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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, 2002
------------------
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 (IRS Employer Identification No.)
incorporation or 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 November 8, 2002, as reported on the OTC Bulletin Board,
was $9,302,962.
Number of shares of common stock outstanding as of November 8, 2002:
77,524,687
FORM 10-Q
For The Quarterly Period Ended September 30, 2002
INDEX
Part I - FINANCIAL INFORMATION Page
Item 1- Financial Statements
Balance Sheets - September 30, 2002 and December 31, 2001 3
Statements of Operations - Three Month and Nine Month Periods
Ended September 30, 2002 and 2001 4
Statement of Stockholders' Equity - Nine Months
Ended September 30, 2002 5
Statements of Cash Flows - Nine Months Ended September 30,
2002 and 2001 6
Notes to Financial Statements 7 - 11
Item 2- Management's Discussion and Analysis of Financial Condition
and Results of Operations 12 - 15
Part II - OTHER INFORMATION
Item 1 - Legal Proceedings 15
Item 2 - Changes in Securities and Use of Proceeds 15
Item 4 - Controls and Procedures 15 - 16
Item 6 - Exhibits and Reports on Form 8-K 16
2
INTERNATIONAL FUEL TECHNOLOGY, INC.
BALANCE SHEETS
September 30, December 31,
ASSETS (Note 2) 2002 2001
- ----------------------------------------------------------------------------------------------------
(Unaudited)
Current Assets
Cash $ 275,510 $ 33,168
Accounts Receivable 3,645 --
Inventory 17,742 --
Prepaid Expenses 15,250 15,250
Notes Receivable 35,000 80,000
------------ ------------
Total current assets 347,147 128,418
------------ ------------
Property and Equipment
Machinery and equipment 26,881 26,881
Accumulated depreciation (10,971) (5,824)
------------ ------------
Total property and equipment 15,910 21,057
------------ ------------
Purchased Patents & Technology, Net (Note 3) 1,866,668 2,166,668
Goodwill, Net (Note 3) 2,211,805 2,211,805
------------ ------------
Total assets $ 4,441,530 $ 4,527,948
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 127,338 $ 252,779
Accrued expenses 411,128 342,030
Accrued interest 25,063 17,750
------------ ------------
Total current liabilities 563,529 612,559
------------ ------------
Long-Term Liabilities
Notes payable to stockholder 162,500 162,500
Convertible debentures (net of discount) (Note 4) 56,277 95,924
------------ ------------
Total liabilities 782,306 870,983
------------ ------------
Commitments and Contingencies
Stockholders' Equity (Notes 4, 5 and 6) Common stock, $.01 par value;
authorized, 150,000,000, 77,524,689 and 55,119,612 shares issued
and outstanding at September 30, 2002 and December 31, 2001,
respectively 775,247 551,196
Discount on common stock (819,923) (819,923)
Additional paid-in capital 37,173,206 32,595,070
Accumulated deficit (31,469,306) (28,669,378)
------------ ------------
5,659,224 3,656,965
N/R - Stockholder (2,000,000) --
------------ ------------
Total stockholders' equity 3,659,224 3,656,965
------------ ------------
$ 4,441,530 $ 4,527,948
============ ============
3
INTERNATIONAL FUEL TECHNOLOGY, INC.
