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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 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 April 30, 2011
 
Commission file number: 000-49993
 
FORCE FUELS, INC.
(Exact name of small business issuer as specified in its charter)


 
Nevada
 
56-2284320
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification Number)



1503 South Coast Dr. Ste. 206      Costa Mesa CA 92626
(Address of principal executive offices)



714 927 9118
(Issuer’s telephone number)


Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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   o
   
 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 accelerated filer” and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one): 
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 12-b-2 of the Exchange Act).  Yes  o    No  x

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 10,441,875 shares of Common Stock, as of June 13, 2011.

Transitional Small Business Disclosure Format (check one): Yes  o    No  x
 
 

 

TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
 
   
 
Item 1.
Financial Statements
F-1 to F-14
       
 
Item 2.
Management's Discussion and Analysis of Financial Conditions and Results of Operations
1
       
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
5
       
 
Item 4.
Controls and Procedures
5
       
PART II - OTHER INFORMATION
5
   
 
Item 1.
Legal Proceedings
5
       
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
6
       
 
Item 3.
Defaults Upon Senior Securities
7
       
 
Item 4.
Submission of Matters to a Vote of Security Holders
7
       
 
Item 5.
Other Information
7
       
 
Item 6.
Exhibits
7
       
SIGNATURES
7
   
EXHIBIT INDEX
8

 

 
 

 

PART I - FINANCIAL INFORMATION
Item 1.
Unaudited Financial Statements


 
FORCE FUELS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Contents
Page(s)
   
Consolidated Balance Sheets at April 30, 2011 (Unaudited) and July 31, 2010 
F-2
   
Consolidated Statements of Operations for the Three and Nine Month Periods Ended April 30, 2011 and 2010, and from Inception on July 15, 2002 through April 30, 2011 (Unaudited)
F-3
   
Consolidated Statements of Stockholders’ Equity (Deficit) for the period from July 15, 2002 (inception) through April 30, 2011 (Unaudited)
F-4 - F-5
   
Consolidated Statements of Cash Flows for the Nine Month Periods Ended April 30, 2011 and 2010, and for the period from Inception on July 15, 2002 through April 30, 2011 (Unaudited)
F-6 - F-7
   
Notes to the Consolidated Financial Statements (Unaudited)
F-8 to F-15


  
  

 
F-1
 
 

 
 
FORCE FUELS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS

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

   
April 30,
   
July 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
ASSETS
 
CURRENT ASSETS:
           
Cash
  $ 48,647     $ 86,842  
Accounts receivable, net
            7,451  
Inventory, net
    -       81,980  
Prepaid expenses
    -       10,000  
Notes receivable - related
    2,500       -  
                 
Total Current Assets
    51,147       186,273  
                 
LONG-TERM ASSETS:
               
Deposits
    12,638       -  
Oil and gas property, net
    -       1,258,292  
Property and equipment, net
    -       133,361  
                 
Total Long-term Assets
    12,638       1,391,653  
                 
Total Assets
  $ 63,785     $ 1,577,926  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
 
CURRENT LIABILITIES:
               
Accounts payable and accrued expenses
  $ 230,550     $ 224,258  
Notes payable, net
    340,366       139,747  
Convertible notes payable - related
    29,200       -  
Notes payable for acquisition of oil and gas property, net
    -       1,368,121  
Accrued officer salaries
    617,053       310,830  
                 
Total Current Liabilities
    1,217,169       2,042,956  
                 
NON CURRENT LIABILITIES:
               
Asset retirement obligation
    31,979       36,622  
                 
Total Liabilities
    1,249,148       2,079,578  
                 
STOCKHOLDERS' DEFICIT:
               
Preferred stock at $0.001 par value: 1,000,000 shares authorized;
               
none issued or outstanding
    -       -  
Common stock at $0.001 par value: 100,000,000 shares authorized;
               
9,641,875 and 6,475,129 shares issued, respectively
    9,642       6,475  
Additional paid-in capital
    3,333,533       2,543,518  
Deficit accumulated during development stage
    (4,528,538 )     (3,051,645 )
                 
Total Stockholders' Deficit
    (1,185,363 )     (501,652 )
                 
Total Liabilities and Stockholders' Deficit
  $ 63,785     $ 1,577,926  


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

F-2
 
 

 

FORCE FUELS, INC. AND SUBSIDIARY
 (A DEVELOPMENT STAGE COMPANY)
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
                           
For the Period
 
                           
from July 15,
 
   
For the Three Months Ended
   
For the Nine Months Ended
   
2002 (inception)
 
   
April 30,
   
April 30,
   
through January 31,
 
   
2011
   
2010
   
2011
   
2010
   
2011
 
                               
REVENUES:
                             
Oil and gas
  $ -     $ -     $ 41,758     $ -     $ 49,209  
                                         
COST OF SALES
    -       -       52,291       -       52,291  
                                         
GROSS PROFIT (LOSS)
    -       -       (10,533 )     -       (3,082 )
                                         
OPERATING EXPENSES:
                                       
                                         
Well operating costs
    -       -       30,394       -       55,394  
Depreciation on well operating equipment
    4,939       -       14,817       -       9,878  
Research and development
    -       -       -       -       115,434  
Salary and wages - officers
    78,176       96,666       299,336       169,166       550,740  
Impairment of intellectual property rights
    -       -       -       -       344,000  
Stock based compensation
    -       (12,900 )     -       322,310       494,933  
General and administrative expenses
    174,897       119,225       764,082       294,587       1,963,533  
                                         
