UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period ended June 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 000-25367
International Fuel Technology, Inc.
-----------------------------------
(Exact name of registrant as specified in its charter)
Nevada 88-0357508
------ ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
7777 Bonhomme, Suite 1920, St. Louis, Missouri 63105
-------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(314) 727-3333
--------------
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g)
of the Act: Common Stock, $.01 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
The aggregate market value of the voting and non-voting common stock held
by non-affiliates of the Registrant, based upon the average bid and asked price
of the common stock on August 1, 2002, as reported on the OTC Bulletin Board,
was $10,049,591.
Number of shares of common stock outstanding as of August 1, 2002:
59,115,243
1
FORM 10-Q
For The Quarterly Period Ended June 30, 2002
INDEX
Part I - FINANCIAL INFORMATION Page
Item 1- Financial Statements
Balance Sheets - June 30, 2002 and December 31, 2001 3
Statements of Operations - Three Month and Six Month
Periods Ended June 30, 2002 and 2001. 4
Statement of Stockholders' Equity - Six Months Ended June
30, 2002 5
Statements of Cash Flows - Six Months Ended June 30, 2002
and 2001 6
Notes to Financial Statements 7 - 11
Item 2- Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 15
Item 3- Quantitative and Qualitative Disclosures About Market
Risk 15
Part II - OTHER INFORMATION
Item 6- Exhibits and Reports on Form 8-K 15
2
INTERNATIONAL FUEL TECHNOLOGY, INC.
BALANCE SHEETS
June 30, December 31,
ASSETS (Note 2) 2002 2001
- -----------------------------------------------------------------------------------------------------
(Unaudited)
Current Assets
Cash $ 80,628 $ 33,168
Accounts Receivable 6,442 --
Inventory 15,302 --
Prepaid Expenses 15,250 15,250
Notes Receivable 43,059 80,000
------------ ------------
Total current assets 160,681 128,418
------------ ------------
Property and Equipment
Machinery and equipment 26,881 26,881
Accumulated depreciation (9,255) (5,824)
------------ ------------
Total property and equipment 17,626 21,057
------------ ------------
Purchased Patents & Technology, Net (Note 3) 1,966,668 2,166,668
Goodwill, Net (Note 3) 2,211,805 2,211,805
------------ ------------
Total assets $ 4,356,780 $ 4,527,948
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 147,895 $ 252,779
Advances from stockholders 250,000 --
Accrued expenses 378,771 342,030
Accrued interest 22,625 17,750
------------ ------------
Total current liabilities 799,291 612,559
------------ ------------
Long-Term Liabilities
Notes payable to stockholder 162,500 162,500
Convertible debentures (net of discount) (Note 4) 49,295 95,924
------------ ------------
Total liabilities 1,011,086 870,983
------------ ------------
Commitments and Contingencies
Stockholders' Equity (Notes 4, 5 and 6)
Common stock, $.01 par value; authorized, 150,000,000,
57,345,245 and 55,119,612 shares issued and outstanding
at June 30, 2002 and December 31, 2001, respectively 573,452 551,196
Discount on common stock (819,923) (819,923)
Additional paid-in capital 33,688,273 32,595,070
Accumulated deficit (30,096,108) (28,669,378)
------------ ------------
Total stockholders' equity 3,345,694 3,656,965
------------ ------------
$ 4,356,780 $ 4,527,948
============ ============
See Notes to Financial Statements.