STATEMENTS OF OPERATIONS (Unaudited)
Three Months Nine Months
Ended Ended
September 30, September 30,
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------
Revenues $ 9,855 $ -- $ 17,539 $ --
Cost of Revenues 6,090 -- 10,460 --
-------------------------------------------------------------
Gross Profit 3,765 -- 7,079 --
-------------------------------------------------------------
Operating Expenses:
Selling, general and administrative expenses 1,192,804 675,015 2,277,890 3,388,735
Depreciation and Amortization 101,716 113,194 305,147 152,054
-------------------------------------------------------------
Total operating expenses 1,294,520 788,209 2,583,037 3,540,789
-------------------------------------------------------------
Net loss from operations (1,290,755) (788,209) (2,575,958) (3,540,789)
Interest income 4,755 -- 21,257 --
Interest expense (Note 4) (87,198) (308,758) (245,227) (628,765)
-------------------------------------------------------------
Total other expense, net (82,443) (308,758) (223,970) (628,765)
-------------------------------------------------------------
Net loss (1,373,198) (1,096,967) (2,799,928) (4,169,554)
=============================================================
Basic and diluted net loss
per common share $ (.02) $ (.03) $ (.05) $ (.14)
Weighted average common shares outstanding 56,049,132 41,984,052 55,187,481 28,853,413
See Notes to Financial Statements
4
INTERNATIONAL FUEL TECHNOLOGY, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED
September 30, 2002
(Unaudited)
Common Common Discount on
Stock Stock Common Accumulated Notes
Shares Amount Stock APIC Deficit Receivable
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2002 55,119,612 $551,196 $(819,923) $ 32,595,070 $(28,669,378) --
Shares issued for cash and notes receivable 13,888,889 138,889 -- 2,361,111 -- $ (2,000,000)
Shares issued in repayment of shareholder
advances 1,555,555 15,556 -- 264,444 -- --
Proceeds from the issuance of common stock 850,000 8,500 -- 191,500 -- --
Issuances of stock for compensation 2,125,000 21,250 -- 588,750 -- --
Issuances of stock for services 3,075,000 30,750 -- 423,000 -- --
Cancellation of Interfacial escrow shares (500,000) (5,000) -- 5,000 -- --
Issuances of stock for convertible debentures 1,410,633 14,106 -- 385,894 -- --
Discount on issuances of convertible debt -- -- -- 190,537 -- --
Accrued stock based compensation -- -- -- 269,591 -- --
Accrued stock based services -- -- -- (247,108) -- --
Compensation relating to stock options -- -- -- 145,417 -- --
Net loss -- -- -- -- (2,799,928) --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2002 77,524,689 $775,247 $(819,923) $ 37,173,206 $(31,469,306) $ (2,000,000)
====================================================================================================================================
Total
- ------------------------------------------------------------
Balance, January 1, 2002 $ 3,656,965
Shares issued for cash and notes receivable 500,000
Shares issued in repayment of shareholder
advances 280,000
Proceeds from the issuance of common stock 200,000
Issuances of stock for compensation 610,000
Issuances of stock for services 453,750
Cancellation of Interfacial escrow shares --
Issuances of stock for convertible debentures 400,000
Discount on issuances of convertible debt 190,537
Accrued stock based compensation 269,591
Accrued stock based services (247,108)
Compensation relating to stock options 145,417
Net loss (2,799,928)
- ------------------------------------------------------------
Balance, September 30, 2002 $ 3,659,224
============================================================
See Notes to Financial Statements
5
INTERNATIONAL FUEL TECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Nine Months
Ended Ended
September 30, September 30,
2002 2001
- ----------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net loss $(2,799,928) $(4,169,554)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation/Amortization 305,147 152,055
Stock issued and additional paid in capital
recognized for services and compensation 1,231,650 2,099,623
Interest expense recognized - discount and conversion of debt 230,890 589,650
Loss on disposal of machinery and equipment -- 5,527
Change in assets and liabilities:
Increase in accounts receivable (3,645) --
Increase in inventory (17,742) --
Decrease in prepaid expenses -- 4,707
(Decrease)/Increase in accounts payable (125,441) 227,637
Increase in accrued expenses 69,098 36,502
Increase in accrued interest 7,313 6,739
--------------------------
Net cash used in operating activities (1,102,658) (1,047,114)
--------------------------
Cash Flows from Investing Activities:
Acquisition of machinery and equipment -- (1,642)
Increase in employee and stockholder receivables -- (35,000)
Proceeds from repayments of notes receivable 45,000 2,400
--------------------------
Net cash provided by (used in) investing activities 45,000 (34,242)
--------------------------
Cash Flows from Financing Activities:
Increase in amount due to related party -- 151,000
Proceeds from common stock issued 700,000 --
Advances from stockholders 280,000 --
Proceeds from convertible debentures 320,000 874,000
Payment on notes payable -- (22,500)
--------------------------
Net cash provided by financing activities 1,300,000 1,002,500
--------------------------
Net increase (decrease) in cash 242,342 (78,856)
Cash, beginning 33,168 128,204
--------------------------
Cash, ending $ 275,510 $ 49,348
==========================
See Notes to Financial Statements
6
INTERNATIONAL FUEL TECHNOLOGY, INC.
