INTERNATIONAL FUEL TECHNOLOGY INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the Quarterly Period ended June 30, 2004

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from to

Commission file number: 000-25367

International Fuel Technology, Inc.
(Exact name of registrant as specified in its charter)

Nevada		88-0357508

(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

7777 Bonhomme, Suite 1920, St. Louis, Missouri		63105

(Address of principal executive offices)		(Zip Code)

(314) 727- 3333

(Registrant’s telephone number)

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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act).

Yes o

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 July 19, 2004, as reported on the OTC Bulletin Board, was $28,419,899.

Number of shares of common stock outstanding as of June 30, 2004: 74,789,209

FORM 10-Q

For The Quarterly Period Ended June 30, 2004

INDEX

			Page

Part I – FINANCIAL INFORMATION

	Item 1-	Financial Statements

		Balance Sheets – June 30, 2004 and December 31, 2003	3

		Statements of Operations – Three Month and Six Month Periods Ended June 30, 2004 and 2003	4

		Statement of Stockholders’ Equity – Six Months Ended June 30, 2004	5

		Statements of Cash Flows – Six Months Ended June 30, 2004 and 2003	6

		Notes to Financial Statements	7 - 8

	Item 2-	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9 – 11

	Item 3 –	Quantitative and Qualitative Disclosures about Market Risk	11

	Item 4 –	Controls and Procedures	11 – 12

Part II – OTHER INFORMATION

	Item 1 –	Legal Proceedings	12

	Item 2 –	Change in Securities, Use of Proceeds and Issuer Purchase of Equity Securities	12

	Item 6 –	Exhibits and Reports on Form 8-K	12

INTERNATIONAL FUEL TECHNOLOGY, INC.

BALANCE SHEETS

	June 30, 2004			December 31, 2003

	(Unaudited)
ASSETS
Current Assets
Cash	$	32,505		$	358,954
Accounts Receivable		10,418			6,100
Inventory		101,290			62,310
Prepaid Expenses		14,275			13,137

Total current assets		158,488			440,501

Property and Equipment
Machinery and equipment		27,621			27,621
Accumulated depreciation		(23,165	)		(19,611	)

Total property and equipment		4,456			8,010

Purchased Technology, Net of accumulated amortization of $1,233,333 and $1,033,333 at June 30, 2004 and December 31, 2003, respectively		1,166,668			1,366,668
Goodwill		2,211,805			2,211,805

Total assets	$	3,541,417		$	4,026,984

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	127,097		$	211,653
Accrued compensation		226,011			221,426
Other accrued expenses		50,000			50,000

Total current liabilities		403,108			483,079

Commitments and Contingencies
Stockholders’ Equity
Common stock, $.01 par value; authorized, 150,000,000, 74,789,209 and 72,461,829 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively		747,892			724,618
Discount on common stock		(819,923	)		(819,923	)
Additional paid-in capital		39,168,958			38,405,926
Accumulated deficit		(35,958,618	)		(34,766,716	)

Total stockholders’ equity		3,138,309			3,543,905

	$	3,541,417		$	4,026,984

See Notes to Financial Statements.

INTERNATIONAL FUEL TECHNOLOGY, INC.

STATEMENTS OF OPERATIONS
(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,

	2004			2003			2004			2003

Revenues		4,605			571			8,219			1,865
Cost of Revenues		2,276			322			3,842			1,105

Gross Profit		2,329			249			4,377			760

Operating Expenses
Selling, general and administrative expenses		489,914			625,991			992,724			1,305,555
Amortization and depreciation		101,777			101,716			203,555			203,431

Total operating expenses		591,691			727,707			1,196,279			1,508,986

Net loss from operations		(589,362	)		(727,458	)		(1,191,902	)		(1,508,226	)
Interest expense		—			(2,438	)		—			(4,876	)

Total other expense, net		—			(2,438	)		—			(4,876	)

Net loss		(589,362	)	$	(729,896	)		(1,191,902	)		(1,513,102	)

Basic and diluted net loss per common share	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.02	)

Weighted average common shares outstanding		73,924,060			69,838,685			73,456,652			69,656,685

See Notes to Financial Statements.

INTERNATIONAL FUEL TECHNOLOGY, INC.

STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2004
(Unaudited)

	Common Stock Shares		Common Stock Amount		Discount on Common Stock			Additional Paid-In Capital		Accumulated Deficit			Total

Balance, January 1, 2004		72,461,829	$	724,618	$	(819,923	)	$	38,405,926	$	(34,766,716	)	$	3,543,905
Proceeds from issuance of stock		2,327,380		23,274		—			726,726		—			750,000
Expense relating to stock option grants		—		—		—			36,306		—			36,306
Net loss		—		—		—			—		(1,191,902	)		(1,191,902	)

Balance, June 30, 2004		74,789,209	$	747,892	$	(819,923	)	$	39,168,958	$	(35,958,618	)	$	3,138,309

See Notes to Financial Statements.

INTERNATIONAL FUEL TECHNOLOGY, INC.

STATEMENTS OF CASH FLOWS
(Unaudited)

	Six Months Ended June 30, 2004			Six Months Ended June 30, 2003

Cash Flows from Operating Activities:
Net loss	$	(1,191,902	)	$	(1,513,102	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization/Depreciation		203,555			203,431
Non-cash stock compensation		36,306			218,942
Change in assets and liabilities:
(Increase)/Decrease in prepaid expenses		(1,138	)		818
Increase in accounts receivable		(4,318	)		—
Increase in inventory		(38,980	)		(1,638	)
(Decrease)/Increase in accounts payable		(84,406	)		52,111
Increase/(Decrease) in accrued expenses		4,434			(89,396	)
Increase in accrued interest		—			4,875

Net cash used in operating activities		(1,076,449	)		(1,123,958	)

Cash Flows from Financing Activities:
Proceeds from common stock issued		750,000			30,000
Proceeds from note receivable - stockholder		—			1,100,001

Net cash provided by financing activities		750,000			1,130,001

Net (decrease)/increase in cash		(326,449	)		6,043
Cash, beginning		358,954			13,662

Cash, ending	$	32,505		$	19,705

See Notes to Financial Statements.

INTERNATIONAL FUEL TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS
(Unaudited)

Note 1 – Basis of Presentation

The interim financial statements included herein have been prepared by International Fuel Technology, Inc. (“IFT”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although IFT believes that the disclosures are adequate to make the information presented not misleading.

These statements reflect all adjustments, consisting of normal recurring adjustments which, in the opinion of management, are necessary for fair presentation of the information contained therein. Interim results are not necessarily indicative of results for a full year. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in IFT’s annual report on Form 10-K for the twelve month period ended December 31, 2003. IFT follows the same accounting policies in preparation of interim reports as it does in its annual 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 $700,000 over the remainder of the 2004 fiscal year will be necessary in order to enable us to meet our capital needs. IFT has secured $1,050,000 in funding for the remainder of 2004 with a significant shareholder and director, of which $300,000 has been utilized in the second quarter of 2004. The number of restricted shares to be issued to the shareholder is based on the lower of the Company’s stock price on the date of funding and $0.35. Under the financing agreement, shareholder will receive a minimum of 3,000,000 restricted shares, which would bring his ownership percentage to 24.5%. If Company receives alternative sources of funding, shareholder has the option of either funding or canceling the remaining amount.

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 – 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 expenses the excess of market price of the stock over the exercise price on the measurement date.

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 loss and loss per share had IFT adopted the fair value method under SFAS No. 123.

INTERNATIONAL FUEL TECHNOLOGY, INC.

The weighted-average, grant date fair value of stock options granted to employees during the period and the weighted-average significant assumptions used to determine those fair values, using a modified Black-Scholes 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:

	Three months ended 6/30/04			Six months ended 6/30/04

Significant assumptions (weighted average)
Weighted average fair value per option granted	$	0.50		$	0.50
Risk-free interest rate at grant date		2.21	%		2.21	%
Expected stock price volatility		1.5			1.5
Expected dividend payout		0			0
Expected option life (years)		4			4
Net loss
As Reported	$	(589,362	)	$	(1,191,902	)
Add expense recognized for variable-based awards		39,327			36,306
Deduct total stock-based employee compensation expense determined under the fair value based method		(55,078	)		(78,473	)

Proforma	$	(605,113	)	$	(1,234,069	)

Net loss per share
As Reported	$	(0.01	)	$	(0.02	)
Proforma	$	(0.01	)	$	(0.02	)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements and Associated Risks

This Quarterly Report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. These forward looking statements are based largely on IFT’s expectations and are subject to a number of risks and uncertainties, many of which are beyond IFT’s control, including, but not limited to, economic, competitive and other factors affecting IFT’s operations, markets, products and services, expansion strategies and other factors described elsewhere in this report and the documents filed by IFT with the Securities and Exchange Commission. Actual results could differ materially from these forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this report will in fact prove accurate. IFT does not undertake any obligation to revise these forward-looking statements to reflect future events or circumstances.

