S-1 1 ifue_s1.htm FORM S-1 ifue_s1.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM S-1
 
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
FUEL PERFORMANCE SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
 
Nevada
 
6770
 
88-0357508
(State or other jurisdiction of
incorporation or organization)
 
(Primary Standard Industrial
Classification Code Number)
 
(I.R.S. Employer
Identification Number)
 
7777 Bonhomme Avenue, Suite 1920
St. Louis, MO 63105
Tel. No.: (314) 727-3333
(Address, including zip code, and telephone number including area code, of registrant’s principal executive offices)
 
Copies of communications to:
 
Gregg E. Jaclin, Esq.
Szaferman Lakind Blumstein & Blader, PC
101 Grovers Mill Road
Second Floor
Lawrenceville, NJ 08648
Tel. No.: (609) 275-0400
 Fax No.: (609) 555-0969
 
Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this registration statement.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. 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.
 
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
x
 


 
 

 
Calculation of Registration Fee
 
Title of Each Class Of Securities to be Registered
 
Amount to be
Registered (1)
 
 
Proposed
Maximum
Offering Price
Per Share (2)
 
 
Proposed
Maximum
Aggregate
Offering Price
 
 
Amount of
Registration Fee
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock, par value $0.01 per share, issuable pursuant to the conversion of a 10% senior convertible note
 
 
11,500,000
 
 
$
0.10
 
 
$
1,150,000
 
 
$
148.12
 
Common stock, par value $0.01 per share, underlying warrants
 
 
6,666,667
 
 
$
0.12
 
 
$
800,000
 
 
$
103.04
 
Common stock, par value $0.01 per share, issuable pursuant to the exercise of warrants issued to the Pataki-Cahill Group
   
70,750
   
$
0.12
   
$
8,490
   
$
1.09
 
Common stock, par value $0.01 per share, issuable pursuant to the exercise of warrants issued to John M. Hennessy
   
7,187,500
   
$
0.12
   
$
862,500
   
$
111.09
 
Total
 
 
25,424,917
 
 
   
 
 
$
2,820,990
 
 
$
363.34
 
____________
(1) Pursuant to Rule 416 under the Securities Act of 1933, as amended, (the “Securities Act”) this registration statement shall be deemed to cover the additional securities (i) to be offered or issued in connection with any provision of any securities purported to be registered hereby to be offered pursuant to terms which provide for a change in the amount of securities being offered or issued to prevent dilution resulting from stock splits, stock dividends or similar transactions, (ii) of the same class as the securities covered by this registration statement issued or issuable prior to completion of the distribution of the securities covered by this registration statement as a result of a split of, or a stock dividend on, the registered securities; (iii) 7,187,500 and 70,750 shares of common stock issuable upon exercise of warrants held by John M. Hennessy and the Pataki-Cahill Group, respectively, pursuant to certain piggy-back registration rights agreements.
 
(2) The offering price has been estimated solely for the purpose of computing the amount of the registration fee in accordance with Rule 457(c) and Rule 457(o) of the Securities Act on the basis of the closing bid price of the common stock of the registrant as reported on the OTC Pink Marketplace on September 18, 2014.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.
 
 
2

 
 
EXPLANATORY NOTE
 
This registration statement contains one prospectus as set forth below:
 
Resale Prospectus. This prospectus is to be used by the selling security holders in connection with a potential resale by certain seller security holders of up to an aggregate of 25,424,917 shares of the registrant’s common stock, par value $0.01, per share consisting of: (i) 11,500,000 shares of common stock underlying shares of the registrant’s 10% senior convertible note; (ii) warrants to purchase an aggregate of 6,666,667 shares of the registrant’s common stock issuable to the selling security holders pursuant to a stock purchase agreement, dated August 22, 2014, between the registrant and certain selling security holders, upon conversion of the registrant’s outstanding 10% senior convertible note and exercise of the warrants held by the selling security holders upon the effectiveness of this registration statement; and (iii) an aggregate of 7,258,250 shares of common stock issuable upon exercise of warrants pursuant to certain piggy-back registration rights agreements;
 
 
The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission (“SEC”) is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
 
 
 
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PRELIMINARY PROSPECTUS
Subject to completion, dated September _______, 2014
 
FUEL PERFORMANCE SOLUTIONS, INC.
 
25,424,917 SHARES OF COMMON STOCK
 
This prospectus is to be used by certain funds and accounts (the “Selling Security Holders”) in connection with a potential resale by certain Seller Security Holders of up to an aggregate of 25,424,917 shares of Fuel Performance Solutions, Inc.’s (the “Company”) common stock, par value $0.01, per share (the “Common Stock”) consisting of: (i) 11,500,000 shares (the “Convertible Note Common Shares”) of Common Stock underlying shares of the Company’s 10% senior convertible note (the “Convertible Note”); (ii) shares underlying warrants (the “Warrants”) to purchase an aggregate of 6,666,667 shares of Common Stock (the “Warrant Shares”) issuable to the Selling Security Holders pursuant to a stock purchase agreement dated August 22, 2014 (the “Stock Purchase Agreement”), between the Company and the Selling Security Holders, upon conversion of the Company’s outstanding Convertible Note Common Shares and exercise of the Warrants held by Selling Security Holders upon the effectiveness of this registration statement; and (iii) an aggregate of 7,258,250 shares of common stock (the “Piggy-back Warrant Shares”) issuable upon exercise of warrants (the “Piggy-back Warrants”) pursuant to certain piggy-back registration rights agreements;
 
Our Common Stock is quoted on the Over-The-Counter (“OTC”) Pink Marketplace under the ticker symbol “IFUE.” The Selling Security Holders have not engaged any underwriter in connection with the sale of their shares of Common Stock. Common Stock being registered in this registration statement may be sold by Selling Security Holders at prevailing market prices or privately negotiated prices or in transactions that are not in the public market. On September 18, 2014, the closing price of our Common Stock was $0.115 per share.
 
We are an emerging growth company as that term is used in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) and are subject to reduced public company reporting requirements.
 
Investing in our Common Stock involves a high degree of risk. Before buying any shares, you should carefully read the discussion of the material risks of investing in our Common Stock in “Risk Factors” beginning on page 8 of this prospectus.
 
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
 
The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the SEC is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
 
FUEL PERFORMANCE SOLUTIONS, INC.
 
The date of this prospectus is September __, 2014
 
 
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TABLE OF CONTENTS
 
   
PAGE
 
Prospectus Summary
    6  
Cautionary Statement Regarding Forward-Looking Statements
    7  
Risk Factors
    8  
Use of Proceeds
    13  
Determination of Offering Price
    13  
Dilution
    13  
Selling Security Holders
    13  
Plan of Distribution
    15  
Description of Securities
    16  
Interests of Named Experts and Counsel
    17  
Description of Business
    18  
Description of Property
    25  
Legal Proceedings
    25  
Market for Common Equity and Related Shareholder Matters
    26  
Holders
    26  
Dividend Policy
    26  
Transfer Agent and Registrar
    26  
Management Discussion and Analysis of Financial Condition and Results of Operations
    27  
Directors, Executive Officers, Promoters and Control Persons
    35  
Executive Compensation
    38  
Security Ownership of Certain Beneficial Owners and Management
    41  
Transactions with Related Persons, Promoters and Certain Control Persons
    44  
Disclosure of Commission Position on Indemnification of Securities Act Liabilities
    45  
Where You Can Find Additional Information
    45  
Index to Financial Statements
    46  
Signatures
    52  
 
 
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Please read this prospectus carefully. It describes our business, our financial condition and results of operations. We have prepared this prospectus so that you will have the information necessary to make an informed investment decision.
 
You should rely only on information contained in this prospectus. We have not authorized any other person to provide you with different information. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted. The information in this prospectus is complete and accurate as of the date on the front cover, but the information may have changed since that date.
 
PROSPECTUS SUMMARY
 
This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all the information that you should consider before investing in the common stock. You should carefully read the entire prospectus, including “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements, before making an investment decision. In this prospectus, the terms “FPS,” “IFUE,” “Company,” “we,” “us” and “our” refer to Fuel Performance Solutions, Inc., a Nevada corporation and its subsidiaries, including Interfacial Technologies (UK) Limited.
 
Overview
 
Fuel Performance Solutions, Inc., formerly known as International Fuel Technology, Inc., (the “Company” or “FPS”) is 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.
 
Where You Can Find Us
 
Our principal executive office is located at 7777 Bonhomme Avenue, Suite 1920, St. Louis, Missouri 63105. Our telephone number is (314) 772-3333 and fax number is (314) 863-6900. Our website is: http://www.fuelperformancesolutions.com/.

Implications of Being an Emerging Growth Company
 
We qualify as an emerging growth company as that term is used in the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:
 
A requirement to have only two years of audited financial statements and only two years of related Management Discussion & Analysis;
 
Exemption from the auditor attestation requirement in the assessment of the emerging growth company’s internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002;
 
Reduced disclosure about the emerging growth company’s executive compensation arrangements; and
 
No non-binding advisory votes on executive compensation or golden parachute arrangements.
 
We have already taken advantage of these reduced reporting burdens in this prospectus, which are also available to us as a smaller reporting company as defined under Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
 
 
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In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”) for complying with new or revised accounting standards. We have elected to use the extended transition period provided above and therefore our financial statements may not be comparable to companies that comply with public company effective dates.
 
We could remain an emerging growth company for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our Common Stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.
 
THE OFFERING
 
Securities offered
 
25,424,917 shares of Common Stock underlying: (1) 11,500,000 shares of Common Stock underlying shares of the Company’s 10% senior convertible note and (2) warrants to purchase an aggregate of 6,666,667 shares of Common Stock. The Common Stock underlying the 10% senior convertible note and the Warrants are fully vested, exercisable immediately and with an expiration period of five years; (3) an aggregate of 7,258,250 of Common Stock issuable upon exercise of warrants pursuant to certain piggy-back registration rights agreements.
 
 
 
Common stock outstanding before the offering:
 
202,675,382*
 
 
 
Common stock outstanding after the offering:
 
202,675,382*
 
 
 
Termination of the offering:
 
The offering will conclude upon such time as all of the Common Stock becomes eligible for resale without volume limitations pursuant to Rule 144 under the Securities Act, or any other rule of similar effect.
 
 
 
OTCBB trading symbol:
 
IFUE
 
 
 
Use of proceeds:
 
We are not selling any shares of the Common Stock covered by this prospectus. As such, we will not receive any of the offering proceeds from the registration of the shares of Common Stock covered by this prospectus.
 
 
 
Risk factors:
 
The Common Stock offered hereby involves a high degree of risk and should not be purchased by investors who cannot afford the loss of their entire investment. See “Risk Factors” beginning on page 8.
___________
*does not include Common Stock underlying any convertible note, warrant or option, including ones offered in this registration statement.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
 
The information contained in this prospectus, including in the documents incorporated by reference into this prospectus, includes some statements that are not purely historical and that are “forward-looking statements.” Such forward-looking statements include, but are not limited to, statements regarding our Company and management’s expectations, hopes, beliefs, intentions or strategies regarding the future, including our financial condition, results of operations, and the expected impact of the offering on the Company’s individual and combined financial performance. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipates,” “believes,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “possible,” “potential,” “predicts,” “projects,” “seeks,” “should,” “will,” “would” and similar expressions, or the negatives of such terms, may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.
 
The forward-looking statements contained in this prospectus are based on current expectations and beliefs concerning future developments and the potential effects on the Company and the transaction. There can be no assurance that future developments actually affecting us will be those anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond the Company’s control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements.
 
 
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RISK FACTORS

Prior to the filing of our comprehensive annual report on Form 10-K for the fiscal years ended December 31, 2013and 2012 and the quarterly periods ended March 31, 2013, June 30, 2013 and September 30, 2013 (the “2013 10-K”) on May 15, 2014, we had been delinquent in our SEC reporting obligations for over 12 months. Although we expect to file our periodic reports in a timely fashion going forward, we cannot provide assurance that our business and the price of our common stock will not be materially adversely affected by our previous failure to file required periodic reports.
 
Despite the filing of our 2013 10-K, we face a continuing risk that the SEC will initiate an administrative proceeding to suspend or revoke the registration of our common stock under the Exchange Act due to our previous failure to file an annual report on Form 10-K since March 30, 2012 or quarterly reports on Form 10-Q since November 14, 2012. In addition, there may be continued concern on the part of customers, investors and employees about our financial condition and extended filing delay status, which may result in the loss of business opportunities, limitations on our ability to raise capital and general reputational harm. Any of the foregoing could materially adversely affect our business, results of operations, financial condition and stock price.
 
Because we have transitioned from a development stage to a commercialization phase for our products with a new technology and little market and sales visibility, we may not be able to create market demand for our products.
 
We are currently engaged in extensive marketing and sales efforts, including additional laboratory testing and customer field-based demonstration trials to generate purchasing interest in our products. We have only a limited marketing history. There is a substantial risk of failure associated with development stage businesses attempting to make the transition to self-sustaining commercial entities because of the lack of established customer relationships and knowledge and acceptance of the new products being marketed. We have experienced in the past, are continuing to experience, and may experience in the future, some of the problems, delays and expenses associated with this transition, many of which are beyond our control, including but not limited to those depicted below:
 
substantial delays and expenses related to testing and further development of our products;
 
customer resistance relating to the marketing of a new product in the fuel additive marketplace;
 
competition from larger and more established companies; and
 
lack of market acceptance of our new products and technologies.

We have a history of operating losses and due to our current lack of sustainable sales and the possibility of not achieving our sales goals, we may not become profitable or be able to sustain profitability.
 
Since our inception we have incurred significant net losses. We reported net losses of $1,394,596 and $1,929,917 for the twelve months ended December 31, 2013 and December 31, 2012, respectively. We reported net losses of $653,957 and $798,030 for the six months ended June 30, 2014 and June 30, 2013, respectively. Our accumulated deficit as of June 30, 2014 and December 31, 2013 was $71,781,404 and $71,127,447, respectively. We expect to continue to incur net losses in the near to mid-term future. The magnitude of these losses will depend, in large part, on our ability to realize product sales revenue from the marketing and sale of our products. To date, we have not had any material operating revenue from the sale of our products and there can be no assurance we will be able generate material revenues. Our ability to generate revenues will be dependent upon, among other things, being able to (1) overcome negative connotations on the part of industrial fuel consumers regarding fuel additives in general; (2) convince potential customers of the efficacy and economic and environmental benefits of our products; and (3) generate the acceptance of our technology and products by potential customers and thereby create the opportunity to sell our products at a sufficient profit margin. Because we do not yet have a material, recurring revenue stream resulting from the sale of our products, there can be no assurance that we will be successful in these efforts. Should we achieve profitability, there is no assurance we can maintain, or increase, our level of profitability in the future.
 
 
8

 
 
Our independent registered public accounting firm has substantial doubt as to our ability to continue as a going concern.
 
As a result of our losses to date, potential losses in the future, current limited capital resources and accumulated deficit, our independent registered public accounting firm has concluded that there is substantial doubt as to our ability to continue as a going concern, and accordingly, has modified their report on our December 31, 2013 financial statements included in our 2013 10-K in the form of an explanatory paragraph describing the events that have given rise to this uncertainty. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. These factors may make it more difficult for us to obtain additional funding to meet our obligations. Our continuation is dependent upon our ability to generate or obtain sufficient cash to meet our obligations on a timely basis and ultimately to attain profitable operations. We anticipate that we will continue to incur significant losses at least until successful commercialization of one or more of our products, and we may never operate profitably in the future.
 