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, 2001. IFT follows the same accounting policies in
preparation of interim reports.
Results of operations for the interim periods are not indicative of annual
results. Prior to the completion of the development of its main products and
inception of revenue generating sales, the Company reported as a development
stage Company.
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 limited funds with which to operate. Management is in the
process of executing a strategy based upon marketing 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. IFT has begun selling products directly to the
commercial marketplace and expects to eventually generate a level of revenue
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 $500,000 over the
remainder of the current fiscal year will be necessary to meet our current
capital needs. Management believes that the proceeds from financing will be used
as follows: $150,000 for professional fees, $150,000 for salary expenses and
$200,000 working capital for administrative and other capital needs, including
investigation of future acquisitions, if any.
On August 15, 2002 the Company secured $2.5 million in new capital from the sale
of restricted common stock to R.C. Holding Company. The new capital consisted of
a cash payment of $500,000 guaranteed notes to be paid in equal installments
over the next 21 months.
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 12,500,001 common shares to the shareholders of
Interfacial Technology Ltd. ("Interfacial") to acquire all of Interfacial's
outstanding common stock. Interfacial is a development stage company formed in
May 2000 which has since its inception focused its efforts to develop
proprietary fuels and fuel additive formulations that will improve fuel economy,
enhance lubricity and lower harmful engine emissions, while decreasing reliance
on petroleum-based fuels. IFT acquired Interfacial because it believed their
technology could be more expeditiously and cost effectively brought
7
INTERNATIONAL FUEL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
to market than its previously acquired PEERFUEL(TM) technology. The purchase
price of approximately $6,750,000 was determined based on the market price of
IFT's common stock on the date the acquisition was announced. Stock certificates
for an additional 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. In
January 2002, the Company and the former shareholders of Interfacial agreed to
reduce the additional shares subject to the performance escrow by 500,000
shares. 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 a portion, as determined by a
formula in the performance escrow agreement, of the stock certificates for the
8,000,002 common being released to the Interfacial shareholders. The shares
placed in the escrow account will not be included in the computation of basic
and diluted loss per share until they are released to the former 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 has been accounted for using the purchase method of accounting,
and the assets have been recorded at fair value. Results of operations have been
included as of the effective date of the transaction. The purchase price of
$6,750,001 was initially allocated to intangible assets and goodwill, and was
being amortized over a 15-year life. During the fourth quarter of 2001, a
valuation of the acquisition was completed. Based on this valuation, the Company
re-assessed the allocation of the purchase price and the lives of the respective
intangible assets acquired, allocating $2,400,001 to purchased technology,
$1,900,000 to in-process research and development, and $2,450,000 to goodwill.
After completion of the valuation report, the estimated lives of purchased
technology and goodwill were changed to six years. In-process research and
development related to ongoing testing and optimization efforts for which the
underlying technology has not yet achieved market readiness and had no
alternative future use. At the date of acquisition, Interfacial's efforts
focused on fine-tuning its additive technology for aqueous blends and tailoring
it to existing applications, in order to optimize the emission-reducing
characteristics while preserving engine efficiency, and there existed
uncertainties regarding the successful development of the technology. The amount
allocated to in-process research and development was calculated in the valuation
using the discounted cash flow method based on a useful life of six years, and
the entire value of $1,900,000 was charged to research and development expense
during 2001. As of December 31, 2001, the Company had completed development of
this technology and was shifting its focus to commercialization.
