 2012.

In May 2012, we issued 60,000,000 shares to three unaffiliated purchasers of common stock that participated in private placements of our common stock in the previous six months. Due to delays in issuing the stock to these investors, the Company agreed to lower the purchase price for the shares to $0.003 per share. We recorded a total of $60,000 as "stock compensation cost" in our statements of operations for the six months ended June 30, 2012 based on the market value of these shares on the date of issuance.

Warrants

In May 2012, we executed a consulting agreement with an unaffiliated third party through which we issued three year warrants to purchase up to 30,000,000 shares of our common stock at exercise prices of $0.0015 (10,000,000 shares), $0.002 (10,000,000 shares) and $0.004 (10,000,000 shares). These warrants were valued at $25,000 using the Black-Scholes option pricing model. As the consulting agreement carries a six month term, the value of the warrants totaling $25,000 will be expensed over that six month term of the agreement.

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 June 30, 2012:

Stock Options

All options outstanding at June 30, 2012 are fully vested and exercisable. A summary of outstanding stock option balances under the 2005 Stock Incentive Plan and the 2009 Stock Incentive Plan at December 31, 2011 and at June 30, 2012 is as follows:

2005 Stock Incentive Plan

2009 Stock Incentive Plan

Note 10: Subsequent Events

During the month ended July 31, 2012, we issued an additional 230,000,000 shares of our common stock upon the conversion of a total of $18,250 principal value of various convertible notes.

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

Item 2. 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 we have prepared 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, our auditors have raised a substantial doubt about our ability to continue as a going concern in their audit reports for the years ended December 31, 2011 and 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. Our steam/hydrogen output is also being designed to drive turbine-based underwater propulsion systems and auxiliary power systems. 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.

We have completed the design and engineering modifications necessary and have begun limited production of our Portable Balloon Inflation Systems. In October 2011,we announced we were awarded a contract to deliver a PBIS-2000 Portable Balloon Inflation System to the Air Force Special Operations Command (AFSOC). This unit was delivered in April 2012 and includes 360 cartridges as well as a spare parts kit, a tool kit and two days of training by our engineers at the customer’s site. 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).

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 $1,000,000 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 six months ended June 30, 2012, we received a net of approximately $310,032 from our financing activities, primarily from the issuance of notes payable from various sources totaling $477,750 as well as sales of Company common stock totaling $11,000 and sales of AFPI stock by the Corporation of $41,038. This was offset by payments on notes payable totaling $97,921 as well as redemptions of preferred stock of $110,857. This compared to cash provided by financing activities of $317,640 in the six months ended June 30, 2011 derived from proceeds from the issuance of notes payable totaling $458,150 and sales of AFPI common stock of $20,000. This was offset by payments on notes payable of $150,510.

In the six month period ended June 30, 2012, net cash used in operating activities was $308,615. This compared to net cash used in operating activities of $320,056 for six month period ended June 30, 2011. The 2012 amount included a $1,262,001 net loss that included approximately $755,700 in non-cash charges and credits to operating assets and liabilities primarily from amortization of discount on debentures payable and an increase in derivative liability on the Company's convertible notes and debentures of totaling $585,937. This compares to a net loss of $1,121,064 in the six months ended June 30, 2011 that included a non-cash loss of approximately $416,000 primarily from stock based compensation expense of $345,833 related to the issuance of stock to consultants that was offset by a decrease in derivative liability on the Company's convertible notes of $195,660.

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. This includes no assurance that we will be successful in our efforts to raise capital through sales of AFPI common stock on the European markets. Our inability to access various capital markets or acceptable financing could have a material adverse 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.

During the remainder of our fiscal year and for the foreseeable future, we will be concentrating on raising the necessary working capital through acceptable debt instruments and equity financing to insure our ability to continue our research and implement other business strategies including funding our newly acquired alternative energy business. To the extent that additional capital is raised through the sale of equity or equity related securities such as convertible notes, the issuance of such securities has resulted and will continue to result in significant dilution to our current shareholders.

(b) Results of Operations

Six Month Period ended June 30, 2012 vs. June 30, 2011

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, was delivered in April 2012. Accordingly, the Company did not recognize the revenue from this sale in the amount of $61,134 until delivery of the unit early in the second quarter of 2012.

The Company recorded an asset as "Work in progress" totaling $31,092 on our balance sheet at March 31, 2012, reflecting the cost of producing the PBIS-2000 through that date. This amount included parts, labor and other expenses directly related to production of the PBIS-2000 and AlumiFuel cartridges being manufactured for sale under the Air Force contract. Upon payment for the unit in the quarter ended June 30, 2012, a total of $32,918 for costs related to producing the PBIS-2000 was expensed and is presented on our statements of operations a "Cost of goods sold".

