SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 (Fee Required)
For the fiscal year ended June 30, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No Fee Required)
for the transition period from to
Commission File Number: 1-13234
IONIC FUEL TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1333140
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation) No.)
300 Delaware Avenue, #1704, Wilmington, Delaware 19801-1622
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (302) 427-5957
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par value $.01 Boston Stock Exchange
Series A Redeemable Common
Stock Purchase Warrant ("A Warrants") Boston Stock Exchange
Series B Redeemable Common
Stock Purchase Warrant ("B Warrants") Boston Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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 twelve (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 ninety (90) days. Yes: x No:
1
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing.
Aggregate market value of securities held by non-affiliates as of September 17,
1997 - $8,236,000.
Indicate the number of shares outstanding of each of the registrant's class of
common stock, as of the latest practicable date. At September 15, 1997, there
were 6,173,433 common shares, 1,200,000 Series A Warrants, 1,200,000 Series B
Warrants and 189,000 Underwriters' Warrants, 771,883 Series C Warrants, 150,000
Consultant's Warrants outstanding.
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) any annual report to security-holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security-holders
for fiscal year ended December 24, 1980)
1. Part III incorporates by reference the Company's Proxy Statement to
stockholders for the Annual Meeting to be held November 6, 1997.
2. Part IV, Item 14, incorporated by reference the following Exhibits: 3.1, 3.2,
4.1, 4.2, 4.3 and 10.1.
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PART I
Item 1. BUSINESS
INTRODUCTION
The Company is an environmental technology company engaged in the
design, assembly, marketing, sale and leasing of its patented, proprietary IFT
System designed to reduce harmful airborne emissions from and increase fuel
efficiency of heating and power generation systems. The Company currently
markets the System to various industries in the U.K. and Europe.
The IFT System, which is attached to a customer's heating or power
generation equipment, produces negatively charged ions ("Ions") by passing an
air flow over a body of vibrating liquid and into the combustion chamber or air
intake of the customer's machinery. The ionized air supply accelerates the
normal combustion process. As a result of the improved combustion, the amount of
air and fuel supplied to the burner can be reduced while still maintaining a
constant measure of power output. This reduction of air and fuel decreases fuel
consumption as well as the production of NOX CO and CO2 and when burning fuel
oil, fireside coking and particulate emissions are also reduced.
THE SYSTEM
The IFT System is self contained in a cube-shaped metal cabinet. The
System's interior mechanism vibrates the surface of a liquid contained inside
the cabinet. The vibrating liquid releases negatively charged Ions that are then
delivered to the customer's equipment through a connection placed either
adjacent to the boiler's combustion chamber or to the boiler's air intake
mechanism.
The System is available in eight sizes ranging from 15" x 12" x 16" to 43"
x 3 1-5" x 35". Such sizes are suitable for boilers generating from
approximately 1,000 lbs. of steam per hour to approximately 96,000 lbs. of steam
per hour. Multiple Systems are used when either the boiler has more than one
burner or the boiler's power generating capacity exceeds the capacity of the
largest IFT System. The System generally requires only a routine servicing every
six months and may be leased or purchased.
Typical performance results of the System reveal a reduction in NOx.
emissions ranging from 6% to 60%, a reduction in CO emissions ranging from 6% to
80%, a reduction in CO2 emissions ranging from 2 1/2% to 7%, a reduction in
particulate emissions ranging from 6%
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to 40% and a reduction in fuel consumption ranging from 2 1/2% to 7%. The exact
performance of the System depends upon the customer's existing equipment and
desired objectives; customers may achieve less favorable results or no
improvement if their equipment requires repair or if fuel and air flows cannot
be closely controlled. If NOx and CO emissions have been reduced by the use of
other equipment, the System may be used to reduce CO2 emissions and fuel
consumption. CO2 emission reduction correlates directly with the fuel savings
which the IFT System provides.
MARKETING AND SALES
Performance Trials
The Company initially sought to performance test its System in locations
where a sales or lease contract could result. It also has performance tested the
System in certain locations solely to develop performance test data. The Company
has now phased out uncompensated performance testing because the Company's data
from its numerous sites supports the claims regarding the benefits offered by
the IFT System. The Company has now developed new application software enabling
on site performance to be evaluated in real time to show the immediate
improvements to the customer resulting in reducing the lead time between
performance trials and customer acceptance of the System.
The performance trial results obtained at a customer's location enable the
Company to use such results to confirm the price of the IFT System to such
customer. In setting the price, the Company considers the potential fuel savings
and emissions reduction to be realized by that customer from use of the System,
thereby enabling a customer to offset the cost of the System.
The Company has also participated in a laboratory test conducted by The
Building Services Research and Information Association ("BSRIA"), an independent
U.K. organization. The BSRIA test was instigated and primarily funded by the
British government to generate data on the emissions of various power generation
systems and ancillary equipment. BSRIA rendered a favorable report on the IFT
System and such report was disseminated to BSRIA's members.
Tests were conducted at the Lownebrau brewery by the German test
authority TUV and showed that with IFT System the boiler was able to operate
with less combustion air thereby improving the thermal effidency. A review on
ionisation processes conducted by Portsmouth University sponsored by the Energy
Technical Support
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Unit, ETSU, reported that fuel savings could be achieved by use of the IFT
technology.
Marketing
The Company currently markets the IFT System to (a) large scale commercial
power plant and industrial manufacturers such as breweries, oil refiners,
textile plants, chemical plants and paper mills and (b) commercial industrial
heat processors including municipal authorities and universities.
The Company had found that its technology was often not
readily understood by power plant managers who therefore hesitated to test the
IFT System. The Company devised a four step approach to educate the power
generation community about its technology. First, it employed people experienced
in boiler and burner applications to market the System. Second, the Company has
marketed the System to large multiple plant users, with emphasis on well known
international companies, so that such companies may be used as references for
other potential customers and also that such customers will consider using the
IFT System in their other plants. Third, the Company utilizes the services of a
recognized authority in flame chemistry to specifically explain the scientific
principles behind the System. Fourth the Company has introduced a reporting
system using sophisticated statistical modeling to present the test results to
potential customers in a succinct, concise manner. This reporting system
computerizes data derived from testing flue gases, monitors fuel to steam
performance and then presents in graphic form the benefits offered by the IFT
System to the customer.
Sales and Rentals
The Company has adopted two approaches to its sales efforts. First, it
sells directly to industrial users with its own employees in the UK and Belgium
supplemented by the use of independent sales agents. Secondly the Company sells
the System through dealers who are assigned a specific territory and compensated
on a commission basis. This marketing method is generally used in Europe.
More recently the company has been working with energy management
companies who undertake to operate a customer's power or boiler plant, the
benefit to these companies is to reduce their operating costs by reducing their
fuel bills. Generally these organizations prefer to rent the IFT System, as
their payback is immediate.
