Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
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December 31, 2010
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
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to
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Commission file number
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000-25367
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INTERNATIONAL FUEL TECHNOLOGY, INC.
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(Exact name of registrant as specified in its charter)
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Nevada
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88-0357508
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(I.R.S. Employer Identification No.)
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7777 Bonhomme Avenue, Suite 1920
St. Louis, Missouri
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63105
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(Zip Code)
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Registrant’s telephone number, including area code:
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(314) 727-3333
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Securities registered pursuant to Section 12(b) of the Act: None.
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value
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(Title of Class)
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x No
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. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information 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 a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter was $25,835,556.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 101,342,284 as of March 24, 2011.
DOCUMENTS INCORPORATED BY REFERENCE
None.
INTERNATIONAL FUEL TECHNOLOGY, INC.
FORM 10-K
For The Fiscal Year Ended December 31, 2010
INDEX
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Part I
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Item 1.
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Business
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1
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Item 1A.
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Risk Factors
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11
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Item 1B.
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Unresolved Staff Comments
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16
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Item 2.
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Properties
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Item 3.
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Legal Proceedings
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Item 4.
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(Removed and Reserved)
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Part II
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Item 5.
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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17
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Item 6.
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Selected Financial Data
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17
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Item 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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17
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Item 8.
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Financial Statements and Supplementary Data
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23
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Item 9.
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
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23
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Item 9A.
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Controls and Procedures
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Item 9B.
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Other Information
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Part III
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Item 10.
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Directors, Executive Officers and Corporate Governance
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25
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Item 11.
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Executive Compensation
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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33
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Item 13.
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Certain Relationships and Related Transactions, and Director Independence
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35
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Item 14.
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Principal Accountant Fees and Services
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35
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Part IV
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Item 15.
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Exhibits and Financial Statement Schedules
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37
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Signatures
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Exhibit Index
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PART I
FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this document that are based on management’s current reasonable expectations, estimates and projections. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” variations of such words and similar expressions are intended to identify such forward-looking statements. Forward-looking statements are subject to risks and uncertainties, many of which are difficult to predict and generally beyond our control, that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Such risks include, but are not limited to, risks relating to economic, competitive and other factors affecting our operations, markets, products and services and marketing and sales strategies, as well as the risks noted under the section in this report entitled “Risk Factors.” We do not undertake any obligation to revise these forward-looking statements to reflect future events or circumstances.
Item 1. Business
INTRODUCTION
International Fuel Technology, Inc. (“IFT” or the “Company”) was incorporated in Nevada on April 9, 1996 by a team of individuals who sought to address the challenges of reducing harmful emissions while at the same time improving the operating performance of internal combustion engines, especially with respect to fuel economy and engine cleanliness. After our incorporation, our initial focus was product research and development, but since late 2005 and early 2006, our efforts have been directed to commercializing our product slate, primarily DiesoLIFTTM, for use with diesel fuel and bio-diesel fuel blends, by focusing on marketing, sales and distribution efforts.
For information regarding revenues from external customers attributed to our domestic operations and to all foreign countries, see Note 1 to our financial statements for the fiscal year ended December 31, 2010.
At December 31, 2010, we had six full-time employees. None of our employees are represented by a labor union or is subject to a collective bargaining agreement. We believe that our employee relations are good.
We are a technology company that has developed a range of liquid fuel additive formulations that enhance the performance of petroleum-based fuels and renewable liquid fuels. We believe that use of our proprietary fuel additive formulations with a base fuel: enhances the combustion process; improves fuel economy; reduces harmful emissions; increases fuel lubricity; acts as a detergent to clean the fuel system; co-solves free water in the fuel system; reduces corrosion and microbial contamination in the fuel system; and when used in bio-fuels increases fuel oxidation stability and reduces deposit formation.
We have developed additive products for diesel, pure bio-diesel, bio-diesel fuel blends, gasoline and kerosene (heating oil) fuels.