3
INTERNATIONAL FUEL TECHNOLOGY, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Six Months
Ended Ended
June 30, June 30,
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------
Revenues $ 2,361 $ -- $ 7,684 $ --
Cost of Revenues 1,823 -- 4,370 --
------------------------------------------------------------
Gross Profit 538 -- 3,314 --
------------------------------------------------------------
Operating Expenses:
Selling, general and administrative expenses 196,054 1,237,833 1,085,086 2,715,080
Depreciation and Amortization 101,715 37,500 203,431 37,500
------------------------------------------------------------
Total operating expenses 297,769 1,275,333 1,288,517 2,752,580
------------------------------------------------------------
Net loss from operations (297,231) (1,275,333) (1,285,203) (2,752,580)
Interest income 3,128 -- 16,502 --
Interest expense (Note 4) (62,938) (294,968) (158,029) (320,007)
------------------------------------------------------------
Total other expense, net (59,810) (294,968) (141,527) (320,007)
------------------------------------------------------------
Net loss $ (357,041) $ (1,570,301) $ (1,426,730) $ (3,072,587)
============================================================
Basic and diluted net loss
per common share $ (.01) $ (.05) $ (.03) $ (.11)
Weighted average common shares outstanding 48,508,441 32,820,831 47,900,522 28,645,101
See Notes to Financial Statements
4
INTERNATIONAL FUEL TECHNOLOGY, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED June 30, 2002
(Unaudited)
Common Common Discount on
Stock Stock Common Accumulated
Shares Amount APIC Stock Deficit Total
- --------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2002 55,119,612 $ 551,196 $32,595,070 $ (819,923) $(28,669,378) $ 3,656,965
Proceeds from the issuance of common stock 850,000 8,500 191,500 -- -- 200,000
Stock-based compensation -- -- 150,000 -- -- 150,000
Issuances of stock for compensation 125,000 1,250 (1,250) -- -- --
Issuances of stock for services 340,000 3,400 141,500 -- -- 144,900
Cancellation of Interfacial escrow shares (500,000) (5,000) 5,000 -- -- --
Issuances of stock for convertible debentures 1,410,633 14,106 385,894 -- -- 400,000
Discount on issuances of convertible debt -- -- 112,759 -- -- 112,759
Accrued stock based compensation -- -- 102,816 -- -- 102,816
Accrued stock based services -- -- 4,984 -- -- 4,984
Net loss -- -- -- -- (1,426,730) (1,426,730)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2002 57,345,245 $ 573,452 $33,688,273 $ (819,923) $(30,096,108) $ 3,345,694
================================================================================================================================
See Notes to Financial Statements
5
INTERNATIONAL FUEL TECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Six Months
Ended Ended
June 30, June 30,
2002 2001
- -----------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net loss $ (1,426,730) $ (3,072,587)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation/Amortization 203,431 38,861
Stock issued and additional paid in capital
recognized for services and compensation 402,700 1,754,341
Interest expense recognized - discount and conversion of debt 146,130 285,683
Loss on disposal of machinery and equipment -- 2,887
Change in assets and liabilities:
Increase in accounts receivable (6,442) --
Increase in inventory (15,302) --
Increase in prepaid expenses -- (26,523)
(Decrease)/Increase in accounts payable (104,884) 157,105
Increase in accrued expenses 36,741 182,859
Increase in accrued interest 4,875 9,448
----------------------------
Net cash used in operating activities (759,481) (667,926)
----------------------------
Cash Flows from Investing Activities:
Acquisition of machinery and equipment -- (1,642)
Increase in employee and stockholder receivables -- (35,000)
Proceeds from repayments of notes receivable 36,941 --
----------------------------
Net cash provided by (used in) investing activities 36,941 (36,642)
----------------------------
Cash Flows from Financing Activities:
Increase in amount due to related party -- 151,000
Proceeds from common stock issued 200,000 --
Advances from stockholders 250,000 --
Proceeds from convertible debentures 320,000 475,000
Payment on notes payable -- (13,750)
----------------------------
Net cash provided by financing activities 770,000 612,250
----------------------------
Net increase (decrease) in cash 47,460 (92,318)
Cash, beginning 33,168 128,204
----------------------------
Cash, ending $ 80,628 $ 35,886
============================
Schedule of non-cash investing and financing activities
Discount on issuance of convertible debt $ 112,759 $ 324,917
Conversion of debt to common stock $ 400,000 $ 338,743
Acquisition of Interfacial -- $ 6,750,001
See Notes to Financial Statements
6
INTERNATIONAL FUEL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The interim financial statements included herein have been prepared by
International Fuel Technology, Inc. ("IFT"), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations, although IFT believes that the disclosures are
adequate to make the information presented not misleading.