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The Company will rent or sell the System. In the general industrial
market customers prefer to rent, in the oil and petrochemical industry the
preference is to purchase.
Warranty and Service
The Company provides a one year warranty on parts and labor to
purchasers of the System and thereafter servicing under a service contract.
Lessees of the system receive service without additional charge within the terms
of the rental agreement.
Assembly and Suppliers
The IFT System is assembled in the U.K. at the Company's facility in
Laindon, Essex under strict quality control procedures. Although there have been
no sourcing problems, the Company has a policy of dual sourcing where this is
deemed advantageous for cost and continuity of supply. Single sourcing is
currently confined to vibrators and air pumps that are widely produced for use
in other industries and therefore readily available.
Research and Development
The Company's research and development efforts are a continuing process
and are focused primarily on refining the vibration technology that forms the
basis of the IFT System. To that end, the Company has studied such areas as the
interaction of the charged particles and the combustion process, the delivery of
the charged particles to the combustion chamber, the optimum volume of the
charge, the optimum ratio of air to liquid surface and the impact of pressure
and temperature on delivery of the charge. The Company's efforts resulted in an
enhancement to the patented vibration technology for which a European patent
application was filed in January 1994.
The Company's research and development costs are written off as
incurred. Employees engaged in engineering and manufacturing also perform R & D
functions, therefore it is unrealistic to isolate these specific costs since
they were not material in 1997.
Patents
The first U.S. Patent for the Ion generating technology utilized
by the IFT System was issued in 1975 to F.A. Wentworth, Jr.
("Wentworth"). This original technology employed a "bubble"
process whereby the air was "bubbled" through liquid to release
Ions at the surface of the liquid. A subsequent patent was issued
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to Wentworth in December 1990 employing a "vibration" process which
substantially enhanced the commercial potential of the technology by increasing
the negative charge. The "vibration" technology involves vibrating the surface
of the water to release the Charged Particles. In January 1994, an additional
patent application was filed in Europe on behalf of the Company covering an
enhancement to the vibration technology. This improved "Vibration" technology
allows for a more powerful and more consistent negative charge than the initial
Wentworth vibration patent. This improvement has been incorporated into the IFT
System. The Company filed counterpart applications to its latest European patent
application in the United States and several other foreign countries in 1995.
The Company entered into a Royalty Agreement ("Royalty Agreement") dated
June 2, 1994 (effective as of December 5, 1991) with Wentworth pursuant to which
Wentworth sold all of his interest in the patents relating to the ion generating
technology to the Company. As consideration for the assignment and sale,
Wentworth received a $50,000 initial payment and a $6,000 per month royalty fee
during the life of the patents. In addition, Wentworth purchased 80,000 shares
of the Company's Common Stock at S. 125 per share in December 1991. Wentworth
has retained a security interest in the patent rights transferred to the Company
pursuant to the Royalty Agreement.
The Company owns six U.S. Patents, twelve foreign patents and five foreign
patent applications covering, in the aggregate, up to twenty different
countries. Several of the earlier "bubble" technology patents have expired.
However, improvement patents covering the "bubble" technology still exist in the
United States and several foreign countries, and the more important "vibration"
technology patents, which form the basis of the IFT System, run to at least
2007. The Company was also granted a patent in Japan.
While the Company intends to vigorously enforce its patent rights against
infringement by third parties, no assurance can be given that such rights will
be enforceable or will provide the Company with meaningful protection from
competitors or that any pending patent applications will be allowed. Even if a
competitor's products were to infringe patents owned by the Company, it could be
damaging to the Company to enforce its rights because such action would divert
funds and resources which otherwise could be used in the Company's operations.
No assurance can be given that the Company would be successful in enforcing such
rights, that the Company's products or processes do not infringe the patent or
intellectual property rights of a third party, or that, if the Company is not
successful in a suit involving patents or other intellectual property rights of
a third party, a license for such technology from such third party would be
available on
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commercially reasonable terms, if at all.
Regulations
Concern over environmental pollution has led to legislation introducing
tougher and tighter controls on emissions. NOx, for example, is now understood
to be a key element in the formation of ground level ozone, widely recognized as
a hazard to health and a precursor to urban smog. The problem for industry is to
reduce NOx levels as is currently demanded while not increasing emissions of the
equally undesirable carbon monoxide or reducing power generation capacity.
According to available statistics, approximately 55% of the 20 million tons of
annual Nox production comes from utilities, industrial boilers and furnaces the
balance is from motor vehicles.
The Federal Clean Air Act, initially adopted in 1970 and extensively
amended in 1990 and European Community regulations require compliance with
specified air quality standards and empower government to establish and enforce
limits on the emission of various pollutants from specific types of industrial
facilities. In the USA, the states have primary responsibility for implementing
these standards, and, in some cases, have adopted standards more stringent than
those established by Federal regulation.
In general, emitters of pollution are required to obtain permits issued by
the appropriate environmental agency. A typical permit would set forth the
amount of pollutants that the "source" may emit, mandatory emission control
device description and installation deadlines plus monitoring/reporting
requirements. Pollution sources maybe charged a fee proportional to the amount
of pollution the source creates each year. This provides an incentive for the
polluter to acquire technology which will reduce its emissions. IFT is
attempting to work with customers on an individual basis prior to and during its
process of negotiating permits in an attempt to have the System "accepted" by
such regulatory agencies.
Domestic and international environmental laws and regulations are, and
will continue to be, a principal factor affecting demand for the IFT System.
Although the Company believes there is a trend toward increasing regulation and
enforcement by all levels of government, a decline in enforcement and related
expenditures by businesses subject to such laws and regulations could have a
significant adverse effect on the demand for the IFT System. In addition, there
can be no assurance that the IFT System currently, or as adjusted or enhanced,
will enable others to comply with specified or yet unspecified emissions
standards implemented by any
8
amendments to present laws and regulations or any future
legislation.
Competition
While most other pollution control technologies are aimed at reducing
airborne emissions, the Company is not aware of any technology which enhances
combustion efficiency and reduces noxious emissions. The technology used by the
Company's competitors can be divided into three categories: pre-combustion,
combustion and post-combustion.
Pre-combustion techniques include chemical additives, low NOx burners, and
water/steam injection added to the fuel. Such techniques can achieve reduction
in particulate and NOx emissions but do not result in material fuel savings.
Combustion techniques include air/fuel control systems, chemical additives
(i.e. urea injection) and flue gas recirculation. These methods reduce NOx
emissions but may result in higher particulate emissions and/or reduced boiler
efficiency. Furthermore, they are generally more expensive to install than the
IFT System.
Post-combustion systems include precipitators, bag filters and scrubbers.
These systems require large capital expenses often involve high maintenance and
operating costs and do not address fuel efficiency. Some have the added
disadvantage of producing by-products which may present disposal problems.
