UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2013
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ________ to ___________
Commission file number:333-14477
FUELSTREAM, INC.
(Name of Small Business Issuer in Its Charter)
| Delaware | 87-0561426 | |
(State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) | |
| 510 Shotgun Road, Suite 110 | ||
| Fort Lauderdale, Florida | 33326 | |
| (Address of Principal Executive Offices) | (Zip Code) |
| (954) 423-5345 | ||
| (Issuer’s Telephone Number) | ||
| ||
| (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) | ||
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 past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No []
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,”“accelerated filer,” and “smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
| Large Accelerated Filer [ ] | Accelerated Filer [ ] | |
| Non-Accelerated Filer [ ] | 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]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Exchange Act of 1934 after the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date. As of August 19, 2013, the Company had outstanding 19,677,587 shares of common stock, par value $0.0001 per share.
PART I
FINANCIAL INFORMATION
The CondensedConsolidatedFinancial Statements of the Company are prepared as of June 30, 2013.
ITEM 1. FINANCIAL STATEMENTS REQUIRED BY FORM 10-Q
CONTENTS
| |
| Condensed Consolidated Balance Sheets as of June 30, 2013 (unaudited) and December 31,2012
| 4 |
| 5 |
| 6 |
| Notes to the Unaudited Condensed Consolidated Financial Statements
| 7 |
FUELSTREAM, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
June 30, 2013
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations. The information furnished in the interim consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements. Although management believes the disclosures and information presented are adequate to make the information not misleading, it is suggested that these interim consolidated financial statements be read in conjunction with the Company’s audited financial statements and notes thereto included in its Form 10-K filed on April 16, 2013. Operating results for the six months ended June 30, 2013 are not necessarily indicative of the results to be expected for the year ending December 31, 2013.
Organization and Nature of Operation
Fuelstream, Inc. (the “Company”) was incorporated under the laws of the State of Delaware on July 12, 1996 under the name of “Durwood, Inc.” From April 6, 1999 to April 9,2010, the Company operated as a sports marketing firm under the name of “Sportsnuts” Inc. On April 9, 2010, the Company changed its name to Fuelstream, Inc. and changed its business model to become a fuel transportation and logistics company.
On April 11, 2011, the Company entered into a joint venture agreement (“Joint Venture”) with Aviation Fuel International, Inc., a Florida corporation (“AFI”) and a purchaser and reseller of aviation fuel for commercial and private aircraft. The Joint Venture required the Company to contribute up to $200,000 in respect of supplying aviation fuel to various commercial aircraft via tanker trucks which were intended to be acquired by the Joint Venture. The Company ultimately contributed $183,500 in connection with the Joint Venture. On January 18, 2012, the Joint Venture was terminated upon completion of the acquisition of AFI, which is now a wholly-owned subsidiary of the Company (refer to note 3).
On May 10, 2012, the Company along with two partners formed AFI South Africa LLC (“AFI SA”),immediately the Company purchased shares of the other partners to become 100% owner of AFI SA (refer to note 3). AFI SA was effective as Limited Liability Company under the Act by the filing organization with the office of the Secretary of State of Florida on May 11, 2012. The Company has been organized for the purpose of partnering with Global Aviation for brokering the sale of Fuel for aircraft in South Africa.
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue in accordance with Accounting Standards Codification subtopic 605-10,Revenue Recognition (“ASC 605-10”) which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments
FUELSTREAM, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
June 30, 2013
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (Continued)
regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. ASC605-10 incorporates Accounting Standards Codification subtopic 605-25, Multiple-Element Arrangements (“ASC 605-25”). ASC 605-25 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets.
Principles of Consolidation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) and include the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated
Cash
The Company considers cash to consist of cash on hand and temporary investments having an original maturity of 90 days or less that are readily convertible into cash.
Income Taxes
The Company has adopted Accounting Standards Codification subtopic 740-10, Income Taxes (“ASC 740-10”) which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes consist primarily of timing differences such as deferred officers’ compensation and stock based compensation accounting.
Net Loss per share
The Company complies with accounting and disclosure requirements of FASB ASC 260, “Earnings Per Share.” Net loss per ordinary share is computed by dividing net loss applicable to ordinary shareholders by the weighted average number of ordinary shares outstanding for the period. Common share equivalents are excluded from the diluted earnings (loss) per share computation if their effect is anti-dilutive.
Stock based compensation
The Company follows Accounting Standards Codification subtopic 718-10, Compensation (“ASC 718-10”) which requires that all share-based payments to both employees and non-employees be recognized in the income statement based on their fair values.