These statements reflect all adjustments, consisting of normal recurring
adjustments which, in the opinion of management, are necessary for fair
presentation of the information contained therein. It is suggested that
these financial statements be read in conjunction with the financial
statements and notes thereto included in IFT's annual report on Form 10-K
for the twelve month period ended December 31, 2001. IFT follows the same
accounting policies in preparation of interim reports.
Results of operations for the interim periods are not indicative of annual
results. Previous to the completion of the development of its main
products and inception of revenue generating sales, the Company reported
as a development stage Company.
Note 2 -- Ability to Continue as a Going Concern
IFT's financial statements are presented on the going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. IFT has incurred significant losses
since inception and has limited funds with which to operate. Management is
in the process of executing a strategy based upon marketing pollution
emission control technologies that also offer enhanced engine performance
with respect to greater fuel economy. IFT already has several technologies
in development, and may seek to add other technologies through
acquisitions. Management anticipates receiving necessary regulatory and
commercial acceptance for its acquired technologies within the next twelve
months. IFT has begun selling products directly to the commercial
marketplace and expects to eventually generate a level of revenues
sufficient to meet IFT's working capital requirements. While management
cannot make any assurance as to the accuracy of our projections of future
capital needs, it is anticipated that a total of approximately $1,000,000
over the remainder of the current fiscal year will be necessary in order
to enable us to meet our current capital needs. The Company is currently
looking for alternative sources of financing. Agora Capital has been hired
as consultants to assist the Company with the securing of funding.
Management believes the proceeds from financing will be used as follows:
$100,000 for commercial fleet testing programs, $250,000 for professional
fees, $250,000 for salary expenses and $400,000 working capital for
administrative and other capital needs, including investigation of future
acquisitions, if any.
On January 3, 2001 IFT entered into a Securities Purchase Agreement with
IIG Equity Opportunities Fund Ltd. ("IIG Fund"), which has a one-year
commitment amount of $3 million, with an option at our control for an
additional $3 million in financing after the completion of the one-year
commitment. On March 1, 2001, IFT completed registration of the common
shares required by the January 3, 2001 Securities Purchase Agreement (the
"Agreement"). The Agreement provides for IFT to sell up to $250,000 in
convertible debentures to the IIG Fund every thirty days. On March 2, 2001
IFT initiated the first convertible debenture purchase and on March 7,
2001 received $200,000 and on March 22, 2001 received $50,000. On April 6,
2001, IFT initiated the second convertible debenture purchase and on April
24, 2001 received $225,000. During May 2001 IFT received notification that
due to regulatory issues relating to the structure of the transactions
contemplated by the Securities Purchase Agreement, 18,163,872 shares
issuable upon possible future conversion of debentures not yet issued and
750,000 shares issuable upon possible future exercise of not yet issued
warrants will never be issued. Due to the inability to sell additional
convertible debentures after April 2001, IFT entered into a new Securities
Purchase Agreement with IIG on July 10, 2001 that provides for the sale of
common stock and has a
7
INTERNATIONAL FUEL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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 June 30, 2002, IFT
has borrowed a total of $1,750,000 under the financing agreement. IIG has
currently suspended its financing agreement with the Company due to IFT's
low stock price. The Company is currently pursuing alternative financing
sources.
The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
possible inability of IFT to continue as a going concern.
