10-Q 1 fps-10q.htm QUARTERLY REPORT

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

 

FORM 10-Q

 

xQuarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 For the quarterly period ended June 30, 2014

 

OR

 

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 For the transition period from ________ to _____________________

 

Commission File No. 000-25367

 

 

 

FUEL PERFORMANCE SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada 88-0357508
(State or other jurisdiction of incorporation or
organization)
(I.R.S. Employer Identification No.)
   

7777 Bonhomme, Suite 1920

St. Louis, Missouri

63105
(Address of principal executive offices) (Zip Code)
   

(314) 727-3333

(Registrant’s telephone number, including area code)

 

 

 

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 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 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” 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  
  (Do not check if a smaller reporting company)  

 

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

Yes   o                      No   x

 

The number of shares outstanding of registrant’s only class of stock as of August 13, 2014: Common stock, par value $0.01 per share – 202,675,382 shares outstanding.

 
  

INDEX  

 

     PAGE NO.
PART I. FINANCIAL INFORMATION   
      
Item 1. Financial Statements   
      
  Balance Sheets — June 30, 2014 (unaudited) and December 31, 2013  2
      
  Statements of Operations (unaudited) — Three-Month and Six-Month Periods Ended June 30, 2014 and June 30, 2013  3
      
  Statement of Stockholders’ Equity (Deficit) (unaudited) — Six-Month Period Ended June 30, 2014  4
      
  Statements of Cash Flows (unaudited) — Six-Month Periods Ended June 30, 2014 and June 30, 2013  5
      
  Notes to Unaudited Financial Statements  6
      
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations  12
      
Item 4. Controls and Procedures  18
      
PART II. OTHER INFORMATION   
      
Item 1. Legal Proceedings  19
      
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  19
      
Item 5. Other Information  20
      
Item 6. Exhibits  20
 
  
FUEL PERFORMANCE SOLUTIONS, INC.
(formerly known as International Fuel Technology, Inc.)
 
BALANCE SHEETS

 

   June 30,  December 31,
   2014  2013
ASSETS  (Unaudited)   
       
Current assets          
Cash and cash equivalents  $443,338   $216,913 
Accounts receivable   291,633    10,781 
Inventory   19,286    33,784 
Prepaid expenses and other assets   56,669    28,284 
Total current assets   810,926    289,762 
           
Goodwill   2,211,805    2,211,805 
           
Total assets  $3,022,731   $2,501,567 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)          
           
Current liabilities          
Accounts payable  $576,368   $350,984 
Accrued compensation   766,193    742,465 
Note payable to a related party   -    550,000 
Deferred revenue   -    2,998,242 
Derivative liability   302,000    - 
Other accrued expenses   190,000    190,000 
Other current liabilities   8,332    - 
Total current liabilities   1,842,893    4,831,691 
           
Deferred rent   11,476    12,573 
Deferred income taxes   755,000    723,000 
Total long-term liabilities   766,476    735,573 
           
Total liabilities   2,609,369    5,567,264 
           
Commitments and contingencies          
           
Stockholders’ equity (deficit)          
Common stock, $0.01 par value; 350,000,000 and 250,000,000 shares authorized; 202,675,382 and 158,280,604 (net of 1,440,000 shares held in treasury) shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively   2,041,154    1,597,206 
Treasury stock   (664,600)   (664,600)
Discount on common stock   (819,923)   (819,923)
Additional paid-in capital   71,638,135    67,949,067 
Accumulated deficit   (71,781,404)   (71,127,447)
Total stockholders’ equity (deficit)   413,362    (3,065,697)
           
Total liabilities and stockholders’ equity (deficit)  $3,022,731   $2,501,567 

 

See accompanying Notes to Unaudited Financial Statements.

2
  
FUEL PERFORMANCE SOLUTIONS, INC.
(formerly known as International Fuel Technology, Inc.)
 
STATEMENTS OF OPERATIONS
(Unaudited)

 

   Three Months Ended  Six Months Ended
   June 30,  June 30,  June 30,  June 30,
   2014  2013  2014  2013
             
Net revenues  $454,667   $111,532   $829,093   $324,826 
                     
Operating expenses:                    
Cost of operations   (335,589)   (95,425)   (632,540)   (272,573)
Selling, general and administrative expense   (2,248,713)   (389,656)   (3,127,425)   (818,345)
Gain on deferred revenue write off   -    -    2,998,242    - 
Total operating expenses   (2,584,302)   (485,081)   (761,723)   (1,090,918)
                     
Net income (loss) from operations   (2,129,635)   (373,549)   67,370    (766,092)
                     
Interest income   115    41    173    62 
Gain (loss) on derivative liability   155,000    -    (302,000)   - 
Loss on conversion of debt from a related party   -    -    (387,500)   - 
                     
Net loss before income taxes   (1,974,520)   (373,508)   (621,957)   (766,030)
                     
Income tax provision   16,000    16,000    32,000    32,000 
                     
Net loss  $(1,990,520)  $(389,508)  $(653,957)  $(798,030)
                     
Basic and diluted net loss per common share  $(0.01)  $(0.00)  $(0.00)  $(0.01)
                     
Weighted-average common shares outstanding, basic and diluted   201,484,299    129,617,839    190,057,196    128,315,394 

 

See accompanying Notes to Unaudited Financial Statements.

