AlumiFuel Power Corp - Quarter Report: 2013 September (Form 10-Q)

afpw_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended SEPTEMBER 30, 2013

o TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______to_______

Commission File No. 333-57946

ALUMIFUEL POWER CORPORATION

(Exact Name of Registrant as Specified in its Charter)

Nevada		88-0448626
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)

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 x 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.

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	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

Number of shares of common stock outstanding at November 1, 2013: 327,761,772

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Index to Financial Statements

(Unaudited)

		Page

	Consolidated Balance Sheets at September 30, 2013 (Unaudited) and December 31, 2012		F-2

	Consolidated Statement of Operations for the Three and Nine months ended September 30, 2013 and the Three and Nine months ended September 30, 2012 (Unaudited)		F-3

	Consolidated Statement of Changes in Shareholders' Deficit for the Nine months ended September 30, 2013 (Unaudited)		F-4

	Consolidated Statement of Cash Flows for the Nine months ended September 30, 2013 and the Nine months ended September 30, 2012 (Unaudited)		F-5

	Notes to Financial Statements		F-6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		30

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		33

Item 4T.	Controls and Procedures		33

Part II – Other Information			35

	Signatures		36

F-1

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

	September 30,			December 31,
	2013			2012
	(Unaudited)
Assets
Cash	$	5,653		$	5,216
Deposits		-			313
Prepaid expenses		-			-
Notes receivable (Note 4)		8,000			8,000
Work in progress (Note 1)		-			18,732
Other current assets		1,222			744

Total current assets		14,875			33,005

Property and equipment, less accumulated depreciation
of $7,199 (2013) and $5,780 (2012) (Note 1)		281			1,111
Deferred debt issuance costs (Note 4)		4,500			12,340

Total long-term assets		4,781			13,451

Total assets	$	19,656		$	46,456

Liabilities and Shareholders’ Deficit

Current liabilities:
Accounts and notes payable:
Accounts payable, related party (Note 3)	$	365,303		$	336,639
Accounts payable, other		531,642			571,424
Derivative liability, convertible notes payable (Note 4)		558,989			693,269
Notes payable, related party (Note 3)		47,129			27,207
Notes payable, other (Note 4)		594,031			489,373
Convertible notes payable, net of discount of
$63,921 (2013) and $137,253 (2012) (Note 4)		388,951			244,247
Litigation contingency (Note 7)		-			360,803
Payroll liabilities (Note 7)		130,170			118,647
Accrued expenses (Note 7)		453,846			298,463
Dividends payable (Note 9)		69,924			45,747
Accrued interest payable:
Interest payable, convertible notes (Note 4)		88,933			69,205
Interest payable, related party notes (Note 3)		8,912			7,008
Interest payable, notes payable other (Note 4)		57,244			30,521

Total current liabilities		3,295,074			3,292,553

Capital leases (Note 7)		-			389

Long-term convertible notes payable net of current portion, net of discount of $384 (2013) and $32,083 (2012)		1,116			2,917

Total long-term liabilities		1,116			3,306

Total liabilities		3,296,190			3,295,859

Commitments and contingencies		-			-

Shareholders’ deficit: (Notes 1 & 9)
Preferred stock, $.001 par value; 10,000,000 shares authorized,
404,055 (2013) and 404,055 (2012) shares
issued and outstanding		404,055			404,055
Common stock, $.001 par value; 500,000,000 (2013) and
7,500,000,000 (2012) shares authorized,
235,920,054 (2013) and 22,238,636 (2012) shares
issued and outstanding		235,920			22,239
Additional paid-in capital		14,598,928			14,543,507
Accumulated deficit		(22,522,029	)		(21,746,084	)

Total shareholders' deficit of the Company		(7,283,126	)		(6,776,283	)

Non-controlling interest (Note 1)		4,006,592			3,526,880

Total shareholders' deficit		(3,276,534	)		(3,249,403	)

Total liabilities and shareholders' deficit	$	19,656		$	46,456

See accompanying notes to consolidated financial statements.

F-2

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

	Three months			Three months			Nine months			Nine months
	ended			ended			ended			ended
	September 30,			September 30,			September 30,			September 30,
	2013			2012			2013			2012

Revenue (Note 1)
Reactor sales	$	-			-		$	13,440			61,134
Consulting fees		-		$	-			-		$	-
Total revenue		-			-			13,440			61,134

Cost of goods sold (Note 1)		-			-			(21,421	)		(32,918	)

Gross loss		-			-			(7,981	)		28,216

Operating costs and expenses:
Reactor production		-			-			-			(7,089	)
Product development expense (Note 1)		-			-			-			593
Selling, general and administrative expenses
Related party (Note 3)		83,711			93,525			250,780			250,860
Stock-based compensation (Note 9)		-			37,500			3,239			121,081
Depreciation		84			588			831			1,763
Other (Note 6)		105,380			118,135			331,662			494,239

Total operating costs and expenses		(189,176	)		(249,748	)		(586,512	)		(861,447	)

Loss from operations		(189,176	)		(249,748	)		(594,493	)		(833,231	)

Other income (expense)
Litigation contingency (Note 7)		-			-			351,232			-
Interest (expense) income, amortization
of convertible note discount (Note 4)		(102,159	)		(80,647	)		(341,025	)		(374,315	)
Interest expense (Notes 3 & 4)		(34,036	)		6,616			(85,382	)		(81,782	)
Fair value adjustment of derivative liabilities (Note 4)		(11,485	)		(35,000	)		(106,277	)		(331,452	)
		(147,679	)		(109,031	)		(181,452	)		(787,549	)

Loss before income taxes		(336,855	)		(358,779	)		(775,945	)		(1,620,780	)

Income tax provision (Note 8)		-			-			-			-

Net loss		(336,855	)		(358,779	)		(775,945	)		(1,620,780	)

Net loss attributable to non-controlling interest (Note 1)		21,950			11,800			48,472			29,689

Net loss attributable to Company	$	(314,905	)	$	(346,979	)	$	(727,473	)	$	(1,591,091	)

Basic and diluted loss per common share	$	(0.01	)	$	(0.03	)	$	(0.02	)	$	(0.22	)

Weighted average common shares
outstanding (Notes 1 & 9)		131,161,731			11,605,069			47,407,115			7,320,910

See accompanying notes to consolidated financial statements.

F-3

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Statement of Changes in Shareholders’ Deficit

Nine months ended September 30, 2013

(Unaudited)

	Common stock				Preferred stock				Additional paid-in			Accumulated			Non-controlling		Total shareholders
	Shares		Par value		Shares		Par value		capital			deficit			interest		deficit

Balance at December 31, 2012 (Restated)		22,238,636	$	22,239		404,055	$	405,055		14,543,507		$	(21,746,084	)	$	3,526,880	$	(3,249,403	)

May 2013, Reverse stock split (1 for 200)
shares issued for fractional shares		641		-		-		-		-			-			-		-

January through September 2013, issuance of common
stock to convertible noteholders (Notes 4 & 9)		211,840,777		211,841		-		-		515,411			-			-		727,252

January through September 2013, issuance of common
stock on conversion of debt (Notes 4 & 9)		1,840,000		1,840		-		-		34,960			-			-		36,800

January through September 2013, dividends on Series B
Preferred Stock (Note 9)		-		-		-		-		(24,178	)		-			-		(24,178	)

January through September 2013, issuance of warrants
to purchase common stock (Note 9)		-		-		-		-		3,239			-			-		3,239

Issuance of equity by AlumiFuel Power International,
Inc. subsidiary, net of non-controlling interest (Note 1)		-		-		-		-		5,700			-			-		5,700

Equity of AlumiFuel Power International,
Inc. subsidiary, net of non-controlling interest (Note 1)		-		-		-		-		(479,711	)		-			431,240		(48,471	)

Net loss		-		-		-		-		-			(775,945	)		48,472		(727,473	)

Balance at September 30, 2013		235,920,054	$	235,920		404,055	$	405,055	$	14,598,928		$	(22,522,029	)	$	4,006,592	$	(3,276,534	)

See accompanying notes to consolidated financial statements.