Note 3 - Acquisition
On May 25, 2001 IFT issued 12,500,001 common shares to the shareholders of
Interfacial Technology Ltd. ("Interfacial") to acquire all of
Interfacial's outstanding common stock. Interfacial is a development stage
company formed in May 2000 which has since its inception focused its
efforts to develop proprietary fuels and fuel additive formulations that
will improve fuel economy, enhance lubricity and lower harmful engine
emissions, while decreasing reliance on petroleum-based fuels. IFT
acquired Interfacial because it believed their technology could be more
expeditiously and cost effectively brought to market than its previously
acquired PEERFUEL(TM) technology. The purchase price of approximately
$6,750,000 was determined based on the market price of IFT's common stock
on the date the acquisition was announced. Stock certificates for an
additional 8,500,002 common shares were placed in an escrow account
subject to a performance escrow agreement that provides for the release of
the stock certificates to the Interfacial shareholders based on the
achievement of certain revenue levels by IFT within two years following
May 25, 2001. In January 2002, the Company and the former shareholders of
Interfacial agreed to reduce the additional shares subject to the
performance escrow by 500,000 shares. Revenues equal to, or more than,
$3,500,000 for the one year period ending May 24, 2002, or revenues equal
to, or more than, $10,000,000 for the two year period ending May 24, 2003
will result in a portion, as determined by a formula in the performance
escrow agreement, of the stock certificates for the 8,000,002 common being
released to the Interfacial shareholders. The shares placed in the escrow
account will not be included in the computation of basic and diluted loss
per share until they are released to the former Interfacial shareholders.
In connection with the closing of this transaction three of the
Interfacial shareholders have been appointed to IFT's board of directors.
In addition, IFT entered into consulting agreements with four of the
Interfacial shareholders on May 25, 2001.
The acquisition has been accounted for using the purchase method of
accounting, and the assets have been recorded at fair value. Results of
operations have been included as of the effective date of the transaction.
The purchase price of $6,750,001 was initially allocated to intangible
assets and goodwill, and was being amortized over a 15-year life. During
the fourth quarter of 2001, a valuation of the acquisition was completed.
Based on this valuation, the Company re-assessed the allocation of the
purchase price and the lives of the respective intangible assets acquired,
allocating $2,400,001 to purchased technology, $1,900,000 to in-process
research and development, and $2,450,000 to goodwill. After completion of
the valuation report, the estimated lives of purchased technology and
goodwill were changed to six years. In-process research and development
related to ongoing testing and optimization efforts for which the
underlying technology has not yet achieved market readiness and had no
alternative future use. At the date of acquisition, Interfacial's efforts
focused on fine-tuning its additive technology for aqueous blends and
tailoring it to existing applications, in order to optimize the
emission-reducing characteristics while preserving engine efficiency, and
there existed uncertainties regarding the successful development of the
technology. The amount allocated to in-process research and development
was calculated in the valuation using the discounted cash flow method
based on a useful life of six years, and the entire value of $1,900,000
was charged to research and development expense during 2001. As of
December 31, 2001, the Company had completed development of this
technology and was shifting its focus to commercialization.
8
INTERNATIONAL FUEL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Effective January 1, 2002 we adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (FAS 142). Under
the new rules, we are no longer required to amortize goodwill and other
intangible assets with indefinite lives. We will be required to subject
these assets to periodic testing for impairment. Impairment losses for
goodwill and indefinite-lived intangible assets that arise due to the
initial application of FAS 142 are required to be reported as resulting in
a change in accounting principle.
An evaluation of our existing goodwill as of January 1, 2002 was
performed, and it was determined that goodwill associated with our sole
business unit was not impaired. The business was evaluated using the
quoted market price of our common stock as of January 1, 2002, which
indicated that the fair value of the business exceeded its carrying value.
Goodwill amortization was $238,195 through December 31, 2001, at which
time amortization ceased with the implementation of FAS 142. The remaining
book value of $2,211,805 will be periodically tested for impairment.
Amortization of purchased technology amounted to $233,333 during the year
ended December 31, 2001, and $200,000 during the six months ended June 30,
2002. Amortization of purchased technology is expected to equal $400,000
per annum through May 25, 2007, subject to periodic impairment tests.