For the six month period ended June 30, 2012, our total revenue was $61,134 from the sale of a PBIS-2000 unit and AlumiFuel cartridges versus $2,574 from fees related to subcontracting on a U.S. Navy Unmanned Underwater Vehicle development project in the 2010 period. The costs of goods sold related to production of the PBIS-2000 reactor for the six month period ended June 30, 2012 was $32,918 for gross profit of $28,216 for the period. Similar costs of goods sold for the six month period in 2010 was $123 for gross profit of 2,451. The loss from operations for the six month period ended June 30, 2012 was $583,483 versus $1,014,536 in the six month period ended June 30, 2011. Due to a credit from a vendor of an overcharge from 2011, reactor production costs were $(7,088) for the six months ended June 30, 2012. The losses included $157,335 and $218,125 in 2012 and 2011, respectively, comprised of related party expense that included officer and key employee management fees as well as rent paid to related parties. These amounts were lower in 2012 due to a decrease in related parties. The losses also include $83,581 and $345,833 in stock based compensation primarily for costs related to the issuance of common stock to consultants in both periods as well as shares issued to stockholders for delays in issuance of private placement certificates in 2012.

The balance of $376,104 and $450,787 for “other” SG&A expenses in the six month periods ended June 30, 2012 and June 30, 2011 was comprised of the following:

The “other” SG&A expense during the nine months ended September 30, 2011 included a decrease in general and administrative expenses as the Company worked to keep costs down with across the board expense cuts. Salaries and benefits decreased due to the loss of subsidiary employees. Legal and accounting costs also decreased. Professional services increased as the Company experienced increases in consulting fees during the 2012 period as compared to the 2011 period including significant costs related to a custodian account in Europe related to its International subsidiary.

The company recorded $(678,518) in “other income (expense)” during the six months ended June 30, 2012 as compared to $(106,538) in the six months ended June 30, 2011. This incrase is primarily attributed to fair value adjustments of derivative liabilities related to the Company's various convertible notes as the Company's stock price has decreased. The Company experienced increases in interest expense with the addition of additional notes payable in the 2012 period versus the 2011 period as well as for beneficial conversion features on debt converted to stock for the difference in the conversion price versus the market price on the conversion date.

Three Month Period ended June 30, 2012 vs. June 30, 2011

For the three month period ended June 30, 2012 we recorded revenue of $61,134 from the sale of one PBIS-2000 unit and accompanying AlumiFuel cartridges as compared to revenue of $2,574 from fees related to subcontracting on a U.S. Navy Unmanned Underwater Vehicle development project during the three month period ended June 30, 2011. Costs of goods sold were $32,918 in the three month period ended June 30, 2012 for gross profit of $28,216. Our total operating costs and expenses in 2012 were $274,335 versus $342,976 for the three month period in 2011. The loss included $72,975 and $102,525 in 2012 and 2011, respectively, comprised of related party expense that included officer and key employee management fees as well as rent paid to related parties. These amounts were lower in 2012 with the decrease in 2011 in related parties at the Company's subsidiaries. The 2012 expense also includes $69,000 in stock based compensation for costs related to the issuance of common stock on the conversion of Series B Preferred and the issuance of restricted stock at a below market price. Stock based compensation expense totaled $25,000 in the three months ended June 30, 2011 primarily for costs related to the issuance of stock to consultants during that period.

The balance of $131,773 and $214,744 for “other” SG&A expenses in the three month periods ended June 30, 2012 and June 30, 2011 was comprised of the following:

The “other” SG&A expense during the three months ended June 30, 2012 included a decrease in general and administrative expenses as the Company worked to keep costs down, specifically office rent. Salaries and benefits decreased due to a decrease in subsidiary employees. Legal and accounting costs also decreased at the subsidiary level. Professional services increased as the Company incurred significant fees related to its custodian account in Europe related to sales of small portions of the Company's stock in AFPI. There were no similar fees during the June 30, 2011 period.

The company recorded $(274,335) in “other income (expense)” during the three months ended June 30, 2012 as compared to $(342,975) in the three months ended June 30, 2011. This decrease is primarily attributed to fair value adjustments of derivative liabilities related to the Company's various convertible notes with the decrease in the notes outstanding and resultant decrease in the fair value adjustment expense. Interest expense, amortization of convertible note discount showed no significant changes for the comparable periods.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable

Item 4T. 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 concluded that as of June 30, 2012 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:

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 primarily in the hands of two individuals. This limited segregation of duties represents a material weakness. We will continue to periodically review our disclosure controls and procedures and internal control over financial reporting and make modifications from time to time considered necessary or desirable.

This Quarterly 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.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 2. Unregistered Sales of Equity Securities

In May 2012, we executed a consulting agreement with an unaffiliated third party through which we paid the consultant 20,000,000 shares of our common stock valued at $20,000 reflecting the market price on the date of issuance of $0.001.

In May 2012, we issued 60,000,000 shares to three unaffiliated purchasers of common stock that participated in private placements of our common stock in the previous six months. Due to delays in issuing the stock to these investors, the Company agreed to lower the purchase price for the shares to $0.003 per share. We recorded a total of $60,000 as "stock compensation cost" in our statements of operations for the six months ended June 30, 2012 based on the market value of these shares on the date of issuance.

During the three month period ended June 30, 2012, we issued a total of 490,591,451 shares of our common stock on the conversion of $153,100, or $0.0003 per share, in principal and interest on our various convertible promissory notes.

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 3. Defaults upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None

Item 5. Other Information

None.

Item 6. Exhibits

SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.