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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, 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
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(State or other jurisdiction of
incorporation or organization) (IRS Employer Identification No.)
7777 Bonhomme Avenue, Suite 1920, St. Louis, Missouri 63105
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(Address of principal executive offices)
(314) 727-3333
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(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. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) |_| No |X|
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 June 30, 2002 as reported on the OTC Bulletin Board, was
$18,605,925.
Number of shares of common stock outstanding as of March 26, 2003:
77,524,689
INTERNATIONAL FUEL TECHNOLOGY, INC.
FORM 10-K
For The Fiscal Year Ended December 31, 2002
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 12
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 12-13
Item 6. Selected Financial Data 13-14
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition 14-21
Item 7a. Quantitative and Qualitative Disclosures About Market
Risk 21
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 21
Part III
Item 10. Directors and Executive Officers of the Registrant 22-23
Item 11. Executive Compensation 23-25
Item 12. Security Ownership of Certain Beneficial Owners
and Management 25-26
Item 13. Certain Relationships and Related Transactions 26-28
Part IV
Item 14. Control and Procedures 28
Item 15. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 28-29
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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 the expectations of International Fuel Technology
Inc. ("IFT") 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
IFT 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.
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(TM) in North America. On May 29, 1998,
IFT merged with Scientific Fuel Technology, LLC, a company
affiliated with IFT through common ownership. Scientific Fuel
Technology was in the reprocessed fuels business with technology
designed to improve fuel efficiency and reduce harmful emissions.
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. On May 8, 2000, IFT
contingently issued 300,000 shares of it common stock pursuant to
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 shares of its common stock to
the shareholders of Interfacial Technologies (UK) Ltd.
("Interfacial"), to acquire all of Interfacial's issued and
outstanding capital 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
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certificates for an additional 8,500,002 shares of its common stock
were placed in an escrow account subject to a performance escrow
agreement that provided for the release of the stock certificates to
the Interfacial shareholders based on the achievement of certain
revenue levels by IFT. In January 2002, IFT and the former
shareholders of Interfacial agreed to reduce the shares subject to
the performance escrow by 500,000 shares. Revenues equal to, or
greater than, $10,000,000 for the two year period ending May 24,
2003 will result in all of the stock certificates for the 8,000,002
shares of its common stock being released to the Interfacial
shareholders. Revenues greater 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 8,000,002 shares of its
common stock being released to the Interfacial shareholders.
In connection with the closing of this transaction three of the
Interfacial shareholders were 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.
IFT is engaged in one reportable industry segment. Financial
information regarding this segment is contained in IFT's financial
statements included in this report.
(b) Description of Business
IFT 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. Since its
incorporation, IFT's initial focus was on the research and
development of a fuel processing system aimed at reducing harmful
engine emissions called the PEERFUEL(TM) system for Performance
Enhanced Emission Reduced fuels. The Board of Directors determined
that IFT should broaden its technology base while still maintaining
efforts to complete its original fuel processing system.
As part of IFT's efforts to expand into promising new engine
emission-reduction technologies, IFT completed the acquisition of
Interfacial in May 2001. Interfacial is a developer of a family of
proprietary fuels and fuel additive formulas based in Manchester,
England.
Through the acquisition of Interfacial, IFT acquired Interfacial's
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 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(TM) technology has
significant potential in the future, management has concluded that
Interfacial's technology can be more expeditiously and cost
effectively sold in commercial markets. Therefore, management has
decided to currently focus all of its efforts on commercializing
Interfacial's proprietary technology.
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IFT has emerged from its research and development phase and is now
primarily focused on the commercialization and marketing of its
numerous fuel blends and additives. Primary research and development
efforts were completed in August of 2001, patent applications to
protect its intellectual property pertaining to its proprietary
technology have been filed with the U.S. patent office and all
manufacturing of additive formulations is outsourced. Management
estimates that capital requirements for fixed assets, working
capital, and research and development are expected to be
approximately $1.3 million for the year ending December 31, 2003.
PRODUCTS
Unlike traditional fuel additives, which are predominantly
hydrocarbon based -- derived from petroleum sources, IFT's
proprietary technology is entirely based upon surfactant
chemistry. A complex mixture of chemical molecules which, when
blended into distillates or gasoline, positively alter the
composition and make-up of the finished fuel. These resulting
changes, add to the performance of the fuel, and have been proven
to significantly reduce harmful emissions like Carbon Monoxide
(CO) and environmental emissions including Carbon Dioxide (CO[2])
and Nitrous Oxide (NO[X]), increase miles per gallon, reduce
black smoke, reduce particulates and enable excellent fuel
lubricity throughout the engine and fuel system.
In summary IFT's technology can be adapted for any industry from
Marine to Refinery, Motorsport to Transport -- its technical
efficacy has been demonstrated and confirmed by many independent
laboratories including Southwest Research Institute ("SwRI").
IFT has introduced three trademarked brands to support the companies
drive towards sales and marketing around the world --
Diesolift: A range of diesel additives.
Kerolift: A range of kerosene additives.
Gasolift: A range of gasoline additives.
Each brand has a number of products associated with it that have
been specifically designed to meet industries exacting and
diversifying requirements.
Several technical papers have been co-published and presented on
behalf of IFT by SwRI at world conferences, ensuring that IFT and
its technology receives industry recognition and approval.
To summarize the benefits of the technology:
i. Increase miles per gallon.
i. Increase fuel lubricity.
ii. Reduce toxic emissions, e.g. CO, HC.
iii. Reduce NOx and CO2, both attributed to global warming
(greenhouse gases).
iv. Reduce maintenance.
v. Eliminate the need for biocides in diesel (a difficult
product to handle.
vi. Supports the use of Ethanol within fuels -- thus ensuring a
stable fuel.
vii. Are natural corrosion inhibitors.
viii. Are natural detergents.
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It should also be recognized that through market knowledge and in
particular environmental concerns around the world, the 'olift'
series of products are allowing meaningful partnerships with
associates to be formed.
The marketing perspective is being determined by the initial
appointment of consultants in these target areas, which will
culminate after our due diligence into a firm presence in each
market. This approach limits 'risk reward' and enables strategies
with trade mark and patent protection in active areas.
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. 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.
IFT's research and development expenses have been $16,802, $197,433,
and $286,914 for the years 2002, 2001, and 2000, respectively.
EP Act APPLICATION
In February 2002, IFT filed a formal petition with the Department
of Energy ("DOE") requesting "alternative fuel" status for its
Synthetic Diesel fuel blend under the Energy Policy Act of 1992
("EP Act"). The EP Act program was designed with very specific
goals in mind: make targeted reductions in the use of
petroleum-based fuels in the United States 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 United States.
In July 2002, the DOE responded to IFT's petition deciding to
take no additional action at this time. Management still believes
that its Synthetic Diesel should qualify for alternative fuel
status and is in the process of pursuing other avenues to achieve
designation of such status.
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 EP Act 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.
SOUTHWEST RESEARCH INSTITUTE
All of IFT's products 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)
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an increase in fuel economy; (2) no loss of engine 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 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 additives 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 additive
would save approximately 1,200 gallons of fuel per year. In
addition, use of IFT's additive 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 United States
government and the governments of 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 these limitations, 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. Management believes the
"natural selection" expected to take place over the coming decade
for 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:
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o Europe, where several countries, including Great Britain,
France and Italy have enacted legislation providing tax breaks
to companies that use fuel emulsions blending diesel and
water;
o United States, 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
where powerful agricultural lobbies are promoting the use of
alternative fuels such as biodiesel and ethanol in the federal
government;
o China, where the central government has announced the
construction of its first ethanol facilities;
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.
Also, in order for IFT's products to be used in the United
States, EPA registration is required. In December 2001, IFT
received EPA registration for the additive component of its fuel
blends. 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 the California Air Resources Board ("CARB"). All
diesel fuel sold in California must be approved by CARB, which
has a thorough and well-defined procedure for certification.
Another federal agency shaping the landscape of petroleum-based
fuel consumption is the 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 (EP Act) and the ethanol and biodiesel subsidy
programs, put in place by the DOE and other government agencies,
provide significant incentives for the adoption of targeted fuel
blends, many of which are created and enhanced by the use of
IFT's products. IFT 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 United
States and the rest of the world.
8
MANUFACTURING PARTNER
In 2001, IFT signed a manufacturing agreement with Tomah(3)
Products, Inc., ("Tomah") 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. IFT chose Tomah as its partner for long-term supply
arrangements because of Tomah's 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. IFT's fuel blends form a
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 IFT 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 customers allowing IFT 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. IFT has
developed and is executing a four-pronged marketing 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
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diesel engine use including trucking, school buses,
off-road construction, and marine applications. IFT has not
finalized any agreements to date.
Distribution Partners
In order to streamline operations and take advantage of
existing industry expertise, IFT 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. IFT has not finalized any agreements to
date.
Direct Sales
In addition to marketing efforts with fleet owners and
distribution concerns, IFT is currently selling "additive
only" directly to the consumer using several distribution
channels. IFT continues to utilize trade show attendance,
direct mail and direct telemarketing to create initial
awareness of the products and their benefits to consumers,
supported by "800" number call-in support.