Stock based compensation recorded in the unaudited condensed consolidated financial statements for the six months ended June 30, 2013 and 2012 were $180,075 and $-0- respectively.
Financial Instruments
On January 1, 2008, the Company adopted FASB ASC 820-10-50, “Fair Value Measurements.” This guidance defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three levels are defined as follows:
FUELSTREAM, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
June 30, 2013
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (Continued)
-Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities inactive markets.
- Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
- Level 3 inputs to valuation methodology are unobservable and significant to the fair measurement.
The carrying amounts reported in the balance sheets for the cash and cash equivalents, receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest.
Recently Accounting pronouncements
The Company has adopted all applicable recently-issued accounting pronouncements. The adoption of the accounting pronouncements, including any not yet effective, is not anticipated to have a material effect on the financial position or results of operations of the Company.
Reclassification
Certain reclassifications have been made to prior periods' data to conform to the current period's presentation. These reclassifications had no effect on reported income or losses
NOTE 2 - GOING CONCERN CONSIDERATIONS
The accompanying unaudited condensed consolidated financial statements have been prepared using generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As reported in its Annual Report on Form 10-K for the year ended December 31, 2012, the Company has an accumulated deficit of $51,842,805 from inception of the Company through December 31, 2012. It should be noted that prior to the acquisition of AFI as discussed in Note 3, the Company had an accumulated deficit of $32,105,264 as reported in its Annual Report on Form 10-K for the year ended December 31, 2011. The accumulated deficit as of June 30, 2013 was $53,021,538 and the total stockholders’ deficit at June 30, 2013 was $6,039,680 and had working capital deficit (current liabilities minus current assets) of $5,660,586, continued losses and negative cash flows from operations. These factors combined, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans to address and alleviate these concerns are as follows:
The Company’s management continues to develop a strategy of exploring all options available to it so that it can develop successful operations and have sufficient funds, therefore, as to be able to operate over the next twelve months. The Company is attempting to improve these conditions by way of financial assistance through issuances of additional equity and by generating revenues by brokering the sale of aircraft fuel. No assurance can be given that funds will be available, or, if available, that it will be on terms deemed satisfactory to management.
The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually attain profitable operations. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of these uncertainties.
FUELSTREAM, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
June 30, 2013
NOTE 3 - ACQUISITION
On January 18, 2012 the Company completed the acquisition of 100% of the equity of Aviation Fuel International, Inc., a Florida corporation (“AFI”). AFI is a purchaser and reseller of aviation fuel for commercial and private aircraft. The consideration for the acquisition of AFI consisted of 7,400,000 shares of restricted common stock and a note payable in the amount of $1,000,000. On June 25, 2013, the Company disaffirmed the note payable of $1,000,000. However, until the Company receives a judicially approved release, the note payable will remain on the financial statements and is included in the balance sheet as of June 30, 2013. Prior to the acquisition, AFI had accumulated notes payable of $1,356,300 and accounts payable of $536,610. These liabilities have been recorded in the Condensed Consolidated Balance Sheet. These liabilities are due from AFI and were not incurred or guaranteed by the parent company, Fuelstream, Inc.
NOTE 4 - LOSS CONTINGENCIES
The Company is involved with various legal proceedings as described in Part II Item I of this Form 10-Q. The Company has evaluated these contingencies per the requirements of ASC 450-20 (previously SFAS 5, “Accounting for Contingencies”) and determined that the likelihood of loss from these proceedings are remote.
NOTE 5- ACCOUNTS RECEIVABLE
Accounts receivable at June 30, 2013 and December 31, 2012 are as follow:
| June 30,2013 | December 31, 2012 | |||||||
| Accounts receivable | $ | 698,000 | $ | 850,000 | ||||
| 698,000 | 850,000 | |||||||
| Less:allowance on accounts receivable | (670,000 | ) | (670,000 | ) | ||||
| Accounts receivable, net | $ | 28,000 | 180,000 | |||||
The Company was involved in disputes with the above accounts receivable and has filed a lawsuit.
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The accounts payable of $778,740, as of June 30, 2013, includes two parties who are seeking motion for entry for final garnishment judgment, The Company has assumed these two accounts payable with the acquisition of AFI (refer to note 3). Per court order interest is calculated at rate of 6% per annum on $325,138 on one of the accounts payable and 18% on $211,471 of the second accounts payable. Accrued interest on accounts payable balance as of June 30, 2013 and December 31, 2012 is $101,988 and $74,948, respectively..Interest expense of $13,520 and $27,039 was charged to expenses during the three and six months ended June 30, 2013.