The following tables summarize the results of continuing operations and
earnings per share had FAS 142 been adopted at the beginning of 2001:
Six Months ended
June 30, 2001
--------------------
Reported net loss $(3,072,587)
Add back: Goodwill amortization 13,611
--------------------
Adjusted net loss $(3,058,976)
====================
Basic and Diluted
Six months ended June 20, 2001 Loss per Share
--------------------
Reported net loss $(0.11)
Goodwill amortization 0.00
--------------------
Adjusted net loss $(0.11)
====================
The 8,000,002 common shares placed in the escrow account will be valued as
an addition to the purchase price if and when the shares are released to
the Interfacial shareholders in accordance with the performance escrow
agreement at the appropriate price of IFT's common stock at that date. The
8,000,002 common shares are currently recorded at par value, or $80,000,
as common stock and a reduction of additional paid-in capital.
The summarized unaudited pro forma results of operations set forth below
for the six months ended June 30, 2002 and 2001 assume the acquisition
occurred as of the beginning of 2001.
The unaudited pro forma results of operations are not necessarily
indicative of what actually would have occurred if the acquisition had
been completed at the beginning of 2001, nor are the results of operations
necessarily indicative of the results that will be attained in the future.
9
INTERNATIONAL FUEL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended
June 30,
2002 2001
--------------------------
Revenues $7,684 $0
Net loss $(1,426,730) $(5,320,544)
Net loss per common share:
Basic and diluted $(.03) $(.14)
Note 4 - Convertible Debentures
On June 30, 2002, IFT had outstanding convertible debentures of $75,000,
less the related discount on the beneficial conversion feature of the
debenture of $25,705. The debentures bear interest at a rate of 6% per
annum commencing on the date of issuance, are convertible upon issuance,
and will mature on December 31, 2003.
The convertible debentures are immediately convertible at the option of
the holder into the number of shares of our common stock equal to the
principal amount of the debentures to be converted, including all accrued
interest, divided by the conversion price in effect on the conversion
date. The conversion price is calculated at 80% of the average of the two
lowest closing bid prices for the ten trading days immediately subsequent
to the convertible debenture issuance date.
During the six months ended June 30, 2002, IFT issued 1,410,033 shares of
common stock upon the conversion of $400,000 worth of convertible
debentures owned by IIG. An additional $112,759 had been recorded as a
discount on the convertible debenture and added to additional
paid-in-capital, relating to the beneficial conversion feature.
Note 5 - Stockholders' Equity
During January 2002, the Company sold 600,000 restricted shares of common
stock at a price of $.25 per share to a Director. The Company recorded
payroll expense of $150,000 relating to the excess of the trading price of
IFT's stock over the proceeds.
During January 2002, 500,000 shares of the Company's common stock were
removed from the Interfacial Technologies' escrow account and canceled.
The shares were removed because Interfacial failed to pay liabilities it
had incurred prior to being bought by the Company.
During January 2002, the Company issued 125,000 shares of common stock to
a Director. These shares had been accrued as payroll expense and
additional paid in capital as of December 31, 2001.
During February 2002, the Company sold 250,000 restricted shares of common
stock at a price of $.20 per share to a consultant. The Company recorded
consulting expense of $40,000 relating to the excess of the trading price
of IFT's stock over the proceeds.
During April and May 2002, the Company issued a total of 340,000 shares of
common stock to consultants for services. The Company recorded consulting
expense of $104,900.
During the six months ended June 30, 2002, the Company recorded
compensation expense of $102,816 relating to shares of common stock that
were earned under employment agreements for two officers but unissued as
of June 30, 2002.
10
INTERNATIONAL FUEL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
During the six months ended June 30, 2002, the Company recorded consulting
expense of $4,984 relating to shares of common stock that were earned
under consulting agreements for various consultants but unissued as of
June 30, 2002.
Note 6 - Subsequent Events
In July 2002, the Company entered into a consulting agreement in which the
Company issued 1,250,000 shares of common stock upon inception of the
agreement, and will issue an additional 1,250,000 shares at a mutually
agreed upon time. The consulting agreement, for which the Company will
receive strategic planning and general business consulting, is for a
one-year term expiring July 31, 2003.