3
  

FUEL PERFORMANCE SOLUTIONS, INC.

(formerly known as International Fuel Technology, Inc.)

 

STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2014

(Unaudited)

 

   Common
Stock Shares
   Common
Stock Amount
   Treasury
Stock
   Discount on
Common Stock
   Additional
Paid-in Capital
   Accumulated
Deficit
   Total 
Balance, December 31, 2013   159,720,604   $1,597,206   $(664,600)  $(819,923)  $67,949,067   $(71,127,447)  $(3,065,697)
Issuance of stock for cash   31,894,778    318,948    -    -    508,776    -    827,724 
Issuance of stock for conversion of debt   12,500,000    125,000    -    -    812,500    -    937,500 
Expense relating to stock option grants   -    -    -    -    2,367,792    -    2,367,792 
Net loss   -    -    -    -    -    (653,957)   (653,957)
Balance, June 30, 2014   204,115,382   $2,041,154   $(664,600)  $(819,923)  $71,638,135   $(71,781,404)  $413,362 

 

See accompanying Notes to Unaudited Financial Statements.

4
  
FUEL PERFORMANCE SOLUTIONS, INC.
(formerly known as International Fuel Technology, Inc.)
 
STATEMENTS OF CASH FLOWS
(Unaudited)

 

   Six Months Ended
June 30,
2014
   Six Months Ended
June 30,
2013
 
         
Cash flows from operating activities:          
Net loss  $(653,957)  $(798,030)
Adjustments to reconcile net loss to net cash used in operating activities:          
Non-cash stock-based compensation   -    16,875 
Non-cash option expense   2,367,792    - 
Gain on deferred revenue write off   (2,998,242)   - 
Loss on derivative liability   302,000    - 
Loss on conversion of debt from a related party   387,500    - 
Income tax provision   32,000    32,000 
Change in assets and liabilities:          
Accounts receivable   (280,852)   85,043 
Inventory   14,498    19,173 
Prepaid expenses and other assets   (28,385)   4,846 
Accounts payable   225,384    59,681 
Accrued compensation   23,728    96,598 
Deferred rent   (1,097)   (571)
Net cash used in operating activities   (609,631)   (484,385)
           
Cash flows from financing activities:          
Proceeds from issuance of note payable to a related party   -    250,000 
Principal payments on debt due to related party   -    (100,000)
Deposits received for stock purchase   8,332    - 
Proceeds from issuance of common stock   827,724    350,000 
Net cash provided by financing activities   836,056    500,000 
           
Net increase in cash and cash equivalents   226,425    15,615 
Cash and cash equivalents, beginning   216,913    51,346 
Cash and cash equivalents, ending  $443,338   $66,961 
           
Supplemental disclosure of cash flow information:          
Cash paid during the six months ended June 30:          
Interest  $-   $- 
Income taxes   -    - 
           
Non-cash transactions:          
Conversion of related party notes to common stock  $550,000   $- 

 

See accompanying Notes to Unaudited Financial Statements.

5
  

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 – Basis of Presentation

 

The interim financial statements included herein have been prepared by Fuel Performance Solutions, Inc. (formerly known as International Fuel Technology, Inc.) (“FPS,” “we” or the “Company,”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to make the information presented not misleading.

 

These statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary for fair presentation of the information contained therein. Interim results are not necessarily indicative of results for a full year. We suggest that these financial statements be read in conjunction with the financial statements and notes thereto included in the comprehensive annual report on Form 10-K for the years ended December 31, 2013 and 2012 and the quarterly periods ended March 31, 2013, June 30, 2013 and September 30, 2013, filed with the SEC on May 15, 2014. We follow the same accounting policies in preparation of interim reports as we do in our annual reports.

 

Note 2 – Substantial Doubt About Ability to Continue as a Going Concern

 

Our financial statements are presented on the going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have incurred significant losses since inception and currently have, and previously from time to time have had, limited funds with which to operate. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern. Management is in the process of executing a strategy based upon marketing technologies that offer enhanced engine performance and greater fuel economy along with pollution control benefits. We have several technologies in the commercialization phase and in development. We have received necessary regulatory approvals for our products currently in the commercialization phase. We are selling our products directly to the commercial marketplace. We expect to increase our sales to the marketplace, eventually generating a level of revenues sufficient to meet our cash flow and earnings requirements. Until such time, we are dependent on external sources of capital to help fund the operations of the Company.

 

We have been funded since inception primarily by unregistered sales of Company restricted stock, generally to existing shareholders. We believe we still have access to capital from existing shareholders and in addition, management is in the process of executing a plan that we believe will provide us with sufficient funds to allow us to operate through the end of the fourth quarter of 2014. However, we can make no assurances that additional capital will be available to us from either of these sources. Therefore, if we are unable to secure additional capital, we will need to curtail operations.

 

The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of FPS to continue as a going concern.

6
 

Note 3 – Significant Accounting Policies

 

Derivative Financial Instruments

 

The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in our statements of operations. For stock-based derivative financial instruments, the Company uses a Black-Scholes option pricing model, assuming maximum value, in accordance with the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) ASC 815-15, “Derivatives and Hedging,” to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in our balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

 

Fair Value of Financial Instruments

 

The Company measures its financial assets and liabilities in accordance with the requirements of ASC 820, “Fair Value Measurements and Disclosures.” ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

 

Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

 

Level 2 - Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date and includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.

