UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q  

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. 

For the Quarterly Ended June 30, 2014

Commission File Number: 333-191407

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒   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 ☒   No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

As of August 13, 2014, the registrant had 21,802,114 shares of its common stock outstanding.

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TABLE OF CONTENTS

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PART I:  FINANCIAL INFORMATION

NutraFuels, Inc

Balance Sheets

(Unaudited)

ASSETS

The accompanying notes are an integral part of these unaudited financial statements.

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NutraFuels, Inc.

STATEMENTS OF OPERATIONS

(Unaudited)

The accompanying notes are an integral part of these unaudited financial statements.

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NutraFuels, Inc.

STATEMENTS OF CASH FLOWS

(Unaudited)

The accompanying notes are an integral part of these unaudited financial statements.

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NOTES TO UNAUDITED FINANCIAL STATEMENTS:

NOTE 1 – DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Nutrafuels is the producer of nutritional supplements that uses micro molecular formulae and a utilization of an oral spray to provide faster and more efficient absorption.

Basis of presentation

The financial statements have been prepared by Nutrafuels, Inc. in accordance with accounting principles generally accepted in the United States. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments), which are, in the opinion of management, necessary to fairly present the financial position and operating results for the respective periods.

Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal period, as reported in the Company’s most recent annual report on Form 10-K, have been omitted.  

NOTE 2 – GOING CONCERN

As shown in the accompanying financial statements, we have incurred losses from inception, including net losses of $817,447 for the six months ended June 30, 2014. In response to these conditions, we may raise additional capital through the sale of equity securities, through an offering of debt securities or through borrowings from financial institutions or individuals. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

NOTE 3 –NOTES PAYABLE

During February 2014, an investor loaned the Company $50,000.  The loan was due by May 1, 2014 and an informal extension was granted by the investor for the balance of $25,000.  The investor also received 50,000 shares of common stock in conjunction with the loan.  The proceeds were allocated using relative fair value to the stock and loan as follows:

The discount on the note, $25,000, will be recognized as additional interest over the life of the note.  As of June 30, 2014, the note’s discount has been fully amortized.

NOTE 4 – CONVERTIBLE DEBT

On March 26, 2014, the Company borrowed $290,000 under a convertible note agreement with an investor.  The note bears an interest rate of 10%, matures on March 26, 2015, and is convertible at $1.00 per share.  The investor received warrants to purchase 500,000 shares of common stock at $0.50 per share with a two year exercise term.

We evaluated the warrants for derivative accounting consideration under ASC Topic 815-40, Derivatives and Hedging – Contracts in Entity’s own stock. We concluded that the warrants meet the criteria for classification in stockholders' equity. Therefore, derivative accounting is not applicable for the warrants.  Accordingly, we allocated the proceeds from the transaction to the debt, stock, and warrants based on their relative fair value.  We determined the fair value of the warrants using a Black-Sholes option pricing model with the following inputs:

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The volatility was determined by referring to the average historical volatility of a peer group of public companies because we do not have a trading history from which to determine historical volatility. 

The fair value of the investment was allocated between the note and warrant as follows:

Because the price for recent sales of common stock exceeded the effective conversion price, we also recognized a beneficial conversion feature of $122,553.  The total discount on the note, $290,000, will be recognized as additional interest over the life of the note.  As of June 30, 2014, the remaining amount of the discount is $254,611.

On June 23, 2014, the Company borrowed $30,000 under a convertible note agreement with an investor.  The note bears an interest rate of 10%, matures on June 23, 2015, and is convertible at $1.00 per share. Because the market price for our common stock on the date of the note exceeded the note’s conversion price, $1.00 per share, we recognized a beneficial conversion feature of $21,600 as a discount on the note.  The discount will be recognized as additional interest over the life of the note.  As of June 30, 2014, the remaining amount of the discount is $21,600.

We evaluated the conversion features embedded in the two notes payable described above for derivative accounting in accordance with ASC 815-40, Derivatives and Hedging embedded in the modified notes payable for derivative accounting in accordance with the criteria for classification in stockholders' equity. Therefore, derivative accounting is not applicable.

NOTE 5 – SHAREHOLDERS’ EQUITY

During April 2014, an investor purchased 500,000 shares for $1.00 per share.  The investor also received warrants to purchase 500,000 shares at exercise price of $0.50 per share.  The warrants have a one-year term.

