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UNITED STATES
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
For the Fiscal Year Ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ________________ to _________
Commission File Number: 000-25367
International Fuel Technology, Inc.
-----------------------------------
(Exact name of registrant as specified in its charter)
Nevada 88-0357508
------ ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
7777 Bonhomme Avenue, Suite 1920, St. Louis, Missouri 63105
-----------------------------------------------------------
(Address of principal executive offices)
(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
--------- -----
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 informational
statements incorporated by reference in Part III of this form 10-K or any
amendment to this form 10-K. [ ]
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 March 22, 2002 as reported on the OTC Bulletin
Board, was $22,532,424.
Number of shares of common stock outstanding as of March 22, 2002: 56,331,061
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
FORM 10-K
For the Fiscal Year Ended December 31, 2001
INDEX
Part I
Item 1. Business 3-11
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition 14-23
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 23
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 24
Part III
Item 10. Directors and Executive Officers of the Registrant 24-26
Item 11. Executive Compensation 26-27
Item 12. Security Ownership of Certain Beneficial Owners and Management 27-28
Item 13. Certain Relationships and Related Transactions 28-30
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 30-31
2
PART I
Item 1. Business
Forward Looking Statements and Associated Risks
-----------------------------------------------
This Annual Report on Form 10-K 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 International Fuel Technology's
("IFT" or the "Company") 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.
(a) History
-----------
The Company was incorporated under the laws of the State of Nevada
on April 9, 1996, as MagnoDynamic Corporation. The name of the
corporation was changed to International Fuel Technology, Inc. on
November 13, 1996.
IFT has an authorized capitalization of 150,000,000 shares of
common stock, $.01 par value per share and no authorized preferred
stock. On July 22, 1999, IFT effected a one-for-ten reverse split
of its outstanding common stock. All references to share
information have been restated to reflect this split. IFT's common
stock is traded on the NASD OTC Bulletin Board under the symbol
"IFUE."
Effective March 31, 1998, IFT merged with United States Fuel
Technology, Inc. United States Fuel Technology, Inc. was formed
primarily to market PEERFUEL in North America. On May 29, 1998,
IFT merged with Scientific Fuel Technology, LLC, a company related
through common ownership to improve efficiency and reduce harmful
emissions, which are reprocessed fuel.
Pursuant to an Agreement and Plan of Merger effective as of
October 27, 1999 IFT merged with Blencathia Acquisition
Corporation("Blencathia") in which IFT was the surviving company.
Blencathia (a development stage company) was incorporated in
Delaware on December 3, 1998 to serve as a vehicle to effect a
merger, exchange of capital stock, asset acquisition or other
business combination with a domestic or foreign private business.
3
On May 8, 2000 IFT issued 300,000 shars that were contingently
issued per the Blencathia merger agreement.
The officers, directors, and by-laws of IFT continued without
change as the officers, directors, and by-laws of the successor
issuer following the merger with Blencathia. All financial
statement information presented for IFT reflects the operations of
IFT and does not include any operations of Blencathia.
On May 25, 2001 IFT issued 12,500,001 common shares to the
shareholders of Interfacial Technologies (UK) Ltd., to acquire all
of Interfacial's outstanding common stock. 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. Revenues equal to, or more than, $3,500,000 for the one year
period ending May 24, 2002, or revenues equal to, or more than,
$10,000,000 for the two year period ending May 24, 2003 will
result in all of the stock certificates for the 8,500,002 common
shares being released to the Interfacial shareholders. Revenues
more than $5,000,000 but less than $10,000,000 for the two year
period ending May 24, 2003 will result in a portion, as determined
by a formula in the performance escrow agreement, of the stock
certificates for the 8,500,002 common shares being released to the
Interfacial shareholders.
In connection with the closing of this transaction three of the
Interfacial shareholders have been appointed to IFT's board of
directors. In addition, IFT entered into an employment agreement
with one of the Interfacial shareholders and into a consulting
agreement with three of the Interfacial shareholders on May 25,
2001.
4
IFT is engaged in one reportable industry segment. Financial
information regarding this segment is contained in IFT's financial
statements included in this report.
IFT has an authorized capitalization of 150,000,000 shares of
common stock, $.01 par value per share and no authorized preferred
stock. On July 22, 1999, IFT effected a one-for-ten reverse split
of its outstanding common stock. All references to share
information have been restated to reflect this split. IFT's common
stock is traded on the NASD OTC Bulletin Board under the symbol
"IFUE."
(b) Description of Business
---------------------------
The Company was founded in 1996 by a team of individuals who
sought to address the issue of reducing harmful engine emissions
while at the same time improving the operating performance of
engines, especially with respect to engine power and fuel economy.
After spending several years attempting to develop a fuel
processing system (the PEERFUEL(TM) system, for Performance
Enhanced Emission Reduced fuels), it was determined that the
Company should broaden its technology base while still maintaining
efforts to complete its original fuel processing system.
As part of the Company's efforts to expand into promising new
engine emission-reduction technologies, IFT completed the
acquisition of Interfacial Technologies (UK) Ltd. ("Interfacial").
Based in Manchester, England, the foundation of Interfacial's
technology was started in 1999.
Through the acquisition of Interfacial, IFT has acquired a family
of proprietary fuels and fuel additive formulations. The additive
formulations may be easily splash blended in diesel or gasoline,
or combined with fossil fuel and a series of mediums including
synthetic diesel, ethanol, biodiesel, and urea/water, creating
environmentally friendly finished fuel blends. These fuel blends
have been created to materially improve fuel economy, enhance
lubricity (reducing engine wear and tear) and lower harmful engine
emissions, while decreasing reliance on petroleum-based fuels
through the use of more efficient, alternative and renewable fuel
mediums. With the increasing pressure from public and private
efforts around the world to reduce the level of harmful engine
emissions, combined with the high cost of existing technologies
now being sold to address this problem, management believes
Interfacial is poised to be one of the leading technologies
adopted as part of the effort to clean up the global environment.
Although management still believes the PEERFUEL technology has
significant potential, management has concluded that Interfacial's
technology can be more expeditiously and cost effectively brought
to market, and therefore has decided to focus all of its efforts
on commercializing Interfacial's proprietary technology.
The Company has emerged from its research and development phase
and is now focused on the commercialization of its numerous fuel
blends and additives. From an operating standpoint, IFT is
primarily a marketing company. Primary research and development
efforts are complete, intellectual property pertaining to its
proprietary technology has been filed for, and all manufacturing
of additive formulations is outsourced. Going forward, capital
5
requirements for fixed assets, working capital, and research and
development are expected to be approximately $1,800,000 for the
year ended December 31, 2002.
PRODUCTS AND TESTING
The Company's additives, when mixed with a petroleum-based fuel or
a combination of a petroleum-based fuel and an alternative fuel
medium, form fuel blends that achieve perfect and stable emulsion,
even at extreme temperatures. IFT currently has eight products
ready for commercialization.
Premium Diesel
--------------
Premium Diesel is created by blending conventional diesel fuel
with an IFT additive (PD-1). Tests at Southwest Research
Institute ("SwRI") showed that this fuel blend, when compared
to conventional, EPA #2 diesel, had a 7% increase in fuel
economy, a 44% increase in lubricity and decreased levels of
particulate matter ("PM"), Carbon Dioxide ("CO2") and Oxides
of Nitrogen ("NOx"). This product can be used in any diesel
engine.
Premium Gasoline
----------------
Premium Gasoline is created by adding an IFT additive to
conventional gasoline. Independent testing indicated that this
fuel blend, when compared to conventional gasoline, had an
increase in fuel economy and lubricity, and a reduction in
harmful emissions and Reid vapor pressure ("Rvp"). This
product can be used in any gasoline engine.
Synthetic Diesel
----------------
Synthetic Diesel is created by adding an IFT additive to a
mixture of kerosene (distilled from natural gas condensate)
and #2 diesel or California certified diesel. Tests at SwRI
revealed that this fuel blend, when compared with #2 diesel,
had a 6% increase in fuel economy, a 46% increase in
lubricity, and decreased levels of PM, CO2 and NOx. This
product can be used in any diesel engine without the need for
any engine retrofit or changes in infrastructure for blending,
storing, or distributing the fuel. In addition to meeting CARB
diesel requirements, this fuel blend could be used in every
vehicle covered by EPAct, if EPAct status is received. (See
below for discussion of EPAct)
California Air Resources Board ("CARB") Equivalent Diesel
---------------------------------------------------------
This fuel blend is created by adding kerosene (from the
barrel) with #2 diesel or CARB diesel to the IFT additive.
Test results at SwRI showed that this blend, when compared to
#2 diesel, had a 6% increase in fuel economy, a 46% increase
in lubricity, and decrease levels of PM, CO2 and NOx. This
product can be used in any diesel engine without the need for
any engine retrofit or change in infrastructure for blending,
storing, or distributing the fuel. In addition, this fuel
blend meets all CARB diesel requirements.
Urea/Water Diesel
-----------------
This fuel blend is created by adding the IFT additive to a
mixture of urea, water, and diesel. Tests at SwRI showed that
this fuel blend, when compared to #2 diesel, had no loss of
fuel economy or power or torque, no change in lubricity, and
decreased levels of PM, CO2 and NOx. This product can be used
in any diesel engine without the need for any engine retrofit
or change in infrastructure for blending, storing, or
distributing the fuel.
Spent Solvents Diesel
---------------------
This fuel blend is created by adding spent solvents (e.g. an
alcohol/water mixture) and diesel to the IFT additive.
Chemical and pharmaceutical companies generate enormous
amounts of spent solvents/waste liquids annually, most of
which are disposed of at a substantial cost. Tests showed
6
that IFT's additive allows for the perfect emulsion of certain
spent solvents with diesel for cogeneration or resale as
oxygenated cleaner burning bunker fuel.
Enhanced E-diesel
-----------------
Enhanced E-diesel is created by combining ethanol and diesel
with the help of IFT's additive. Tests at SwRI showed that
this fuel blend, when compared with #2 diesel, had a 3%
increase in fuel economy, a 35% increase in lubricity, a 45%
decrease in PM, and decreased levels of CO2 and NOx. This
product can be used in any diesel engine without the need for
any engine retrofit or change in infrastructure for blending,
storing, or distributing the fuel.
Enhanced Biodiesel
------------------
This fuel blend is created by a combination of biodiesel with
IFT additive. Tests at SwRI showed that this fuel blend, when
compared with #2 diesel, had no loss of fuel economy, power or
torque, an increase in lubricity, decreased levels of PM and
CO2, and no change in NOx. This product can be used in any
diesel engine without the need for any engine retrofit or
change in infrastructure for blending, storing, or
distributing the fuel.
IFT's fuel additives are cost effective and easy to use. The raw
materials used in IFT additives are readily available chemicals
and the initial and ongoing capital investment in the
manufacturing process is minimal. The cost of IFT additives ranges
from less than 1 cent to 5 cents per gallon of fuel treated
depending on the fuel blend. Management anticipates that cost
reductions can be achieved through dosage optimization and volume
purchase discounts associated with increased revenue levels. IFT
additives have been engineered to be easily and conveniently added
directly to fuel ("splash blended") at the terminal or a central
fueling location. Most importantly, unlike certain competitive
products that can require substantial investments in changing the
fuel delivery infrastructure, IFT's additive formulations do not
require the purchase of specialized blending or storage equipment,
or require additional steps in the blending process.
EPAct APPLICATION
The Company recently filed a formal petition with the Department
of Energy requesting "alternative fuel" status for its Synthetic
Diesel fuel blend under the Energy Policy Act of 1992 ("EPAct").
The EPAct program was designed with very specific goals in mind:
make targeted reductions in the use of petroleum-based fuels in
the U.S. while ensuring that the alternative fuels used to reduce
our dependence on foreign oil are environmentally sound. IFT
Synthetic Diesel is a fuel blend that consists substantially of
synthetic diesel distilled from natural gas condensate, a
non-petroleum or non-barrel natural resource that is in abundant
supply in the U.S. By blending synthetic diesel with either
conventional EPA #2 diesel or CARB diesel, plus a proprietary fuel
additive formulation from IFT, management believes this new fuel
meets the legislated definition of an alternative fuel under
EPAct.
The benefits Synthetic Diesel delivers with respect to increased
fuel economy, greater lubricity, lower emissions and other gains,
enables this fuel blend on a net basis to be comparable or even
lower in price than conventional EPA #2 diesel. With the ability
to readily and significantly increase the supply of synthetic
diesel derived from gas condensate, the wholesale adoption of this
fuel blend by both EPAct and regular commercial fleets can be
relatively rapid. As with all IFT fuel blends, there are no
special infrastructure requirements for blending, storing or
distributing Synthetic Diesel. Furthermore, Synthetic Diesel is a
proprietary IFT fuel blend.
7
SOUTHWEST RESEARCH INSTITUTE
Of the eight IFT products that are ready for commercialization,
five (Premium Diesel, Synthetic Diesel, Enhanced E-Diesel,
Enhanced Biodiesel, and Urea/Water Diesel) were tested extensively
at SwRI. The test results confirmed the effectiveness of IFT's
additive formulations. In particular, all IFT fuel blends tested
achieved: (1) an increase in fuel economy; (2) no loss of power or
torque; (3) an increase in lubricity; and (4) a reduction in CO2,
NOx, and PM. SwRI is an independent, nonprofit, applied
engineering and physical sciences research and development
organization with 11 technical divisions using multidisciplinary
approaches to problem solving. The institute occupies 1,200 acres
and provides nearly two million square feet of laboratories, test
facilities, workshops, and offices for more than 2,700 employees
who perform contract work for industry and government clients.
SwRI's main office is located in San Antonio, TX and their web
site can be found at www.swri.com.
The testing protocol at SwRI for the IFT tests used the California
Air Resources Board ("CARB") reference engine, a 1991 Detroit
Diesel Corporation Series 60 heavy-duty diesel engine (rebuilt to
1994-model specifications). The engine performance tests were
conducted using the Environmental Protection Agency ("EPA")
Federal Test Procedure transient cycle, and the emissions were
evaluated according to the California Code of Federal Regulations
Title 40 requirements for heavy-duty engines. To get a
representative picture of the use of different fuel mediums
against base diesel fuels, the testing used both EPA #2 diesel and
CARB-equivalent diesel, which has significantly lower sulfur and
aromatics content.
The significance of the results obtained by IFT's Premium Diesel
fuel blend can be illustrated by a simple analysis of normal use
patterns for heavy-duty vehicle engines. A heavy-duty diesel truck
engine operating for 1,500 hours annually (equal to 100,000 miles
at an average fuel economy of 5 miles per gallon) using IFT's
Premium Diesel fuel blend (IFT additive with EPA #2 diesel fuel)
would save approximately 1,200 gallons of fuel per year. In
addition, use of Premium Diesel could eliminate 10.5 tons of
carbon dioxide, a key component in the global warming problem, per
year per vehicle. Equally important to truck drivers is the
improvement in fuel lubricity and its effect on maintenance costs
as today's lower sulfur fuels act as an abrasive in the fuel
delivery system which may cause injector pump failure 50% sooner
than occurred with "older" diesel containing more sulfur.
COMPETITION
The breadth of existing technologies making claims to have solved
engine emissions problems runs the gamut from alternative fueled
vehicles (electric cars, fuel cell vehicles, etc.) to engine
magnets. Despite the vast amount of research that has been
performed with the intention of solving emissions problems, no
single technology has yet to gain widespread acceptance from both
the public (regulatory) and private sectors. The governments of
the U.S. and other countries have tried using economic incentives
and tax breaks to promote the development of a variety of
emissions reduction technologies. However the base cost of many of
these coupled with issues such as lack of appropriate
infrastructure (for example, compressed natural gas storage and
delivery systems) and technical limitations (keeping alternative
fuels emulsified, significant loss of power and fuel economy with
current alternative fuels), currently makes market acceptance of
many technologies economically unfeasible over the long term.