Total operating  expenses
    258,012       202,991       1,108,629       786,063       3,533,912  
                                         
NET LOSS FROM OPERATIONS
    (258,012 )     (202,991 )     (1,119,162 )     (786,063 )     (3,536,994 )
                                         
OTHER INCOME (EXPENSES) :
                                       
Gain on settlement of debt
    (46,882 )     739,689       (271,882 )     739,689       (535,014 )
Loss on disposal of assets
    -       -       -       -       (19,915 )
Interest expense
    (7,406 )     (1,875 )     (85,849 )     (6,448 )     (124,315 )
                                         
Total other income (expenses)
    (54,288 )     737,814       (357,731 )     733,241       (679,244 )
                                         
NET LOSS BEFORE TAXES
    (312,300 )     534,823       (1,476,893 )     (52,822 )     (4,216,238 )
                                         
INCOME TAXES
    -       -       -       -       -  
                                         
NET LOSS
  $ (312,300 )   $ 534,823     $ (1,476,893 )   $ (52,822 )   $ (4,216,238 )
                                         
NET LOSS PER COMMON SHARE
                                       
- BASIC AND DILUTED:
  $ (0.03 )   $ 0.09     $ (0.19 )   $ (0.01 )        
                                         
Weighted Average Common
                                       
Outstanding - basic and diluted
    8,927,268       6,130,037       7,876,956       5,983,214          
  
 
The accompanying notes are an integral part of these consolidated financial statements.

F-3
 
 

 

FORCE FUELS, INC. AND SUBSIDIARY
 (A DEVELOPMENT STAGE COMPANY)
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

                           
Deficit
       
                           
Accumulated
   
Total
 
   
Common Stock
   
Additional
         
During the
   
Stockholders'
 
   
Number of
         
Paid-in
   
Treasury
   
Development
   
Equity
 
   
Shares
   
Par Value
   
Capital
   
Stock
   
Stage
   
(Deficit)
 
                                     
Balance at inception on July 15, 2002
    -     $ -     $ -     $ -     $ -     $ -  
                                                 
Common shares issued in March, 2006 for
                                               
   cash at an average price of $2.43 per share
    175,000       175       425,825       -       -       426,000  
                                                 
Adjustment on reverse acquisition
                                               
   in March, 2006
    1,050,000       1,050       (10,550 )     (235,000 )     -       (244,500 )
                                                 
Treasury stock purchased in June, 2006
    -       -       -       (75,000 )     -       (75,000 )
                                                 
Net loss for the period from inception on
                                               
   July 15, 2002 through July 31, 2006
    -       -       -       -       (30,873 )     (30,873 )
                                                 
Balance, July 31, 2006
    1,225,000       1,225       415,275       (310,000 )     (30,873 )     75,627  
                                                 
Net loss for the year ended July 31, 2007
    -       -       -       -       (69,804 )     (69,804 )
                                                 
Balance, July 31, 2007
    1,225,000       1,225       415,275       (310,000 )     (100,677 )     5,823  
                                                 
Retirement of treasury stock in May, 2008
    (1,100,000 )     (1,100 )     (308,900 )     310,000       -       -  
                                                 
Common shares issued in May, 2008 for
                                               
   services rendered at $0.03 per share
    3,700,000       3,700       107,300       -       -       111,000  
                                                 
Common shares issued in June, 2008 for
                                               
   services rendered at $0.03 per share
    2,797,763       2,798       81,135       -       -       83,933  
                                                 
Common shares issued in June, 2008 at
                                               
   $0.03 per share in connection with assets
                                               
   assignment agreement
    1,000,000       1,000       29,000       -       -       30,000  
                                                 
Net loss for the year ended July 31, 2008
    -       -       -       -       (269,356 )     (269,356 )
                                                 
Balance, July 31, 2008
    7,622,763       7,623       323,810       -       (370,033 )     (38,600 )
                                                 
Common shares issued in February, 2010
                                               
   for services rendered at $0.10 per share
    60,000       60       5,940       -       -       6,000  
                                                 
Net loss for the year ended July 31, 2009
    -       -       -       -       (399,723 )     (399,723 )
                                                 
Balance, July 31, 2009
    7,682,763     $ 7,683     $ 329,750     $ -     $ (769,756 )   $ (432,323 )
The accompanying notes are an integral part of these consolidated financial statements.
 
F-4
 
 

 

FORCE FUELS, INC. AND SUBSIDIARY
 (A DEVELOPMENT STAGE COMPANY)
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

                           
Deficit
       
                           
Accumulated
   
Total
 
   
Common Stock
   
Additional
         
During the
   
Stockholders'
 
   
Number of
         
Paid-in
   
Treasury
   
Development
   
Equity
 
   
Shares
   
Par Value
   
Capital
   
Stock
   
Stage
   
(Deficit)
 
                                     
Balance, July 31, 2009
    7,682,763     $ 7,683     $ 329,750     $ -     $ (769,756 )   $ (432,323 )
                                                 
Common shares issued in October, 2009
                                               
   for signing bonus at $0.30 per share
    1,000,000       1,000       299,000       -       -       300,000  
                                                 
