During the second quarter of 2005, IFT granted 3,000,000 stock options to non-employees. 1,000,000 of the options granted vested immediately and were recorded as consulting expense at that time. The remaining 2,000,000 options will vest based on the occurrence of certain events and therefore consulting expense will not be recorded until the triggering event occurs.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements and Associated Risks
This Quarterly Report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. These forward looking statements are based largely on IFT’s expectations and are subject to a number of risks and uncertainties, many of which are beyond IFT’s control, including, but not limited to, economic, competitive and other factors affecting IFT’s operations, markets, products and services, expansion strategies and other factors described elsewhere in this report and the documents filed by IFT with the Securities and Exchange Commission. Actual results could differ materially from these forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this report will in fact prove accurate. IFT does not undertake any obligation to revise these forward-looking statements to reflect future events or circumstances.
Overview
IFT has developed a family of fuel additives that have been created through the use of proprietary surfactant chemistry technology. IFT is in the process of patenting the fuel additives and resulting fuel blends as part of its commercialization efforts. The individual fuel blends incorporating the IFT additive formulations include base fuel with additive only, base fuel with kerosene, base fuel with biodiesel, base fuel with ethanol, and base fuel with an urea/water solution. IFT seeks to commercialize the use of the additives in these and other fuel blends on a global basis through the use of strategic partnerships with a variety of targeted companies including fuel consumers, distributors of fuel additives, original equipment manufacturers, and other companies.
Three and Six Months Ended June 30, 2005 compared to the Three and Six Months Ended June 30, 2004
IFT’s revenues of $56,535 for the three months ended June 30, 2005, and $56,583 for the six months ended June 30, 2005, were generated from the sales of Diesolift, Gasolift, and Kerolift products.
Total operating expenses were $1,529,533 for the three months ended June 30, 2005, as compared to operating expenses of $591,691 for the three month period ended June 30, 2004. This represents a $937,842 increase from the prior period. Total operating expenses were $2,548,247 for the six months ended June 30, 2005, as compared to operating expenses of $1,196,279 for the six months ended June 30, 2004. The $1,351,968 increase in operating expenses is a result of an increase in selling, general and administrative and stock option expenses in 2005, as described below.
Selling, general and administrative expenses for the three months ended June 30, 2005 were $670,030, as compared to the selling, general and administrative expenses of $450,587 for the three month period ended June 30, 2004. This represents an increase of $219,443 from the prior year period which is attributable to an increase in consulting fees. Total selling, general and administrative expenses were $1,356,365 for the six months ended June 30, 2005 as compared to selling, general and administrative expenses of $956,418 for the six months ended June 30, 2004. This represents an increase of $399,947 from the prior period and is attributable to an increase in consulting fees.
Stock option expense for the three months ended June 30, 2005 was $759,246, as compared to the stock option expense of $39,327 for the three month period ended June 30, 2004. This represents an increase of $719,919 from the prior year period which is attributable to a higher stock price and the issuance of additional stock options. Stock option expense for the six month period ended June 30, 2005 was $991,368 compared to $36,306 for the six month period ended June 30, 2005. This represents an increase of $955,062 which is attributable to a higher stock price and the issuance of additional stock options.
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Amortization and depreciation expenses for the three months ended June 30, 2005 were $100,257, as compared to $101,777 for the corresponding period in 2004. Amortization and depreciation expenses for the six months ended June 30, 2005 were $200,514 as compared to $203,555 for the corresponding period in 2004.
The net loss for the three months ended June 30, 2005 was $1,509,723 as compared to the net loss of $589,362 for the three months ended June 30, 2004. This represents a $920,361 increase from the prior period, primarily due to an increase in stock option expense and consulting fees. The net loss for the six month period ended June 30, 2005 was $2,528,410 as compared to the net loss of $1,191,902 for the corresponding period in 2004. This represents an increase of $1,336,508 from the prior period, which is due to an increase in stock option expense and legal and consulting fees. The basic and dilutive net loss per common share for the three months ended June 30, 2005 was $.02 as compared to the basic and dilutive net loss per common share of $.01 for the three months ended June 30, 2004. The basic and dilutive net loss per common share for the six months ended June 30, 2005 was $.03 as compared to the basic and dilutive net loss per common share of $.02 for the six months ended June 30, 2004.
Critical Accounting Policies
Valuation of long-lived and intangible assets. IFT assesses the impairment of long-lived identifiable intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors IFT considers important which could trigger an impairment review include the following:
• | Significant underperformance relative to expected historical or projected future operating results; |
• | Significant changes in the manner of IFT’s use of acquired assets or the strategy for IFT’s overall business; |
• | Significant negative industry or economic trends; |
• | Significant decline in IFT’s stock price for a sustained period; and |
• | IFT’s market capitalization relative to net book value. |
As of June 30, 2005, there has been no impairment of long-lived intangible assets.