Given the limitations just outlined, it is unlikely that the
global marketplace will accept just one or a limited number of
technologies to solve the problems with harmful engine emissions.
The Management of IFT believes the "natural selection" expected to
take place over the coming decade for
8
new technologies may evolve on a market-by-market basis and be
largely dependent upon local political influence. Signs of the
market development forces can be seen in:
o Europe, where several countries (England, France and Italy)
have enacted legislation providing tax breaks to companies
that use fuel emulsions blending diesel and water;
o U.S., where legislation has been enacted in Texas granting tax
incentives to diesel and water based emulsions, in California
where low-sulfur diesel is being phased in, and in the federal
government where powerful agricultural lobbies are promoting
the use of alternative fuels such as biodiesel and ethanol;
o China, where the central government has announced the
construction of its first ethanol facilities; and
o Brazil, where regulations require a fuel blend with up to 22%
ethanol.
Because the efforts to reduce harmful engine emissions are so
widespread throughout the world, the market for competitive
alternatives to existing solutions is relatively robust. In
general, these efforts can be placed into four categories: fuel
blends (including aqueous and ethanol), additive technologies
(catalysts such as metallic or precious metal additives),
alternative fuels (CNG, biodiesel, and others), and after-market
systems (catalytic converters and urea SCR systems). Despite the
efforts of all of these disparate technologies, the management of
IFT believes no one technology will come to dominate the emissions
control market due to the technological limitations inherent in
each one. Rather a combination of technologies will be used that
maximizes their individual strengths while limiting their
weakness, all while delivering the highest cost/value
relationship.
REGULATORY ISSUES
In January, 2000 the EPA enacted a far-reaching, stringent set of
diesel emission standards that requires the significant reduction
in harmful emissions, especially Particulate Matter (PM) and
Oxides of Nitrogen (NOx), beginning in 2004, and to be completely
integrated by 2007. PM in diesel emissions is to be reduced by 90%
and NOx is to be reduced by 95%. Equally important in the diesel
fuel marketplace, the EPA is also requiring that 97% of the sulfur
currently in diesel fuel be eliminated beginning in 2006.
In addition to the EPA (a federal agency), each state has its own
regulatory body governing emissions standards. The most well known
state agency, and the precedent setter for many other states, is
CARB. All diesel fuel sold in California must be approved by CARB,
which has a thorough and well-defined procedure for certification.
The Company anticipates no barriers to obtaining the required
certification for these fuel blends targeted for this marketplace.
Also, in order for the Company's products to be used in the U.S.,
EPA registration is required. In December 2001, the Company
received EPA registration for the additive component of its fuel
blends.
Another federal agency shaping the landscape of petroleum-based
fuel consumption is the Department of Energy ("DOE"). In an effort
to reduce dependence on foreign oil and keep up with increasing
demand for petroleum products, the DOE has created and sponsored
programs that encourage the use of alternative fuels. The
programs, such as the Energy Policy Act (EPAct) and the ethanol
and biodiesel subsidy programs, put in place by the DOE and other
government agencies, provide
9
significant incentives for the adoption of targeted fuel blends,
many of which are created and enhanced by the use of IFT's
products. The Company believes its products are well positioned to
help consumers conform to current and future emissions standards
and take advantage of existing incentive programs in the U.S. and
the rest of the world. The Company has filed a formal petition
with the DOE requesting EPAct status for its Synthetic Diesel fuel
blend.
MANUFACTURING PARTNER
In 2001, the Company signed a manufacturing agreement with Tomah
Products, Inc., which makes Tomah the primary manufacturer of
IFT's fuel additives. The agreement covers existing and
to-be-developed fuel additives. The agreement also involves Tomah
in efforts to work with IFT to continue to optimize the
effectiveness and reduce the manufactured costs of the fuel
additives and additive formulations, as well as collaborate on
research and development activities on behalf of IFT.
Tomah, based in Milton, Wisconsin, is a privately owned company
specializing in the manufacturing of industrial surfactants. Tomah
manufactures products for a variety of industries including
petroleum additives, mining, and industrial and institutional
cleaning, and ships product to companies around the world.
Originally founded in 1967, Tomah was acquired by Exxon in 1984
and operated as a division of Exxon until 1994, when it was spun
off in a management buyout. Tomah excels at custom manufacturing
and in jointly developing products designed to meet specific
needs. Tomah is an excellent partner for long term supply
arrangements because of Tomah's unique manufacturing capabilities,
rapid response times and technical expertise.
TECHNOLOGY AND INTELLECTUAL PROPERTY
The underlying technology for IFT's additive formulations is based
on an emulsification technology that: (i) solves the issue of
phase separation when trying to combine petroleum-based fuels with
substances such as ethanol or urea/water, or other mediums known
to impart performance and emissions benefits to base fuels; (ii)
has the ability to alter the chemical makeup of the fuel creating
a denser fuel and change the T temperatures resulting in a more
efficient and powerful burn of the fuel; and (iii) substantially
increases fuel lubricity. The Company's fuel blends form a perfect
and stable emulsion. As a result, the reformulated fuel remains
stable and combined on a perpetual basis at temperature extremes,
especially at lower temperatures when other fuel formulations can
begin to gel. Once the fuel blend is combined, there is no
additional mixing or agitation required for the fuel to remain
perfectly emulsified. IFT has filed four patents pertaining to
eight applications of its proprietary technology relating to its
fuel blends and fuel additives.
IFT and Tomah have filed a joint patent covering urea/water
technology, and the Company has filed a number of additional
patents, in IFT's name only. In addition to Tomah, IFT will work
with distribution partners to gain insight into the market needs
and regulatory requirements of potential
10
customers allowing the Company to create patented products that
accurately fit the specific needs of potential customers.
MARKETING STRATEGY
Since completion of independent testing at SwRI and securing a
manufacturing partner in Tomah, IFT has focused its efforts on
product acceptance and sales into the marketplace. The Company has
developed and is executing a four-pronged approach to product
commercialization.
Field Engagement Partners
-------------------------
Management believes an expeditious means of achieving product
awareness and market acceptance is through strategic field
engagements with commercial level users of petroleum products.
IFT is in discussions with several fleet owners who represent
a cross-section of diesel engine use including trucking,
school buses, off-road construction, and marine applications.
The Company has not finalized any agreements to date.
Distribution Partners
---------------------
In order to streamline operations and take advantage of
existing industry expertise, the Company is pursuing
distribution partnerships with certain companies that have
established operations in fuel additive markets to market and
sell IFT products worldwide. IFT is in formal discussions with
a number of potential distribution partners to market and sell
its products. The Company has not finalized any agreements to
date.
Direct Sales
------------
In addition to marketing efforts with fleet owners and
distribution concerns, the Company will sell "additive only"
direct to the consumer using several distribution channels.
IFT will utilize trade show attendance, direct mail and direct
telemarketing to create initial awareness of the products and
their benefits to consumers, supported by an on-line, web
based ordering system and "800" number call-in support.
Since the "consumer" tends to be less price sensitive than
distributors/wholesalers of fuels, and the U.S. political
climate is desirable to market a product that reduces
dependence on foreign oil, protects the environment (through
reductions in harmful emissions) and ultimately pays for
itself two to three times over through increases in fuel
economy, management believes there is an opportunity with a
direct-to-the-customer strategy.
Regulatory and Trade Association Relationships
----------------------------------------------
The final component of the Company's marketing strategy
involves educating a number of industry related entities as to
the benefits of IFT products. The Company has started to, and
will continue to, develop relationships with groups such as
the Renewable Fuels Association (an ethanol industry trade
group), California Air Resources Board, the United States
Department of Energy, the European Parliament, and other
entities representing a diverse group of private and
11
public interests, to push for the adoption of IFT additive
formulations in a variety of finished fuel blends.
SUMMARY
The Company believes its products are well-positioned to help
consumers: (1) conform to current and future emissions standards,
(2) take advantage of existing incentive programs in the U.S. and
the rest of the world, and (3) realize fuel economy improvements.
Going forward the Company believes its additive formulations will
be especially advantageous as the utilization of lighter fraction
fuels will increase. Historically, the blending of lighter
fraction fuels with conventional heavier fraction fuels has
resulted in a reduction in harmful emissions but a decrease in
power, torque, fuel economy and lubricity. IFT additive
formulations allow for the blending of lighter fraction fuels with
conventional, heavier fraction fuels without a decrease in power,
torque, fuel economy and lubricity while still reducing harmful
emissions.
EMPLOYEES
Currently, IFT has eight full time employees. The management of
IFT believes the relationship with its employees is satisfactory.
Item 2. Properties
IFT maintains its administrative offices at 7777 Bonhomme Avenue,
Suite 1920, St. Louis, Missouri, 63105, under a lease agreement
for office space and administrative services of $5,269 per month
for approximately 1,500 square feet. A new five-year lease
agreement was signed on January 1, 2002.
The management of IFT believes that the current facilities are
adequate to meet current operating requirements.
Item 3. Legal Proceedings
Name of the Court: NYE County, Nevada
Date Instituted: August 27, 2001
Parties: Plaintiff Donald Thompson v. Defendant
International Fuel Technology, Inc.
("Company")
Facts: Plaintiff alleges that he entered into an
oral consulting contract with the
Company. Plaintiff alleges that one-time
fee paid is an acceptance of his offer to
provide monthly consulting services. There
is no written proof of the consulting
contract.
Relief sought: Money damages for consulting fees and
expenses incurred.
Name of the Court: Superior Court of the State of California
for the county of Los Angeles
Date Instituted: August 17, 2001
Parties: California Environmental Engineering, Inc.;
George Gemayel; George Thaye; and The
Brothers Trust; Plaintiffs v. International
Fuel Technology; Terence Mendiretta; Salomon
Grey Financial Corporation; SPIGA Limited;
Investe Co Ernst & Company; Encore Holdings;
Norman Barrett; Defendants
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Facts: Plaintiffs allege the following against
Defendants: negligent misrepresentation,
fraud, conversion, specific recovery of
personal property, breach of fiduciary duty,
common count for money had and received, and
elder abuse. Plaintiffs' claims are
principally based on the allegation that the
defendants are liable for a purported
misappropriation of proceeds from sales of
stock that were supposedly to have been
conducted on the Plaintiffs' behalf.
Relief sought: Plaintiffs seek compensatory damages in
excess of $3,000,000, plus interest,
punitive damages, attorneys' fees and costs
of an unspecified amount. Plaintiffs also
seek certain injunctive relief.
International Fuel Technology has not yet
filed an answer.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 2001.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
(a) Market Information
----------------------
The Common Stock of IFT is traded on the National Association of
Securities Dealers OTC Bulletin Board system under the symbol
"IFUE." The range of closing high and low bid prices shown below
is as reported by the OTC Bulletin Board. The quotations shown
reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
Per Share Common Stock Bid Prices by Quarter
For the Fiscal Year Ended December 31, 2001
-------------------------------------------
High Low
First Quarter $ .56 $ .25
Second Quarter $ .63 $ .25
Third Quarter $ .70 $ .40
Fourth Quarter $ .62 $ .41
Per Share Common Stock Bid Prices by Quarter
For the Fiscal Year Ended December 31, 2000
-------------------------------------------
High Low
First Quarter $3.97 $1.88
Second Quarter $2.38 $ .41
Third Quarter $ .98 $ .38
Fourth Quarter $ .98 $ .33
13
(b) Holders of Common Stock
---------------------------
As of the close of business on March 22, 2002, the last reported
bid price per share of IFT's common stock was $.40. As of March
22, 2002, IFT estimates there were 1,500 record holders
of IFT's common stock. Such number does not include persons whose
shares are held by a bank, brokerage house or clearing company,
but does include such bank, brokerage houses and clearing
companies.
(c) Dividends
-------------
IFT has not declared or paid a cash dividend to stockholders. The
Board of Directors presently intends to retain any future earnings
to finance IFT operations and does not expect to authorize cash
dividends in the foreseeable future.
Item 6. Selected Financial Statement Data
The following tables set forth certain information concerning the
Statements of Operations and Balance Sheets of IFT and should be
read in conjunction with the Financial Statements and the notes
thereto appearing elsewhere in this report.
(a) Selected Statement of Operations Data (In Thousands of
Dollars, Except Per Share Data)
-----------------------------------------------------------------
Twelve Months Ended December 31,
2001 2000
---- ----
Revenues $ 0 $ 0
Operating Expenses 6,787 4,690
Net Loss (7,575) (6,688)
Basic and Diluted Net Loss per Common Share ($.21) ($.36)
Weighted Average Shares 36,416,469 18,827,802
Nine Months Ended December 31,
1999
----
Revenues $ 0
Operating Expenses 4,727
Net Loss (5,132)
Basic and Diluted Net Loss per Common Share ($.32)
Weighted Average Shares 15,800,725
Fiscal Year Ended March 31,
1999 1998
---- ----
Revenues $ 0 $ 0
Operating Expenses 7,751 1,083
Net Loss (7,839) (1,091)
Basic and Diluted Net Loss per Common Share ($.59) ($.20)
Weighted Average Shares 13,390,417 5,351,089
14
IFT is a development stage company and has incurred $28,669,378 in
expenses from inception in April 1996.
(b) Selected Balance Sheet Data (In Thousands of Dollars)
-------------------------------------------------------
December 31,
--------------------------
2001 2000 1999
---- ---- ----
Total Assets $4,528 $ 175 $ 68
Long-Term Debt $ 258 $ 162 $ 0
March 31,
-----------------
1999 1998
---- ----
Total Assets $ 6 $ 7
Long-Term Debt $ 0 $ 0
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition
The following discussion and analysis should be read in
conjunction with the financial statements and related notes
thereto and included elsewhere in this Form 10-K.
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, through the Interfacial subsidiary, 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.
Comparison of Twelve Months Ended 12/31/01 and Twelve Months
Ended 12/31/00
Operating expenses
Total operating expenses from development stage operations were
$6,787,050 for the twelve months ended December 31, 2001, as
compared to the development stage operating expenses of $4,689,953
for the twelve months ended December 31, 2000. Total operating
expenses for the twelve months ended December 31, 2001 represents
a $2,097,097, or 45%, increase from the prior period. The increase
was mainly due to acquired in-process research and development
costs of $1,900,000 in 2001. Operating expenses for the 2002 year
are expected to be consistent with 2000 expenses.
Following is an overview of the significant fluctuations in
operating expenses:
15
Advertising and marketing
Total advertising and marketing expenses were $14,500 for the
twelve months ended December 31, 2001, as compared to $20,522 for
the twelve months ended December 31, 2000. Total advertising and
marketing expenses for the twelve months ended December 31, 2001
represent a $6,022 decrease, or 29.3% decrease from the prior
period. The level of advertising and marketing expenses for the
twelve months ended December 31, 2001 is consistent with the prior
year. Advertising and marketing expenses should increase while IFT
increases its efforts to commercialize its products.
Amortization and depreciation
Amortization and depreciation expenses were $474,797 for the
twelve months ended December 31, 2001, as compared to $3,217 for
the twelve months ended December 31, 2000. The increase was
primarily due to amortization of goodwill and purchased technology
associated with the purchase of Interfacial. Amortization and
depreciation expenses should be approximately $400,000 in 2002 as
IFT will only be amortizing the purchased technology in the
future.
Consulting Expenses
Consulting expenses were $1,191,456 for the twelve months ended
December 31, 2001, as compared to $0 for the twelve months ended
December 31, 2000. The increase in consulting expenses is due to
the issuance of common stock pursuant to consulting agreements
with four former shareholders of Interfacial.
Insurance
Insurance expense was $38,592 for the twelve months ended December
31, 2001, as compared to $34,454 for the twelve months ended
December 31, 2000. Total insurance expense for the twelve months
ended December 31, 2001 is consistent with the prior year.
Insurance expense should remain consistent in 2002.