Common shares issued in January, 2010
                                               
   for services rendered at $0.30 per share
    1,122,366       1,122       335,588       -       -       336,710  
                                                 
Common shares issued in March, 2010
                                               
   for services rendered at $0.30 per share
    172,000       172       51,428       -       -       51,600  
                                                 
Common shares issued in April, 2010
                                               
   upon conversion of debt at an average
                                               
   price of $4.07 per share
    138,000       138       561,476       -       -       561,613  
                                                 
Issuance of shares in June, 2010 for
                                               
   as a loan inducement fee
                                               
   at $0.89 per share
    150,000       150       133,350       -       -       133,500  
                                                 
Common shares issued in July, 2010
                                               
   upon conversion of promissory
                                               
   note at $0.94 per share
    10,000       10       9,390       -       -       9,400  
                                                 
Cancellation of common shares
    (3,800,000 )     (3,800 )     3,800       -       -       -  
                                                 
Forgiveness of debt by shareholder
    -       -       739,689       -       -       739,689  
                                                 
Fair value of warrants granted
    -       -       80,047       -       -       80,047  
                                                 
Net loss for the year ended July 31, 2010
    -       -       -       -       (2,281,889 )     (2,281,889 )
                                                 
Balance, July 31, 2010
    6,475,129       6,475       2,543,518       -       (3,051,645 )     (501,652 )
                                                 
Common shares issued in August, 2010
                                               
   for prepaid consulting fees at
                                               
   $0.65 per share (unaudited)
    50,000       50       32,450       -       -       32,500  
                                                 
Common shares issued in August, 2010
                                               
   for consulting services at $1.05 per share (unaudited)
    31,746       32       33,300       -       -       33,332  
                                                 
Common shares issued in August, 2010
                                               
   for consulting services at $0.65 per share (unaudited)
    100,000       100       64,900       -       -       65,000  
                                                 
Common shares issued in September, 2010
                                               
   upon default on promissory note at
                                               
   $0.45 per share (unaudited)
    500,000       500       224,500       -       -       225,000  
                                                 
Common shares issued in September, 2010
                                               
   as loan inducement fee at $0.26 per share (unaudited)
    60,000       60       15,540       -       -       15,600  
                                                 
Common shares issued in October, 2010
                                               
   for prepaid consulting fees at
                                               
   $0.45 per share (unaudited)
    150,000       150       67,350       -       -       67,500  
                                                 
Common shares issued in October, 2010
                                               
   for consulting services at $0.45 per share (unaudited)
    25,000       25       11,225       -       -       11,250  
                                                 
Common shares issued in November, 2010
                                               
   for consulting services at $0.35 per share (unaudited)
    300,000       300       104,700       -       -       105,000  
                                                 
Common shares issued in December, 2010
                                               
   for services at $0.20 per share (unaudited)
    150,000       150       29,850       -       -       30,000  
                                                 
Common shares issued in January, 2011
                                               
   for services at $0.10 per share (unaudited)
    700,000       700       69,300       -       -       70,000  
Common shares issued in February, 2011
                                               
   for services at $0.15 per share (unaudited)
    200,000       200       29,800       -       -       30,000  
Common shares issued in March, 2011
                                               
   for services at $0.12 per share (unaudited)
    900,000       900       107,100       -       -       108,000  
                                                 
Net loss for the nine months ended
                                               
   April 30, 2011 (unaudited)
    -       -       -       -       (1,476,893 )     (1,476,893 )
                                                 
Balance, April 30, 2011 (unaudited)
    9,641,875     $ 9,642     $ 3,333,533     $ -     $ (4,528,538 )   $ (1,185,364 )


The accompanying notes are an integral part of these consolidated financial statements.
 
F-5
 
 

 

FORCE FUELS, INC. AND SUBSIDIARY
 (A DEVELOPMENT STAGE COMPANY)
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
               
For the Period
 
               
from July 15,
 
   
For the Nine Months Ended
   
2002 (inception)
 
   
April 30,
   
through April 30,
 
   
2011
   
2010
   
2011
 
                   
CASH FLOWS FROM OPERATING ACTIVITIES:
                 
 Net Loss
    (1,476,893 )     (52,822 )     (4,216,238 )
  
                       
 Adjustments to reconcile net loss to net cash
                       
 used in operating activities
                       
         Depreciation
    14,817       1,734       24,091  
         Amortization of intangible assets
    -       21,500       86,000  
         Impairment of intellectual property rights
    -       -       344,000  
         Gain on settlement of debt
    271,882       -       581,896  
         Loss on disposal of assets
    -       -       19,915  
         Amortization of discount on debt
    65,198       -       98,033  
         Stock based compensation
    -       -       300,000  
         Common stock issued for services
    568,182       290,209       1,290,925  
         Fair value of warrants
    -       -       40,063  
 Changes in operating assets and liabilities:
                       
          Accounts receivable
    7,451       -       -  
          Inventory
    52,291       -       52,291  
          Deposits and prepaid expenses
    (2,638 )     -       (2,638 )
         Other current assets
    -       -       -  
         Accounts payable and accrued expenses
    6,292       47,901       221,051  
         Accrued salaries
    306,223       -       617,053  
                         
 NET CASH USED IN OPERATING ACTIVITIES
    (187,195 )     308,522       (543,558 )
                         
