UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 2001
-------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 000-25367
---------
International Fuel Technology, Inc.
-----------------------------------
(Exact name of registrant as specified in its charter)
Nevada 88-0357508
------ ----------
(State or other jurisdiction of incorporation or (IRS Employer Identification No.)
organization)
7777 Bonhomme, Suite 1920, St. Louis, Missouri 63105
-------------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(314) 727-3333
----------------
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No___
---
The aggregate market value of the voting and non-voting common stock held
by non-affiliates of the Registrant, based upon the average bid and asked price
of the common stock on September 30, 2001, as reported on the OTC Bulletin
Board, was $26,853,394.
Number of shares of common stock outstanding as of October 31, 2001:
53,522,934
1
FORM 10-Q
For The Quarterly Period Ended September 30, 2001
INDEX
Part I - FINANCIAL INFORMATION Page
Item 1- Financial Statements
Balance Sheets - September 30, 2001 and December 31, 2000 3
Statements of Operations - Three Month and Nine Month Periods
Ended September 30, 2001 and 2000, and From Inception (April 9,
1996) to September 30, 2001 4
Statement of Stockholders' Equity (Deficit) - Nine Months
Ended September 30, 2001 5
Statements of Cash Flows - Nine Months Ended September 30, 2001
and 2000, and From Inception (April 9, 1996) to September 30,
2001 6
Notes to Financial Statements 7 - 10
Item 2- Management's Discussion and Analysis of Financial Condition
and Results of Operations 11 - 17
Part II - OTHER INFORMATION
Item 3- Quantitative and Qualitative Disclosures About Market Risk 18
Item 4- Submissions of Matters to a Vote of Security Holders 18
Item 5- Exhibits and Reports on Form 8-K 18
2
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
September 30, December 31,
ASSETS (Note 2) 2001 2000
--------------------------------------------------------------------------------------------
(Unaudited)
Current Assets
Cash $ 49,348 $ 128,204
Prepaid Expenses 24,400 29,107
Note Receivable - Stockholders 35,000 --
------------ ------------
Total current assets 108,748 157,311
------------ ------------
Property and Equipment
Machinery and equipment 14,382 23,703
Accumulated depreciation (4,610) (5,592)
------------ ------------
Total property and equipment 9,772 18,111
------------ ------------
Purchased Patents & Technology, net (Note 3) 4,204,444 --
Goodwill, net (Note 3) 2,395,556 --
------------ ------------
Total assets $ 6,718,520 $ 175,422
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) (Note 2)
-------------------------------------------------------
Current Liabilities
Accounts payable $ 451,885 $ 227,748
Accrued expenses 240,827 204,325
Accrued interest 15,313 8,948
Notes payable to stockholders -- 32,500
------------ ------------
Total current liabilities 708,025 473,521
------------ ------------
Long-Term Liabilities
Notes payable to stockholder 162,500 162,500
Convertible debentures (net of discount) (Note 4) 62,115 --
------------ ------------
Total liabilities 932,640 636,021
------------ ------------
Commitments and Contingencies
Stockholders' Equity (Deficit) (Notes 4 and 5)
Common stock, $.01 par value; authorized, 150,000,000,
52,654,789 and 24,560,453 shares issued and outstanding at
September 30, 2001 and December 31, 2000, respectively 526,547 245,604
Discount on common stock (904,923) (819,923)
Additional paid-in capital 31,428,378 21,208,288
Deficit accumulated during the development stage (25,264,122) (21,094,568)
------------ ------------
Total stockholders' equity (deficit) 5,785,880 (460,599)
------------ ------------
$ 6,718,520 $ 175,422
============ ============
See Notes to Financial Statements.