Investment advisory fees
Investment advisory fees were $0 during the twelve months ended
December 31, 2001, as compared to $1,251,413 for the twelve months
ended December 31, 2000. The decrease is attributable to IFT not
issuing any warrants to any investors involved with the
convertible debenture purchase agreement with IIG Equity
Opportunities Fund, Ltd.
Office and Other
Office and other expenses were $221,595 for the twelve months
ended December 31, 2001, as compared to $79,545 for the twelve
months ended December 31, 2000. Office and other expenses for the
twelve month period ended December 31, 2001 represent an increase
of $142,050 from the prior period. The increase is primarily due
to an increase in travel expense related to product
commercialization and office expenses. Office and other expenses
should remain consistent in 2002.
16
Payroll
Payroll expenses were $2,237,743 during the twelve months ended
December 31, 2001, as compared to $2,329,521 for the twelve month
period ended December 31, 2000. Payroll for the twelve month
period ended December 31, 2001 represents a decrease of $91,778
from the prior period. The decrease is attributable to a decrease
in officer payroll of $410,886, partially offset by an increase of
other and director payroll of $298,090. Payroll expenses included
$1,661,313 and $1,691,099 of stock-based compensation in 2001 and
2000, respectively.
Professional Services
Professional services were $510,934 during the twelve months ended
December 31, 2001 as compared to $684,367 for the twelve months
ended December 31, 2000. Professional services for the twelve
month period ended December 31, 2001 represents a decrease of
$173,433. The decrease is primarily due to a decrease in
accounting and other fees. Professional services should remain
consistent in 2002.
Research and development costs
Research and development costs were $197,433 during the twelve
months ended December 31, 2001 as compared to $286,914 for the
twelve months ended December 31, 2000. Research and development
for the twelve months ended December 31, 2001 represents a
decrease of $89,481 from the prior period. The decrease is due to
decreased testing and laboratory fees of $88,957. Management
expects expenditures for research and development during the year
2002 to be approximately $200,000.
Interest
Interest expense was $787,760 for the twelve months ended December
31, 2001 as compared to $1,997,583 for the twelve months ended
December 31, 2000. Interest expense for the twelve months ended
December 31, 2001 represents a decrease of $1,209,823 from the
prior period. Interest expense was higher in 2000 due to discounts
recorded on notes payable. Management expects that interest
expenses should remain consistent with the 2001 year.
Provision for Income Taxes
The Company has operated at a net loss since inception and has not
recorded or paid any income taxes. The Company has a significant
net operating loss carryforward that would be recognized at such
time as the Company demonstrates the ability to operate on a
profitable basis for an extended period of time.
Net Loss
The net loss was $7,574,810 for the twelve months ended December
31, 2001 as compared to the net loss of $6,687,536 for the twelve
months ended December 31, 2000. Net loss for the twelve months
ended December 31, 2001 represents an increase of $887,274, or
13.2%, from the prior period. The net loss increased due to the
purchase of in-process research and development offset by a
reduction in interest expense. The net loss per common share was
$.21 for the twelve months ended December 31, 2001 as compared to
the net loss per common share of $.36 for the twelve months ended
December 31, 2000.
Comparison of Twelve Months Ended 12/31/00 and Nine Months Ended
12/31/99
-----------------------------------------------------------------
17
Operating Expenses
Total operating expenses from development stage operations were
$4,689,953 for the twelve months ended December 31, 2000, as
compared to the development stage operating expenses of $4,726,799
for the nine months ended December 31, 1999. Total operating
expenses for the twelve months ended December 31, 2000 represents
a $36,846, or .8%, decrease from the prior period. Total operating
expenses for the twelve months ended December 31, 2000 is
consistent with the prior year.
Consulting Expenses
Consulting expenses were $0 for the twelve months ended December
31, 2000, as compared to $295,000 for the nine months ended
December 31, 1999. Consulting expenses decreased due to consulting
expenses during the twelve months ended December 31, 2000 being
reduced due to the elimination of a related party account payable
that had previously been recorded to consulting expense.
Investment Advisory Fees
Investment advisory fees were $1,251,413 during the twelve months
ended December 31, 2000, as compared to $0 for the nine months
ended December 31, 1999. IFT entered into a convertible debenture
purchase agreement dated February 25, 2000 with GEM Global Yield
Fund Limited ("GEM"). In addition to the convertible debentures,
GEM, one of the investors in the convertible debentures, received
a warrant to purchase 390,000 shares of common stock as part of
its fee for arranging the convertible debenture financing. On
March 28, 2000 a warrant for 390,000 shares of common stock was
exercised by GEM at a cost of $.01 per share. The closing trading
price of IFT's stock on March 28, 2000 was $2.9375, resulting in a
total market value of $1,145,625 for the 390,000 common shares.
The market value in excess of the $.01 warrant exercise cost,
$1,141,725, is reflected in the statement of operations for the
twelve months ended December 31, 2000 as an investment advisory
fee. During February 2000, IFT issued 195,000 shares of common
stock and placed them in escrow in accordance with the convertible
debenture purchase agreement entered into on February 25, 2000.
The 195,000 shares were to be released from escrow and issued to
the purchasers of the convertible debenture in the event of an
uncured default by IFT prior to the closing of the convertible
debenture purchase agreement. The 195,000 shares of common stock
were released to the purchasers of the convertible debenture
purchase agreement in conjunction with an amendment to the
convertible debenture purchase agreement dated June 16, 2000, and
were recorded as an investment advisory fee of $109,688 based on
the closing trading price of IFT's stock on that date. The term of
GEM's commitment period expired August 24, 2000. GEM was
conditionally willing to further extend the deadline, however IFT
management determined that the terms and conditions of the
extension were not in the best interests of IFT's shareholders and
elected not to enter into the extension.
Payroll Expenses
Payroll expenses were $2,329,521 during the twelve months ended
December 31, 2000, as compared to $273,466 for the nine month
period ended December 31, 1999. Payroll expenses for the twelve
month period ended December 31, 2000 represents an increase of
$2,056,055 from the prior period. The increase was primarily due
to the Board of Director's granting of restricted stock awards to
the executive officers of IFT at two separate times in
18
2000. The first stock award of 100,000 restricted shares of IFT's
common stock was granted to IFT's President/COO and IFT's Chief
Executive Officer on February 23, 2000. The 200,000 restricted
shares have been reflected in the statement of operations as
payroll expense of $550,000 for the twelve months ended December
31, 2000. Additionally, on February 23, 2000, the Board of
Directors adopted the Director's Stock Compensation Plan, which
provided for an annual award of 10,000 shares of IFT's common
stock to Board members as reimbursement for their attendance at
the Board meetings. The President/COO and the Chief Executive
Officer were each awarded 10,000 restricted shares of IFT's common
stock as Board members. These restricted shares have been
reflected in the statement of operations as payroll expense of
$55,000 for the twelve months ended December 31, 2000. The
February 23, 2000 restricted stock award shares value was
calculated based on the closing trading price of IFT's stock on
February 23, 2000, which was $2.75 per share. The second stock
award of 475,000 restricted shares of IFT's common stock was
granted to IFT's President/COO and IFT's Chief Executive Officer
on October 13, 2000. The 950,000 restricted shares have been
reflected in the statement of operations as payroll expense of
$593,750 for the twelve months ended December 31, 2000. The
October 13, 2000 restricted stock award shares value was
calculated based on the closing trading price of IFT's stock on
October 13, 2000, which was $.625 per share. Additionally, on
January 31, 2000, IFT entered into revised employment agreements
with its President/COO and Chief Executive Officer. The revised
employment agreements term extended through December 31, 2000 and
automatically renewed on January 1, 2001, for another one year
term. Under these agreements, the President/COO received an annual
base salary of $200,000 and 20,833 restricted shares of IFT's
common stock per month, and a bonus award as deemed appropriate by
the Board of Directors of IFT. The Chief Executive Officer
received an annual base salary of $200,000 and 20,833 restricted
shares of IFT's common stock per month, and a bonus award as
deemed appropriate by the Board of Directors of IFT. The 99,000
restricted shares related to the two employment agreements are
reflected in the statement of operations as payroll expense of
$321,750 for the twelve months ended December 31, 2000. The
restricted shares value was calculated based on the closing
trading price of IFT's stock on February 1, 2000, which was $3.25
per share. During the twelve month period ended December 31, 2000,
payroll expense from restricted common stock issued totaled
$834,067 for the Chief Executive Officer and $716,721 for the
President/COO. During the twelve month period ended December 31,
2000, payroll expense from payroll accruals pursuant to the
employment agreements with the President/COO and the Chief
Executive Officer totaled $204,325. Also, stock awards totaling
275,000 restricted shares of IFT's common stock were granted to
the three non-employee directors of IFT on October 13, 2000. The
275,000 restricted shares have been reflected in the statement of
operations as payroll expense of $171,875 for the twelve months
ended December 31, 2000. The October 13, 2000 restricted stock
award shares value was calculated based on the closing trading
price of IFT's stock on October 13, 2000, which was $.625 per
share. On February 23, 2001, IFT's Board of Directors
authorized the issuance of 2,575,000 shares of restricted common
stock to executive officers or non-employee directors for stock
awards for the year 2001.
Professional Services
Professional services were $684,367 during the twelve months ended
December 31, 2000 as compared to $3,662,718 for the nine months
ended December 31, 1999. Professional services for the twelve
months ended December 31, 2000 represents a decrease of
$2,978,351, or 81.3%, from the prior period. Approximately
$350,000 of the professional services for the twelve months ended
December 31, 2000 is for accounting and legal fees related to
IFT's attempt to obtain financing through the issuance of
convertible debentures.
19
Accounting and legal fees related to general business development
and operations totaled approximately $100,000 for the year 2000.
Professionals used for development of IFT's 2000 and 2001 product
and business strategy totaled approximately $112,000 and investor
relations totaled approximately $42,500 for the year 2000. On July
1, 1999, IFT entered into an agreement with Onkar Corporation,
Ltd. to issue 1,500,000 shares of common stock in exchange for
various services including introduction to brokers, dealers and
potential investors and for facilitating the writing of research
reports on IFT. IFT received $750,000 for these shares. The
$3,468,750 difference between the value of the shares using the
market price at the date of the agreement and the $750,000 of
proceeds received from the agreement were reflected in the
statement of operations for the nine month period ended December
31, 1999 as professional services expense.
Research & Development Expenses
Research and development costs were $286,914 during the twelve
months ended December 31, 2000 as compared to $330,353 for the
nine months ended December 31, 1999. Research and development for
the twelve months ended December 31, 2000 represents a decrease of
$43,439 from the prior period. The decrease is primarily due to
decreased testing and laboratory fees.
Interest Expense
Interest expense was $1,997,583 for the twelve months ended
December 31, 2000 as compared to $405,341 for the nine months
ended December 31, 1999. Interest expense for the twelve months
ended December 31, 2000 represents an increase of $1,592,242 from
the prior period. The increase is primarily due to the
amortization of discounts on notes payable in connection with
IFT's issuance of common stock warrants to stockholders for
advances received. The discount amount amortized during the twelve
month period was $1,228,424. During the twelve month period ended
December 31, 2000, IFT received advances from stockholders
totaling $416,000. In addition to the repayment of principal, each
stockholder received a warrant to purchase from IFT up to 25,000
shares of common stock at $.01 per share for each $5,000 in
principal advanced to IFT. The value of the warrants, $1,228,424,
was based on the market value of IFT's common stock on the day(s)
the advances were received. The warrant value was recorded as a
discount on the notes payable to stockholders to be amortized as
interest expense over the expected repayment period of the
advance. The notes payable were repaid during December 2000 either
by the issuance of a new note or by the issuance of restricted
common stock. The restricted common stock was issued based on a
value price of $.30 per share. The market value of IFT's common
stock on the day this value was determined was $.50 per share. IFT
issued 1,186,669 restricted shares as payment on $356,000 of note
principal. The $.20 per share difference between the market value
and the determined payment value, or $237,333, is included as
interest expense in the statement of operations for the twelve
months ended December 31, 2000. In addition, IFT repaid $374,000
of note principal from other advances received with 1,626,086
restricted common shares. The restricted common stock was issued
based on a value price of $.23 per share. The market value of
IFT's common stock on the day this value was determined was $.55
per share. The $.32 per share difference between the market value
and the determined payment
20
value, or $520,347, is included as interest expense in the
statement of operations for the twelve months ended December 31,
2000.
Net Loss
The net loss was $6,687,536 for the twelve months ended December
31, 2000 as compared to the net loss of $5,132,140 for the nine
months ended December 31, 1999. Net loss for the twelve months
ended December 31, 2000 represents a decrease of $1,555,396, or
30.3%, from the prior period. The net loss per common share was
$.36 for the twelve months ended December 31, 2000 as compared to
the net loss per common share of $.32 for the nine months ended
December 31, 1999.
New Accounting Pronouncements
-----------------------------
In June 2001, the Financial Accounting Standards Board finalized
FASB Statements No. 141., Business Combinations (SFAS 141), and
No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141
requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interest method of accounting
for business combinations initiated after June 30, 2001. SFAS 141
also requires that IFT recognize acquired intangible assets apart
from goodwill if the acquired intangible assets meet certain
criteria. SFAS 141 applies to all business combinations initiated
after June 30, 2001 and for purchase business combinations
completed on or after July 1, 2001. It also requires, upon
adoption of SFAS 142, that IFT reclassify the carrying amounts of
intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at
least annually. In addition, SFAS 142 requires that IFT identify
reporting units for the purposes of assessing potential future
impairments of goodwill, reassess the useful lives of other
existing recognized intangible assets, and cease amortization of
intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for
impairment in accordance with the guidance in SFAS 142. SFAS 142
is required to be applied in fiscal years beginning after December
15, 2001 to all goodwill and other intangible assets recognized at
that date, regardless of when those assets were initially
recognized. SFAS 142 requires IFT to complete a transitional
goodwill impairment test six months from the date of adoption. IFT
is also required to reassess the useful lives of other intangible
assets within the first interim quarter after adoption of SFAS
142.
Previous business combinations were accounted for using the
purchase method. As of December 31, 2001, the net carrying amount
of goodwill is $2,211,805 and other intangible assets is
$2,166,668. Amortization expense during the year ended December
31, 2001 was $471,528. Currently, IFT is assessing but has not yet
determined how the adoption of SFAS 141 and SFAS 142 will impact
its financial position and results of operations.
In October 2001, the Financial Accounting Standards Board issues
SFAS 144 "Accounting for the Impairment of Disposal of Long-Lived
Assets ("FAS 144"). This statement addresses financial accounting
and reporting for the impairment and disposal of long-lived
assets. This Statement supercedes FASB Statement 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of", and the accounting and reporting provisions of
APB Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effect of Disposal of a Segment of a
21
Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions", for the disposal of a segment of a
business. The provisions of FAS 144 will be effective for fiscal
years beginning after December 15, 2001. The Company is currently
evaluating the implications of adoption of FAS 144 and anticipates
adopting its provisions in fiscal year 2002.
Liquidity and Capital Resources
-------------------------------
A critical component of 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 revenues
from license fees from our products, which may take the next few
years or longer 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. Additionally, if IFT's
stock price falls below its current level, additional shares may
need to be issued upon the conversion of IFT's convertible
debentures, which will dilute the existing shareholders. The
independent auditor's reports included with the financial
statements later in this 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 have
totaled $16,235,379 and for the twelve month period ended December
31, 2001, totaled $2,790,287. In addition, $3,086,385 of interest
expense resulted from non-cash charges related to the convertible
feature of our debt instruments. In addition to these amounts, the
Company has raised $2,808,328 in cash from the issuance of common
stock since IFT's inception, with $0 of this total raised during
the twelve month period ended December 31, 2001. Most of these
funds have been raised through private placement transactions. For
the twelve months ended December 31, 2001 proceeds from notes
payable totaled $1,431,000 with $23,500 repaid and $1,275,000
converted to common stock.
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. A more detailed description
of the transaction is included below.