 

Level 3 - Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

 

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of June 30, 2014, and December 31, 2013:

 

Recurring Fair Value Measures  Level 1   Level 2   Level 3   Total 
June 30, 2014                    
Derivative liability  $-   $-   $302,000   $302,000 
December 31, 2013                    
Derivative liability  $-   $-   $-   $- 
7
 

Note 4 – Stockholders’ Equity (Deficit)

 

On May 22, 2014, we filed a certificate of amendment to our Articles of Incorporation increasing the number of our authorized shares from 250,000,000 to 350,000,000 shares with the Nevada Secretary of State.

 

Non-cash stock-based compensation expense recorded in the three and six months ended June 30, 2014 and June 30, 2013 is as follows:

 

   Three Months
 Ended
June 30, 2014
   Three Months
Ended
June 30, 2013
   Six Months
Ended
June 30, 2014
   Six Months
Ended
June 30, 2013
 
                     
Awards to employees  $1,795,206   $-   $2,284,478   $- 
Awards to non-employees   -    -    83,314    16,875 
Total non-cash stock-based compensation expense  $1,795,206   $-   $2,367,792   $16,875 

 

Employee and Director awards

 

During the three months ended June 30, 2014, we issued 10,000,000 options to employees and 5,000,000 options to Directors for Director-related services.

 

During the three months ended March 31, 2014, we issued 12,401,200 options to employees and 2,624,800 options to Directors for Director-related services. These option grants were issued in conjunction with the cancellation of 7,070,400 options that had previously been issued to employees and Directors.

 

During the three months ended March 31, 2014, 20,000 options previously granted to an employee expired. These options had vested before expiration.

 

The following tables summarize information about stock options issued to employees and Directors during the six months ended June 30, 2014:

 

   Shares   Weighted-
average exercise
 price
   Weighted-
average exercise
life
   Intrinsic value 
                 
Outstanding at December 31, 2013   9,489,120   $0.41    1.06   $- 
                     
Granted   30,026,000   $0.10    4.74      
Cancelled   (7,070,400)  $0.39    -      
Expired   (20,000)  $0.25    -      
Outstanding at June 30, 2014   32,424,720   $0.13    4.44   $1,397,736 
                     
Options exercisable at June 30, 2014   29,195,386   $0.13    4.40      
Options exercisable at December 31, 2013   9,489,120   $0.41    1.06      
8
 

The following table provides the primary assumptions used to value employee and Director non-cash stock-based compensation for the six months ended June 30, 2014:

 

  

For the Six Months
Ended

June 30, 2014

 
     
Weighted-average fair value of options granted  $0.09 
Weighted-average assumptions:     
Risk-free interest rate   0.65%
Dividend yield   - 
Expected volatility   1.09 
Expected option life (years)   2.58 

 

Non-employee awards

 

During the three months ended June 30, 2014, we did not issue any options to non-employee consultants for services. No stock options were granted to non-employee consultants for services during the three months ended June 30, 2013.

 

During the three months ended March 31, 2014, we issued 1,555,000 options to non-employee consultants for services. These option grants were issued in conjunction with the cancellation of 1,352,000 options that had previously been issued to a non-employee. No stock options were granted to non-employee consultants for services during the three months ended March 31, 2013.

 

During the three months ended June 30, 2014, 1,015,600 options previously granted to non-employee consultants for services expired. 1,010,400 of these options had vested before expiration.

 

During the three months ended March 31, 2014, 1,000,000 options previously granted to non-employee consultants for services expired. These options had vested before expiration.

 

Services performed by non-employees who were granted options include product/distribution consulting and investor relations related services. The weighted-average fair value for such options that have had a fair value calculation applied ($0.05 for the six months ended June 30, 2014) was estimated at the date of grant using a Black-Scholes option pricing model. The following weighted-average assumptions were used for the first quarter of 2014 grants: risk-free interest rate of 1.08%, volatility factor of 1.03, and a weighted-average expected life of the option of approximately 3.68 years.

 

The following table summarizes information about stock options issued to non-employees during the six months ended June 30, 2014:

 

   Shares   Weighted-
average
exercise price
   Weighted-
average
exercise life
   Intrinsic value 
                 
Outstanding at December 31, 2013   4,137,599   $0.46    0.73   $- 
                     
Granted   1,555,000   $0.08    3.49      
Cancelled   (1,352,000)  $0.48    -      
Expired   (2,015,600)  $0.47    -      
Outstanding at June 30, 2014   2,324,999   $0.19    2.53   $104,305 
                     
Options exercisable at June 30, 2014   2,324,999   $0.19    2.53      
Options exercisable at December 31, 2013   4,132,399   $0.46    0.73      
9
 

Sales of common stock

 

During the three months ended June 30, 2014, we received proceeds of $226,284 for the sale of 5,391,795 restricted shares of our common stock to a small group of accredited investors. We also received $8,332 in funds as deposits to be applied to the purchase of 83,316 restricted shares of common stock.

 

During the three months ended March 31, 2014, we received proceeds of $601,440 for the sale of 26,502,983 restricted shares of our common stock to a small group of accredited investors.

 

See Note 5 – Equity Commitment and Related Party Transactions for a description of other equity transactions FPS effected during the six months ended June 30, 2014.