 CASH FLOWS FROM INVESTING ACTIVITIES:
                       
  Note receivable - related party
    (2,500 )     -       (2,500 )
  Purchase of test equipment
    -       -       (24,250 )
                         
 NET CASH USED IN INVESTING ACTIVITIES
    (2,500 )     -       (26,750 )
                         
 CASH FLOWS FROM FINANCING ACTIVITIES:
                       
 Proceeds from sale of common stock
    -       -       501,000  
 Payment of common stock to be issued
    -       -       (75,000 )
 Purchase of treasury stock
    -       -       (310,000 )
 Proceeds from notes payable
    196,500       115,658       615,066  
 Repayment of notes payable
    (45,000 )     -       (145,000 )
 Due to related parties
    -       131,750       345,189  
                         
 NET CASH PROVIDED BY FINANCING ACTIVITIES
    151,500       247,408       931,255  
                         
 NET CHANGE IN CASH & CASH EQUIVALENTS
    (38,195 )     555,930       360,947  
  
                       
 Cash & Cash Equivalents at Beginning of Period
    86,842       -       -  
                         
 Cash & Cash Equivalents at End of Period
    48,647       555,930       360,947  

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

F-6
 
 

 

FORCE FUELS, INC. AND SUBSIDIARY
 (A DEVELOPMENT STAGE COMPANY)
  CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 
   
For the Nine Months Ended
April 30,
   
For the period
from July 15, 2002
(inception) through
 April 30,
 
   
2011
   
2010
   
2011
 
                         
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
                       
                         
   Interest paid
 
$
-
   
$
6,545
   
$
-
 
   Income tax paid
 
$
-
   
$
-
   
$
-
 
                         
 NON-CASH INVESTING AND FINANCING ACTIVITIES:
                       
                         
Issuance of shares and debt for purchase of intellectual property rights
 
$
-
     
-
   
$
430,000
 
Forgiveness of debt from related party
 
$
-
     
-
   
$
739,689
 
Issuance of promissory note for investment in oil lease rights and related assets
 
$
-
     
-
   
$
1,500,000
 


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

F-7
 
 

 
FORCE FUELS, INC.
 (A Development Stage Company)
 Notes to the Consolidated Financial Statements
 April 30, 2011 and July 31, 2010

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies of Force Fuels, Inc. and Subsidiary is presented to assist in understanding the Company’s consolidated financial statements. Collectively, these entities are referred to hereafter as the Company.” The consolidated financial statements and notes are representations of the Company’s management, which is responsible for their collective integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the Unites States of America, as well as standards of the Public Company Accounting Oversight Board (United States) and have been consistently applied in the preparation of the consolidated financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in accordance with such rules and regulations. The information furnished in the interim condensed 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. Operating results for the nine months ended April 30, 2011 are not necessarily indicative of the results that may be expected for the year ending July 31, 2011.

Organization and Business Activities

Force Fuels, Inc. (the Company”)(a development stage company) was incorporated under the laws of the State of Nevada in July 2002. The primary products of the Company are regulated and standardized energy-based products. These energy-based products include traditional hydrocarbon-based oil and gas as well as “green” or “alternative” energy, which includes solar and wind.

Principles of Consolidation

The consolidated financial statements include the accounts of Force Fuels Services, Inc., and Cheetah Motor Corporation.  All inter-company balances and transactions have been eliminated.

Reclassification

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation.   These reclassifications had no effect on reported losses.

Development stage company

The Company is a development stage company as defined by ASC 915.  The Company is still devoting substantially all of its efforts to establishing the businesses. 

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP”) 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 dates of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.

Cash equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
F-8
 
 

 

FORCE FUELS, INC.
 (A Development Stage Company)
 Notes to the Consolidated Financial Statements
April 30, 2011 and July 31, 2010

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Property and equipment, net

Property and equipment is recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of 7 years. The cost of assets sold or retired and the related amounts of accumulated depreciation are removed from the accounts in the year of disposal. Any resulting gain or loss is reflected in current operations. Expenditures for maintenance and repairs are charged to operations as incurred. The capitalized cost of the oil properties will be amortized based on the units-of-production method.  Costs incurred for property acquisition and further development activity will be capitalized and amortized as previously noted.

Revenue recognition

The Company follows the guidance of ASC 605 for revenue recognition.  The Company recognizes revenues when they are realized or realizable and earned, less estimated future doubtful accounts.  The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.  The Company will derive majority of its revenue from sales of oil purchased from third parties and/or produced by its wells.

The Company uses the sales method to account for sales of crude oil and natural gas. Under this method, revenues are recognized based on actual volumes of oil and gas sold to purchasers. The volumes sold may differ from the volumes to which the Company is entitled based on the interest in the properties. These differences create imbalances which are recognized as a liability only when the imbalance exceeds the estimate of remaining reserves. Costs associated with production are expensed in the period incurred.

Stock-based compensation

The Company accounted for its stock based compensation under the recognition and measurement principles of the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 (revised 2004) Share-Based Payment” (SFAS No. 123R”)(ASC 718) using the modified prospective method for transactions in which the Company obtains employee services in share-based payment transactions and the Financial Accounting Standards Board Emerging Issues Task Force Issue No. 96-18 Accounting For Equity Instruments That Are Issued To Other Than Employees For Acquiring, Or In Conjunction With Selling Goods Or Services” (EITF No. 96-18”) for share-based payment transactions with parties other than employees provided in SFAS No. 123R(ASC 718).  All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.  The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the third-party performance is complete or the date on which it is probable that performance will occur.