The IFT technology is not, by itself, a solution to all emissions
problems. More frequently the technology is complementary to solutions a
customer may wish to utilize. For example, to achieve extremely low NOx
emission, ammonia injection might be selected. IFT could enhance combustion
efficiency so that less NOx is produced and subsequently less ammonia required
to achieve the final lower NOx level.
While the Company believes that its System enjoys significant advantages
as compared to its competitors' products, many of the Company's competitors have
greater resources, both financial and otherwise, than the Company and therefore
may be capable of testing, enhancing, marketing and distributing their products
on a wider basis than the Company. In addition, future technological
developments and novel approaches in the flame combustion field as well as
enhancements of current technology will, in all likelihood, create new products
and services that directly compete with the IFT System. There can be no
assurance that the Company would not be
9
adversely affected by such technological change.
Item 2. PROPERTY
The Company leases approximately 10,000 square feet of space for its
principal executive offices, manufacturing and research and development
facilities in Laindon, Essex, U.K. This lease expires in December 1997, the
terms for renewal are currently being negotiated. The base rent for this
facility is approximately $6,000 per month for 1995, approximately $6,655 per
month for 1996 and approximately $7,375 per month for 1997.
The Company maintains one office in New Canaan, Connecticut on a month to
month basis at $105 per month and a sales office in Gent, Belgium pursuant to a
three year lease at $360 per month plus utilities.
The Company maintains its corporate office in Wilmington, Delaware
pursuant to an annual lease with an annual rental of $3,000 plus utilities. The
lease expires in December 1997 and will be renewed.
The Company believes that its facilities are adequate for its present
and anticipated needs.
Item 3. LEGAL PROCEEDINGS
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
Item 5. MARKET FOR REGISTRANT'S SECURITIES AND RELATED
STOCKHOLDER MATTERS
The Company's common stock, Class A and Class B Warrants are quoted on
the Nasdaq SmallCap Market and Boston Stock Exchange under the symbols "IFTI",
"IFTIW", and "IFTIZ" respectively.
The table set forth below shows, for the period indicated, the high and
low bid quotations on the Nasdaq SmallCap Market for the Company's Securities.
These amounts represent quotation between dealers in securities, and do not
include retail mark-ups, mark-downs or commissions and may not represent actual
transactions.
Bid
Period Ended Type of Security High Low
September 1995 Common Stock 1 3/16 11/32
Class A Warrant 5/32 3/32
Class B Warrant 3/32 3/32
December 1995 Common Stock 7/16 1/4
Class A Warrant 3/32 1/64
Class B Warrant 3/32 1/64
March 1996 Common Stock 1 1/8 1/4
Class A Warrant 3/16 3/32
Class B Warrant 5/32 3/32
June 1996 Common Stock 2 25/32 5/8
Class A Warrant 9/32 5/32
Class B Warrant 7/32 1/8
September 1996 Common Stock 2 3/4 1
Class A Warrant 1/4 3/32
Class B Warrant 1/4 3/16
December 1996 Common Stock 21/2 1
Class A Warrant 1/8 3/32
Class B Warrant 3/16 3/32
March 1997 Common Stock 2 3/4 1 5/32
Class A Warrant 3/16 1/16
Class B Warrant 3/16 3/32
June 1997 Common Stock 3 13/16 2 1/8
Class A Warrant 1/8 1/16
Class B Warrant 7/32 1/8
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At September 19, 1997 the number of shareholders of record and in
street name of the Company's common stock and Class A Warrants and Class B
Warrants were 99, 28 and 29, respectively.
The Company has not paid any cash dividends.
Item 6. SELECTED FINANCIAL DATA
Statement of Six Months
Operations Year Ended Ended
Data: December 31, 1992 June 30,1993(1)
Revenues.... $ 22,751 $17,025
Cost of
Revenues... 131,793 121,828
Operating
Expenses... 1,485,644 999,771
Net (loss).. (1,573,706) (1,101,056)
Net (loss) per
share...... $ (.44) $ (.27)
Weighted average
number of common
shares..... 3,546,668 3,957,540
Cash dividend
per common share..
Balance Sheet
Data: December 31, 1992 June 30, 1993 (1)
----------------- -------------
Total assets.. $2,063,110 $3,965,244
Working capital. 765,500 2,670,427
Long-term
liabilities. 437,464 437,108
Total
liabilities. 806,732 758,335
Accumulated
deficit..... (1,579,788) (2,680,844)
Cumulative
translation
adjustment... (148,467) (166,806)
Stockholders'
equity...... 1,256,378 3,206,909
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Year Ended Year Ended Year Ended Year Ended
June 30, 1994 June 30, 1995 June 30, 1996 June 30, 1997
Statement of
Operations Data:
Revenues $1,190,291 $ 476,161 $ 593,959 $628,694
Cost of Revenues 445,355 344,868 537,110 723,327
Operating Expenses 2,631,912 2,974,998 1,669,145 882,524
Net Loss (1,928,987) (2,725,744) (1,563,667) 1,004,425
Net Loss per
share $ (.46) $ (.51) $ (.29) $ (.19)
Weighted average
number of 4,210,668 5,318,445 5,410,500 5,412,100
common shares
Cash Dividend
per common share --- ---- --- ---
Balance Sheet:
Total Assets $2,601,471 $4,463,543 $2,659,185 $1,627,291
Working Capital 636,096 2,687,338 1,306,293 434,686
Long-term
liabilities 422,521 394,625 364,773 346,249
Total
liabilities 1,318,560 1,106,581 886,274 782,734
Accumulated
deficit (4,609,831) (7,335,575) (8,899,242) (9,903,667)
Cumulative
translation
adjustment (161,817) (130,436) (150,820) (143,199)
Stockholders'
Equity 1,282,911 3,356,962 1,772,911 844,557
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company commenced operations in late December 1991. During 1992,
the Company's primary focus was completing the design and testing of the IFT
System. In 1993, the first production equipment was made available and a
customer testing program was commenced. Simultaneously, the Company stepped-up
its marketing and promotional activities.
In 1993, the Company changed its year end to June 30. During Fiscal
1994 the Company increased its staffing levels and acquired the Vapormid
business from EcoLab, BVBA, a distributor of the Company's earlier "bubble
technology".
On July 18, 1994 the Company's Initial Public Offering was completed
generating net proceeds of $4,768,414. In conjunction with the public offering,
the Company increased its operational and marketing activities in an effort to
achieve cash flow break even by fiscal year end. This objective was not
accomplished in part because of long lead times experienced between initial
sales presentations and invoicing, together with a lack of positive test data on
three very large pulverized coal facilities. Therefore a sharp reduction in
expenses, including staff cuts, was implemented in May which reduced annual
costs by approximately $1,200,000 during fiscal 1996. A leading international
oil company completed testing the IFT System in its central research facility
with positive results and recommendations to its operating units to utilize the
technology. As a consequence the Company has installed an IFT System on a large
Texaco boiler with follow on orders expected in Fiscal '98. Likewise initial
installations have been completed at sites with British Petroleum and Amoco. An
average size refinery or petrochemical plant could utilize IFT technology and
equipment valued at approximately $1,000,000. With this large market
opportunity, fiscal '98 revenues are estimated to be higher than in the past
year providing positive cash flow and net income. The additional volume of
business can be accommodated within the existing capacity of the Company
allowing for increases in material purchases. The attainment of positive cash
flow remains the Company's primary financial objective and the immediate focus
of operations will be the European Community where the IFT technology has
achieved market recognition.