The cash used in operating activities is $1,470,794 for the twelve
months ended December 31, 2001 as compared to cash used in
operating activities of $977,594 for the twelve months ended
December 31, 2000. Cash used in operations for the twelve months
ended December 31, 2001 increased primarily due to an increase in
payments for rent, research and development, and consulting.
Research and development expense in 2000 was substantially
comprised of non-cash stock-based compensation. The cash used in
investing activities was $31,742 for the twelve months ended
December 31, 2001 as compared to $8,198 used in investing
activities for the nine months ended December 31, 2000. Cash used
in investing activities for the twelve months ended December 31,
2001 increased primarily due to the issuance of a note receivable
of $35,000. The cash provided by financing activities was
$1,407,500 for the twelve months ended December 31, 2001 as
compared to $1,087,150
22
provided by financing activities for the twelve months ended
December 31, 2000. Cash provided by financing activities for the
twelve months ended December 31, 2001 related solely to the
proceeds from additional notes payable. Net cash decreased by
$95,036 for the twelve months ended December 31, 2001 as compared
to net cash increasing by $101,358 for the twelve months ended
December 31, 2000.
The cash used in operating activities is $977,594 for the twelve
months ended December 31, 2000 as compared to cash used in
operating activities of $1,162,743 for the nine months ended
December 31, 1999. Cash used in operations for the twelve months
ended December 31, 2000 decreased primarily due to an increase of
$200,919 in accrued expenses. The cash used in investing
activities was $8,198 for the twelve months ended December 31,
2000 as compares to $25,049 used in investing activities for the
nine months ended December 31, 1999. Cash used in investing
activities for the twelve months ended December 31, 2000 decreased
primarily due to the nine month period ended December 31, 1999
including $15,468 in cash used for employee and stockholder
advances. The cash provided by financing activities was $1,087,150
for the twelve months ended December 31, 2000 as compared to
$1,214,150 provided by financing activities for the nine months
ended December 31, 1999. Cash provided by financing activities for
the twelve months ended December 31, 2000 decreased due to
$921,800 less in proceeds being received from issuance of common
stock while the net activity of notes payable provided funds of
$794,800. Net cash increased by $101,358 for the twelve months
ended December 31, 2000 as compared to net cash increasing by
$26,358 for the nine months ended December 31, 1999.
Working capital at December 31, 2001 was ($484,141) as compared to
($316,210) at December 31, 2000.
Effective October 27, 1999, IFT merged with and into Blencathia
Acquisition Corporation. Blencathia had 300,000 shares outstanding
at the time of merger, which it redeemed and canceled. In exchange
for 300,000 shares of Blencathia's common stock, IFT issued
Blencathia 300,000 shares of its restricted common stock. These
restricted common shares are expected to be sold in an amount
sufficient to provide the former shareholders of Blencathia with
proceeds of $500,000.
On May 8, 2000, IFT issued 300,000 common shares that were
contingently issued per the Blencathia merger agreement. The
300,000 shares of common stock are included in the statement of
stockholders' deficit for the twelve months ended December 31,
2000 but are not included in earnings per share and weighted
average share calculations for the twelve month period ended
December 31, 2000. They will be included when the shares are sold
to provide payment to the shareholders of Blencathia. The
shareholders of Blencathia have represented to the management of
IFT that the 300,000 shares will be sold only with IFT's approval.
If the shares are sold and $500,000 is not generated additional
shares may need to be issued to the shareholders of Blencathia.
Based on the March 22, 2002 market price, $.40, of IFT's common
stock, a total of 1,250,000 shares would need to be issued to
generate the $500,000 proceeds.
On May 25, 2001 IFT issued 12,500,001 common shares to the
shareholders of Interfacial to acquire all of Interfacial's
outstanding common stock. The purchase price of approximately
$6,750,000 was 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
23
achievement of certain revenue levels by IFT within two years
following May 25, 2001. Revenues equal to, or more than,
$3,500,000 for the one year period ending May 24, 2002, or
revenues equal to, or more than, $10,000,000 for the two year
period ending May 24, 2003 will result in a portion, as determined
by a formula in the performance escrow agreement, of the stock
certificates for the 8,500,002 common being released to the
Interfacial shareholders. In connection with the closing of this
transaction three of the Interfacial shareholders have been
appointed to IFT's board of directors. In addition, IFT entered
into consulting agreements with four of the Interfacial
shareholders on May 25, 2001.
The acquisition was accounted for using the purchase method of
accounting, with $4,850,001 of the purchase price being allocated
to intangible assets, which are subject to amortization, and the
remaining $1,900,000 recorded as in-process research and
development. The intangible assets consist primarily of technology
and goodwill. The 8,500,002 common shares placed in the escrow
account will be valued as an addition to the purchase price if and
when the shares are released to the Interfacial shareholders in
accordance with the performance escrow agreement at the
appropriate market price of IFT's common stock at that date, and
will be excluded from the basic and diluted loss per share
calculation until that date.
On January 3, 2001 IFT entered into a Securities Purchase
Agreement with IIG Equity Opportunities Fund Ltd. ("IIG Fund"),
which had a one-year commitment amount of $3 million, with an
option at IFT's control for an additional $3 million in financing
after the completion of the one-year commitment. On March 1, 2001,
IFT completed registration of the common shares required by the
January 3, 2001 Securities Purchase Agreement (the "Agreement").
The Agreement provided for IFT to sell up to $250,000 in
convertible debentures to the IIG Fund every thirty days. On March
2, 2001 IFT initiated the first convertible debenture purchase and
on March 7, 2001 received $200,000 and on March 22, 2001 received
$50,000. On April 6, 2001, IFT initiated the second convertible
debenture purchase and on April 24, 2001 received $225,000. During
May 2001 IFT received notification that due to regulatory issues
relating to the structure of the transactions contemplated by the
Agreement, 18,163,872 shares issuable upon possible future
conversion of debentures not yet issued and 750,000 shares
issuable upon possible future exercise of not yet issued warrants
will never be issued. Due to the inability to sell additional
convertible debentures after April 2001, IFT entered into a new
Agreement with IIG on 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 December 31, 2001, IFT has borrowed a total of $
1,430,000 under the financing agreement.
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 $1.8 million over the remainder of the 2002
fiscal year will be necessary in order to enable us to meet our
current capital needs. We expect to obtain this financing through
our convertible-debenture agreement with IIG. Management believes
the proceeds from its convertible debenture financing will be used
as follows: $250,000 for commercial fleet testing programs,
$600,000 for professional fees and advertising, $650,000 for
salary expenses and $300,000 working capital for administrative
and other capital needs, including investigation of future
acquisitions, if any.
24
Subsequent Events
-----------------
During January 2002, IFT sold 600,000 restricted shares of common
stock at a price of $.25 per share to Harry F. Demetriou. The
proceeds of $150,000 will provide the Company with additional cash
and will be used to fund daily operating expenses.
During January 2002, 500,000 restricted common shares of the
Company were removed from the Interfacial Technologies' escrow
account. The shares were removed because Interfacial failed to pay
liabilities it had incurred prior to being bought by the Company.
Item 7a. 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
cost of financing, investing and operating transactions. IFT has
debt totaling 30% of total liabilities at fixed rates of interest
and fluctuations in the interest rate could have a material impact
on the underlying fair value. See Note 4 of the financial
statements for further discussion.
Item 8. Financial Statements and Supplementary Data
Financial statements as of and for the twelve month periods ended
December 31, 2001, and 2000 and for the nine month period ended
December 31, 1999 are presented in a separate section of this
report following Part IV.
Item 9. Changes in and Disagreements With Accountants On Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The following are the names of our directors and executive
officers, their present positions with IFT and information about
their background.
Name Age Title
---- --- -----
Jonathan R. Burst 43 Chief Executive Officer, President, Director,
Chairman
William J. Lindenmayer 42 Chief Operating Officer, Director
Michael F. Obertop 31 Chief Financial Officer, Corporate Secretary
Senator George J. Mitchell 68 Director
David B. Norris 53 Director
Harry Demetriou 57 Director
Ian Williamson 46 Director
John P. Stupp Jr. 51 Director
Simon Orange 34 Director
Geoff Robinson 58 Director
25
All directors hold office until the next annual meeting of
shareholders or until their successors are elected and qualified.
At present, our Articles of Incorporation provide for not less
than one nor more than thirteen directors. Currently, we have nine
directors. Our by-laws permit the Board of Directors to fill any
vacancy and such director may serve until the next annual meeting
of shareholders or until his successor is elected and qualified.
Officers serve at the discretion of the Board of Directors.
26
Background of Directors and Executive Officers:
JONATHAN R. BURST has served as our Chief Executive Officer since
July 1999. From July 1999 to February 2000 he also served as our
President. From January 2002 he served as President again. In
February 2000, Mr. Burst was appointed to our Board of Directors
and became chairman in June 2000. In 1998, Mr. Burst founded
Burcor International, in St. Louis, Missouri, an insurance
brokerage firm, and has served as its President since its
inception. From 1992 to 1998, Mr. Burst served as Executive Vice
President and Managing Director of mergers and acquisitions at Aon
Risk Services, a St. Louis, Missouri, mergers and acquisition risk
management consulting company. Mr. Burst received his Bachelor of
Arts degree in Economics from the University of Missouri in 1981.
WILLIAM J. LINDENMAYER has served as our Chief Operating Officer
since July 1999. He also served as our President from February
2000 until January 2002. In February 2000, Mr. Lindenmayer was
appointed to our Board of Directors. From 1999 to February 2000,
Mr. Lindenmayer served as Managing Director of Burcor Capital,
LLC, a venture capital merger and acquisitions subsidiary of
Burcor International, St. Louis, Missouri. From 1997 to 1999, Mr.
Lindenmayer served as president of DLW Partners, LLC, St. Louis,
Missouri, a video tape distribution company. From 1995 to 1997,
Mr. Lindenmayer served as President of WLI William Lindenmayer
Group, Inc., St. Louis, Missouri, a financial consulting company.
Mr. Lindenmayer received his Bachelor of Science degree in
Business Management from Cornell University in 1982 and his
Masters of Business Administration from University of Virginia in
1988.
MICHAEL F. OBERTOP, JD has served as our Chief Financial Officer
since October 2001. From 1998 to September 2001, Mr. Obertop
provided tax consulting services for PricewaterhouseCoopers LLP,
St. Louis, Missouri. Mr. Obertop received his Masters in Business
Administration and Juris Doctorate degree from the University of
Missouri, Columbia in May of 1998.
SENATOR GEORGE MITCHELL has served on our Board of Directors since
June 2001. Senator Mitchell's professional career spans over 45
years, and includes nearly 30 years of service in the public
sector, most notably as a Senator from Maine. While in the Senate,
he was the key sponsor of the Clean Air Act legislation that is
the foundation for regulations governing the quality of the
environment in the United States. Since leaving the Senate,
Senator Mitchell has been involved in a number of advisory
positions on behalf of the government of the United States, as
well as other nations, in attempting to mediate disputes in
Northern Ireland and the Middle East. Senator Mitchell also is
active on the board of directors for several corporations and is a
Special Counsel to a Washington, D.C.-based law firm. Senator
Mitchell also serves on the following boards: The Walt Disney
Company, FedEX Corporation, Xerox Corporation, UNUM, Casella Waste
Systems, Starwood Motels & Resorts Worldwide, and MPS Group.
DAVID B. NORRIS has served on our Board of Directors since April
1999. Since 1983, Mr. Norris has been the owner and President of
Addicks Services, Inc., Richmond, Texas, a construction company.
HARRY DEMETRIOU has served on our Board of Directors since
February 2000. Mr. Demetriou has been a ship owner for over 25
years. The ships are bulk carriers of transport goods in bulk on a
worldwide basis.
IAN WILLIAMSON has served on our Board of Directors since May
2001. Mr. Williamson has been involved with the combustion of
non-barrel materials and looking for alternatives
27
since 1975, predominantly in the field of district heating and
energy schemes, utilizing trash and other non oil substitutes,
until 1994 when "alternative fuels for the motor industry"
research started. Mr. Williamson is the original inventor of a
clear stable "e-diesel" (1996) and author of eight patents and
applications related to cleaner burning and performance enhancing
motor fuels utilizing alcohol, water, bio-diesel and liquids from
natural gas. Mr. Williamson studied mechanical services and
combustion at Nottingham University, United Kingdom for three
years. Mr. Williamson was previoiusly employed by Interfacial.
GEOFF ROBINSON has served on our Board of Directors since May
2001. From 1973 to 1983 Mr. Robinson worked in different
capacities with Lex Service Group Plc including the last 4.5 years
as Managing Director of Lex Transfleet Ltd. and Lex Harvey Ltd
(two small business units within Plc). In 1983, Mr. Robinson
started Road Holdings which provided money and management
expertise and was successfully sold in 1992. From 1994 to present,
Mr. Robinson has served as Chairman of Fastrac Print Ltd.,
Mailfast Ltd., UK Logistics Ltd. and Director of UK-US Holding
Inc. Mr. Robinson was previously employed by Interfacial.
SIMON ORANGE has served on our Board of Directors since May 2001.
Mr. Orange is a fully qualified financial adviser and has
extensive experience both investing in and managing diversified
businesses including property, retail, finance and software
technology. Mr. Orange's primary role in these businesses has been
assistance in raising capital and company management at board
level. Mr. Orange is a registered financial advisor in the U.K.
Mr. Orange was previously employed by Interfacial.
JOHN P. STUPP JR. has served on our Board of Directors since May
2001. From 1992 to 1995 Mr. Stupp served as the president, and
since 1995 as the Chief Executive Officer of Stupp Corporation,
the steel pipe manufacturing division of Stupp Bros. Since 1985 he
has been a director of Atrion Corporation, a publicly traded
company involved in the medical device and component industry, and
is an Advisory Board member of the Midwest BankCentre, a regional
financial institution. Mr. Stupp holds a Bachelor of Science
degree in Business and Economics from Leigh University, and is
actively involved in working with a number of non-profit
institutions and charitable organizations throughout the greater
St. Louis region.
Item 11. Executive Compensation
The following table sets forth information concerning all cash and
non-cash compensation paid or to be paid by IFT as well as certain
other compensation awarded, earned by and paid, during the fiscal
years indicated, to the Chief Executive Officer and for each of
IFT's other executive officers whose annual salary and bonus
exceeds $100,000 for such period in all capacities in which they
served.
28
Summary Compensation Table
Long Term
Annual Compensation Compensation
----------------------- ------------
Name and Other Restricted All
Principal Period Compen- Stock Other
Position Ended Salary Bonus sation Awards Compensation
- -------- ----- ------------- ----- --------------- --------------- ------------
Jonathan R. Burst,
Chief Executive 12/31/01 $200,000 $0 $0 $555,000 $0
Officer 12/31/00 180,000 0 0 834,067 0
William J. Linden- 12/31/01 200,000 0 0 555,000 0
mayer, President 12/31/00 180,000 0 0 716,721 0
Perquisites and other personal benefits are omitted because they
do not exceed either $50,000 or 10% of the total of annual salary
and bonus for the named executive officer.
Employment Agreements
---------------------
In January 2001, IFT entered into an employment agreement with Mr.
Burst to serve as Chief Executive Officer with an annual base
salary of $200,000 and 20,834 IFT restricted common shares per
month, and a bonus award as deemed appropriate by our Board of
Directors. The agreement automatically renewed on January 1, 2002
for another one year term.
In January 2001, IFT entered into an employment agreement with Mr.
Lindenmayer to serve as President/Chief Operating Officer with an
annual base salary of $200,000 and 20,834 IFT restricted common
shares per month, and a bonus award as deemed appropriate by our
Board of Directors. The agreement automatically renewed on January
1, 2002 for another one year term.