Income taxes

The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109 Accounting for Income Taxes”  (SFAS No. 109”)(ASC 740).  Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.  Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. 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.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of operations in the period that includes the enactment date.
 
F-9
 
 

 

FORCE FUELS, INC.
 (A Development Stage Company)
 Notes to the Consolidated Financial Statements
 April 30, 2011 and July 31, 2010

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Inventory

The Company’s inventory at April 30, 2011 consists of purchased barrels of oil. The inventory is accounted for on a First-In-First-Out (FIFO) basis, and is valued at the lower of cost or market. Inventory is evaluated periodically by management for potential impairment issues.

Oil and Gas Properties, Successful Efforts Method

The Company uses the successful efforts method of accounting for oil and gas producing activities. Under the successful efforts method, costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells that find proved reserves, and to drill and equip development wells are capitalized. Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed as incurred. The Company evaluates its proved oil and gas properties for impairment on a field-by-field basis whenever events or changes in circumstances indicate that an asset’s carrying value may not be recoverable. The Company follows ASC 360 for these evaluations. Unamortized capital costs are reduced to fair value if the undiscounted future net cash flows from our interest in the property’s estimated proved reserves are less than the asset’s net book value.

Unproved oil and gas properties that are individually significant are periodically assessed for impairment of value, and a loss is recognized at the time of impairment by providing an impairment allowance. Other unproved properties are amortized based on the Company's experience of successful drilling and average holding period. Capitalized costs of producing oil and gas properties, after considering estimated dismantlement and abandonment costs and estimated salvage values, are depreciated and depleted by the unit-of-production method. Support equipment and other property and equipment are depreciated over their estimated useful lives.

Under ASC 932, drilling costs for exploratory wells are initially capitalized but generally must be charged to expense unless the wells are determined to be successful within one year after completion of drilling. Circumstances that permit continued capitalization of exploratory drilling costs are addressed by ASC 932. The one-year limitation may be exceeded for an exploratory well only if sufficient reserves have been found to justify its completion and sufficient progress has been made in assessing the reserves and the economic and operating viability of the project. If the exploratory well does not meet both criteria, its capitalized costs are expensed, net of any salvage value. Annual disclosures are required under ASC 932 to provide information about management’s evaluation of capitalized exploratory well costs, including disclosure of (i) net changes from period to period in the costs for wells that are pending the determination of proved reserves, (ii) the amount of any exploratory well costs that have been capitalized for more than one-year after the completion of drilling and (iii) an aging of suspended exploratory well costs and the number of wells affected. 

On the sale or retirement of a complete unit of a proved property, the cost and related accumulated depreciation, depletion, and amortization are eliminated from the property accounts, and the resultant gain or loss is recognized. On the retirement or sale of a partial unit of proved property, the cost is charged to accumulated depreciation, depletion, and amortization with a resulting gain or loss recognized in income. On the sale of an entire interest in an unproved property for cash or cash equivalent, gain or loss on the sale is recognized, taking into consideration the amount of any recorded impairment if the property had been assessed individually. If a partial interest in an unproved property is sold, the amount received is treated as a reduction of the cost of the interest retained.
 
F-10
 
 

 

FORCE FUELS, INC.
 (A Development Stage Company)
 Notes to the Consolidated Financial Statements
 April 30, 2011 and July 31, 2010

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently issued accounting pronouncements

In January 2010, the FASB issued Accounting Standards Update 2010-02, Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary. This amendment to Topic 810 clarifies, but does not change, the scope of current US GAAP. It clarifies the decrease in ownership provisions of Subtopic 810-10 and removes the potential conflict between guidance in that Subtopic and asset derecognition and gain or loss recognition guidance that may exist in other US GAAP. An entity will be required to follow the amended guidance beginning in the period that it first adopts FAS 160 (now included in Subtopic 810-10). For those entities that have already adopted FAS 160, the amendments are effective at the beginning of the first interim or annual reporting period ending on or after December 15, 2009. The amendments should be applied retrospectively to the first period that an entity adopted FAS 160.

In January 2010, the FASB issued Accounting Standards Update 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash (A Consensus of the FASB Emerging Issues Task Force). This amendment to Topic 505 clarifies the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a limit on the amount of cash that will be distributed is not a stock dividend for purposes of applying Topics 505 and 260. Effective for interim and annual periods ending on or after December 15, 2009, and would be applied on a retrospective basis. 

In December 2009, the FASB issued Accounting Standards Update 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. This Accounting Standards Update amends the FASB Accounting Standards Codification for Statement 167.

In December 2009, the FASB issued Accounting Standards Update 2009-16, Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets. This Accounting Standards Update amends the FASB Accounting Standards Codification for Statement 166. 

In October 2009, the FASB issued Accounting Standards Update 2009-15, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing. This Accounting Standards Update amends the FASB Accounting Standard Codification for EITF 09-1.

In October 2009, the FASB issued Accounting Standards Update 2009-14, Software (Topic 985): Certain Revenue Arrangements That Include Software Elements. This update changed the accounting model for revenue arrangements that include both tangible products and software elements. Effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted.