 

Note 5 – Equity Commitment and Related Party Transactions

 

Effective December 11, 2007, we received an investment commitment from Rex Carr, a Director of FPS and a holder of over 5% of our common stock. Pursuant to the terms of the commitment, Mr. Carr has agreed to invest up to an aggregate of $1,000,000 in FPS, at such time or times as we may request, in the form of a purchase or purchases of restricted common stock of FPS. FPS may elect to draw from the commitment at one time or from time to time; provided, however, that the aggregate of such draws may not exceed $1,000,000. If and when we elect to utilize available commitment funds, we will issue to Mr. Carr that number of shares of restricted common stock of FPS equal to the value of the investment then provided to FPS. The number of shares to be issued will be calculated based on the closing price of our common stock as quoted on OTC Market Group’s OTC Pink marketplace on the date of the sale. There is no stipulation regarding the duration of this commitment. As of June 30, 2014, $500,000 remains available under this equity commitment.

 

As of December 31, 2013, the Company owed $500,000 to Mr. Carr. The terms of the loans associated with this cumulative loan balance did not require the payment of interest and did not require repayment of the principal by a certain date. On February 6, 2014, FPS issued 10,000,000 restricted shares of Company common stock in exchange for the cancellation of this note payable from a related party in the aggregate (face amount) of $500,000. This conversion of notes payable from a related party to restricted shares of the Company’s common stock was treated separately from the equity commitment in place with Mr. Carr.

 

On February 4, 2013, David B. Norris, a Director of FPS, loaned us $50,000. The terms of this loan did not require the payment of interest and did not require repayment of the principal by a certain date. This loan was converted to 2,500,000 shares of the Company’s common stock on February 6, 2014.

 

In conjunction with the conversion of Mr. Carr’s and Mr. Norris’ notes payable from a related party to equity, FPS recorded a $387,500 loss on the conversion of related party notes to our income statement during the six months ended June 30, 2014.

10
 

Note 6 – Blencathia Merger

 

Effective October 27, 1999, we merged with Blencathia Acquisition Corporation (“Blencathia”). Blencathia was a public shell company with immaterial assets and liabilities and 312,000 shares outstanding at the time of the merger, which it redeemed and cancelled upon the merger. In exchange, we issued 312,000 of our common shares to the prior Blencathia owner with the contractual understanding that such shares were to be sold by that owner to achieve gross cash proceeds of $500,000. Any excess proceeds were to be returned to us and any deficiency was to be made up by us issuing additional shares or paying the difference in cash. As we believed that we controlled the ultimate timing of the sale of these 312,000 shares by the prior Blencathia owner, we did not consider these shares as issued or outstanding for purposes of computing earnings per share prior to 2006.

 

In 2006, we learned that the prior Blencathia owner had, in fact, sold the 312,000 shares for aggregate proceeds of approximately $150,000, without our consent. Accordingly, in the fourth quarter of 2006, we recorded $500,000 of general expenses (representing the cost of the 1999 merger) and the deemed issuance of approximately $150,000 of common stock. The remaining $350,000 obligation was reflected as a current accrued expense. Beginning in 2006, the 312,000 shares have been reflected as outstanding for earnings per share computations. During 2009 and 2010, we made payments totaling $160,000 to the prior Blencathia owner. We have not made any payments to the prior Blencathia owner since 2010. The related current accrued expense balance remains at $190,000 at June 30, 2014. We are in negotiations with the prior Blencathia owner to resolve this obligation and may ultimately settle the obligation with either cash or equity securities with a lower market value.

 

Note 7 – Derivative Liability

 

During 2009, we granted a warrant to purchase 2,000,000 shares of the Company’s common stock to an accredited investor in conjunction with equity raise efforts. On April 12, 2013, the Company’s Board of Directors authorized and approved the extension of the expiration date and a change of exercise price for this warrant. The outstanding share purchase warrant originally had a March 23, 2014 expiration date and an exercise price of $0.25. The new modified terms extended the warrant expiration date to April 11, 2018 and reduced the exercise price to $0.226. The exercise price is also subject to dilutive adjustments for share issuances (full ratchet reset features).

 

Because this warrant has full reset adjustments tied to future issuances of equity securities by the Company, it is subject to derivative liability treatment under ASC 815-40-15, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock.” ASC 815-40-15 requires as of the date the warrant is issued, the derivative liability to be measured at fair value and re-evaluated at the end of each reporting period.

 

As of December 31, 2013, we determined the fair value of the warrant’s derivative liability to be nominal. As of June 30, 2014, the fair value of the warrant’s derivative liability is $302,000 and the Company recognized a loss on derivative liability of $302,000 for the six months ended June 30, 2014.

 

Note 8 – Deferred Revenue

 

On February 26, 2009, we received the first purchase order pursuant to a Memorandum of Understanding (“MOU”) with Libya Oil Holdings Limited, Tamoil, Libya Africa Investment Portfolio and Vision Oil Services Ltd (“VOS”). Pursuant to the MOU, VOS paid for the purchase of 600 metric tons of DiesoLiFTTM 10 at a price of 6,000 Euros (approximately $7,600) per metric ton from FPS. We received cash proceeds of approximately $3 million from VOS in February 2009. No such revenues had been recorded to date relating

11
 

to this order because there has been no requested delivery of the product. We have had no communication with VOS in nearly five years and believe they have ceased all activities on behalf of FPS.