The Company recorded interest expense of $13,650 and $13,650 on one of the accounts payable balance for the three and six months ended June 30, 2013.
FUELSTREAM, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
June 30, 2013
NOTE 7 - NOTES PAYABLE
| Notes payable consisted of the following: | ||||||||
| June 30, 2013 | December 31, 2012 | |||||||
| Notes payable, issued on May 6, 2011, unsecured, interest at 10% per annum, due on demand. | 59,500 | 59,500 | ||||||
| Notes payable, issued on August 25, 2010, unsecured, interest at 10% per annum due on demand. | 172,500 | 172,500 | ||||||
| Notes payable issued on May 25, 2012, secured, interest at 6%per annum, due on November 14, 2012, is in default(1) | 50,000 | 50,000 | ||||||
| Notes payable issued on January 28, 2012 to individual, unsecured, interest included, due on demand(2) | 610,000 | 610,000 | ||||||
| Notes payable issued on October 18, 2010 to individual, unsecured, interest at 15% per annum, due on demand(3) | 786,300 | 786,300 | ||||||
| Total notes payable | 1,678,300 | 1,678,300 | ||||||
| Less: current portion | (1,678,300 | ) | (1,678,300 | ) | ||||
| Long-term notes payable | $ | — | $ | — | ||||
| Maturities of notes payable are as follows: | ||||||||
Year Ending June 30, |
Amount | |||||||
| 2014 | $ | 1,678,300 | ||||||
| Total | $ | 1,678,300 | ||||||
Accrued interest on notes payable as of June 30, 2013 was $293,267 and as of December 31, 2012 was $221,787. Interest expense of $35,938 and $71,480 has been charged to expenses for the three and six months ended June 30, 2013, respectively.
| 1) | This note payable was guaranteed by one of the shareholder. During the year ended December 31, 2012 the Company also issued 25,000 shares of Common stock as a consideration for the note which was fair valued at market rate for $62,500 and charged to expenses. |
| 2) | This note payable was assumed on the acquisition of AFI. The original owner of AFI has pledge 1,200,000 shares of the Company in escrow account. The Company has not agreed to the terms and has repudiated the same. The matter is scheduled for a hearing in June. |
| 3) | This Note payable was assumed on the acquisition of AFI. The Company is negotiating a settlement agreement for $786,300, inclusive of all interest on the date of settlement. |
FUELSTREAM, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
June 30, 2013
NOTE 8- CONVERTIBLE DEBENTURE/NOTES PAYABLE
| Convertible debenture/notes payable consisted of the following | June 30, 2013 | December 31, 2012 | ||||||
| Convertible debenture issued on October 2, 2012, unsecured, interest included, due on October 2, 2015, convertible into common stock at 60% of the lowest closing bid price for the twenty trading days immediately preceding the date of conversion, (less unamortized debt discount of $90,301 and $110,137, respectively) | $ | 29,699 | $ | 9,863 | ||||
| Convertible Notes payable issued on March 12, 2012, unsecured, interest included, due on March 12, 2014,convertible into common stock at $1.00 per share (less unamortized debt discount of $91,455 and $151,869, respectively) | 158,545 | 98,131 | ||||||
| Convertible debenture issued on February 1, 2013 , unsecured, interest included, due on October 2, 2015, convertible into common stock at 60% of the lowest closing bid price for the twenty trading days immediately preceding the date of conversion, (less unamortized debt discount of $84,687 and $-0-, respectively) | 15,313 | — | ||||||
| Total notes payable | 203,557 | 107,994 | ||||||
| Less: current portion | 158,545 | — | ||||||
| Long-term convertible debenture/notes payable | $ | 45,012 | $ | 107,994 | ||||
Convertible note issued March 12, 2012
On March 12, 2012, the Company issued a $250,000 Convertible Promissory Note which is convertible into 250,000 shares of the Company’s common stock at the holder’s option, or $1.00 per share, and there is no fluctuation in this conversion rate.
In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the note. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $250,000 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the note. The debt discount attributed to the beneficial conversion feature is charged to current period operations as interest expense using the effective interest method over the term of the note.
During the six months ended June 30, 2013 and 2012, the Company amortized $60,414 and $0, respectively, to the operations as interest expense. During the three months ended June 30, 2013 and 2012, the Company amortized $30,374 and $0, respectively, to the operations as interest expense. In the year 2012, the holder of the promissory note made payments of $200,000 directly to vendors of the Company for purchase of fuel and paid $50,000 directly to the Company. As part of the joint venture agreement the Company has agreed to pay 37.5% of all the profits generated by all the fuel transactions in South Africa. As of June 30, 2013 and 2012, the Company has paid $-0- to the joint venture partner.