Incentives
----------
On February 23, 2000, the Board of Directors adopted a Stock
Incentive Plan that will consist of stock awards paid in the
amount of 100,000 shares of IFT's common stock to IFT's senior
management when the finalization of a subordinated debt contract
is complete, funding is secured to cover the budget for the next
24 months, creation and enactment of the IFT's Business Plan is in
progress and the initiation of the final protocol testing for the
reference standard fuel has commenced.
Compensation of Directors
-------------------------
On February 23, 2000, the Board of Directors adopted the
Director's Stock Compensation Plan, which provides for an annual
award of 10,000 shares of IFT's common stock to the Board members
as reimbursement for their attendance at the Board meetings. Each
Board member will be awarded additional 1,000 shares of IFT's
common stock for any three-telephone conference call Board
meetings attended. On March 6, 2000, IFT issued 15,000 shares of
restricted common stock to each of its non-employee members of the
Board of Directors.
29
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of January 31, 2002,
regarding the beneficial ownership determined in accordance with
the rules of the SEC, which generally attributes beneficial
ownership of securities to persons who possess sole or shared
voting power and/or investment power with respect to those
securities, of IFT's common stock of: (i) each person known by IFT
to own beneficially more than five percent of IFT's common stock;
(ii) each director and nominee for director of the IFT; (iii) each
executive officer named in the Summary Compensation Table (see
"Executive Compensation"); and (iv) all directors and executive
officers of IFT as a group. Except as otherwise specified, the
named beneficial owner has the sole voting and investment power
over the shares listed.
Name of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Common Stock(1)
---------------- -------------------- -------------
Jonathan R. Burst(2) 2,706,000 4.9%
William J. Lindenmayer 1,901,000 3.4%
Senator George J. Mitchell 400,000 0.7%
David B. Norris 1,096,562 2.0%
Harry F. Demetriou(3) 1,806,667 3.3%
Simon Orange 3,495,230 6.3%
Albert House, 18 Albert Square, Bowdon, Altrineham WA 14 2ND U.K.
Ian Williamson 2,125,000 3.9%
Geoff Robinson 468,237 0.8%
John P. Stupp Jr. 318,233 0.6%
All directors and executive
officers as a group 14,316,929 26.0%
(1)Based upon 55,119,612 outstanding shares of common stock.
(2)Includes 50,000 shares owned by Burcor Capital, LLC of which
Mr. Burst is an executive officer and deemed to be the
beneficial owner of such shares.
(3)Includes 1,366,667 shares owned by Observor Acceptances,
Ltd. of which Mr. Demetriou is the sole owner and deemed to
be the beneficial owner of such shares.
Section 16(a) Beneficial Ownership Reporting Compliance
-------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), requires IFT's executive officers and
directors, and persons who beneficially own more than ten percent
of IFT's common stock, to file initial reports of ownership and
reports of changes in ownership with the SEC. Executive officers,
directors and greater than ten percent beneficial owners are
required by SEC regulations to furnish IFT with copies of all
Section 16(a) forms they file. Based upon a review of the copies
of such forms furnished to IFT and written representations from
IFT's executive officers and directors, IFT believes that during
fiscal 2001 Forms 3 and 4 were not filed on a timely basis for
IFT's executive officers and directors. All these forms have since
been filed. Jonathan R. Burst failed to make 5 Form 4 filings on a
timely basis during the 2001 year. William J. Lindenmayer failed
to make 4 Form 4 filings on a timely basis during the 2001 year.
Item 13. Certain Relationships and Related Transactions
On January 31, 2001, IFT issued 33,333 shares in repayment of a
$10,000 note payable to a stockholder. In connection with the
issuance of the shares, IFT recognized $7,041 in interest expense
30
due to the fair value of the stock on the date of extinguishment
exceeding the carrying value of the debt.
On April 6, 2001 IFT issued 10,000 restricted common shares to
employees of Burcor Capital as payment for $4,375 in consulting
services and 10,000 restricted common shares as a payment on a
$3,500 account payable due to Steven Walters, CPA. Steven Walters
was the former Chief Financial Officer of the Company.
On May 25, 2001 IFT entered into consulting agreements with four
Interfacial shareholders. Common stock totaling 960,000 shares was
issued and recorded as a consulting expense. The consulting
agreements provide for the total issuance of 960,000 shares of
common stock on May 25, 2002 and 1,180,000 shares of common stock
on May 25, 2003, and the Company is recording the value of these
shares ratably over the term of the consulting agreements. On
December 6, 2001, the Company issued 300,000 shares which were to
be issued May 25, 2002 under the consulting agreements. IFT has
recorded $1,024,817 to consulting expense for the year ended
December 31, 2001, relating to these consulting agreements.
On July 18, 2001, IFT issued 326,087 shares of common stock as
payment to Mr. Simon Orange, a director of IFT in exchange for the
director's rights on a $60,000 note receivable and $99,783 of
consulting services.
IFT obtained general and administrative services and rents office
space and equipment from Burcor Capital, LLC, a company related
through common ownership (Mr. Jonathan Burst, executive officer
and director of IFT, is the founder and president of Burcor
Capital, LLC), under an agreement requiring monthly payments of
$5,000. Expenses recorded as professional services paid to Burcor
totaled $51,848 during the twelve month period ended December 31,
2001 and $60,000 during the twelve month period ended December 31,
2000.
On November 16th, 2001, IFT purchased Burcor Capital's equipment
for $12,500.
On October 7, 1999, we entered into an Advisory Agreement with Mr.
Harry Demetriou, a director of IFT, on a non-exclusive basis to
render financial advisory services in connection with the possible
sale of IFT. As of December 31, 1999 no payments had been made
related to this agreement. During June 2000 this agreement was
canceled and replaced with an agreement that provided for payment
of 250,000 restricted common shares. These shares were issued on
June 16, 2000 with a value of $218,750.
During October 1999 IFT entered into an agreement with TPG Capital
Corporation, a company related through common ownership, for
consulting services. A payment of $100,000 was made and expensed
during the nine month period ended December 31, 1999.
On November 1, 1999, IFT entered into an agreement with certain
related party promissory note holders to issue 423,537 shares of
its common stock by December 31, 1999 in exchange for the balance
of the promissory notes due in the amount of $677,254, a related
party account payable of $26,500 and interest on the notes due in
the amount of $142,820 at $2.00 per share. The stock-based note
and interest exchange value was calculated based on the trading
price of IFT's stock at November 1, 1999. The $355,771 difference
between the $2.00 (per the agreement) value of the shares and the
trading price of the shares has been reflected in these financial
statements as interest expense.
31
At December 31, 1999, IFT owed one of its stockholders
approximately $87,000 for legal services performed. Subsequent to
December 31, 1999, the stockholder agreed to accept 27,559 shares
of IFT's common stock in lieu of cash for the amounts due to him.
During June 2000, IFT purchased a Directors and Officers Liability
insurance policy from Burcor Insurance Group, a company owned by
Jonathan Burst.
During the year 2000, IFT paid MarketMatch, Inc. $106,293 for
professional services. MarketMatch, Inc. is owned and operated by
William Center. William Center was a director of IFT from October
2000 through May 2001.
During the year 2000, IFT paid Steven D. Walters, CPA $25,168 for
professional services. Steven D. Walters, CPA was owned and
operated by Steven Walters. Steven Walters was appointed as the
Chief Financial Officer of IFT in October 2000.
During the year 2000, IFT received advances from stockholders
totaling $516,000. For $416,000 of the advances each stockholder
received a warrant to purchase from IFT up to 25,000 shares of
restricted common stock at $.01 per share for each $5,000 in
principal advanced to IFT. IFT issued 2,030,000 restricted common
shares based upon the exercise of the warrants. In addition, IFT
repaid $356,000 of the advances received from the stockholders by
issuing 1,186,669 restricted common shares and $27,500 of the
advances received from stockholders by check disbursement.
$132,500 of the advances received from stockholders is recorded as
a liability on the December 31, 2000 balance sheet.
PART IV
Item 14. Exhibits, Financial Statements and Schedules, and Reports On
Form 8-K
(a) Document List
1. Financial Statements
See index to financial statements and supporting schedules
on page F-1 of this annual report on Form 10-K
2. Financial Statement Schedules
All other schedules for which provision is made in the
applicable accounting regulations of the SEC are not
required under the related instructions or are inapplicable
and therefore have been omitted.
3. Exhibits Required by Securities and Exchange Commission
Regulation S-K
The following exhibits are filed as part of the report or
are incorporated by reference:
EXHIBITS
**2.1 Agreement and Plan of Merger between Blencathia
Acquisition Corporation and and International Fuel
Technology, Inc.
32
**3.1 Certificate of Incorporation of International Fuel
Technology, Inc. and all amendments.
**3.2 By-laws of International Fuel Technology, Inc.
**10.1 TPG Consulting Agreement
**10.2 Convertible Debenture Purchase Agreement
**10.3 Jonathan R. Burst Employment Agreement
**10.4 William J. Lindenmayer Employment Agreement
***10.5 IIG Securities Purchase Agreement
23.1 Consents of BDO Seidman, LLP
*Incorporated by reference to Exhibits to Form 8-K filed on
February 10, 2000
**Incorporated by reference to Exhibits to Form 10-K filed on
May 10, 2000
***Incorporated by reference to Exhibits to S-1 filed on July
12, 2001
(b) Reports on Form 8-K
- Form 8-K filed October 20, 2000, including press release as
an exhibit.
- Form 8-K filed October 20, 2000, including press release as
an exhibit.
- Form 8-K filed November 8, 2000, including press release as
an exhibit.
(c) Exhibits
See (a) above
33
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
Report of Independent Certified Public Accountants F-2
Financial Statements
Balance sheets F-3
Statements of operations F-4
Statements of stockholders' deficit F-5 & 6
Statements of cash flows F-7 & 8
Notes to Financial Statements F-8 - F-25
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
International Fuel Technology, Inc.
St. Louis, Missouri
We have audited the accompanying balance sheets of International Fuel
Technology, Inc. (a development stage company) as of December 31, 2001
and 2000, and the related statements of operations, stockholders'
deficit and cash flows for the twelve month, twelve month, and nine
month periods ended December 31, 2001, 2000, and 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform the audits 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 financial statements referred to above present
fairly, in all material respects, the financial position of
International Fuel Technology, Inc. as of December 31, 2001 and 2000
and the results of its operations and its cash flows for the twelve
month, twelve month, and nine month periods ended December 31, 2001,
2000, and 1999 in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that
International Fuel Technology, Inc. will continue as a going concern.
As discussed in Note 2 to the financial statements, International Fuel
Technology, Inc. has suffered recurring losses from operations, has
negative working capital, cash used in operating activities and has a
deficit accumulated during the development stage that raise substantial
doubt about International Fuel Technology, Inc.'s ability to continue
as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
BDO SEIDMAN, LLP
Chicago, Illinois
January 25, 2002
F-2
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
December 31, December 31,
ASSETS (Note 2) 2001 2000
-----------------------------------------------------------------------------------------------------
Current Assets
Cash $ 33,168 $ 128,204
Prepaid Expenses 15,250 29,107
Notes Receivable (Note 5) 80,000 -
------------- ------------
Total current assets 128,418 157,311
------------- ------------
Property and Equipment
Machinery and equipment 26,881 23,703
Accumulated depreciation (5,824) (5,592)
------------- ------------
Total property and equipment 21,057 18,111
------------- ------------
Purchased Technology, Net (Note 3) 2,166,668 -
Goodwill, Net (Note 3) 2,211,805 -
------------- ------------
Total assets $ 4,527,948 $ 175,422
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable $ 252,779 $ 227,748
Accrued expenses (Note 5) 342,030 204,325
Accrued interest 17,750 8,948
Notes payable to stockholders - 32,500
------------- ------------
Total current liabilities 612,559 473,521
------------- ------------
Long-Term Liabilities
Notes payable to stockholder (Note 4) 162,500 162,500
Convertible debentures (net of discount) (Note 4) 95,924 -
------------- ------------
Total liabilities 870,983 636,021
------------- ------------
Commitments, contingencies, and subsequent events (Notes,
2, 3, 8, 9, and 10)
Stockholders' Equity (Deficit) (Notes 5 and 10)
Common stock, $.01 par value;150,000,000 shares authorized
55,119,612 and 24,560,453 shares issued and outstanding at
December 31, 2001 and December 31, 2000, respectively 551,196 245,604
Discount on common stock (819,923) (819,923)
Additional paid-in capital 32,595,070 21,208,288
Deficit accumulated during the development stage (28,669,378) (21,094,568)
------------- --------------
Total stockholders' equity (Deficit) 3,656,965 (460,599)
------------- ---------------
$ 4,527,948 $ 175,422
============= ============
See Notes to Financial Statements.
F-3
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
Twelve Twelve Nine From Inception
Months Months Months (April 9, 1996)
Ended Ended Ended Through
December 31, December 31, Dec. 31, December 31,
---------------- --------------------------------------- ------------
2001 2000 1999 2001
- ----------------------------------------------------------------------------------------------------------------------------------
(unaudited)
Revenues $ - $ - $ - $ -
Cost of Revenues - - - -
---------------- ----------------- ---------------- --------------
Gross Profit - - - -
---------------- ----------------- ---------------- --------------
Operating Expenses:
Advertising and marketing 14,500 20,522 12,913 59,041
Amortization & Depreciation 474,797 3,217 1,614 480,389
Consulting 1,191,456 - 295,000 8,549, 720
Insurance 38,592 34,454 17,806 90,852
Investment advisory fee - 1,251,413 - 1,251,413
Office and other 221,595 79,545 132,929 944,727
Payroll 2,237,743 2,329,521 273,466 5,091,866
Professional services 510,934 684,367 3,662,718 4,987,835
Purchased in-process research and development (Note 3) 1,900,000 - - 1,900,000
Research and development costs 197,433 286,914 330,353 2,027,424
---------------- ----------------- ---------------- --------------
Total operating expenses 6,787,050 4,689,953 4,726,799 25,383,267
---------------- ----------------- ---------------- --------------
Net loss from operations 6,787,050 $ 4,689,953 4,726,799 25,383,267
Interest expense (Note 4) 787,760 1,997,583 405,341 3,286,111
---------------- ----------------- ---------------- --------------
Net loss $ 7,574,810 $ 6,687,536 $5,132,140 28,669,378
================ ================= ================ ==============
Basic and diluted net loss
per common share $ .21 $ .36 $ .32
================ ================= ================
Weighted average common shares outstanding 36,416,469 18,827,802 15,800,725
See Notes to Financial Statements.