 

Based upon a written legal opinion received during the first quarter of 2014, it was determined that effective February 2014, we were no longer obligated to present the nearly $3 million deferred revenue liability on our balance sheet as the statute of limitations period for our performance obligation has passed. In conjunction with this determination, we recorded a gain on deferred revenue liability write-off of approximately $3 million during the six months ended June 30, 2014.

 

Note 9 – Legal Proceedings

 

We are subject to various lawsuits and claims with respect to matters arising out of the normal course of business. While the impact on future financial results is not subject to reasonable estimation because considerable uncertainty exists, management believes, after consulting with counsel, that it is more likely than not that the ultimate liabilities resulting from such lawsuits and claims will not materially affect our financial position, results of operations or liquidity.

 

On July 31, 2006, we received notice from the American Arbitration Association (“AAA”) of a Demand for Arbitration dated July 27, 2006 received by the AAA naming FPS as Respondent and TPG Capital Partners (“TPG”), the prior Blencathia owner, as the Claimant. The arbitration had been requested by TPG to resolve an alleged aggregate proceeds shortfall from the sale of FPS securities issued in the Blencathia merger. TPG has claimed it sold some or all of the 312,000 shares and the sales have not generated at least $500,000 of proceeds, as guaranteed in the merger documents.

 

In an effort to resolve this matter prior to submission to binding arbitration, both TPG and FPS participated in a non-binding mediation conference on January 30, 2007, which did not resolve the matter. Informal discussions are ongoing. It is not expected that the ultimate settlement of this matter, considering we have recorded a liability for the shortfall amount, will have an additional adverse material effect on FPS.

 

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

 

The following is management’s discussion and analysis of certain significant factors that have affected the financial condition, results of operations and cash flows of Fuel Performance Solutions, Inc. (formerly known as International Fuel Technology, Inc.) (“FPS,” “we” or the “Company”) during the periods included in the accompanying financial statements. This discussion should be read in conjunction with the financial statements and notes included in our comprehensive annual report on Form 10-K for the years ended December 31, 2013 and 2012 and the quarterly periods ended March 31, 2013, June 30, 2013 and September 30, 2013, filed with the Securities and Exchange Commission (“SEC”) on May 15, 2014 (the “Annual Report”).

 

Forward-looking Statements and Associated Risks

 

This quarterly report on Form 10-Q contains forward-looking statements that are based largely on our expectations and are subject to a number of risks and uncertainties, many of which are beyond our control, including, but not limited to, economic, competitive and other factors affecting our operations, markets, products and services, expansion strategies, our ability to raise additional capital and other factors described elsewhere in this report and documents filed by us with the SEC, including in our Annual Report under the “Risk Factors” section. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” variations of such words and similar expressions are intended to identify such forward-looking statements. Actual results could differ materially from these forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this report will, in

12
 

fact, prove accurate. We do not undertake any obligation to revise these forward-looking statements to reflect future events or circumstances.

 

Overview

 

We are a fuel performance enhancement technology company transitioning to a commercial enterprise. We believe the macroeconomic environment for our technology and products is excellent now and will continue to be so for the foreseeable future. We believe ever-increasing fuel environmental regulations will likely result in increased demand for additive products to help offset adverse fuel performance and engine impacts resulting from these regulations. We believe our products and technology are uniquely positioned to benefit from this macro environment by offering fuel performance enhancement solutions that specifically address these macro developments and trends.

 

Results of Operations

 

Three and Six Months Ended June 30, 2014 Compared to Three and Six Months Ended June 30, 2013

 

Net Revenues

 

Net revenues for the three months ended June 30, 2014 were $454,667, as compared to $111,532 for the three-month period ended June 30, 2013. This increase is primarily attributable to increased sales of the PerfoLiFTTM BD-Series and DiesoLiFTTM through our distributor network during the three months ended June 30, 2014.

 

During the three months ended June 30, 2014, 94% of our sales were concentrated among four customers. During the three months ended June 30, 2013, 98% of our sales were concentrated among three customers. Sales revenue was split between sales to distributors (95%) and end-users (5%) for the three months ended June 30, 2014. Sales revenue was split between sales to distributors (82%) and end-users (18%) for the three months ended June 30, 2013. Sales revenue generated during the three months ended June 30, 2014 and June 30, 2013 was primarily generated from the sale of the PerfoLiFTTM BD-Series and DiesoLiFTTM.

 

Net revenues for the six months ended June 30, 2014 were $829,093, as compared to $324,826 for the six-month period ended June 30, 2013. This increase is primarily attributable to increased sales of the PerfoLiFTTM BD-Series and DiesoLiFTTM through our distributor network during the six months ended June 30, 2014.

 

During the six months ended June 30, 2014, 86% of our sales were concentrated among three customers. During the six months ended June 30, 2013, 89% of our sales were concentrated among four customers. Sales revenue was split between sales to distributors (96%) and end-users (4%) for the six months ended June 30, 2014. Sales revenue was split between sales to distributors (85%) and end-users (15%) for the six months ended June 30, 2013. Sales revenues generated during the six months ended June 30, 2014 and June 30, 2013 were primarily generated from the sale of the PerfoLiFTTM BD-Series and DiesoLiFTTM.