We have identified a material weakness in our internal control over financial reporting and as such, a material misstatement of the annual or interim financial statements may not be prevented or detected on a timely basis.

We identified a material weakness in our internal control over financial reporting in 2012 and 2013. The material weakness relates to the fact that FPS has limited accounting personnel with sufficient expertise, accounting knowledge and training in United States generally accepted accounting principles (“GAAP”) and financial reporting requirements. Specifically, FPS lacks sufficient personnel to anticipate, identify, resolve and review complex accounting issues and to complete a timely review of the financial statements. This material weakness was not corrected during 2013. See Item 9A, “Controls and Procedures” in our 2013 10-K for additional information. We cannot be assured that additional material weaknesses, significant deficiencies and control deficiencies in our internal control over financial reporting will not be identified in the future. If we fail to achieve and maintain effective controls and procedures for financial reporting, we may be unable to provide timely and accurate financial information. This may cause investors to lose confidence in our reported financial information. This may also have an adverse effect on the trading price of our common stock, give rise to an investigation by the SEC, and possible civil or criminal sanctions. Additionally, ineffective internal control over financial reporting could place us at increased risk of fraud or misuse of corporate assets.
 
We have only a limited product sales history upon which to base any projection of the likelihood we will prove successful; therefore, we may not achieve profitable operations, or even generate meaningful operating revenues.
 
Our fuel performance enhancing technology is a relatively new approach to increasing fuel performance in internal combustion engines and, therefore, may never prove commercially viable on a wide-scale basis. It is possible that we may not be able to reproduce, on a sustainable basis, the preliminary performance results achieved in certain of our research and development and field-based demonstration efforts.
 
We are not certain how many laboratory and customer field-based demonstration test programs will be necessary to demonstrate to potential customers sufficient fuel economy and other economic and environmental benefit from our products, nor is there any assurance that such test programs, even if positive results are observed, will convince potential customers of the efficacy of our products leading to subsequent sales orders. The success of any given product in the marketplace is dependent upon many factors, with one of the most important factors being the ability to demonstrate a sustainable and meaningful economic benefit to product end-users. If our products are unable to provide this sustainable economic benefit, or potential customers do not recognize these economic benefits, our business could fail.
 
 
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If projected sales and revenues do not materialize as planned, we will require additional financing to continue operations.
 
Based on our current cash position, projected sales for 2014, a $1,000,000 equity commitment from one of our Directors, of which $500,000 is still available, and discussions we are currently having with additional external capital sources, we believe we have sufficient funds available to provide resources for our operations through the end of the third quarter of 2015. However, failure to achieve significant, sustained sales and revenues by the end of this period would require us to obtain additional financing. Our budget for the next 12 months emphasizes continued field and laboratory testing and customer support marketing of our products. Cash requirements during the next 12-month period are expected to average approximately $120,000 per month. In addition, unexpected changes may occur in our current operations that could exhaust available cash resources sooner than anticipated. If anticipated product sales do not materialize, or are significantly less than anticipated, we will need to raise additional funds to continue operations. If this future financing is not available, our business may fail. We currently have no other firm commitments from third parties to provide any additional financing. Consequently, we cannot assure investors that additional financing, if necessary, will be available to us on acceptable terms, or at all.

We are exposed to risks associated with the prolonged worldwide economic slowdowns and related political uncertainties.
 
We are subject to macro-economic fluctuations in the United States, the countries of Europe and the economies of other countries throughout the world. Concerns about consumer and investor confidence, volatile corporate profits, reduced capital spending, international conflicts, terrorist and military activity, civil unrest and pandemic illness could cause a slowdown in customer orders. In addition, political and social turmoil related to international conflicts and terrorist acts may put further pressure on economic conditions in the United States and abroad.
 
Our financial performance depends on varying conditions in the markets we are trying to penetrate, particularly the general industrial markets. Demand in these markets fluctuates in response to overall economic conditions. A weakened economy may result in decreased demand for our products, and economic uncertainties may cause our customers or prospective customers to continue to defer or reduce spending on the products we provide, which could reduce future earnings and cash flow.
 
Furthermore, adverse economic conditions or economic uncertainty may cause some of our customers or vendors to reduce or discontinue operations, which may adversely affect our operations. If, as a result of adverse economic conditions, any of our customers enter bankruptcy or liquidate their operations, our revenues and accounts receivable could be materially adversely affected.
 
We are dependent on third parties for the distribution of our products outside North America and they may experience the same delays, customer acceptance problems or other product commercialization issues we have experienced, which could negatively impact our commercialization efforts in these regions.
 
We have entered into distribution and sales agency agreements with certain third parties to help us achieve rapid customer trialing and acceptance of our products, and to oversee certain elements of our field-based demonstration testing program. If these third parties elect to discontinue their efforts, we may not be able to commercialize our products in a timely manner, or to commercialize them at all.
 
Although certain of these agreements contain progress milestones, we are not able to control the amount of time and effort these third parties put forth on our behalf. It is possible that any of these third parties may not perform as expected, may not achieve the contractual milestones and may breach or terminate their agreements with us before completing their work. Any failure of a third party to provide the services for which we have contracted could prevent or significantly delay us from commercializing our products.
 
 
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As we currently purchase all of our product supply requirements from outside sources and have no in-house product manufacturing capability, any business complications arising with either our suppliers or with our relationships with our suppliers could create adverse consequences with our product supply chain.
 
We currently contract with outside specialty chemical manufacturing companies for the production and supply of 100% of our product needs. We have no in-house product manufacturing capability and, therefore, are exposed to potential product supply disruptions caused by adverse business circumstances with our suppliers (for example, raw material shortages, plant breakdowns and other adverse circumstances affecting the supply of our products from suppliers). There can be no assurances that, in the event of a supply disruption, we would be able to quickly contract with another manufacturer for the continued supply of our products. We, therefore, could be without adequate supply of our products and could lose sales for an extended period of time as a result.
 
There is a risk that one or more of the raw material suppliers currently supplying raw materials to our contract manufacturer could stop making a building block raw material necessary for production of our product and, therefore, cause a supply shortage until substitution raw materials could be identified and located.

If the supplier were no longer able to obtain building block raw materials necessary for production of our product, suitable substitutes would have to be identified and obtained. There can be no assurances that, in the event of a raw material supply disruption, our manufacturers would be able to quickly identify and obtain a suitable substitute component and, therefore, we could be without product inventory and could lose sales for an extended period of time.
 
Products developed by our competitors could severely impact our product commercialization and customer acceptance efforts, thereby reducing the sales of our products and severely impacting our ability to meet our sales goals or to continue operations.
 
We face competition from companies who are developing and marketing products similar to those we are developing and marketing. The petroleum/fossil fuels industry has spawned a large number of efforts to create technologies that help improve the performance of internal combustion engines and reduce harmful emissions. Some of these companies have significantly greater marketing, financial and managerial resources than us. We cannot provide any assurance that our competitors will not succeed in developing and distributing products that will render our products obsolete or non-competitive. Such competition could potentially force us out of business.
 
Our products are designed for use in internal combustion engines and the development of alternative engine design and technology could severely reduce the market potential for our products.
 
Our products are designed for, and marketed to, customers utilizing internal combustion engines. Significant efforts now exist to develop alternatives to internal combustion engines. In addition, the regulatory environment is becoming increasingly restrictive with regard to the performance of internal combustion engines and the harmful emissions they produce. If alternatives to internal combustion engines become commercially viable, it is possible that the potential market for our products could be reduced, if not eliminated.
 
If we are unable to protect our technology and intellectual property from use by competitors, there is a risk that we will sustain losses, or that our business could fail.
 
Our success will depend, in part, on our ability to obtain and enforce intellectual property protection for our technology in both the United States and other countries. We have taken steps to protect our intellectual property through patent applications in the United States Patent and Trademark Office and its international counterparts under the Patent Cooperation Treaty. We cannot provide any assurance that patents will be issued as a result of these applications or that, with respect to any patents, issued or pending, the claims allowed are, or will be, sufficiently broad enough to protect the key aspects of our technology, or that the patent laws will provide effective legal or injunctive remedies to stop any infringement of our patents. In addition, we cannot provide assurance that any patent rights owned by us will not be challenged, invalidated or circumvented, or that our competitors will not independently develop or patent technologies that are substantially equivalent or superior to our technology. If we are forced to defend our patents in court, well-funded adversaries could use such actions as part of a strategy for depleting the resources of a small company such as ours. We cannot provide assurance that we will have sufficient resources to successfully prosecute our interests in any litigation that may be brought.
 
 
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Because of the nature of our products, we may be subject to government approvals and regulations that reduce or prevent our ability to commercialize our products, increase our costs of operations and decrease our ability to generate income.
 
We are subject to United States and international laws and regulations regarding the products we sell. There is no single regulatory authority to which we must apply for certification or approval to sell our products in the United States, or outside its borders. Any changes in policy or regulations by regulatory agencies in countries in which we intend to do business may cause delays or rejections of our attempts to obtain necessary approvals for the sale of our products.

There can be no assurance that we will obtain regulatory approvals and certifications for our products in all of the markets we seek to conduct business. Even if we are granted such regulatory approvals and certifications, we may be subject to limitations imposed on the use of our products. In the future, we may be required to comply with certain restrictive regulations, or potential future regulations, rules, or directives that could adversely impact our ability to sell our products. We cannot guarantee that restrictive regulations will not, in the future, be imposed. Such potential regulatory conditions or compliance with such regulations may increase our cost of operations or decrease our ability to generate income.
 
We create products that may have harmful effects on the environment if not stored and handled properly prior to use, which could result in significant liability and compliance expense.
 
The blending of base fuels with our current or future products involves the controlled use of materials that could be hazardous to the environment. We cannot eliminate the risk of accidental contamination or discharge to the environment of these materials and any resulting problems that occur. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We may be named a defendant in any suit that arises from the improper handling, storage or disposal of these products. We could be subject to civil damages in the event of an improper or unauthorized release of, or exposure of individuals to, these materials. Claimants may sue us for injury or contamination that results from use by third parties of our products, and our liability may exceed our total assets. Compliance with environmental laws and regulations may be expensive, and current or future environmental regulations may impair our research, development and sales and marketing efforts. Although we carry product and general liability insurance with limits we deem sufficient, there can be no assurance that an event, or series of events, will not occur that will require, in the aggregate, resources in excess of these limits.
 
If we lose any key personnel or are unable to attract qualified personnel and consultants, we may lose business prospects and sales, or be unable to otherwise fully operate our business.
 
We are dependent on the principal members of our management staff, the loss of any of whom could impair our product development and commercialization efforts underway. Furthermore, we depend on our ability to attract and retain additional qualified personnel to develop and manage our future business and markets. We may have to recruit qualified personnel with competitive compensation packages, equity participation and other benefits that may reduce the working capital available for our operations. We cannot provide assurance that we will be able to obtain qualified personnel on reasonable terms, or that we will be able to retain our existing management staff.

We may have difficulties managing growth, which could lead to lost sales opportunities.
 
While we have not yet achieved any meaningful, sustained revenues through the sale of our products, should certain events occur, such as a large recurring order from a well-known company or endorsement of our products from a well-known commercial entity, sales may escalate rapidly. Rapid growth could strain our human and infrastructure resources, potentially leading to higher operating costs, lost sales opportunities, or both. Our ability to manage operations and control growth will be dependent upon our ability to improve our operational, financial and management controls, reporting systems and procedures, and to attract and retain adequate numbers of qualified employees. Should we be unable to successfully provide the resources needed to manage growth, product sales and customer satisfaction could suffer and higher costs and losses could occur.
 
Our shares are quoted on the OTC Market Group’s OTC Pink Marketplace and are subject to a high degree of volatility and liquidity risk.
 
Our common stock is currently quoted on the OTC Market Group’s OTC Pink Marketplace. As such, we believe our stock price is more volatile and the share liquidity characteristics to be of higher risk than if we were listed on one of the national exchanges. Also, if our stock were no longer quoted on OTC Pink Marketplace, the ability to trade our stock would become even more limited and investors may not be able to sell their shares.
 
 
12

 
 
USE OF PROCEEDS
 
We will not receive any proceeds from the sale of shares by the Selling Security Holders. However, we received an aggregate of $1,000,000 from the sale of the Convertible Note and Warrants to the Selling Security Holders, except for the Pataki-Cahill investors, pursuant to the Securities Purchase Agreement. The net proceeds to the Company after commissions, professional fees, payoff of OID (original issue discount) promissory notes is $845,000. We intend to use the net proceeds for general corporate and working capital purposes and acquisitions or assets, businesses or operations or for other purposes that our board of directors (the “Board”), in its good faith deem to be in the best interest of the Company. The Company has agreed to bear the expenses relating to the registration statement for the shares underlying the Convertible Note and Warrants issued to the Selling Security Holders.
 
DETERMINATION OF OFFERING PRICE
 
The prices at which the shares of Common Stock underlying the Convertible Note, the Warrants and the Piggy-back Warrants are converted are determined based on the exercise price in the Securities Purchase Agreement and the piggy-back registration rights provisions thereof between the Company and the Selling Security Holders, as entered into August 22, 2014.

The prices at which the shares or Common Stock covered by this prospectus may actually be sold will be determined by the prevailing public market price for shares of common stock, by negotiations between the Selling Security Holders and buyers of our Common Stock in private transactions or as otherwise described in “Plan of Distribution” on page 15.
 
DILUTION
 
There is not substantial disparity between the public offering price and the effective cash cost to officers, directors, promoters and affiliated persons of common equity acquired by them in transactions during the past five years and we were subject to the reporting requirements of section 13(a) and 15(d) of the Exchange Act immediately prior to filing the registration statement.

The Common Stock and Warrants in the amount of 25,424,917 shares to be registered in this prospectus have no effect on the dilution of the existing common shares outstanding in the amount of 202,675,382 until they are exercised. On a fully diluted basis, (excluding any other diluted warrants or option not considered part of this transaction), assuming all 25,424,917 shares of Common Stock and Warrants are exercised, the current common shares outstanding will be diluted by approximately 11.15%.

SELLING SECURITY HOLDERS
 
The common shares being offered for resale by the fourteen (14) Selling Security Holders, six (6) of whom are collectively deemed as the Pataki-Cahill Group below, consist of 25,424,917 shares of Common Stock consisting of: (1) 11,500,000 shares of Common Stock issuable upon conversion of the Convertible Note, (2) 6,666,667 shares of our Common Stock issuable upon exercise of Warrants, issued to certain Selling Security Holders pursuant to the Stock Purchase Agreement dated August 22, 2014, and (3) 7,258,250 of Common Stock issuable upon exercise of warrants pursuant to certain piggy-back registration rights agreements.
 