F-4

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

	Nine months			Nine months
	ended			ended
	September 30,			September 30,
	2013			2012

Cash flows from operating activities:
Net loss	$	(775,945	)	$	(1,620,780	)
Adjustments to reconcile net loss to net cash
used by operating activities:
Non-cash interest expense (Note 9)		254,886			62,577
Stock based compensation (Note 9)		3,239			121,081
Debt issuance costs (Note 4)		14,340			31,084
Beneficial conversion feature (Note 9)		18,400			-
Allowance for bad debt (Note 5)		-			8,780
Recovery of bad debt expense (Note 5)		(87,200	)		-
Depreciation and amortization		831			1,764
Change in fair value of derivative liability (Note 4)		(88,926	)		366,436
Amortization of discount on debentures payable (Note 3)		266,934			335,148
Change in non-controlling interest (Note 1)		(42,655	)		(5,108	)
Changes in operating assets and liabilities:
Accounts and other receivables		60,321			(9,260	)
Work in progress		18,732			(9,000	)
Prepaid expenses and other assets		314			472
Accounts payable and accrued expenses		(157,067	)		197,475
Related party payables (Note 3)		28,663			136,033
Dividends payable (Note 9)		24,177			(25,197	)
Interest payable		78,929			23,190
Net cash used in operating activities		(382,027	)		(385,305	)

Cash flows from investing activities:
Purchase of equipment		-			-
Issuance of notes receivable (Note 5)		-			-
Net cash used in investing activities		-			-

Cash flows from financing activities:
Proceeds from convertible notes (Note 4)		131,000			219,000
Proceeds from notes payable, related (Note 3)		24,600			52,470
Proceeds from notes payable, other (Note 4)		268,600			313,990
Prodeeds from sales of notes receivable (Note 5)		25,000			-
Proceeds from sales of common stock (Note 9)		-			5,000
Proceeds from sales of subsidiary equity (Notes 1 & 9)		-			62,782
Proceeds from sale of subsidiary stock by parent (Notes 1 & 9)		-			-
Payments under capital leases (Note 7)		(389	)		(1,166	)
Payments on notes payable (Note 4)		(49,959	)		(63,835	)
Payments on notes payable, related (Note 3)		(4,678	)		(54,557	)
Payments to placement agents (Note 4)		(6,500	)		(21,500	)
Payments on convertible notes payable (Note 4)		(5,000	)		-
Payments on redemption of preferred stock (Note 4)		-			(110,857	)
Net cash provided by financing activities		382,674			401,327

Net change in cash and cash equivalents		647			16,022

Cash and cash equivalents:
Beginning of period		5,216			2,628

End of period	$	5,863		$	18,650

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes	$	-		$	-
Interest	$	13,353		$	7,533

Noncash financing transactions:
Notes and interest payable converted to stock	$	109,482		$	454,650

See accompanying notes to consolidated financial statements.

F-5

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Basis of presentation

The interim unaudited financial statements presented herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and for the three and nine month periods ended September 30, 2013 and 2012 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"), newly formed subsidiary Novofuel, Inc. ("Novofuel"), and 58% 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, 2012, 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 no revenue during the nine months ended September 30, 2013, and has an accumulated deficit of $22,522,029 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.

On April 24, 2013, the Company effected a one-for-two hundred (1 for 200) reverse stock split. As a result of the reverse split, the number of shares outstanding and per share information for all prior periods presented have been retroactively restated to reflect the new capital structure.

AlumiFuel Power International, Inc.

In February 2010, the Company formed its subsidiary, AFPI. The total number of AFPI shares outstanding at December 31, 2012 and September 30, 2012 was 62,411,864. There were 68,114,864 shares outstanding at September 30, 2013.

During the year ended December 31, 2012, the Company sold a total of 8,373,271 shares of AFPI and during the nine months ended September 30, 2013 issued 5,700,000 shares valued at $5,700 in transactions with noteholders. The Company owned 39,984,494 shares of AFPI common stock at December 31, 2012 and September 30, 2013. At September 30, 2012, the Company owned 46,484,813 shares. We maintain a custody account for our cash and securities in Germany that had a cash balance of $3,417 at September 30, 2013 and is reflected as Cash on our balance sheet.

In December 2012, the Deutsche Börse Frankfurt Stock Exchange closed the First Quotation Board, the exchange on which AFPI's common stock traded. The Company anticipates applying for listing on the GXG Markets on which it will seek admission to the GXG Markets' First Quote segment, which is the new European stock exchange catering to early stage growth companies.

The value of all shares of AFPI held by the Company have been eliminated on consolidation of the financial statements at September 30, 2013 as intercompany accounts. At September 30, 2013 there were 28,127,370 shares held by shareholders other than the Company representing 41% of the outstanding common shares of AFPI as of that date. This represents a non-controlling interest in AFPI that totaled $4,006,592 based on AFPI's outstanding total equity of $9,702,167 at September 30, 2013. In addition, $48,471 in the net loss of AFPI of $117,377 for the nine months ended September 30, 2013 has been attributed to the non-controlling interest of those stockholders.

F-6

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Formation of Novofuel, Inc.

During the nine month period ended September 30, 2013, we transferred all of the assets related to our hydrogen generation business to a new wholly owned subsidiary, Novofuel, Inc. ("Novofuel") in exchange for 12,000,000 shares of Novofuel common stock. Novofuel was formed as a separate entity in anticipation of executing a transaction with Genport, SrL of Italy. In November 2013, the Company signed an agreement with Genport, SrL of Italy to combine and integrate their technologies, assets and operations into NovoFuel, contingent upon closing of private financing of up to $4,500,000 for the venture.

On closing of a capital investment, NovoFuel common shares are to be allocated to Genport shareholders in exchange for 100% of Genport shares. Although Genport would then be a wholly-owned subsidiary of NovoFuel, Genport, SrL would retain its status as an Italian company under Italian law. Following the closing of the transaction, NovoFuel will have operations in the United States and Italy.

Note 2: Summary of Significant Accounting Policies

Use of Estimates

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

Cash and Cash Equivalents

The Company considers all highly liquid securities with original maturities of three months or less when acquired to be cash equivalents. Cash equivalents at September 30, 2013 were $-0-.

Stock-based Compensation

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

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

F-7

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Debt Issue Costs

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

Financial Instruments

At September 30, 2013, the fair value of the Company’s financial instruments approximate their carrying value based on their terms and interest rates.

Fair value of financial instruments

The estimated fair value of financial instruments has been determined by the Company using available market information and appropriate methodologies; however, considerable judgment is required in interpreting information necessary to develop these estimates. Accordingly, the Company’s estimates of fair values are not necessarily indicative of the amounts that the Company could realize in a current market exchange.

The fair values of cash and cash equivalents, current non-related party accounts receivable, and accounts payable approximate their carrying amounts because of the short maturities of these instruments.

The fair values of notes and advances receivable from non-related parties approximate their net carrying values because of the allowances recorded as well as the short maturities of these instruments. The fair values of receivables from related parties are not practicable to estimate, based upon the related party nature of the underlying transactions.

The fair values of notes and loans payable to non-related parties approximate their carrying values because of the short maturities of these instruments. The fair value of long-term debt to non-related parties approximates carrying values, net of discounts applied, based on market rates currently available to the Company.

Loss per Common Share

Loss per share of common stock is computed based on the weighted average number of common shares outstanding during the period. Stock options, warrants, and common stock underlying convertible promissory notes are not considered in the calculations for the periods ended September 30, 2013 and September 30, 2012, as the impact of the potential common shares, which totaled approximately 1,109,000,000 (September 30, 2013) and 23,375,000 (September 30, 2012), would be anti-dilutive and decrease loss per share. Therefore, diluted loss per share presented for the three and nine month periods ended September 30, 2013 and September 30, 2012 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.

F-8

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Management reviewed accounting pronouncements issued during the three months ended September 30, 2013, and no pronouncements were adopted.

Note 3: Related Party

Related Party Accounts Payable

The Company's president and treasurer accrue a monthly management fee from the Company of $8,000 and 2,000 and from AFPI of $7,500 and $3,500, respectively, for their services as managers. This amount totaled $189,000 for the nine month period ended September 30, 2013. As of September 30, 2013, the Company owed $326,392 to its officers for management services.

In September 2009, the Company's board directors authorized a bonus program for the Company's officers related to their efforts raising capital to fund the Company's operations. Accordingly, the Company's president and secretary are eligible to receive a bonus based on 50% of the traditional "Lehman Formula" whereby they will receive 2.5% of the total proceeds of the first $1,000,000 in capital raised by the Company, 2.0% of the next $1,000,000, 1.5% of the next $1,000,000, 1% of the next $1,000,000 and .5% of any proceeds above $4,000,000. The amount is capped at $150,000 per fiscal year. During the nine month period ended September 30, 2013, the Company expensed $3,280 under this bonus plan, and a total amount due of $2,264 remained unpaid at that date.

APTI pays a management fee of $6,500 per month to a company owned by the Company’s officers for services related to their bookkeeping, accounting and corporate governance functions. For the nine months ended September 30, 2013, these management fees totaled $58,500. During the nine month period ended September 30, 2013, $92,450 was paid and as of September 30, 2013, APTI owed $4,185 in accrued fees and related expenses.

The Company rents office space, including the use of certain office machines, phone systems and long distance fees, from a company owned by its officers at the rate of $1,200 per month, based on the amount of space occupied by the Company and use of the office equipment and services. Rent expense totaled $10,800 for the nine months ended September 30, 2013 with $2,400 accrued and payable as of that date.