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements and Associated Risks
This Quarterly Report on Form 10-Q contains forward-looking statements
made pursuant to the safe harbor provisions of the Securities Litigation
Reform Act of 1995. These forward looking statements are based largely on
IFT's expectations and are subject to a number of risks and uncertainties,
many of which are beyond IFT's control, including, but not limited to,
economic, competitive and other factors affecting IFT's operations,
markets, products and services, expansion strategies and other factors
discussed elsewhere in this report and the documents filed by IFT with the
Securities and Exchange Commission. Actual results could differ materially
from these forward-looking statements. In light of these risks and
uncertainties, there can be no assurance that the forward-looking
information contained in this report will in fact prove accurate. IFT does
not undertake any obligation to revise these forward-looking statements to
reflect future events or circumstances.
Overview
International Fuel Technology and its subsidiary is comprised largely of
the operations and assets that were previously the business of
Interfacial, a company located in Manchester, England. IFT completed the
acquisition of Interfacial on May 25, 2001.
IFT has developed a family of fuel blends that have been created through
the use of proprietary fuel additives. IFT is now in the process of
patenting the fuel additives and resulting fuel blends as part of its
efforts to commercialize these fuel blends. The individual fuel blends
incorporating the IFT additive formulations include base fuel with
additive only, base fuel with kerosene, base fuel with biodiesel, base
fuel with ethanol, and base fuel with an urea/water solution. The Company
seeks to commercialize these fuel blends on a global basis through the use
of strategic partnerships with a variety of targeted companies including
fuel refiners, distributors of fuel additives, OEM's, and other companies.
IFT began selling its products during the first quarter of 2002 and is no
longer a development stage company and has raised capital for initial
development through the issuance of its securities and debt instruments.
Three and Six Months Ended June 30, 2002 compared to the Three and Six
Months Ended June 30, 2001
Total operating expenses were $297,769 for the three months ended June 30,
2002, as compared to the operating expenses of $1,275,333 for the three
month period ended June 30, 2001. This represents a $977,564 decrease from
the prior period. Decreased operating expenses in the current period
compared to the prior period are a result of a reduction of selling,
general and administrative expenses in 2002, as discussed below. Total
operating expenses were $1,288,517 for the six months ended June 30, 2002,
as compared to the operating expenses of $2,752,580 for the six months
ended June 30, 2001. This represents a $1,464,063 decrease from the prior
period which is primarily attributable to the significant reductions of
selling, general and administrative expenses during the first six months
of 2002, as discussed below.
Selling, general and administrative expenses for the three months ended
June 30, 2002 were $196,054, as compared to the selling, general and
administrative expenses of $1,237,833 for the three month period ended
June 30, 2001. This represents a decrease of $1,041,779 from the prior
period. This decrease can be attributed to the issuance of consulting
shares in the second quarter of 2001 which resulted in an expense of
approximately $580,000. In addition, the remaining consulting shares were
expensed over the remaining term of the consulting agreements, and
adjusted for stock price fluctuations, resulted in a reversal of
approximately $300,000 caused by a declining stock price in 2002. Selling,
general and administrative expenses for the six months ended June 30, 2002
were $1,085,086, as compared to the selling, general and administrative
expenses of $2,715,080 for the six months period ended June 30, 2001. This
represents a decrease of $1,629,994 from the prior
12
period. The decrease is attributable to the following: In February 2001,
the Company issued a one-time stock grant of 2,485,000 shares to employees
and directors, resulting in compensation expense of over $1 million; The
issuance of consulting shares, in the second quarter of 2001 resulted in
expenses of approximately $580,000.
Amortization and depreciation expenses for the three months ended June 30,
2002 were $101,715, as compared to $37,500 for the corresponding period in
2001. This increase of $64,215 is attributable to the amortization of
technology which was acquired in May of 2001. Amortization and
depreciation expenses for the six months ended June 30, 2002 were $203,431
representing an increase of $165,931 from the corresponding period in
2001. This increase is primarily attributable to the shorter period (1.2
months) of amortization of intangibles in 2001.