NOTE 6 – COMMITMENTS & CONTINGENCIES

During January 2014, we were granted a license to market nutritional supplements under the TapouT XT name to retail locations worldwide. Under the license agreement, we are required to pay a royalty fee to Nutra Evolution of 12.5% of net sales. The agreement provides us with an initial test period of four years, until January 31, 2018, to distribute the product. We paid $85,000 in conjunction with the license. At the expiration of this four year period, we may extend the license for three (3) consecutive three (3) year terms. We are required to pay minimum royalties of $400,000 during the first contract year; $750,000 during the second contract year and $1,000,000 each year thereafter.

In late April 2014, the Company entered into an agreement with Sullivan Media Group, a Nevada corporation, to conduct market research in regards to promotion of the NutraFuels brand at a cost of $104,500.

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On May 26, 2014, we entered into an agreement with SRC Sales Inc., a Massachusetts corporation (“SRC Sales”) to be the exclusive distributor of our products to certain retailers (the “Retailer Accounts”) in the United States and Canada.  We agreed to pay 7% of sales derived from any Retailer Account obtained from the efforts of SRC Sales.  The agreement has a term of 36 months.  We agreed to issue 50,000 restricted shares of our common stock to SRC Sales for each Retailer Account, and 50,000 shares for each order of $500,000.    For purposes of the agreement, Retailer Account means a retailer with more than 200 locations.  The terms of the Agreement do not apply to any of our prior or existing customers.

NOTE 7 – NOTES PAYABLE - RELATED PARTY

As of June 30 2014, the Company is indebted to Neil Catania, vice president, for $305,000.  From time to time, Mr. Catania has advanced funds to the Company with no formal note agreement.  During 2013, Mr. Catania advanced $405,000 to the Company and the Company repaid $310,000, resulting a net balance due to him of $95,000.  The remaining $210,000 relates to two convertible notes payable, which are described below. 

On November 15, 2012, the Company borrowed $135,000 under a convertible note agreement with Neil Catania, vice president. Under the original terms of the note, it was convertible at the most recent price of shares sold in an offering registered with SEC. The note bears interest at 10% and is due on November 15, 2014.  As of December 31, 2012, $160,000 in principal was outstanding. During September 2013, the note was modified to establish a set conversion price of $1.00 per share. Because no registered offering of our common stock has occurred, the notes did not have an effective conversion feature before the modification occurred and thus derivative treatment could not be determined.  Additionally, there was no beneficial conversion feature associated with the notes prior to their modification.  

We evaluated the modification using the criteria set forth in ASC Topic 470-50, Debt – Modifications and Extinguishments and we determined that the modification was an extinguishment because there was a substantial modification of terms.  However, we did not experience a gain or loss on extinguishment because the fair value of the extinguished note was the same as the fair value of the modified note.  There was no beneficial conversion feature associated with the modified note because the conversion price equaled or exceeded the cash sales prices of common stock ($.35 per share) that had occurred before the modification.

On February 15, 2013 Mr. Catania lent the Company an additional $50,000.  The note is convertible into common stock at a price of $1.00 per share.  The note bears interest at 10% and is due on May 15, 2014.  The conversion feature was not beneficial at the time of issuance because the conversion price equaled or exceeded the cash sales prices of common stock ($.35 per share) that had occurred before the modification.

We evaluated the conversion features embedded in the modified November Note and the February Note for derivative accounting in accordance with ASC 815-40, Derivatives and Hedging – Contracts in Entity’s own stock and concluded that the conversion features meet the criteria for classification in stockholders' equity. Therefore, derivative accounting is not applicable.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and notes thereto included elsewhere in this prospectus. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors”.

OVERVIEW

NutraFuels, Inc. (“NutraFuels”, “us”, “we”, or “our”) is the producer of nutritional oral spray supplements that provide faster and more efficient absorption than traditional methods of delivery.

We were founded as NutraFuels, LLC in 2010. We have progressively added the needed equipment to expand our operations to meet the demand of consumption on a national level.  

We have continually invested for the long term, adding larger facilities, purchasing necessary equipment, and other application development to expand sales and marketing.  This has increased our costs on an absolute basis in the near-term. Many of these investments had and will continue to occur in advance of experiencing any immediate near term benefit.