The following table sets forth the names of the Selling Security Holders, the number of shares of Common Stock beneficially owned by each of the Selling Security Holders as of September 18, 2014 and the number of shares of Common Stock being offered by the Selling Security Holders. The shares being offered hereby are being registered to permit public secondary trading, and the Selling Security Holders may offer all or part of the shares for resale from time to time. However, the Selling Security Holders are under no obligation to sell all or any portion of such shares nor are the Selling Security Holders obligated to sell any shares immediately upon effectiveness of this prospectus. All information with respect to share ownership has been furnished by the Selling Security Holders.
 
 
13

 

Fuel Performance Solutions, Inc.
 
Registration of Common Shares for Underlying the 10% Senior Convertible Note,
Warrants and Piggy-back Warrants
 
 
 
Common Stock
 
 
 
Prior to the offering
   
After the offering
 
Selling Security Holder (1)
 
Number of Shares of Common Stock
Beneficially
Owned (2)
   
Percentage of
Common
Stock (3)
   
Shares
Being
Offered
   
Number of
Shares of Common Stock
Beneficially Owned
   
Percentage of
Common
Stock
 
 
                             
Gemini Master Fund, Ltd.
   
4,541,668
     
2.19
%
   
4,541,668
     
0
     
0
%
 
                                       
Brio Capital Master Fund Ltd.
   
4,541,667
     
2.19
%
   
4,541,667
     
0
     
0
%
 
                                       
John M. Hennessy (4)
   
14,533,333
     
7.14
%
   
8,095,833
     
6,437,500
     
3.18
%
 
                                       
Helmsbridge Holdings Limited
   
908,333
     
0.45
%
   
908,333
     
0
     
0
%
 
                                       
Cranshire Capital Master Fund
   
908,333
     
0.45
%
   
908,333
     
0
     
0
%
 
                                       
R&R Opportunity Fund
   
3,633,333
     
1.76
%
   
3,633,333
     
0
     
0
%
                                         
Richard Messina
   
1,816,667
     
0.89
%
   
1,816,667
     
0
     
0
%
                                         
The Pataki-Cahill Group (5)
   
283,000
     
0.14
%
   
70,750
     
212,250
     
0.10
%
                                         
Jonathan R. Burst (6)
   
16,240,173
     
7.98
%
   
908,333
     
15,331,840
     
7.56
%
                                         
Total
    474,065,507              
25,424,917
     
21,981,590
         
______________
(1) 
On August 22, 2014, the Company entered into a Stock Purchase Agreement with certain funds and accounts (listed above) as to which Gemini Strategies, LLC acts as an investment manager. Unless listed otherwise, the address and principal business office of each Selling Security Holder is Gemini Strategies, LLC
619 South Vulcan, Suite 203, Encinitas, CA 92024.
(2)
Pursuant to the Securities Purchase Agreement, the Company issued to the Selling Security Holders an aggregate of: (1) 11,500,000 shares of its Common Stock underlying a 10% senior convertible note and (2) warrants to purchase 6,666,667 shares of Common Stock. With the exception of the Pataki-Cahill Group and certain Common Stock underlying warrants issuable upon exercise by John M. Hennessy, the Convertible Note and the Warrant Shares combine for 18,166,667 shares allocated between the eight (8) investment funds and accounts listed above and are hereby being registered as required by the purchasers in the Securities Purchase Agreement.
(3)
Based on 202,675,382 shares of common stock issued and outstanding as of September 18, 2014. Beneficial ownership percentage is determined under the rules of the SEC and includes investment power with respect to common stock. The number of shares beneficially owned by a person includes shares of Common Stock underlying warrants, stock options and other derivative securities to acquire our Common Stock held by that person that are currently exercisable or convertible within 60 days after September 18, 2014. The shares issuable under these securities are treated as outstanding for computing the percentage ownership of the person holding these securities, but are not treated as outstanding for the purposes of computing the percentage ownership of any other person.
(4)
Mr. Hennessy’s principal address is 47 West Lake Road, Tuxedo Park, NY 10987. Pursuant to the Registration Rights Agreement on August 22, 2014, Mr. Hennessy or his affiliated parties may also register warrants to purchase up to 7,187,500 shares of Common Stock in addition to the Common Stock underlying the Convertible Note and Warrant pursuant to certain piggy-back registration rights agreements.
(5)
The Pataki-Cahill Group’s principal address is 30 Rockefeller Plaza, Suite 3100, New York, NY 10112. Pursuant to the Registration Rights Agreement on August 22, 2014, the Pataki-Cahill group may register up to 70,570 shares underlying warrants pursuant to certain piggy-back registration rights agreements.
(6)
Mr. Burst’s address and principal business office is 7777 Bonhomme Avenue, Suite 1920, St. Louis, MO 63105.
 
 
14

 
 
To our knowledge, with the exception of Jonathan R. Burst, who is the Company’s Chairman of the Board and Chief Executive Officer, none of the Selling Security Holders or their beneficial owners:
 
has had a material relationship with us other than as a shareholder at any time within the past three years; or
   
has ever been one of our officers or directors or an officer or director of our predecessors or affiliates; or
   
are broker-dealers or affiliated with broker-dealers.
 
PLAN OF DISTRIBUTION
 
This prospectus is to be used by the Selling Security Holders in connection with a potential resale by certain Seller Security Holders of up to an aggregate of 25,424,917 shares of the registrant’s Common Stock issuable upon i) the conversion of 11,500,000 shares of common stock underlying the Convertible Note, ii) exercise of Warrants to purchase 18,166,667 shares of Common Stock, issuable upon the effectiveness of this registration statement, and iii) 7,258,250 shares of Common Stock issuable upon exercise of warrants pursuant to certain piggy-back registration rights agreements;
 
Each Selling Security Holder of our Common Stock and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of Common Stock covered hereby on the principal trading market or any other stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. A Selling Security Holder may use any one or more of the following methods when selling shares:
 
ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

an exchange distribution in accordance with the rules of the applicable exchange;

privately negotiated transactions;

settlement of short sales entered into after the effective date of the registration statement of which this prospectus is a part;

in transactions through broker-dealers that agree with the Selling Security Holders to sell a specified number of such shares at a stipulated price per share;

through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;

a combination of any such methods of sale; or

any other method permitted pursuant to applicable law.
 
The Selling Security Holders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.
 
 
15

 
 
Broker-dealers engaged by the Selling Security Holders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Security Holders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this prospectus, in the case of an agency transaction not in excess of a customary brokerage commission in compliance with Financial Industry Regulatory Authority (“FINRA”) Rule 2440; and in the case of a principal transaction a markup or markdown in compliance with FINRA IM-2440.
 
In connection with the sale of the Common Stock or interests therein, the Selling Security Holders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the Common Stock in the course of hedging the positions they assume. The Selling Security Holders may also sell shares of the Common Stock short and deliver these securities to close out their short positions, or loan or pledge the Common Stock to broker-dealers that in turn may sell these securities. The Selling Security Holders may also enter into option or other transactions with broker-dealers or other financial institutions or create one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).
 
The Selling Security Holders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Each of the Selling Security Holders has informed the Company that it does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute the Common Stock. In no event shall any broker-dealer receive fees, commissions and markups which, in the aggregate, would exceed eight percent (8%).
 
Because Selling Security Holders may be deemed to be “underwriters” within the meaning of the Securities Act, they will be subject to the prospectus delivery requirements of the Securities Act including Rule 172 thereunder. The Selling Security Holders have advised us that there is no underwriter or coordinating broker acting in connection with the proposed sale of the resale shares by the Selling Security Holders.
 
Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the resale shares may not simultaneously engage in market making activities with respect to the Common Stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, Selling Security Holders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of shares of the Common Stock by the Selling Security Holders or any other person. We will make copies of this prospectus available to the Selling Security Holders and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act).

DESCRIPTION OF SECURITIES
 
Authorized Capital and Common Stock
 
Our authorized capital stock consists of 350,000,000 shares of Common Stock, par value $0.01 per share. As of September 18, 2014, there were 202,675,382 shares of Common Stock outstanding.
 
Common Stock
 
The following is a summary of the material rights and restrictions associated with our Common Stock.
 
The holders of our Common Stock currently have: (i) equal ratable rights to dividends from funds legally available therefore, when, as and if declared by the Board; (ii) are entitled to share ratably in all of the assets of the Company available for distribution to holders of Common Stock upon liquidation, dissolution or winding up of the affairs of the Company; (iii) do not have pre-emptive, subscription or conversion rights and there are no redemption or sinking fund provisions or rights applicable thereto; and (iv) are entitled to one non-cumulative vote per share on all matters on which stock holders may vote. Please refer to the Company’s Articles of Incorporation, by-laws and the applicable statutes of the State of Nevada for a more complete description of the rights and liabilities of holders of the Company’s securities.
 
 
16

 
 
Warrants
 
Prior to the Securities Purchase Agreement the Company had 19,270,750 Warrants issued and outstanding. Of the 19,270,750 warrants, 2,000,000 have an exercise price of $0.226 and 2,570,750 have an exercise price of $0.25 and are excercisable within five (5) years of respective issuance. The remaining 14,700,000 warrants were issued with an exercise price of $0.10 and are exercisable within five (5) years of each issuance. These warrants have certain rights that include price protection and piggy-back registration rights, and may be adjusted from time to time pursuant to the terms and conditions of the warrant agreement thereof.
 
On August 22, 2014, the Company entered into a Securities Purchase Agreement with Gemini Strategies, LLC., in which the Company issued the following to the purchasers: (i) 11,500,000 shares of Common Stock underlying the Convertible Note; and (ii) Warrants to purchase an aggregate of 6,666,667 shares of Common Stock for an exercise price of $0.12 per share. Pursuant to the Securities Purchase Agreement and certain piggy-back registration rights provisions thereof, the Company agreed to register in this registration statement i) 7,187,500 shares of Common Stock issuable upon exercise of warrants by John M. Hennessy and ii) 70,750 shares of Common Stock issuable upon exercise of warrants by certain investors in the Pataki-Cahill Group.

The Warrants are exercisable in whole or in part, at an initial exercise price per share of $0.12 (subject to adjustment) (the “Exercise Price”), and may be exercised in a cashless exercise. The exercise price and number of shares of Common Stock issuable under the Warrants are subject to adjustments for stock dividends, splits, combinations, subsequent rights offerings, pro rata distributions and similar events.
 
The number of outstanding warrants as of the date of this prospectus, of which this registration statement is a part, is 25,937,417.
 
Options
 
The Company employees, officers, and directors have outstanding stock options of 32,424,720 to purchase our securities as of June 30, 2014.
 
INTERESTS OF NAMED EXPERTS AND COUNSEL
 
No expert or counsel named in this prospectus as having prepared or certified any part of this prospectus or having given an opinion upon the validity of the securities being registered or upon other legal matters in connection with the registration or offering of the Common Stock was employed on a contingency basis, or had, or is to receive, in connection with the offering, a substantial interest, direct or indirect, in the registrant or any of its parents or subsidiaries. Nor was any such person connected with the registrant or any of its parents or subsidiaries as a promoter, managing or principal underwriter, voting trustee, director, officer, or employee.
 
The financial statements as of December 31, 2013 and December 31, 2012 included in this prospectus and the registration statement have been audited by MaloneBailey LLP to the extent and for the periods set forth in their report appearing elsewhere herein and in the registration statement, and are included in reliance upon such report given upon the authority of said firm as experts in auditing and accounting.
 
The validity of the issuance of the Common Stock hereby will be passed upon for us by Szaferman Lakind Blumstein & Blader, P.C., Lawrenceville, New Jersey.
 
 
17

 
 
DESCRIPTION OF BUSINESS
 
Corporate History

Fuel Performance Solutions, Inc. was incorporated in Nevada on April 9, 1996 by a team of individuals who sought to address the challenges of reducing harmful emissions while at the same time improving the operating performance of internal combustion engines, especially with respect to fuel economy and engine cleanliness. After our incorporation, our initial focus was product research and development, but over the past few years, our efforts have been directed to commercializing our product slate, primarily DiesoLiFTTM and the PerfoLiFT BD-Series, for use with diesel fuel and bio-diesel fuel blends, by focusing on marketing, sales and distribution efforts in conjunction with our distribution partners. On February 5, 2014, the Company changed its name from International Fuel Technology, Inc. to Fuel Performance Solutions, Inc.

Overview

We are a technology company that has developed a range of liquid fuel additive formulations that enhance the performance of petroleum-based fuels and renewable liquid fuels. We believe that use of our proprietary fuel additive formulations with a base fuel: enhances the combustion process; stabilizes the fuel; improves fuel economy; reduces harmful emissions; increases fuel lubricity; acts as a detergent to clean the fuel system; co-solves free water in the fuel system; reduces corrosion and microbial contamination in the fuel system; and when used in bio-fuels, increases fuel oxidation stability and reduces deposit formation.

We have developed a slate of fuel additive products (see “Products” section below) for use with diesel, pure bio-diesel, bio-diesel fuel blends, gasoline, gasoline ethanol blends and kerosene (heating oil) fuels.

Unlike traditional fuel additives, which are derived from petroleum, our products are derived from a mixture of complex substances that utilize, in part, naturally occurring fractions that are bio-degradable. Our additive products are easily blended into motor fuels (usually through splash blending), or combined with base motor fuels plus other fuel formulations, including bio-diesel, synthetic diesel, ethanol and urea/water, creating environmentally-friendly finished fuel blends.

The manufacture of our products is outsourced to Brenntag AG (“Brenntag”) pursuant to a manufacturing and supply agreement (see “Manufacturing Partner” below).

We have funded and completed several independent laboratory testing efforts conducted by various well-regarded laboratories in the United States, Canada, Europe, Brazil, South Africa, China and Thailand to confirm the efficacy of our technology. We have completed customer-focused field demonstration testing, which has validated independent laboratory test results. We have a number of customers that have been using our products for years with positive results.
 
With the increasing public and private pressure to reduce the level of harmful engine emissions, combined with the uncertain cost of base fuel, we believe our technology and its further development is poised to become one of the leading fuel performance enhancement technologies available to facilitate the worldwide effort to address these issues.

Technology

Our additive formulations are composed of a mixture of complex chemical molecules which, when blended into a base fuel, lower that base fuel’s overall surface tension at liquid-air, liquid-liquid, and liquid-solid (pipe wall) interfaces. This promotes lubricity and detergency and allows for improved atomization of the fuel in the induction and combustion chambers, resulting in a more complete and efficient burn, improving fuel economy and reducing harmful emissions.

Once the additive is blended with a base fuel, the blend forms into and remains a stable solution. No additional mixing or agitation is required for the fuel blend to remain perfectly mixed.
 
 
18

 

The following summarizes the primary benefits of our technology:
 
·
Fuel economy: The reduction in the fuel’s overall surface tension as it enters the combustion chamber allows for improved atomization, resulting in a more complete burn. The engine, therefore, is effectively maximizing the inherent energy in the fuel. Fuel economy is also enhanced by (i) increased lubricity which reduces friction in the fuel system, and (ii) the detergency effect which prevents the deterioration of engine performance caused by detrimental deposits.

·
Lubricity: The inherent lubricity properties of our additive formulations increase the lubricity of the fuel. This occurs because the additive will adsorb to the sides of the engine fuel system. This has the effect of coating the fuel system and reducing the friction created as the fuel flows through it.