F-9

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accounts payable to related parties consisted of the following at September 30, 2013:

Management fees, rent and bonus payable to officers	$	339,176

Accrued expenses payable to subsidiary officer		26,127

Total accounts payable, related party	$	365,303

Related Party Notes Payable

AlumiFuel Power Corporation

At September 30, 2013 and 2012, the Company owed $500 and $3,055, respectively, to its president for loans made to it from time-to-time in demand notes with 8% interest. There was $18 and $102 in accrued interest payable at September 30, 2013 and 2012, respectively.

At both September 30, 2013 and 2012, the Company owed the president of APTI $1,511 in loans in demand notes with 8% interest. As of September 30, 2013 and 2012 there was accrued interest payable of $335 and $214, respectively.

At September 30, 2013 and 2012, the Company owed $17,725 and $303, respectively, to a company owned by its president in demand notes with 8% interest. These amounts include $18,100 and $18,550 loaned during the nine month periods ended September 30, 2013 and 2012, respectively, along with payments of $678 in principal and $22 in accrued interest during the 2013 period and $18,365 in principal and $185 in interest during the 2012 period. There was $242 and $1 in accrued interest payable at September 30, 2013 and 2012, respectively.

At September 30, 2013 and 2012, the Company owed $5,435 and $5,435, respectively, to a company affiliated with its Secretary in demand notes with 8% interest. There was $953 and $517 in accrued interest payable at September 30, 2013 and 2012, respectively.

At both September 30, 2013 and 2012, the Company owed $2,165 in principal in certain promissory notes issued to a partnership affiliated with the Company’s president with interest rate of 8% and due on demand. As of September 30, 2013 and 2012, the Company owed $585 and $412, respectively, in accrued interest on these notes.

At both September 30, 2013 and 2012, the Company owed a partnership affiliated with its president and secretary $5,000 in a note with an interest rate of 8% per annum and due on demand. As of both September 30, 2013 and 2012, $1,787 and $1,388 in accrued interest was payable at those dates, respectively.

At September 30, 2013 and 2012, the Company owed $0 and $869, respectively, to a company owned by the Company's officers in demand notes with an interest rate of 8%.These amounts include $1,500 and $15,950 loaned during the nine month periods ended September 30, 2013 and 2012, respectively, along with payments of $1,500 in principal and $1 in accrued interest during the 2013 period and $16,349 in principal and $231 in interest during the 2012 period. There was $0 and $6 in accrued interest payable at September 30, 2013 and 2012, respectively.

At September 30, 2013 and 2012, the Company owed $9,590 and $11,008, respectively, to a corporation affiliated with the Company's officers in demand notes with interest at 8%. There was $1,624 and $948 in accrued interest payable on these notes at September 30, 2013 and 2012, respectively.

At both September 30, 2013 and 2012, the Company owed $350 to a corporation affiliated with the Company's officers in demand notes with an interest rate of 8%.There was $300 and $272 in accrued interest payable on these notes at September 30, 2013 and 2012, respectively.

F-10

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At September 30, 2013 and 2012, the Company owed a corporation owned by the Company's secretary $2,000 and $0, respectively, in demand notes with interest of 8% per annum. These amounts include $4,500 and $9,270 loaned during the nine month periods ended September 30, 2013 and 2012, respectively, along with payments of $2,500 in principal and $2 in accrued interest during the 2013 period and $9,270 in principal and $6 in interest during the 2012 period. There was $42 and $2 in accrued interest payable at September 30, 2013 and 2012, respectively.

At both September 30, 2013 and 2012, the Company owed $2,853 to an affiliate of the Company's president in notes carrying an interest rate of 8% per annum and due on demand. There was $426 and $197 in accrued interest payable on these notes at September 30, 2013 and 2012, respectively.

As of both September 30, 2013 and 2012, the Company owed two companies affiliated with its officers a total of $2,365 in interest on notes paid in periods prior to 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 September 30, 2013 and 2012.

Total

Total notes and interest payable to related parties consisted of the following at September 30, 2013 and 2012:

	2013		2012
Notes payable to officers; interest at 8% and due on demand	$	2,011	$	4,566

Notes payable to affiliates of Company officers; interest at 8% and due on demand		45,118		27,983

Notes payable, related party		47,129		32,549

Interest payable related party		8,912		6,659

Total principal and interest payable, related party	$	56,041	$	39,208

Note 4: Notes Payable

AlumiFuel Power Corporation

At September 30, 2013 and 2012, the Company owed $183,731 and $254,350, respectively, to an unaffiliated trust at an interest rate of 8% and due on demand. During the nine months ended September 30, 2013, the trust loaned the Company $74,200 and sold $28,300 in principal on these notes to unaffiliated third parties that converted that balance to convertible notes and/or common stock of the Company. Please see Note 9 Capital Stock below for further information on these transactions. During the nine month period ended September 30, 2012, the trust made $281,550 in additional loans and sold $33,150 in principal on these notes to an unaffiliated third party that converted that balance to common stock of the Company. The Company made payments on these notes during the nine month period ended September 30, 2013 totaling $17,018 in principal and $12,352 in accrued interest. The Company made payments on these notes during the nine month period ended September 30, 2012 totaling $3,785 in principal and $915 in accrued interest. There was $11,335 and $6,356 in accrued interest payable on these notes at September 30, 2013 and 2012, respectively.

F-11

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At both September 30, 2013 and 2012, the Company owed $32,732 to an unaffiliated third party with interest payable at 8% and due on demand. There was $4,921 and $2,299 in accrued interest payable on these notes at September 30, 2013 and 2012, respectively.

At September 30, 2013 and 2012, the Company owed an unaffiliated third party $99,588 and $26,000, respectively. These notes are due on demand and carry an interest rate of 8%. There was a total of $118,351 due to this party at December 31, 2012. An additional $40,921 was loaned during the nine month period ended September 30, 2013. In the nine month period ended September 30, 2012, $85,683 of these notes was purchased by an unaffiliated third party. There was $7,749 and $1,613 in accrued interest payable at September 30, 2013 and 2012, respectively.

At September 30, 2013 and 2012, the Company owed an unaffiliated third party $113,000 and $26,440, respectively. These amounts include $19,500 and $26,440 loaned in the nine month periods ended September 30, 2013 and 2012, respectively. A total of $19,500 in principal and $975 in accrued interest was repaid during the nine months ended September 30, 2013. In addition, $13,400 that was loaned in 2012 was also repaid. These notes carry current interest rates of 8% per annum. As of September 30, 2013 and 2012, there was $17,257 and $4,332 in accrued interest payable on these notes.

As of both September 30, 2013 and 2012, we owed an unaffiliated third party $6,000 in a demand note with 8% interest. As of September 30, 2013 and 2012, there was $826 and $345 in accrued interest payable on this note 3.

During the year ended December 31, 2010 a note payable in the amount of $30,000 was issued and repaid to an unaffiliated third party leaving an interest balance due of $57. This amount remained unpaid as of both September 30, 2013 and 2012.

AlumiFuel Power, Inc.

During the period ended September 30, 2012, API paid $60,000 in promissory notes payable to an unaffiliated third party in accounts receivable financing. There was $2,400 in accrued interest paid on these notes during that period and there was $1,050 and $3,450 in unpaid interest due at September 30, 2013 and 2012, respectively.

AlumiFuel Power International, Inc.

In February 2011, an unaffiliated third party loaned the Company $75,000. This note called for a payment of $50,000 in thirty days with a balance due no later than 90 days from its issuance and carries and interest rate of 12% per annum. The $50,000 was repaid during the quarter ended June 30,2011. No further payments have been made on this note leaving a balance due at both September 30, 2013 and 2012 of $25,000 with interest payable of $8,030 (2013) and $5,030 (2012).

During the quarter ended June 30, 2012, $26,100 in accrued interest payable to an unaffiliated third party was converted to a convertible promissory note leaving an interest balance due of $5 at both September 30, 2013 and 2012.

During the nine months ended September 30, 2013, the Company was loaned a total of Euro 103,400 from unaffiliated third parties. This amount represented $133,980 as of September 30, 2013. These notes are due one year from issuance with an interest rate of 10% and may be converted to AFPI common stock after six months outstanding and if AFPI's common stock begins trading again. As of September 30, 2013, there was a total of $5,367 in interest payable on these notes.

F-12

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HPI Partners, LLC

In 2009, various notes issued by HPI were converted to equity by third parties. Following those conversions, $647 in interest remained due and payable, which was outstanding at both September 30, 2013 and 2012.