Since the "consumer" tends to be less price sensitive than
distributors/wholesalers of fuels, and the United States
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 IFT's marketing strategy involves
educating a number of industry related entities as to the
benefits of IFT products. IFT 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 public
interests, to push for the adoption of IFT additive
formulations in a variety of finished fuel blends.
SUMMARY
IFT believes that 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 IFT 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.
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EMPLOYEES
Currently, IFT has seven full time employees. Management believes that 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 $4,269 per month for approximately 1,500
square feet. A new five-year lease agreement was signed on January 1,
2002.
Management 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: Donald Thompson v. IFT
Facts: Mr. Thompson alleges that he entered into an oral
consulting contract with IFT. Mr. Thompson alleges that
one-time fee paid is an acceptance of his offer to
provide monthly consulting services.
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; v. IFT;
Terence Mendiretta; Salomon Grey Financial Corporation;
SPIGA Limited; Investe Co Ernst & Company; Encore
Holdings; Norman Barrett; Defendants
Facts: Plaintiffs allege negligent misrepresentation, fraud,
conversion, specific recovery of personal property,
breach of fiduciary duty, common count for money had
and received, and elder abuse against IFT and the other
defendants. Plaintiffs' claims are principally based on
the allegation that IFT and the other 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.
IFT 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 IFT.
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Item 4. Submission of Matters to a Vote of Security Holders
On November 18, 2002, IFT's annual shareholders meeting was held in
St.Louis. At this meeting the following directors were elected to the
Board of Directors: Jonathan R. Burst, Rex Carr, David B. Norris, Harry F.
Demetriou, John P. Stupp Jr., Ian Williamson, and Tony Cross. All
directors will serve on IFT's Board of Directors until the next annual
shareholders' meeting. A summary of the vote for Directors follows:
FOR WITHHELD
------------------------------
Jonathan R. Burst 45,235,720 870,465
Rex Carr 46,069,070 37,115
David B. Norris 46,020,520 85,665
Harry F. Demetriou 46,069,070 37,115
John P. Stupp, Jr. 46,068,000 38,185
Ian Williamson 45,944,220 161,965
Tony Cross 46,007,200 98,985
The other matter shareholders voted on was the ratification of IFT's
auditors, BDO Seidman LLP. 45,045,470 shares, being more than a majority
of the outstanding stock of IFT, were voted in favor of, 19,675 shares
voted against, and 1,041,040 shares abstained from ratification of the
appointment of BDO Seidman LLP to audit the financial statements of IFT
for the year 2002.
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
2001 2002
-----------------------------------------------
High Low High Low
First Quarter $0.56 $0.25 $0.52 $0.30
Second Quarter $0.63 $0.25 $0.47 $0.16
Third Quarter $0.70 $0.40 $0.29 $0.11
Fourth Quarter $0.62 $0.41 $0.17 $0.07
12
(b) Holders of Common Stock
As of the close of business on March 26, 2003, the last reported bid price
per share of IFT's common stock was $.09. As of March 26, 2003, IFT
estimates there were 4,500 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 shareholders. 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.
(d) Securities authorized for issuance under equity compensation plans
------------------------------------------------------------------------------------------------------------
Number of securities
Number of securities remaining available for
to be issued upon Weighted-average future issuance under
exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column (a))
------------------------------------------------------------------------------------------------------------
(a) (b) (c)
------------------------------------------------------------------------------------------------------------
Equity compensation 8,360,000 0.48 9,140,000
plans approved by
security holders (1)
------------------------------------------------------------------------------------------------------------
Equity compensation 0 0 0
plans not approved by
security holders
------------------------------------------------------------------------------------------------------------
Total 8,360,000 9,140,000
------------------------------------------------------------------------------------------------------------
(1) Includes IFT's long-term incentive plan
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.
13
(a) Selected Statement of Operations Data (In Thousands of Dollars, Except
Per Share Data)
Nine Months Fiscal Year
ended Ended
Fiscal Year Ended December 31, December 31, March 31,
2002 2001 2000 1999 1999
-------------------------------------------------------------------------
Revenues 20 0 0 0 0
Operating Expenses 3,237 6,787 4,690 4,727 7,751
Net Loss (3,479) (7,575) (6,688) (5,132) (7,839)
Basic and Diluted Net
Loss per Common Share ($0.06) ($0.21) ($0.36) ($0.32) ($0.59)
Weighted Average Shares 55,489,495 36,416,469 18,827,802 15,800,725 13,390,417
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.
(b) Selected Balance Sheet Data (In Thousands of Dollars)
Nine Months Fiscal Year
ended Ended
Fiscal Year Ended December 31, December 31, March 31,
2002 2001 2000 1999 1999
-------------------------------------------------------------------------
Total Assets 4,067 4,528 175 68 6
Long-Term Debt 163 258 162 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
IFT has developed a family of fuel blends that have been created through
the use of proprietary fuel additives. IFT is 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. IFT 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. IFT is no longer a development
stage company, IFT raised capital for its initial development through the
issuance of its securities and debt instruments.
14
Comparison of Twelve Months Ended 12/31/02 and Twelve Months Ended
12/31/01
Operating expenses
Total operating expenses were $3,236,761 for the twelve months ended
December 31, 2002, as compared to operating expenses of $6,787,050 for the
twelve months ended December 31, 2001. Total operating expenses for the
twelve months ended December 31, 2002 represents a $3,550,289, or 52%,
decrease from the prior period. The decrease was mainly due to acquired
in-process research and development costs of $1,900,000 in 2001 and a
reduction of stock based compensation and stock issued to consultants of
$752,349 and $650,515, respectively.
Following is an overview of the significant fluctuations in operating
expenses:
Selling, General and Administrative Expenses
Total selling, general and administrative expenses were $2,829,898 for the
twelve months ended December 31, 2002, as compared to $6,312,253 for the
twelve months ended December 31, 2001. Total selling, general and
administrative expenses for the twelve months ended December 31, 2002
represent a $3,482,355 decrease, or 55% decrease from the prior period.
The level of selling, general and administrative expenses for the twelve
months ended December 31, 2002 was significantly lower because in 2001 IFT
had $1,900,000 of acquired in-process research and development costs and
IFT significantly reduced stock based compensation and stock issued to
consultants by $752,349 and $650,515, respectively. Selling, general and
administrative expenses should increase while IFT increases its efforts to
commercialize its products.
Payroll
Payroll expenses were $1,369,600 during the twelve months ended December
31, 2002, as compared to $2,237,743 for the twelve month period ended
December 31, 2001. Payroll for the twelve month period ended December 31,
2002 represents a decrease of $868,142 from the prior period. Payroll
expenses decreased primarily as a result of a reduction in stock based
compensation of $752,349.
Amortization and depreciation
Amortization and depreciation expenses were $406,863 for the twelve months
ended December 31, 2002, as compared to $474,797 for the twelve months
ended December 31, 2001. The level of amortization and depreciation
expense for the twelve months ended December 31, 2002 has decreased over
2001 as a result of IFT implementing FAS 142. As a result there is no
goodwill amortization in 2002 which reduced the expense by $238,000. This
reduction was offset by a full year of amortization of purchased
technology of $400,000 in 2002 compared with amortization of purchased
technology of $233,333 in 2001. Amortization and depreciation expenses
should be consistent with 2002 in 2003.
Interest
Interest expense was $266,387 for the twelve months ended December 31,
2002 as compared to $787,760 for the twelve months ended December 31,
2001. Interest expense for the twelve months ended December 31, 2002
represents a decrease of $521,373 from the prior period. Interest expense
was higher in 2001 due to discounts recorded on the convertible debenture
15
agreement with IIG Equity Opportunities Fund Ltd. ("IIG"). Management
expects that interest expenses will decrease in 2003 due to the minimal
debt balance at the end of 2002.
Provision for Income Taxes
IFT has operated at a net loss since inception and has not recorded or
paid any income taxes. IFT has a significant net operating loss
carryforward that would be recognized at such time as IFT demonstrates the
ability to operate on a profitable basis for an extended period of time.
The deferred tax asset resulting from the net operating loss carryforward
has been fully reserved with a valuation allowance.
Net Loss
The net loss was $3,478,620 for the twelve months ended December 31, 2002
as compared to the net loss of $7,574,810 for the twelve months ended
December 31, 2001. Net loss for the twelve months ended December 31, 2002
represents a decrease of $4,096,190, or 54%, from the prior period. The
net loss decreased due to the purchase of in-process research and
development in 2001 combined with a reduction in professional fees,
interest expense, and officers stock awards. The net loss per share of
common stock was $.06 for the twelve months ended December 31, 2002 as
compared to the net loss per common share of $.21 for the twelve months
ended December 31, 2001. The decrease in loss per share was caused by
decreased net losses for the twelve months ended December 31, 2002 and
greater dilution of common stock for the twelve months ended December 31,
2002.
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 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.