3
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(UNAUDITED)
From Inception
Three Months Nine Months (April 9, 1996)
Ended Ended Through
September 30, September 30, September 30,
2001 2000 2001 2000 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues $ - $ - $ - $ - $ -
Cost of Revenues - - - - -
-------------------------------------------------------------------------------------
Gross Profit - - - - -
-------------------------------------------------------------------------------------
Operating Expenses:
Advertising and marketing 14,500 1,555 14,500 15,368 59,041
Amortization & Depreciation 113,194 - 152,054 - 152,054
Board meeting expense - - - 117,216 117,216
Consulting 176,098 - 935,493 278,632 8,578,889
Insurance 9,671 8,612 39,356 25,183 91,616
Investment advisory fee - - - 1,251,413 1,251,413
Office and Other 18,032 22,661 59,916 77,233 788,640
Payroll 186,663 204,702 1,619,498 1,219,680 4,356,405
Professional services 174,626 193,499 527,499 538,309 5,004,400
Research and development costs 95,425 - 192,473 1,736 1,737,332
-------------------------------------------------------------------------------------
Total operating expenses 788,209 431,029 3,540,789 3,524,770 22,137,006
-------------------------------------------------------------------------------------
Net loss from operations 788,209 431,029 3,540,789 3,524,770 22,137,006
Interest expense 308,758 769,749 628,765 894,166 3,127,116
-------------------------------------------------------------------------------------
Net loss before income taxes 1,096,967 1,200,778 4,169,554 4,418,936 25,264,122
Provision for income taxes - - - - -
-------------------------------------------------------------------------------------
Net loss $ 1,096,967 $ 1,200,778 $ 4,169,554 $ 4,418,936 $ 25,264,122
=====================================================================================
Basic and diluted net loss
Per common share $ .04 $ .06 $ .14 $ .25
Weighted average common shares
outstanding 41,984,052 18,716,339 28,853,413 17,894,524
See Notes to Financial Statements
4
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS'
EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2001
(Unaudited)
Deficit
Accumulated
Common Stock Additional During
Shares Common Discount on Paid-In Development
Stock Amount Common Stock Capital Stage Total
------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2001 24,560,453 $ 245,604 $ (819,923) $ 21,208,288 $ (21,094,568) $ (460,599)
Conversion of debt and interest 33,333 333 - 16,708 - 17,041
Issuances of common stock for
compensation 2,579,000 25,790 - 1,059,773 - 1,085,563
Issuances of common stock for
convertible debentures 2,769,390 27,694 - 847,306 - 875,000
Issuances of common stock for debt
interest 406,523 4,065 - 139,137 - 143,202
Issuances of common stock for
accounts payable 10,000 100 - 3,400 - 3,500
Issuances of common stock for services 1,296,087 12,961 - 669,597 - 682,558
Issuances of common stock for
Interfacial acquisition 12,500,001 125,000 - 6,625,001 - 6,750,001
Issuances of common stock for
Interfacial escrow 8,500,002 85,000 (85,000) - - -
Discount on issuances of convertible
debt - - - 484,916 - 484,916
Issuances of common stock warrants - - - 42,750 - 42,750
Accrued stock based compensation - - - 150,004 - 150,004
Accrued stock based services - - - 181,500 - 181,500
Net loss - - - - (4,169,554) (4,169,554)
------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2001 52,654,789 $ 526,547 $ (904,923) $ 31,428,378 $ (25,264,122) 5,785,880
==============================================================================================================================
See Notes to Financial Statements
5
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(Unaudited) From
Nine Months Nine Months Inception
Ended Ended (April 9, 1996)
to September
September 30, September 30, 30,
2001 2000 2001
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net loss $ (4,169,554) $ (4,418,936) $ (25,264,122)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 2,055 2,414 7,647
Amortization 150,000 - 150,000
Stock issued and additional paid in capital
Interest expense recognized due to discount on debt 25,753 887,887 1,254,177
Interest expense recognized upon conversion of debt 563,897 - 1,677,348
Loss on disposal of machinery and equipment 5,527 - 5,527
Change in assets and liabilities:
Increase in prepaid expenses 4,707 (10,447) (24,400)
Increase in accounts payable 227,637 134,291 470,853
Increase in accounts payable-stockholders - (100,000) 87,095
Increase in accrued expenses 36,502 197,512 240,827
Increase in accrued interest 6,739 - 158,507
-----------------------------------------------------------
Net cash used in operating activities: (1,047,114) (700,022) (5,691,826)
-----------------------------------------------------------
Cash Flows from Investing Activities
Acquisition of machinery and equipment (1,642) - (23,701)
Increase in employee and stockholder receivables (35,000) - (50,468)
Proceeds from the sale of property and equipment 2,400 - 2,400
Cash acquired in connection with the purchase of
United States Fuel Technology, Inc. - - 358
-----------------------------------------------------------
Net cash used for investing activities: (34,242) (71,411)
-----------------------------------------------------------
-
Cash Flows from Financing Activities
Increase in amount due to related party 151,000 - 177,500
Increase in due to United States Fuel Technology, Inc. - - 372,503
Proceeds from common stock issued - 218,150 2,808,328
Proceeds from convertible debentures 874,000 - 874,000
Proceeds from notes payable - 516,000 2,179,425
Payment on notes payable (22,500) - (599,171)
-----------------------------------------------------------
Net cash provided by financing activities: 1,002,500 734,150 5,812,585
-----------------------------------------------------------
Net increase (decrease) in cash (78,856) 34,128 49,348
Cash, beginning 128,204 26,846 -
-----------------------------------------------------------
Cash, ending $ 49,348 $ 60,974 $ 49,348
===========================================================
See Notes to Financial Statements
6
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The interim financial statements included herein have been prepared by
International Fuel Technology, Inc. ("IFT"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although IFT believes that the disclosures are adequate to
make the information presented not misleading.
These statements reflect all adjustments, consisting of normal recurring
adjustments which, in the opinion of management, are necessary for fair
presentation of the information contained therein. It is suggested that
these financial statements be read in conjunction with the financial
statements and notes thereto included in IFT's annual report on Form 10-K
for the twelve month period ended December 31, 2000. IFT follows the same
accounting policies in preparation of interim reports.