Components of Results of Operations

Revenues

We derive our revenues from sales of our products. We recognize our revenues from the point of sale and shipment. For the quarter ended June 30, 2014, and June 30, 2013, our revenues were $47,910 and $240,405, respectively. Our revenues declined during the period ending June 30, 2014 because of significantly lower purchases from wholesale and distribution customers and the loss of one of our primary distributors.

Should we not have sufficient revenues to meet operating costs, we will require additional capital. We have no commitments or assurances that it will ever be successful in obtaining adequate future financing.  We have incurred net losses and losses from operations and we expect that we will continue to have negative cash flows as we implement our business plan. There can be no assurance that our continuing efforts to execute our business plan will be successful and that we will be able to continue as a going concern. The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate our continuation as a going concern. As of June 30, 2014 we did not have sufficient cash to sustain us for the next twelve months and we will require additional capital to continue as a going concern. In the event that future financing does not materialize, we may be unable to pay our obligations as they become due or continue as a going concern, any of which circumstances would have a material adverse effect on our business, prospects, financial condition and results of operations.

Costs and Expenses

The Cost of Goods Sold was heavily concentrated in labor and overhead costs.

Advertising costs continued to be some of our largest operational expenses.  As 2014 progresses, we are anticipating more marketing expenditures to research, promote, and enhance our brand.  

The remaining significant expenses related to professional fees associated with our SEC filings and accrued interest as it relates to debt securities issued from current and prior years.

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Results of Operations

In comparison to the prior year, sales have decreased significantly by 80%.  As of the six months ending June 30, 2014, we’ve experienced a decline in repeat business from prior year wholesale and distribution customers and we no longer sold our product to one of our primary distributors.

To address the loss of our primary distributor, we entered into a distribution agreement on May 26, 2014, with SRC Sales Inc., a Massachusetts corporation in the United States and Canada.  We agreed to pay 7% of sales derived from any Retailer Account obtained from the efforts of SRC Sales.  The agreement has a term of 36 months.  We agreed to issue 50,000 restricted shares of our common stock to SRC Sales for each Retailer Account, and 50,000 shares for each order of $500,000.    For purposes of the agreement, Retailer Account means a retailer with more than 200 locations.  The terms of the Agreement do not apply to any of our prior or existing customers.  During the three month period ending June 30, 2014, we did not receive additional sales from the agreement.

Advertising costs have nearly doubled due to marketing research and brand promotion.  

Selling, General, and Administrative Costs are significantly lower than the prior year, as there’s been relatively no stock compensation issued for services performed by employees or outside parties.

Finally, interest expense is higher due to the issuance of debt securities to finance operations.

LIQUIDITY AND CAPITAL RESOURCES

In addition to revenue, our primary source of cash stems from issuance of equity and debt securities.  We are dependent upon the proceeds from the offer and sale of securities to fund our operations.  

Operating

During the first half of 2014, in addition to fixed & variable overhead costs, other operational expenditures primarily consisted of inventory purchases, payments to vendors, professional fees, and advertising costs.

Investing

During the first half of 2014, our investments in fixed assets were limited to equipment purchases.

Financing

Our cash inflow from financing related to the issuance of debt and equity securities.  During the six month period ended June 30, 2014, we received an aggregate of $870,000 from the sale of securities as follows:

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♦ a note payable with shares of common stock in the amount of $50,000 on February 20, 2014, 

♦ a convertible note with attached warrants in the principal amount of $290,000  on March 26, 2014,

♦ a convertible note in the principal amount of $30,000 on June 23, 2014,

♦  the sale of 500,000 common shares at the price of $1.00 per share or an aggregate of $500,000, on April 25, 2014.

SIGNIFICANT ACCOUNTING POLICIES

We report revenues and expenses using the accrual method of accounting for financial and tax reporting purposes.

USE OF ESTIMATES

Management uses estimates and assumption in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses.

INCOME TAXES

We account for income taxes under ASC 740 “Income Taxes” which codified SFAS 109, “Accounting for Income Taxes” and FIN 48 “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109.” Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that we will not realize tax assets through future operations.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Accounting Standards Codification Topic 820, “Disclosures About Fair Value of Financial Instruments,” requires us to disclose, when reasonably attainable, the fair market values of our assets and liabilities, which are deemed to be financial instruments. Our financial instruments consist primarily of cash.