Following is an overview of the significant fluctuations in operating
expenses:
Selling, General & Administrative Expenses
Total selling, general and administrative expenses were $6,312,253 for the
twelve months ended December 31, 2001, as compared to $4,686,736 for the
twelve months ended December 31, 2000. Total selling, general and
administrative expenses for the twelve months ended December 31, 2001
represent a $1,625,517 increase, or 34.7% increase from the prior period.
This increase was mainly due to acquired in-process research and
development costs of $1,900,000 in 2001.
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 director payroll of $298,090. Payroll expenses
included $1,661,313 and $1,691,099
16
of stock-based compensation in 2001 and 2000, respectively.
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.
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.
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
share of common stock 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.
New Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 145, "Rescission
of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections. This Statement rescinds SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of Debt" and an amendment of that
Statement, SFAS No. 64, "Extinguishment of Debt Made to Satisfy
Sinking-Fund Requirements." This Statement also rescinds SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers." This Statement
amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency
between the required accounting for sale-leaseback transactions and the
required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement
also amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings or describe their applicability
under changed conditions. The provisions of this Statement are effective
for financial statements on or after May 15, 2002. Management does not
believe that the adoption of this Statement will have a material impact on
IFT's financial statements.
In July 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in
Restructuring)." This Statement requires that a liability for costs
associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability in incurred. The
provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002. Management does not believe
that the adoption of this Statement will have a material impact on IFT's
financial statements.
17
In December 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." This Statement amends the
transition and disclosure requirements of FASB Statement No. 123,
"Accounting for Stock-Based Compensation." For most companies, the impact
of Statement 148 is more frequent and prominent disclosure of stock-based
compensation expense beginning with financial statements for fiscal years
ending after December 15, 2002. Statement 148 amends existing disclosures
that a company should make in its annual financial statements and requires
for the first time, disclosure in interim financial reports.
In November 2002, FASB Interpretation No. 45 ("FIN 45"), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Indebtedness of Others" was issued. FIN 45 elaborates on the disclosures
to be made by a guarantor in its interim and annual financial statements
about its obligations under certain guarantees that it has issued. It also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of this Interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The required
disclosures and a roll-froward of product warranty liabilities are
effective for financial statements of interim or annual periods ending
after December 15, 2002. At this time, IFT does not believe that the
adoption of this interpretation will have a material effect on its
financial statements.
Critical Accounting Policies
Valuation of long-lived and intangible assets and goodwill. IFT assesses
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 IFT considers 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 IFT's use of the acquired assets
or the strategy for IFT's overall business;
o Significant negative industry or economic trends;
o Significant decline in IFT's stock price for a sustained period; and
o IFT's market capitalization relative to net book value.
When IFT determines 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, IFT
measures any impairment based on the quoted market price of IFT's common
stock.
In 2002, SFAS No. 142, "Goodwill and Other Intangible Assets" became
effective and as a result, IFT ceased to amortize approximately $2.2
million of goodwill. IFT recorded approximately $238,000 of amortization
on these amounts during 2001 and would have recorded approximately
$408,000 of amortization during 2002. The provisions of SFAS 142 also
required the completion of transitional impairment test within 12 months
of adoption, with any impairment treated as a cumulative effect of change
in accounting principle. During the second quarter of 2002, IFT completed
the transitional impairment test, which did not result in impairment of
recorded goodwill.
IFT adopted an annual goodwill impairment test date as of the beginning of
the fourth quarter of 2002. Following this approach, the business was
evaluated using the quoted market price of the common stock, which
indicated that the fair value of the business exceeded its carrying value.
As a result, no impairment of goodwill was recorded.
18
Deferred Income Taxes. Deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory
rates applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities. At December 31, 2002, IFT's deferred tax asset consisted
principally of net operating loss carryforwards. IFT 's deferred tax asset
has been reduced by a valuation allowance to the extent such benefits are
not expected to be fully utilized.
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 that IFT will generate a positive internal cash flow until such
time as IFT can generate revenues from license fees from its products,
which may take the next few years to realize. If IFT cannot obtain the
necessary capital to pursue its business plan, IFT may have to cease or
significantly curtail its operations. This would materially impact its
ability to continue as a going concern. 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 IFT'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 IFT's
common stock and interest expense related to conversion features of IFT
debt. IFT has offset its capital needs primarily through the issuance of
common stock to its employees and consultants as compensation for services
rendered, which have totaled $1,387,423 for the twelve month period ended
December 31, 2002. In addition, $249,613 of interest expense resulted from
non-cash charges related to the convertible feature of our debt
instruments during 2002. In addition to these amounts, IFT has raised
$800,000 in cash from the issuance of common stock. Most of these funds
have been raised through private placement transactions. For the twelve
months ended December 31, 2002 proceeds from notes payable and advances
from stockholders converted to common stock totaled $600,000.
IFT 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, IFT acquired Interfacial 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 $1,464,506 for the twelve months
ended December 31, 2002 as compared to cash used in operating activities
of $1,470,794 for the twelve months ended December 31, 2001. Cash used in
operations for the twelve months ended December 31, 2002 stayed consistent
with cash used in operations in the prior year. The cash provided by
investing activities was $45,000 for the twelve months ended December 31,
2002 as compared to $31,742 used in investing activities for the twelve
months ended December 31, 2001. Cash provided by investing activities in
2002 consists solely of proceeds received on repayment of notes
receivable. The cash provided by financing activities was $1,400,000 for
the twelve months ended December 31, 2002 as compared to $1,407,500
provided by financing activities for the twelve months ended December 31,
2001. Cash provided by financing activities in 2002 included $800,000 in
proceeds from issuance of common stock and $600,000 in proceeds on debt
that was converted to common stock. Net cash decreased by $19,506 for the
twelve months ended December 31, 2002 as compared to net cash decreasing
by $95,036 for the twelve months ended December 31, 2001.
19
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 twelve 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 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.
Working capital at December 31, 2002 was ($518,862) as compared to
($484,141) at December 31, 2001.
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, 2002, 2001, and 2000 but are not included
in earnings per share and weighted average share calculations for the
twelve month period ended December 31, 2002, 2001, and 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 26, 2003 market price, $.09, of IFT's common stock, a total of
5,555,555 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 issued and outstanding capital
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 shares of common
stock were placed in an escrow account subject to a performance escrow
agreement that provided for the release of the stock certificates to the
Interfacial shareholders based on the achievement of certain revenue
levels by IFT. In January of 2002, IFT and the former shareholders of
Interfacial agreed to reduce the shares subject to the performance escrow
by 500,000 shares. Revenues equal to, or greater 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 shares of common stock 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.
20
On January 3, 2001 IFT entered into a Securities Purchase Agreement with
IIG, 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 IIG 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. As of December 31, 2002, IFT has borrowed a total of
$1,750,000 under the financing agreement. IIG has suspended its financing
agreement with IFT due to IFT's low stock price.
On August 15, 2002 IFT secured $2.5 million in new capital from the sale
of restricted common Stock to R.C. Holding Company. The new capital
consisted of a cash payment of $500,000 and guaranteed notes to be paid in
three installments of $666,667 due in January 2003, June 2003 and January
2004.
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 $1.3 million over the remainder of the 2003 fiscal year will
be necessary in order to enable us to meet our current capital needs.
These cash requirements will be met through the arrangement with R.C.
Holding Company. Management believes that the proceeds from this financing
will be used as follows: $100,000 for commercial fleet testing programs,
$300,000 for professional fees and advertising, $750,000 for salary
expenses and $150,000 working capital for administrative and other capital
needs, including investigation of future acquisitions, if any.
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 22%
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 December 31, 2002 and 2001 and for the twelve
month periods ended December 31, 2002, 2001 and 2000 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.
21
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 44 Chief Executive Officer,
President, Director, Chairman
Michael F. Obertop 32 Chief Financial Officer,
Corporate Secretary
Gary Kirk 41 Director of Sales and Marketing
David B. Norris 54 Director
Harry F. Demetriou 58 Director
Ian Williamson 47 Director
John P. Stupp Jr. 52 Director
Rex Carr 76 Director
Tony Cross 54 Director
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 seven 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.
Background of Directors and Executive Officers:
JONATHAN R. BURST has served as IFT's 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 IFT's 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.
MICHAEL F. OBERTOP, JD, has served as Chief Financial Officer and
Corporate Secretary 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 1998.
GARY KIRK has served as Director of Sales and Marketing since January 1,
2003. Mr. Kirk has 23 years (1980 to present) of experience in the
petroleum industry, all with Petrochem Carless Ltd., a United Kingdom
based refiner and marketer of petroleum products. Mr. Kirk spent his first
eight years as a research chemist and the last fifteen years in the
marketing department. Mr. Kirk reported directly to the President as the
Marketing Manager for Performance Fuels, covering accounts in Europe and
the rest of the world.
22
DAVID B. NORRIS has served on IFT's 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 IFT's Board of Directors since February
2000. Mr. Demetriou has been a ship owner for over 25 years. The ships are
carriers of transport goods in bulk on a worldwide basis.
IAN WILLIAMSON has served on IFT's Board of Directors since May 2001. Mr.