Results of operations for the interim periods are not indicative of annual
results.
Note 2 -- Ability to Continue as a Going Concern
IFT's 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. IFT has incurred significant losses since
inception and has previously had limited funds with which to operate.
Management is in the process of executing a strategy based upon developing
pollution emission control technologies that also offer enhanced engine
performance with respect to greater fuel economy. IFT already has several
technologies in development, and may seek to add other technologies through
acquisitions. Management anticipates receiving necessary regulatory and
commercial acceptance for its acquired technologies within the next twelve
months. Immediately thereafter, IFT expects to begin licensing its products
and/or selling them directly to the commercial marketplace, with IFT
eventually generating a level of revenues sufficient to meet IFT's working
capital requirements. 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 $750,000 over the remainder of the current fiscal
year will be necessary in order to enable us to meet our current capital
needs. Management believes the proceeds from financing will be used as
follows: $200,000 for commercial fleet testing programs, $150,000 for
professional fees, $200,000 for salary expenses and $200,000 working
capital for administrative and other capital needs, including investigation
of future acquisitions, if any.
On January 3, 2001 IFT entered into a Securities Purchase Agreement with
IIG Equity Opportunities Fund Ltd. ("IIG Fund"), which has a one-year
commitment amount of $3 million, with an option at our control for an
additional $3 million in financing after the completion of the one-year
commitment. On March 1, 2001, IFT completed registration of the common
shares required by the January 3, 2001 Securities Purchase Agreement (the
"Agreement"). The Agreement provides for IFT to sell up to $250,000 in
convertible debentures to the IIG Fund every thirty days. On March 2, 2001
IFT initiated the first convertible debenture purchase and on March 7, 2001
received $200,000 and on March 22, 2001 received $50,000. On April 6, 2001,
IFT initiated the second convertible debenture purchase and on April 24,
2001 received $225,000. During May 2001 IFT received notification that due
to regulatory issues relating to the structure of the transactions
contemplated by the Securities Purchase Agreement, 18,163,872 shares
issuable upon possible future conversion of debentures not yet issued and
750,000 shares issuable upon possible future exercise of not yet issued
warrants will never be issued. Due to the inability to sell additional
convertible debentures after April 2001, IFT entered into a new Securities
Purchase Agreement with IIG on July 10, 2001 that provides for the sale of
common stock and has a one-year commitment amount of $3 million, with
7
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
an option at our control for an additional $3 million in financing after
the completion of the one-year commitment. A registration statement for the
common stock to be issued in connection with this agreement was filed on
July 12, 2001 and declared effective by the SEC on July 23, 2001. As of
November 7th, 2001, IFT has borrowed a total of $1,025,000 under the
financing agreement.
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 IFT to continue as a going concern.
Note 3 - Acquisition
On May 25, 2001 IFT issued 21,000,003 common shares to the shareholders of
Interfacial Technologies (UK) Ltd. ("Interfacial"), to acquire all of
Interfacial's outstanding common stock. The purchase price of approximately
$6,750,001 was determined based on the market price of IFT's common stock
on the date the acquisition was announced. Stock certificates totaling
12,500,001 common shares were delivered to the Interfacial shareholders on
May 25, 2001. Stock certificates for the remaining 8,500,002 common shares
were placed in an escrow account subject to a performance escrow agreement
that provides for the release of the stock certificates to the Interfacial
shareholders based on the achievement of certain revenue levels by IFT
within two years following May 25, 2001. Revenues equal to, or more than,
$3,500,000 for the one year period ending May 24, 2002, or revenues equal
to, or more than, $10,000,000 for the two year period ending May 24, 2003
will result in all of the stock certificates for the 8,500,002 common
shares being released to the Interfacial shareholders. Revenues more than
$5,000,000 but less than $10,000,000 for the two year period ending May 24,
2003 will result in a portion, as determined by a formula in the
performance escrow agreement, of the stock certificates for the 8,500,002
common shares being released to the Interfacial shareholders. In connection
with the closing of this transaction three of the Interfacial shareholders
have been appointed to IFT's board of directors. In addition, IFT entered
into an employment agreement with one of the Interfacial shareholders and
into a consulting agreement with three of the Interfacial shareholders on
May 25, 2001.
This transaction has been accounted for as a purchase, and accordingly, the
assets have been recorded at fair market value. Results of operations have
been included as of the effective date of the transaction. The purchase
price exceeded fair market value of the assets acquired by approximately
$2,450,000 and is being amortized straight line over 15 years. Amortization
expense during the nine month period ended September 30, 2001 was $150,000.
The 8,500,002 common shares placed in the escrow account will be valued as
an addition to the purchase price if and when the shares are released to
the Interfacial shareholders in accordance with the performance escrow
agreement at the appropriate market price of IFT's common stock at that
date. The 8,500,002 common shares are currently recorded at par value, or
$85,000, as common stock and a discount on common stock.