Interest expense was $62,938 for the three months ended June 30, 2002, as
compared to the interest expense of $294,968 for the three month period
ended June 30, 2001. The decrease is primarily attributable to a larger
discount amortization on convertible debt in 2001 due to warrants issued
and a one-time $143,200 beneficial conversion feature. Interest expense
was $158,029 for the six months ended June 30, 2002, as compared to the
interest expense of $320,007 for the six months ended June 30, 2001. This
represents a $161,978 decrease from the prior period. The decrease is
primarily attributable to a one-time $143,200 beneficial conversion
feature in 2001.
The net loss for the three months ended June 30, 2002 was $357,041 as
compared to the net loss of $1,570,301 for the three months ended June 30,
2001. This represents a $1,213,260 decrease from the prior period,
primarily due to a greater stock-based compensation and interest in 2001
due to one-time charges. The net loss for the six months ended June 30,
2002, was $1,426,730 as compared to the net loss of $3,072,587 for the six
months ended June 30, 2001. This represents a $1,645,857 decrease from the
prior period. This decrease is primarily attributable to significant
reductions in stock-based compensation and interest in 2002. The basic and
dilutive net loss per common share for the three months ended June 30,
2002 was $.01 as compared to the basic and dilutive net loss per common
share of $.05 for the three months ended June 30, 2001. The basic and
dilutive net loss per common share for the six months ended June 30, 2002
was $.03 as compared to the basic and dilutive net loss per common share
of $.11 for the six months ended June 30, 2001. The decrease in loss per
share was caused by decreased net losses and greater dilution of common
stock.
Critical Accounting Policies
Valuation of long-lived and intangible assets and goodwill. We assess the
impairment of identifiable intangibles, long-lived assets and related
goodwill whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors we consider important which
could trigger an impairment review include the following:
o Significant underperformance relative to expected historical or
projected future operating results;
o Significant changes in the manner of our use of the acquired assets
or the strategy for our overall business;
o Significant negative industry or economic trends;
o Significant decline in our stock price for a sustained period; and
o Our market capitalization relative to net book value.
When we determine that the carrying value of intangibles, long-lived
assets and related goodwill may not be recoverable based upon the
existence of one or more of the above indicators of impairment, we measure
any impairment based on the quoted market price of our common stock.
In 2002, Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" became effective and as a result,
we will cease to amortize approximately $2.2 million of goodwill. We had
recorded approximately $238,000 of amortization on these amounts during
2001 and would have recorded approximately $408,000 of amortization during
2002. In lieu of amortization, we are required to perform an initial
impairment review of our goodwill in 2002 and an annual impairment review
thereafter. We completed our initial review during the second quarter of
2002, and did not record an
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impairment charge.
Liquidity and Capital Resources
A critical component of management's operating plan impacting the
continued existence of IFT is the ability to obtain additional capital
through additional debt and/or equity financing. Management does not
anticipate IFT will generate a positive internal cash flow until such time
as IFT can generate significant revenues from either sale of our products
or license fees for our technologies, which may take the next few years to
realize. If IFT cannot obtain the necessary capital to pursue our business
plan, IFT may have to cease or significantly curtail its operations. This
would materially impact our ability to continue as a going concern. The
independent auditor's reports included with the December 31, 2001
financial statements in Form 10-K indicate there is a substantial doubt
that IFT can continue as a going concern.
A significant portion of the Company's operating loss relates to charges
for non-cash operating expenses such as amortization and depreciation,
employee stock-based compensation, consulting services fees paid in the
Company's common stock and interest expense related to conversion features
of the Company debt. The Company has offset its capital needs since
inception primarily through the issuance of common stock to its employees
and consultants as compensation for services rendered, which totaled
$402,700 for the six month period ended June 30, 2002. For the six months
ended June 30, 2002 proceeds from notes payable and advances from
stockholders totaled $570,000 with $0 repaid and $400,000 converted to
common stock. During the six months ended June 30, 2002, the Company
received $200,000 in proceeds from the sale of common stock to Directors
and consultants.