Total

Notes and interest payable to others consisted of the following at September 30, 2013:

	2013
Notes payable, non-affiliates; interest at 8% and due on demand	$	435,051

Notes payable, non-affiliates; interest at 60% and due on demand		-

Notes payable, non-affiliates; interest at 24% and due on demand		-

Notes payable, non-affiliates; interest at 10% and due in March 2014-July 2014		133,980

Notes payable, non-affiliates; interest at 12% and due on demand		25,000

Notes payable		594,031

Interest payable, non-affiliates		57,244

Total principal and interest payable, other	$	651,275

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

Convertible Notes and Debentures with Embedded Derivatives:

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

F-13

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2009/2010 Convertible Debentures

In September 2009 through January 2010 we issued $435,000 of 6% unsecured convertible debentures in transactions with private investors (the “Debentures”). We received net proceeds from the Debentures of $363,190 after debt issuance costs of $71,810 paid to the placement agent. Additionally, the placement agent received a one-time issuance of 4,500 shares of our $0.001 par value common stock valued at $117,000 or $26.00 per share, the market price for our common stock on the date of issuance.

Among other terms of the offering, the Debentures were originally due in January 2013, but have been extended to December 31, 2013 (the “Maturity Date”), unless prepayment of the Debentures is required in certain events, as called for in the agreements. The Debentures are convertible at a conversion price (the “Conversion Price”) for each share of common stock equal to 75% of the lowest closing bid price per share (as reported by Bloomberg, LP) of the Company’s common stock for the twenty (20) trading days immediately preceding the date of conversion. In addition, the Debentures provide for adjustments in the case of certain corporate actions.

Each Debenture bears interest, in arrears, at six percent (6%) per annum, payable (i) upon conversion, or (ii) on the Maturity Date, in cash or shares of our common stock at the Conversion Price with a default interest rate of eighteen percent (18%) per annum. The Company may redeem the Debentures for an amount now equal to 131%.

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

The debt issuance costs of $188,810 are being amortized over the three year term of the Debentures or such shorter period as the debentures may be outstanding. Accordingly, as the debentures are converted to common stock, that amount of debt issuance costs attributable to the amounts converted will be accelerated and expensed as of the applicable conversion dates. As of December 31, 2012, $188,080 of these costs had been expensed as debt issuance costs.

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

As of December 31, 2012, the total face value of the Debentures outstanding was $47,000 following conversions made prior to that date.

During the nine months ended September 30, 2013, the debenture holders converted a total of $37,000 in face value of the debentures to 2,466,667 shares of our common stock, or $0.015 per share. As a result of these transactions, the Company recorded a decrease to the derivative liability of $49,333 and as of September 30, 2013, the total face value of the Debentures outstanding was $10,000.

At September 30, 2013 the Company revalued the derivative liability balance of the remaining outstanding Debentures. Therefore, for the period from their issuance to September 30, 2013, the Company has recorded an expense and decreased the previously recorded liabilities by $492,857 resulting in a derivative liability balance of $13,333 at September 30, 2013.

F-14

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The fair value of the Debentures was calculated at September 30, 2013 utilizing the following assumptions:

Fair Value			Term		Assumed Conversion Price				Volatility Percentage				Interest Rate
$	13,333		3 years		$	0.00045				330	%			0.63	%

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 an 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.

At September 30, 2013, the Company revalued the derivative liability balance of the remaining outstanding January 2012 Interest Note. As a result, for the period from their issuance to September 30, 2013, the Company has recorded an adjustment and increased the previously recorded liabilities by $14,914 resulting in a derivative liability balance of $52,200 at September 30, 2013.

The fair value of the January 2012 Interest Note was calculated at September 30, 2013 utilizing the following assumptions:

Fair Value			Term		Assumed Conversion Price				Volatility Percentage				Interest Rate
$	52,200		12 months		$	0.0003				341	%			0.12	%

September 2012 Convertible Note

In September 2012 we issued $35,000 of 6% unsecured convertible note with a private investor (the “Sept Debenture”).

Among other terms of the offering, the Sept Debenture is due in September 2015 (the “Maturity Date”), unless prepayment of the Sept Debenture is required in certain events, as called for in the agreements. The Sept Debenture is convertible at a conversion price (the “Conversion Price”) for each share of common stock equal to 50% of the lowest closing bid price per share (as reported by Bloomberg, LP) of the Company’s common stock for the twenty (20) trading days immediately preceding the date of conversion. In addition, the Sept Debenture provides for adjustments in the case of certain corporate actions.

The Sept Debenture bears interest, in arrears, at six percent (6%) per annum, payable (i) upon conversion, or (ii) on the Maturity Date, in cash or shares of our common stock at the Conversion Price with a default interest rate of eighteen percent (18%) per annum. The Company may redeem the Sept Debenture for an amount equal to 120% within 90 days of issuance, 130% between 91 and 120 days of issuance, and 140% if 121 days or more after issuance. Further terms call for the Company to maintain sufficient authorized shares reserved for issuance under the agreement equal to 300% of the number of shares issuable upon conversion of the Sept Debenture.

Debt issuance costs totaling $11,500 are being amortized over the three year term of the Sept Debenture or such shorter period as the Sept Debenture may be outstanding. Accordingly, as the Sept Debenture is converted to common stock, that amount of debt issuance costs attributable to the amounts converted will be accelerated and expensed as of the applicable conversion dates. As of September 30, 2013, $1,917 of these costs had been expensed as debt issuance costs.

F-15

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The beneficial conversion feature (an embedded derivative) included in the Sept Debenture resulted in an initial debt discount of $35,000 and an initial loss on the valuation of derivative liabilities of $35,000 for a derivative liability balance of $70,000 at issuance.

During the nine months ended September 30, 2013, the note holder converted a total of $33,500 in face value of the Sept Debenture to 26,017,640 shares of our common stock, or $0.0013 per share. As a result of these transactions, the Company recorded a decrease to the derivative liability of $67,000 and as of September 30, 2013, the total face value of the Sept Debenture outstanding was $1,500.

At September 30, 2013, the Company revalued the derivative liability balance of the remaining outstanding Sept Debenture. As a result, for the period from their issuance to September 30, 2013, the Company recorded a $32,000 adjustment to the previously recorded liabilities resulting in a derivative liability balance of $3,000 at September 30, 2013.

The fair value of the Sept Debenture was calculated at September 30, 2013 utilizing the following assumptions:

Fair Value			Term		Assumed Conversion Price				Volatility Percentage				Interest Rate
$	3,000		3 years		$	0.0003				330	%			0.63	%

2012 and 2013 Asher 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 convertible promissory notes in the aggregate amount of $134,000 on the following dates and in the following amounts (together the "2012 Asher Convertible Notes"):

Date of Issue	Amount		Due Date
1/24/12	$	36,000	October 19, 2012
3/7/12	$	33,000	December 5, 2012
4/12/12	$	32,500	January 16, 2013
5/10/12	$	32,500	February 13, 2013

During the nine month period ended September 30, 2013, the Company entered into note agreements with the same institutional investor for the issuance of convertible promissory notes in the aggregate amount of $50,000 on the following dates and in the following amounts (the "2013 Asher Convertible Notes"):

Date of Issue	Amount		Due Date
5/31/13	$	27,500	February 24, 2014
7/31/13	$	22,500	April 22, 2014

Together, the above notes comprise the "2012 and 2013 Asher Convertible Notes".

Among other terms, the 2012 and 2013 Asher Convertible Notes are due on the dates above, unless prepayment is required in certain events, as called for in the agreements. The 2012 and 2013 Asher 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 and 2013 Asher 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-16

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The outstanding principal balance the 2012 and 2013 Asher 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 and 2013 Asher 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 and 2013 Asher 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 and 2013 Asher 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 and 2013 Asher Convertible Notes.

We received net proceeds from the 2012 Asher 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 Asher Convertible Notes or such shorter period as the Notes may be outstanding. Accordingly, as the 2012 Asher 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, 2013, all of these costs had been expensed as debt issuance costs.

The beneficial conversion feature (an embedded derivative) included in the 2012 Asher 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.

We received net proceeds from the 2013 Asher Convertible Notes of $45,000 after debt issuance costs of $5,000 paid for lender legal fees. These debt issuance costs will be amortized over the terms of the 2013 Asher Convertible Notes or such shorter period as the Notes may be outstanding. Accordingly, as the 2013 Asher 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, 2013, $1,667 of these costs had been expensed as debt issuance costs.

The beneficial conversion feature (an embedded derivative) included in the 2013 Asher Convertible Notes resulted in total initial debt discounts of $50,000 and a total initial loss on the valuation of derivative liabilities of $38,500 for a derivative liability balance of $88,500 total at issuance.

The fair value of the 2013 Asher 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
5/31/13	$	49,500	9 months	$	0.0025	$	0.0082		328	%		0.11	%
7/31/13	$	39,000	9 months	$	0.00075	$	0.0016		313	%		0.11	%

As of December 31, 2012, the total face value of the 2012 Asher Convertible Notes outstanding was $105,900 following issuance prior to that date.