Unlike traditional fuel additives, which are derived from petroleum, our products are derived from a mixture of complex surfactant substances that utilize, in part, naturally occurring fractions that are bio-degradable. Our additive products are easily blended into motor fuels (usually through splash blending), or combined with base motor fuels plus other fuel formulations, including bio-diesel, synthetic diesel, ethanol and urea/water, creating environmentally-friendly finished fuel blends.
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The manufacture of our products is outsourced to Multisol France (“Multisol”) and Air Products, Inc. pursuant to manufacturing and supply agreements (see “Manufacturing Partners”).
We have funded and completed several independent laboratory testing efforts conducted by various well-regarded laboratories in the United States, Canada, Europe, Brazil, South Africa, China and Thailand to confirm the efficacy of our technology. We have completed customer-focused field demonstration testing, which has validated independent laboratory test results. Additional field demonstration and various other laboratory testing efforts are currently underway to further our product commercialization efforts.
With the increasing public and private pressure to reduce the level of harmful engine emissions, combined with the uncertain cost of base fuel, we believe our technology and its further development is poised to become one of the leading fuel performance enhancement technologies available to facilitate the worldwide effort to address these issues.
TECHNOLOGY
Our surfactant-based additive formulations are composed of a mixture of complex chemical molecules which, when blended into a base fuel, lower that base fuel’s overall surface tensions at liquid-air, liquid-liquid, and liquid-solid (pipe wall) interfaces. This promotes lubricity and detergency and allows for improved atomization of the fuel in the induction and combustion chambers, resulting in a more complete and efficient burn, improving fuel economy and reducing harmful emissions.
Once the additive is blended with a base fuel, the blend forms into and remains a stable solution. No additional mixing or agitation is required for the fuel blend to remain perfectly mixed.
The following summarizes the primary benefits of our technology:
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Fuel economy: The reduction in the fuel’s overall surface tension as it enters the combustion chamber allows for improved atomization, resulting in a more complete burn. The engine, therefore, is effectively maximizing the inherent energy in the fuel. Fuel economy is also enhanced by (i) increased lubricity which reduces friction in the fuel system, and (ii) the detergency effect which prevents the deterioration of engine performance caused by detrimental deposits.
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Lubricity: The inherent lubricity properties of our additive formulations increase the lubricity of the fuel. This occurs because the additive will adsorb to the sides of the engine fuel system. This has the effect of coating the fuel system and reducing the friction created as the fuel flows through it.
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Detergency: Because surfactants are detergents, they will act to constantly clean the fuel system and engine. The detrimental deposits, which might occur in ordinary use, are washed out and retained by fuel and lube oil filters.
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Emissions: The improved atomization of the fuel, resulting from the use of our additives, provides for a more complete combustion of the fuel. As a result, the amount of harmful carbon monoxide, unburned hydrocarbons and particulate matter (“PM”) emissions are reduced significantly. The increased fuel efficiency and economy resulting from the use of our additive means that less fuel has to be burned for the same power output. Therefore, for the same power output, less carbon dioxide and nitrogen oxides (“NOx”) (both “green house” gases) are released into the atmosphere.
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Co-solvency: An important benefit of our additive technology is the ability to hold limited amounts of ethanol and/or water in gasoline and diesel as a stable, homogeneous fuel. This is possible because our additives are based on surfactant physical chemistry. This enables the water and/or ethanol molecules to be distributed throughout the fuel in a stable and homogeneous single phase, preventing phase separation and enhancing uniform combustion.
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Microbial contamination: If small amounts of water are present in the fuel, and phase separation occurs, aerobic and anaerobic bacterial and fungal growths may occur in the aqueous phase. The co-solving effect of our additives prevents phase separation from occurring and eliminates the environment for microbial growth. This curbs foaming and limits the formation of corrosive organic acids. This also reduces the need for biocides to treat the fuel, which can be expensive and difficult to handle.
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Corrosion inhibitors: Our fuel additives are natural corrosion inhibitors. When the additive surfactant molecules adsorb to the side of the fuel system, they provide a protective coating. Also, the ability to co-solve any free water in the fuel, and prevent phase separation, helps prevent any corrosion that may occur due to the aqueous phase.