 

Operating Expenses

 

Total operating expenses were $2,584,302 for the three months ended June 30, 2014, as compared to $485,081 for the three-month period ended June 30, 2013. This $2,099,221 increase from the prior period was primarily attributable to an increase in cost of operations due to increased sales and an increase in non-cash stock-based compensation expense, which is more fully described below.

13
 

Total operating expenses were $761,723 for the six months ended June 30, 2014, as compared to $1,090,918 for the six-month period ended June 30, 2013. This $329,195 decrease from the prior period was primarily attributable to a gain on deferred revenue liability of $2,998,242 during the six months ended June 30, 2014, partially offset by an increase in cost of operations due to increased sales and an increase in non-cash stock-based compensation expense, which is more fully described below.

 

Cost of Operations

 

Cost of operations was $335,589 for the three months ended June 30, 2014, as compared to $95,425 for the three-month period ended June 30, 2013. This increase was due to increased sales for the three months ended June 30, 2014, compared to the three months ended June 30, 2013.

 

Cost of operations was $632,540 for the six months ended June 30, 2014, as compared to $272,573 for the six-month period ended June 30, 2013. This increase was due to increased sales for the six months ended June 30, 2014, compared to the six months ended June 30, 2013.

 

Selling, General and Administrative Expense

  

Selling, general and administrative expense for the three months ended June 30, 2014 was $2,248,713 (including non-cash stock-based compensation of $1,795,206), as compared to $389,656 (including non-cash stock-based compensation of $0) for the three-month period ended June 30, 2013. This increase of $1,859,057 was primarily attributable to the following activities:

  

a $1,795,206 increase in non-cash stock-based compensation expense primarily related to the issuance of options to employees and Directors during the three months ended June 30, 2014; and

 

an approximate $81,000 increase in accounting fees related to audit services conducted during the three months ended June 30, 2014 for our Annual Report.

 

Selling, general and administrative expense for the six months ended June 30, 2014 was $3,127,425 (including non-cash stock-based compensation of $2,367,792), as compared to $818,345 (including non-cash stock-based compensation of $16,875) for the six-month period ended June 30, 2013. This increase of $2,309,080 was primarily attributable to the following activities:

 

a $2,367,792 increase in non-cash stock-based compensation expense related to the cancellation of certain options previously granted to employees and Directors and new option grants to employees, Directors and non-employee consultants during the six months ended June 30, 2014;

 

an approximate $81,000 increase in accounting fees related to audit services conducted during the three months ended June 30, 2014 for our Annual Report;

 

an approximate $75,000 decrease in salary expense (and related payroll taxes) for the comparable periods as the number of employees on payroll has decreased from the prior comparable period; and

 

an approximate $55,000 decrease in research and development expense primarily related to trials conducted at London Midlands during the three months ended March 31, 2013.
14
 

Gain on Deferred Revenue Liability Write Off

 

Gain on deferred revenue liability was $0 and $0 for the three months ended June 30, 2014 and June 30, 2013, respectively.

 

Gain on deferred revenue liability was $2,998,242 and $0 for the six months ended June 30, 2014 and June 30, 2013, respectively. The increase relates to the first quarter of 2014 write off of a previously recorded obligation due to the expiration of the relevant statute of limitations. See Note 8 – Deferred Revenue.

 

Interest Income

 

Interest income was $115 and $41 for the three months ended June 30, 2014 and June 30, 2013, respectively. The increase in interest income is primarily attributable to higher invested cash and cash equivalents balance during the current quarter.

 

Interest income was $173 and $62 for the six months ended June 30, 2014 and June 30, 2013, respectively. The increase in interest income is primarily attributable to higher invested cash and cash equivalents balance during the first six months of 2014.

 

Gain (Loss) on Derivative Liability

 

Gain (loss) on derivative liability was $155,000 and $0 for the three months ended June 30, 2014 and June 30, 2013, respectively.

 

Gain (loss) on derivative liability was $(302,000) and $0 for the six months ended June 30, 2014 and June 30, 2013, respectively.

 

During 2009, we granted a warrant to purchase 2,000,000 shares of the Company’s common stock to an accredited investor in conjunction with equity raise efforts. On April 12, 2013, the Company’s Board of Directors authorized and approved the extension of the expiration date and a change of exercise price for this warrant. The outstanding share purchase warrant originally had a March 23, 2014 expiration date and an exercise price of $0.25. The new modified terms extended the warrant expiration date to April 11, 2018 and reduced the exercise price to $0.226. The exercise price is also subject to dilutive adjustments for share issuances (full ratchet reset features).

 

Because this warrant has full reset adjustments tied to future issuances of equity securities by the Company, it is subject to derivative liability treatment under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) ASC 815-40-15, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock.” ASC 815-40-15 requires as of the date the warrant is issued, the derivative liability to be measured at fair value and re-evaluated at the end of each reporting period.

 

As of December 31, 2013, we determined the fair value of the warrant’s derivative liability to be nominal. As of June 30, 2014, the fair value of the warrant’s derivative liability is $302,000 and the Company recognized a gain (loss) on derivative liability of $155,000 for the three months ended June 30, 2014 and $(302,000) for the six months ended June 30, 2014.

 

Loss on Conversion of Debt From a Related Party

 

Loss on conversion of debt from a related party was $0 and $0 for the three months ended June 30, 2014 and June 30, 2013, respectively.