·
Detergency: Because our additive formulations are detergents, they will act to constantly clean the fuel system and engine. The detrimental deposits, which might occur in ordinary use, are washed out and retained by fuel and lube oil filters.

·
Emissions: The improved atomization of the fuel, resulting from the use of our additives, provides for a more complete combustion of the fuel. As a result, the amount of harmful carbon monoxide, unburned hydrocarbons and particulate matter (“PM”) emissions are reduced significantly. The increased fuel efficiency and economy resulting from the use of our additive means that less fuel has to be burned for the same power output. Therefore, for the same power output, less carbon dioxide and nitrogen oxides (“NOx”) (both “greenhouse” gases) are released into the atmosphere.

·
Co-solvency: An important benefit of our additive technology is the ability to hold limited amounts of ethanol and/or water in gasoline and diesel as a stable, homogeneous fuel. This is possible because our additives are based on physical chemistry that enables the water and/or ethanol molecules to be distributed throughout the fuel in a stable and homogeneous single phase, preventing phase separation and enhancing uniform combustion.

·
Microbial contamination: If small amounts of water are present in the fuel, and phase separation occurs, aerobic and anaerobic bacterial and fungal growths may occur in the aqueous phase. The co-solving effect of our additives prevents phase separation from occurring and eliminates the environment for microbial growth. This curbs foaming and limits the formation of corrosive organic acids. This also reduces the need for bio-cides to treat the fuel, which can be expensive and difficult to handle.

·
Corrosion inhibitors: Our fuel additives are natural corrosion inhibitors. When the additive molecules adsorb to the side of the fuel system, they provide a protective coating. Also, the ability to co-solve any free water in the fuel, and prevent phase separation, helps prevent any corrosion that may occur due to the aqueous phase.

·
Reduced maintenance: The combined effects of improved lubricity, detergency, water co-solvency, corrosion inhibition, and cleaner burn resulting from the use of our additive technology extend the service life of the engine and parts, while reducing maintenance costs.

·
Oxidation stability: Our PerfoLiFT BD-series and AO-Series products are powerful antioxidants which provide superior oxidation stability to pure bio-diesel fuel and fuel blends containing bio-diesel, as well as pure hydrocarbon fuels.

·
Deposit formation control: Our PerfoLiFT BD-series and AO-Series products excel at stabilizing bio-diesels and fuel blends containing bio-diesel, as well as pure hydrocarbon fuels during long storage periods and at preventing deposit formation.
 
 
19

 
 
Intellectual Property
 
We have been granted United States Patent No. 7,374,588 on our original additive formulation based on nitrogen donors. We have also filed patent applications for a similar but upgraded formulation in the United States and three other countries.
 
We have made the following progress related to intellectual property advancements pertaining to fuel additive, additive-containing fuel composition, and method of manufacture:
 
·
we were granted Japanese Patent No. 4,767,466;

·
we were granted European Patent EP 1,246,894 B; and

·
we were granted United States Patent No. 8,147,566.
 
We have also filed an international patent application, under the Patent Cooperation Treaty, covering our technology in certain foreign countries.
 
The patents obtained and these patent applications protect our technology in many countries. Additional patent applications for extension of our technology are constantly evaluated as additional scientific and technical data and laboratory testing results become available. The patent application process is important to us, but we will also continue to rely on trade secrets.
 
We also have trademark protection for DiesoLiFT™, GasoLiFT™ and KeroLiFT™ in a certain number of countries.
 
Independent Demonstration and Testing
 
There are two primary methods of product demonstration: laboratory bench tests and field trials. We utilize both demonstration methods to further develop the body of test data necessary to support marketing and sales efforts. We believe that it is important to develop and manage specific testing protocols for field-based demonstrations and to adhere to already developed, industry recognized testing standards when engaged in laboratory bench tests. Numerous variables exist in any testing protocol and if not carefully managed, a change in one variable can skew test results. To address this challenge, we use our best efforts to ensure standardized testing and demonstration evaluation protocols, both industry prescribed and custom developed, whenever laboratory or field-based demonstration is undertaken. The use of these protocols allows us to: (i) effectively analyze and interpret test results; (ii) ensure testing is structured and conducted in a controlled way; (iii) ensure we will have full access to all testing results conducted by third parties; and (iv) assist our marketing and sales efforts through potential client recognition of and attention to results generated from industry adopted testing protocols.
 
In addition to extensive field-based customer demonstrations completed or under way, we have funded extensive laboratory bench testing at numerous well-known independent testing laboratories, including:
 
·
mi Technology, United Kingdom;
 
·
Southwest Research Institute, United States;
 
·
Forest Engineering Research Institute of Canada – FERIC;
 
·
Motive Power, United States;
 
·
Gerotek, South Africa;
 
·
South African Bureau of Standards;
 
·
Prodrive Ltd, United Kingdom;
 
·
BfB Laboratories, Belgium;
 
·
National Institute of Technology – INT, Brazil;
 
·
Technological Institute for Development - LacTec, Brazil;
 
·
Technology Research Institute, Brazil;
 
·
MTEC, Thailand; and
 
·
Tsinghua University, China.
 
 
20

 
 
Test results have confirmed the effectiveness of our additive formulations. In particular, FPS fuel blends tested have achieved: (i) an increase in fuel economy; (ii) an increase in lubricity; and (iii) a reduction in harmful emissions.
 
Products
 
We currently have 6 product lines that are being marketed around the world:
 
DiesoLiFTTM 10 - DiesoLiFTTM 10 is FPS’s proprietary fuel enhancing technology for use with diesel fuel and bio-diesel fuel blends. DiesoLiFTTM 10 has been scientifically proven to increase fuel economy and fuel lubricity while reducing harmful fuel emissions.
 
PerfoLiFT BD-Series - The PerfoLiFT BD-Series is a unique formulation developed for the stabilization of bio-diesel bases of various origins and corresponding bio-diesel fuel blends (B-5, B-10, B-20, etc.). The PerfoLiFT BD-Series provides protection against premature and developing oxidation and can be utilized for storage stability and deposit control. Likewise, the PerfoLiFT AO-Series provides similar protection to pure hydrocarbon fuels and blends.
 
DiesoLiFTTM FEB - DiesoLiFTTM FEB is engineered to deliver the same improved lubricity, co-solvency of water, cleaning of fuel systems, improved fuel economy and environmental benefits of DiesoLiFTTM 10. However, DiesoLiFTTM FEB also provides oxidation stability and deposit control benefits to bio-diesel and bio-diesel fuel blends.
 
GasoLiFTTM - GasoLiFTTM is the range of products specifically designed to apply our fuel enhancing technology to gasoline motor fuel and engines. Use of GasoLiFTTM provides similar benefits to gasoline engines as DiesoLiFTTM 10 provides to diesel engines.
 
KeroLiFTTM - KeroLiFTTM has been specifically formulated to bring added benefits to heating oils, kerosene fuel systems and oil burners for all oil-fired equipment applications. KeroLiFTTM has a positive effect on the environment by reducing harmful emissions and “greenhouse” gases, and by eliminating smoke.
 
PerfoClean - PerfoClean is specifically designed to provide superior cleaning and protection properties for diesel fuel storage tanks.
 
Manufacturing Partner
 
The manufacturer of the Company’s products is outsourced to Brenntag. Brenntag is a global leader in the distribution and manufacture of industrial and specialty chemicals and additives and lubricants. Brenntag has a global network of more than 400 locations in 70 countries and annual sales of $13 billion.
 
In July 2008, we signed a manufacturing agreement with Brenntag that covers existing and to-be-developed fuel performance enhancement additive products utilizing our technology. The agreement also provides for Brenntag and us to cooperate and work together to optimize the effectiveness of and reduce the manufacturing and supply costs of the additive product formulations, as well as to collaborate on product research and development activities. We have worked closely with Brenntag for years and believe the relationship to be solid. The manufacturing agreement has a 15-year term. Either party may terminate the manufacturing agreement by providing the other party advance notice at least 180 days before the desired termination date.
 
We are also in negotiations with Brenntag for the manufacture of our products in Brazil and the United States.

Regulatory Issues

Government regulations across the globe regarding motor fuels are continually changing. Most regulation focuses on fuel emissions. However, there is also growing concern about dependence on hydrocarbon-based fuels. This is driving legislation and regulation toward mandating alternative fuels such as bio-fuels and providing incentives for their development and use. Fuels regulation exists at various levels of government and enforcement around the globe. However, we believe the consistent pattern of regulations designed to reduce harmful emissions and reduce dependence on oil for fuel needs will only become more stringent. We believe this will be an advantage to us as many of our products reduce fuel consumption and improve performance of alternative fuel blends. We believe that as fuels regulatory compliance becomes more burdensome to fuel manufacturers, suppliers and users, demand for our products should increase. One of our strategies is to monitor government fuel related regulatory activity in the countries strategic to our business plan. This surveillance program is designed to support the product development and intellectual property process to ensure our products respond to the changing regulatory climate and are protected as quickly as possible to maintain competitive advantage. The surveillance program also supports the marketing of our products to accentuate their attributes in helping customers meet the new regulatory compliance directives.
 
 
21

 

As an example, in January 2000, the Environmental Protection Agency in the United States (the “EPA”) enacted a stringent and far-reaching set of diesel emission standards that requires the significant reduction in harmful emissions, especially PM and NOx. These regulations were phased in beginning in 2004, with PM in diesel emissions to be reduced by 90% and NOx to be reduced by 95%. Of equal importance to diesel fuel producers, the EPA also requires 97% of the sulfur currently in diesel fuel be eliminated beginning in 2006. The elimination of sulfur in diesel fuel will likely cause a decrease in diesel fuel lubricity. We believe that our products are well-positioned to benefit from the more stringent environmental rules, as tests have shown positive PM reduction effects and increased lubricity attributes when our products are added to base diesel fuel.

Another example is the regulation passed applicable to the European Union (“EU”) regarding the use of bio-fuels (bio-diesel and ethanol). The EU is supporting bio-fuels with the aim of reducing “greenhouse gas” emissions, boosting the de-carbonization of transport fuels, diversifying fuel supply sources, offering new income opportunities in rural areas and developing long term replacements for fossil fuel. In May 2003, the European Parliament and the Council adopted the “Directive on the promotion of the use of bio-fuels or other renewable fuels for transport.” This Directive aims at promoting the use of bio-fuels or other renewable fuels to replace diesel or petroleum for transport purposes, with a view to contribute to objectives such as improving the security of energy supply, reducing “greenhouse gas” emissions and creating new opportunities for sustainable rural development. The Directive requires member states to ensure that a minimum proportion of bio-fuels and other renewable fuels for transport are placed on the market and, to that effect, set indicative targets as a percent of energy content of the fossil fuels replaced. Reference values for these targets were: 2% for the end of 2005 and 5.75% for the end of 2010, on the basis of energy content of all petroleum and diesel for transport purposes. Member states were allowed to deviate from the reference values but if they did so, they were required to report their motivations for the deviation to the Commission.

However, despite the transport sector experiencing continued growth in renewable fuel share, the 2010 target was not met. In January 2011, the EU commission issued its new “Energy 2020” strategy, which calls for the use of 10% renewable energy in the transport sector by 2020. Member states expect to meet this new target by using first generation bio-fuels (bio-diesel and bio-ethanol) which will be the predominant bio-energy sources over the period to 2020.
 
There is now a general consensus within the EU towards the generalization of B-7 over the next few years, while B-10 is the target for implementation between now and 2020 in order to meet the Commission’s “Energy 2020” plan. Due to next generation engine technology constraints, B-10 will likely be the highest concentration bio-diesel fuel blend ever offered at the fuel pump. However, higher concentration bio-diesel fuel blends such as B-30 are already used and will be increasingly used in captive fleets. As bio-diesel percentage content increases in a base fuel, the need for oxidation control and storage stability also increases, making our PerfoLiFT BD-Series and DiesoLiFTTM FEB products even more beneficial to users.

In the United States, there are current efforts to encourage the development of alternative fuels and the required use of ethanol. In an effort to reduce dependence on foreign oil and keep up with increasing demand for petroleum products, the United States Department of Energy (“DOE”) has created and sponsored programs that encourage the use of these alternative fuels. The programs, such as the one derived from the Energy Policy and the ethanol and bio-diesel subsidy programs implemented by the DOE and other government agencies, in response to the 2005 energy legislation, provide significant incentives for the adoption of targeted fuel blends, the performance of which can be enhanced by the use of our products. We believe our products are well-positioned to help fuel producers and consumers comply with current and future fuels related regulatory standards and take advantage of existing incentive programs in the United States and the rest of the world.
 
 
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Industry and Competition

Our product slate and business is a part of the hydrocarbon fuels and lubricants additive industry. The industry is composed of a few relatively large companies and a large number of smaller participants. We fall into the latter category. The large firms capture their revenue through sales of proprietary, branded products, or by sales to fuel refiners to meet state and federal fuel specifications, or fuel wholesalers and retailers trying to differentiate their own branded products. The common denominator is that all industry participants produce products which are added to hydrocarbon fuels to allow the fuel, or the overall fuel system, to perform better with the additive than without. Industry participants generally do not make the fuel itself.

The main thrust of industry participants’ products centers around improved engine cleanliness and efficiency (e.g., detergency characteristics applicable to fuel injector nozzles), improved fuel flow (e.g., mitigation of fuel problems caused by low ambient temperature) and fuel system protection (e.g., improved lubricity). These are common focus areas for the full range of gasoline and distillate fuels. Additives designed to address specific problem areas in specific fuel applications (e.g., Cetane improver in diesel fuel) and static electricity dissipation in turbine engines are also significant.

The primary market for FPS is fuel economy improvement. Although many companies make claims regarding the ability of their respective products to improve fuel economy, we are not aware of any fuel additive formulation that has consistently demonstrated the ability to achieve the fuel economy improvement demonstrated by FPS products in independent laboratory testing and field-based demonstrations. Virtually every gallon of diesel fuel, bio-diesel fuel blend, gasoline and kerosene consumed in the world today is a potential market for our products.

Marketing and Sales

Our commercial goal is the bulk sale (by the ton or 55-gallon drum) of our proprietary products to major end-users of diesel fuel and bio-diesel fuel blends: centrally-fueled road transport operators; rail operators; stationary power generation operators; and the marine vessel operators. Our primary marketing and sales strategy to accomplish this goal is to outsource marketing, sales and distribution by partnering with prominent fuel additive distribution companies with existing customers and distribution channels. Our goal is to identify and work with established in-country or global commercial distributors to partner with us to secure an expanding and sustainable revenue stream. We have a number of distribution agreements and partnerships in place:

Brenntag: Brenntag is a global leader in the distribution and manufacture of industrial and specialty chemicals and additives and lubricants. Brenntag has a global network of more than 400 locations in 70 countries and annual sales of $13 billion. Brenntag is marketing and distributing our products to its customer base with an initial focus in Europe.

Nordmann Rassmann: Nordmann Rassmann (“NRC”) is a leading international distributor of specialty chemicals, lubricants and fuel additives. NRC sells its portfolio of high quality products throughout Germany, Austria, Central and Eastern Europe, Scandinavia and Switzerland. NRC, founded in 1912, has annual revenues of $450 million.