Year ended June 30, 1997 and June 30, 1996
Total revenues increased to approximately $629,000 during
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the year ended June 30, 1997 from $594,000 in the fiscal year ended June 30,
1996. The net increase relates to a decrease in rental income to approximately
$307,000 ($347,000 in 1996), an increase in system sales to approximately
$171,000 ($123,000 in 1996) and an increase in service income to approximately
$151,000 ($124,000 in 1996). The decrease in rental income is due to rentals
being converted to sales during the year. The increase in system sales is
primarily attributable to UK activity in 1997 where larger companies may prefer
to purchase the IFT System rather than rent, however, system sales occur on an
irregular basis. The increase in service income reflects increased installation
fees in 1997.
There was a gross loss of approximately $95,000 during the year ended
June 30, 1997 compared to a profit of $57,000 during the year ended June 30,
1996. The gross loss related primarily to field engineering and service costs of
approximately $269,000 in 1997 which in the previous year were classified, for
nine months, in general and administrative expenses. Total field engineering and
service costs were $716,000 in 1996 and $443,000 in 1997. The reduction of
$273,000 was from staff reductions in the United States and Belgium and the
transfer of support activities to England. Other items in cost of goods sold in
aggregate, were reduced $83,000 for the year ended June 30, 1997. The different
classification relates to the maturing of the Company's technology from a
development state requiring extensive engineering support to complete the sales
process to a mature product. The Company has discontinued free or conditional
testing and all trial installations are paid for by the customer.
General and adminstrative expenses decreased to approximately $657,000
during the year ended June 30, 1997 from approximately $1,230,000 in the year
ending June 30, 1996, a reduction of $573,000. Field engineering and service
costs of $541,000 which represents nine months of charges in the year ended June
30, 1996 are no longer classified as general and adminstrative as stated above.
Other items in aggregate were reduced $32,000.
Sales and marketing expenses decreased to $161,000 during the year
ended June 30, 1997 from approximately $362,000 during the year ended June 30,
1996. The decrease of $201,000 is primarily due to the termination of sales and
marketing arrangements in Eastern Europe and Germany and the substitution of
geographic coverage by existing sales staff and top management.
Other income was a loss of approximately $27,000 during the
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year ended June 30, 1997 from a profit of $49,000 during the year ended June 30,
1995, a decrease of $75,000 primarily due to the use of funds in operations of
the Company and reduced interest income.
Year ended June 30, 1996 and June 30, 1995
Total revenues increased to approximately $594,000 during the year
ended June 30, 1996. The increase relates to an increase in rental income to
approximately $347,000 ($277,000 in 1995), an increase in system sales to
approximately $123,000 ($81,000 in 1995) and an increase in service income to
approximately $124,000 ($118,000 in 1995). The increase in rental income is due
to trials being converted to normal rentals during the year. The increase in
system sales is primarily attributable to UK activity in 1996 where larger
companies may prefer to purchase the IFT system rather than rent. System sales
occur on an irregular basis. The increase in service income reflects the
increased sales and rentals in 1996.
Gross profit decreased to approximately $57,000 during the year ended
June 30, 1996 from $131,000 during the year ended June 30, 1995. The decrease
related to field engineering, installation and other field costs of
approximately $176,000 incurred during the final quarter of the year ended June
30, 1996 which had been classified as cost of revenues; in previous periods,
these costs have been classified as sales and marketing expenses. The different
classification relates to the maturing of the Company's system from a
development state requiring extensive engineering support to complete the sales
process to a mature product. In January, the Company discontinued free or
conditional testing and by the fourth quarter all previously free tests had been
completed.
General and administrative expenses decreased to approximately
$1,230,000 during the year ended June 30, 1996 from approximately $1,855,000
during the year ended June 30, 1995, a decrease of $625,000 due to internal
staff and other cost reductions implemented in May 1995. A total one-time cost
of $198,000 was incurred in May 1995, related to the personnel reductions.
Sales and marketing expenses decreased to approximately $362,000 during
the year ended June 30, 1996 from approximately $853,000 during the year ended
June 30, 1995. The decrease of $491,000 is due to cost reductions implemented in
May 1995, and continuing through 1996, as well as approximately $176,000 of
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engineering and other technical costs incurred in the fourth quarter of the year
ended June 30, 1996, which were included in cost of revenues. These technical
costs were included in sales and marketing expenses during the year ended June
30, 1995 and the first three quarters of the year ended June 30, 1996. This
change is a result of the change in responsibilities of certain employee's
caused by the maturing of the Company's system from a developmental state to a
mature product.
Other income decreased to approximately $49,000 during the year ended
June 30, 1996 from approximately $118,000 during the year ended June 30, 1995, a
decrease of $69,000 primarily due to the use of funds in operations of the
Company.
Liquidity and Capital Resources
Since inception, the Company's funding requirements have been met
through the initial public offering of equity securities totaling approximately
$4.8 million, the private placement of equity securities totaling approximately
$6 million, and revenue generated from operations. On July 14, 1997 the Company
sold an additional 771,833 common shares with gross proceeds of $1,736,624.
Net cash used in operations was approximately $900,000, $1.3 million,
and $2.6 million for the years ended June 30, 1997, 1996 and 1995. The principal
use of cash was to fund operating losses incurred by the Company in developing
the IFT System and sales, marketing and promotional activities. Working capital
was approximately $435,000, $1.3 million, and $2.7 million at June 30, 1997,
1996 and 1995, respectively. Fluctuations in working capital have been primarily
due to increases in accounts receivable and inventory offset by increases in
accounts payable and other accruals.
The Company liquidated its U.S. Treasury investments during the year
ended June 30, 1996. The Company's primary investing activity in the year ended
June 30, 1995 involved the acquisition and sale of U.S. Treasury obligations.
Capital expenditures amounted to approximately $29,000 and $100,000 during
fiscal years "97 and "95, respectively. There were no capital expenditures
during the year ended June 30, 1996. Capital expenditures were associated with
the purchase of equipment used in manufacturing as well as expenditures
incurred to produce rental equipment. The Company has no plans for a
significant investment in ucapital equipment in fiscal 1998.