The summarized unaudited pro forma results of operations set forth below
for the nine month periods ended September 30, 2001 and 2000 assume the
acquisition occurred as of the beginning of 2001 and the beginning of
Interfacial's 2000 year.
The unaudited pro forma results of operations are not necessarily
indicative of what actually would have occurred if the acquisition had been
completed at the beginning of each of the periods presented, nor are the
results of operations necessarily indicative of the results that will be
attained in the future.
8
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended
September 30,
2001 2000
-----------------------
Revenues $ 0 $ 0
Net loss $4,310,882 $4,618,507
Net loss per common share:
Basic and diluted $ .11 $ .12
Note 4 - Convertible Debentures
On September 30, 2001, IFT had outstanding convertible debentures of
$150,000 less the related discount for the beneficial conversion feature of
the debenture of $87,884. The debentures bear interest at a rate of 6% per
annum commencing on the date of issuance, are convertible upon issuance,
and will mature on December 31, 2003.
The convertible debentures are immediately convertible at the option of the
holder into the number of shares of our common stock equal to the principal
amount of the debentures to be converted, including all accrued interest,
divided by the conversion price in effect on the conversion date. The
conversion price is calculated at 80% of the average of the three lowest
closing bid prices for the ten trading days immediately prior to the
conversion date, but in no event more than 110% of the average of the three
lowest closing bid prices for the ten trading days immediately preceding
the convertible debenture issuance date.
Note 5 - Stockholders' Equity (Deficit)
On January 31, 2001, IFT issued 33,333 shares in repayment of a $10,000
note payable to a stockholder. In connection with the issuance of the
shares, IFT recognized $6,666 in interest expense due to the fair value of
the stock on the date of extinguishment exceeding the carrying value of the
debt.
On January 31, 2001, IFT issued 99,000 shares earned by the Chief Executive
Officer and Chief Operating Officer under employment agreements, which
expired on December 31, 2000.
On February 23, 2001 the Board of Directors of IFT authorized the issuance
of 2,475,000 shares of common stock to employees and non-employee directors
IFT. The value of the common shares, $1,082,812, has been included in
payroll expense for the nine months ended September 30, 2001, and was
calculated based on the closing stock price of $.4375 on February 23, 2001.
The 2,475,000 shares of restricted common stock were issued to the
employees and non-employee directors of IFT on April 10, 2001.
On April 6, 2001 IFT issued 10,000 restricted common shares as payment for
$4,375 in consulting services and 10,000 restricted common shares as a
payment on a $4,125 account payable.
On April 11, 2001 IFT issued 406,523 common shares to a total of four
individuals as a recalculation of the beneficial conversion rate used for
the payment of notes payable in November 2000. The recalculation was
required due to the 1,626,086 common shares issued in November 2000 not
being registered with the United States Securities and Exchange Commission
by March 31, 2001, as the notes payable specified.
9
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
During January 2001, IFT entered into an employment agreement with Jonathan
R. Burst to serve as Chief Executive Officer and William J. Lindenmayer to
serve as President and Chief Operating Officer until December 31, 2003. The
agreements provide for a stock grant of 20,834 shares of common stock at
the end of each month to each employee.
The shares are earned ratably on a monthly basis. The stock based
compensation earned through September 30, 2001, reflected in these
financial statements as payroll expense and as additional paid in capital
of $127,504, has been calculated based on the trading price of IFT's stock
on January 1, 2001. No shares have been issued under these agreements.
On May 25, 2001 IFT entered into consulting agreements with four
Interfacial shareholders. Common stock totaling 960,000 shares valued at
$518,400, or $.54 per share, was issued and recorded as a consulting
expense. The consulting agreements provide for the total issuance of
960,000 shares of common stock on May 25, 2002 and 1,180,000 shares of
common stock on May 25, 2003. Based on the common stock price of $.51 on
September 29, 2001, IFT has recorded $363,783 to consulting expense for the
nine months ended September 30, 2001.
On July 18, 2001, IFT issued 326,087 shares of common stock as payment for
$159,783, or $.49 per share, for consulting services to a director of IFT.
The stock price was based on the stock price for the period during which
the services were performed.
On August 16, 2001, IFT issued 5,000 shares of common stock valued at
$2,750, or $.55 per share, to an employee. The stock price was based on the
closing stock price on the date of the grant.
During the nine months ended September 30, 2001, IFT has issued 2,769,390
of stock upon the conversion of $875,000 worth of convertible debentures
owned by IIG. An additional $527,666 was charged to interest expense and
added to additional paid-in capital, relating to the beneficial conversion
feature and value of warrants related to the convertible debentures.
Effective October 27, 1999, IFT merged with and into Blencathia Acquisition
Corporation ("Blencathia"). Blencathia had 300,000 shares outstanding at
the time of the merger, which it redeemed and canceled. In exchange for
300,000 shares of Blencathia's common stock, IFT issued 300,000 shares of
its restricted common stock. These shares are expected to be sold in an
amount sufficient to provide the former shareholders of Blencathia with
proceeds of $500,000, the negotiated cost of the acquisition.