Unipart Group: Unipart Group is a multinational, supply chain, manufacturing and consultancy company headquartered in Cowley, Oxfordshire, England. It has operations in Europe, North America, Australia and Japan and works across a variety of sectors that include automotive, rail, marine and leisure. Unipart employs 10,000 people and has annual revenues of approximately $1.7 billion. Unipart’s initial focus is in the rail industry and road transport industries in the United Kingdom and Europe.

IPU Group: IPU Group designs, manufactures and distributes high quality parts and systems for critical diesel and gas engine applications. Their core business is power generation - virtually every diesel generation manufacturer is a client – but they also provide engineered solutions to the oil and gas, marine, industrial engines, mining and land-based industries. Their initial focus will be to market, sell, distribute and provide aftermarket support for PerfoClean. PerfoClean is a new FPS product specifically designed to provide superior cleaning and protection properties for diesel fuel storage tanks.

In addition to our distribution partnerships, we also have a United Kingdom-based sales force (Environmental Fuel Technology, Inc. – “EFT”) and a number of independent sales agents in the United Kingdom and the United States. All United Kingdom-based independent sales agents work under the EFT umbrella and EFT sales and marketing efforts are supported by Unipart Group.

We believe an expeditious means of achieving product awareness and market acceptance is through field engagements with strategic commercial users of motor fuels. We are always seeking companies recognized as leaders in their industry to try our products in a field-based demonstration trial setting. Formal field-based demonstration trials have been completed with several such companies and the efficacy of our technology has been validated. Additional field-based demonstration trials are currently underway, or have been committed to, which upon completion we believe will lead to additional commercial opportunities.
 
 
23

 
 
Commercial Update

FPS has emerged from the research and development phase and is in the early stages of commercializing its technology. Through distribution partners, FPS has clients that are purchasing and using DiesoLiFTTM 10, the PerfoLiFT BD-Series, DiesoLiFTTM FEB, GasoLiFTTM, and KeroLiFTTM. FPS products are marketed to end-users or under FPS brand names or to retail distributors who repackage and rebrand FPS products. Product sales doubled from 2012 to 2013 and are on pace to more than double again in 2014.

Thanks primarily to the efforts of our distribution partners, FPS has made meaningful commercial progress over the last few years. Going forward, our distribution partners will continue to drive our commercial progress:
 
·
In 2014, Brenntag commenced the ramp up of its sales and marketing efforts on behalf of FPS. Brenntag has introduced FPS products to a number of its customers and is also using DiesoLiFTTM in one of its captive fleets. In addition, Brenntag has distributed FPS products to one of the largest bio-diesel manufacturers in Brazil. Brenntag Brazil and FPS are currently in the process of finalizing commercial plans to market and sell FPS products in Brazil. Brenntag also sells FPS products to Bardahl who repackages the products and sells to retail customers under their own brand name.

·
NRC has sold FPS products to some of the largest bio-diesel manufacturers in Europe. In addition, they have a number of road transport and rail opportunities pending. NRC also sells FPS products to Lubrichim who repackages the products and sells to retail under their own brand name.

·
Unipart Group has made a number of bulk purchases of DiesoLiFTTM. They have supplied a number of new road transport accounts in the United Kingdom and expect to begin selling DiesoLiFTTM to passenger and freight rail operators in the United Kingdom this year.

·
EFT continues to secure additional road transport accounts in the United Kingdom. They are supported by Unipart Group who provides them logistical and after-market support.

·
In the United States, we have a number of road transport operators using our products, one such account for over 7 years. In addition, we are involved in a project with one of the largest municipal fleets in the United States. During the third quarter of 2014, we have also received an initial purchase order pursuant to a product supply arrangement with a United States-based retail fuel distribution company for our DiesoLiFTTM and GasoLiFTTM fuel additives which will be added to diesel and gasoline, respectively, creating premium fuel blends for both types of fuel for sale at the retail pump in the United States. 
 
 
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Employees
 
As of September 18, 2014, we have four (4) full-time employees. None of our employees is represented by a labor union or is subject to a collective bargaining agreement. We believe that our employee relations are good.

Corporation Information
 
Our principal executive office is located at 7777 Bonhomme Avenue, Suite 1920, St. Louis, Missouri 63105. Our telephone number is (314) 863-3333 and fax number is (314) 863-6900. Our website is: http://www.fuelperformancesolutions.com/.
 
Other Information
 
News and information about Fuel Performance Solutions, Inc. and our wholly owned subsidiary is available on and/or may be accessed through our website, www.fuelperformancesolutions.com. In addition to news and other information about our company, we have provided access through this site to our filings with the SEC as soon as reasonably practicable after we file or furnish them electronically. Information on our website does not constitute part of and is not incorporated by reference into this registration statement or any other report we file or furnish with the SEC. You may also read and copy any document that we file at the public reference facilities of the SEC in Washington, D.C. You may call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from the SEC’s website at http://www.sec.gov.
 
DESCRIPTION OF PROPERTY
 
We maintain our administrative offices at 7777 Bonhomme Avenue, Suite 1920, St. Louis, Missouri 63105 pursuant to a lease agreement. The lease agreement, which expires on April 30, 2017, provides for a base rent of $3,687 per month, subject to an annual escalation adjustment.
 
We believe our current facilities are adequate to meet current and near-term operating requirements.
 
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 the Company 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 the Company’s 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 the Company 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 the Company. Since 2009, we have made payments to TPG totaling $160,000 to reduce the recorded liability. The remaining liability balance is $190,000 at June 30, 2014 and December 31, 2013.
 
 
25

 
 
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
 
Price Range of Common Stock
 
Our Common Stock is quoted on OTC Market Group’s OTC Pink Marketplace under the symbol “IFUE.” The table below shows the range of high and low sales prices on a quarterly basis for the three most recently completed fiscal years. The quotations shown reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
 
   
2014
   
2013
   
2012
 
   
High
   
Low
   
High
   
Low
   
High
   
Low
 
First Quarter
 
$
0.23
   
$
0.03
   
$
0.10
   
$
0.06
   
$
0.18
   
$
0.14
 
Second Quarter
 
$
0.25
   
$
0.14
   
$
0.10
   
$
0.03
   
$
0.18
   
$
0.05
 
Third Quarter
   
NA
     
NA
   
$
0.07
   
$
0.03
   
$
0.21
   
$
0.07
 
Fourth Quarter
   
NA
     
NA
   
$
0.04
   
$
0.02
   
$
0.15
   
$
0.07
 
 
As of the close of business on September 17, 2014, the last reported sales price per share of our Common Stock was $0.115.

HOLDERS
 
As of September 18, 2014 we had approximately 2,227 record holders of our common stock, holding 202,675,382 shares of Common Stock. Such number does not include persons whose shares are held by a bank, brokerage house or clearing company, but does include such bank, brokerage houses and clearing companies.
 
Holders of our Common Stock are entitled to one vote for each share on all matters submitted to a stockholder vote. Holders of Common Stock do not have cumulative voting rights.
 
Therefore, holders of a majority of the shares of Common Stock voting for the election of directors can elect all of the directors. Holders of our Common Stock representing a majority of the voting power of our capital stock issued and outstanding and entitled to vote, represented in person or by proxy, are necessary to constitute a quorum at any meeting of our stockholders. A vote by the holders of a majority of our outstanding shares is required to effectuate certain fundamental corporate changes such as liquidation, merger or an amendment to our Articles of Incorporation.
 
Although there are no provisions in our charter or by-laws that may delay, defer or prevent a change in control, we are authorized, without shareholder approval, to issue shares of Common Stock that may contain rights or restrictions that could have this effect.
 
Holders of Common Stock are entitled to share in all dividends that the Board, in its discretion, declares from legally available funds. In the event of liquidation, dissolution or winding up, each outstanding share entitles its holder to participate pro rata in all assets that remain after payment of liabilities and after providing for each class of stock, if any, having preference over the common stock. Holders of our Common Stock have no pre-emptive rights, no conversion rights and there are no redemption provisions applicable to our common stock.
 
DIVIDEND POLICY
 
Historically, we have not declared or paid a cash dividend to shareholders. The Board presently intends to retain any future earnings to finance our operations and does not expect to authorize cash dividends in the foreseeable future.
TRANSFER AGENT AND REGISTRAR
 
The transfer agent for our Common Stock is Pacific Stock Transfer Company at 4045 S. Spencer Street, Suite 403, Las Vegas, NV 89119, and its telephone number is (800) 785-7782.
 
 
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis of the results of operations and financial condition for the quarter ended June 30, 2014; and the fiscal years ended December 31, 2013 and 2012 should be read in conjunction with our consolidated financial statements and the notes to those consolidated financial statements that are included elsewhere in this registration statement. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. See “Cautionary Statements Regarding Forward-Looking Statements.”

The following is management’s discussion and analysis of certain significant factors that have affected our financial condition, results of operations and cash flows during the periods included in the accompanying financial statements. This discussion should be read in conjunction with the financial statements and notes included elsewhere in this registration statement.

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
 
Comparison of the Twelve Months Ended December 31, 2013 and the Twelve Months Ended December 31, 2012

Net Revenues

Net revenue for the twelve months ended December 31, 2013 was $704,189, as compared to $335,096 for the twelve-month period ended December 31, 2012. This increase in net revenue was primarily due to increased sales volume from our distributor network ($410,467) and decreased sales volume to end-user customers ($41,374). Sales revenue for 2013 was split between sales to our distributor network (89% of sales revenue) and end-user customers (11% of sales revenue). Sales revenue for 2012 was split between sales to our distributor network (65% of sales revenue) and end-user customers (35% of sales revenue).

Sales revenue generated during 2013 and 2012 resulted primarily from the sale of the PerfoLiFT BD-Series and DiesoLiFTTM 10.

Operating Expenses

Total operating expense was $2,034,884 for the twelve months ended December 31, 2013 (including non-cash stock-based compensation expense of $16,875), as compared to $2,201,173 for the twelve-month period ended December 31, 2012 (including non-cash stock-based compensation expense of $14,853). This represents a $166,289 decrease from the prior period, and was primarily attributable to a decrease in selling, general and administrative expense, partially offset by an increase in cost of operations. These fluctuations are more fully described below.

Cost of Operations

Cost of operations for the twelve months ended December 31, 2013 was $603,189, as compared to $243,642 for the twelve-month period ended December 31, 2012. This increase of $359,547 was primarily attributable to an increase in sales revenues.
 
 
27

 

Selling, General and Administrative Expense

Selling, general and administrative expense for the twelve months ended December 31, 2013 was $1,431,695 (including non-cash stock-based compensation expense of $16,875), as compared to $1,957,531 (including non-cash stock-based compensation of $14,853) for the twelve-month period ended December 31, 2012, representing a $525,836 decrease from the prior period.

The decrease in selling, general and administrative expense was primarily due to:

(1)
an approximate $377,000 decrease in salary expense (and related payroll taxes) during 2013 as the basis for accruing base salaries was reduced effective January 1, 2013; and
(2)
an approximate $108,000 decrease in professional service fees in 2013, as we were unable to conduct our 2012 annual audit (accounting and SEC legal fees would have been incurred during the first quarter of 2013) and our three 2013 quarterly reviews.

Interest Income

Net interest income for the twelve months ended December 31, 2013 was $99, as compared to $160 for the twelve-month period ended December 31, 2012. The change in net interest income is primarily attributable to a decrease in invested funds during 2013 as compared to 2012.

Provision for Income Taxes

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 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 $65,000 each year.

Net Loss

Net loss for the twelve months ended December 31, 2013 was $1,394,596, as compared to $1,929,917 for the twelve months ended December 31, 2012. The decrease in net loss was primarily due to an increased gross margin created by increased sales and a decrease in selling, general and administrative expense (as described above). The basic and diluted net loss per common share for the twelve months ended December 31, 2013 and 2012 was $(0.01) and $(0.02), 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, and 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.
 
 
28

 
 
Beginning in May 2013, as 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 the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) ASC 605-45, “Principal Agent Considerations.”
 
Investor Warrant Modifications
 
The Company and the Board from time to time have authorized the modification to the terms of certain prior warrant issuances. The Company analyzes such modifications under ASC 718 “Compensation-Stock Compensation” (“ASC 718”) and ASC 505, “Equity Based Payments to Non-Employees” (“ASC 505”) and has historically determined that no gain or loss is recognized upon the modification due to the warrants having been issued to an investor and investor awards not being subject to either ASC 718 or ASC 505.
 
Valuation of goodwill
 
The Company accounts for goodwill and intangible assets in accordance with ASC 350 "Intangibles-Goodwill and Other" ("ASC 350"). ASC 350 requires that goodwill and other intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value. In addition, ASC 350 requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests when circumstances indicate that the recoverability of the carrying amount of goodwill may be in doubt. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions or the occurrence of one or more confirming events in future periods could cause the actual results or outcomes to materially differ from such estimates and could also affect the determination of fair value and/or goodwill impairment at future reporting dates.
 
The Company completed an evaluation of goodwill at December 31, 2013 and 2012 and determined that there was no impairment. The Company employed a qualitative evaluation for 2013 analysis. For the 20121 evaluation, a net book value of less than $0 was determined using Step 1. The Company determined that its qualitative evaluation for 2012 resulted in a less than more likely than not determination of impairment, resulting in Step 2 being bypassed.
 
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.
 
 
29

 
 
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 September 18, 2014, receivable collections expected to be received within the next thirty days and a remaining $500,000 balance from a $1,000,000 equity commitment from one of our Directors (see Equity Commitment in Note 3 to our 2013 Annual Report financial statements), we have adequate cash and cash equivalents balances and commitments to fund operations through the end of the third quarter of 2015. Management implemented a salary deferral program for all employees during 2011 to conserve our cash position. This salary deferral program has continued.
 
We have been funded since inception primarily by unregistered sales of the Company’s restricted stock, generally to existing shareholders. Although we believe we still have access to capital from existing shareholders, we can make no assurances that, if required, additional capital will be available to us from this source. Therefore, if we are unable to achieve significant, sustained sales and revenues or secure additional capital by the end of the third quarter of 2015, we will need to curtail operations.
 
Cash used in operating activities was $1,066,590 for the twelve months ended December 31, 2013, as compared to cash used in operating activities of $1,335,549 for the twelve months ended December 31, 2012. The decrease in cash flow used in operating activities was due primarily to a $535,321 reduction in net loss attributable to a $369,093 increase in sales (and therefore increased accounts receivable receipts during 2013), partially offset by the fact that we aggressively paid down vendor payables during 2013.
 
Cash provided by financing activities was $1,232,157 for the twelve months ended December 31, 2013, as compared to $1,070,000 for the twelve months ended December 31, 2012. During 2013, we raised $882,157 upon the private placement of 32,482,820 restricted shares of our common stock to accredited investors. We also received net proceeds of $350,000 in the form of notes payable from related parties. During 2012, we raised $810,000 upon the private placement of 9,975,000 restricted shares of our common stock to accredited investors. During 2012, we also received net proceeds of $260,000 in the form of notes payable from related parties.
 
Net cash increased by $165,567 for the twelve months ended December 31, 2013, as compared to a decrease in net cash of $265,549 for the twelve months ended December 31, 2012.
 
During the twelve months ended December 31, 2013 and December 31, 2012, we did not make significant investments in property and equipment and do not anticipate doing so in the immediate future.
 