17
Under an Assignment and Royalty Agreement with the inventor of the
Technology utilized by the Company's System ("Royalty Agreement"), the Company
is required to make payments of $6,000 per month to the inventor over the
remaining life of patents relating to the technology. In conjunction with
Royalty Agreement, the Company pays an executive officer/director of the Company
a royalty override of $5,000 per month.
On July 14, 1997, the Company issued 771,833 units, each unit
consisting of one share of common stock, par value $.01 per share and one Series
C, Common Stock purchase warrant. As a result, the Company raised $1,571,960 net
of discounts, commissions and offering costs of $164,664.
The Company believes that the proceeds from the above offering together
with anticipated funds from operations, will satisfy the Company's working
capital requirements and capital expenditures through fiscal 1998. The Company
intends to focus its operations primarily on continued expansion with the
European Community.
Currency Fluctuation
The Company's revenues are invoiced primarily in Pounds Sterling and
also currencies of other European countries (Belgium, Austria and Germany).
Changes in exchange rates of these currencies relative to the U.S. dollar could
affect the Company's operations and cash flow. During the fiscal years ended
June 30, '97 and '96, currency fluctuations were not significant and were not an
influence on Company revenues and expenses. Currently, the Company does not
enter into derivative contracts to hedge currency risks.
During the year ended June 30, 1997, the average rate of exchange used
to translate revenues and expenses denominated in Pounds Sterling has increased
from approximately $1.55 U.S. dollars to 1 Pound to approximately $1.65 U.S.
dollars to 1 Pound.
Inflation
The Company does not believe that inflation has had a significant
impact on the results of its operations since inception.
18
Forward-Looking Statements
Forward-looking statements made in this Annual Report are made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Investors are cautioned that all forward-looking statements involve risks
and uncertainties including without limitation risks in technology development,
risks in product development and market acceptance of and demand for the
Company's products, risks associated with competition and competitive pricing
pressures, risks associated with foreign sales and other risks detailed in the
Company's filings with the Securities and Exchange Commission.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the consolidated financial statements and the financial statement
schedule set forth in Item 14 of this annual report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable
19
PART IV
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K
Page
A. (1) Financial Statements
Report of Independent Auditors F-1
Consolidated Balance Sheet - June 30, 1997 and 1996 F-2
Consolidated Statement of Operations - Years Ended F-3
June 30, 1997, 1996 and 1995
Consolidated Statement of Stockholders' Equity - F-4
Years Ended June 30, 1997, 1996 and 1995
Consolidated Statement of Cash Flows - Years Ended F-6
June 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements F-7
The following consolidated financial statement schedule of
Ionic Fuel Technology, Inc. is included in Item 14(d):
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.
(3) Exhibits
3.1 Certificate of Incorporation
Incorporated by reference to the filing of such Exhibit with
Registrants Annual Report on Form 10K for the fiscal year
ended June 30, 1996.
3.2 By-Laws
Incorporated by reference to the filing of such Exhibit with
Registrants Annual Report on Form 10K for the fiscal year
ended June 30, 1996.
4.1 Specimen Certificate of Common Stock Incorporated by reference
to the filing of such Exhibit with Registrants Annual Report
on Form 10K for the fiscal year ended June 30, 1996.
20
4.2 Specimen Certificate of A Warrant
Incorporated by reference to the filing of such Exhibit with
Registrants Annual Report on Form 10K for the fiscal year
ended June 30, 1996.
4.3 Specimen Certificate of B Warrant
Incorporated by reference to the filing of such Exhibit with
Registrants Annual Report on Form 10K for the fiscal year
ended June 30, 1996.
10.1 Stock Option Plan
Incorporated by reference to the filing of such Exhibit with
Registrants Annual Report on Form 10K for the fiscal year
ended June 30, 1996.
27 Financial Data Schedule
B. Reports on Form 8-K
Form 8K dated July 10, 1997 electronically filed and
accepted on July 15, 1997; Accession No. 0001012118-97-000095.
Reference Item 5. Other Events: On July 10, 1997, the Registrant
concluded a private placement of Units pursuant to Regulation S
promulgated under the Securities Act of 1933, as amended.
Form 8K dated July 24, 1997 electronically filed and
accepted on July 24, 1997; Accession No. 0001012118-97-000105.
Item 5, Other Events: Extending the expiration date of the Class
A Warrants.
21
Report of Independent Auditors
To the Board of Directors and Stockholders
Ionic Fuel Technology, Inc.
We have audited the accompanying consolidated balance sheet of Ionic Fuel
Technology, Inc. as of June 30, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 1997. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Ionic
Fuel Technology, Inc. at June,30, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended June 30, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects, the information set forth therein.
/s/ Ernst & Young LLP
September 5, 1997
F-1
Ionic Fuel Technology, Inc.
Consolidated Balance Sheet
June 30
1997 1996
-------------------------------------------
Assets
Current assets:
Cash and cash equivalents (Note 1) $191,629 $1,173,088
Trade accounts receivable (net of allowances of $0 and $43,791, 59,420 80,332
respectively)
VAT and other receivables - 25,642
Inventory (Note 2) 482,446 464,093
Prepaid expenses 137,676 84,639
-------------------------------------------
Total current assets 871,171 1,827,794
Equipment and vehicles, net (Notes 1 and 3) 153,117 192,608
Patents, net (Notes 1 and 4) 603,003 638,783
-------------------------------------------
Total assets $ 1,627,291 $2,659,185
===========================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 87,155 $ 87,739
Accrued expenses 239,827 316,493
Provisions for warranties and returns 16,380 63,833
Accrued royalty - due to officer (Note 4) 40,000 20,800
Current portion of royalty agreement (Note 4) 18,720 16,127
Accrued salary, benefits and payroll taxes 19,419 16,509
Current portion of capital lease obligations (Note 5) 14,984 -
-------------------------------------------
Total current liabilities 436,485 521,501
Other long-term liabilities (Note 4) 346,249 364,773
Stockholders' equity (Notes 7 and 10):
Common stock, $.01 par value:
20,000,000 shares authorized; issued and outstanding 5,401,600
and 5,400,000 shares, respectively (Note 7) 54,016 54,000
Capital in excess of par value 10,837,407 10,768,973
Accumulated deficit (9,903,667) (8,899,242)
Cumulative translation adjustment (Note 1) (143,199) (150,820)
-------------------------------------------
Total stockholders' equity 844,557 1,772,911
-------------------------------------------
Total liabilities and stockholders' equity $ 1,627,291 $ 2,659,185
===========================================
See accompanying notes.
F-2
Ionic Fuel Technology, Inc.