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Reduced maintenance: The combined effects of improved lubricity, detergency, water co-solvency, corrosion inhibition, and cleaner burn resulting from the use of our additive technology extend the service life of the engine and parts, while reducing maintenance costs.
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Oxidation Stability: Our PerfoLIFT BD-series and AO-Series products are powerful antioxidants which provide superior oxidation stability to pure bio-diesel fuel and fuel blends containing bio-diesel, as well as pure hydrocarbon fuels.
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Deposit Formation Control: Our PerfoLIFT BD-series and AO-Series products excel at stabilizing bio-diesels and fuel blends containing bio-diesel, as well as pure hydrocarbon fuels during long storage periods and at preventing deposit formation.
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Research and development costs are expensed as incurred. Research and development expense from services received from external vendors for 2010 and 2009 was $52,429 and $115,151, respectively.
INTELLECTUAL PROPERTY
We have been granted United States patent number 7,374,588 on our original additive formulation based on nitrogen donors.
We have also filed patent applications for a similar but upgraded formulation in the United States and three other countries.
We have also filed an international patent application, under the Patent Cooperation Treaty, covering our technology in certain foreign countries.
The patent obtained and these patent applications protect our technology in many countries. Additional patent applications for extension of our technology are constantly evaluated as additional scientific, technical data and laboratory testing results become available.
INDEPENDENT DEMONSTRATION AND TESTING
There are two primary methods of product demonstration: laboratory bench tests and field trials. We utilize both demonstration methods to further develop the body of test data necessary to support marketing and sales efforts. As IFT has matured, we have become aware of the importance of developing and managing specific
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testing protocols for field-based demonstrations and adhering to already developed, industry recognized testing standards when engaged in laboratory bench tests. Numerous variables exist in any testing protocol and if not carefully managed, one change in one variable can skew test results. To address this challenge, we use our best efforts to ensure standardized testing and demonstration evaluation protocols, both industry prescribed and custom developed, whenever laboratory or field-based demonstration is undertaken. The use of these protocols allows us to: (i) effectively analyze and interpret test results; (ii) ensure testing is structured and conducted in a controlled way; (iii) ensure we will have full access to all testing results conducted by third parties; and (iv) assist our marketing and sales efforts through potential client recognition of and attention to results generated from industry adopted testing protocols.
In addition to extensive field-based customer demonstrations completed or under way, we have funded extensive laboratory bench testing at numerous well-known independent testing laboratories, including:
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mi Technology, United Kingdom;
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Southwest Research Institute, United States;
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Forest Engineering Research Institute of Canada – FERIC;
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Motive Power, United States;
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Gerotek, South Africa;
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Prodrive Ltd, United Kingdom;
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BfB Laboratories, Belgium;
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National Institute of Technology – INT, Brazil;
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Technological Institute for Development - LacTec, Brazil;
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MTEC, Thailand; and
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Tsinghua University, China.
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Test results have confirmed the effectiveness of our additive formulations. In particular, IFT fuel blends tested have achieved: (i) an increase in fuel economy; (ii) an increase in lubricity; and (iii) a reduction in harmful emissions.
PRODUCTS
We have introduced three trademarked product brands that are being marketed around the world: DiesoLIFTTM, GasoLIFTTM, and KeroLIFTTM.
DiesoLIFTTM 10 DiesoLIFTTM 10 is IFT’s proprietary fuel enhancing technology for use with diesel fuel and bio-diesel fuel blends. DiesoLIFTTM 10 has been scientifically proven to increase fuel economy and fuel lubricity while reducing harmful fuel emissions.
PerfoLIFT BD-Series The PerfoLIFT BD-Series is a unique formulation developed for the stabilization of bio-diesel bases of various origins and corresponding bio-diesel fuel blends (B5, B-10, B-20, etc.). The PerfoLIFT BD-Series provides protection against premature and developing oxidation and can be utilized for storage stability and deposit control. Likewise, the PerfoLIFT AO-Series provides similar protection to pure hydrocarbon fuels and blends.