15
 

Loss on conversion of debt from a related party was $387,500 and $0 for the six months ended June 30, 2014 and June 30, 2013, respectively. During the six months ended June 30, 2014, we converted $550,000 of notes payable to related parties, triggering this loss.

 

Income Tax Provision

 

We have operated at a net loss since inception and have not recorded or paid any income taxes, other than for non-cash deferred tax expense related to a basis difference between financial reporting and tax reporting deductible goodwill. We have significant net operating loss (“NOL”) carry-forwards that would be recognized at such time as we demonstrate the ability to operate on a profitable basis for an extended period of time. The deferred income tax asset resulting primarily from the NOL carry-forwards has been fully reserved with a valuation allowance. Because goodwill is not depreciated and has an indefinite life for book purposes, the deferred tax liability related to the book to tax basis difference is not offset against the deferred tax assets when establishing our valuation allowance. Accordingly, we record non-cash deferred income tax expense, which increases the deferred tax liability, of approximately $16,000 each quarter.

 

Net Loss

 

Net loss for the three months ended June 30, 2014 was $1,990,520, as compared to $389,508 for the three months ended June 30, 2013. The increase in net loss was primarily due to an increase in non-cash stock-based compensation expense ($1,795,206) and an increase in accounting fees (approximately $81,000), partially offset by an increase in gross margin from sales ($102,971) and a gain on derivative liability ($155,000), as described above. The basic and diluted net loss per common share for the three months ended June 30, 2014 and June 30, 2013 was $(0.01) and $(0.00), respectively.

 

Net loss for the six months ended June 30, 2014 was $653,957, as compared to $798,030 for the six months ended June 30, 2013. The decrease in net loss was primarily due an increase in gross margin from sales ($144,300), a gain on a deferred revenue liability write off ($2,998,242) and a decrease in salary expense (approximately $75,000) and research and development expense (approximately $55,000), partially offset by an increase in non-cash stock-based compensation expense ($2,367,792) and accounting fees (approximately $81,000) and losses related to a derivative liability ($302,000) and conversions of related party notes ($387,500), as described above. The basic and diluted net loss per common share for the six months ended June 30, 2014 and June 30, 2013 was $(0.00) and $(0.01), respectively.

 

Recently Issued Accounting Pronouncements

 

Management does not believe that any recently issued, but not effective, accounting standards, if currently adopted, would have a material effect on the Company’s financial statements.

 

Critical Accounting Policies and Estimates

 

Revenue Recognition

 

We recognize revenue from the sale of our products when the price is fixed and determinable, persuasive evidence of an arrangement exists, the products are shipped, title and risk of loss has passed to the buyer and collectability of the resulting receivable is reasonably assured. The majority of our revenues is from sales to product distributors. Product distributors do not have the option to return product that is not immediately sold to an end-user. Therefore, our revenue recognition is not conditional on whether a distributor is able to sell product to an ultimate product end-user. Our sales policies for end-users are consistent with product distributor sales policies.

16
 

Beginning in May 2013, in an effort to address our outstanding payable balance with and at the request of our product manufacturer, our non-United States customers began remitting receivable payments directly to our product manufacturer in lieu of remitting payment directly to us. Under this arrangement, we still maintained the risks and benefits related to sending the product to each customer and thus recorded sales revenues (and associated cost of sales) applying the gross reporting treatment for each transaction pursuant to ASC 605-45, “Principal Agent Considerations.” During the first quarter of 2014, we once again began collecting payments directly from our non-United States customers and paying our product manufacturer separately for the corresponding cost of manufactured goods.

 

Derivative Financial Instruments

 

The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company uses a Black-Scholes option pricing model, assuming maximum value, in accordance with ASC 815-15, “Derivatives and Hedging,” to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.

 

Liquidity and Capital Resources

 

A critical component of our operating plan affecting our ability to execute the product commercialization process is the cash resources needed to pursue our marketing and sales objectives. Until we are able to generate positive and sustainable operating cash flow, our ability to attract additional capital resources in the future will be critical to continue the funding of our operations.

 

In its May 14, 2014 report, our independent registered public accounting firm expressed substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

While we cannot make any assurances as to the accuracy of our projections of future capital needs, based on our current cash available as of August 11, 2014 (approximately $340,000), receivable balances expected to be received within the next fifteen days (approximately $240,000) and a remaining $500,000 balance from a $1,000,000 equity commitment from one of our Directors (see Note 5 to our financial statements), we have adequate cash and cash equivalents balances and commitments to fund operations through the end of the fourth quarter of 2014. In 2011, management implemented a salary deferral program for all employees to conserve our cash position. This salary deferral program has continued to be in effect during the first six months of 2014.

 

We have been funded since inception primarily by unregistered sales of Company restricted stock, generally to existing shareholders. We believe we still have access to capital from existing shareholders and in addition, management is in the process of executing a plan that we believe will provide us with sufficient funds to allow us to operate through the end of the fourth quarter of 2014. However, we can make no assurances that additional capital will be available to us from either of these sources. Therefore, if we are unable to secure additional capital, we will need to curtail operations.