The Company has not made significant cash investments in property and
equipment or in the acquisition of companies or technologies. During the
period ended December 31, 2001, the Company acquired Interfacial
Technologies, Ltd., a UK company in exchange for 12,500,001 shares of the
common stock.
The cash used in operating activities was $759,841 for the six months
ended June 30, 2002 as compared to cash used in operating activities of
$667,926 for the six months ended June 30, 2001. Cash used in operations
for the six months ended June 30, 2002 increased primarily because the
Company paid down over $100,000 of accounts payable for the period ended
June 30, 2002. The cash provided by investing activities was $36,941 for
the six months ended June 30, 2002 as compared to ($36,642) used in
investing activities for the six months ended June 30, 2001. Cash provided
by investing activities for the six months ended June 30, 2002 increased
primarily due to the proceeds from repayments of notes receivable. The
cash provided by financing activities was $770,000 for the six months
ended June 30, 2002 as compared to $612,250 provided by financing
activities for the six months ended June 30, 2001. Cash provided by
financing activities for the six months ended June 30, 2002 related to the
issuance of convertible debentures, advances from stockholders, and the
sale of common stock. Net cash increased by $47,460 for the six months
ended June 30, 2002 as compared to net cash decreasing by $92,318 for the
six months ended June 30, 2001.
Working capital at June 30, 2002 was ($638,610) as compared to ($484,141)
at December 31, 2001.
IFT's main source of capital has been a Securities Purchase Agreement with
IIG dated July 10, 2001 that provides for the sale of convertible
debentures and has a one-year commitment amount of $3 million, with an
option at our control for an additional $3 million in financing after the
completion of the one-year commitment. As of June 30, 2002, IFT has
borrowed a total of $1,750,000 under the financing agreement. IIG has
currently suspended its financing agreement with the Company due to IFT's
low stock price. The Company is currently pursuing alternative financing
sources.
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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 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 alternative financing sources. The
Company is currently looking for alternative sources of financing. Agora
Capital has been hired as consultants to assist the Company with the
securing of funding. Management believes the proceeds from its financing
will be used as follows: $100,000 for commercial fleet testing programs,
$250,000 for professional fees, $250,000 for salary expenses and $400,000
working capital for administrative and other capital needs, including
investigation of future acquisitions, if any.
Subsequent Events
In July 2002, the Company entered into a consulting agreement in which the
Company issued 1,250,000 shares of common stock upon inception of the
agreement, and will issue an additional 1,250,000 shares at a mutually
agreed upon time. The consulting agreement, for which the Company will
receive strategic planning and general business consulting, is for a
one-year term expiring July 31, 2003.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, operations of IFT may be exposed to
fluctuations in interest rates. These fluctuations can vary the costs of
financing, investing and operating transactions. At June 30, 2002 IFT has
debt totaling 21% of total liabilities at fixed interest rates and
fluctuations in the interest rate could have a material impact on the
underlying fair value.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
None
(b) Reports on Form 8-K
None
All other items of this report are inapplicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
INTERNATIONAL FUEL TECHNOLOGY, INC.
(Registrant)
By: /s/ Jonathan R. Burst Date: August 14, 2002
--------------------------- ---------------
Jonathan R. Burst
Chief Executive Officer
By: /s/ Michael F. Obertop Date August 14, 2002
--------------------------- ---------------
Michael F. Obertop
Chief Financial Officer
CERTIFICATION
Each of the undersigned hereby certifies, in accordance with 18 U.S.C.
ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of
2002, in his capacity as an officer of International Fuel Technology
Inc. ("IFT"), that the Quarterly Report of IFT on Form 10-Q for the
period ended June 30, 2002, fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that
the information contained in the report fairly represents, in all
material respects, the financial condition and results of operation of
IFT.
By: /s/ Jonathan R. Burst Date: August 14, 2002
--------------------------- ---------------
Jonathan R. Burst
Chief Executive Officer
By: /s/ Michael F. Obertop Date August 14, 2002
--------------------------- ---------------
Michael F. Obertop
Chief Financial Officer
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