Working capital deficit at December 31, 2013 was $(4,541,929), as compared to $(4,108,872) at December 31, 2012. This decrease was primarily attributable to funding cash operating expenses for 2012. The negative working capital amount for 2013 and 2012 is strongly impacted by the approximate $3 million deferred revenue liability recorded on our balance sheet at both December 31, 2013 and 2012.
 
Effective October 27, 1999, we merged with 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 loss per share.
 
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. Since 2009, we have made payments to the prior Blencathia owner in the aggregate of $160,000 reducing this obligation. The remaining $190,000 obligation has been reflected as a current accrued expense. 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. Beginning in 2006, the 312,000 shares have been reflected as outstanding for earnings per share computations.
 
 
30

 
 
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 PerfoLiFT 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 PerfoLiFT 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 PerfoLiFT 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 PerfoLiFT 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.

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.
 
 
31

 
 
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 2013 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 2013 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.

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 in our second quarter 2014 financial statements.

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.
 
 
32

 

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 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”). 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.

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.
 
 
33

 

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.

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 September 18, 2014, receivable balances expected to be received within the next thirty days and a remaining $500,000 balance from a $1,000,000 equity commitment from one of our Directors (see Note 5 to our second quarter of 2014 financial statements), we have adequate cash and cash equivalents balances and commitments to fund operations through the end of the third quarter of 2015. 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.
 
 
34

 

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 third quarter of 2015. 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.

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.

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
 
Directors and Executive Officers
 
Set forth below are the names, ages and other biographical information of our directors and executive officers as of September 18, 2014:
 
The following are the names of our current executive officers and Directors, as well as those who served as executive officers and Directors during the fiscal years ended December 31, 2012 and 2013, their present positions with the Company and certain biographical information.
 
Name
 
Age
 
Position(s) and Offices Held with FPS
 
Dates in Position or Office
Jonathan R. Burst
 
56
 
Chief Executive Officer and Chairman of the Board
 
1999-Present (Chief Executive Officer); 2000-Present (Chairman of the Board)
Stuart D. Beath
 
55
 
Chief Financial Officer
 
2007-Present
Rex Carr
 
87
 
Director
 
2002-Present
Michael Gianino
 
56
 
Director
 
2012-Present
Gary Kirk
 
53
 
*
 
2003-2013
David B. Norris
 
66
 
Director
 
2000-Present
_____________
*
During the fiscal year ended December 31, 2012 and through October 7, 2013, Mr. Kirk served as a Director and as our Director of Sales and Marketing, a non-executive officer position. Mr. Kirk resigned as a Director and as Director of Sales and Marketing effective October 7, 2013.

 
35

 
 
All Directors hold office until the next annual meeting of shareholders or until their successors are elected and qualified. At present, our Articles of Incorporation provide for not less than 1 nor more than 9 directors. Currently, we have 4 directors. Our by-laws permit the Board to fill any vacancy and such director may serve until the next annual meeting of shareholders or until his successor is elected and qualified. Officers serve at the discretion of the Board.

Background of Directors and Executive Officers:
 
JONATHAN R. BURST has served as our Chief Executive Officer since 1999, and as the President of the Company from 1999 to 2000 and 2002 to 2005. Mr. Burst has also served as a Director and Chairman of the Board since 2000. Mr. Burst founded Burcor International in 1998, primarily an insurance brokerage firm, and has served as President since its inception. Mr. Burst received a bachelor of arts degree in Economics from the University of Missouri in 1981.
 
STUART D. BEATH has served as our Chief Financial Officer since 2007. From 2001 until his appointment as Chief Financial Officer, Mr. Beath served as our Director of Corporate Development. Prior to joining the Company, Mr. Beath was a First Vice President and served in the Corporate Finance Department of Stifel, Nicolaus & Company, Incorporated, a brokerage and investment banking firm, from 1993 to 1997. Mr. Beath was also a member of the Board of Directors of Anchor Gaming from 1994 to 2001, serving on the Board’s Audit Committee. From 1987 to 1993, Mr. Beath served in the Corporate Finance Department of A.G. Edwards & Sons, Inc., a brokerage and investment banking firm, where he was an Assistant Vice President of the Firm. Mr. Beath earned a bachelor of arts degree from Williams College in 1981 and a masters in business administration degree from the Darden School at the University of Virginia in 1987.

REX CARR has served as a Director of the Company since 2002. Mr. Carr has been the managing partner of the Rex Carr Law Firm, a law firm with offices in East St. Louis, Illinois, St. Louis, Missouri and Belleville, Illinois, since 2004. Until 2003, Mr. Carr was the senior partner of a 36-person law firm, Carr, Korein, and Tillery, with offices in Missouri and Illinois, for more than 5 years. Mr. Carr is admitted to practice in the United States Supreme Court and the Illinois and Missouri Supreme Courts.

MICHAEL GIANINO has served as a Director of the Company since 2012. Mr. Gianino has served as the owner/President of Homewatch CareGivers of St. Louis, a home health care agency that provides non-medical in-home assistance primarily to the elderly, since 2001. Prior to 2001, Mr. Gianino was employed at Anheuser-Busch, Inc., serving in a variety of positions within Anheuser-Busch’s Field Sales Department.

GARY KIRK served as a Director of the Company from 2003 through October 7, 2013. Mr. Kirk served as our Director of Sales and Marketing from 2003 through October 7, 2013. Mr. Kirk had extensive experience (1980 to 2003) in the petroleum industry, all with Petrochem Carless Ltd., a United Kingdom-based refiner and marketer of petroleum products. Mr. Kirk spent his first 8 years as a research chemist and the remainder in Petrochem Carless’ marketing department. From 1988 to 2003, Mr. Kirk reported directly to the President of Petrochem Carless as the Marketing Manager for Performance Fuels, covering accounts in Europe and the rest of the world.

DAVID B. NORRIS has served as a Director of the Company since 1999. Mr. Norris founded and owns Addicks Services, Inc., a construction company, and has served as its Vice President since 1983.
 
 
36

 

Section 16(a) Beneficial Ownership Compliance
 
Based solely upon our review of copies of such forms received by us, we believe that, during the fiscal years ended December 31, 2012 and 2013, the following persons did not timely file Forms 3, Forms 4 and Forms 5 reporting beneficial ownership of FPS securities and/or changes therein.
 
   
2012
   
2013
 
Reporting Person
 
Number of Known
Failures to File
Required Form
   
Number of
Transactions
Not Reported
   
Number of Known
Failures to File
Required Form
   
Number of
Transactions
Not Reported
 
Jonathan R. Burst
    1       1       1       1  
Rex Carr
    3       3       1       1  
Fer Eren, M.D. (1)
    1       1      
NA
     
NA
 
Michael Gianino
    1       -       4       4  
Gary Kirk (2)
    1       1       1       1  
David B. Norris
    1       1       1       1  
______________
(1)
Dr. Eren ceased to be a member of our Board as of December 4, 2012.
(2)
Mr. Kirk ceased to be a member of our Board as of October 7, 2013.
 
Code of Business Conduct and Ethics

We have adopted a Code of Business Conduct and Ethics that applies to the Chief Executive Officer, the Chief Financial Officer, senior financial officers and employees with financial reporting responsibilities. A copy will be provided at no charge. Requests can be sent to Fuel Performance Solutions, Inc., 7777 Bonhomme Avenue, Suite 1920, St. Louis, Missouri 63105, attention Thomas M. Powell.
 
Audit Committee
 
We have a separately designated Audit Committee. Mr. Norris currently is the only member of our Audit Committee.
 
The Board has determined that Mr. Norris, an independent member of the Board, satisfies all of the criteria to be an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K.
 
Procedures for Nominating Directors
 
There have been no material changes to the procedures by which security holders may recommend nominees to the Board since the filing of our quarterly report on Form 10-Q for the fiscal quarter ended June 30, 2014.
 
 
37

 
 
EXECUTIVE COMPENSATION
 
Summary Compensation Table
 
2013 Summary Compensation Table
 
The following table sets forth information concerning all cash and non-cash compensation paid or to be paid by us as well as certain other compensation awarded to, earned by and paid to, during the indicated fiscal years, to the Chief Executive Officer and Chief Financial Officer.
 
Name and Principal Position
 
Year
   
Salary
($)
   
Option Awards
($)
   
All Other Compensation
($)
   
Total
($)
 
                                       
Jonathan R. Burst,
 
2013
   
$
   
$
   
$
324,663
(1)
 
$
324,663
 
Chief Executive Officer
 
2012
     
52,154
     
     
381,245
(2)
   
433,399
 
                                       
Stuart D. Beath,
 
2013
     
112,500
     
     
64,346
(3)
   
176,846
 
Chief Financial Officer
 
2012
     
139,739
     
     
66,179
(4)
   
205,918
 
_____________
1)
Includes (i) $223,702 of payments made to Burcor Capital, LLC, a company owned by Mr. Burst, in lieu of salary due to Mr. Burst, (ii) $70,500 of deferred salary owed to Mr. Burst (see “Executive Officer Base Salaries” below), (iii) $28,283 of health insurance coverage for Mr. Burst and his family, and (iv) $2,178 of life insurance premiums paid by FPS.
2)
Includes (i) $205,494 of payments made to Burcor Capital, LLC, a company owned by Mr. Burst, in lieu of salary due to Mr. Burst, (ii) $146,737 of deferred salary owed to Mr. Burst (see “Executive Officer Base Salaries” below), (iii) $26,156 of health insurance coverage for Mr. Burst and his family, (iv) $2,178 of life insurance premiums paid by FPS, and (v) $680 of non-cash expense recorded for the grant of 10,000 options for 2012 Board services provided. The non-cash expense represents the aggregate grant date fair value computed in accordance with ASC 718. See Note 4 to our 2013 Annual Report financial statements for ASC 718 assumptions. These fully vested options were valued based on the closing price of our stock on the grant date ($0.09 on December 31, 2012).
3)
Represents $26,846 of health insurance coverage for Mr. Beath and his family and $37,500 of deferred salary owed to Mr. Beath. See “Executive Officer Base Salaries” below.
4)
Represents $26,156 of health insurance coverage for Mr. Beath and his family and $40,023 of deferred salary owed to Mr. Beath. See “Executive Officer Base Salaries” below.
 
Executive Officer Base Salaries
 
For the fiscal year ended December 31, 2011, Mr. Burst’s and Mr. Beath’s annual base salaries were $400,000 and $175,000, respectively. In May 2011, the Company instituted a policy pursuant to which all employees, including our named executive officers (“NEOs”), agreed to defer receipt of 50% of all earned salary until further notice. Effective July 2011, the policy was revised. Pursuant to the new policy, effective July 2011, Mr. Burst agreed to defer receipt of 26% of all earned salary until further notice and Mr. Beath agreed to defer receipt of 14% of all earned salary until further notice. In June 2013, the policy was again revised to provide that each of Messrs. Burst and Beath would defer receipt of 25% of his earned salary until further notice. 
 
 
38

 
 
Outstanding Equity Awards at Fiscal Year-End
 
The following table provides information on all restricted stock, stock options and SAR awards (if any) held by our NEOs as of December 31, 2013 and as of December 31, 2012.
 
    Option Awards
(as of December 31, 2012)
 
Option Awards
(as of December 31, 2013)
 
 
Name
 
No. of
Securities
Underlying
Unexercised
Options
Exercisable
(#)
 
No. of
Securities
Underlying
Unexercised
Options
Unexercisable
(#)
 
Option
Exercise
Price
($)
 
Option
Expiration
Date
 
No. of
Securities
Underlying
Unexercised
Options
Exercisable
(#)
 
No. of
Securities
Underlying
Unexercised
Options
Unexercisable
(#)
 
Option
Exercise
Price
($)
 
Option
Expiration
Date
 
Jonathan R. Burst
    10,400       $ 0.21  
12/31/2013
         
NA
    NA  
      450,000       $ 0.50  
12/31/2013
         
NA
 
NA
 
      780,000       $ 0.13  
12/31/2014
    780,000       $ 0.13  
12/31/2014
 
      1,040,000       $ 0.24  
12/31/2014
    1,040,000       $ 0.24  
12/31/2014
 
      4,600,000       $ 0.48  
12/31/2014
    4,600,000       $ 0.48  
12/31/2014
 
      10,000       $ 0.09  
12/31/2017
    10,000       $ 0.09  
12/31/2014
 
                                                 
Stuart D. Beath
    250,000       $ 0.50  
12/31/2013
         
NA
 
NA
 
      200,000       $ 0.25  
8/2/2014
    200,000       $ 0.25  
8/2/2014
 
      1,352,000       $ 0.48  
12/31/2014
    1,352,000       $ 0.48  
12/31/2014
 
 
2013 and 2012 Director Compensation
 
Directors do not receive any cash compensation for their services as members of the Board, although they are reimbursed for certain expenses incurred in connection with attendance at Board and Committee meetings.

Historically, each non-employee and employee Director was entitled to an annual award of 10,000 restricted shares or an immediately vesting option to purchase 10,000 shares of our Common Stock as compensation for their services as Board members. In addition, each Board member was entitled to receive 1,000 shares of restricted stock or an option to purchase 1,000 shares of our Common Stock for every 3 Board meetings attended.
 
However, during 2013, the Company and the Board undertook a review of its Director compensation policy. This review was not finalized during 2013, thus no Board compensation was granted for 2013 Board services.

Board members are also eligible to receive discretionary grants of Common Stock under the Consultant and Employee Stock Compensation Plan and grants of stock options, stock appreciation rights and restricted stock pursuant to the Amended and Restated LTIP.
 
 
39

 

The following table provides information related to the compensation of our non-NEO Directors for fiscal 2013 and 2012. For information regarding our Chairman and Chief Executive Officer’s 2013 and 2012 compensation, see the 2013 Summary Compensation table.
 