F-4
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' DEFICIT
Deficit
Accumulated
Common Common Discount Additional During
Stock Stock on Common Paid-In Development
Shares Amount Stock Capital Stage Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, April 1, 1997 (unaudited) 296,439 $2,964 $(14, 670) $171,044 $(344,473) $(185,135)
Issuances of common stock for cash 158,350 1,584 - 286,268 - 287,852
Issuances of common stock for technology (Note 5) 5,320,952 53,209 (532,095) 478,886 - -
Issuances of common stock (Note 5) 142,280 1,423 - (1,423) - -
Issuances of common stock for services (Note 5) 1,211,883 12,119 - 109,070 - 121,189
Expense recorded for services rendered by
consultants (Note 5) - - 169,980 - 169,980
Issuance of common stock for compensation (Note 5) 70,100 701 - 6,309 - 7,010
Issuances of common stock in connection with the
acquisition of United States Fuel Technology, 2,795,979 27,960 - 346,545 - 374,505
Cancellation of shares (Note 3) (94,400) (944) 9,440 (8,496) - -
Net loss - - - (1,090,666) (1,090,666)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, April 1, 1998 (unaudited) 9,901,583 99,016 (537,325) 1,558,183 (1,435,139) (315,265)
Issuances of common stock for cash 200,000 2,000 - 998,000 - 1,000,000
Issuances of common stock for services (Note 5) 1,200,000 12,000 - 5,988,000 - 6,000,000
Issuances of common stock in connection with the
acquisition of Scientific Fuel Technology, LLC
(Note 3) 2,795,979 27,960 (279,598) 251,638 - -
Net loss - - - (7,839,753) (7,839,753)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, April 1, 1999 (unaudited) 14,097,562 140,976 (816,923) 8,795,821 (9,274,892) (1,155,018)
Issuances of common stock for services and cash
(Note 5) 1,500,000 15,000 - 4,203,750 - 4,218,750
Issuances of common stock for cash (Note 5) 794,740 7,947 - 388,503 - 396,450
Issuances of common stock for compensation (Note 5) 2,500 25 - 6,975 - 7,000
Conversion of debt (Note 4) 423,537 4,236 - 1,198,609 - 1,202,845
Accrued stock based compensation (Note 5) - - 166,585 - 166,585
Net loss - - - (5,132,140) (5,132,140)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2000 16,818,339 168,184 (816,923) 14,760,243 (14,407,032) (295,528)
Issuances of common stock for cash and services
(Note5) 101,800 1,018 - 330,682 - 331,700
Issuances of common stock for compensation (Note 5) 90,000 900 - 29,388 - 30,288
Issuances of common stock for services (Note 5) 92,559 925 - 277,726 - 278,651
Issuances of common stock for compensation (Note 5) 200,000 2,000 - 548,000 - 550,000
Issuances of common stock for services (Note 5) 195,000 1,950 - 107,738 - 109,688
Issuance of common stock for services and cash
(Note 5) 390,000 3,900 - 1,141,725 - 1,145,625
Issuance of common stock for services (Note 5) 250,000 2,500 - 216,250 - 218,750
Issuance of common stock warrants for notes payable-
Stockholders (Note 4) - - - 1,228,424 - 1,228,424
Issuance of common stock for warrants exercised
(Note 5) 2,030,000 20,300 - - - 20,300
Issuance of common stock for compensation (Note 5) 1,255,000 12,550 - 776,511 - 789,061
Issuance of common stock for services (Note 5) 25,000 250 - 10,298 - 10,548
Conversion of debt (Note 4) 1,626,086 16,261 - 878,086 - 894,347
Conversion of debt and interest (Note 4) 1,186,669 11,866 - 581,467 593,333
Issuance of contingently issued common stock (Note 5) 300,000 3,000 (3,000) - - 0
Accrued stock based compensation (Note 5) - - - 321,750 - 321,750
Net loss - - - - (6,687,536) (6,687,536)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 24,560,453 $245,604 $(819,923 $21,208,288 $(21,094,568) $(460,599)
Conversion of debt and interest (note 5) 33,333 333 16,708 17,041
Issuance's of stock for assignment of note
receivable (Note 5) 326,087 3,261 156,522 159,783
Issuances of stock for compensation (Note 5) 3,679,000 36,790 1,565,773 1,602,563
Issuances of stock for convertible debentures
(Note 4) 3,834,213 38,342 1,236,658 1,275,000
F-5
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' DEFICIT
Deficit
Accumulated
Common Common Discount Additional During
Stock Stock on Common Paid-In Development
Shares Amount Stock Capital Stage Total
- ------------------------------------------------------------------------------------------------------------------------------------
Issuances of stock for convertible debt interest
(Note 4) 406,523 4,066 139,135 143,201
Issuances of stock for accounts payable (Note 5) 10,000 100 3,400 3,500
Issuances of stock for services (Note 5) 1,270,000 12,700 660,075 672,775
Issuances of stock for Interfacial acquisition
(Note 3) 12,500,001 125,000 6,625,001 6,750,001
Issuances of stock for Interfacial escrow (Note 3) 8,500,002 85,000 (85,000) -
Discount on issuance's of convertible debt (Note 4) - - 610,593 610,593
Issuances of common stock warrants (Note 4) - - 42,750 42,750
Accrued stock based compensation (Note 5) - - 58,750 58,750
Accrued stock based services (Note 5) - - 356,417 356,417
Net loss (7,574,810) (7,574,810)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 55,119,612 551,196 (819,923) 32,595,070 (28,669,378) 3,656,965
====================================================================================================================================
See Notes to Financial Statements
F-6
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
Twelve Months Twelve Months Nine Months From Inception
Ended Ended Ended (April 9, 1996)
December 31, December 31, Dec. 31, to December 31,
2001 2000 1999 2001
- ------------------------------------------------------------------------------------------------------------------------------------
(unaudited)
Cash Flows from Operating Activities
Net loss $ (7,574,810)$ (6,687,536)$ (5,132,140) $ (28,669,378)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation/ Amortization 474,797 3,218 1,614 480,389
In-process research and development acquired 1,900,000 1,900,000
Stock issued and additional paid in capital
recognized for services and compensation 2,790,287 3,494,616 3,642,335 16,235,379
Interest expense recognized-discount on notes payable 594,267 1,228,424 - 1,822,691
Interest expense recognized-conversion of debt 150,243 757,680 355,771 1,263,694
Loss on disposal of machinery and equipment 5,527 - - 5,527
Change in assets and liabilities:
Decrease (increase) in prepaid insurance 13,857 (16,388) (12,719) (15,250)
Increase (decrease) in accounts payable 28,531 132,525 (203,288) 271,747
(Decrease) increase in accounts payable-stockholders - (100,000) 187,095 87,095
Increase (decrease) in accrued expenses 137,705 200,919 (1,411) 350,832
Increase in accrued interest 8,802 8,948 - 151,768
---------------------------------------------------------------------------
Net Cash Used in Operating Activities (1,470,794) (977,594) (1,162,743) (6,115,506)
---------------------------------------------------------------------------
Cash Flows from Investing Activities
Acquisition of machinery and equipment (14,142) (8,198) (9,581) (36,201)
Increase in employee and stockholder receivables - - (15,468) (15,468)
Proceeds from the sale of property and equipment 2,400 - - 2,400
Issuance of Note Receivable (35,000) - - (35,000)
Proceeds from repayments of Note Receivable 15,000 - - 15,000
Cash acquired in connection with the purchase of
United States Fuel Technology, Inc. - - - 358
---------------------------------------------------------------------------
Net Cash Used in Investing Activities (31,742) (8,198) (25,049) (68,911)
---------------------------------------------------------------------------
Cash Flows from Financing Activities
Increase (decrease) in amount due to related party - - - 26,500
Increase in due to United States Fuel Technology, Inc. - - - 372,503
Proceeds from common stock issued - 224,650 1,146,450 2,808,328
Proceeds from notes payable 1,431,000 890,000 325,700 3,610,425
Payment on notes payable (23,500) (27,500) (258,000) (600,171)
---------------------------------------------------------------------------
Net Cash Provided by Financing Activities 1,407,500 1,087,150 1,214,150 6,217,585
---------------------------------------------------------------------------
Net (Decrease) Increase in Cash (95,036) 101,358 26,358 33,168
Cash, beginning 128,204 26,846 488 -
---------------------------------------------------------------------------
Cash, ending $ 33,168$ 128,204$ 26,846 33,168
===========================================================================
Supplemental Cash Flow Information
Interest paid $ -$ 2,531$ - $ 4,631
See Notes to Financial Statements.
F-7
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS (CONT'D)
Twelve Months Twelve Months Nine Months From Inception
Ended Ended Ended (April 9, 1996)
December 31, December 31, Dec. 31, to December 31,
2001 2000 1999 2001
- ------------------------------------------------------------------------------------------------------------------------------------
(unaudited)
Schedule of non-cash investing and financing activities
Discount on issuances of convertible debt and notes
payable 653,343 1,228,424 - 1,881,767
Conversion of debt to common stock 1,438,742 1,487,680 1,202,845 4,129,267
Acquisition of Interfacial 6,750,001 - - 6,750,001
Acquisition of United State Fuel Technology - - - 374,505
Issuance of stock for note receivable $ 60,000$ - $ - $ 60,000
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business
------------------
International Fuel Technology, Inc., ("IFT") is a development stage
company that was incorporated under the laws of the State of Nevada on
April 9, 1996 and was formerly known as MagnoDynamic Corporation. IFT
was formed primarily for the production of a family of proprietary
fuels known as PEERFUELTM. IFT developed a process, which it believes
will make diesel fuel burn more efficiently and with less emissions.
IFT, as described in Note 3, has acquired United State Fuel Technology,
Inc, and Scientific Fuel Technology, LLC, to streamline the selling of
PEERFUELTM. As described in Note 5, IFT has acquired Blencathia
Acquisition Corporation to ensure IFT would remain a fully trading and
reporting entity on the OTC Bulletin Board. United States Fuel
Technology, Inc., Scientific Fuel Technology, LLC, and Blencathia
Acquisition Corporation were all dissolved subsequent to their merger
into IFT. As part of the Company's efforts to expand into promising new
engine emission-reduction technologies, IFT completed the acquisition
of Interfacial Technologies (UK) Ltd. ("Interfacial") on May 25, 2001.
Through the acquisition of Interfacial, IFT has developed a family of
proprietary fuels and fuel additive formulations. These unique fuel
blends have been created to materially improve fuel economy, enhance
lubricity (reducing engine wear and tear) and lower harmful engine
emissions, while decreasing reliance on petroleum-based fuels through
the use of more efficient, alternative and renewable fuel mediums. The
Company has emerged from its research and development phase and is now
focused on the commercialization of its numerous fuel blends and
additives.
F-8
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
Summaries of IFT's significant accounting policies follow:
Use of estimates in the preparation of financial statements
-----------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statement and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Cash
----
IFT maintains cash in a bank account, which, at times, exceeds
federally insured limits. IFT has experienced no losses relating to
these excess amounts of cash in a bank.
Machinery and equipment
-----------------------
Machinery and equipment are stated at cost. Depreciation is computed on
the straight-line method over the appropriate estimated useful lives of
the assets, generally over a period of 3 to 5 years.
Deferred taxes
--------------
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences, operating
losses and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are
the differences between the reported amounts of assets and liabilities
and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than
not that some or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Research and Development
------------------------
Research and development costs are expensed in the period incurred.
Basic and diluted net loss per common share
-------------------------------------------
IFT adopted Statement of Financial Accounting Standards No. 128 (SFAS
128), Earnings per Share. SFAS 128 establishes standards for computing
and presenting earnings per share and replaces primary earnings per
share with a presentation of basic and diluted earnings per share.
Basic earnings per share are based upon the weighted average number of
common shares outstanding for the period. Diluted earnings per share
are based upon the weighted average number of common and potentially
dilutive common shares outstanding for the period. Pursuant
F-9
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
to SFAS 128, no adjustment is made for diluted earnings per share
purposes since IFT is reporting a net loss and common stock equivalents
would have an anti-dilutive effect. For the fiscal years ended December
31, 2001, 2000, and 1999, 587,853, 0, and 0 shares, respectively, of
common stock equivalents were excluded from the computation of diluted
earnings per share since their effect would be anti-dilutive.
Fair value of financial instruments
-----------------------------------
Statement of Financial Accounting Standards FASB No. 107 (SFAS 107),
Disclosures about Fair Value of Financial Instruments, requires the
disclosure of fair value for all financial instruments as defined in
SFAS 107 for which it is practicable to estimate fair value.
The carrying amounts of accounts payable approximate fair value because
of their short maturity.
The fair value of notes payable and convertible debentures approximate
their carrying basis based on the nature of these obligations and
current interest rates approximating stated interest rates.
New Accounting Pronouncements
-----------------------------
In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141., Business Combinations (SFAS 141), and No. 142,
Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the
use of the purchase method of accounting and prohibits the use of the
pooling-of-interest method of accounting for business combinations
initiated after June 30, 2001. SFAS 141 also requires that IFT
recognize acquired intangible assets apart from goodwill if the
acquired intangible assets meet certain criteria. SFAS 141 applies to
all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It
also requires, upon adoption of SFAS 142, that IFT reclassify the
carrying amounts of intangible assets and goodwill based on the
criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least
annually. In addition, SFAS 142 requires that IFT identify reporting
units for the purposes of assessing potential future impairments of
goodwill, reassess the useful lives of other existing recognized
intangible assets, and cease amortization of intangible assets with an
indefinite useful life. An intangible asset with an indefinite useful
life should be tested for impairment in accordance with the guidance in
SFAS 142. SFAS 142 is required to be applied in fiscal years beginning
after December 15, 2001 to all goodwill and other intangible assets
recognized at that date, regardless of when those assets were initially
recognized. SFAS 142 requires IFT to complete a transitional goodwill
impairment test six months from the date of adoption. IFT is also
required to reassess the useful lives of other intangible assets within
the first interim quarter after adoption of SFAS 142.
Previous business combinations were accounted for using the purchase
method. As of December 31, 2001, the net carrying amount of goodwill is
$2,211,805 and other intangible assets is $2,166,668. Amortization
expense during the year ended December 31, 2001 was $471,528.
Currently, IFT is assessing but has not yet determined how the adoption
of SFAS 141 and SFAS 142 will impact its financial position and results
of operations.
F-10
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
In October 2001, the Financial Accounting Standards Board issues SFAS
144 "Accounting for the Impairment of Disposal of Long-Lived Assets
("FAS 144"). This statement addresses financial accounting and
reporting for the impairment and disposal of long-lived assets. This
Statement supercedes FASB Statement 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of", and
the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations--Reporting the Effect of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions", for the disposal of a segment of a
business. The provisions of FAS 144 will be effective for fiscal years
beginning after December 15, 2001. The Company is currently evaluating
the implications of adoption of FAS 144.
Reclassifications
-----------------
Certain amounts from the prior years' financial statements have been
reclassified to conform to the current period presentation.
Note 2. Ability to Continue as a Going Concern
IFT's financial statements are presented on the going concern basis,
which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. IFT has incurred
significant losses since inception and has previously had limited funds
with which to operate. Management is in the process of executing a
strategy based upon developing pollution emission control technologies
that also offer enhanced engine performance with respect to greater
fuel economy. IFT already has one technology in development, and may
seek to add other technologies through acquisitions. Management
anticipates receiving necessary regulatory and commercial acceptance
for its existing technology and acquired technologies within the next
twelve months. Immediately thereafter, IFT expects to begin licensing
its products and/or selling them directly to the commercial
marketplace, with IFT eventually generating a level of revenues
sufficient to meet IFT's working capital requirements. While management
cannot make any assurance as to the accuracy of our projections of
future capital needs, it is anticipated that a total of $1,800,000 over
the remainder of the 2002 fiscal year will be necessary in order to
enable us to meet our capital needs. Management believes the proceeds
from its convertible debenture financing will be used as follows:
$250,000 for commercial fleet testing programs, $600,000 for
professional fees and advertising $650,000 for salary expenses and
$300,000 working capital for administrative and other capital needs,
including investigation of future acquisitions, if any.
On January 3, 2001 IFT entered into a Securities Purchase Agreement
with IIG Equity Opportunities Fund Ltd. ("IIG Fund"), which has a
one-year commitment amount of $3 million, with an option at our control
for an additional $3 million in financing after the completion of the
one-year commitment. On March 1, 2001, IFT completed registration of
the common shares required by the January 3, 2001 Securities Purchase
Agreement (the "Agreement"). The Agreement provides for IFT to sell up
to $250,000 in convertible debentures to the IIG Fund every thirty
days. On March 2, 2001 IFT initiated the first convertible debenture
purchase and on March 7, 2001 received $200,000 and on March 22, 2001
received $50,000. On April 6, 2001, IFT initiated the second
convertible debenture purchase and on April 24, 2001 received $225,000.