Effective January 1, 2002 we adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" (FAS 142). Under the new rules,
we are no longer required to amortize goodwill and other intangible assets with
indefinite lives. We will be required to subject these assets to periodic
testing for impairment. Impairment losses for goodwill and indefinite-lived
intangible assets that arise due to the initial application of FAS 142 are
required to be reported as resulting in a change in accounting principle.
An evaluation of our existing goodwill as of January 1, 2002 was performed, and
it was determined that goodwill associated with our sole business unit was not
impaired. The business was evaluated using the quoted market price of our common
stock as of January 1, 2002, which indicated that the fair value of the business
exceeded its carrying value.
Goodwill amortization was $238,195 through December 31, 2001, at which time
amortization ceased with the implementation of FAS 142. The remaining book value
of $2,211,805 will be periodically tested for impairment. Amortization of
purchased technology amounted to $233,333 during the year ended December 31,
2001, and $300,000 during the nine months ended September 30, 2002. Amortization
of purchased technology is expected to equal $400,000 per annum through May 25,
2007, subject to periodic impairment tests.
8
INTERNATIONAL FUEL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
The following tables summarize the results of continuing operations and earnings
per share had FAS 142 been adopted at the beginning of 2001:
For the Nine Months Ended For the Three Months Ended
Sept. 30, 2002 Sept. 30, 2001 Sept. 30, 2002 Sept. 30, 2001
------------------------------ -------------------------------
Reported net loss ($4,169,554) (2,799,928) ($1,373,198) (1,096,967)
Add back: Goodwill amortization -- 54,444 -- 40,833
------------------------------ -------------------------------
Adjusted net loss ($4,115,110) (2,745,484) ($1,373,198) ($1,056,134)
The retroactive application of the Statement had no impact on earnings per share
as previously reported.
The 8,000,002 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 price of IFT's common stock at that date. The 8,000,002 common
shares are currently recorded at par value, or $80,000, as common stock and a
reduction of additional paid-in capital.
The summarized unaudited pro forma results of operations set forth below for the
nine months ended September 30, 2002 and 2001 assume the acquisition occurred as
of the beginning of 2001. 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 2001, nor are the results of operations
necessarily indicative of the results that will be attained in the future.
Nine Months Ended
September 30,
2002 2001
-------------------------------
Revenues $ 17,539 $ 0
Net loss $(2,799,928) $(6,405,011)
Net loss per common share:
Basic and diluted $ (.05) $ (.18)
Note 4 - Convertible Debentures
On September 30, 2002, IFT had outstanding convertible debentures of $75,000,
less the related discount on the beneficial conversion feature of the debenture
of $18,723. 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 two lowest closing bid prices
for the ten trading days immediately subsequent to the convertible debenture
issuance date.
During the nine months ended September 30, 2002, IFT issued 1,410,633 shares of
common stock upon the conversion of $400,000 worth of convertible debentures
owned by IIG. An additional $112,759 had
9
INTERNATIONAL FUEL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
been recorded as a discount on the convertible debenture and added to additional
paid-in-capital, relating to the beneficial conversion feature.
Note 5 - Stockholders' Equity
During January 2002, the Company sold 600,000 restricted shares of common stock
at a price of $.25 per share to a Director. The Company recorded payroll expense
of $150,000 relating to the excess of the trading price of IFT's stock over the
proceeds. In August 2002, the Company issued an additional 2,000,000 shares to
this Director and recorded payroll expense of $460,000.
During January 2002, 500,000 shares of the Company's common stock were removed
from the Interfacial Technologies' escrow account and canceled. The shares were
removed because Interfacial failed to pay liabilities it had incurred prior to
being bought by the Company.
During January 2002, the Company issued 125,000 shares of common stock to a
Director. These shares had been accrued as payroll expense and additional paid
in capital as of December 31, 2001.