Williamson has been involved with the combustion of non-barrel materials
and looking for alternatives 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 previously employed by
Interfacial.
JOHN P. STUPP JR. has served on IFT's 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.
REX CARR has served on IFT's Board of Directors since August 2002. Mr.
Carr has served as the senior partner of a 36 man law firm,
CarrKoreinTillery, with offices in Missouri and Illinois, for more than
fifty years. He and his firm specialize in a trial practice representing
plaintiffs in complex litigation, class actions, and injury actions. He is
admitted to practice in the U.S. Supreme Court and the Illinois and
Missouri Supreme Courts. His business ventures include RC Holding Company,
which owns and operates five hotel boats in France; Art Company London,
which manufactures and sells art reproduced on canvas; the Carlyle Limited
Partnership, which operates a marina at Carlyle Lake in Illinois; and
numerous apartment complexes in Illinois.
TONY CROSS has served on IFT's Board of Directors since November 2002. Mr.
Cross is a graduate Chemical Engineer from the University of Sheffield,
UK. He spent 17 years with Exxon Chemical, in Australia, Belgium and the
UK where he was marketing Manager for the Solvents Business Division. In
1987, he joined the board of Carless Refining & Marketing Ltd., an
independent UK refiner, as Marketing Director. Following its take-over by
Repsol, Spain's leading oil company, he was made Managing Director in 1996
overseeing the subsequent sale of the company as part of Repsol's
divestment program in 2000.
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.
23
Summary Compensation Table
Annual Compensation Compensation
------------------------------ -----------------------
Securities
Name and Other Restricted underlying All Other
Principal Period Compen- Stock Options/ Compen-
Position Ended Salary Bonus sation Awards SARs sation
-------- ------------------------------------------ ------------------------------------
Jonathan R. Burst, 12/31/02 $250,000 $0 $0 $0 $0 $0
CEO 12/31/01 $200,000 $0 $0 $555,000 $0 $0
12/31/00 $180,000 $0 $0 $834,067 $0 $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 2002, IFT entered into an employment agreement with Mr. Burst
to serve as Chief Executive Officer with an annual base salary of $250,000
and options to purchase 250,000 shares of IFT stock annually and a bonus
award as deemed appropriate by IFT's Board of Directors. The three-year
agreement ends on December 31, 2004.
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 an
additional 1,000 shares of IFT's common stock for any three-telephone
conference call Board meetings attended.
The following table sets forth certain information concerning options
granted during the fiscal year ended December 31, 2002 to the Named
Executives by IFT. IFT did not grant any share appreciation rights during
2002.
24
Number of Percent of Total Potential Realized
Securities Options/ SARS Value of Assumed
Underlying Granted to Exercise Annual Rates of Stock
Options Employees in or Base Expiration Price Appreciation for
Name and Principal Granted (A) Fiscal Year Price Date Option Term
----------------------------------------------------------------------------------------------------------------
5% 10%
Jonathan R. Burst, 1,000,000 (a) 19% $0.25 8/19/07 $43,545 $120,417
CEO 1,000,000 (a) 19% $0.50 8/19/07 (d) (d)
1,000,000 (a) 19% $0.75 8/19/07 (d) (d)
250,000 (a) 6% $0.14 8/19/07 $3,288 $13,315
750,000 (b) 14% $0.50 8/19/07 (d) (d)
750,000 (c) 14% $0.50 8/19/07 (d) (d)
----------------- -------------------
4,750,000 91%
================= ===================
(a) 3,250,000 options are exercisable at December 31, 2002
(b) 750,000 options vest and become exercisable on August 19, 2003
(c) 750,000 options vest and become exercisable on August 19, 2004
(d) Exercise price exceeds the potential realized value of assumed
annual rates of stock price appreciation for option term.
None of the options granted to Mr. Burst are in-the-money at December 31,
2002
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of January 31, 2003,
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) 5,931,000 7.3%
David B. Norris 1,096,562 1.4%
Harry F. Demetriou(3) 4,872,778 6.3%
Ian Williamson(4) 3,425,000 4.4%
John P. Stupp Jr. 318,233 0.4%
Rex Carr 14,903,889 19.2%
Tony Cross 0 0%
All directors and executive
officers as a group(5) 30,837,462 37.6%
25
(1) Based upon 77,524,689 outstanding shares of common stock and vested
options of beneficial owners where applicable.
(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. Includes 3,250,000 shares issuable upon exercise of
stock options.
(3) Includes 4,832,778 shares owned by Observor Acceptances, Ltd. of
which Mr. Demetriou is the sole owner and deemed to be the
beneficial owner of such shares.
(4) Includes 1,000,000 shares issuable upon exercise of stock options.
(5) Includes 4,510,000 shares issuable upon exercise of stock options.
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
2002 Forms 3, 4 and 5 were filed on a timely basis for IFT's executive
officers and directors.
Item 13. Certain Relationships and Related Transactions
IFT obtained general and administrative services and rented 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 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 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 IFT.
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 IFT is recording
the value of these shares ratably over the term of the consulting
agreements. On December 6, 2001, IFT 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.
26
On July 18, 2001, IFT issued 326,087 shares of common stock as payment to
Mr. Simon Orange, a former director of IFT in exchange for the director's
rights on a $60,000 note receivable and $99,783 of consulting services.
On November 16th, 2001, IFT purchased Burcor Capital's equipment for
$12,500.
In January 2002, IFT sold 600,000 restricted shares of common stock at a
price of $.25 per share to Harry Demetriou, a Director. IFT recorded
payroll expense of $150,000 relating to the excess of the trading price of
IFT's stock over the proceeds. In August 2002, IFT issued an additional
2,000,000 shares to this Director and recorded payroll expense of $460,000
based on the closing stock price at the date of grant.
In January 2002, 500,000 shares of IFT's common stock were removed from
the Interfacial escrow account and canceled. The shares were removed
because Interfacial failed to pay liabilities it had incurred prior to
being bought by IFT.
In January 2002, IFT 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.
In February 2002, IFT sold 250,000 restricted shares of common stock at a
price of $.20 per share to a consultant. IFT recorded consulting expense
of $40,000 relating to the excess of the trading price of IFT's stock over
the proceeds.
In April and May 2002, IFT issued a total of 340,000 shares of common
stock to consultants for services. IFT recorded consulting expense of
$104,900 based on the closing stock price at the date of the grant.
In July 2002, IFT entered into a consulting agreement with Sabita Dhingra
in which IFT 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 IFT will receive
strategic planning and general business consulting, is for a one-year term
expiring July 31, 2003. IFT has recorded consulting expense of $140,625
through December 31, 2002 in connection with this agreement. IFT is
recording the value of these shares ratably over the term of the
consulting agreement.
In July 2002, IFT issued 500,000 shares of common stock to a consultant
for services. The consulting agreement is for a one-year term expiring
June 30, 2003. IFT has recorded consulting expense of $52,500 through
December 31, 2002 in connection with this agreement. IFT is recording the
value of these shares ratably over the term of the consulting agreement.
In September 2002, IFT issued 1,555,555 shares of common stock to convert
advances of $280,000 from stockholders and recorded deemed interest of
$77,778 due to the fair value of the stock on the date of extinguishment
exceeding the carrying value by this amount.
In September 2002, IFT issued 960,000 shares of common stock to four
consultants pursuant to two-year consulting agreements with these
individuals, and recorded consulting expense of $216,000. IFT recorded a
reduction in consulting expense of ($278,833) due to a reduction in value
of 980,000 shares to be issued in May 2003 under these agreements.
In August 2002, IFT secured $2.5 million in new capital from the sale of
13,888,889 shares of restricted common stock to R.C. Holding Company. Rex
Carr, a director of IFT, is the principal owner
27
of R.C. Holding Company. The new capital consisted of a cash payment of
$500,000 and $2,000,000 guaranteed notes to be paid in three installments.
As of December 31, 2002, IFT has received $100,000 in proceeds for
repayments of the notes receivable. The notes have been classified as a
reduction of stockholders' equity on the accompanying balance sheet.
In August 2002, IFT granted an additional 4,850,000 stock options to
employees. 3,000,000 of these options vested immediately, and the
remaining options will vest after 12 or 24 months. The options have
exercise prices ranging from $0.25 to $0.75, and expire in August 2007.
IFT applied the intrinsic value method under APB Opinion 25 and related
interpretations in accounting for these options. Accordingly, no
compensation cost has been recognized.
During the twelve months ended December 31, 2002, IFT recorded $298,964 in
compensation expense relating to shares that were to be issued to
employees on various anniversary dates of their employment. These shares
were never issued, and were replaced with grants of options to purchase an
aggregate of 510,000 shares of common stock at exercise prices ranging
from $0.14 to $0.25 per share, vesting immediately, and expiring in August
2007.
During the twelve months ended December 31, 2002, IFT recorded consulting
expense of $174,167 in connection with the granting of 3,000,000 stock
options to non-employees. 1,000,000 of these options vested immediately
and were recorded as consulting expense at that time. The remaining
2,000,000 options will vest after 12 and 24 months, and the fair value of
these options are being recorded as consulting expense ratably over the
vesting period. The options have exercise prices ranging from $0.25 to
$0.75, and expire in August 2007.