FUELSTREAM, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
June 30, 2013
NOTE 8- CONVERTIBLE DEBENTURE/NOTES PAYABLE (Continued)
Convertible debenture
On October 2, 2012, the Company issued a $120,000 Convertible Promissory Note which bears interest at a rate of 6% and is convertible into the Company’s common stock at the holder’s option, at the conversion rate of 60% of the lowest closing bid price for the twenty trading days immediately preceding the date of conversion. During the year ended December 31, 2012 the Company also issued 30,000 of shares along with Note which valued at market rate for $75,000 and was charged to expenses. The Company received net $88,000 from the debenture holder and balance $32,000 were paid towards the legal expenses and due diligence fees.
On February 1, 2013, the Company issued a $100,000 Convertible Promissory Note which bears interest at a rate of 6% and is convertible into the Company’s common stock at the holder’s option, at the conversion rate of 60% of the lowest closing bid price for the twenty trading days immediately preceding the date of conversion. The Company received net $90,000 from the debenture holder and balance $10,000 were paid towards the legal expenses.
The Company identified embedded derivatives related to the Convertible Promissory Note entered into on February 1, 2013. These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date. At the inception of the Convertible Promissory Note, the Company determined a fair value of $206,062 of the embedded derivative. The fair value of the embedded derivative was determined using the Binomial Lattice Model based on the following assumptions:
| Dividend yield: | -0- | % | ||
| Volatility | 200.33 | % | ||
| Risk free rate: | 0.40 | % |
The initial fair value of the embedded debt derivative of $206,062 was allocated as a debt discount up to the proceeds of the note ($100,000) with the remainder($106,062) charged to current period operations as interest expense for the six months ended June 30, 2013.
The fair value of the described embedded derivative of $334,082 at June 30, 2013 was determined using the Binomial Lattice Model with the following assumptions:
| Dividend yield: | -0- | % | ||
| Volatility | 198.87 | % | ||
| Risk free rate: | 0.36 | % |
At June 30, 2013, the Company adjusted the recorded fair value of the derivative liability to market on both notes resulting in non-cash, non-operating gain of $76,119 and $137,569 for the three and six months ended June 30, 2013, respectively.
During the six months ended June 30, 2013 and 2012, the Company amortized $35,149 and $-0- to current period operations as interest expense respectively. During the three months ended June 30, 2013 and 2012, the Company amortized $19,325 and $-0- to current period operations as interest expense respectively.
FUELSTREAM, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
June 30, 2013
NOTE 9 - NOTES PAYABLE - RELATED PARTIES
| Notes payable - related parties consist of the following: | ||||||||
| June 30, 2013 | December 31, 2012 | |||||||
| Note payable to a shareholder, secured by tangible and intangible assets of the Company, interest at 16% per annum, principal and interest due April 1, 2000, past due. Note is convertible into common stock of the Company at $0.10 per share. Note is in default. | $ | 450,000 | $ | 450,000 | ||||
| Note payable to a related individual, interest at 8% per annum,past due. Note is in default. (1) | 1,000,000 | 1,000,000 | ||||||
| Notes payable to related individuals, unsecured, interest at 10%,due on demand. | 43,500 | 43,500 | ||||||
| Total notes payable - related parties | 1,493,500 | 1,493,500 | ||||||
| Less: current portion | (1,493,500 | ) | (1,493,500 | ) | ||||
| Long-term notes payable - related parties | $ | — | $ | — | ||||
| Maturities of notes payable - related parties are as follows: | ||||||||
| Year Ending June 30, |
Amount | |||||||
| 2014 | $ | 1,493,500 | ||||||
| Total | $ | 1,493,500 | ||||||
Accrued interest on notes payable – related parties for the six months ended June 30, 2013 and year ended December 31, 2012 was $970,351 and $892,819, respectively. During the three and six months ended June 30, 2013, total interest expense to related party was $38,980 and $77,532, respectively.
| 1) | This note was issued for the acquisition of AFI on January 28, 2012. As of June 30, 2013 and December 31, 2012, the Company had accrued interest on the note in the amount of $113,753 and $74,082, respectively. |
NOTE 10 - COMMON AND PREFERRED STOCK TRANSACTIONS
Preferred Stock
The Company is authorized to issue 200 preferred shares of $0.0001 par value. As of June 30, 2013 and December 31, 2012 the Company has 200 shares of preferred stock issued and outstanding.Although the preferred stock carries no dividend, distribution, liquidation or conversion rights, each share of preferred stock carries ten million (10,000,000) votes and holders of our preferred stock are able to vote together with our common stockholders on all matters. Consequently, the holder of our preferred stock is able to unilaterally control the election of our board of directors and, ultimately, the direction of our Company.