DiesoLIFTTMEM-1 DiesoLIFTTM EM-1 is engineered to deliver the same improved lubricity, co-solvency of water, cleaning of fuel systems, improved fuel economy and environmental benefits of DiesoLIFTTM 10. However, DiesoLIFTTM EM-1 also provides oxidation stability and deposit control benefits to bio-diesel and bio-diesel fuel blends.
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GasoLIFTTM GasoLIFTTM is the range of products specifically designed to apply our fuel enhancing technology to gasoline motor fuel and engines. Use of GasoLIFTTM provides similar benefits to gasoline engines as DiesoLIFTTM 10 provides to diesel engines.
KeroLIFTTM KeroLIFTTM has been specifically formulated to bring added benefits to heating oils, kerosene fuel systems and oil burners for all oil-fired equipment applications. KeroLIFTTM has a positive effect on the environment by reducing harmful emissions and “green house” gases, and by eliminating smoke.
MANUFACTURING PARTNERS
In 2001, we signed a manufacturing agreement with Tomah, a specialty chemical manufacturer. The agreement covers existing and to-be-developed fuel performance enhancement additive products utilizing our technology. The agreement allows us to consider sourcing the supply of our products from others, but allows Tomah the right of first refusal to meet the terms of other supplier proposals. If Tomah elects not to meet the third party terms, we then have the right to contract with the third party for the manufacture and supply of our products. The agreement also provides for Tomah and us to cooperate and work together to optimize the effectiveness of and reduce the manufacturing and supply costs of the additive product formulations, as well as collaborate on product research and development activities. The agreement has a fifteen-year term.
Tomah, headquartered in Milton, Wisconsin, with production facilities in both Wisconsin and Louisiana, was purchased by Air Products, Inc., a worldwide manufacturer and supplier of chemical, industrial gases and other industrial products, in 2005. Tomah specializes in the manufacturing of specialty chemicals with an emphasis on industrial surfactants. Tomah manufactures products for a variety of industries, including fuel additives, mining and industrial and institutional cleaning. Tomah markets and distributes its products to companies around the world. Originally founded in 1967, Tomah was acquired by Exxon in 1984 and operated as a division of Exxon Chemical until 1994, when it was spun off in a management buyout. Tomah excels at custom manufacturing and in developing products designed to meet specific needs. We chose Tomah as our manufacturing and supply partner because of its manufacturing capabilities, rapid response times, service level, industry contacts and technical expertise. We believe our relationship with Tomah and Air Products, Inc. to be excellent.
In addition, in July 2008 we signed a manufacturing agreement and a marketing and distribution agreement with Multisol. Multisol is part of the Multisol Group, a prominent international chemical, additives and lubricants manufacturer and distributor with operations in Europe, the Middle East and Africa. The manufacturing agreement covers existing and to-be-developed fuel performance enhancement additive products utilizing our technology. The agreement also provides for Multisol and us to cooperate and work together to optimize the effectiveness of and reduce the manufacturing and supply costs of the additive product formulations, as well as collaborate on product research and development activities. The manufacturing agreement has a fifteen-year term. Either party may terminate the manufacturing agreement by providing the other party advance notice at least one hundred eighty days before desired termination date. The marketing and distribution agreement has a term ending December 31, 2012 and can be terminated by either party with cause after providing at least ninety days notice of termination.