On May 8, 2000 IFT issued 300,000 common shares that were contingently
issued per the Blencathia merger agreement. The 300,000 shares of common
stock are included in the statement of stockholders' deficit for the three
months ended March 31, 2001 but are not included in earnings per share and
weighted average share calculations for the three months ended March 31,
2001. They will be included when the shares are sold to provide payment to
the shareholders of Blencathia. The shareholders of Blencathia have
represented to the management of IFT that the 300,000 shares will be sold
only with IFT's approval. If the shares are sold and $500,000 is not
generated additional shares may need to be issued to the shareholders of
Blencathia. Based on the September 29, 2001 market price, $.54, of IFT's
common stock, a total of 925,926 shares would need to be issued to generate
the $500,000 proceeds.
Note 6 - Subsequent Events
During October 2001, IFT issued 868,145 common shares to the IIG Fund as
payment on a $250,000 subsequent closing of a common stock put sale as
provided for in the July 10, 2001 Securities Purchase Agreement.
10
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 discussed 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
International Fuel Technology and its subsidiary is comprised largely of
the operations and assets that were previously the business of Interfacial
Technologies, Ltd., a company located in Manchester, England and is now a
wholly-owned subsidiary of the Company. IFT completed the acquisition of
Interfacial on May 23, 2001.
IFT, through the Interfacial subsidiary, has developed a family of fuel
blends which have been created through the use of proprietary fuel
additives, IFT is now in the process of patenting the fuel additives and
resulting fuel blends as part of its efforts to commercialize these fuel
blends. 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 a
urea/water solution. The Company seeks to commercialize these fuel blends
on a global basis through the use of strategic partnerships with a variety
of targeted companies including fuel refiners, distributors of fuel
additives, OEM's, and other companies.
Three Months Ended September 30, 2001 and Nine Months Ended September 30,
2001 Compared to the Three Months Ended September 30, 2000 and Nine Months
Ended September 30, 2000
Operating expenses
Total operating expenses from development stage operations were $788,209
for the three months ended September 30, 2001, as compared to the
development stage operating expenses of $431,029 for the three month period
ended September 30, 2000. This represents an increase of $357,180, or 82%,
from the prior period. The increase relates primarily to the increase in
amortization and depreciation, and consulting partially offset by a
decrease in interest expense.
Total operating expenses from development stage operations were $3,540,789
for the nine months ended September 30, 2001, as compared to the
development stage operating expenses of $3,524,770 for the nine month
period ended September 30, 2000. This represents an increase of $16,019
from the prior period. The increase is a result of increased consulting
fees, payroll expenses, and increased amortization and depreciation
expenses partially offset by reduced investment advisory fees, reduced
board meeting expense and interest.
Advertising and marketing
The Company's advertising and marketing expenses relate primarily to the
development of marketing material to assist us in the marketing of our
products and our Company. Total advertising and marketing expenses were
$14,500 for the three months ended September 30, 2001, as compared to the
advertising and marketing expenses of $1,500 for the three month period
ended September 30, 2000. Total advertising and marketing expenses were
$14,500 for the nine months ended September 30, 2001, as compared to the
advertising and marketing expenses of $15,368 for the nine month period
ended September 30, 2000. Marketing expenses for the three and nine months
ended September 30, 2001 were consistent with the corresponding periods.
Amortization and depreciation
Amortization and depreciation expenses for the three months ended September
30, 2001 were $113,194 as compared to $0 for the same period in 2000.
Amortization and depreciation expenses for the nine months ended September
30, 2001 were $152,054 compared to zero for the same period in
11
2000. The increase was primarily due to amortization of goodwill and
purchased patents and technology associated with the purchase of
Interfacial Technologies, Ltd.
Board Meeting Expense
There were no board meeting expenses for the nine months ended September
30, 2001, representing a decrease of $117,216 from the corresponding period
of 2000. The decrease is due to no common shares being authorized or issued
for Director's expenses in 2001. In the prior year, board meeting expense
recognized the value of 45,000 shares of common stock issued to members of
the Board of Directors as reimbursement for expenses incurred. The shares
were issued on March 6, 2000 and $6,534 of the total value was allocated to
travel expense. On February 23, 2000 the Board of Directors adopted the
Director's Stock Compensation Plan, which provides for an annual award of
10,000 shares of IFT's common stock to IFT's Board members as reimbursement
for their attendance at the Board meetings and an additional 1,000 shares
of IFT's common stock for any three telephone conference call Board
meetings attended. As of September 30, 2001 IFT's Board of Directors has
not authorized the issuance of common stock under the Director's Stock
Compensation Plan for the year 2001.