During the nine month period ended September 30, 2013, the 2012 Asher Convertible Notes holders converted a total of $100,800 in principal and $5,360 in interest to 117,962,476 shares of our common stock, or $0.0009 per share. As a result of all conversions, the Company recorded a decrease to the derivative liability of $187,224 and as of September 30, 2013, the total face value of the 2012 Asher Convertible Notes outstanding was $5,100.

At September 30, 2013, the Company revalued the derivative liability balance of the remaining outstanding 2012 Asher Convertible Notes. As a result, for the period from their issuance to September 30, 2013, the Company has recorded an adjustment and decreased the previously recorded liabilities by $221,667 resulting in a derivative liability balance of $8,500 at September 30, 2013.

F-17

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The fair value of the 2012 Asher Convertible Notes was calculated at September 30, 2013 utilizing the following assumptions:

Fair Value			Term		Assumed Conversion Price				Volatility Percentage				Interest Rate
$	8,500		9 months		$	0.0003				301	%			0.10	%

At September 30, 2013, the Company revalued the derivative liability balance of the outstanding 2013 Asher Convertible Notes totaling $50,000 in face value. As a result, for the period from their issuance to September 30, 2013, the Company has recorded an adjustment and decreased the previously recorded liabilities by $5,167 resulting in a derivative liability balance of $83,333 at September 30, 2013.

The fair value of the 2013 Asher Convertible Notes was calculated at September 30, 2013 utilizing the following assumptions:

Fair Value			Term		Assumed Conversion Price				Volatility Percentage				Interest Rate
$	83,333		9 months		$	0.0003				301	%			0.10	%

October 2012 Convertible Notes

In October 2012 we issued $10,000 of 8% unsecured convertible note with a private investor at which time the investor also purchased $50,000 in existing notes from one of our third party note holders (together the “October Notes”).

Among other terms of the offering, the October Notes are due in October 2013 (the “Maturity Date”), unless prepayment is required in certain events, as called for in the agreements. The October Notes are convertible at a conversion price (the “Conversion Price”) for each share of common stock equal to 50% of the lowest closing price per share of the Company’s common stock for the thirty (30) trading days immediately preceding the date of conversion. In addition, the October Notes provides for adjustments in the case of certain corporate actions.

The October Notes bear interest at eight percent (8%) per annum, payable (i) upon conversion, or (ii) on the Maturity Date, in cash or shares of our common stock at the Conversion Price with a default interest rate of eighteen to twenty-two percent (18%-22%) per annum. The Company may redeem the October Notes for an amount equal to 140% within 180 days of issuance. Further terms call for the Company to maintain sufficient authorized shares reserved for issuance under the agreement equal to 300% of the number of shares issuable upon conversion of the October Notes.

Debt issuance costs totaling $1,000 are being amortized over the three year term of the October Notes or such shorter period as the October Notes may be outstanding. Accordingly, as the October Notes is converted to common stock, that amount of debt issuance costs attributable to the amounts converted will be accelerated and expensed as of the applicable conversion dates. As of December 31, 2012, $208 of these costs had been expensed as debt issuance costs.

The beneficial conversion feature (an embedded derivative) included in the October Notes resulted in an initial debt discount of $60,000 and an initial loss on the valuation of derivative liabilities of $60,000 for a derivative liability balance of $120,000 at issuance.

F-18

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2012, the total face value of the October Notes outstanding was $27,500 following conversions made prior to that date.

During the nine month period ended September 30, 2013, the October Notes holders converted a total of $17,500 in face value of the October Notes plus $514 in interest to 1,804,194 shares of our common stock, or $0.01 per share. As a result of these transactions, the Company recorded a decrease to the derivative liability of $35,000 and as of September 30, 2013, the total face value of the October Notes outstanding was $10,000.

At September 30, 2013 the Company revalued the derivative liability balance of the remaining outstanding October Notes. Therefore, for the period from their issuance to September 30, 2013, the Company has recorded an expense and increased the previously recorded liabilities by $100,000 resulting in a derivative liability balance of $20,000 at September 30, 2013.

The fair value of the October Notes was calculated at September 30, 2013 utilizing the following assumptions:

Fair Value			Term		Assumed Conversion Price				Volatility Percentage				Interest Rate
$	20,000		1 year		$	0.0003				341	%			0.12	%

February 2013 Notes

In February 2013, this investor purchased an additional note in the amount of $26,000 from one of our third party note holders (the "February 2013 Notes"). The February 2013 Notes may be converted at any time at the lower of a discount to market of 50% of the lowest closing price per share of the Company’s common stock for the ten (10) trading days immediately preceding the date of conversion, or $0.00005, as adjusted for splits and other events. This note has an interest rate of 8% per annum and is due in January 2014.

The beneficial conversion feature (an embedded derivative) included in the February 2013 Notes resulted in an initial debt discount of $26,000 and an initial loss on the valuation of derivative liabilities of $26,000 for a derivative liability balance of $52,000 at issuance.

The fair value of the February 2013 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
2/13/13			52,000		1 year		$	0.00005			$	0.0001				296	%			0.15	%

During the nine month period ended September 30, 2013, the note holders converted a total of $26,000 in face value of the February 2013 Notes to 13,852,300 shares of our common stock, or $0.0019 per share. As a result of these transactions, the Company recorded a decrease to the derivative liability of $52,000 and as of September 30, 2013, the total face value of the February 2013 Notes outstanding was $0.

May 2013 Notes

In May 2013 we issued $2,500 of 8% unsecured convertible note with the same private investor (the “May 2013 Notes”).

Among other terms of the offering, the May 2013 Notes are due in February 2014 (the “Maturity Date”), unless prepayment is required in certain events, as called for in the agreements. The May 2013 Notes are convertible at a conversion price (the “Conversion Price”) for each share of common stock equal to 50% of the lowest closing price per share of the Company’s common stock for the ten (10) trading days immediately preceding the date of conversion. In addition, the May 2013 Notes provides for adjustments in the case of certain corporate actions.

F-19

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The May 2013 Notes bear interest at eight percent (8%) per annum, payable (i) upon conversion, or (ii) on the Maturity Date, in cash or shares of our common stock at the Conversion Price with a default interest rate of twenty-two percent (22%) per annum. The Company may redeem the May 2013 Notes for an amount equal to 150% of the redeemed amount.

The beneficial conversion feature (an embedded derivative) included in the May 2013 Notes resulted in an initial debt discount of $2,500 and an initial loss on the valuation of derivative liabilities of $2,232 for a derivative liability balance of $4,732 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
5/14/13		$	4,732		1 year		$	0.0013			$	0.0025				365	%			0.11	%

At September 30, 2013 the Company revalued the derivative liability balance of the remaining outstanding May 2013 Notes totaling $2,500. Therefore, for the period from their issuance to September 30, 2013, the Company has recorded an expense and increased the previously recorded liabilities by $268 resulting in a derivative liability balance of $5,000 at September 30, 2013.

The fair value of the May 2013 Notes was calculated at September 30, 2013 utilizing the following assumptions:

Fair Value			Term		Assumed Conversion Price				Volatility Percentage				Interest Rate
$	5,000		1 year		$	0.0003				341	%			0.12	%

October/November Convertible Notes

In October and November 2012 a private investor purchased a total of $139,600 in existing notes from one of our third party note holders (together the “October/November Notes”). The notes were amended to include a maturity date that is nine months from the amendment date or July/August 2013 and have an 8% interest rate.

The October/November Notes are convertible at a conversion price (the “Conversion Price”) for each share of common stock equal to 50% ($124,300) and 45% ($15,300) of the lowest closing bid price per share of the Company’s common stock for the ten (10) trading days immediately preceding the date of conversion.

The October/November Notes bear interest, in arrears, at eight percent (8%) per annum, payable (i) upon conversion, or (ii) on the Maturity Date, in cash or shares of our common stock at the Conversion Price.

The beneficial conversion feature (an embedded derivative) included in the October/November Notes resulted in an initial debt discount of $139,600 and an initial loss on the valuation of derivative liabilities of $143,000 for a derivative liability balance of $282,600 at issuance.

F-20

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2012 the total face value of the October/November Notes outstanding was $125,000.

During the nine months ended September 30, 2013, the note holders converted a total of $26,321 in face value of the October/November Notes to 14,750,000 shares of our common stock, or $0.0018 per share. As a result of these transactions, the Company recorded a decrease to the derivative liability of $52,927 and as of September 30, 2013, the total face value of the October/November Notes outstanding was $98,679.

At September 30, 2013, the Company revalued the derivative liability balance of the remaining outstanding October/November Notes. For the period from their issuance to September 30, 2013, there was a decrease of $118,135 to the previously recorded liabilities resulting in a derivative liability balance of $164,465 at September 30, 2013.