FUELSTREAM, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
June 30, 2013
NOTE 10 - COMMON AND PREFERRED STOCK TRANSACTIONS (Continued)
Common stock
The Company is authorized to issue 50,000,000 shares of $0.0001 par value of common stock. As of June 30, 2013 and December 31, 2012 the Company has 15,520,799 and 15,216,848 shares of common stock as issued and outstanding.
On January 28, 2013, the Company issued an aggregate of 49,951 shares of common stock to employees and consultants of the Company. The shares were valued at market price of $1.65 and the market value of stock on the date of issuance was $82,418.
On May 31, 2013, the Company issued an aggregate of 254,000 shares of common stock to consultants of the Company. The shares were valued at market price of $1.20 and the market value of stock on the date of issuance was $304,800.
NOTE 11 - OPTIONS AND WARRANTS
The Company has adopted FASB ASC 718, “Share-Based Payments” (“ASC 718”) to account for its stock options. The Company estimates the fair value of each stock award at the grant date by using the Black-Scholes option pricing model. The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and our experience. Compensation expense is recognized only for those options expect to vest, with forfeitures estimated at the date of grant based on our historical experience and future expectations.
The following table summarizes the changes in options outstanding issued to employees of the Company:
| Number of Shares | Weighted Average Exercise Price | |||||||||
| Outstanding as of January 1, 2013 | 70,000 | $ | 0.01 | |||||||
| Granted | 300,000 | 1.65 | ||||||||
| Exercised | — | — | ||||||||
| Cancelled | — | — | ||||||||
| Outstanding at June 30, 2013 | 370,000 | $ | 1.34 | |||||||
Common stock options outstanding and exercisable as of June 30, 2013 are:
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Expiration Date | Exercise Price | Number shares outstanding | Weighted Average Contractual Life (Years) | Number Exercisable | Weighted Average Exercise Price | |||||||||||||||
| October 1, 2018 | $ | 0.01 | 70,000 | 5.25 | 54,973 | $ | 0.01 | |||||||||||||
| January 2, 2019 | 1.65 | 300,000 | 5.50 | 105,822 | 1.65 | |||||||||||||||
| Total | 370,000 | 160,795 | ||||||||||||||||||
FUELSTREAM, INC. AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
June 30, 2013
NOTE 11 - OPTIONS AND WARRANTS (Continued)
During the six months ended June 30, 2013, the Company granted 300,000 stock options with an exercise price of $1.65 out of which 75,000 were immediately vested and balance vesting over three years and expiring six years from issuance date.
The fair value of the vested portion of $34,406 and $180,075 was charged to expenses and additional paid in capital during the three and six months ended June 30, 2013, respectively.
The fair value of these stock options granted and the significant assumptions used to determine those fair values, using a Black-Scholes option-pricing model are as follows:
| Significant assumptions: | ||||||||
| Risk-free interest rate at grant date | 1.04%-0.89 | % | ||||||
| Expected stock price volatility | 199.38%-344.22 | % | ||||||
| Expected dividend payout | — | |||||||
| Expected option life-years | 6 | |||||||
NOTE 12 – SUBSEQUENT EVENTS
Subsequent to June 30, 2013, the Company issued 4,081,788 shares of common stock and redeemed for cash the convertible debentures as described in Note 8. The debt holder no longer holds any debt securities of the Company.
On August 5, 2013, the Company agreed to issue 1,800,000 shares of common stock to an accredited investor for cash. The cash was paid directly to a Note holder to pay off the debt. The value of the shares sold was approximately $0.07 per share.
On August 6, 2013, the Company issued 75,000 shares of common stock for services rendered to the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of Fuelstream, Inc. (hereafter, “Fuelstream,” the “Company,” “we,” “our,” or “us”) should be read in conjunction with the Unaudited Financial Statements and related Notes thereto included herein. This discussion may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding the Company’s expectations, beliefs, intentions, or future strategies that are signified by the words "expects," "anticipates," "intends," "believes," or similar language. Actual results could differ materially from those projected in the forward looking statements. Prospective investors should carefully consider the information set forth herein, and the Company cautions investors that its business and financial performance is subject to substantial risks and uncertainties.