Consulting Expenses
Consulting expenses during the three months ended September 30, 2001 were
$176,098 as compared to $0 for the same period in 2000. Consulting expenses
during the nine months ended September 30, 2001 were $935,493 as compared
to $278,632 for the same period in 2000. This represents an increase of
$656,861 from the corresponding period in 2000. The increase in the
consulting expenses in the three month and nine month period is due to
consulting agreements signed with four shareholders of Interfacial. The
consulting agreements consist of both cash and stock payments through June
2003.
Prior year includes $131,250 that resulted from the sale of 100,000 common
shares to a Director of IFT for $2.00 per share when the market value was
$3.3125 per share. The $131,250 in market value in excess of the cash
amount received is reflected in these financial statements as consulting
expense and additional paid in capital for the nine month period ended
September 30, 2000. Prior year also includes the issuance of 250,000 shares
of restricted common stock to a company whose sole director is a director
of IFT. The market value of the stock on the day of the issuance was
$218,750. The $218,750 in market value is reflected in these financial
statements as consulting expense and additional paid in capital. In
addition, consulting expenses in 2000 were reduced by $110,367 due to the
elimination of a related party account payable that had previously been
recorded to consulting expenses.
Insurance
The Company's insurance expense relates primarily to the director and
officer insurance in place for the benefit of the Company's executives and
health insurance benefits for our employees. Insurance expense for the
three and nine months ended September 30, 2001 was consistent with the
corresponding periods.
Investment Advisory Fee
There was no investment advisory fee expense for the nine months ended
September 30, 2001, representing a $1,251,413 decrease from the
corresponding period for 2000. On March 28, 2000 a warrant for 390,000
shares of common stock was exercised by GEM Global Yield Fund Limited at a
cost of $.01 per share. The value over par value of these shares, reflected
in the financial statements for the three month period ended March 31,
2000, as an investment advisory fee, has been calculated based on the
trading price of IFT's stock at March 28, 2000 in the amount of $1,141,725.
During February 2000 IFT issued 195,000 shares of common stock and placed
them in escrow in accordance with the convertible debenture purchase
agreement entered into in February 2000. The
12
shares were to be released from escrow and issued to the purchasers of the
convertible debenture in the event of an uncured default by IFT prior to
the closing of the convertible debenture purchase agreement. The 195,000
shares of common stock were released to the purchasers of the convertible
debenture in conjunction with an amendment to the convertible debenture
purchase agreement dated September 16, 2000, and were recorded as an
investment advisory fee of $109,688 based upon IFT's closing stock price on
September 16, 2000.
Office and Other
Office and other expenses include those expenses associated with
maintaining our corporate headquarters and other miscellaneous income or
expense items that occur during the normal course of operating a business.
Total office and other expenses were $18,032 for the three months ended
September 30, 2001, as compared to the office and other expenses of $22,661
for the three month period ended September 30, 2000. Total office and other
expenses were $69,916 for the nine months ended September 30, 2001, as
compared to the office and other expenses of $77,233 for the nine month
period ended September 30, 2000. Office and other expenses for the three
and nine months ended September 30, 2001 were consistent with the
corresponding periods.
Payroll
Payroll expenses during the three months ended September 30, 2001 were
$186,663 as compared to $204,702 for the same period in 2000. This
represents an decrease of $18,039 from the corresponding period of 2000.
Payroll expenses during the nine months ended September 30, 2001 were
$1,619,498 compared to $1,219,680 for the same period in 2000. This
represents an increase of $399,818 from the corresponding of 2000. The
increase was primarily due to increased compensation to our executives and
compensation paid to certain member of our Board of Directors.
On January 1, 2001 IFT entered into employment agreements with its
President/COO and Chief Executive Officer through December 31, 2003. Under
these agreements, the Chief Executive Officer and the President/COO will
each receive an annual base salary of $200,000, a stock award of 20,834
each month and a bonus award as deemed appropriate by the Board of
Directors. The Board of Director's granted a bonus of 1,000,000 shares of
our common stock payable to our President/COO and our Chief Executive
Officer on February 23, 2001. These shares have been reflected in the
financial statements for the nine-month period ended September 30, 2001, as
payroll expense of $875,000.
The Board of Director's granted stock awards totaling 425,000 restricted
shares of the Company's common stock to three non-employee directors of
IFT. The 475,000 restricted shares have been reflected in the statement of
operations as payroll expense of $185,937 for the nine months ended
September 30, 2001.
Professional Services
Professional service expense consists primarily of fees charged by the
Company's attorneys, accountants and investor relations firm. The fees
relate primarily to the registration of the Company's securities and
required filings with the Securities and Exchange Commission, legal
assistance in connection with the Interfacial acquisition, and legal
assistance in connection with our patent registration. Total professional
services expenses were $174,626 for the three months ended September 30,
2001, as compared to the professional services expenses of $193,499 for the
three month period ended September 30, 2000. Total professional services
expenses were $527,499 for the nine months ended September 30, 2001, as
compared to the professional services expenses of $538,309 for the nine
month period ended September 30, 2000. Professional service expenses for
the three and nine months ended September 30, 2001 was consistent with the
corresponding periods.