Overview

IFT has developed a family of fuel blends that have been created through the use of proprietary fuel additives. IFT is now in the process of patenting the fuel additives and resulting fuel blends as part of its efforts to commercialize these fuel blends. The individual fuel blends incorporating the IFT additive formulations include base fuel with additive only, base fuel with kerosene, base fuel with biodiesel, base fuel with ethanol, and base fuel with an urea/water solution. 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, Original Equipment Manufacturers, and other companies.

Three and Six Months Ended June 30, 2004 compared to the Three and Six Months Ended June 30, 2003

IFT’s revenues of $4,605, in the second quarter of 2004, and $8,219 for the six months ended June 30, 2004, were generated from the sales of Diesolift, Gasolift, and Kerolift products.

Total operating expenses were $591,691 for the three months ended June 30, 2004, as compared to the operating expenses of $727,707 for the three month period ended June 30, 2003. This represents a $136,016 decrease from the prior period. Total operating expenses were $1,196,279 for the six months ended June 30, 2004, as compared to the operating expenses of $1,508,986. This represents a $312,707 decrease from the prior period. Decreased operating expenses are a result of a decrease in selling, general and administrative expenses in 2004, as described below.

Selling, general and administrative expenses for the three months ended June 30, 2004 were $489,914, as compared to the selling, general and administrative expenses of $625,991 for the three month period ended June 30, 2003. This represents a decrease of $136,077 from the prior period which is attributable to the decrease in legal and consulting fees. Legal fees were reduced due to the settlement of lawsuits during the fourth quarter of 2003. Total selling, general and administrative expenses were $992,724 for the six months ended June 30, 2004 as compared to selling, general and administrative expenses of $1,305,555 for the six months ended June 30, 2003. This represents a decrease of $312,831 from the prior period and is attributable to a decrease in legal and consulting fees.

Amortization and depreciation expenses for the three months ended June 30, 2004 were $101,777, as compared to $101,716 for the corresponding period in 2003. Amortization and depreciation expenses for the six months ended June 30, 2004 were $203,555 as compared to $203,431 for the corresponding period in 2003.

Interest expense was $0 for the three months ended June 30, 2004, as compared to the interest expense of $2,438 for the three month period ended June 30, 2003. Interest expense for the six months ended June 30, 2004 was $0 as compared to the interest expense of $4,876 for the corresponding period in 2003. Interest expense is zero because of the extinguishment of the long-term liability during the fourth quarter of 2003.

The net loss for the three months ended June 30, 2004 was $589,362 as compared to the net loss of $729,896 for the three months ended June 30, 2003. This represents a $140,534 decrease from the prior period, primarily due to a decrease in legal fees and consulting fees. The net loss for the six month period ended June 30, 2004 was $1,191,902 as compared to the net loss of $1,513,102 for the corresponding period in 2003. This represents a decrease of $321,200 from the prior period, which is due to a decrease in legal fees and consulting fees. The basic and dilutive net loss per common share for the three months ended June 30, 2004 was $.01 as compared to the basic and dilutive net loss per common share of $.01 for the three months ended June 30, 2003. The basic and dilutive net loss per common share for the six months ended June 30, 2004 was $.02 as compared to the basic and dilutive net loss per common share of $.02 for the six months ended June 30, 2003.

Critical Accounting Policies

Valuation of long-lived and intangible assets. IFT assesses the impairment of identifiable intangibles, long-lived assets 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:
•	Significant underperformance relative to expected historical or projected future operating results;
•	Significant changes in the manner of IFT’s use of the acquired assets or the strategy for IFT’s overall business;
•	Significant negative industry or economic trends;
•	Significant decline in IFT’s stock price for a sustained period; and
•	IFT’s market capitalization relative to net book value.

As of June 30, 2004, there has been no impairment of long-lived intangible assets.