During February 2002, the Company sold 250,000 restricted shares of common stock
at a price of $.20 per share to a consultant. The Company recorded consulting
expense of $40,000 relating to the excess of the trading price of IFT's stock
over the proceeds.
During April and May 2002, the Company issued a total of 340,000 shares of
common stock to consultants for services. The Company recorded consulting
expense of $104,900.
During the nine months ended September 30, 2002, the Company recorded
compensation expense of $132,191 relating to shares of common stock that were
earned under employment agreements for two officers but unissued as of September
30, 2002.
In July 2002, the Company entered into a consulting agreement in which the
Company issued 1,250,000 shares of common stock upon inception of the agreement,
and will issue an additional 1,250,000 shares at a mutually agreed upon time.
The consulting agreement, for which the Company will receive strategic planning
and general business consulting, is for a one-year term expiring July 31, 2003.
The Company has recorded consulting expense of $62,500 through September 30,
2002 in connection with this agreement.
In July 2002, the Company issued 500,000 shares of common stock to a consultant
for services. The consulting agreement is for a one-year term expiring June 30,
2003. The Company has recorded consulting expense of $26,250 through September
30, 2002 in connection with this agreement.
In July 2002, the Company issued 20,000 shares of common stock to a consultant
for services. The Company recorded a consulting expense of $2,800.
In August 2002, the Company issued 5,000 shares of common stock to a consultant
for services. The Company recorded a consulting expense of $1,300.
In August 2002, the Company secured $2.5 million in new capital from the sale of
13,888,889 shares of restricted common stock to R.C. Holding Company. The new
capital consisted of a cash payment of $500,000 and $2,000,000 guaranteed notes
to be paid in equal installments over the next 21 months. The notes have been
classified as a reduction of stockholders' equity on the accompanying balance
sheet.
10
INTERNATIONAL FUEL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
In September 2002, the Company issued 1,555,555 shares of common stock to
convert advances of $280,000 from stockholders and recorded deemed interest of
$77,778 due to a beneficial conversion.
In September 2002, the Company issued 960,000 shares of common stock to four
consultants pursuant to two-year consulting agreements with these individuals,
and recorded consulting expense of $216,000. The Company has recorded a
reduction in consulting expense of ($271,484) due to a reduction in value of
980,000 shares to be issued in May 2003 under these agreements.
During the nine months ended September 30, 2002, the Company recorded consulting
expense of $24,376 under an agreement in which the Company will issue 20,833
shares per month for services to consultant.
During the nine months ended September 30, 2002, the Company recorded $137,400
in compensation expense relating to shares that were to be issued to employees
on various anniversary dates of their employment. These shares were never
issued, and were replaced with grants of options to purchase an aggregate of
260,000 shares of common stock at $0.25 per share, vesting immediately, and
expiring in August 2007.
During the nine months ended 2002, the Company recorded consulting expense of
$145,417 in connection with the granting of 3,000,000 stock options to
nonemployees. 1,000,000 of these options vested immediately and were recorded as
consulting expense at that time. The remaining 2,000,000 options will vest after
12 and 24 months, and the fair value of these options are being recorded as
consulting expense ratably over the vesting period. The options have exercise
prices ranging from $0.25 to $0.75, and expire in August 2007.
In August 2002, the Company granted an additional 4,850,000 stock options to
employees. 1,000,000 of these options vested immediately, and the remaining
options will vest after 12 or 24 months. The options have exercise prices
ranging from $0.25 to $0.75, and expire in August 2007.
11
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, a
company located in Manchester, England. IFT completed the acquisition of
Interfacial on May 25, 2001.
IFT has developed a family of fuel blends that 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 an 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. IFT began selling its products during the first quarter of 2002 and
is no longer a development stage company and has raised capital for initial
development through the issuance of its securities and debt instruments.