PART IV
Item 14. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Based on their
evaluations as of a date within 90 days of the filing of this report, our
principal executive officer and principal financial officer, with the
participation of our full management team, have concluded that our
disclosure controls and procedures (as defined in Rules 13a-14(c) and
15(d)-14(c) under the Securities Exchange Act) are effective to ensure
that information required to be disclosed by us in reports that we file or
submit under the Securities Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules and
forms of the SEC.
Changes in controls. There were no significant changes in our internal
controls or in other factors that could significantly affect these
internal controls subsequent to the date of their most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Item 15. 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
28
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 International Fuel Technology, Inc.
**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
***10.5 IIG Securities Purchase Agreement
23.1 Consent 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
29
INTERNATIONAL FUEL TECHNOLOGY, INC.
Report of Independent Certified Public Accountants F-2
Financial Statements
Balance sheets F-3
Statements of operations F-4
Statements of stockholders' equity F-5
Statements of cash flows F-6
Notes to Financial Statements F-7 - F-24
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. as of December 31, 2002 and 2001, and the related
statements of operations, stockholders' equity and cash flows for each of
the three years in the period ended December 31, 2002. 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, 2002 and 2001 and the results of its
operations and its cash flows for each of the three years in the period
ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 3 to the financial statements, effective January 1,
2002, the Company adopted FASB Statement No. 142, "Goodwill and Other
Intangible Assets."
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 and cash used in operating activities 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 29, 2003
F-2
INTERNATIONAL FUEL TECHNOLOGY, INC.
BALANCE SHEETS
December 31, December 31,
ASSETS (Note 2) 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Current Assets
Cash $13,662 $33,168
Accounts Receivable 3,338 --
Inventory 7,070 --
Prepaid Expenses 15,250 15,250
Notes Receivable 35,000 80,000
------------ ------------
Total current assets 74,320 128,418
------------ ------------
Property and Equipment
Machinery and equipment 26,881 26,881
Accumulated depreciation (12,687) (5,824)
------------ ------------
Total property and equipment 14,194 21,057
------------ ------------
Purchased Technology, Net of accumulated amortization of $633,333 and
$233,333 at December 31, 2002 and 2001, respectively (Note 3) 1,766,668 2,166,668
Goodwill (Note 3) 2,211,805 2,211,805
------------ ------------
Total assets $ 4,066,987 $ 4,527,948
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 145,773 $ 252,779
Accrued compensation (Note 5) 304,909 277,030
Other Accrued expenses 115,000 65,000
Accrued interest 27,500 17,750
------------ ------------
Total current liabilities 593,182 612,559
------------ ------------
Long -Term Liabilities
Notes payable to stockholder (Note 4) 162,500 162,500
Convertible debentures (net of discount) (Note 4) -- 95,924
------------ ------------
Total liabilities 755,682 870,983
------------ ------------
Commitments and Contingencies (Notes, 2, 3, 8, 9, and 10)
Stockholders' Equity (Notes 5 and 10)
Common stock, $.01 par value;150,000,000 shares authorized
77,524,689 and 55,119,612 shares issued and outstanding at
December 31, 2002 and December 31, 2001, respectively 775,247 551,196
Discount on common stock (819,923) (819,923)
Additional paid-in capital 37,403,979 32,595,070
Accumulated Deficit (32,147,998)) (28,669,378)
------------ ------------
5,211,305 3,656,965
Note receivable - stockholder (Note 5) (1,900,000) --
------------ ------------
Total stockholders' equity 3,311,305 3,656,965
------------ ------------
Total Liabilities and Stockholders' Equity 4,066,987 4,527,948
============ ============
See Notes to Financial Statements.
F-3
INTERNATIONAL FUEL TECHNOLOGY, INC.
STATEMENTS OF OPERATIONS
Year Year Year
Ended Ended Ended
December 31 December 31 December 31
------------ ------------------------------
2002 2001 2000
- ------------------------------------------------------------------------------------------------------
Revenues $ 20,073 $ -- $ --
Cost of Goods Sold 16,802 -- --
------------ ------------ ------------
Gross Profit 3,271 -- --
------------ ------------ ------------
Operating Expenses:
Selling, general and administrative expenses 2,829,898 6,312,253 4,686,736
Amortization & Depreciation 406,863 474,797 3,217
------------ ------------ ------------
Total operating expenses 3,236,761 6,787,050 4,689,953
------------ ------------ ------------
Net loss from operations (3,233,490) (6,787,050) (4,689,953)
------------ ------------ ------------
Interest Income 21,257 -- --
Interest expense (Note 4) (266,387) (787,760) (1,997,583)
------------ ------------ ------------
Total other expense, net (245,130) (787,760) (1,997,583)
------------ ------------ ------------
Net loss $ (3,478,620) $ (7,574,810) $ (6,687,536)
============ ============ ============
Basic and diluted net loss
per common share $ (.06) $ (.21) $ (.36)
============ ============ ============
Weighted average common shares outstanding 55,489,495 36,416,469 18,827,802
See Notes to Financial Statements.
F-4
INTERNATIONAL FUEL TECHNOLOGY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Common Stock Common Discount on Paid-In
Shares Stock Amount Common Stock Capital
- -------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2000 16,818,339 168,184 (816,923) 14,760,243
Issuances of stock for cash and services (Note 5) 491,800 4,918 -- 1,472,407
Issuances of stock for compensation (Note 5) 1,545,000 15,450 -- 1,353,899
Issuances of stock for services (Note 5) 562,559 5,625 -- 612,012
Issuance of stock warrants and notes payable-Stockholders (Note 4) -- -- -- 1,228,424
Issuance of stock for warrants exercised (Note 5) 2,030,000 20,300 -- --
Conversion of debt (Note 4) 1,626,086 16,261 -- 878,086
Conversion of debt and interest (Note 4) 1,186,669 11,866 -- 581,467
Issuance of contingently issued stock (Note 5) 300,000 3,000 (3,000) --
Accrued stock based compensation (Note 5) -- -- -- 321,750
Net loss -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 24,560,453 245,604 (819,923) 21,208,288
Conversion of debt and interest (Note 5) 33,333 333 -- 16,708
Issuances of stock for assignment of note receivable (Note 5) 326,087 3,261 -- 156,522
Issuances of stock for compensation (Note 5) 3,679,000 36,790 -- 1,565,773
Issuances of stock for convertible debentures (Note 4) 3,834,213 38,342 -- 1,236,658
Issuances of stock of convertible debt interest (Note 4) 406,523 4,066 -- 139,135
Issuances of stock for accounts payable (Note 5) 10,000 100 -- 3,400
Issuances of stock for services (Note 5) 1,270,000 12,700 -- 660,075
Issuances of stock for Interfacial acquisition (Note 3) 12,500,001 125,000 -- 6,625,001
Issuances of stock for Interfacial escrow (Note 3) 8,500,002 85,000 -- (85,000)
Discount on issuances of convertible debt (Note 4) -- -- -- 610,593
Issuances of common stock warrants (Note 4) -- -- -- 42,750
Accrued stock based compensation (Note 5) -- -- -- 58,750
Accrued stock based services (Note 5) -- -- -- 356,417
Net loss -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 55,119,612 551,196 (819,923) 32,595,070
Shares issued for cash and notes receivable (Note 5) 13,888,889 138,889 -- 2,361,111
Shares issued in repayment of shareholder advances (Note 4) 1,555,555 15,556 -- 342,221
Proceeds from the issuance of common stock (Note 5) 850,000 8,500 -- 191,500
Issuances of stock for compensation (Note 5) 125,000 1,250 -- 148,750
Issuances of stock for services (Note 5) 5,075,000 50,750 -- 967,375
Cancellation of Interfacial escrow shares (Note 5) (500,000) (5,000) -- 5,000
Issuances of stock for convertible debentures (Note 4) 1,410,633 14,106 -- 460,894
Discount on issuances of convertible debt (Note 4) -- -- -- 112,760
Accrued stock based compensation (Note 11) -- -- -- 298,963
Accrued stock based services (Note 5) -- -- -- (253,832)
Compensation relating to stock options (Note 11) -- -- -- 174,167
Net loss -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 77,524,689 775,247 (819,923) 37,403,979
===============================================================================================================================
Notes Accumulated
Receivable Deficit Total
- ------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2000 -- (14,407,032) (295,528)
Issuances of stock for cash and services (Note 5) -- -- 1,477,325
Issuances of stock for compensation (Note 5) -- -- 1,369,349
Issuances of stock for services (Note 5) -- -- 617,637
Issuance of stock warrants and notes payable-Stockholders (Note 4) -- -- 1,228,424
Issuance of stock for warrants exercised (Note 5) -- 20,300
Conversion of debt (Note 4) -- -- 894,347
Conversion of debt and interest (Note 4) -- -- 593,333
Issuance of contingently issued stock (Note 5) -- -- --
Accrued stock based compensation (Note 5) -- -- 321,750
Net loss -- (6,687,536) (6,687,536)
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 -- (21,094,568) (460,599)
Conversion of debt and interest (Note 5) -- -- 17,041
Issuances of stock for assignment of note receivable (Note 5) -- -- 159,783
Issuances of stock for compensation (Note 5) -- -- 1,602,563
Issuances of stock for convertible debentures (Note 4) -- -- 1,275,000
Issuances of stock of convertible debt interest (Note 4) -- -- 143,201
Issuances of stock for accounts payable (Note 5) -- -- 3,500
Issuances of stock for services (Note 5) -- -- 672,775
Issuances of stock for Interfacial acquisition (Note 3) -- -- 6,750,001
Issuances of stock for Interfacial escrow (Note 3) -- -- --
Discount on issuances of convertible debt (Note 4) -- -- 610,593
Issuances of common stock warrants (Note 4) -- -- 42,750
Accrued stock based compensation (Note 5) -- -- 58,750
Accrued stock based services (Note 5) -- -- 356,417
Net loss -- (7,574,810) (7,574,810)