Name
 
Year
   
Stock
Awards
($)
   
Option
Awards
($)
   
All Other
Compensation
($)
   
Total
($)
 
                                       
Rex Carr (1)
 
2013
   
$
   
$
   
$
   
$
 
   
2012
     
     
680 (2)
     
     
680
 
                                       
Fer Eren, M.D. (3)
 
2013
     
     
     
     
 
   
2012
     
     
     
     
 
                                       
Michael Gianino (4)
 
2013
     
     
             
 
   
2012
     
     
680 (2)
     
     
680
 
                                       
Gary Kirk (5)
 
2013
     
     
     
121,154 (6)
     
121,154
 
   
2012
     
     
680 (2)
     
157,163 (6)
     
157,843
 
                                       
David B. Norris (7)
 
2013
     
     
     
     
 
   
2012
     
     
680 (2)
     
     
680
 
__________________
(1)  
Mr. Carr’s FPS equity holdings as of both December 31, 2013 and 2012 include 16,695,298 shares of restricted Common Stock owned by R.C. Holding Company, of which Mr. Carr is a Director, President and 41% stockholder. Mr. Carr is deemed to be the beneficial owner of these shares. Mr. Carr also owned 125,000 shares of Common Stock as of both December 31, 2013 and 2012, and 5,449,901 shares of restricted Common Stock as of both December 31, 2013 and 2012. Mr. Carr also had 700,760 and 811,160 vested options/warrants to purchase shares of FPS Common Stock as of December 31, 2013 and 2012, respectively, and 10,000 restricted common shares as of both December 31, 2013 and 2012, obtained from Board services provided from 2002 to date.
(2)  
Represents the grant date fair value for options granted as compensation for 2012 Board services. Key assumptions used in determining the fair value (pursuant to ASC 718) of these options include the following:
 
Measurement date:  
December 31,
2012
 
Fair value per option:   $ 0.068  
Risk-free interest rate:     0.74 %
Dividend yield:      
Volatility factor:     1.03  
Expected option life:   5 years.  
__________________                                                                                                                                                                                                                                                                               
(3)  
Dr. Eren ceased to be a member of our Board as of December 4, 2012. Dr. Eren’s FPS equity holdings as of December 31, 2012 included 642,899 shares of common stock. Dr. Eren also held 130,000 vested options to purchase shares of FPS common stock, obtained from Board services provided from 2009 to 2012.
(4)  
Mr. Gianino’s FPS equity holdings as of December 31, 2013 and 2012 include 2,630,893 and 1,005,893, respectively, shares of common stock. Mr. Gianino also held 10,000 vested options to purchase shares of FPS Common Stock as of both December 31, 2013 and 2012 for Board services provided from 2012 to date. Mr. Gianino also held 250,000 and 125,000 vested warrants to purchase shares of FPS Common Stock as of December 31, 2013 and 2012, respectively.
(5)  
Mr. Kirk ceased to be a member of our Board as of October 7, 2013. Mr. Kirk’s FPS equity holdings as of December 31, 2012 included 2,330,000, respectively, vested options to purchase shares of FPS Common Stock granted for employee services. Mr. Kirk also held 84,720 vested options to purchase shares of FPS Common Stock as of December 31, 2012, obtained from Board services provided from 2003 to 2012.
(6)  
These amounts represent Mr. Kirk’s annual base salary for the fiscal years 2013 and 2012. Included in these amounts are accrued but unpaid salary amounts of $29,651 and $45,996 for 2013 and 2012, respectively.
(7)  
Mr. Norris’ FPS equity holdings as of both December 31, 2013 and 2012 include 1,244,425, respectively, shares of restricted common stock. Mr. Norris also held 0 and 208,000 vested options to purchase shares of FPS Common Stock for non-director related services provided as of December 31, 2013 and 2012, respectively. Mr. Norris also held 99,040 and 209,040 vested options to purchase shares of FPS Common Stock as of December 31, 2013 and 2012, respectively, and 10,000 restricted common shares obtained from Board services provided from 2000 to the respective date as of both December 31, 2013 and 2012.

 
40

 
 
Director Independence
 
Mr. Norris is an independent Director, as such term is defined in the listing standards of The NASDAQ Stock Market, Inc. (“NASDAQ”).

The Company does not have a separately designated nominating committee for its Board. Each of the following directors is not deemed to be independent, as such term is defined in the NASDAQ listing standards: Mr. Burst and Mr. Carr. In addition, Mr. Kirk, who served as a Director until October 7, 2013 was not an independent Director. 
 
Involvement in Certain Legal Proceedings

To our knowledge, during the past ten years, none of our directors, executive officers, promoters, control persons, or nominees has:
 
been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
   
had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;
   
been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;
   
been found by a court of competent jurisdiction in a civil action or by the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
   
been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
   
been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
Security Ownership of Certain Beneficial Owners and Management
 
The following table sets forth information regarding the ownership of our Common Stock as of September 18, 2014, respectively, by (i) each person known by FPS to own beneficially more than 5% of our Common Stock; (ii) each Director of FPS; (iii) each executive officer named in the Summary Compensation Table (see “Executive Compensation”); and (iv) all Directors and executive officers of FPS as a group. This table is based upon information supplied by officers, directors and principal stockholders. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, we believe that each of the stockholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned.
 
 
41

 
 
Name of Beneficial Owner (1)
 
Amount and
Nature of
Beneficial
Ownership (2)
   
% of
Common
Stock (2)
 
             
Jonathan R. Burst (3)
   
16,240,173
     
7.54
%
Stuart D. Beath (4)
   
6,349,024
     
3.04
%
Rex Carr (5)
   
36,592,159
     
17.68
%
Michael Gianino (6)
   
4,580,893
     
2.24
%
David B. Norris (7)
   
5,682,265
     
2.78
%
All directors and executive officers as a group (5 persons) (8)
   
69,444,514
     
30.27
%
John M. Hennessy (9)
   
14,533,333
     
6.91
%
__________________
(1)  
Unless otherwise indicated, the principal address of each of the stockholders named in this table is: c/o Fuel Performance Solutions, Inc., 7777 Bonhomme Avenue, Suite 1920, St. Louis, Missouri 63105.

(2)  
The number of shares beneficially owned includes shares of Common Stock that the owner or owners had the right to acquire on or within 60 days of September 10, 2014, including through the exercise of options or warrants. Also included are restricted shares of common stock, over which the owner or owners have voting power, but no investment power. Calculation based on 202,675,382 common shares outstanding as of September 10, 2014 and calculated in accordance with Rule 13d-3 under the Exchange Act.
 
(3)
Includes 52,000 restricted shares of Common Stock owned by Burcor Capital, LLC, of which Mr. Burst is an executive officer. Mr. Burst is deemed to be the beneficial owner of such shares. It also includes 12,401,200 shares issuable upon the exercise of options and 333,333 shares issuable upon the exercise of warrants.
 
(4)
Represents 349,024 shares of Common Stock and 6,000,000 shares issuable upon exercise of options.

(5)
Includes 23,820,298 shares of restricted Common Stock owned by R.C. Holding Company, of which Mr. Carr is a director, President and 41% stockholder. Mr. Carr is deemed to be the beneficial owner of these shares. Also includes 125,000 shares of Common Stock and 8,324,901 shares of restricted Common Stock owned by Mr. Carr. Amount also includes 4,311,960 shares issuable upon exercise of options/warrants; and 10,000 restricted common shares obtained from Board services provided from 2002 to date.

(6)
Represents 2,830,893 shares of Common Stock and 1,625,000 shares issuable upon exercise of options/warrants.

(7)
Represents 3,754,425 shares of Common Stock and 1,927,840 shares issuable upon exercise of options.
 
(8)
Includes 26,724,333 shares issuable upon exercise of options/warrants.

(9)
Represents 5,425,131 shares of Common Stock held directly by Mr. Hennessy; 1,587,369 shares of Common Stock held by a grantor retained annuity trust, of which Mr. Hennessy serves as trustee (the “GRAT”); 6,520,833 shares issuable upon exercise of warrants held directly by Mr. Hennessy; and 1,000,000 shares issuable upon exercise of warrants held by the GRAT. Mr. Hennessy’s principal address is 47 West Lake Road, Tuxedo Park, NY 10987.

 
42

 

Securities Authorized for Issuance Under Equity Compensation Plans as of December 31, 2013
 
Plan category
 
Number of securities to
be issued upon exercise
of outstanding options,
warrants and
rights
   
Weighted-average
exercise
price of
outstanding
options,
warrants
and
rights
   
Number of securities
remaining
available for
future issuance under equity
compensation
plans (excluding
securities
reflected in
column (a))
 
   
(a)
   
(b)
   
(c)
 
                         
Equity compensation plans approved by security holders
        $        
Equity compensation plans not approved by security holders (1) (2)
    35,222,469     $ 0.26       4,560,455  
Total
    35,222,469     $ 0.26       4,560,455  
__________________
(1)
Includes options granted to employees, Directors and non-employees under our original Long Term Incentive Plan, our Amended and Restated LTIP and under other arrangements, and options and warrants issued to non-employees under other arrangements. Other arrangements include warrants issued to non-employees in relation to certain equity raise activities and option grants to certain employees and non-employees whose underlying common shares are not registered under the Securities Act or any state securities laws.
   
(2)
See Notes 3 and 4 to our 2013 10-K financial statements.
 
Securities Authorized for Issuance Under Equity Compensation Plans as of December 31, 2012
 
Plan category
 
Number of securities to
be issued upon exercise
of outstanding options,
warrants and
rights
   
Weighted-average
exercise
price of
outstanding
options,
warrants
and
rights
   
Number of securities
remaining
available for
future issuance under equity
compensation
plans (excluding
securities
reflected in
column (a))
 
   
(a)
   
(b)
   
(c)
 
                         
Equity compensation plans approved by security holders
        $        
Equity compensation plans not approved by security holders (1) (2)
    33,249,469     $ 0.30       2,318,455  
Total
    33,249,469     $ 0.30       2,318,455  
__________________
(1)
Includes options granted to employees, Directors and non-employees under our original Long Term Incentive Plan, our Amended and Restated LTIP and under other arrangements, and options and warrants issued to non-employees under other arrangements. Other arrangements include warrants issued to non-employees in relation to certain equity raise activities and option grants to certain employees and non-employees whose underlying common shares are not registered under the Securities Act, or any state securities laws.
   
(2)
See Notes 3 and 4 to our 2012 financial statements as presented in our 2013 10-K.

 
43

 
 
TRANSACTIONS WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS
 
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. See Equity Commitment in Note 3 to our 2013 10-K financial statements. 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. The total amount available under this commitment is $500,000 as of June 30, 2014 and December 31, 2013, and $800,000 as of December 31, 2012, respectively.

In 2012 and 2013, Mr. Carr made several loans to FPS. The terms of these loans did not require the payment of interest and did not require repayment of the principal by a certain date. The table below outlines these various loans.
 
Date of Loan to FPS
 
Amount of
Loan to FPS
   
Aggregate Amount Owed by FPS
to Mr. Carr Pursuant to Loans
 
                 
March 13, 2012
 
$
50,000.00
   
$
50,000.00
 
April 2, 2012
 
$
40,000.00
   
$
90,000.00
 
June 12, 2012
 
$
100,000.00
   
$
140,000.00
(1)
July 6, 2012
 
$
25,000.00
   
$
165,000.00
 
August 7, 2012
 
$
25,000.00
   
$
190,000.00
 
August 8, 2012
 
$
10,000.00
   
$
200,000.00
 
February 28, 2013
 
$
50,000.00
   
$
250,000.00
 
May 24, 2013
 
$
50,000.00
   
$
250,000.00
(2)
May 30, 2013
 
$
50,000.00
   
$
300,000.00
 
September 16, 2013
 
$
100,000.00
   
$
400,000.00
 
November 12, 2013
 
$
25,000.00
   
$
425,000.00
 
December 6, 2013
 
$
75,000.00
   
$
500,000.00
 
__________
(1) 
On May 10, 2012, Mr. Carr converted $50,000 of the outstanding loan balance to equity at the then-market price of $0.10 per share, pursuant to the equity commitment arrangement in place with Mr. Carr.
 
(2) 
On April, 4, 2013, FPS made a payment of $50,000 to Mr. Carr, in partial repayment of the aggregate amount owed to Mr. Carr pursuant to the loans.

On February 6, 2014, in exchange for the cancellation of the cumulative $500,000 loan balance with Mr. Carr, we agreed to sell 10,000,000 restricted shares of our Common Stock to Mr. Carr (or entities controlled by Mr. Carr). No principal or interest relating to the cancelled loan balance was paid by FPS.

The cumulative $500,000 loan balance to Mr. Carr was subsequently converted to equity on February 6, 2014 with the issuance of 10,000,000 shares to Mr. Carr (or entities controlled by Mr. Carr).

On February 4, 2013, David B. Norris, a Director of the Company, 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. On February 6, 2014, in exchange for the cancellation of this $50,000 loan with Mr. Norris, we agreed to sell 2,500,000 restricted shares of our Common Stock to Mr. Norris. No principal or interest relating to the cancelled loan was paid by FPS.

On March 1, 2013, Jonathan R. Burst, our Board Chairman and Chief Executive Officer, loaned us $50,000. In exchange for the receipt by us of $50,000, we agreed to repay the principal amount of the loan. On April 30, 2013 and May 24, 2013, we made payments in the amount of $20,000 and $30,000, respectively, to Mr. Burst in repayment of the loan. 
 
Transactions with Promoters
 
We did not expressly engage a promoter at the time of its formation. We have used selling agents and consultants from time to time. The terms of those arrangements have been disclosed in previous filings with the SEC.
 
 
44

 
 
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION OF SECURITIES ACT LIABILITIES
 
Our directors and officers are indemnified as provided by the Nevada corporate law and our by-laws. We have agreed to indemnify each of our directors and certain officers against certain liabilities, including liabilities under the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the provisions described above, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than our payment of expenses incurred or paid by our director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
 
We have been advised that in the opinion of the SEC indemnification for liabilities arising under the Securities Act is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities is asserted by one of our directors, officers, or controlling persons in connection with the securities being registered, we will, unless in the opinion of our legal counsel the matter has been settled by controlling precedent, submit the question of whether such indemnification is against public policy to a court of appropriate jurisdiction. We will then be governed by the court’s decision.
 
WHERE YOU CAN FIND ADDITIONAL INFORMATION
 
We filed with the SEC a registration statement under the Securities Act for the shares of Common Stock in this offering. This prospectus does not contain all of the information in the registration statement and the exhibits and schedule that were filed with the registration statement. For further information with respect to us and our common stock, we refer you to the registration statement and the exhibits and schedule that were filed with the registration statement. Statements contained in this prospectus about the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and we refer you to the full text of the contract or other document filed as an exhibit to the registration statement. A copy of the registration statement and the exhibits and schedules that were filed with the registration statement may be inspected without charge at the Public Reference Room maintained by the SEC at 100 F. Street, N.E., Washington, DC 20549-6010, and copies of all or any part of the registration statement may be obtained from the SEC upon payment of the prescribed fee. Information regarding the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a web site that contains reports, proxy and information statements, and other information regarding registrants that file electronically with the SEC. The address of the site is www.sec.gov.
 
 
45

 
 
FUEL PERFORMANCE SOLUTIONS, INC.
(formerly International Fuel Technology, Inc.)
 