Three and Nine Months Ended September 30, 2002 compared to the Three and Nine
Months Ended September 30, 2001
Total operating expenses were $1,294,520 for the three months ended September
30, 2002, as compared to the operating expenses of $788,209 for the three month
period ended September 30, 2001. This represents a $506,311 increase from the
prior period. Increased operating expenses in the current period compared to the
prior period are a result of an increase of selling, general and administrative
expenses in 2002, as discussed below. Total operating expenses were $2,583,037
for the nine months ended September 30, 2002, as compared to the operating
expenses of $3,540,789 for the nine months ended September 30, 2001. This
represents a $957,752 decrease from the prior period which is primarily
attributable to the significant reductions of selling, general and
administrative expenses during the first nine months of 2002, as discussed
below.
Selling, general and administrative expenses for the three months ended
September 30, 2002 were $1,192,804, as compared to the selling, general and
administrative expenses of $675,015 for the three month period ended September
30, 2001. This represents an increase of $517,789 from the prior period. This
increase can be attributed to the issuance of a large number of shares and stock
options to employees and consultants in order to maintain its cash balance, as
well as to avoid potential tax liabilities for recipients by replacing
contingent stock grants with options. Selling, general and administrative
expenses for the nine months ended September 30, 2002 were $2,277,890, as
compared to the selling, general and administrative expenses of $3,388,735 for
the nine months period ended September 30, 2001. This represents a decrease of
$1,110,845 from the prior period.
12
The decrease is primarily attributable a one-time stock grant of 2,485,000
shares to employees and directors in February 2001, resulting in compensation
expense of over $1 million.
Amortization and depreciation expenses for the three months ended September 30,
2002 were $101,716, as compared to $113,194 for the corresponding period in
2001. This decrease of $11,478 is attributable to the amortization of goodwill
during 2001. Amortization and depreciation expenses for the nine months ended
September 30, 2002 were $305,147, as compared to $152,054 for the corresponding
period in 2001, representing an increase of $153,093 from the corresponding
period in 2001. This increase is primarily attributable to the shorter period
(4.5 months) of amortization of intangibles in 2001.
Interest expense was $87,198 for the three months ended September 30, 2002, as
compared to the interest expense of $308,758 for the three month period ended
September 30, 2001. The decrease is primarily attributable to a larger amount of
debt conversions in 2001. Interest expense was $245,227 for the nine months
ended September 30, 2002, as compared to the interest expense of $628,765 for
the nine months ended September 30, 2001. This represents a $383,538 decrease
from the prior period. The decrease is primarily attributable to greater amount
of debt conversions in 2001.
The net loss for the three months ended September 30, 2002 was $1,373,198 as
compared to the net loss of $1,096,967 for the three months ended September 30,
2001. This represents a $276,231 increase from the prior period, primarily due
to a greater amount of shares and options being issued in 2002 to employees and
consultants. The net loss for the nine months ended September 30, 2002, was
$2,799,928 as compared to the net loss of $4,169,554 for the nine months ended
September 30, 2001. This represents a $1,369,626 decrease from the prior period.
This decrease is primarily attributable to significant reductions in stock-based
compensation and interest in 2002. The basic and dilutive net loss per common
share for the three months ended September 30, 2002 was $.02 as compared to the
basic and dilutive net loss per common share of $.03 for the three months ended
September 30, 2001. The basic and dilutive net loss per common share for the
nine months ended September 30, 2002 was $.05 as compared to the basic and
dilutive net loss per common share of $.14 for the nine months ended September
30, 2001. The decrease in loss per share was caused by decreased net losses for
the nine months ended September 30, 2002 and greater dilution of common stock
for the three and nine months ended September 30, 2002.
Critical Accounting Policies
Valuation of long-lived and intangible assets and goodwill. We assess the
impairment of identifiable intangibles, long-lived assets and related goodwill
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. Factors we consider important which could trigger an
impairment review include the following:
o Significant underperformance relative to expected historical or projected
future operating results;
o Significant changes in the manner of our use of the acquired assets or the
strategy for our overall business;
o Significant negative industry or economic trends;
o Significant decline in our stock price for a sustained period; and
o Our market capitalization relative to net book value.