Consolidated Statement of Operations
Year ended June 30
1997 1996 1995
-----------------------------------------------------------------
Revenues (Note 1):
Equipment sales $ 171,079 $ 122,671 $ 80,788
Service income 150,755 124,084 118,035
Rental income 306,860 347,204 277,338
-----------------------------------------------------------------
Total revenue 628,694 593,959 476,161
Cost of revenues 723,327 537,110 344,868
-----------------------------------------------------------------
(94,633) 56,849 131,293
Operating expenses:
General and administrative 657,133 1,229,969 1,854,880
Sales and marketing 161,418 361,644 853,093
Restructuring charges (Note 9) - - 198,006
Royalty charges 60,000 60,000 60,000
Research and development 3,973 17,532 9,019
-----------------------------------------------------------------
882,524 1,669,145 2,974,998
-----------------------------------------------------------------
Loss from operations (977,157) (1,612,296) (2,843,705)
Other income (expense):
Interest income 28,801 106,905 161,787
Miscellaneous income - - 16,145
Interest expense (56,069) (58,276) (59,971)
-----------------------------------------------------------------
(27,268) 48,629 117,961
-----------------------------------------------------------------
Net (loss) $(1,004,425) $(1,563,667) $(2,725,744)
=================================================================
Net (loss) per share (Note 1) $ (0.19) $ (0.29) $ (0.51)
=================================================================
Weighted average number of common shares
(Note 1) 5,412,100 5,410,500 5,318,445
=================================================================
See accompanying notes.
F-3
Ionic Fuel Technology, Inc.
Consolidated Statement of Stockholders' Equity
Common Stock
---------------------------------- Capital in
Par Excess of
Shares Value Par Value
-----------------------------------------------------
Balance at June 30, 1994 4,200,000 $42,000 $ 6,012,559
Issuance of common stock 1,200,000 12,000 4,756,414
Net loss
Translation adjustment
-----------------------------------------------------
Balance at June 30, 1995 5,400,000 54,000 10,768,973
Net loss
Translation adjustment
-----------------------------------------------------
Balance at June 30, 1996 5,400,000 54,000 10,768,973
Net loss
Issuance of compensatory stock
options and warrants 68,000
Exercise of stock options 1,600 16 434
Translation adjustment
-----------------------------------------------------
Balance at June 30, 1997 5,401,600 $54,016 $10,837,407
=====================================================
See accompanying notes.
F-4
Ionic Fuel Technology, Inc.
Consolidated Statement of Stockholders' Equity
Cumulative
Accumulated Translation
Deficit Adjustment Total
------------------------------------------------------------
Balance at June 30, 1994 $(4,609,831) $(161,817) $ 1,282,911
Issuance of common stock 4,768,414
Net loss (2,725,744) (2,725,744)
Translation adjustment 31,381 31,381
------------------------------------------------------------
Balance at June 30, 1995 (7,335,575) (130,436) 3,356,962
Net loss (1,563,667) (1,563,667)
Translation adjustment (20,384) (20,384)
------------------------------------------------------------
Balance at June 30, 1996 (8,899,242) (150,820) 1,772,911
Net loss (1,004,425) (1,004,425)
Issuance of compensatory stock
options and warrants 68,000
Exercise of stock options 450
Translation adjustment 7,621 7,621
------------------------------------------------------------
Balance at June 30, 1997 $(9,903,667) $(143,199) $ 844,557
============================================================
See accompanying notes.
F-5
Ionic Fuel Technology, Inc.
Consolidated Statement of Cash Flows
Year ended June 30
1997 1996 1995
-----------------------------------------------------------------
Operating activities
Net (loss) $(1,004,425) $(1,563,667) $(2,725,744)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 66,241 111,316 67,763
Amortization 62,661 85,653 79,414
Non cash compensation 16,000 - -
Changes in operating assets and liabilities:
Accounts receivable 26,128 112,352 (77,870)
Other receivables 8,674 2,311 5,039
Inventory 43,464 (9,058) (89,498)
Prepaid expenses 19,211 61,750 (62,966)
Deferred charges - - 327,614
Other assets 2,195 33,374 (6,267)
Accounts payable and accrued expenses (131,121) (174,440) (165,866)
-----------------------------------------------------------------
Net cash used in operating activities (890,972) (1,340,409) (2,648,381)
Investing activities
Acquisition of investments - - (6,063,303)
Acquisition of patents and license (25,885) (18,703) (38,219)
Acquisition of equipment (29,239) - (100,283)
Accretion of interest - (13,949) (122,161)
Proceeds from maturity of investments - 1,300,000 4,899,413
-----------------------------------------------------------------
Net cash (used in) provided by investing activities (55,124) 1,267,348 (1,424,553)
Financing activities
Principal payments on capital leases - (14,707) (30,911)
Principal payments under licensing agreement (15,931) (13,725) (11,824)
Net proceeds from issuance of stock 450 - 4,768,414
-----------------------------------------------------------------
Net cash (used in) provided by financing activities (15,481) (28,432) 4,725,679
-----------------------------------------------------------------
Effects of exchange rate differences on cash (19,882) (6,677) 9,810
-----------------------------------------------------------------
(Decrease) increase in cash (981,459) (108,170) 662,555
Cash, beginning of year 1,173,088 1,281,258 618,703
-----------------------------------------------------------------
Cash, end of year $ 191,629 $ 1,173,088 $ 1,281,258
=================================================================
Interest paid $ 56,069 $ 58,276 $ 59,971
=================================================================
See accompanying notes.
F-6
Ionic Fuel Technology, Inc.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Presentation
Ionic Fuel Technology, Inc. ("Company"), a Delaware corporation formed on
December 10, 1991, manufactures ion generating equipment for sale or lease to
entities in various industries, in the United Kingdom and Europe, to reduce
airborne emissions and fuel consumption.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Ionic Fuel Technology USA, Inc. ("IFT, USA"), a
company incorporated in the U.S. and Ionic Fuel Technology Ltd. ("IFT Ltd."), a
company incorporated in the United Kingdom. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Concentration of Credit Risk
At June 30, 1997 and 1996, the Company maintained cash balances of approximately
$69,000 and $980,000, respectively, at a bank in excess of the insurance limits
($100,000) of the Federal Deposit Insurance Corporation.
The Company performs periodic evaluations of its customers financial condition
and generally does not require collateral.
Cash Equivalents
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
Inventory
Inventory is valued at the lower of cost, determined by the first-in, first-out
method, or net realizable value.
Equipment and Vehicles
Equipment and vehicles are stated at cost less accumulated depreciation and
amortization provided on the straight-line basis over the estimated useful lives
of the assets, which range from three to ten years. Equipment under lease to
third parties is depreciated over the life of the lease, generally five years.
F-7
Ionic Fuel Technology, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Intangible Assets
Patents are carried at cost, less accumulated amortization provided on the
straight-line basis over the estimated useful lives of the assets which range
from five to fifteen years. Amortization expense of these intangible assets
amounted to $62,661, $61,732 and $59,410 for the years ended June 30, 1997, 1996
and 1995, respectively. Accumulated amortization amounted to $322,272 and
$259,611 at June 30, 1997 and 1996, respectively.