Overview
We are an in-wing and on-location supplier and distributor of aviation fuel to corporate, commercial, military, and privately-owned aircraft throughout the world. We also provide a variety of ground services either directly or through our affiliates, including concierge services, passenger and baggage handling, landing rights, coordination with local aviation authorities, aircraft maintenance services, catering, cabin cleaning, customs approvals, and third-party invoice reconciliation. Our personnel assist customers in flight planning and aircraft routing aircraft, obtaining permits, arranging overflies, and flight follow services.
Our core business has developed as a result of a joint venture and eventual acquisition of Aviation Fuel International, Inc., now a wholly-owned subsidiary of the Company (“AFI”). The Company’s principal sources of revenues are expected to result from the gross selling price of fuel delivery contracts and associated services. Expenses which comprise the costs of goods sold are expected to include the acquisition price of fuel transported, as well as operational and staffing costs of the trucks and other vehicles used for delivery. General and administrative expenses have been comprised of administrative wages and benefits; occupancy and office expenses; outside legal, accounting and other professional fees; travel and other miscellaneous office and administrative expenses. Selling and marketing expenses include selling/marketing wages and benefits; advertising and promotional expenses; travel and other miscellaneous related expenses.
On June 21, 2012 the Company entered into an agreement to create a fuel logistics joint venture with South African based Global Airways ("Global"). Global is an international air transport organization whose activities cover acquisition, refurbishment, heavy maintenance, leasing and chartering of aircrafts throughout South Africa. We expect that this transaction will expand the Company’s international footprint in a market that is developing standardized systems to meet the aviation fueling needs of commercial and cargo carriers.
The partnership with Global underlines the company's strategic plan to generate new revenue streams by partnering with aircraft leasing and MRO businesses and includes the development, operation and management of the fuel storage, supply and logistic operations located in South Africa. It is anticipated that the partnership will oversee the logistics delivery of up to 3 Million gallons of Jet-A Fuel per month by the end of 2013 if the Company is able to secure sufficient means of financing the purchase of such fuel.
Our ability to generate revenues during the year 2013 and beyond depends substantially upon the Company’s resources available in order to develop and grow the business of AFI as a supplier of fuel and logistics. Such efforts require significant systems development, marketing and personnel costs, which, in turn, require substantial funding. If we are unable to obtain such funding, its ability to generate revenues will be significantly impaired and we may be unable to continue operations.
Because the Company has incurred losses, income tax expenses are immaterial. No tax benefits have been booked related to operating loss carryforwards, given the uncertainty of the Company being able to utilize such loss carryforwards in future years. We anticipate incurring additional losses during the coming year.
Results of Operations
Following is management’s discussion of the relevant items affecting results of operations for the six months ended June 30, 2013 and 2012.
Revenues. For both the three and six months ended June 30, 2013, net revenues were $-0- compared to $398,537 for the three and six months ended June 30, 2012. In the future, the Company’s sole source of revenue is expected to be related to fuel delivery contracts and associated services.
Cost of Sales. Cost of sales for both the three and six months ended June 30, 2013 were $-0- compared to $377,898 during the three and six months ended June 30,2012. This correlates with the amount of revenues during the periods presented.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended June 30, 2013 were $511,864 compared to $787,184 during the second quarter of 2012. For the six months ended June 30, 2013, selling, general and administrative expenses were $918,848 compared to $857,537 during the six months ended June 30, 2012. The Company has made a concerted effort to decrease these expenses as it tries to increase revenues. The Company recorded $670,000 in bad debts expense during the six months ended June 30, 2012. The Company issued non-cash stock compensation in the amount of $339,206 and $567,294 during the three and six months ended June 30, 2013, respectively. The Company expects that salaries and consulting expenses, that are cash- instead of share-based, will increase as we add personnel to build our fuel brokerage business.
Other Income (Expense). The Company had net other expenses of $87,608 for the three months ended June 30, 2013 compared to $24,830 during the second quarter of 2012. For the six months ended June 30, 2013, the Company had net other expenses of $259,885 compared to $50,367 during the six months ended June 30, 2012. Other expenses incurred were comprised primarily of interest expenses related to balances on Company credit cards, and interest on notes payable including amortization of debt discount and setoff with gain on change in derivative liability. During the six months ended June 30, 2013 and 2012, interest expense was $397,454 and $50,367, respectively. During the three months ended June 30, 2013 and 2012, interest expense was $163,727 and $24,830, respectively. The increase in interest expense is the result of the increase in the balances on notes payable which increased approximately $1,500,000 during the first six months of 2013 compared to 2012.