When we determine that the carrying value of intangibles, long-lived assets and
related goodwill may not be recoverable based upon the existence of one or more
of the above indicators of impairment, we measure any impairment based on the
quoted market price of our common stock.
In 2002, Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets" became effective and as a result, we will cease to
amortize approximately $2.2 million of goodwill. We had recorded approximately
$238,000 of amortization on these amounts during 2001 and would have recorded
approximately $408,000 of amortization during 2002. In lieu of amortization, we
are required to perform an initial impairment review of our goodwill in 2002 and
an annual impairment review thereafter. We completed our initial review during
the second quarter of 2002, and did not record an
13
impairment charge.
Liquidity and Capital Resources
A critical component of management's operating plan impacting the continued
existence of IFT is the ability to obtain additional capital through additional
debt and/or equity financing. Management does not anticipate IFT will generate a
positive internal cash flow until such time as IFT can generate significant
revenues from either sale of our products or license fees for our technologies,
which may take the next few years to realize. If IFT cannot obtain the necessary
capital to pursue our business plan, IFT may have to cease or significantly
curtail its operations. This would materially impact our ability to continue as
a going concern. The independent auditor's reports included with the December
31, 2001 financial statements in Form 10-K indicate there is a substantial doubt
that IFT can continue as a going concern.
A significant portion of the Company's operating loss relates to charges for
non-cash operating expenses such as amortization and depreciation, employee
stock-based compensation, consulting services fees paid in the Company's common
stock and interest expense related to conversion features of the Company debt.
The Company has offset its capital needs since inception primarily through the
issuance of common stock to its employees and consultants as compensation for
services rendered, which totaled $1,231,650 for the nine month period ended
September 30, 2002. For the nine months ended September 30, 2002 proceeds from
notes payable and advances from stockholders totaled $600,000 with $0 repaid and
$680,000 converted to common stock. Proceeds from the issuance of common stock
was $700,000 during the nine months ended September 30, 2002.
The Company has not made significant cash investments in property and equipment
or in the acquisition of companies or technologies. During the period ended
December 31, 2001, the Company acquired Interfacial Technologies, Ltd., a UK
company in exchange for 12,500,001 shares of the common stock.
The cash used in operating activities was $1,102,658 for the nine months ended
September 30, 2002 as compared to cash used in operating activities of
$1,047,114 for the nine months ended September 30, 2001. Cash used in operations
for the nine months ended September 30, 2002 increased primarily because the
Company paid down over $125,000 of accounts payable for the period ended
September 30, 2002. The cash provided by investing activities was $45,000 for
the nine months ended September 30, 2002 as compared to ($34,242) used in
investing activities for the nine months ended September 30, 2001. Cash provided
by investing activities for the nine months ended September 30, 2002 increased
primarily due to the proceeds from repayments of notes receivable. The cash
provided by financing activities was $1,300,000 for the nine months ended
September 30, 2002 as compared to $1,002,500 provided by financing activities
for the nine months ended September 30, 2001. Cash provided by financing
activities for the nine months ended September 30, 2002 related to the issuance
of convertible debentures, advances from stockholders, and the sale of common
stock. Net cash increased by $242,342 for the nine months ended September 30,
2002 as compared to net cash decreasing by $78,856 for the nine months ended
September 30, 2001.
Working capital at September 30, 2002 was ($216,382) as compared to ($484,141)
at December 31, 2001.
IFT's main source of capital has been a Securities Purchase Agreement with IIG
dated July 10, 2001 that provides for the sale of convertible debentures and 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. As of September 30, 2002, IFT has borrowed a total of $1,750,000
under the financing agreement. IIG has currently suspended its financing
agreement with the Company due to IFT's low stock price. On August 15, 2002 the
Company secured $2.5 million in new capital from the sale of restricted common
stock to R.C. Holding
14
Company. The new capital consisted of a cash payment of $500,000 and guaranteed
notes to be paid in equal installments over the next 21 months.