17
 

Cash used in operating activities was $609,631 for the six months ended June 30, 2014, as compared to cash used in operating activities of $484,385 for the six months ended June 30, 2013. The increase in cash used in operating activities was due primarily to payments made to our external auditors in the six months ended June 30, 2014 in conjunction with our 2011, 2012 and 2013 annual audits which commenced in April 2014 and reduced cash expenditures associated with payroll for the six months ended June 30, 2014 due to a reduced number of employees.

 

Cash provided by financing activities was $836,056 for the six months ended June 30, 2014, as compared to $500,000 for the six months ended June 30, 2013. During the six months ended June 30, 2014, we raised $827,724 upon the private placement of 31,894,778 restricted shares of our common stock to accredited investors. During the six months ended June 30, 2013, we raised $350,000 upon the private placement of 5,875,000 restricted shares of our common stock to accredited investors. During the six months ended June 30, 2013, we also received net proceeds of $150,000 in the form of notes payable from related parties.

 

Net cash increased by $226,425 for the six months ended June 30, 2014, as compared to an increase in net cash of $15,615 for the six months ended June 30, 2013.

 

During the six months ended June 30, 2014 and June 30, 2013, we did not make significant investments in property and equipment and do not anticipate doing so in the immediate future.

 

Working capital deficit at June 30, 2014 was $(1,031,967), as compared to $(4,541,929) at December 31, 2013. The negative working capital balance for June 30, 2014 is negatively impacted by a $302,000 derivative liability that was recorded during the six months ended June 30, 2014. The negative working capital amount for December 31, 2013 is strongly impacted by the approximate $3 million deferred revenue liability that was recorded on our balance sheet, but has since been removed.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

Our management has evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2014. Based on this evaluation, the principal executive officer and principal financial officer have identified a material weakness in our internal control over financial reporting. Because of the material weakness, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective at June 30, 2014.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

This quarterly report does not include an attestation report of our independent auditors regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent auditors pursuant to temporary rules of the SEC that permit our company to provide only management’s report in this quarterly report.

18
 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are subject to various lawsuits and claims with respect to matters arising out of the normal course of business. While the impact on future financial results is not subject to reasonable estimation because considerable uncertainty exists, management believes, after consulting with counsel, that it is more likely than not that the ultimate liabilities resulting from such lawsuits and claims will not materially affect our financial position, results of operations or liquidity.

 

On July 31, 2006, we received notice from the American Arbitration Association (“AAA”) of a Demand for Arbitration dated July 27, 2006 received by the AAA naming FPS as Respondent and TPG Capital Partners (“TPG”), the prior Blencathia Acquisition Corporation (“Blencathia”) owner, as the Claimant. The arbitration had been requested by TPG to resolve an alleged aggregate proceeds shortfall from the sale of FPS securities issued in the Blencathia merger. TPG has claimed they sold some or all of the 312,000 shares and the sales have not generated at least $500,000 of proceeds, as guaranteed in the merger documents.

 

In an effort to resolve this matter prior to submission to binding arbitration, both TPG and FPS participated in a non-binding mediation conference on January 30, 2007, which did not resolve the matter. Informal discussions are ongoing. It is not expected that the ultimate settlement of this matter, considering we have recorded a liability for the shortfall amount, will have an additional adverse material effect on FPS. Since 2009, FPS has made payments to TPG totaling $160,000 to reduce the recorded liability. The remaining liability balance is $190,000 at June 30, 2014.

 

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

 

During the three months ended June 30, 2014, we sold the following securities that were not registered under the Securities Act of 1933, as amended. All of such securities were sold to accredited investors.

 

Transaction Date Aggregate No.
of Restricted
Shares

Aggregate
Purchase
Price

Exemption From
Registration

Sale to 3 accredited investors   April 2, 2014 – April 22, 2014    2,500,000   $125,000   Rule 506 of
Regulation D
Sale to 1 accredited investor   April 29, 2014    100,000   $10,000   Rule 506 of
Regulation D
Sale to 1 accredited investor   April 29, 2014    1,693,051   $33,861   Regulation S
Sale to 3 accredited investors   May 2, 2014 – May 23, 2014    1,049,024   $52,451   Regulation S
Sale to 1 accredited investor   June 4, 2014    49,720   $4,972   Regulation S
Sale to 1 accredited investor   June 16, 2014    83,316   $8,332   Regulation S
19
 

Item 5. Other Information

 

There have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors since the filing of our Annual Report.

 

Item 6. Exhibits

 

(a)The following exhibits are filed as part of this report:

  

31.1Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.

  

31.2Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.

  

32.1Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

  

32.2Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101.INS XBRL Instance Document

 

101.SCH XBRL Taxonomy Extension Schema

 

101.PRE XBRL Taxonomy Extension Presentation Linkbase

 

101.LAB XBRL Taxonomy Extension Labe Linkbase

 

101.CAL XBRL Taxonomy Extension Calculation Linkbase

 

101.DEF XBRL Taxonomy Extension Definition Linkbase

20
 

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.

  

FUEL PERFORMANCE SOLUTIONS, INC.

(Registrant)

 

By: /s/ Jonathan R. Burst   Date:  August 13, 2014  
  Jonathan R. Burst        
  Chief Executive Officer        
  (Principal Executive Officer)        
           
By: /s/ Stuart D. Beath   Date: August 13, 2014  
  Stuart D. Beath        
  Chief Financial Officer        
  (Principal Financial and Accounting Officer)    
21