Net Loss. The Company had net loss of $1,178,733 for the six months ended June 30, 2013 compared to a net loss of $887,265 during the six months ended June 30, 2012, the increase in net loss was mainly due to the increase in selling, general and administrative expenses and interest expenses as discussed above. The Company had net loss of $599,472 for the three months ended June 30, 2013 compared to a net loss of $791,375 during the three months ended June 30, 2012, the decrease in net loss was mainly due to the decrease in selling, general and administrative expenses and offset by increase in interest expenses as discussed above.
Liquidity and Capital Resources
As of June 30, 2013, our primary source of liquidity consisted of $-0- in cash and cash equivalents. We hold most of our cash reserves in local checking accounts with local financial institutions. Since inception, we have financed our operations through a combination of short and long-term loans, and through the private placement of our common stock.
We have sustained significant net losses which have resulted in a total stockholders’ deficit at June 30, 2013 of $6,039,680 and are currently experiencing a substantial shortfall in operating capital which raises doubt about our ability to continue as a going concern. We anticipate a net loss for the year ended December 31, 2013 and with the expected cash requirements for the coming months, without additional cash inflows from an increase in revenues combined with continued cost-cutting or a receipt of cash from capital investment, there is substantial doubt as to the Company’s ability to continue operations.
There is presently no agreement in place with any source of financing for the Company and we cannot assure you that the Company will be able to raise any additional funds, or that such funds will be available on acceptable terms. Funds raised through future equity financing will likely be substantially dilutive to current shareholders. Lack of additional funds will materially affect the Company and its business, and may cause us to cease operations. Consequently, shareholders could incur a loss of their entire investment in the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company we are not required to provide this information.
ITEM 4. CONTROLS AND PROCEDURES
Management’s Evaluation on Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under theSecurities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, to allow for timely decisions regarding required disclosure.
As of June 30, 2013, the end of our second quarter, we carried out an evaluation, under the supervision of our Chief Executive Officer and Controller, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, we concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this quarterly report. Our board of directors has only two members. We do not have a formal audit committee.
Changes in Internal Control over Financial Reporting
There have been no significant changes in our internal controls over financial reporting that occurred during the quarter ended June 30, 2013 that have materially or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Ryan International Airlines. One of our subsidiaries, Aviation Fuel International ("AFI") is involved in disputes with two airlines: Ryan International Airlines, LLC ("Ryan") and Direct Air. Both aviation fuel customers litigation arise out of disputed amounts for the delivery of Jet Fuel. Ryan Air failed to pay for fuelings received from AFI. AFI filed under the commercial lien laws as required to secure a lien on the planes fueled in order to protect their receivable due from Ryan. Disagreements between the parties resulted in both parties filing separate lawsuits in three actions. Ryan filed a cause of action in Case No. 09-57580,Ryan International Airlines, Inc. v. Aviation Flight Services, LLC (“AFS”) and Aviation Fuel International, Inc., (“AFI”), and sought recovery of $1,491,308.66 allegedly paid to AFS as pre-payment of aviation fuel and flight services under a contractual relationship between Ryan and AFS. AFI moved to dismiss the action, to which, Ryan has subsequently filed a notice of removal to the Federal District Court for the Northern District of Illinois, Bankruptcy Division Case No.: 12-80802. AFI filed an action for breach of contract for Ryan’s failure to pay certain Jet Fuel invoices for the delivery of fuel in the amount of $678,000 plus interest;Aviation Fuel International v. Ryan International Airlines, Inc., a Kansas corporation, Wells Fargo Bank Northwest, Trustee N.A., a Utah corporation, RUBLOFF 757-MSN24794LLC, an Illinois limited liability company, RYAN 767 LLC, an Illinois limited liability company, AFT TRUST SUB I, a Delaware corporation, RYAN 767 N123 LLC, an Illinois limited liability company, and RUBLOFF 440 LLC, an Illinois corporation, Civil Action Case No. CACE 10-037788-04. AFI also filed the corresponding claims of liens under the FAA Aircraft Registration Branch, for each plane, registered and tail wing number listed therein. This action has also been recently noticed for been removal to the Federal District Court for the Northern District of Illinois, Bankruptcy Division Case No.: 12-80802. In addition, as a result of Ryan’s filing a Federal Involuntary Bankruptcy Petition against Aviation Flight Services (“AFS”) on June 10, 2010, Case No.: 10-27313-JKO, (S.D. of Fla.), our subsidiary AFI, also filed and was discharged as a creditor in the amount of $269,000. However, the obligations for the unpaid fuelings owed to AFI still remain outstanding as obligations due to AFI.