While management can not make any assurance as to the accuracy of our
projections of future capital needs, it is anticipated that a total of
approximately $500,000 over the remainder of the 2002 fiscal year will be
necessary in order to enable us to meet our current capital needs. Management
believes the proceeds from its financing will be used as follows: $150,000 for
professional fees, $150,000 for salary expenses and $200,000 working capital for
administrative and other capital needs, including investigation of future
acquisitions, if any.
Subsequent Events
None
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, 2002 IFT has
debt totaling 28% of total liabilities at fixed interest rates and fluctuations
in the interest rate could have a material impact on the underlying fair value.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to legal proceedings in the normal course of business.
Based on evaluation of these matters and discussions with counsel, management
believes that liabilities arising from these matters will not have a material
adverse effect on the results of operations or financial position of the
Company.
Item 2. Changes in Securities and Use Of Proceeds
The Company issued securities, which were not registered under the Securities
Act of 1933, as amended, as follows:
During the Quarter ended September 30, 2002, the Company issued a total of
13,888,889 shares of its common stock to R.C. Holding Company pursuant to a
financing agreement. Additionally, the Company issued 1,555,555 shares of common
stock to shareholders in exchange for cash previously advanced to the Company
and 660,000 shares of common stock pursuant to consulting agreements. The
Company also issued 2,000,000 shares of common stock to a director for
consulting services.
With respect to these transactions, the Company relied on Section 4(2) of the
Securities Act of 1933, as amended. The investors were given complete
information concerning the Company. The appropriate restrictive legend was
placed on the certificates and stop transfer instructions were issued to the
transfer agent.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Based on their
evaluations as of a date within 90 days of the filing of this report, our
principal executive officer and principal financial officer, with the
participation of our full management team, have concluded that our
disclosure controls and procedures (as defined in Rules 13a-14(c) and
15(d)-14(c) under the Securities Exchange Act) are effective to ensure that
information required to be disclosed by
15
us in reports that we file or submit under the Securities Exchange Act is
recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the SEC.
(b) Changes in controls. There were no significant changes in our internal
controls or in other factors that could significantly affect these internal
controls subsequent to the date of their most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
Exhibit 99 - IFT secures $2.5 million in equity capital
(b) Reports on Form 8-K
Current Report on Form 8-K dated August 20, 2002 was filed on August 26,
2002 pursuant to Item 5 (Other Events)
All other items of this report are inapplicable.
16
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, 2002
-------------------------------- -----------------
Jonathan R. Burst
Chief Executive Officer
By: /s/ Michael F. Obertop Date November 14, 2002
-------------------------------- -----------------
Michael F. Obertop
Chief Financial Officer
CERTIFICATION
Each of the undersigned hereby certifies, in accordance with 18 U.S.C. ss.1350,
as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, in his capacity
as an officer of International Fuel Technology Inc. ("IFT"), that, to his
knowledge, the Quarterly Report of IFT on Form 10-Q for the period ended
September 30, 2002, fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934 and that the information contained
in the report fairly represents, in all material respects, the financial
condition and results of operation of IFT.
By: /s/ Jonathan R. Burst Date: November 14, 2002
------------------------------------ -----------------
Jonathan R. Burst
Chief Executive Officer
By: /s/ Michael F. Obertop Date November 14, 2002
------------------------------------ -----------------
Michael F. Obertop
Chief Financial Officer
17
CERTIFICATION
I, Jonathan R. Burst, certify that:
1. I have reviewed this quarterly report on Form 10-Q of International Fuel
Technology, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
By: /s/ Jonathan R. Burst
------------------------------------
Jonathan R. Burst
Chief Executive Officer
18
CERTIFICATION
I, Michael F. Obertop, certify that:
1. I have reviewed this quarterly report on Form 10-Q of International Fuel
Technology, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
By: /s/ Michael F. Obertop
------------------------------------
Michael F. Obertop
Chief Financial Officer
19