During May 2001 IFT received notification that due to regulatory issues
relating to the structure of the transactions contemplated by the
Agreement, 18,163,872 shares issuable upon possible
F-11
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
future conversion of debentures not yet issued and 750,000 shares
issuable upon possible future exercise of not yet issued warrants will
never be issued. Due to the inability to sell additional convertible
debentures after April 2001, IFT entered into a new Agreement with IIG
on 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. A registration statement for the
common stock to be issued in connection with this agreement was filed
on July 12, 2001 and declared effective by the SEC on July 23, 2001. As
of December 31, 2001, IFT has borrowed a total of $ 1,430,000 under the
financing agreement. (Note 4)
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. Acquisitions of Subsidiaries
On April 3, 1998, the stockholders approved a merger with United States
Fuel Technology, Inc. ("USFT"), effective March 31, 1998. USFT was
formed primarily to market PEERFUELSTM in North America. IFT granted
USFT an exclusive license to market its product pursuant to an Amended
and Restated License Agreement dated October 16, 1997, in exchange for
94,400 shares of USFT common stock. Because IFT did not have a
commercially viable product, USFT did not have any revenues but had
incurred some general and administrative expenses through the date of
the merger, the most significant of which were consulting and
professional fees. As a result of the merger, each non-dissenting
holder of outstanding shares of USFT Common Stock received one share of
IFT Common Stock for every share of USFT common stock. IFT issued
2,795,979 shares. This merger has been accounted for as a purchase
based upon the net asset value, which represented the fair value, of
USFT on March 31, 1998.
IFT's investment in USFT consisted of the 94,400 shares of USFT common
stock issued to IFT in exchange for certain marketing rights. These
shares were valued at zero by IFT and were redeemed and canceled in
connection with the acquisition of USFT.
On May 29, 1998 IFT merged with Scientific Fuel Technology, LLC
("SFT"), a company related through common ownership. The assets and
liabilities of SFT consisted solely of an agreement whereby SFT would
receive 50% of USFT's rights pursuant to the Amended and Restated
License Agreement dated October 16, 1997 with IFT. As IFT did not have
a commercially viable product at the time of the merger with SFT, there
had been no payments made to SFT and SFT had not yet begun operations.
This marketing agreement was valued by SFT at zero due to the
uncertainty of the future revenues. SFT had no revenues, expenses,
assets or liabilities as of the date of the purchase. Management
believed it was no longer in IFT's best interest to be contractually
bound to acquire these sales and marketing services from SFT and,
accordingly it initiated the merger with SFT. As a result of the
merger, 2,795,979 shares of IFT were exchanged for the member interests
in SFT. The issuance of these shares was accounted for by recording a
discount on common stock equal to the par value of stock issued.
F-12
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
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 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. 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 8,500,002 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. (Note 5)
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, 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.
Goodwill amortization was $238,195 through December 31, 2001, at which
time amortization ceased with the implementation of SFAS 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.
F-13
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
The 8,500,002 common shares placed in the escrow account will be valued
as an addition to the purchase price if and when the shares are
released to the Interfacial shareholders in accordance with the
performance escrow agreement at the appropriate price of IFT's common
stock at that date. The 8,500,002 common shares are currently recorded
at par value, or $85,000, as common stock and a reduction of additional
paid-in capital (Note 10).
The summarized unaudited pro forma results of operations set forth
below for the years ended December 31, 2001 and 2000 assume the
acquisition occurred as of the beginning of 2001 and upon inception of
Interfacial on May 15, 2000.
The unaudited pro forma results of operations are not necessarily
indicative of what actually would have occurred if the acquisition had
been completed at the beginning of each of the periods presented, nor
are the results of operations necessarily indicative of the results
that will be attained in the future.
Year Ended
December 31,
2001 _ 2000
--------------------------
Revenues $0 $0
Net loss $8,097,073 $12,136,666
Net loss per common share:
Basic and diluted $.20 $.46
Note 4. Notes Payable and Convertible Debentures
In March 2000 ONKAR Corporation, Ltd. ("ONKAR"), a stockholder of IFT,
advanced IFT $50,000 which is due in March 2005 and has an annual
interest rate of 6%. In April 2000 ONKAR advanced IFT $50,000 which is
due in April 2005 and has an annual interest rate of 6%. In addition,
IFT has a note payable to ONKAR for $62,500 that is due in November
2004 at an annual interest rate of 6%.
During the twelve-month period ended December 31, 2000 IFT received
advances from stockholders totaling $416,000. IFT repaid $356,000 of
the advances received from the stockholders by issuing 1,186,669
restricted common shares and repaid $27,500 of the advances received
from stockholders by cash. In connection with the issuance of the
1,186,669 restricted common shares IFT recognized $237,333 in interest
expense due to the fair value of the stock on the date of
extinguishment exceeding the carrying value by this amount. Notes
payable to stockholders totaling $32,500 with an annual interest of 10%
and a due date of April 30, 2001 is recorded as a liability on the
December 31, 2000 balance sheet. Of this amount, $22,500 was repaid in
2001 and the remaining $10,000 was converted to common stock on January
31, 2001 (Note 5). In addition to the repayment of principal each
stockholder received a warrant to purchase from IFT up to 25,000 shares
of common stock at $.01 per share for each $5,000 in principal advanced
to IFT. The value of the warrants, $1,228,424 based on the market value
of IFT's common stock on the day(s) the advances were received has been
recorded as a discount on
F-14
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
the notes payable to stockholders and as an addition to additional paid
in capital. During the twelve months ended December 31, 2000,
$1,228,424 was amortized against the discount on notes payable to
stockholders and recognized as interest expense.
During the twelve-month period ended December 31, 2000 IFT received
advances totaling $374,000 from four individuals. IFT repaid $374,000
of the advances received by issuing 1,626,086 restricted common shares.
In connection with the issuance of the 1,626,086 restricted common
shares IFT recognized $520,347 in interest expense due to the fair
value of the stock on the date of extinguishment exceeding the carrying
value by this amount.
On April 11, 2001 IFT issued 406,523 common shares to a total of four
individuals as a recalculation of the beneficial conversion rate used
for the payment of notes payable in November 2000. The recalculation
was required due to 1,626,086 common shares issued in November 2000 not
being registered with the United States Securities and Exchange
Commission by March 31, 2001, as the notes payable specified.
On December 31, 2001, IFT had outstanding convertible debentures of
$155,000 less the related discount for the beneficial conversion
feature of the debenture of $59,076. 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
discount will be amortized until the note matures or is converted. The
convertible debentures are immediately convertible at the option of the
holder into the number of shares of IFT common stock equal to the
principal amount of the debentures to be converted, including all
accrued interest, divided by the conversion price in effect on the
conversion date. The conversion price is calculated at 80% of the
average of the three lowest closing bid prices for the ten trading days
immediately prior to the conversion date, but in no event more than
110% of the average of the three lowest closing bid prices for the ten
trading days immediately preceding the convertible debenture issuance
date.
During the year ended December 31, 2001, IFT has issued 3,834,213
shares of common stock upon the conversion of $1,275,000 worth of
convertible debentures owned by IIG. An additional $653,343 had been
recorded as a discount on the convertible debenture and added to
additional paid-in-capital, relating to the beneficial conversion
feature and the $42,750 value of 150,000 warrants related to the
convertible debentures. The warrants were valued at the fair value on
the date of issuance using the Black-Scholes option pricing model. The
beneficial conversion feature was calculated as the excess value of the
shares to be converted over the amount of the proceeds allocated to the
convertible debentures. (Note 5)
Note 5. Stockholders' Deficit
On July 7, 1999 the stockholders approved a 1 for 10 reverse stock
split which was effected on July 22, 1999. The effect of the split is
presented within stockholders' deficit at March 31, 1999 by
transferring the par value for the reduction in shares issued from
common stock to additional paid in capital. All references in the
financial statements referring to shares, share prices, per share
amounts and stock plans have been adjusted retroactively for the split.
F-15
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IFT issued shares to certain founding stockholders during fiscal years
1998 and 1997 in exchange for the technology related to its diesel fuel
treatment business. This technology constituted research and
development expenditures to these stockholders and consistent with
Generally Accepted Accounting Principles, was not recorded as an asset
but rather was recorded as an expense by these shareholders. Because
the subsequent transfer of this technology to IFT was a transaction
between entities under common control, it was accounted for using the
carrying value of the technology which was zero. A discount on common
stock was recorded equal to the par value of the stock issued in
exchange for the technology. The shares were issued as follows:
Date Shares
---- ---------------
April 1997 1,558,084
July 1997 783,944
August 1997 51,800
September 1997 2,927,124
--------------
Total year ended March 31, 1998 5,320,952
===============
IFT also issued shares to certain stockholders in exchange for services
and certain corporate officers were issued stock as additional
compensation. Management valued the services that were received at
their fair value. Common stock shares were issued, at par, to equal the
fair value of the services. The fair value of the services and
additional compensation was $128,199 in fiscal 1998. The shares were
issued as the services were rendered as follows:
Expense
Date Shares Amount
---- ---------- -------
SERVICES:
--------
April 1997 6,900
May 1997 10,900
July-August 1997 251,315
September 1997 942,768
------------------
Total year ended March 31, 1998 1,211,883 $121,189
================== ========
COMPENSATION:
-------------
April 1997 10,000
July 1997 10,100
September 1997 50,000
------------------
Total year ended March 31, 1998 70,100 $7,010
================== ======
Certain stockholders who purchased stock for cash were subsequently
issued additional shares of stock for no consideration to adjust the
amount of shares previously issued to them. The adjustment was required
due to shares being sold to stockholders at different prices while the
fair value of the common stock remained consistent. The original shares
had been issued on various dates between July 30, 1996 and September
13, 1997 and the additional shares were issued with the same date as
the original shares. Since IFT has no retained earnings, a charge to
additional paid-in-capital was recorded to reflect the par value of the
stock issued. The additional shares
F-16
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
were issued as follows:
Date Total Additional Shares
---- --------------------------
July 1997 6,350
August 1997 40,000
September 1997 95,930
------------------
Total year ended March 31, 1998 142,280
==================
From January through March 1998, a principal shareholder of IFT
distributed 1,699,800 of his personal shares to others for services.
These services included providing business contacts to assist IFT in
its business plan and to assist IFT in raising capital. Because there
were no formal service agreements and no specified time frame for the
performance of these services, the cost of the services was recognized
at the date the shares were distributed. The value of the services was
deemed to be $169,980 by the Board of Directors. This amount was
expensed in the year ended March 31, 1998 with an increase to
additional paid-in capital. During December 1998, the Board of
Directors approved issuance of 1,200,000 restricted shares to a
consultant and former Board Chairman. This consultant had been a
founder of IFT, served as Board Chairman and provided services in
connection with the technology of IFT. These shares served as payment
to this consultant for his past services. Because there were no formal
service agreements and no specified time frame for the performance of
these services, the cost of the services was recognized as expense at
the date the shares were distributed. The market value of these shares
was determined by the Board of Directors based upon the private
placement of common stock sold in November 1998 at $5.00 per share.
This $6,000,000 was expensed in the year ended March 31, 1999.
On April 26, 1999 IFT offered all stockholders of record on March 31,
1999 the right to purchase 900 common shares at $.50 per share, a price
determined by IFT's Board of Directors. The market price of IFT's stock
on April 26, 1999 was $1.40 per share. IFT issued 794,740 shares and
received proceeds of $396,450 as a result of this offering that expired
May 28, 1999.
IFT issued 2,500 shares on June 2, 1999 to a director. The shares were
issued in exchange for serving as a director. The value of these
services was determined based upon the market value at the date of
issuance. IFT has recorded a charge to operations in the amount of
$7,000.
On July 1,1999, IFT entered into a one year advisory agreement with
ONKAR Corporation, Ltd. ("ONKAR") for various services including
introductions to brokers, dealers and potential investors and ONKAR
agreed to facilitate the writing of a minimum of three research reports
on IFT. Two of these research reports have been received by IFT, one
dated July 22, 1999 and one dated August 25, 1999. The third research
report was not generated and no services were provided after September
30, 1999 due to IFT terminating the agreement. As consideration for the
services, ONKAR received the right to purchase 1.5 million shares of
restricted common stock at $.50 per share. These rights were issued and
exercised with IFT receiving cash proceeds of $750,000. IFT determined
the value of the services to be provided based upon the market value of
the common stock, $2.81, on July 1, 1999, the date of the agreement.
The total value of this agreement was determined to be $4,218,750. The
amount in excess of the cash proceeds received of $750,000 has been
charged to operations as professional services. No shareholders of
F-17
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IFT were shareholders of ONKAR prior to this transaction.
On July 13, 1999 IFT entered into employment agreements with its Chief
Executive Officer and Chief Operating Officer which expired on January
31, 2000. Under the terms of these agreements, these officers each
received base pay of $1,000 per month plus up to a total of 60,000 and
30,000 shares of IFT's stock, respectively, payable at the end of the
initial term of the agreements. The shares were earned ratably on a
monthly basis. The value of the stock based compensation for these
90,000 shares is $196,875. The stock based compensation earned through
December 31, 1999, $166,585, reflected in these financial statements as
payroll expense and as additional paid in capital, has been calculated
based on the trading price of IFT's stock at July 13, 1999.
On April 26, 1999 IFT offered all stockholders of record on March 31,
1999 the right to purchase 900 common shares at $.50 per share. During
January 2000 IFT issued 1,800 shares and received proceeds of $450 as a
result of this offering that expired May 28, 1999. The $450 for the
other 900 shares was received during the nine month period ended
December 31, 1999.
During January 2000 IFT issued 100,000 shares of common stock in a
private placement for $200,000 to a company whose sole owner is a
director of IFT. The market value of the shares on the date of issuance
was $331,250. The $131,250 of market value in excess of the cash amount
received has been recorded as consulting expense during the twelve
month period ended December 31, 2000.
The 90,000 shares earned by the Chief Executive Officer and Chief
Operating Officer under employment agreements which expired on January
31, 2000 were issued on January 31, 2000.
The stock based compensation earned through January 31, 2000, $30,288,
reflected in these financial statements as payroll expense and as
additional paid in capital, has been calculated based on the trading
price of IFT's stock at July 13, 1999.
At December 31, 1999, IFT owed one of its stockholders approximately
$87,000 for legal services performed. In February 2000, the stockholder
agreed to accept 27,559 shares of IFT's stock in lieu of cash for the
amounts due to him. The value of the shares issued, $99,901, was based
upon the market value price of the common shares on February 9, 2000.
Effective January 14, 2000 IFT adopted a Consultant and Employee Stock
Compensation Plan. This plan provides that the Board of Directors may
award shares of IFT's stock to officers, directors, consultants and
employees as compensation for services. The maximum number of shares of
common stock, which may be awarded under this plan, is 500,000 shares.
During March 2000 IFT issued a total of 65,000 shares of common stock
to five directors as reimbursement for directors' expenses. The value
of these shares, reflected in these financial statements as payroll
expenses for Jonathan Burst and William J. Lindenmayer in the amount of
$55,000 and as board meeting and travel expenses in the amount of
$117,216 and $6,534, respectively, for the remaining directors, has
been calculated based on the trading price of IFT's stock at February
23, 2000.
F-18
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
On February 23, 2000 the Board of Directors granted Jonathan Burst
100,000 shares of IFT's common stock for his appointment as Chief
Executive Officer. The value of these shares, reflected in these
financial statements as payroll expense, has been calculated based on
the trading price of IFT's stock at February 23, 2000. On February 23,
2000 the Board of Directors awarded an initial grant of 100,000 shares
of IFT's common stock to William Lindenmayer for his appointment as
President and Chief Operating Officer. The value of these shares,
reflected in these financial statements as payroll expense, has been
calculated based on the trading price of IFT's stock at February 23,
2000. The total charged to payroll expense for these transactions was
$550,000.
In February 2000, IFT entered into a convertible debenture purchase
agreement to raise $3,000,000 through the sale of convertible
debentures to GEM Global Yield Fund, Ltd. and Turbo International Ltd.