Research and development
Research and development expense consists mainly of fees paid to outside
laboratories to test and certify the performance of our products and
products under consideration for possible acquisition. The increase in
research and development expense is consistent with the Company's current
stage of operations where we are beginning to actively market our product
to potential customers, which requires an extensive amount of independent
outside verification. Research and development activities performed by the
Company's employees or contracted consultants are classified as applicable
and not under research and development.
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Interest
Interest expense for the three months ended September 30, 2001 was $308,758
as compared to $769,749 for the same period in 2000. This represents a
decrease of $460,991 over the corresponding period for 2000. Interest
expense for the nine months ended September 30, 2001 was $628,765 as
compared to $894,166 for the same period in 2000. This represents a
decrease of $265,401 over the corresponding period for 2000. Interest
expense for the three and nine month period ending September 30, 2001
consisted almost entirely of interest expense recognized in conjunction
with the issuance and conversion of the IIG convertible debentures.
Provision for Income Taxes
The Company has operated at a net loss since inception and has not recorded
or paid any income taxes. The Company has a significant net operating loss
carryforward that would be recognized at such time as the Company
demonstrates the ability to operate on a profitable basis for an extended
period of time.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill
and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the
purchase method of accounting and prohibits the use of the
pooling-of-interest method of accounting for business combinations
initiated after June 30, 2001. SFAS 141 also requires that IFT recognize
acquired intangible assets apart from goodwill if the acquired intangible
assets meet certain criteria. SFAS 141 applies to all business combinations
initiated after June 30, 2001 and for purchase business combinations
completed on or after July 1, 2001. It also requires, upon adoption of SFAS
142, that IFT reclassify the carrying amounts of intangible assets and
goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that IFT identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess
the useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An
intangible asset with an indefinite useful life should be tested for
impairment in accordance with the guidance in SFAS 142. SFAS 142 is
required to be applied in fiscal years beginning after December 15, 2001 to
all goodwill and other intangible assets recognized at that date,
regardless of when those assets were initially recognized. SFAS 142
requires IFT to complete a transitional goodwill impairment test six months
from the date of adoption. IFT is also required to reassess the useful
lives of other intangible assets within the first interim quarter after
adoption of SFAS 142.
Previous business combinations were accounted for using the purchase
method. As of September 30, 2001, the net carrying amount of goodwill is
$2,395,556 and other intangible assets is $4,204,444. Amortization expense
during the nine month period ended September 30, 2001 was $150,000.
Currently, IFT is assessing but has not yet determined how the adoption of
SFAS 141 and SFAS 142 will impact its financial position and results of
operations.
In October 2001, the Financial Accounting Standards Board issued SFAS 144
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS
144"). This statement addresses financial accounting and reporting for the
impairment and disposal of long-lived assets. This Statement supercedes
FASB Statement 121,"Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of", and the accounting and reporting
provisions of APB Opinion No. 30,"Reporting the Results of Operations -
Reporting the Effect of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions",
for the disposal of a segment of a business. The provisions of FAS 144 will
be effective for fiscal years
14
beginning after December 15, 2001. The Company is currently evaluating the
implications of adoption of FAS 144 and anticipates adopting its provisions in
fiscal year 2002.
Liquidity and Capital Resources
A critical component of our operating plan impacting the continued existence of
our company is the ability to obtain additional capital through additional debt
and/or equity financing. We do not anticipate generating positive operating cash
flow until such time as we can generate revenues from license fees from our
products, which may take the next few years to realize. If we cannot obtain the
necessary capital to pursue our business plan, we may have to cease or
significantly curtail our operations. This would materially impact our ability
to continue as a going concern.
A significant portion of the Company's operating loss relate to charges for
non-cash operating expenses such as amortization and depreciation, employee
compensation, consulting services fees paid in the Company's common stock and
interest expense related to conversion features of the Company debt. We have
offset our capital needs since inception primarily through the issuance of
common stock to our employees and consultants as compensation for services
rendered, which have totaled $15,544,715. In addition, $1,931,525 of interest
expense resulted from non-cash charges related to the convertible feature of our
debt instruments.
The Company has not made significant cash investments in property and equipment
or in the acquisition of companies or technologies. During the period ended
September 30, 2001, the Company acquired Interfacial Technologies, Ltd. a UK
company in exchange for 12,500,001 shares of the common stock. A more detailed
description of the transaction is included below.
Since inception, the Company's financing activities consist mainly of cash from
the issuance of common stock $2,808,328 and proceeds from the issuance of debt
instruments $3,053,425. For the nine months ended September 30, 2001, $874,000
was raised through the issuance of convertible debentures and $151,000 was
raised through the issuance of notes payable of which $150,000 was an advance
that was later converted into a convertible debenture. At the end of the period,
all but $150,000 of convertible debentures had been converted into equity.