The value of rental and maintenance contracts acquired was amortized over the
lives of the contracts, which ranged from one to four years. The original lives
of all contracts purchased expired in 1996. This amortization expense amounted
to $23,921 and $20,004 for the years ended June 30, 1996 and 1995, respectively.
Income Taxes
The Company accounts for income taxes under the liability method in accordance
with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." Under this method, deferred income taxes are recognized for the
tax consequences of "temporary differences" by applying enacted statutory tax
rates applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. Under
SFAS 109, the effect upon deferred taxes of a change in tax rates is recognized
in income in the period that includes the enactment date.
Fair Value
Cash and cash equivalents, accounts receivable and accounts payable: The
carrying amounts reported in the balance sheet for cash and cash equivalents,
accounts receivable and accounts payable approximate their fair value.
Stock Compensation
The Company accounts for stock option grants in accordance with Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees". Under the Company's current plan, options may be granted at not less
than the fair market value on the date of grant and therefore, no compensation
expense is recognized for the stock options granted. In the year ended June 30,
1997, the Company adopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation". The effect of applying SFAS No. 123's fair value
method to the Company's stock- based awards results in net loss and per share
data amounts for the years ended June 30, 1997 and 1996, respectively, that are
not materially different from amounts reported.
Per Share Data
Net loss per share of common stock is computed using the treasury stock method
based on the weighted average number of shares of common stock and dilutive
common equivalent shares outstanding during the period.
F-8
Ionic Fuel Technology, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Foreign Currencies
Adjustments resulting from the translation of the financial statements of the
Company's foreign subsidiary are excluded from the determination of income
(loss) and are accumulated in a separate component of stockholders' equity.
Revenue Recognition
Rental income under operating leases is recognized on a straight-line basis over
the lease term. The equipment leased is owned by the Company and, accordingly,
the Company bears all repairs and maintenance costs incurred. The lease term is
generally five years with an option for renewal. Equipment sales are recognized
upon shipment of the equipment and are recorded net of an allowance for returns.
Warranty Costs
Estimated warranty costs are provided for when the product is sold.
Field Engineering Costs
Cost of revenues reflects approximately $176,000 of field engineering,
installation, and other field costs incurred in the fourth quarter of the year
ended June 30, 1996. Similar costs incurred prior to these periods were included
in sales and marketing expenses because extensive engineering support was
required to complete the sales process. This change was a result of the change
in responsibilities of certain employee's caused by the maturing of the
Company's system from a developmental state to a mature product.
Reclassification
Certain amounts at year ended June 30, 1996 have been reclassified to conform to
the presentation at the year ended June 30, 1997.
Use of Estimates
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and as such, include amounts based on
judgments and estimates made by management, which may differ from actual
results.
F-9
Ionic Fuel Technology, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128 "Earnings per Share"which the Company will adopt for it second quarter
ending December 31, 1997. SFAS No. 128 requires the Company to change the method
it currently uses to compute earnings per share and requires restatement of all
prior periods. Under the new requirements, the dilutive effect of stock options
are excluded from computing "basic" earnings per share and remain in the diluted
computation. The impact of SFAS No. 128 is not expected to be material.
2. Inventory
Inventory is comprised of the following:
June 30
1997 1996
----------------------------------------
Material and supplies $161,817 $152,721
Finished goods 320,629 311,372
----------------------------------------
$482,446 $464,093
========================================
Included in finished goods inventory are units, at customer sites, on a
short-term trial basis.
3. Equipment and Vehicles
Equipment and vehicles are comprised of the following:
June 30
1997 1996
----------------------------------------
Equipment $ 440,540 $ 404,994
Vehicles 35,015 22,754
----------------------------------------
475,555 427,748
Accumulated depreciation (394,708) (321,242)
----------------------------------------
80,847 106,506
----------------------------------------
Equipment under lease 119,667 126,072
Accumulated depreciation (47,397) (39,970)
----------------------------------------
72,270 86,102
----------------------------------------
$ 153,117 $ 192,608
========================================
Amortization expense included in depreciation expense, relating to the leased
equipment, amounted to $15,247, $20,898 and $18,208 for the years ended June 30,
1997, 1996 and 1995, respectively.
F-10
Ionic Fuel Technology, Inc.
Notes to Consolidated Financial Statements (continued)
4. Royalty Agreement
Under an agreement effective as of December 1991, the Company purchased certain
patents and inventions for $50,000 and agreed to make payments of $6,000 per
month over the remaining life of the patents (initially 15 years). The Company
has valued these patent rights ($428,698) based upon the present value of the
future minimum royalty payments. The remaining balance of this obligation, less
amounts currently due, is included in other long-term obligations. If certain
annual profitability levels are achieved, an additional royalty of $24,000 per
annum will be payable. In conjunction with this agreement, the Company granted
the inventor a security interest in the patents and inventions during the
royalty period.
A founder/officer of the Company receives an override royalty of $5,000 per
month. This expense amounted to $60,000, for each of the years ended June 30,
1997, 1996 and 1995. During 1995, $1,600 per month of this override royalty was
deferred resulting in an accrued royalty expense of $40,000 and $20,800 at June
30, 1997 and 1996, respectively.
5. Leases
The Company leases its facility under a noncancelable operating lease expiring
in 1997. The future minimum lease payments under operating and capital leases as
of June 30, 1997 are as follows:
Operating Capital
leases leases
--------------------------------
Year ending June 30:
1998 $102,723 $ 2,491
1999 9,130 2,913
2000 3,043 3,146
2001 - 3,399
2002 - 3,039
--------------------------------
Total minimum lease payments $114,896 $14,988
================================
The cost of assets under capital leases amounted to $15,247 at June 30, 1997.
There was no cost of assets under capital leases at June 30, 1996.
Rent expense amounted to $166,118, $135,720 and $102,439 for the years ended
June 30, 1997, 1996 and 1995, respectively.
The future minimum lease payments receivable under noncancelable operating
leases as of June 30, 1997 are as follows:
Operating
leases
----------------
Year ending June 30:
1998 $134,223
1999 66,871
2000 4,926
----------------
Total minimum lease payments receivable $206,020
================
F-11
Ionic Fuel Technology, Inc.