PER SHARE INFORMATION

We compute net loss per share accordance with FASB ASC 205 “Earnings per Share”. FASB ASC 205 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement.

Basic EPS is computed by dividing net loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all potentially dilutive common shares outstanding during the period. Diluted EPS excludes all potentially dilutive shares if their effect is anti-dilutive.

STOCK OPTION GRANTS

We have not granted any stock options to our officers and directors since our inception. Upon the further development of our business, we will likely grant options to directors and officers consistent with industry standards for nutritional and dietary supplement companies.

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We lease an aggregate of 6,400 square feet of office and warehouse space at 6601 Lyons Rd. L-6&7 with base rent at $5,300 per month from Lyons Corporate Park for our executive offices and manufacturing facility. Approximately 5,800 square feet is used for manufacturing and distribution. The lease term expires on January 16, 2016. We believe our facilities are suitable for our present needs.

We do not currently rent any property. We do not intend to renovate, improve, or develop properties. We are not subject to competitive conditions for property and currently have no property to insure. We have no policy with respect to investments in real estate or interests in real estate and no policy with respect to investments in real estate mortgages. Further, we have no policy with respect to investments in securities of or interests in persons primarily engaged in real estate activities. 

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PART II:  OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may become involved in litigation relating to claims arising out of our operations in the normal course of business.  We are not involved in any pending legal proceeding or litigation and, to the best of our knowledge, no governmental authority is contemplating any proceeding to which we are a party or to which any of our properties is subject, which would reasonably be likely to have a material adverse effect on our business and operations.

Item 1A. Risk Factors

Smaller reporting companies are not required to provide the information required by this item.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On April 25, 2014, we sold 500,000 Units to William J. Ferri in exchange for $500,000. Each one (1) unit contains 500,000 shares of common stock and warrants to purchase 500,000 common shares. Each warrant is convertible into one (1) share of our common stock at any time before April 25, 2015.

On April 25, 2014, we issued 50,000 common shares to Dennis Poland in connection with a February 20, 2014, Note Agreement. The note originally had a principal amount of $50,000.  The note had $25,000, outstanding as of June 30, 2014.

On June 23, 2014, we entered into a convertible note agreement with a principal amount of $30,000 with Craig Hetherington which bears interest at 10 %. The note has a maturity date of June 23, 2015, and is convertible into our common shares at the price of $1.00 per share.  As of June 30, 2014, the note had principal and interest outstanding of $30,058.

Item 3. Defaults Upon Senior Securities

Not Applicable.

Item 4. Mine Safety Disclosures

Note Applicable.

Item 5. Other Information

Material Agreements

On May 26, 2014, we entered into an agreement with SRC Sales Inc., a Massachusetts corporation (“SRC Sales”) to be the exclusive distributor of our products to certain retailers (the “Retailer Accounts”) in the United States and Canada.  We agreed to pay 7% of sales derived from any Retailer Account obtained from the efforts of SRC Sales.  The agreement has a term of 36 months.  We agreed to issue 50,000 restricted shares of our common stock to SRC Sales for each Retailer Account, and 50,000 shares for each order of $500,000.    For purposes of the agreement, Retailer Account means a retailer with more than 200 locations.  The terms of the Agreement do not apply to any of our prior or existing customers.

Sullivan Media Group

On April 29, 2014, we entered into an agreement with Sullivan Media Group, Inc., a Nevada corporation to provide us with market research and analysis of the market size, competition, product analysis, revenue model and feasibility for our products for a period of 60 days.  We are obligated to pay $104,500 for the services of which $70,000 has been paid.

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Item 6. Exhibits

(1) Incorporated by reference to our Form S-1 Registration Statement filed with the Securities and Exchange Commission on September 26, 2013.

(2) Incorporated by reference to our Form S-1 Registration Statement filed with the Securities and Exchange

Commission on October 31, 2013.

(3) Incorporated by reference to our Form S-1 Registration Statement filed with the Securities and Exchange

Commission on December 5, 2013.

(4) Incorporated by reference to our Form 10-K filed with the Securities and Exchange Commission on May 5, 2014.
(5) Filed herewith.

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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, there unto duly authorized.

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