Working capital deficit at September 30, 2001 was $599,277 as compared to
$316,210 at December 31, 2000. The increase in the working capital deficit at
September 30, 2001 is primarily due to an increase in accounts payable.
Effective October 27, 1999, IFT merged with and into Blencathia Acquisition
Corporation. Blencathia had 300,000 shares outstanding at the time of merger,
which it redeemed and canceled. In exchange for 300,000 shares of Blencathia's
common stock, IFT issued Blencathia 300,000 shares of its restricted common
stock. These restricted common shares are expected to be sold in an amount
sufficient to provide the former shareholders of Blencathia with proceeds of
$500,000.
On May 8, 2000, IFT issued 300,000 common shares that were contingently issued
per the Blencathia merger agreement. The 300,000 shares of common stock are
included in the statement of stockholders' deficit for the twelve months ended
December 31, 2000 but are not included in earnings per share and weighted
average share calculations for the twelve month period ended December 31, 2000.
They will be included when the shares are sold to provide payment to the
shareholders of Blencathia. The shareholders of Blencathia have represented to
the management of IFT that the 300,000 shares will be sold only with IFT's
approval. If the shares are sold and $500,000 is not generated additional shares
may need to be issued to the shareholders of Blencathia. Based on the September
28, 2001 closing market price, $.53, of IFT's common stock, a total of 925,926
shares would need to be issued to generate the $500,000 proceeds.
On May 25, 2001 IFT issued 21,000,003 common shares to the shareholders of
Interfacial to acquire all of Interfacial's outstanding common stock. The
purchase price of approximately $6,750,000 was
15
determined based on the market price of IFT's common stock on the date the
acquisition was announced. Stock certificates totaling 12,500,001 common shares
were delivered to the Interfacial shareholders on May 25, 2001. Stock
certificates for the remaining 8,500,002 common shares were placed in an escrow
account subject to a performance escrow agreement that provides for the release
of the stock certificates to the Interfacial shareholders based on the
achievement of certain revenue levels by IFT within two years following May 25,
2001. Revenues equal to, or more than, $3,500,000 for the one year period ending
May 24, 2002, or revenues equal to, or more than, $10,000,000 for the two year
period ending May 24, 2003 will result in all of the stock certificates for the
8,500,002 common shares being released to the Interfacial shareholders. Revenues
more than $5,000,000 but less than $10,000,000 for the two year period ending
May 24, 2003 will result in a portion, as determined by a formula in the
performance escrow agreement, of the stock certificates for the 8,500,002 common
shares being released to the Interfacial shareholders. In connection with the
closing of this transaction three of the Interfacial shareholders have been
appointed to IFT's board of directors. In addition, IFT entered into consulting
agreements with four of the Interfacial shareholders on May 25, 2001.
The acquisition was accounted for using the purchase method of accounting, with
the $6,750,000 purchase price being allocated to intangible assets, which are
subject to amortization. The intangible assets consist primarily of patents,
technology and goodwill. The 8,500,002 common shares placed in the escrow
account will be valued as an addition to the purchase price if and when the
shares are released to the Interfacial shareholders in accordance with the
performance escrow agreement at the appropriate market price of IFT's common
stock at that date.
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 $
750,000 over the remainder of the current fiscal year will be necessary in order
to enable us to meet our current capital needs. Management believes the proceeds
from financing will be used as follows: $200,000 for commercial fleet testing
programs, $150,000 for professional fees, $200,000 for salary expenses and
$200,000 working capital for administrative and other capital needs, including
investigation of future acquisitions, if any.
The Company has in place a Securities Purchase Agreement with IIG Equity
Opportunities Fund Ltd. ("IIG Fund"), which has a one-year commitment amount of
$3 million, with an option at our control for an additional $3 million in
financing after the completion of the one-year commitment. Through November 7,
2001 the Company had issued debentures totaling $1,025,000.
Subsequent Events
During October 2001, IFT issued 868,145 common shares to the IIG Fund upon
conversion of $250,000 in convertible debentures as provided for in the July 10,
2001 Securities Purchase Agreement.
16
Part II - Other Information
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, operations of IFT may be exposed to
fluctuations in interest rates. These fluctuations can vary the costs of
financing, investing and operating transactions. At September 30, 2001 IFT has
debt totaling 19.0% of total liabilities at fixed interest rates and
fluctuations in the interest rate could have a material impact on the underlying
fair value of those debt instruments.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Exhibits and Reports of Form 8-K
(a) The following exhibits are filed as part of this report:
None
(b) Reports on Form 8-K
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: November 14, 2001
------------------------------------ -----------------
Jonathan R. Burst
Chief Executive Officer
By: /s/ William J. Lindenmayer Date November 14, 2001
------------------------------------ -----------------
William J. Lindenmayer
Chief Operating Officer
By: /s/ Michael F. Obertop Date November 14, 2001
------------------------------------ -----------------
Michael F. Obertop
Chief Financial Officer
18