Valuation of goodwill. IFT tests goodwill for impairment at least annually in the fourth quarter. IFT will also review goodwill for impairment throughout the year if any events or changes in circumstances that indicate the carrying value may not be recoverable are identified (such triggers for impairment review are described above in the section Valuation of long-lived and intangible assets).
For the test of impairment, IFT is using the market approach in determining the fair value of the Company. Following this test, the fair value of the business exceeded the carrying value of the business. As a result, no impairment of goodwill was recorded through 2004.
Deferred income taxes. Deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities and tax carryfowards. At June 30, 2005, IFT’s deferred income tax assets consisted principally of net operating loss carryforwards and have been fully offset with a valuation allowance due to the uncertainty that a tax benefit will be realized from the assets in the future.
Liquidity and Capital Resources
A critical component of management’s operating plan impacting the continued existence of IFT is the ability to obtain additional capital through additional debt and/or equity financing. Management does not anticipate that IFT will generate a positive internal cash flow until such time as IFT can generate significant revenues from license fees from its products, which may take the next few years to realize. If IFT cannot obtain the necessary capital to pursue its business plan, IFT may have to cease or significantly curtail its operations. This would materially impact its ability to continue as a going concern.
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The independent registered public accounting firm’s reports included with the financial statements filed in IFT’s 2004 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 24, 2005, indicates that there is a substantial doubt that IFT can continue as a going concern.
A portion of IFT’s operating loss relates to charges for non-cash operating expenses such as amortization, depreciation, and stock option expense. For the six months ended June 30, 2005, IFT raised $500,000 in cash from the issuance of restricted common stock in a private placement to a significant shareholder and director. For the same period, IFT also raised $1,092,655 from the issuance of restricted common stock in private placements to accredited investors.
IFT has not made significant cash investments in property and equipment or in the acquisition of companies or technologies during 2005.
Cash used in operating activities was $1,428,591 for the six months ended June 30, 2005 as compared to cash used in operating activities of $1,076,449 for the six months ended June 30, 2004. Cash used in operations for the six months ended June 30, 2005 increased primarily because of an increase in inventory and accounts receivable. The cash provided by financing activities was $2,153,530 for the six months ended June 30, 2005 as compared to $750,000 provided by financing activities for the six months ended June 30, 2004. Cash provided by financing activities for the six months ended June 30, 2005 related to the issuance of restricted common stock in private placement to a significant shareholder and director, and accredited investors. Net cash increased by $724,939 for the six months ended June 30, 2005 as compared to net cash decreasing by $326,449 for the six months ended June 30, 2004.
Working capital at June 30, 2005 was $1,431,065 as compared to $256,750 at December 31, 2004.
While management cannot make any assurance as to the accuracy of our projections of future capital needs, it is anticipated that a total of approximately $1,200,000 over the remainder of the 2005 fiscal year will be necessary in order to enable us to meet our current cash needs. IFT’s current cash balance exceeds the approximate cash needs for the remainder of 2005; however, funding into 2006 is not yet secured.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
N/A
Item 4. Controls and Procedures
| (a) | Evaluation of disclosure controls and procedures. Based on their evaluations as of June 30, 2005, our principal executive officer and principal financial officer, with the participation of our full management team, have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) are (i) adequately designed to ensure that material information relating to us is made known to our chief executive officer and chief financial officer by others particularly during the period in which this report was being prepared, and (ii) effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. |
| | |
| (b) | Changes in controls. There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended June 30, 2005, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. |
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to legal proceedings in the normal course of business. Based on evaluation of these matters and discussions with counsel, management believes that liabilities arising from these matters will not have a material adverse effect on the results of operations or financial position of the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
For the three months ended June 30, 2005, IFT issued a total of 1,111,019 shares of its common stock to various accredited investors and a significant shareholder and director for $1,342,655 cash. These transactions were exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2) of the Act.
Item 6. Exhibits
| (a) | The following exhibits are filed as part of this report: |
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13(a)-14(a) under the Securities Exchange Act of 1934, as amended. |
| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13(a)-14(a) under the Securities Exchange Act of 1934, as amended. |
| 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2 | Certification of Chief Financial Officer pursuant to to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| (b) | Reports on Form 8-K |
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| | None |
| | |
| | All other items of this report are inapplicable. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
INTERNATIONAL FUEL TECHNOLOGY, INC. | | |
(Registrant) | | |
| | | |
By: | /s/ JONATHAN R. BURST | | Date: August 1, 2005 |
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| | |
| Jonathan R. Burst | | |
| Chief Executive Officer | | |
| Principal Executive Officer | | |
| | | |
By: | /s/ GARY HIRSTEIN | | Date: August 1, 2005 |
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| | |
| Gary Hirstein | | |
| Chief Financial Officer | | |
| Principal Financial and Accounting Officer | | |
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