The fair value of the October/November Notes was calculated at September 30, 2013 utilizing the following assumptions:

Fair Value			Term		Assumed Conversion Price				Volatility Percentage				Interest Rate
$	164,465		9 months		$	0.0003				301	%			0.10	%

2013 Convertible Notes

In February and March 2013 a private investor purchased a total of $59,683 in existing notes from one of our third party note holders and loaned an additional $32,000 in new notes for a total of $91,683 (together the “2013 Convertible Notes”). The assumed note has an interest rate of 6% per annum. The new notes are due in December 2013 and have an 8% interest rate.

The 2013 Convertible Notes are convertible at a conversion price (the “Conversion Price”) for each share of common stock equal to 50% of the lowest closing bid price per share of the Company’s common stock for the ten (10) trading days immediately preceding the date of conversion.

The beneficial conversion feature (an embedded derivative) included in the 2013 Convertible Notes resulted in an initial debt discount of $32,000 and an initial loss on the valuation of derivative liabilities of $183,367 for a derivative liability balance of $183,367 at issuance.

The fair value of the 2013 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
2/5/13	$	59,683	6 months	$	0.00005	$	0.0001		271	%		0.11	%
3/7/13	$	15,000	9 months	$	0.00005	$	0.0001		295	%		0.13	%
3/22/13	$	17,000	9 months	$	0.00005	$	0.0001		295	%		0.13	%

During the nine months ended September 30, 2013, the note holders converted a total of $8,990 in face value of the 2013 Convertible Notes to 13,100,000 shares of our common stock, or $0.0007 per share. As a result of these transactions, the Company recorded a decrease to the derivative liability of $16,673 and as of September 30, 2013, the total face value of the 2013 Convertible Notes outstanding was $82,693.

At September 30, 2013, the Company revalued the derivative liability balance of the remaining outstanding 2013 Convertible Notes. For the period from their issuance to September 30, 2013, there was a decrease of $45,545 to the previously recorded liabilities resulting in a derivative liability balance of $137,822 at September 30, 2013.

F-21

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The fair value of the 2013 Convertible Notes was calculated at September 30, 2013 utilizing the following assumptions:

Fair Value			Term		Assumed Conversion Price				Volatility Percentage				Interest Rate
$	137,822		9 months		$	0.0003				301	%			0.10	%

JMJ Convertible Note

In June 2013 we issued $16,500 of 12% unsecured convertible note with a private investor (the “JMJ Convertible Note”).

Among other terms of the offering, the JMJ Convertible Note is due in May 2014 (the “Maturity Date”), unless prepayment is required in certain events, as called for in the agreements. The JMJ Convertible Note is convertible at a conversion price (the “Conversion Price”) for each share of common stock equal to 60% of the lowest trading price per share of the Company’s common stock for the twenty-five (25) trading days immediately preceding the date of conversion. In addition, the JMJ Convertible Note provides for adjustments in the case of certain corporate actions.

The JMJ Convertible Note bears interest at twelve percent (12%) per annum, unless paid within the first three months in which case no interest is due, payable (i) upon conversion, or (ii) on the Maturity Date, in cash or shares of our common stock at the Conversion Price. In the event of a default, the company would owe 150% of the outstanding principal balance plus accrued interest.

The beneficial conversion feature (an embedded derivative) included in the JMJ Convertible Note resulted in an initial debt discount of $16,500 and an initial loss on the valuation of derivative liabilities of $15,180 for a derivative liability balance of $31,680 at issuance.

The fair value of the JMJ Convertible Note 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
6/6/13		$	31,660		1 year		$	0.0025			$	0.0073				367	%			0.14	%

At September 30, 2013 the Company revalued the derivative liability balance of the remaining outstanding JMJ Convertible Note. Therefore, for the period from their issuance to September 30, 2013, the Company has recorded an expense and decreased the previously recorded liabilities by $4,180 resulting in a derivative liability balance of $27,500 at September 30, 2013.

The fair value of the JMJ Convertible Note was calculated at September 30, 2013 utilizing the following assumptions:

Fair Value			Term		Assumed Conversion Price				Volatility Percentage				Interest Rate
$	27,500		1 year			0.00036				341	%			0.012	%

F-22

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Bohn Convertible Note

In May 2013 we issued a $20,000 8% unsecured convertible note with a private investor (the “Bohn Convertible Note”).

Among other terms of the offering, the Bohn Convertible Note is due in November 2013 (the “Maturity Date”), unless prepayment is required in certain events, as called for in the agreements. The Bohn Convertible Note is convertible at a conversion price (the “Conversion Price”) for each share of common stock equal to 75% of the lowest trading price per share of the Company’s common stock for the ten (10) trading days immediately preceding the date of conversion. In addition, the Bohn Convertible Note provides for adjustments in the case of certain corporate actions.

The Bohn Convertible Note bears interest at eight percent (8%) per annum, payable (i) upon conversion, or (ii) on the Maturity Date, in cash or shares of our common stock at the Conversion Price. In the event of a default the interest rate increases to twelve percent (12%) per annum.

The beneficial conversion feature (an embedded derivative) included in the Bohn Convertible Note resulted in an initial debt discount of $20,000 and an initial loss on the valuation of derivative liabilities of $11,429 for a derivative liability balance of $31,429 at issuance.

The fair value of the Bohn Convertible Note 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
6/6/13		$	31,249		6 months		$	0.0028			$	0.0060				292	%			0.08	%

At September 30, 2013 the Company revalued the derivative liability balance of the remaining outstanding Bohn Convertible Note. Therefore, for the period from their issuance to September 30, 2013, the Company has recorded an expense and increased the previously recorded liabilities by $1,905 resulting in a derivative liability balance of $33,334 at September 30, 2013.

The fair value of the Bohn Convertible Note was calculated at September 30, 2013 utilizing the following assumptions:

Fair Value			Term		Assumed Conversion Price				Volatility Percentage				Interest Rate
$	33,334		6 months		$	0.0003				313	%			0.04	%

Wexford Convertible Note

In May 2013, we issued a $75,000 convertible note to the former landlord of API as part of a settlement agreement with respect to a Judgment by Confession entered against API in the Court of Common Pleas Philadelphia County in Philadelphia as described more fully in Note 7 - Commitments and Contingencies below. This note is due in May 2014 and carries an interest rate of 8% per annum. This note may be converted at any time beginning on November 30, 2013 into shares of our common stock at the average of the lowest three (3) Trading Prices for the common stock during the ten trading days prior to the Conversion Date. As this note is convertible at market, there is no imbedded derivative and therefore no corresponding derivative liability.

WHC Capital Note

During the quarter ended September 30 2013, an unaffiliated institutional investor purchased two totaling $9,900 from one of our third party note holders and issued a new note in the amount of $5,000 for a total of $14,900 in amounts due (the "WHC Notes"). The WHC Notes may be converted at any time a a discount to market of 50% of the lowest closing price per share of the Company’s common stock for the ten (10) trading days immediately preceding the date of conversion as adjusted for splits and other events. This note has an interest rate of 8% per annum and is due in June 2014.

F-23

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The beneficial conversion feature (an embedded derivative) included in the WHC Notes resulted in an initial debt discount of $14,900 and an initial loss on the valuation of derivative liabilities of $10,178 for a derivative liability balance of $25,078 at issuance.

The fair value of the WHC 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
7/25/13		18,078	11 months		0.00115		0.0019		337	%		0.12	%
8/13/13		7,000	11 months		0.0005		0.0014		396	%		0.11	%

During the nine month period ended September 30, 2013, the note holders converted a total of $8,600 in face value of the WHC Notes to 21,905,000 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 $15,704 and as of September 30, 2013, the total face value of the WHC Notes outstanding was $6,300.

At September 30, 2013 the Company revalued the derivative liability balance of the remaining outstanding WHC Notes. Therefore, for the period from their issuance to September 30, 2013, the Company has recorded an expense and increased the previously recorded liabilities by $14,578 resulting in a derivative liability balance of $10,500 at September 30, 2013.