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 -- (28,669,378) 3,656,965
Shares issued for cash and notes receivable (Note 5) (1,900,000) -- 600,000
Shares issued in repayment of shareholder advances (Note 4) -- -- 357,777
Proceeds from the issuance of common stock (Note 5) -- -- 200,000
Issuances of stock for compensation (Note 5) -- -- 150,000
Issuances of stock for services (Note 5) -- -- 1,018,125
Cancellation of Interfacial escrow shares (Note 5) -- -- --
Issuances of stock for convertible debentures (Note 4) -- -- 475,000
Discount on issuances of convertible debt (Note 4) -- -- 112,760
Accrued stock based compensation (Note 11) -- -- 298,963
Accrued stock based services (Note 5) -- -- (253,832)
Compensation relating to stock options (Note 11) -- -- 174,167
Net loss -- (3,478,620) (3,478,620)
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 (1,900,000) (32,147,998) 3,311,305
==================================================================================================================
See Notes to Financial Statements
F-5
INTERNATIONAL FUEL TECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net loss $(3,478,620) $(7,574,810) $(6,687,536)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation/ Amortization 406,863 474,797 3,217
In-process research and development acquired -- 1,900,000
Non-cash stock compensation 1,387,423 2,790,287 3,494,616
Interest expense recognized-discount on notes payable 171,835 594,267 1,228,424
Interest expense recognized-conversion of debt 77,778 150,243 757,680
Loss on disposal of machinery and equipment -- 5,527 --
Change in assets and liabilities:
Increase in accounts receivable (3,338) -- --
Increase in inventory (7,070) -- --
Decrease (increase) in prepaid insurance -- 13,857 (16,387)
(Decrease) Increase in accounts payable (107,006) 28,531 132,525
Decrease in accounts payable-stockholders -- -- (100,000)
Increase in accrued expenses 77,879 137,705 200,919
Increase in accrued interest 9,750 8,802 8,948
---------------------------------------------
Net cash used in operating activities (1,464,506) (1,470,794) (977,594)
---------------------------------------------
Cash Flows from Investing Activities
Acquisition of machinery and equipment -- (14,142) (8,198)
Proceeds from the sale of property and equipment -- 2,400 --
Issuance of Note Receivable -- (35,000) --
Proceeds from repayments of Note Receivable 45,000 15,000 --
---------------------------------------------
Net cash provided by (used in) investing activities 45,000 (31,742) (8,198)
---------------------------------------------
Cash Flows from Financing Activities
Proceeds from common stock issued 800,000 -- 224,650
Advances from stockholders 280,000 -- --
Proceeds from notes payable 320,000 1,431,000 890,000
Payment on notes payable -- (23,500) (27,500)
---------------------------------------------
Net cash provided by financing activities 1,400,000 1,407,500 1,087,150
---------------------------------------------
Net (decrease) increase in cash (19,506) (95,036) 101,358
Cash, beginning 33,168 128,204 26,846
---------------------------------------------
Cash, ending $ 13,662 $ 33,168 $ 128,204
=============================================
Supplemental Cash Flow Information
Interest paid $ -- $ -- $ 2,531
Schedule of non-cash investing and financing activities
Discount on issuances of convertible debt and notes
payable 190,537 653,343 1,228,424
Conversion of debt to common stock 475,000 1,438,742 1,487,680
Shares issued in repayment of shareholder advances 280,000 -- --
Acquisition of Interfacial -- 6,750,001 --
Issuance of stock for note receivable $ 1,900,000 $ 60,000 $ --
See Notes to Financial Statements
F-6
NOTES TO FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business
International Fuel Technology, Inc., ("IFT") is a 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, acquired United States Fuel Technology, Inc, and
Scientific Fuel Technology, LLC, to streamline the selling of PEERFUELTM. As
described in Note 5, IFT 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 IFT'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. All of the operations of
Interfacial were transferred to IFT subsequent to the acquisition. 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. In 2002, IFT emerged from its research and development
phase and is now focused on the commercialization of its numerous fuel blends
and additives.
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 statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
IFT recognizes revenue from the sale of its product when the merchandise is
shipped. IFT also intends to license its products, which will result in
recognition of revenue over the life of the contract. At December 31, 2002, IFT
has not yet entered into any agreements to license its products.
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.
F-7
INTERNATIONAL FUEL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
Long-lived Assets
IFT reviews the carrying values of its long-lived and intangible assets for
possible impairment whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable. As of December 31,
2002 there has been no impairment of long-lived assets.
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. Expense for
the years ended 2002, 2001 and 2000 was $16,802, $197,433, and $286,914,
respectively.
Advertising Expenses
Advertising expenses amounted to $11,852, $14,500 and $20,522 in 2002, 2001 and
2000, respectively.
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 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, 2002, 2001, and 2000, 8,360,000,
587,853, 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 and accounts receivable approximate
fair value because of their short maturity.
The fair value of notes payable and convertible debentures approximate their
carrying basis based on the
F-8
INTERNATIONAL FUEL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
nature of these obligations and current interest rates approximating stated
interest rates.
Accounting for Stock-Based Compensation
IFT applies the intrinsic value method under APB Opinion 25 and related
interpretations in accounting for employee stock options, which represents the
excess of market price of the stock over the exercise price on the measurement
date. In addition, as a result of replacing stock grants with options certain
options are treated as variable-based awards in accordance with APB 25. As a
result, IFT will incur future compensation expense if the stock price exceeds
the exercise price established by repricing.
IFT has elected to continue to utilize the accounting provisions of APB25 for
stock options, and is required to provide pro forma disclosures of net income
and earnings per share had IFT adopted the fair value method under SFAS No. 123
The weighted-average, grant date fair value of stock options granted to
employees during the year and the weighted-average significant assumptions used
to determine those fair values, using a modified Black-Sholes option pricing
model, and the pro forma effect on earnings of the fair value accounting for
stock options under Statement of Financial Accounting Standards No. 123, are as
follows:
2002
- -------------------------------------------------------------------------------
Significant assumptions (weighted average)
Weigthed average fair value per options granted $0.50
Risk-free interest rate at grant date 2.21%
Expected stock price volatility 1.5
Expected dividend payout 0
Expected option life (years) 4
Net loss
As Reported ($3,478,620)
Deduct total stock-based employee compensation expense
determined under the fair value based method ($559,987)
Proforma ($4,038,607)
Net loss per share
As Reported ($0.06)
Proforma ($0.07)
New Accounting Pronouncements
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt" and an amendment of that Statement,
F-9
INTERNATIONAL FUEL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
SFAS No. 64, "Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements."
This Statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of
Motor Carriers." This Statement amends SFAS No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings or describe their applicability
under changed conditions. The provisions of this Statement are effective for
financial statements issued on or after May 15, 2002. Management does not
believe that the adoption of this Statement will have a material impact on IFT's
financial statements.
In July 2002, the Financial Accounting Standard Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." This
Statement addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in Restructuring)."
This Statement requires that a liability for costs associated with an exit or
disposal activity be recognized and measured initially at fair value only when
the liability is incurred. The provisions of this Statement are effective for
exit or disposal activities that are initiated after December 31, 2002.
Management does not believe that the adoption of this Statement will have a
material impact on IFT's financial statements.
In November 2002, FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Indebtedness of
Others" was issued. FIN 45 elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The initial
recognition and initial measurement provisions of this Interpretation are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The required disclosures and a roll-froward of product
warranty liabilities are effective for financial statements of interim or annual
periods ending after December 15, 2002. At this time, IFT does not believe that
the adoption of this interpretation will have a material effect on its financial
statements
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 has several technologies in the
commercialization phase and in development, and may seek to add other
technologies through acquisitions. IFT has received necessary regulatory and
commercial acceptance for its products currently in the commercialization phase.
During the first quarter of 2002, IFT began selling its products directly to the
commercial marketplace. IFT expects to begin licensing its products and
increasing its direct sales to the 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 $1,333,000 over the 2003
fiscal year will be necessary in order to enable us to meet our capital needs.