In October 2009, the FASB issued Accounting Standards Update 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. This update addressed the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than a combined unit and will be separated in more circumstances that under existing US GAAP. This amendment has eliminated that residual method of allocation. Effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted.

In September 2009, the FASB issued Accounting Standards Update 2009-12, Fair Value Measurements and Disclosures (Topic 820): Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). This update provides amendments to Topic 820 for the fair value measurement of investments in certain entities that calculate net asset value per share (or its equivalent). It is effective for interim and annual periods ending after December 15, 2009. Early application is permitted in financial statements for earlier interim and annual periods that have not been issued. 
 
F-11
 
 

 

FORCE FUELS, INC.
 (A Development Stage Company)
 Notes to the Consolidated Financial Statements
 April 30, 2011 and July 31, 2010

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently issued accounting pronouncements

In July 2009, the FASB ratified the consensus reached by EITF (Emerging Issues Task Force) issued EITF No. 09-1, (ASC Topic 470) "Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance" ("EITF 09-1"). The provisions of EITF 09-1, clarifies the accounting treatment and disclosure of share-lending arrangements that are classified as equity in the financial statements of the share lender. An example of a share-lending arrangement is an agreement between the Company (share lender) and an investment bank (share borrower) which allows the investment bank to use the loaned shares to enter into equity derivative contracts with investors. EITF 09-1 is effective for fiscal years that beginning on or after December 15, 2009 and requires retrospective application for all arrangements outstanding as of the beginning of fiscal years beginning on or after December 15, 2009. Share-lending arrangements that have been terminated as a result of counterparty default prior to December 15, 2009, but for which the entity has not reached a final settlement as of December 15, 2009 are within the scope. Effective for share-lending arrangements entered into on or after the beginning of the first reporting period that begins on or after June 15, 2009.

The Company has reviewed the above pronouncements and does not expect any of the provisions to have a material effect on the financial position, results of operations or cash flows of the Company.

NOTE 2 - DEVELOPMENT STAGE ACTIVITIES AND GOING CONCERN

The Company is currently in the development stage and has conducted minimal operations to date.  While pursuing the development process of acquiring oil producing properties, on April 23, 2010 the Company entered into an agreement with Pemco, LLC, to acquire thirteen oil producing properties.

As reflected in the accompanying consolidated financial statements, the Company had a deficit accumulated during development stage of $4,528,538 at April 30, 2011 and had a net loss of $1,476,893 for the nine months ended April 30, 2011 with minimal revenues since inception.  Although the Company has recorded minimal revenues through April 30, 2011, these revenues pertain to sales of purchased oil and gas inventory, as opposed to oil and gas removed from the ground by the Company.

While the Company is attempting to grow operations and generate a reliable flow of revenues, the Company’s cash position is not sufficient enough to support the Company’s operations.  Management intends to raise additional funds by way of a public or private offering.   While the Company believes in the viability of its strategy to generate revenues and in its ability to raise additional funds, there can be no assurances to that these efforts will succeed and that the Company will continue as a going concern.  The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise capital and to generate sufficient revenues.  The consolidated financial statements do not include any adjustments that would be necessary if the Company is unable to continue as a going concern.
 
F-12
 
 

 

FORCE FUELS, INC.
 (A Development Stage Company)
 Notes to the Consolidated Financial Statements
 April 30, 2011 and July 31, 2010

NOTE 3 - PURCHASE OF OIL PROPERTIES

On April 23, 2010 the Company entered into an agreement with Pemco LLC to acquire thirteen oil producing properties.  The cost of the properties aggregated $1,500,000 (including all of the associated equipment already in place amounting to $138,300 and approximately one thousand, two hundred seventy one (1,271) barrels of oil in storage amounting to $81,980 which has been considered as inventory. A deposit of $100,000 was paid at closing which reduced the amount due and owing to Pemco to $900,000, to be secured through a collateralized non-interest bearing promissory note to be paid, in equal monthly installments of $100,000, commencing one month after the initial closing and continuing for nine months. The Company has paid $45,000 on this balance through April 30, 2011.  The remaining balance of $500,000 is to be paid to Energy Recovery Systems. The terms of the agreement with Energy Recovery Systems were not finalized as of the date of this report. Through April 30, 2011 The Company has imputed $55,315 of interest on the promissory notes at the rate of 10% per annum.

On March 31, 2011 the Company and Pemco LLC mutually agreed to terminate agreement dated April 23, 2010 above in exchange for one-half (50%) working interest in the Company’s oil producing revenue. As the result of the Joint Operating Agreement, Pemco, LLC and Energy Recovery Systems released all remaining debts owed by the Company.
  