The fair value of the WHC Notes was calculated at September 30, 2013 utilizing the following assumptions:

Fair Value			Term		Assumed Conversion Price				Volatility Percentage				Interest Rate
$	10,500		11 months			0.0003				323	%			0.12	%

F-24

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Debentures and convertible notes and interest payable consisted of the following at September 30, 2013:

Short-term liabilities:	September 30, 2013


Convertible debentures; non-affiliates; interest at 6% and due December 2013; outstanding principal of $10,000 face value; net of discount of $0	$	10,000

2012 and 2013 Asher Convertible Notes; non-affiliate, interest at 8%; due May 2012; $55,100 face value net of discount of $32,778		22,322

January 2012 Convertible Notes; non-affiliate; interest at 8%; due January 2013		50,000

January 2012 Interest Note; non-affiliate; interest at 8%; due January 2013; $26,100 face value net of discount of $0		26,100

October 2012 Convertible Notes/Feb 2013 Notes/May 2013 Notes; non-affiliate; interest at 8%; due October 2013/January 2014; $12,500 face value net of discount of $1,979		10,521

October/November Convertible Notes; non-affiliate; interest at 8%; $98,679 face value net of discount of $0		98,679

2013 Convertible Notes; non-affiliate; interest at 8%; $82,693 face value net of discount of $8,377		74,316

JMJ Convertible Notes; non-affiliate; interest at 12%; $16,500 face value net of discount of $9,167		7,333

Bohn Convertible Note; non-affiliate; interest at 8%; $20,000 face value net of discount of $6,667		13,333

Wexford Convertible Note; non-affiliate; interest at 8%; $75,000 face value net of discount of $0		75,000

WHC Convertible Note; non-affiliate; interest at 8%; $6,300 face value net of discount of $4,953		1,347

Total short-term convertible notes	$	388,951

Interest payable, short-term convertible notes		87,736

Total principal and interest payable, short-term convertible notes	$	476,687

Long-term liabilities:

Convertible debentures; non-affiliates; interest at 6% and due September 2015; outstanding principal of $1,500 face value; net of discount of $384		1,116

Interest payable, long-term convertible notes		1,197

Total principal and interest payable, other	$	2,313

F-25

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5: Notes Receivable

At September 30, 2013 there was $185,403 in loans due the Company from FastFunds Financial Corporation (“FFFC”), an affiliate in which the Company is a minority stockholder, to assist FFFC in payment of its ongoing payment obligations and protect the Company's investment. Of this amount, $1,400 was advanced in the nine months ended September 30, 2013. During the nine months ended September 30, 2013, FFFC was able to repay $62,200 in principal on these loans. In addition, the Company sold $25,000 of these loans to an unaffiliated third party. 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 $1,400 the nine months ended September 30, 2013 and that is included in other selling, general and administrative expenses on the Company’s statement of operations for that period. The Company has allowed for all interest due on these notes and did not record any interest receivable during the nine month period ended September 30, 2013. As of September 30, 2012, FFFC owed the Company $316,358 and paid $44,580 in interest payable against these notes. Given the uncertainty of payments on these notes, if payments are received they are considered recovery of allowed for debt in the case of principal and recorded in "other income (expense)"in our statements of operations while interest income is offset against interest expense.

As of September 30, 2013 and 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 $1,222 and $581 in accrued interest remained receivable at September 30, 2013 and 2012, respectively.

Note 6: Other Expense

Other expense for the three and ninemonth periods ended September 30, 2013 and 2012 consisted of the following:

	Three months ended September 30, 2013			Three months ended September 30, 2012		Nine months ended September 30, 2013			Nine months ended September 30, 2012
General and administrative	$	30,853		$	39,177	$	88,949		$	141,234
Salaries and employee benefits		59,863			52,716		172,111			204,114
Legal and accounting		4,780			9,450		26,435			29,088
Bad debt expense (recovery)		(20,950	)		-		(87,200	)		-
Professional services		30,835			16,792		131,367			119,803
	$	105,381		$	118,135	$	331,662		$	494,239

Note 7: Commitments and Contingencies

Payroll Liabilities

Following the formation of API in May 2008, HPI hired certain former employees of Hydrogen Power, Inc. and maintained an office in Seattle, Washington for a period of approximately five months. During that time, API paid wages to these employees without the benefit of a payroll management service. Upon API's move from Seattle to Philadelphia, Pennsylvania in October 2008, the Company retained the services of a payroll management service to handle its payroll functions. During the period from May to October 2008, the Company recorded $52,576 in payroll liabilities due from wages paid to its employees and has been recording estimated penalties and interest quarterly on the balance for an estimated balance due at December 31, 2012 of $118,647. During the nine months ended September 30, 2013 an additional expense of $11,253 was recorded for a total accrued balance of $130,170 as of that date. This amount is included on the balance sheets at September 30, 2013 as “payroll liabilities”.

F-26

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Office Lease Agreement

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

In November 2011, the Company determined it could no longer sustain the significant payments under the lease and vacated the premises. On November 30, 2011, API was notified that a Judgment by Confession had been entered against it in the Court of Common Pleas Philadelphia County in Philadelphia, Pennsylvania by Wexford-UCSC II, L.P., its former landlord. The Judgment by Confession assesses total damages of $428,232, which is comprised of the following: $73,995 for unpaid monthly rent, maintenance fees, interest and late charges for the period through November 30, 2011; attorney's fees of $5,000; rent and maintenance charges of $10,020 for December 2011; and the value of future rent payments for the period from January 1, 2012 to December 31, 2014 of $339,217. The complaint alleged a breach of contract and event of default for API related to this lease. As of March 31, 2013, the Company had recorded $67,429 in rent expense that was included in "accounts payable, other" as of that date. The additional judgment amount totaling $360,803 was expensed as "litigation contingency" on our statements of operations and is recorded under the same name as a liability on balance sheets at March 31, 2013.

We reached a Settlement Agreement with Wexford-UCSC II, L.P. Pursuant to the terms of the Settlement Agreement, the Company has paid a cash payment of $2,000 and issued a Convertible Promissory Note in the amount of $75,000, as described more fully as "Wexford Convertible Note" in Note 4 - Notes Payable above. Also pursuant to the terms of the Settlement Agreement, AlumiFuel Power, Inc., AlumiFuel Power Corporation and all affiliated entities and persons have been fully released. The dismissal of the action will follow shortly pursuant to the terms of the Agreement. As a result of this settlement, we recorded a gain of $351,232 listed as litigation contingency under "other income (expense" on our statements of operations for the difference between the total assessed damages of $428,232 and the settlement amount valued at $77,000.

Capital Leases

In April 2010 we leased a copier for a period of three years at $129 per month. The contract includes a buyout at lease end for $1 at which time we will own the machine. We have capitalized the value of this machine at January 1, 2011 in the amount of $3,499 based on the then current value with an expected life of 5 years from the lease date and are depreciating this asset over that period. That amount was included in "property and equipment" under the assets portion of our balance sheet with the corresponding liability for future payments placed under "capital leases" in our liabilities. As each monthly payment was made, the amount under capital leases was reduced to reflect the balance due under the lease. As of the March 31, 2013 payment, the lease was completed. During the nine months ended September 30, 2013, a total of $387 was reduced in the "capital leases" account for payments made during the period.

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.

F-27

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9: Capital Stock

Effective on April 24, 2013, the Company effectuated a 1 for 200 reverse stock split. As a result of this transaction, a total of 6,406,699,320 shares of issued and outstanding pre-split common stock became 32,033,497 shares of post-split common stock. The Company filed a Certificate of Change with the Secretary of State of Nevada, pursuant to which the Company effectuated the reverse split as well as decreased the authorized capital stock of the Company from 7,510,000,000 shares to 510,000,000 shares, of which 500,000,000 shares are $0.001 par value common stock and 10,000,000 shares may be $0.001 par value preferred stock having the voting powers, designations, preferences, limitations, restrictions and relative rights as determined by the board of directors from time to time. As a result of the reverse split, the number of shares outstanding and per share information for all prior periods presented have been retroactively restated to reflect the new capital structure.

Common Stock

During the nine month period ended September 30, 2013, we issued a total of 211,840,777 shares of our common stock on the conversion of $283,511 in principal and interest on our various convertible promissory notes. In addition to the converted principal and interest on the notes, the Company recorded $443,741 in additional expense for the derivative liability for a total cost to the Company of $727,252 or $0.0034 per share.

During the nine month period ended September 30, 2013, we issued 1,840,000 shares of our common stock to a noteholder upon conversion of $18,400 in promissory notes. In addition to the face value of the notes, the Company recorded $18,400 in additional expense for the difference between the conversion price ($0.01) and the market price on the issuance dates for a total cost to the Company of $36,800 or $0.02 per share.

Warrants

In March 2013, we issued a total of 150,000 warrants to an unaffiliated third party that are exercisable for a period of three years at an exercise price of $0.02 per share. These warrants were valued at $3,000 based upon the Black Scholes option pricing model, which amount is included in "stock based compensation" in the nine month period ended September 30, 2013.

In May 2013, we issued a total of 40,000 warrants to an unaffiliated third party that are exercisable for a period of three years at an exercise price of $0.01 per share. These warrants were valued at $239 based upon the Black Scholes option pricing model, which amount is included in "stock based compensation" in the nine month period ended September 30, 2013.