Valuation of goodwill. IFT tests goodwill for impairment at least annually in the fourth quarter. IFT will also review goodwill for impairment throughout the year if any events or changes in circumstances that indicate the carrying value may not be recoverable are identified (such triggers for impairment review are described above in the section Valuation of long-lived and intangible assets).

For the test of impairment, IFT is using the market approach in determining the fair value of the Company. Following this approach, the fair value of the business exceeded the carrying value of the business. As a result, no impairment of goodwill was recorded.

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 June 30, 2004, IFT’s deferred income tax assets consisted principally of net operating loss carryforwards and have been fully offset with a valuation allowance due to the uncertainty that a tax benefit will be realized from the assets in the future.

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 filed in IFT’s 2003 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 19, 2004, indicates that there is a substantial doubt that IFT can continue as a going concern.

A portion of IFT’s operating loss relates to charges for non-cash operating expenses such as amortization and depreciation. For the three months ended June 30, 2004, IFT raised $300,000 in cash from the issuance of restricted common stock in a private placement to a significant shareholder and director.

IFT has not made significant cash investments in property and equipment or in the acquisition of companies or technologies during 2004.

The cash used in operating activities was $1,076,449 for the six months ended June 30, 2004 as compared to cash used in operating activities of $1,123,958 for the six months ended June 30, 2003. Cash used in operations for the six months ended June 30, 2003 decreased primarily because legal fees and consulting fees were reduced. The cash provided by investing activities was $0 for the six months ended June 30, 2004 and 2003, because there were no proceeds from repayments of notes receivable or capital expenditures during those periods. The cash provided by financing activities was $750,000 for the six months ended June 30, 2004 as compared to $1,130,001 provided by financing activities for the six months ended June 30, 2003. Cash provided by financing activities for the six months ended June 30, 2003 related to the issuance of restricted common stock in a private placement to a significant shareholder and director. Net cash decreased by $326,449 for the six months ended June 30, 2004 as compared to net cash increasing by $6,043 for the six months ended June 30, 2003.

Working capital at June 30, 2004 was ($244,620) as compared to ($42,578) at December 31, 2003.

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 $700,000 over the remainder of the 2004 fiscal year will be necessary in order to enable us to meet our current capital needs. IFT has secured $1,050,000 in funding for the remainder of 2004 with a significant shareholder and director, of which $300,000 has been utilized in the second quarter of 2004. The number of restricted shares to be issued to the shareholder is based on the lower of the Company’s stock price on the date of funding and $0.35. Under the financing agreement, shareholder will receive a minimum of 3,000,000 restricted shares, which would bring his ownership percentage to 24.5%. If Company receives alternative sources of funding, shareholder has the option of either funding or canceling the remaining amount.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

N/A

Item 4. Controls and Procedures

(a)	Evaluation of disclosure controls and procedures. Based on their evaluations as of a June 30, 2004, 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-15(e) and 15d-15(e) under the Securities Exchange Act) are (i) designed to ensure that material information relating to us is made known to our chief executive officer and chief financial officer by others particularly during the period in which this report was being prepared, and (ii) 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.

(b)		Changes in controls. There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal

quarter ended June 30, 2004, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is party to legal proceedings in the normal course of business. Based on evaluation of these matters and discussions with counsel, management believes that liabilities arising from these matters will not have a material adverse effect on the results of operations or financial position of the Company.

Item 2. Change in Securities, Use of Proceeds and Issuer Purchase of Equity Securities.

For the three months ended June 30, 2004, IFT issued a total of 857,143 shares of its common stock to a significant shareholder and director for $300,000 cash. This transaction was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 9(2) of the Act.

Item 6. Exhibits and Reports on Form 8-K

(a)	The following exhibits are filed as part of this report:

		31.1	Certification of Chief Executive Officer pursuant to Rule 13(a)-14(a) under the Securities Exchange Act of 1934, as amended.

		31.2	Certification of Chief Financial Officer pursuant to Rule 13(a)-14(a) under the Securities Exchange Act of 1934, as amended.

		32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

		32.2	Certification of Chief Financial Officer pursuant to to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b)	Reports on Form 8-K

	None

	All other items of this report are inapplicable.

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:	July 23, 2004

	Jonathan R. Burst
	Chief Executive Officer
	Principal Executive Officer

By:	/s/ MICHAEL F. OBERTOP	Date:	July 23, 2004

	Michael F. Obertop
	Chief Financial Officer
	Principal Financial and Accounting Officer