   
April 30, 2011
   
July 31, 2010
 
Note payable to ERS, unsecured, due November 30, 2010
 
-
   
$
500,000
  
Note payable to Pemco, unsecured, due February 23, 2011
   
 -
     
900,000
 
Discount for imputed interest
   
-
     
(31,879)
 
Net
 
-
   
$
1,368,121
 


NOTE 4 - NOTES PAYABLE

Notes payable at April 30, 2011 and July 31, 2010 consisted of the following:
   
April 30, 2011
   
July 31, 2011
 
Note payable on January 29, 2009, 10% interest, unsecured and due on demand.
  $ 35,960     $ 35,960  
Note payable on June 1, 2009, 10% interest, unsecured and due on demand.
    13,738       13,738  
Note payable on July 1, 2009, 10% interest, unsecured and due on demand.
    12,710       12,710  
Note payable on October 1, 2009, 10% interest, unsecured and due on demand.
    10,658       10,658  
Note payable on July 16, 2010, 10% interest, secured by the pledge of 500,000 shares of the Company’s common stock, due 90 days following the date on which the funds  were delivered.
    100,000       100,000  
Note payable on September 23, 2010, 1.0% interest, unsecured, convertible into common stock at a price of $0.50 per share, due 90 days from issuance date
    59,200       -  
Note payable on November 18, 2010, zero percent interest, unsecured, convertible into  Common stock at a 50% discount to market
    50,000       -  
Note payable on March 28, 2011, 5% interest, unsecured, convertible into common stock at a price of $0.20 per share at the time of conversion
    27,300          
Note payable on February 28, 2011, 8% interest, unsecured, convertible into common stock at a price of $0.25 per share at the time of conversion
    5,000          
Note payable on March 2, 2011, 5% interest, unsecured, convertible into common stock at a price of $0.25 per share at the time of conversion
    5,000          
Note payable on April 22, 2011, 1% interest, unsecured and due on demand
    50,000          
Discount for beneficial conversion feature
    -       (33,319 )
Total
  $ 369,566     $ 139,747  
All of the above notes payable are due to unrelated parties. The related interest expense on these notes for the nine month period ended April 30, 2011 was $46,767.
 
F-13
 
 

 

FORCE FUELS, INC.
 (A Development Stage Company)
 Notes to the Consolidated Financial Statements
 April 30, 2011 and July 31, 2010

NOTE 5 - STOCKHOLDERS’ EQUITY (DEFICIT)

Common Stock

On October 1, 2009, the Company issued 1,000,000 shares of its Common Stock to the Company’s chief executive officer as a signing bonus for entering into an Employment Agreement dated October 1, 2009. The shares were valued at $0.30 per share, or $300,000 in the aggregate.

On January 28, 2010, the Company issued 1,122,366 shares to various consultants for services provided to the Company. The shares were valued at $0.30 per share, or $336,710 in the aggregate.

On March 16, 2010 and March 30, 2010 the Company issued 172,000 shares, of its common stock to various consultants for services provided to the Company. The shares were valued at $0.30 per share, or $51,600 in the aggregate.

Between March 1 and April 30, 2010 the Company issued 138,000 shares of common stock upon conversion of convertible promissory notes at an average price of $4.07 per share, or $561,613 in the aggregate.

On June 25, 2010 the Company issued 150,000 shares of common stock as an inducement to an unrelated third-party lender. The shares were valued at $0.89 per share, or $133,500 in the aggregate.

On July 31, 2010 the Company issued 10,000 shares of common stock upon conversion of convertible promissory notes at a price of $0.94 per share, or $9,400 in the aggregate.

During the year ended July 31, 2010 the Company cancelled 3,800,000 previously issued shares of common stock. 

In August, 2010 the Company issued 50,000 shares of common stock for prepaid consulting services valued at the market rate of $0.65 per share, or $32,500 in the aggregate.

In August, 2010 the Company issued 31,746 shares of common stock for consulting services rendered at $1.05 per share, pursuant to a consulting agreement. The shares were valued at $33,332 in the aggregate.

In August, 2010 the Company issued 100,000 shares of common stock for consulting services at the market rate of $0.65 per share, or $65,000 in the aggregate.

In September, 2010 the Company issued 500,000 shares of common stock upon the default of a note payable. The shares were valued at the market rate of $0.45 per share, or $225,000 in the aggregate.

In September, 2010 the Company issued 60,000 shares of common stock as a loan inducement fee. The shares were valued at the market rate of $0.26 per share, or $15,600 in the aggregate.

In October, 2010 the Company issued 150,000 shares of common stock as payment for prepaid consulting fees valued at the market rate of $0.45 per share, or $67,500 in the aggregate.

In October, 2010 the Company issued 25,000 shares of common stock for services rendered. The shares were valued at the market rate of $0.45 per share, or $11,250 in the aggregate.

In November, 2010 the Company issued 300,000 shares of common stock for services rendered. The shares were valued at the market rate of $0.35 per share, or $105,000 in the aggregate.

In December, 2010 the Company issued 150,000 shares of common stock for services rendered. The shares were valued at the market rate of $0.20 per share, or $30,000 in the aggregate.

In January, 2011 the Company issued 700,000 shares of common stock for services rendered. The shares were valued at the market rate of $0.10 per share, or $70,000 in the aggregate.

In February, 2011 the Company issued 200,000 shares of common stock for services rendered. The shares were valued at the market rate of $0.15 per share, or $30,000 in the aggregate.

In March, 2011 the Company issued 900,000 shares of common stock for services rendered. The shares were valued at the market rate of $0.12 per share, or $108,000 in the aggregate.

F-14
 
 

 

FORCE FUELS, INC.
 (A Development Stage Company)
 Notes to the Consolidated Financial Statements
 April 30, 2011 and July 31, 2010

NOTE 6 - FORMATION OF SUBSIDIARIES

On May 5, 2010 the Company formed Force Fuels Services, Inc., a Kansas entity (FFS”) as a wholly-owned subsidiary of the Company. On September 13, 2010 the Company formed Cheetah Motor Corp., a Nevada entity (Cheetah”), as a wholly-owned subsidiary. Both FFS and Cheetah were formed so as to allow the Company the opportunity to explore additional business opportunities in the green energy industries.