Management believes the proceeds from its financing from R.C. Holding (see
below) will be used as follows: $100,000 for commercial fleet testing programs,
$250,000 for professional fees and advertising $750,000 for salary expenses and
$233,000
F-10
INTERNATIONAL FUEL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
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"), which had a one-year commitment amount
of $3 million, with an option 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 provided for the
sale of convertible debentures and had a one-year commitment amount of $3
million. 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, 2002, IFT has received proceeds
from the sale of convertible debentures of $ 1,750,000 under the financing
agreement. IIG has currently suspended its financing agreement with IFT due to
IFT's low stock price. (Note 4)
On August 15, 2002 IFT secured $2.5 million in new capital from the sale of
restricted common stock to R.C. Holding Company. The new capital consisted of a
cash payment of $500,000 and guaranteed notes to be paid in three installments
of $666,667 due in January 2003, June 2003 and January 2004. As of December 31,
2002, IFT has received $100,000 in proceeds in advance on the first installment
from repayment of the notes receivable.
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
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, USF 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
F-11
INTERNATIONAL FUEL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
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.
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 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. In January of 2002, IFT 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, $5,000,000 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 allocated as follows: $2,400,001 to purchased technology,
$1,900,000 to in-process research and development, and $2,450,000 to goodwill.
IFT is using an estimated life of six years for the purchased technology. 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 a 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, IFT had
completed development of this technology and was shifting its focus to
commercialization. Amortization of purchased technology amounted to $400,000 and
$233,333 for the years ended December 31, 2002 and 2001, respectively.
F-12
INTERNATIONAL FUEL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
Amortization expense for the next five years will be as follows: 2003 -
$400,000; 2004 - $400,000; 2005 - $400,000; 2006 - $400,000; 2007 - $166,668.
On January 1, 2002, IFT adopted SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"), which addresses the financial accounting and reporting
standards for goodwill and other intangible assets subsequent to their
acquisition. This accounting standard requires that goodwill no longer be
amortized, and instead, be tested for impairment on a periodic basis.
In accordance with SFAS 142, IFT discontinued the amortization of goodwill
effective January 1, 2002. The provisions of SFAS 142 also required the
completion of a transitional impairment test within 12 months of adoption, with
any impairment treated as a cumulative effect of change in accounting principle.
During the second quarter of 2002, IFT completed the transitional impairment
test, which did not result in impairment of recorded goodwill.
IFT adopted an annual goodwill impairment test date as of the beginning of the
fourth quarter of 2002. Following this approach, the business was evaluated
using the quoted market price of the common stock, which indicated that the fair
value of the business exceeded its carrying value. As a result, no impairment of
goodwill was recorded.
A reconciliation of previously reported net loss and net loss per share to the
amounts adjusted for the exclusion of goodwill amortization as follows:
Year ended December 31,
---------------------------
2001 2000
---------------------------
Reported net loss (7,574,810) (6,687,536)
Add goodwill amortization 238,195 --
---------------------------
Adjusted net loss (7,336,615) (6,687,536)
===========================
Net loss per share, basic and diluted (0.21) (0.36)
Add goodwill amortization 0.01 --
---------------------------
Adjusted net loss per share, basic and diluted (0.20) (0.36)
===========================
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
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.
F-13
INTERNATIONAL FUEL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
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) ($0.20) ($0.46)
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 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.
During 2002, IFT received advances totaling $280,000 from shareholders. IFT
repaid the $280,000 by issuing 1,555,555 shares of common stock. In connection
with the issuance of the shares, IFT recognized $77,778 in interest expense due
to the fair value of the stock on the date of extinguishment exceeding the
carrying value by this amount.
On December 31, 2002, IFT had no outstanding convertible debentures. On December
31, 2001, IFT had outstanding debentures of $155,000 less the related discount
for the beneficial conversion feature of the debenture of $59,076. During 2002,
IFT received proceeds of $320,000 relating to the convertible
F-14
INTERNATIONAL FUEL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
debentures.
During the years ended December 31, 2002 and 2001, IFT issued 1,410,633 and
3,834,213 shares of common stock upon the conversion of $475,000 and $1,275,000
worth of convertible debentures owned by IIG. An additional $112,760 and
$653,343 had been recorded as a discount on the convertible debentures and added
to additional paid-in capital, relating to the beneficial conversion feature in
2002 and 2001 and the $42,750 value of 150,000 warrants related to the
convertible debentures in 2001. 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. Stockholders' Deficit
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 and recognized
$178,750 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.
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.
F-15
INTERNATIONAL FUEL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
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 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.
F-16
INTERNATIONAL FUEL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
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, 2002, 2001 and 2001 but are not included in earnings per share and weighted
average share calculations for those periods. 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, 2002 market price, $.10,
of IFT's common stock, a total of 5,000,000 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.
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
F-17
INTERNATIONAL FUEL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
well as their 2000 employment agreement, was unpaid and included in accrued
expenses.
In 2002, IFT terminated the employment agreement with William J. Lindenmayer and
amended the employment agreement with Jonathan R. Burst. The amended agreement
with Mr. Burst replaced the stock grants to be issued in 2002 with 250,000
options. Expense was recognized for these options under the variable method of
accounting (see Note 11). As of December 31, 2002, $287,575 of compensation
relating to the 2000, 2001 and 2002 employment agreements 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 IFT is
recording the value of these shares ratably over the term of the consulting
agreement. During 2002 and 2001, IFT issued 960,000 and 300,000 shares,
respectively, relating to this agreement. IFT recorded $1,024,817 to consulting
expense for the year ended December 31, 2001, relating to these consulting
agreements. During 2002, IFT recorded $216,000 of expense relating to the
960,000 shares issued and a reduction in consulting expense of ($278,833) due to
a reduction in value of the 880,000 shares still to be issued in May 2003 under
these 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.
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. IFT 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, 2001and 2002, IFT had a 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.
During January 2002, IFT sold 600,000 restricted shares of common stock at a
price of $.25 per share to a Director. IFT 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 restricted common shares of IFT 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
IFT.
During January 2002, IFT issued 125,000 shares of common stock to a Director.
These shares had been
F-18
INTERNATIONAL FUEL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
accrued as payroll expense and additional paid in capital as of December 31,
2001.
During February 2002, IFT sold 250,000 restricted shares of common stock at a
price of $.20 per share to a consultant. IFT 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, IFT issued a total of 340,000 shares of common stock
to consultants for services. IFT recorded consulting expense of $104,900 based
on the closing stock price on the date of the grants.
In July 2002, IFT entered into a consulting agreement in which IFT 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 IFT will receive strategic planning and general business
consulting, is for a one-year term expiring July 31, 2003. IFT has recorded
consulting expense of $140,625 through December 31, 2002 in connection with this
agreement. IFT is recording the value of these shares ratably over the term of
the consulting agreement.
In July 2002, IFT issued 500,000 shares of common stock to a consultant for
services. The consulting agreement is for a one-year term expiring June 30,
2003. IFT has recorded consulting expense of $52,500 through December 31, 2002
in connection with this agreement. IFT is recording the value of these shares
ratably over the term of the consulting agreement.
In July 2002, IFT issued 20,000 shares of common stock to a consultant for
services. IFT recorded a consulting expense of $2,800 based on the closing stock
price on the date of the grant.
In August 2002, IFT issued 5,000 shares of common stock to a consultant for
services. IFT recorded a consulting expense of $1,300 based on the closing stock
price on the date of the grant.
In August 2002, IFT issued 2,000,000 shares to a Director for services. IFT
recorded a consulting expense of $460,000 based on the closing stock price on
the date of the grant.
In August 2002, IFT secured $2.5 million in new capital from the sale of
13,888,889 shares of restricted common stock to R.C. Holding Company. The new
capital consisted of a cash payment of $500,000 and $2,000,000 guaranteed notes
to be paid in three installments. As of December 31, 2002, IFT has received
$100,000 in proceeds from repayment of the note receivable. The notes have been
classified as a reduction of stockholders' equity on the accompanying balance
sheet.
During the twelve months ended December 31, 2002, IFT recorded consulting
expense of $25,001 under an agreement in which IFT will issue 20,833 shares per
month for services to consultant. IFT is recording the value of these shares
ratably over the term of the consulting agreement.
Note 6. Related Party Transactions
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
F-19
INTERNATIONAL FUEL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
subsequently resigned as a director in 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, 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 IFT assumed the lease on a month to month
basis. In January 2002, IFT entered into a five-year lease with a third party
for its office space. (Note 8)
On November 16th, 2001, IFT purchased the previously leased equipment from
Burcor Capital for $12,500.
Note 7. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The tax effects of temporary
differences that give rise to significant portions of the net deferred tax asset
are as follows:
December 31, 2002 2001
- -------------------------------------------------------------------------------
Net operating loss carryforwards $ 8,238,000 $ 7,309,000
Amortization 700,000 718,000
Stock option expense 161,000 --
Accrued compensation 28,000 90,000
- -------------------------------------------------------------------------------
9,127,000 8,117,000
Less valuation allowance (9,127,000) (8,117,000)
- -------------------------------------------------------------------------------
Deferred tax asset $ -- $ --
===============================================================================
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. IFT 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.