INDEX TO FINANCIAL STATEMENTS
 
Report of Independent Registered Public Accounting Firm
    F-1  
Financial Statements for the Fiscal Years Ended December 31, 2013 and 2012
       
Balance Sheets as of December 31, 2013 and 2012     F-2  
Statements of Operations for the years ended December 31, 2013 and 2012
    F-3  
Statements of Stockholders’ Deficit for the years ended December 31, 2013 and 2012
    F-4  
Statements of Cash Flows for the years ended December 31, 2013 and 2012
    F-5  
Notes to Audited Financial Statements
    F-6  
Financial Statements for the Three and Six Months Ended June 30, 2014 and 2013
       
Balance Sheets as of June 30,2014 (Unaudited) and December 31, 2013
    F-20  
Unaudited Statements of Operations for the three and six months ended June 30, 2014 and June 30, 2013
    F-21  
Unaudited Statements of Stockholders’ Deficit for the six months ended June 30, 2014
    F-22  
Unaudited Statements of Cash Flows for the six months ended June 30, 2014 and 2013
    F-23  
Notes to Unaudited Financial Statements
    F-24  

 
46

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
Fuel Performance Solutions, Inc.
St. Louis, Missouri

We have audited the accompanying balance sheets of Fuel Performance Solutions, Inc. (the “Company”) as of December 31, 2013 and 2012, and the related statements of operations, changes in stockholders’ deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2013 and 2012, and the related results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring loss from operations and has a working capital deficit. This factor raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to this matter also are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 
/s/ MaloneBailey, LLP                               
www.malone-bailey.com
Houston, Texas
May 14, 2014
 
 
F-1

 
 
FUEL PERFORMANCE SOLUTIONS, INC.
(formerly International Fuel Technology, Inc.)
BALANCE SHEETS
 
   
December 31,
2013
   
December 31,
2012
 
ASSETS
Current assets
           
Cash and cash equivalents
  $ 216,913     $ 51,346  
Accounts receivable
    10,781       112,174  
Inventory
    33,784       60,229  
Prepaid expenses and other assets
    28,284       25,957  
Total current assets
    289,762       249,706  
                 
Goodwill
    2,211,805       2,211,805  
                 
Total assets
  $ 2,501,567     $ 2,461,511  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities
               
Accounts payable
  $ 350,984     $ 427,868  
Accrued compensation
    742,465       542,468  
Note payable to related parties
    550,000       200,000  
Deferred revenue
    2,998,242       2,998,242  
Other accrued expenses
    190,000       190,000  
Total current liabilities
    4,831,691       4,358,578  
                 
Deferred rent
    12,573       14,066  
Deferred income taxes
    723,000       659,000  
Total long term liabilities
    735,573       673,066  
                 
Total liabilities
    5,567,264       5,031,644  
                 
Commitments and contingencies
               
                 
Stockholders’ deficit
               
Common stock, $0.01 par value, 250,000,000 shares authorized; 158,280,604 and
    125,610,284 (net of 1,440,000 shares held in treasury stock) shares issued and
    outstanding at December 31, 2013, and 2012, respectively
    1,597,206       1,270,503  
Treasury stock
    (664,600 )     (664,600 )
Discount on common stock
    (819,923 )     (819,923 )
Additional paid-in capital
    67,949,067       67,376,738  
Accumulated deficit
    (71,127,447 )     (69,732,851 )
Total stockholders’ deficit
    (3,065,697 )     (2,570,133 )
                 
Total liabilities and stockholders’ deficit
  $ 2,501,567     $ 2,461,511  
 
See accompanying Notes to Financial Statements.
 
 
F-2

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

   
Year Ended
December 31,
2013
   
Year Ended December 31,
2012
 
             
Net revenues
  $ 704,189     $ 335,096  
                 
Operating expenses
               
Cost of operations
    603,189       243,642  
Selling, general and administrative expense
    1,431,695       1,957,531  
Total operating expenses
    2,034,884       2,201,173  
Net loss from operations
    (1,330,695 )     (1,866,077 )
                 
Interest income
    99       160  
                 
Net loss before income taxes
    (1,330,596 )     (1,865,917 )
Income tax provision
    64,000       64,000  
                 
Net loss
  $ (1,394,596 )   $ (1,929,917 )
                 
Basic and diluted net loss per common share
  $ (0.01 )   $ (0.02 )
                 
Weighted-average common shares outstanding, basic and diluted
    133,559,623       118,911,070  

See accompanying Notes to Financial Statements.
 
 
F-3

 
 
FUEL PERFORMANCE SOLUTIONS, INC.
(formerly International Fuel Technology, Inc.)
STATEMENTS OF STOCKHOLDERS’ DEFICIT
 
   
Common Stock Shares
   
Common Stock Amount
   
Treasury
Stock
   
Discount on Common
Stock
   
Additional Paid-In Capital
   
Accumulated
Deficit
   
Total
 
                                                         
Balance, December 31, 2011
   
116,475,284
   
$
1,164,753
   
$
(664,600
)
 
$
(819,923
)
 
$
66,597,635
   
$
(67,802,934
)
 
$
(1,525,069
)
Issuance of stock for cash
   
9,975,000
     
99,750
     
-
     
-
     
710,250
     
-
     
810,000
 
Issuance of stock for conversion of debt
   
600,000
     
6,000
     
-
     
-
     
54,000
     
-
     
60,000
 
Expense relating to stock option grants
   
-
     
-
     
-
     
-
     
14,853
     
-
     
14,853
 
Net loss
   
-
     
-
     
-
     
-
     
-
     
(1,929,917
)
   
(1,929,917
)
Balance, December 31, 2012
   
127,050,284
   
$
1,270,503
   
$
(664,600
)
 
$
(819,923
)
 
$
67,376,738
   
$
(69,732,851
)
 
$
(2,570,133
)
Issuance of stock for cash
   
32,482,820
     
324,828
     
-
     
-
     
557,329
     
-
     
882,157
 
Issuances of stock for services
   
187,500
     
1,875
     
-
     
-
     
15,000
     
-
     
16,875
 
Net loss
   
-
     
-
     
-
     
-
     
-
     
(1,394,596
)
   
(1,394,596
)
Balance, December 31, 2013
   
159,720,604
   
$
1,597,206
   
$
(664,600
)
 
$
(819,923
)
 
$
67,949,067
   
$
(71,127,447
)
 
$
(3,065,697
)
 
See accompanying Notes to Financial Statements.
 
 
F-4

 

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

   
Year Ended
   
Year Ended
 
   
December 31,
   
December 31,
 
   
2013
   
2012
 
Cash flows from operating activities
           
Net loss
  $ (1,394,596 )   $ (1,929,917 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Non-cash stock-based compensation
    16,875       -  
Non-cash option expense
    -       14,853  
Deferred income tax provision
    64,000       64,000  
Change in assets and liabilities:
               
Accounts receivable
    101,393       (26,952 )
Inventory
    26,445       12,334  
Prepaid expense and other assets
    (2,327 )     (6,345 )
Accounts payable
    (76,884 )     155,022  
Accrued compensation
    199,997       367,390  
Deferred rent
    (1,493 )     14,066  
Net cash used in operating activities
    (1,066,590 )     (1,335,549 )
                 
Cash flows from financing activities
               
Proceeds from issuance of note payable to related parties
    450,000       260,000  
Principal payments on debt due to related party
    (100,000 )     -  
Proceeds from issuance of common stock
    882,157       810,000  
Net cash provided by financing activities
    1,232,157       1,070,000  
                 
Net increase (decrease) in cash and cash equivalents
    165,567       (265,549 )
Cash and cash equivalents, beginning
    51,346       316,895  
Cash and cash equivalents, ending
  $ 216,913     $ 51,346  
                 
Supplemental disclosure of cash flow information:
               
Cash paid during the year ended December 31:
               
Interest
  $ -     $ -  
Income taxes
  $ -     $ -  
                 
Non-cash transactions:
               
Note payable to related party conversion into common stock
  $ -     $ 60,000  

See accompanying Notes to Financial Statements.
 
 
F-5

 
 
FUEL PERFORMANCE SOLUTIONS, INC.
(formerly International Fuel Technology, Inc.)
  
Note 1. Nature of Business and Significant Accounting Policies

Nature of Business

Fuel Performance Solutions, Inc. (“FPS,” “we” or the “Company”) is a company that was incorporated under the laws of the State of Nevada on April 9, 1996. On February 5, 2014, the Company changed its name from International Fuel Technology, Inc. to Fuel Performance Solutions, Inc. We have developed a family of fuel additive product formulations. These unique fuel blends have been created to improve fuel economy, enhance lubricity (reducing engine wear and tear) and lower harmful engine emissions, while decreasing reliance on petroleum-based fuels through the use of more efficient, alternative and renewable fuels. We began transitioning from a development stage technology company to a commercial entity during 2002 and have been increasing our product marketing and sales efforts since. We are now focused on continuing to develop the body of evidence of the efficacy of our products applicable to a wide range of markets and industries within these markets through additional industry specific laboratory testing and customer field-based demonstration trials. In addition, we are continuing to strengthen our distributor and customer contact base. Marketing and sales efforts, in conjunction with the additional industry specific testing, will complete our transition to a commercial enterprise.

During 2013, our net revenues were split in the following manner: 9% to United States end-user customers and 91% to international distributors and end-user customers. 92% of our net revenues for 2013 were concentrated among 5 customers.

During 2012, our net revenues were split in the following manner: 17% to United States end-user customers and 83% to international distributors and end-user customers. 90% of our net revenues for 2012 were concentrated among 3 customers.

At December 31, 2012, 95% of our accounts receivable balance was attributable to 1 customer.
 
Customers whose revenues exceeded 10% of our total revenues for 2013 and 2012, respectively, are listed below:

Customer Name
 
2013
   
2012
 
             
Nordmann, Rassmann
    74 %     59 %
Schnucks Markets, Inc.
    *       14 %
Next Group Brazil
    12 %     -  
East Midlands Trains Limited
    -       17 %
__________________
*Below 10% threshold for applicable period.
 
 
F-6

 

Our product line revenues for 2013 and 2012 have not been significant. See the table below for a breakdown of our product line revenues:

   
2013
   
2012
 
FPS Product
  $       %     $       %  
                             
DiesoLiFTTM 10
  $ 55,763       8 %   $ 107,210       32 %
                                 
PerfoLiFT BD-Series
    633,931       90 %     209,394       62 %
                                 
Other
    14,495       2 %     18,492       6 %
                                 
Total revenues
  $ 704,189       100 %   $ 335,096       100 %

Net revenues related to shipments into various foreign countries were $640,004 and $279,470  during 2013 and 2012, respectively. The following table breaks out net revenues by foreign country:

Country
 
2013
   
2012
 
             
Brazil
  $ 88,361     $ -  
China
    -       -  
Czech. Republic
    139,640       63,513  
Cyprus
    12,175       5,028  
France
    14,495       18,492  
Germany
    310,649       135,357  
Romania
    68,631       -  
United Kingdom
    6,053       57,080  
    $ 640,004     $ 279,470  

We currently utilize Brenntag as our contracted product manufacturer. Brenntag independently purchases required raw materials to manufacture our product. For the years ended December 31, 2013 and 2012, 100% of our product manufacturing has been handled by Brenntag.

Summaries of our significant accounting policies follow:

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with United States generally accepted accounting principles (“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 date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.
 
 
F-7

 

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and trade receivables. The Company places its cash with high credit quality financial institutions. At times such cash may be in excess of the FDIC limit. With respect to trade receivables, the Company routinely assesses the financial strength of its customers and, as a consequence, believes that the receivable credit risk exposure is limited.

Related Parties

A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.

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, and title and risk of loss has passed to the buyer and collectability of the resulting receivable is reasonably assured. A 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.

Beginning in May 2013, as 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.”

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and temporary investments with a maturity of three months or less. We maintain cash in a bank account, which, at times, exceeds federally insured limits. We have experienced no losses relating to these excess amounts of cash in a bank.
 
We utilize a cash management program that assesses daily cash requirements. Excess funds are invested in overnight repurchase agreements backed by United States Treasury securities. Repurchase agreements are not deposits, are not insured or guaranteed by the United States government, the Federal Deposit Insurance Corporation or any other government agency, and involve investment risk including possible loss of principal.
 
 
F-8

 
 
Accounts Receivable

An allowance for doubtful accounts is maintained at a level we believe sufficient to cover potential losses based on historical trends and known current factors impacting our customers. We have determined that an allowance for doubtful accounts was not necessary as of December 31, 2013 and 2012.
 
Inventory
 
Inventory, which consists of finished product, is valued at the lower of cost or market, based on the first-in, first-out (“FIFO”) method, or market, and reflects the purchased cost from vendors. Although we maintain minimal inventory levels in the United States at external storage facilities, the majority of our inventory is manufactured based on customer demand and immediately shipped to customers upon completion. The raw material components required to manufacture our products reside at our product manufacturer’s facilities.

Goodwill

The Company accounts for goodwill and intangible assets in accordance with ASC 350 "Intangibles-Goodwill and Other" ("ASC 350"). ASC 350 requires that goodwill and other intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value. In addition, ASC 350 requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests when circumstances indicate that the recoverability of the carrying amount of goodwill may be in doubt. Application of the goodwill impairment test requires judgment, including the identification of reporting units; assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions or the occurrence of one or more confirming events in future periods could cause the actual results or outcomes to materially differ from such estimates and could also affect the determination of fair value and/or goodwill impairment at future reporting dates.

The Company completed an evaluation of goodwill at December 31, 2013 and 2012 and determined that there was no impairment. The Company employed a qualitative evaluation for 2013 analysis. For the 2012 evaluation, a net book value of less than $0 was determined using the Step 1 test. The Company determined that its qualitative evaluation for 2012 resulted in a less than more likely than not determination of impairment, resulting in the Step 2 test being bypassed.
 
Income Taxes

The Company accounts for income taxes utilizing ASC 740, “Income Taxes” (“ASC 740”). ASC 740 requires the measurement of deferred tax assets for deductible temporary differences and operating loss carry forwards, and of deferred tax liabilities for taxable temporary differences. Measurement of current and deferred tax liabilities and assets is based on provisions of enacted tax law. The effects of future changes in tax laws or rates are not included in the measurement. The Company recognizes the amount of taxes payable or refundable for the current year and recognizes deferred tax liabilities and assets for the expected future tax consequences of events and transactions that have been recognized in the Company’s financial statements or tax returns. The Company currently has substantial NOL carry forwards. The Company has recorded a 100% valuation allowance against net deferred tax assets due to uncertainty of their ultimate realization. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
 
 
F-9

 
 
Research and Development

Research and development costs are expensed as incurred. Expense for services received from external vendors for 2013 and 2012 was $80,689 and $96,117, respectively.

Advertising Expenses

Advertising costs are expensed as incurred and amounted to $56,219 and $73,772 in 2013 and 2012, respectively.

Basic and Diluted Net Earnings (Loss) Per Common Share
 
The Company accounts for earnings per share pursuant to ASC 260, “Earnings per Share,” which requires disclosure on the financial statements of "basic" and "diluted" earnings (loss) per share. Basic earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the year. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding plus common stock equivalents (if dilutive) related to stock options and warrants for each year. As there was a net loss for the periods, basic and diluted loss per share is the same for the years ended December 31, 2013 and 2012, respectively.

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”). 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.
 
 
F-10

 

Employee Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with ASC 718, “Compensation-Stock Compensation” (“ASC 718). ASC 718 requires companies to measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant date fair value of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period.

Non-Employee Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with the provision of ASC 505, “Equity Based Payments to Non-Employees” (“ASC 505”), which requires that such equity instruments are recorded at their fair value on the measurement date. The measurement of stock-based compensation is subject to periodic adjustment as the underlying equity instruments vest.

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.

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 and commercial acceptance for our products currently in the commercialization phase. During the first quarter of 2002, we began 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. Management implemented a salary deferral program for all employees during 2011 to conserve our cash position. This salary deferral program has continued.

 We have been funded since inception primarily by unregistered sales of the Company’s restricted stock, generally to existing shareholders. Although we believe we still have access to capital from existing shareholders , we can make no assurances that, if required, additional capital will be available to us from this source. Therefore, if we are unable to achieve significant, sustained sales and revenues or secure additional capital by the end of the third quarter of 2015, 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 the Company to continue as a going concern.
 
 
F-11

 

Note 3. Stockholders’ Deficit

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 commo