NOTE 7 - SUBSEQUENT EVENTS

In May, 2011 the Company issued 400,000 shares of common stock to an unrelated third-party entity for services rendered. The shares were valued at market rate at $0.11, resulting in an aggregate expense of $44,000.

In accordance with ASC 855-10, Company management reviewed all material events through the date of this report and there are no subsequent events to report other than the event listed in the preceding paragraph.
  
     
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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Plan of Operations

The Company changed the focus of its business plan and on April 23, 2010 signed an agreement with Pemco, LLC to begin the process of engaging in the new direction. The primary products of the Company will be regulated and standardized energy-based products, which do not require a significant marketing or sales force. These energy-based products include traditional hydrocarbon-based oil and gas, as well as green” or alternative” energy, which includes solar and wind. On March 31, 2011 the Company and Pemco LLC mutually agreed to terminate agreement dated April 23, 2010 above in exchange for one-half (50%) working interest in the Company’s oil producing revenue. As the result of the Joint Operating Agreement, Pemco, LLC and Energy Recovery Systems released all remaining debts owed by the Company.
In the oil and gas field, the Company focuses on: 1) the purchase of marginally producing shallow oil wells, which are relatively inexpensive to operate and can be optimized with existing technologies; 2) the purchase of leases with potential for additional drilling in proven producing areas; and 3) the acquisition of in-house know-how to further optimize production through stimulation, refurbishing and site optimization.

The strategy of the Company is to invest principally in the acquisition or installation of energy-based assets that can contribute immediately and substantially to cash flow through sales to local energy companies, thus only requiring external or government financing for subsequent acquisitions and not for operating expenses.
 
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In the short term, the Company will focus on maximizing revenue from its recent acquisition of over 2,600 acres of oil producing land leases with 49 oil strippers and 5 natural gas sites located in southern Kansas.

Subsequently, in the field of electrical energy production, the Company will focus solely on the exploitation of proven and established technologies that can generate a positive return on investment and tax benefits applicable to green energy and oil revenues. While naturally taking full advantage of current government assistance and incentives, placing a significant premium on the economic self-sustainability of all our projects and how new technologies and policies may affect us.

The Company intends to continue to leverage its Intellectual Property assets through further development, expansion and marketing of the technology licensed from ICE Conversions, Inc. This development will be implemented through the creation of a fully owned subsidiary.

This drive train technology consists of a proprietary, zero emission hydrogen fuel cell/electric battery hybrid drive system. and relies on hydrogen fuel cells to produce electricity and acts as a range extender for electric drive vehicles. The Company is currently in the process of selecting a manufacturer to build the first prototypes. The Company intends to combine components purchased from various suppliers and partner those items with its proprietary technology and integrate all of the parts into complete electric drive vehicles. 

Resignation of Oscar Luppi

On March 22, 2011, the Board of Directors accepted Mr. Oscar Luppi’s voluntary resignation from his positions of Chairman, President, Chief Executive Officer, and Treasurer of the Registrant.  There were no disagreements or misunderstandings relating to the Registrant’s operations, policies or practices between the Board and Mr. Luppi leading to his resignation.  

Appointment of Thomas C. Hemingway

On March 22, 2010, Thomas C. Hemingway was appointed Chairman, President , Chief Executive Officer and Treasurer of the Registrant. No compensation arrangement has been entered into or is contemplated with respect to Mr. Hemingway’s employment as President, Chief Executive Officer, Treasurer and Interim Chief Financial Officer.

Going Concern

Our registered independent accounting firm expressed substantial doubt as to our ability to continue as a going concern in its report on the accompanying financial statements for the period ended April 30, 2011 based on the fact that we do not have adequate working capital to finance our day-to-day operations.  Our continued existence depends upon the success of our efforts to raise additional capital necessary to meet our obligations as they come due and to obtain sufficient capital to execute our business plan. We intend to obtain capital primarily through issuances of debt or equity or entering into collaborative arrangements with corporate partners. There can be no assurance that we will be successful in completing additional financing or collaboration transactions or, if financing is available, that it can be obtained on commercially reasonable terms.  If we are not able to obtain the additional financing on a timely basis, we may be required to further scale down or perhaps even cease the operation of our business. The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders.  Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.  Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Liquidity and Capital Resources

At April 30, 2011, we had $48,647 in cash and cash equivalents and our current liabilities consisted of $230,550 in accounts payable and accrued expenses, $369,566 in notes payable and convertible notes, and $617,053 in accrued officer salaries.  

For the nine months ended April 30, 2011, net cash used in operating activities was $187,195, inclusive of a $1,476,893 net loss for the nine months ended April 30, 2011. Additional significant factors effecting cash flows from operations were depreciation charges of $14,817, common stock issuances for services totaling $568,182, a loss on settlement of debt in the amount of $271,882, amortization of debt discount totaling $65,198, a change in inventory of $52,291, an increase in accrued officer salaries in the amount of $306,223, and a change in accounts payable and accrued expenses amounting to $6,292.

Cash used in investing activities during the nine months ended April 30, 2011 totaled $2,500, all of which related to the Company’s note receivable from a related party.