A summary of the activity of the Company’s outstanding warrants at December 31, 2012 and September 30, 2013 is as follows:	Warrants		Weighted-average exercise price		Weighted-average grant date fair value
Outstanding and exercisable at December 31, 2012		940,000	$	0.40	$	0.20

Granted		190,000		0.016		0.017
Expired/Cancelled		-		-		-
Exercised		-		-		-

Outstanding and exercisable at September 30, 2013		1,130,000	$	0.43	$	0.07

F-28

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table sets forth the exercise price range, number of shares, weighted average exercise price and remaining contractual lives of the warrants by groups as of September 30, 2013:

Exercise price range	Number of options outstanding	Weighted-average exercise price	Weighted-average remaining life

$0.01	40,000	0.01	2.7years

$0.20 to $0.80	1,050,000	0.39	2.6years

$2.00	40,000	2.00	3.2 years

	1,130,000	$ 0.43	2.7 years

Note 10: Subsequent Events

On October 14, 2013, the Company 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 510,000,000 shares to 760,000,000 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.

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

F-29

ALUMIFUEL POWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED 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, 2012 and 2011.

The independent auditors’ reports on our financial statements for the years ended December 31, 2012 and 2011 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, 2012.

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, 2012 and 2011.

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 included 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). In September 2012, the Company received a purchase order from the U.S. Air Force to make certain modifications to the PBIS-2000 previously delivered. The unit was returned to the Air Force in the first quarter of 2013 and we booked $13,440 in revenue received for this work.

The focus of Novofuel would be to pursue and capture backup and portable power applications and business opportunities in the United States and Europe. The new entity would pursue the engineering development of an integrated 5kW backup power system for telecom facilities.

LIQUIDITY AND CAPITAL RESOURCES

To address the going concern situation addressed in our financial statements at December 31, 2012 and 2011, we anticipate we will require over the next twelve months approximately $900,000 of additional capital to fund the Company’s operations, not including any financing contemplated for the Novofuel/Genport transaction. This amount also 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 the potential for very minimal cash flows from operations through the production of PBIS reactors and the resultant sales of AlumiFuel cartridges. As in 2012, during 2013 and 2014 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 65% causing the issuance of shares below market value prices causing substantial dilution to our stockholders.

During the nine months ended September 30, 2013, we received a net of $382,674 from our financing activities, primarily from the issuance of notes payable from various sources totaling $424,200 including $131,000 in convertible notes. This was offset by payments on notes payable totaling $49,959. This compared to cash provided by financing activities of $401,327 in the nine months ended September 30, 2012 derived from proceeds from the issuance of notes payable totaling $585,460, proceeds from sales of our common stock of $5,000, and sales of AFPI common stock by parent of $62,782. This was offset by payments on notes payable of $118,392 along with payments on redemption of preferred stock of $110,857.

In the nine month period ended September 30, 2013, net cash used in operating activities was $382,027. This compared to net cash used in operating activities of $385,305 for nine month period ended September 30, 2012. The 2013 amount included a $775,945 net loss that included approximately $339,849 in non-cash charges and credits to operating assets and liabilities primarily from non-cash interest expense of $254,886 related to our convertible notes as well asamortization of discount on debentures payable totaling $266,934 that was offset by the change in fair value of derivative liabilities of $(88,926). This compares to a net loss of $1,620,780 in thenine months ended September 30, 2012 that included a non-cash loss of approximately $921,762 primarily from the change in fair value of derivative liability of $366,436 along with amortization of discount on debentures payable of $335,148 both related to our convertible debt.

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 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 the operation of our business. To the extent that additional capital is raised through the sale of equity or equity related securities such as convertible notes, which is expected to be our primary source of increased capital, the issuance of such securities has resulted and will continue to result in significant dilution to our current shareholders.

(b) Results of Operations

Nine Month Period ended September 30, 2013 vs. September 30, 2012

In September 2012, the Company received a purchase order from the United State Air Force Strategic Operations Command to make modification to a previously delivered PBIS-2000 portable balloon inflation device. This order was delivered in the first quarter of 2013 and accordingly revenue of $13,440 for these modifications was recorded in the first quarter of 2013. We had previously recorded an asset as "Work in progress" on our balance sheet at December 31, 2012, reflecting the cost of our work to modify PBIS-2000 through that date. This amount included parts, labor and other expenses directly related to modifications to the PBIS-2000 unit. Upon payment for the unit in the quarter ended March 31, 2013, a total of $21,421 for costs related to the modifications to the PBIS-2000 was expensed and is presented on our statements of operations as "Cost of goods sold" for the nine month period ended September 30, 2013.

For the nine month period ended September 30, 2013, our total revenue was $13,440 from the PBIS-2000 modifications versus $61,134 from the sale of three PBIS-2000 units to the United State Air Force in the 2012 period. The costs of goods sold was $21,421 for gross loss of $7,981 for the period. Cost of goods sold was $32,918 during the 2012 period for a gross profit of $28,216. The loss from operations for the nine month period ended September 30, 2013 was $588,512 versus $861,447 in the nine month period ended September 30, 2012. As discussed more fully below, "other" SG&A expenses decreased significantly in the 2013 period as compared to the 2012 period accounting for a portion of the decrease. Due to a credit from a vendor of an overcharge from 2011, reactor production costs were $(7,089) for the nine months ended September 30, 2012 with no similar credit or expense in 2013. The losses included $250,780 and $250,860 in 2013 and 2012, respectively, comprised of related party expense that included officer and key employee management fees as well as rent paid to related parties.

A total of $331,662 and $494,239 for “other” SG&A expenses in the nine month periods ended September 30, 2013 and 2012, respectively, was comprised of the following:

	Nine months ended September 30, 2013			Nine months ended September 30, 2012
General and administrative	$	88,949		$	141,234
Salaries and employee benefits		172,111			204,114
Legal and accounting		26,435			29,088
Bad debt expense (recovery)		(87,200	)		-
Professional services		131,367			119,803
	$	331,662		$	494,239

The “other” SG&A expense during the nine months ended September 30, 2013 included a decrease in nearly all categories as the Company limited its operations due to lack of sufficient working capital. The Company recovered $87,200 in bad debt expense from payments received on notes receivable from FFFC in 2013 with no similar payments in the 2012 period.

The company recorded $(181,452) in “other income (expense)” during the nine months ended September 30, 2013 as compared to $(787,549) in the nine months ended September 30, 2012. This significant decrease is the direct result of a gain in "litigation contingency" on the settlement of the lawsuit with API's former landlord of $351,232. In addition, fair value adjustments of derivative liabilities related to the Company's various convertible notes as the Company's stock price decreased compared to the prior period resulting in a decreased change in the derivative liability. The Company experienced decreases in interest expense in the 2013 period versus the 2012 period.

Three Month Period ended September 30, 2013 vs. September 30, 2012

For the three month periods ended September 30, 2013 and 2012, our total revenue was $0. The loss from operations for the three month period ended September 30, 2013 was $189,176 versus $249,748 in the three month period ended September 30, 2012.A significant portion of this decrease in 2013 was the lack of stock based compensation expense versus $37,500 in expense in the 2012 period. The losses included $83,711 and $93,535 in 2013 and 2012, respectively, comprised of related party expense that included officer and key employee management fees as well as rent paid to related parties.

A total of $105,380 and $118,135 for “other” SG&A expenses in the three month periods ended September 30, 2013 and 2012, respectively, was comprised of the following:

	Three months ended September 30, 2013			Three months ended September 30, 2012
General and administrative	$	30,853		$	39,177
Salaries and employee benefits		59,863			52,716
Legal and accounting		4,780			9,450
Bad debt expense (recovery)		(20,950	)		-
Professional services		30,835			16,792
	$	105,381		$	118,135

The “other” SG&A expense during the three months ended September 30, 2013 included a decrease in several categories as the Company limited its operations due to lack of sufficient working capital. The Company recovered $20,850 in bad debt expense from payments received on notes receivable from FFFC in 2013 with no similar recovery in the 2012 period but saw an increase in professional services expense.

The company recorded $147,679 in “other income (expense)” during the three months ended September 30, 2013 as compared to $109,031 in the three months ended September 30, 2012. This decrease is the direct result of the adjustments to derivative liabilities related to the Company's various convertible notesa significant increase in interest expense.

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 September 30, 2013 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 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

During the three month period ended September 30, 2013, we issued a total of 180,880,094 shares of our common stock on the conversion of $104,597 in principal and interest on our various convertible promissory notes. In addition to the converted principal and interest on the notes, the Company recorded $181,943 in additional expense for the derivative liability for a total cost to the Company of $286,540 or $0.0016 per share.

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. Mine Safety Disclosures

None

Item 5. Other Information

None.

Item 6. Exhibits

Exhibits:
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.

101.INS **		XBRL Instance Document

101.SCH **		XBRL Taxonomy Extension Schema Document

101.CAL **		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF **		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB **		XBRL Taxonomy Extension Label Linkbase Document

101.PRE **		XBRL Taxonomy Extension Presentation Linkbase Document

** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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.

	ALUMIFUEL POWER CORPORATION
	(Registrant)

Date: November 19, 2013	By:	/s/ Henry Fong
		Henry Fong
		Principal Executive Officer and
		Principal Financial Officer