Southern Sky Air Tours, d/b/a Myrtle Beach Direct Air and Tours (Direct Air). On or about March 13, 2012, Southern Sky Air Tours, d/b/a Myrtle Beach Direct Air and Tours (“Direct Air”) ― a public charter operator ― ceased operations. Direct Air has subsequently filed for bankruptcy protection in the U.S. Bankruptcy Court for the District of Massachusetts (Worcester)(Case no. 12-40944). The Company currently has $122,000 in cash in escrow with Suntrust Bank, representing a partial payment by Direct Air for Fuel. This action is currently pending before the court, as it relates to the collection of the garnishment.
Julian Manuel Leyva and Gabriel Leyva. On June 8, 2012, Julian Manuel Leyva and Gabriel Leyva (collectively, the “Leyvas”) filed a lawsuit in the Seventeenth Judicial Circuit Court, Broward County, Florida, against us, our subsidiary AFI, and various others, alleging
various claims in connection with efforts to collect sums allegedly loaned to AFI between September 24, 2009 through February 11, 2011. The Leyvas are seeking damages of $570,000 plus interest in addition to additional damages from other parties to the lawsuit.
Russell Adler. On January 11, 2013, Russell Adler, our former Chief Executive Officer, filed a cross-complaint against the Company, AFI, and other associated persons in the Seventeenth Judicial District Court, Broward County, Florida. Mr. Adler’s complaint alleges various causes of action, including indemnification from the Company in respect of litigation involving the Leyvas described above, damages for breach of Mr. Adler’s employment contract, fraud, unpaid legal fees, unjust enrichment, and quantum meruit. We believe Mr. Adler’s claims are without merit and intend to defend the same.
As a result of the non-payment for Jet Fuel by AFI customers, AFI’s suppliers have filed actions that have resulted in judgment and garnishments, in the amount of $330,000. Most of these fuel outstanding fuel delivery charges are secured in the bankruptcy action involving Ryan as described above, through lien filings by both the issuer and individual fuel providers. In addition, AFI incurred certain loan and debt obligations for which the Company is attempting to convert into common stock of the issuer.
From time to time, we are also a party to certain legal proceedings incidental to the normal course of our business including the enforcement of our rights under contracts with purchasers and suppliers of fuel. While the outcome of these legal proceedings cannot at this time be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.
ITEM 1A. RISK FACTORS
As a smaller reporting company, we are not required to provide the information required by this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On January 28, 2013 and May 31, 2013, we issued an aggregate of 49,951 and 254,000 shares of common stock to employees and consultants of the Company, respectively.
No solicitation was made and no underwriting discounts were given or paid in connection with these transactions. The Company believes that the issuance of shares and options as described above was exempt from registration with the Securities and Exchange Commission pursuant to Section 4(2) of the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Effective February 1, 2000, the Company sold and issued a promissory note secured by certain tangible and intangible assets of the Company (“Note”) in exchange for $450,000 in cash proceeds. As of May 1, 2000, the Company is in default with respect to the Note. The Note and its accompanying Security Agreement have been filed as an exhibit to the Company’s 1999 annual report on form 10-KSB filed with the Securities and Exchange Commission on March 30, 2000.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
The following documents are filed as exhibits to this Form 10-Q:
INDEX TO EXHIBITS
| Number | Exhibits | |
| 3.1 | Amended and Restated Certificate of Incorporation of Fuelstream, Inc.(1) | |
| 3.2 | Amended and Restated Bylaws of Fuelstream, Inc.(2) | |
| 10.1 | Form of Indemnification Agreement (3) | |
| 10.2 | 2012 Equity Incentive Plan (3) | |
| 31 | Certification by Chief Executive Officer, Robert Catala, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32 | Certification by Chief Executive Officer, Robert Catala, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
(1) Filed as an Exhibit to the Company’s Current Report on Form 8-K, filed with the Commission on November 22, 2011.
(2) Filed as an Exhibit to the Company’s Current Report on Form 8-K, filed on June 17, 2011.
(3) Filed as an Exhibit to the Company’s Current Report on Form 8-K, filed on September 18, 2012.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FUELSTREAM, INC.
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| Date:August 19, 2013________________ | BY:/s/ Robert Catala__________________ | |
| Robert Catala | ||
| Chief Executive Officer |