Net operating loss carryforwards available for IFT for Federal tax purposes are
as follows:
Total
-----------
Balance $344,473 $1,090,666 $12,971,893 $4,213,207 $2,878,026 $2,729,826 $24,228,091
-----------
Expiration 2012 2013 2019 2020 2021 2022
F-20
INTERNATIONAL FUEL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
The reconciliation of income tax computed at the United States federal statutory
tax rate of 34% to income tax benefit is as follows:
Year ended December 31, 2002 2001 2000
- -----------------------------------------------------------------------------------------
Tax benefit at federal statutory rate (1,183,000) (2,575,000) (2,274,000)
Change in deferred tax valuation allowance 1,010,000 1,717,000 1,592,000
Stock based compensation 173,000 858,000 682,000
- -----------------------------------------------------------------------------------------
Income tax benefit -- -- --
=========================================================================================
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 $52,800
for the years 2003, 2004, 2005, and 2006. Rent expense was $57,607, $63,408, and
$9,219 during the fiscal years ended December 31, 2002, 2001, 2000,
respectively.
Note 9. Legal Proceedings
IFT 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 IFT.
Note 10. Quarterly Statements of Operation Information (Unaudited)
For the Three Month Period Ended
March 31, 2002 June 30, 2002 September 30, 2002 December 31, 2002
-------------- ------------- ------------------ -----------------
Revenues $ 5,323 $ 2,361 $ 9,855 $ 2,534
Gross profit $ 2,776 $ 538 $ 3,765 $ (3,808)
Net loss $ (1,069,689) $ (357,041) $ (1,373,198) $ (678,692)
Basic and diluted
net loss per share $ (.02) $ (.01) $ (.02) $ (.02)
Weighted average
common shares
outstanding 47,223,346 48,508,441 56,049,132 69,735,120
F-21
INTERNATIONAL FUEL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
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
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
Note 11. Options
On October 23, 2001, the Board of Directors adopted International Fuel
Technology, Inc.'s Long-term Incentive Plan. The Board of Directors will be
responsible for the administration of this Plan, and will grant Awards under
this Plan. Subject to the express provisions of the Plan, the Board of Directors
shall have full authority and sole and absolute discretion to interpret and
amend this Plan, to prescribe, amend and rescind rules and regulations relating
to it, and to make all other determinations which it believes to be necessary or
advisable in administering this Plan. The determinations of the Board of
Directors on the matters referred to in this Section shall be conclusive. No
member of the Board of Directors shall be liable for any act or omission in
connection with the administration of this Plan unless it resulted from the
member's willful misconduct.
The maximum number of shares of common stock as to which awards may be granted
under this Plan, subject to subsequent amendments, is 17,500,000 shares. The
common stock which is issued on grant of awards may be authorized except for
unissued shares or shares which have been issued and reacquired by IFT. The
Board of Directors may increase the maximum number of shares of common stock as
to which awards may be granted at such time as it deems advisable. Awards may be
granted to employees or consultants of IFT in their individual capacity only.
During the twelve months ended December 31, 2002, IFT recorded $298,963 in
compensation expense relating to shares that were to be issued to employees on
various anniversary dates of their employment. These shares were never issued,
and were replaced with grants of options under the Long-Term Incentive Plan to
purchase an aggregate of 510,000 shares of common stock at exercise prices
ranging from $0.14
F-22
INTERNATIONAL FUEL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
to $0.25 per share, vesting immediately, and expiring in August 2007. These
options are being accounted for using variable-based accounting in accordance
with APB25. As a result, IFT will incur future compensation expense if the stock
price exceeds the exercise price established by repricing, ranging from $0.26 to
$0.48.
In August 2002, IFT granted an additional 4,850,000 stock options to employees.
3,000,000 of these options vested immediately, and the remaining options will
vest after 12 or 24 months. The options have exercise prices ranging from $0.25
to $0.75, and expire in August 2007. IFT applied the intrinsic value method
under APB Opinion 25 and related interpretations in accounting for these
options. Accordingly, no compensation cost has been recognized, as the market
price of the stock did not exceed the exercise price on the measurement date.
The following tables summarize information about stock options during the year
ended December 31, 2002:
Weighted
Exercise Price Average
Shares per Share Exercise Price
---------- ---------- --------------
Outstanding at December 31, 2001 --
Granted 5,360,000 $0.14-0.75 $ 0.47
Exercised -- -- --
Cancelled -- -- --
----------
Outstanding at December 31, 2002 5,360,000 $0.14-0.75 $ 0.47
========== ========== ==========
Options excercisable at December 31, 2002 3,510,000 $0.14-0.75 $ 0.46
========== ========== ==========
Options Outstanding Options Exercisable
------------------------------------------------ --------------------------
Weighted
Number Average Number Weighted
Outstanding at Remaining Weighted Exercisable at Average
December 31, Contractual Average December 31, Exercise
Exercise Price 2002 Life Exercise Price 2002 Price
- ----------------------------------------------------------------------------------------------------
$0.14 - $0.25 1,510,000 4.7 $0.23 1,510,000 $0.23
$0.50 - $0.75 3,850,000 4.7 0.56 2,000,000 0.63
------------- ----------- -------------- -------------- --------
5,360,000 4.7 $0.47 3,510,000 $0.46
============= =========== ============== ============== ========
During the twelve months ended December 31, 2002, IFT recorded consulting
expense of $174,167 in connection with the granting of 3,000,000 stock options
to non-employees. 1,000,000 of these options vested immediately and were
recorded as consulting expense at that time. The remaining 2,000,000 options
will vest after 12 and 24 months, and the fair value of these options are being
recorded as consulting expense ratably over the vesting period. The options have
exercise prices ranging from $0.25
F-23
INTERNATIONAL FUEL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
to $0.75 and expire in August 2007. Additional consulting expense will be
recognized each period, based on the market value of IFT's stock, until the
options become fully vested.
F-24
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 March 31, 2003
------------------------------------- -------------------
Jonathan R. Burst
President and Chief Executive Officer
By: /s/ Michael F. Obertop Date March 31, 2003
------------------------------------- -------------------
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 March 31, 2003
------------------------------------- -------------------
Jonathan R. Burst
Chairman of the Board
By: /s/ Rex Carr Date March 31, 2003
------------------------------------- -------------------
Rex Carr
Director
By: /s/ Ian Williamson Date March 31, 2003
------------------------------------- -------------------
Ian Williamson
Director
By /s/ David B. Norris Date March 31, 2003
------------------------------------- -------------------
David B. Norris
Director
By: /s/ Harry Demetriou Date March 31, 2003
------------------------------------- -------------------
Harry Demetriou
Director
By: /s/ John P. Stupp Jr. Date March 31, 2003
------------------------------------- -------------------
John P. Stupp Jr.
Director
By: /s/ Tony Cross Date March 31, 2003
------------------------------------- -------------------
Tony Cross
Director
F-25
CERTIFICATION
I, Jonathan R. Burst, certify that:
1. I have reviewed this annual report on Form 10-K of International
Fuel Technology, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 31, 2003
By: /s/ Jonathan R. Burst
------------------------------
Jonathan R. Burst
Chief Executive Officer
F-26
CERTIFICATION
I, Michael F. Obertop, certify that:
1. I have reviewed this annual report on Form 10-K of International
Fuel Technology, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 31, 2003
By: /s/ Michael F. Obertop
-----------------------------
Michael F. Obertop
Chief Financial Officer
F-27
CERTIFICATION OF PERIODIC REPORT
I, Jonathan R. Burst, the chief executive officer of International Fuel
Technology, Inc. (the "Company"), certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that, to the best of my
knowledge:
(1) the Annual Report on Form 10-K of the Company for the year ended December
30, 2002 (the "Report") fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly represents, in all material
respects, the financial condition and results of operations of the Company.
Dated: March 31, 2003 By: /s/ Jonathan R. Burst
--------------------------
Jonathan R. Burst
Chief Executive Officer
I, Michael F. Obertop, the chief financial officer of International Fuel
Technology, Inc. (the "Company"), certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that, to the best of my
knowledge:
(1) the Annual Report on Form 10-K of the Company for the year ended December
30, 2002 (the "Report") fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly represents, in all material
respects, the financial condition and results of operations of the Company.
Dated: March 31, 2003 By: /s/ Michael F. Obertop
--------------------------
Michael F. Obertop
Chief Fiancial Officer
F-28
Consent of Independent Certified Public Accountants
International Fuel Technology, Inc.
St. Louis, Missouri
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File Numbers 333-74596 and 333-96261) of our report
dated January 29, 2003 relating to the financial statements of International
Fuel Technology, Inc. appearing in the Company's Annual Report on Form 10-K for
the year ended December 31, 2002. Our report contains an explanatory paragraph
regarding the Company's ability to continue as a going concern.
/s/ BDO Seidman, LLP
Chicago, Illinois
March 31, 2003
F-29