Notes to Consolidated Financial Statements (continued)
6. Income Taxes
At June 30, 1997, the Company has available operating loss carryforwards for
United States federal income tax purposes of $2,045,157 which are available to
offset future taxable income, if any, through the indicated years: $6,082 in
2006, $54,766 in 2007, $95,812 in 2008, $600,574 in 2009, $615,511 in 2010,
$380,431 in 2011 and $291,981 in 2012. The amount and timing upon which the
Company may realize future tax benefits from its net operating loss is affected
by prior changes in ownership of the Company. The Company's subsidiary has
unused operating loss carryforwards, with no expiration date, for United Kingdom
income tax purposes, of $7,728,104 at June 30, 1997. The statutory tax rates
during the year ended June 30, 1997 are 34% and 24% in the U.S. and U.K. During
the years ended June 30, 1996 and 1995 the statutory tax rates were 34% and 25%
in the U.S. and U.K., respectively.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
June 30
1997 1996
-------------------------------------------
Deferred tax liabilities:
Total deferred tax liabilities $ 16,904 $ -
Deferred tax assets:
Benefit of net operating loss carryforwards - U.S. 695,353 598,180
Benefit of net operating loss carryforwards - U.K. 1,854,745 1,636,330
Other 41,477 58,899
-------------------------------------------
Total deferred tax assets 2,591,575 2,293,409
Valuation allowance (2,574,671) (2,293,409)
-------------------------------------------
Net deferred tax assets 16,904 -
===========================================
Total net deferred tax assets (liabilities) $ - $ -
===========================================
7. Stockholders' Equity
Effective March 28, 1994, an amendment and restatement of the Company's Restated
Certificate of Incorporation was approved by the Board of Directors of the
Company providing for an increase in the authorized common stock of the Company
to 20,000,000 shares.
On July 28, 1994, the Company issued 1,200,000 units, each unit consisting of
one share of common stock, par value $.01 per share, one Series A redeemable
common stock purchase warrant and one Series B redeemable common stock purchase
warrant. Two Series A Warrants entitle the holder, to purchase one share of
Common Stock for $6.50, which rights been extended for a year until July 28,
1998. Two Series B Warrants entitle the holder, to purchase one share of Common
Stock for $7.50 until July 28, 1999. Each Series of Redeemable Warrants is
redeemable at a price of $.01 per two Redeemable Warrants, upon not less than 30
days prior written notice, if the last sale price of the Common Stock has been
at least $9.50 with respect to the Series A Warrants and $10.50 with respect to
the Series B Warrants for the 20 consecutive trading days ending on the third
day prior to the notice of redemption. As a result of the offering, the Company
raised $4,768,414, net of discounts, commissions and offering costs of
$1,231,586.
F-12
Ionic Fuel Technology, Inc.
Notes to Consolidated Financial Statements (continued)
7. Stockholders Equity (continued)
Stock Options
The Company's 1992 Stock Option Plan, as amended, (the "Plan"), provides for the
granting of qualified or nonqualified options to acquire up to 450,000 common
shares by certain key employees of the Company or its subsidiary. Options are
exercisable one year after the date of grant at a rate of 20% per annum, on a
cumulative basis. Options may be granted through November 30, 2002, although the
Plan may be terminated at any time.
The following presents a summary of the Company's stock option activity and
related information:
Weighted
average
Option exercise
Number price per price
of shares share per share
------------------------------------------------------
Options outstanding at June 30, 1994 198,000 $2.81-$5.00 $4.51
Granted 28,000 $2.13 $2.13
Exercised -
Canceled (136,000) $2.81-$4.69 $4.47
------------------
Options outstanding at June 30, 1995 90,000 $2.13-$5.00 $3.18
Granted 36,000 $.28 $ .28
Exercised -
Canceled -
------------------
Options outstanding at June 30, 1996 126,000 $ .28-$5.00 $2.35
Granted 206,000 $1.06-$4.00 $3.31
Exercised (1,600) $ .28 $ .28
Canceled -
------------------
Options outstanding at June 30, 1997 330,400 $ .28-$5.00 $2.96
==================
At June 30, 1997, options for 119,600 shares were available for future grants
and 212,000 options were exercisable.
In April 1997, the Company issued 150,000 options to a financial public
relations firm in lieu of a $20,000 fee required under a written contract for
annual services commencing January 1, 1997. The options were divided into thirds
and are exercisable at $2, $3 and $4 a share, respectively. They are exercisable
immediately and expire on December 31, 2002. For the year ended June 30, 1997,
the Company has recognized compensation expense for the fair value of these
options of $10,000.
F-13
Ionic Fuel Technology, Inc.
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
Warrants
In April 1997, the Company issued 150,000 warrants to a financial consultant in
lieu of present and future compensation for services. Each warrant entitles the
holder to purchase one share of Common Stock. The exercise price of 75,000 of
the warrants is $2.25 per warrant and the exercise price of the remaining 75,000
warrants is $3.50 per warrant. The warrants were exercisable immediately and
expire in March 15, 2001. The fair value of the warrants, $48,000 was based on
contract value of the services to be provided. Compensation expense of $6,000
was recognized for the year ended June 30, 1997.
8. Results of Foreign Operations
Total assets and liabilities and results of operations for IFT Ltd. were as
follows:
June 30
1997 1996
---------------------------------------------------------
Total assets $ 904,452 $ 1,001,869
=========================================================
Total liabilities $ 357,834 $ 543,080
=========================================================
Revenues $ 601,408 $ 593,959
=========================================================
Loss from operations $(709,309) $(1,197,933)
=========================================================
9. Restructuring Charges
During 1995, IFT Ltd. undertook a fundamental restructuring, leading to the
termination of over half of its workforce. Other costs relating to this
restructuring included inventory writedowns and early termination payments on
certain motor vehicle leases.
10. Subsequent Event
On July 14, 1997, the Company completed a private offering of 771,833 shares of
its common stock and Series C Warrants at a price of $2.25 per unit. Each unit
is comprised of one share of common stock, par value $0.01 per share and one
warrant to purchase one share of common stock at a price of $2.95, expiring July
10, 2000. The Company granted 71,183 Series C Warrants to their broker in
exchange for the services provided. The Company received total proceeds of
$1,736,624 which, net of offering expenses of $165,965, will be used for general
working capital.
F-14
Ionic Fuel Technology, Inc.
Schedule II-Valuation and Qualifying Accounts
Additions/Deductions
------------------------------------------
Balance at Charged to Write-Offs
Beginning of Costs and Net of Balance at
Description Period Expenses Recoveries End of Period
-------------------------------------------------------------------------------
For the year ended June 30, 1995
Allowance for doubtful accounts $43,565 $1,439 $ - $45,004
Inventory reserve $12,230 $18,525 $ - $30,755
For the year ended June 30, 1996
Allowance for doubtful accounts $45,004 $ - $1,213 $43,791
Inventory reserve $30,755 $26,560 $ - $57,315
For the year ended June 30, 1997
Allowance for doubtful accounts $43,791 $510 $44,301 $ -
Inventory reserve $57,315 $37,647 $ - $94,962
SIGNATURES
Pursuant to the requirements of Section 13 or 15(b) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: September , 1997
IONIC FUEL TECHNOLOGY, INC.
By:
Douglas F. Johnston
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the date indicated.
Name Titles Date
Douglas F. Johnston Chairman & Chief Financial September , 1997
Officer
Anthony J.S. Garner President, Chief Executive September , 1997
Officer and Director
Paul C. O'Neill Treasurer and Director September , 1997
Frank J. Hollendoner Director September , 1997
Henry W. Sullivan Director September , 1997