("GEM") During June 2000 this agreement was amended to raise $1,500,000
through the sale of convertible debentures to GEM. In connection with
the convertible debenture purchase agreement IFT issued a warrant to
GEM for the purchase of 390,000 shares of common stock at $.01 per
common share. During February 2000 IFT issued 195,000 shares of common
stock and placed them in escrow in accordance with the convertible
debenture purchase agreement entered into in February 2000. The shares
were to be released from escrow and issued to the purchasers of the
convertible debenture in the event of an uncured default by IFT prior
to the closing of the convertible debenture purchase agreement. The
195,000 shares of common stock were released to the purchasers of the
convertible debenture purchase agreement in conjunction with an
amendment to the convertible debenture purchase agreement dated June
16, 2000, and were recorded as an investment advisory fee of $109,688
based on the trading price of IFT's stock.
On March 28, 2000 a warrant for 390,000 shares of common stock was
exercised by GEM Global Yield Fund Limited at a cost of $.01 per share.
The closing trading price of IFT's stock on March 28, 2000 was $2.9375,
resulting in a total market value of $1,145,625 for the 390,000 common
shares. The market value in excess of the $.01 warrant exercise cost,
$1,141,725, is reflected in the statement of operations for the twelve
months ended December 31, 2000 as an investment advisory fee.
On June 19, 2000 IFT issued 250,000 common shares to a director of IFT
for consulting services. The value of the shares, $218,750, was
recorded to research and development expense and was based on the
trading price of IFT's stock on June 19, 2000.
During the twelve month period ended December 31, 2000 IFT issued
2,030,000 common shares due to the exercise of warrants issued in
connection with the advances received from stockholders discussed in
Note 4. There were no warrants outstanding at December 31, 2000.
On October 13, 2000 the Board of Directors granted Jonathan Burst
475,000 shares of IFT's common stock for achievement of a milestone
event for IFT. The value of these shares, reflected in these financial
statements as payroll expense of $296,875, has been calculated based on
the trading price of IFT's stock at October 13, 2000. On October 13,
2000 the Board of Directors granted William Lindenmayer 475,000 shares
of IFT's common stock for achievement of a
F-19
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
milestone event for IFT. The value of these shares, reflected in these
financial statements as payroll expense of $296,875, has been
calculated based on the trading price of IFT's stock at October 13,
2000. On October 13, 2000 the Board of Directors granted the three non
employee directors of IFT a total of 275,000 shares of IFT's common
stock for achievement of a milestone event for IFT. The value of these
shares, reflected in these financial statements as payroll expense of
$171,875, has been calculated based on the trading price of IFT's stock
at October 13, 2000. On October 10, 2000 the Board of Directors granted
an employee of IFT 30,000 shares of IFT's common stock for achieving a
milestone event. The value of these shares, reflected in these
financial statements as payroll expense of $23,436, has been calculated
based on the trading price of IFT's stock at October 10, 2000.
On December 18, 2000 IFT issued 25,000 common shares for consulting
services. The value of the shares, $10,548, was recorded to payroll
expense and was based on the trading price of IFT's stock on December
18, 2000.
Effective October 27, 1999, IFT merged with and into Blencathia
Acquisition Corporation ("Blencathia"). Blencathia had 300,000 shares
outstanding at the time of the merger, which it redeemed and canceled.
In exchange for 300,000 shares of Blencathia's common stock, IFT issued
300,000 shares of its restricted common stock. These shares are
expected to be sold in an amount sufficient to provide the former
shareholders of Blencathia with proceeds of $500,000, the negotiated
cost of the acquisition.
On May 8, 2000 IFT issued 300,000 common shares that were contingently
issued per the Blencathia merger agreement. The 300,000 shares of
common stock are included in the statement of stockholders' deficit for
the year ended December 31, 2000 but are not included in earnings per
share and weighted average share calculations for the year ended
December 31, 2000. They will be included when the shares are sold to
provide payment to the shareholders of Blencathia. The shareholders of
Blencathia have represented to the management of IFT that the 300,000
shares will be sold only with IFT's approval. If the shares are sold
and $500,000 is not generated additional shares may need to be issued
to the shareholders of Blencathia. Based on the December 31, 2001
market price, $.47, of IFT's common stock, a total of 1,063,830 shares
would need to be issued to generate the $500,000 proceeds.
During January 2000, IFT entered into an employment agreement with
Jonathan R. Burst to serve as Chief Executive Officer of IFT until
December 31, 2000 at a base annual salary of $180,000. In addition, Mr.
Burst is to receive 6,000 shares of common stock each month. During
January 2000, IFT entered into an employment agreement with William J.
Lindenmayer to serve as Chief Operating Officer of IFT until December
31, 2000 at a base annual salary of $180,000. In addition, Mr.
Lindenmayer is to receive 3,000 shares of common stock each month. The
shares are earned ratably on a monthly basis. The stock based
compensation earned through December 31, 2000, reflected in these
financial statements as payroll expense and as additional paid in
capital of $321,750, has been calculated based on the trading price of
IFT's stock at February 1, 2000. The 99,000 common shares were issued
on January 31, 2001. As of December 31, 2000, $204,325 of compensation
relating to these employment agreements are unpaid and included in
accrued expenses.
F-20
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
On January 31, 2001, IFT issued 33,333 shares in repayment of a $10,000
note payable to a stockholder. In connection with the issuance of the
shares, IFT recognized $7,041 in interest expense due to the fair value
of the stock on the date of extinguishment exceeding the carrying value
of the debt.
On February 23, 2001 the Board of Directors of IFT authorized the
issuance of 2,475,000 shares of common stock to employees and
non-employee directors of IFT. The value of the common shares,
$1,082,812, has been included in payroll expense for the year ended
December 31, 2001, and was calculated based on the closing stock price
of $.4375 on February 23, 2001. The 2,475,000 shares of restricted
common stock were issued to the employees and non-employee directors of
IFT on April 10, 2001.
On April 6, 2001 IFT issued 10,000 restricted common shares as payment
for $4,375 in consulting services and 10,000 restricted common shares
as a payment on a $3,500 account payable.
During January 2001, IFT entered into an employment agreement with
Jonathan R. Burst to serve as Chief Executive Officer and William J.
Lindenmayer to serve as President and Chief Operating Officer until
December 31, 2003, each at annual salaries of $200,000. The agreements
provide for a stock grant of 20,834 shares of common stock at the end
of each month to each employee. The shares are earned ratably on a
monthly basis. The stock based compensation earned through December 31,
2001, reflected in these financial statements as payroll expense and as
additional paid in capital of $235,000, has been recalculated based on
the trading price of IFT's stock on December 12, 2001, the date the
shares were issued. As of December 31, 2001, $265,546 of compensation
relating to these employment agreements, as well as their 2000
employment agreement, was unpaid and included in accrued expenses.
On May 25, 2001 IFT entered into consulting agreements with four
Interfacial shareholders. Common stock totaling 960,000 shares was
issued and recorded as a consulting expense at the inception of the
consulting agreement. The consulting agreements provide for the total
issuance of 960,000 shares of common stock on May 25, 2002 and
1,180,000 shares of common stock on May 25, 2003, and the Company is
recording the value of these shares ratably over the term of the
consulting agreement. On December 6, 2001, the Company issued 300,000
shares which were to be issued May 25, 2002 under the consulting
agreements. IFT has recorded $1,024,817 to consulting expense for the
year ended December 31, 2001, relating to these consulting agreements.
On July 18, 2001, IFT issued 326,087 shares of common stock valued at
$159,783 based on the closing market price of IFT common stock on July
18, 2001,as payment to a director of IFT in exchange for the director's
rights on a $60,000 note receivable and $99,783 of consulting services.
On August 16, 2001, IFT issued 5,000 shares of common stock valued at
$2,750, or $.55 per share, to an employee. The stock price was based on
the closing stock price on the date of the grant.
F-21
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
On December 12, 2001, IFT issued a total of 600,000 shares of common
stock, valued at $282,000 to two Directors. The value of the shares was
based on the trading price of IFT's stock on December 12, 2001.
On December 12, 2001, IFT's Board of Directors agreed to issue 125,000
shares of common stock to a Director. The Company recorded $58,750 as
payroll expense and additional paid in capital in 2001. The 125,000
shares of common stock were issued in 2002, and valued at the trading
price of IFT's stock on December 12, 2001.
As of December 31, 2001, the Company had in total of 150,000 common
stock warrants outstanding. Warrants to purchase 75,000 shares of
common stock at $0.53 per share expire March 6, 2003. Warrants to
purchase 75,000 shares of common stock at $0.45 per share expire April
6, 2003.
Note 6. Related Party Transactions
On October 7, 1999, IFT entered into an Advisory Agreement with Mr.
Harry Demetriou, a director of IFT, on a non-exclusive basis to render
financial advisory services in connection with the possible sale of
IFT. As of December 31, 1999 no payments had been made related to this
agreement. During June 2000 this agreement was canceled and replaced
with an agreement that provided for payment of 250,000 restricted
common shares. These shares were issued on June 16, 2000 with a value
of $218,750.
During October 1999 IFT entered into an agreement with TPG Capital
Corporation, a company related through common ownership, for consulting
services. A payment of $100,000 was made and expensed during the nine
month period ended December 31, 1999.
On November 1, 1999, IFT entered into an agreement with certain related
party promissory note holders to issue 423,537 shares of its common
stock by December 31, 1999 in exchange for the balance of the
promissory notes due in the amount of $677,254, a related party account
payable of $26,500 and interest on the notes due in the amount of
$142,820 at $2.00 per share. The stock- based note and interest
exchange value was calculated based on the trading price of IFT's stock
at November 1, 1999. The $355,771 difference between the $2.00 (per the
agreement) value of the shares and the trading price of the shares has
been reflected in these financial statements as interest expense.
At December 31, 1999, IFT owed one of its stockholders approximately
$87,000 for legal services performed. Subsequent to December 31, 1999,
the stockholder agreed to accept 27,559 shares of IFT's common stock in
lieu of cash for the amounts due to him.
During June 2000, IFT purchased a Directors and Officers Liability
insurance policy from Burcor Insurance Group, a company owned by
Jonathan Burst.
During the year 2000, IFT paid MarketMatch, Inc. $106,293 for
professional services. MarketMatch, Inc. is owned and operated by
William Center. William Center became a director of IFT in October
2000. He subsequently resigned as a director in 2001.
F-22
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
During the year 2000, IFT paid Steven D. Walters, CPA $25,168 for
professional services. Steven D. Walters, CPA was owned and operated by
Steven Walters. Steven Walters was appointed as the Chief Financial
Officer of IFT in October 2000, and he subsequently resigned in 2001.
IFT obtained general and administrative services and rents office space
and equipment from Burcor Capital, LLC, a company related through
common ownership (Mr. Jonathan Burst, executive officer and director of
IFT, is the founder and president of Burcor Capital, LLC), under an
agreement requiring monthly payments of $5,000. Expenses recorded as
professional services totaled $51,848 during the twelve month period
ended December 31, 2001 and $60,000 during the twelve month period
ended December 31, 2000. IFT has subleased its administrative offices
and administrative services from Burcor Capital under a lease agreement
requiring monthly rentals of $5,000 per month through July 13, 2001.
This agreement ended on October 31, 2001, at which time the Company
assumed the lease on a month to month basis. (Note 8)
On November 16th, 2001, IFT purchased equipment from Burcor Capital for
$12,500.
Note 7. Income Taxes
Deferred tax benefits arising from net operating loss carryforwards
were determined using the applicable statutory rates. The net operating
loss carryforward balances vary from the applicable percentages of net
loss due to expenses recognized under generally accepted accounting
principles, but not deductible for tax purposes. The difference between
the effective tax rate and the statutory tax rate results from the
difference in fair market value of shares issued for services and
compensation and the book expense recorded on those issuances.
Net operating loss carryforwards available for the Company for Federal
tax purposes are as follows:
BALANCE EXPIRATION
------- ----------
$ 344,473 2012
$ 1,090,666 2013
$12,971,893 2019
$ 4,213,207 2020
$ 2,878,026 2021
-----------
$21,498,265
For federal tax purposes, at December 31, 2001 and 2000, the Company
had net deferred tax assets of approximately $8,117,000 and $6,400,000
respectively, which are fully offset by valuation allowances. These net
deferred tax assets principally arise due to the Company's net
operating loss carryforwards.
In accordance with generally accepted accounting principles, a
valuation allowance must be established for a deferred tax asset if it
is uncertain that a tax benefit may be realized from the asset in the
future. The Company has established a valuation allowance to the extent
of its deferred tax assets since it is more likely than not that the
benefit cannot be realized in the future.
F-23
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
Note 8. Lease Commitment
As of January 1, 2002, IFT leased office space under a five-year
operating lease, expiring on December 31, 2006. Future minimum lease
payments are $63,600 for the years 2002, 2003, 2004, 2005, and 2006.
Rent expense was $63,408, $9,219, and $32,685 during the fiscal years
ended December 31, 2001, 2000, 1999, respectively.
Note 9. Legal Proceedings
The Company is subject to various lawsuits and claims with respect to
matters arising out of the normal course of business. While the impact
on future financial results is not subject to reasonable estimation
because considerable uncertainty exists, management believes, after
consulting with counsel, that the ultimate liabilities resulting from
such lawsuits and claims will not materially affect the consolidated
results, liquidity or financial positions of the Company.
Note 10. Subsequent Events
During January 2002, IFT sold 600,000 restricted shares of common stock
at a price of $.25 per share to Harry F. Demetriou. The proceeds of
$150,000 will provide the Company with additional cash and will be used
to fund daily operating expenses.
During January 2002, 500,000 restricted common shares of the Company
were removed from the Interfacial Technologies' escrow account. The
shares were removed because Interfacial failed to pay liabilities it
had incurred prior to being bought by the Company.
Note 11. Quarterly Statements of Operation Information (Unaudited)
For the Three Month Period Ended
March 31, 2001 June 30, 2001 September 30, 2001 December 31, 2001
-------------- ------------- ------------------ -----------------
Revenues $ 0 $ 0 $ 0 $ 0
Gross profit 0 0 0 0
Net loss $ 1,502,286 $ 1,570,301 $ 1,096,967 $ 3,405,256
Basic and diluted
net loss per share $ .06 $ .05 $ .03 $ .08
Weighted average
common shares
outstanding 24,422,973 32,820,831 41,984,052 45,153,558
F-24
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
For the Three Month Period Ended
March 31, 2000 June 30, 2000 September 30, 2000 December 31, 2000
-------------- ------------- ------------------ -----------------
Revenues $ 0 $ 0 $ 0 $ 0
Gross profit 0 0 0 0
Net loss $ 2,417,801 $ 800,357 $ 1,200,778 $ 2,268,600
Basic and diluted
net loss per share $ .14 $ .04 $ .06 $ .12
Weighted average
common shares
outstanding 17,096,481 17,879,918 18,716,339 18,905,000
F-25
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 April 1, 2002
------------------------------------ -----------------------
Jonathan R. Burst
President and Chief Executive Officer
By: /s/ Michael F. Obertop Date April 1, 2002
------------------------------------ -----------------------
Michael F. Obertop
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Jonathan R. Burst Date April 1, 2002
----------------------------------- -----------------------
Jonathan R. Burst
Chairman of the Board
By: /s/ William J. Lindenmayer Date April 1, 2002
----------------------------------- ------------------------
William J. Lindenmayer
Director
By: /s/ George J. Mitchell Date April 1, 2002
------------------------------------ ------------------------
Senator George J. Mitchell
Director
By /s/ David B. Norris Date April 1, 2002
----------------------------------- ------------------------
David B. Norris
Director
By: /s/ Harry Demetriou Date April 1, 2002
------------------------------------ ------------------------
Harry Demetriou
Director
F-26
By: /s/ John P. Stupp Jr. Date April 1, 2002
----------------------------------- ------------------------
John P. Stupp Jr.
Director
By: /s/ Ian Williamson Date April 1, 2002
------------------------------------ ------------------------
Ian Williamson
Director
By /s/ Geoff Robinson Date April 1, 2002
----------------------------------- ------------------------
Geoff Robinson
Director
By: /s/ Simon Orange Date April 1, 2002
------------------------------------ ------------------------
Simon Orange
Director
F-27