REGULATORY ISSUES
Government regulations across the globe regarding motor fuels are continually changing. Most regulation focuses on fuel emissions. However, there is also growing concern about dependence on hydrocarbon-based fuels. This is driving legislation and regulation toward mandating alternative fuels such as bio-fuels and providing incentives for their development and use. Fuels regulation exists at various levels of government and enforcement around the globe. However, we believe the consistent pattern of regulations designed to reduce harmful emissions and reduce dependence on oil for fuel needs will only become more stringent. We believe this will be an advantage to us as many of our product’s benefits reduce fuel consumption and improve performance of alternative fuel blends. We believe that as fuels regulatory compliance becomes more burdensome to fuel manufacturers, suppliers and users, demand for the benefits our products deliver should increase. One of our strategies is to monitor government fuel related regulatory activity in the countries strategic to our business plan. This surveillance program is designed to support the product development and intellectual property process to ensure our products respond to the changing regulatory climate and are protected as quickly as possible to maintain competitive advantage. The surveillance program also supports the marketing of our products to accentuate their attributes in helping customers meet the new regulatory compliance directives.
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As an example, in January 2000, the Environmental Protection Agency in the United States (“EPA”) enacted a stringent and far-reaching set of diesel emission standards that requires the significant reduction in harmful emissions, especially PM and NOx. These regulations were phased in beginning in 2004. PM in diesel emissions is to be reduced by 90% and NOx is to be reduced by 95%. Of equal importance to diesel fuel producers, the EPA also requires 97% of the sulfur currently in diesel fuel be eliminated beginning in 2006. The elimination of sulfur in diesel fuel will likely cause a decrease in diesel fuel lubricity. We believe that our products are well-positioned to benefit from the more stringent environmental rules, as tests have shown positive PM reduction effects and increased lubricity attributes when our products are added to base diesel fuel.
Another example is the regulation passed applicable to the European Union (“EU”) regarding the use of bio-fuels (bio-diesel and ethanol). The EU is supporting bio-fuels with the aim of reducing “green house gas” emissions, boosting the de-carbonization of transport fuels, diversifying fuel supply sources, offering new income opportunities in rural areas and developing long-term replacements for fossil fuel. In May 2003, the European Parliament and the Council adopted the “Directive on the promotion of the use of bio-fuels or other renewable fuels for transport.” This Directive aims at promoting the use of bio-fuels or other renewable fuels to replace diesel or petrol for transport purposes, with a view to contribute to objectives such as improving the security of energy supply, reducing “green house gas” emissions and creating new opportunities for sustainable rural development. The Directive requires member states to ensure that a minimum proportion of bio-fuels and other renewable fuels for transport are placed on the market and, to that effect, set indicative targets as a percent of energy content of the fossil fuels replaced. Reference values for these targets are: 2% for the end of 2005 and 5.75% for the end of 2010, on the basis of energy content of all petrol and diesel for transport purposes. Member states may deviate from the reference values but if they do, they should report their motivations for the deviation to the Commission.
Current efforts are being demonstrated in the United States to encourage the development of alternative fuels and the required use of ethanol. In an effort to reduce dependence on foreign oil and keep up with increasing demand for petroleum products, the United States Department of Energy (“DOE”) has created and sponsored programs that encourage the use of these alternative fuels. The programs, such as the one derived from the Energy Policy and the ethanol and bio-diesel subsidy programs implemented by the DOE and other government agencies, in response to the 2005 energy legislation, provide significant incentives for the adoption of targeted fuel blends, the performance of which can be enhanced by the use of our products. We believe our products are well-positioned to help fuel producers and consumers comply with current and future fuels related regulatory standards and take advantage of existing incentive programs in the United States and the rest of the world.
INDUSTRY AND COMPETITION
Our product slate and business is a part of the hydrocarbon fuels and lubricants additive industry. The industry is composed of a few relatively large companies and a large number of smaller participants. We fall into the latter category. The large firms capture their revenue through sales of proprietary, branded products, or by sales to fuel refiners to meet state and federal fuel specifications, or fuel wholesalers and retailers trying to differentiate their own branded products. The common denominator is that all industry participants produce products which are added to hydrocarbon fuels to allow the fuel, or the overall fuel system, to perform better with the additive than without. Industry participants do not make the fuel itself.
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The main thrust of industry participants’ products centers around improved engine cleanliness and efficiency (e.g., detergency characteristics applicable to fuel injector nozzles), improved fuel flow (e.g., mitigation of fuel problems caused by low ambient temperature) and fuel system protection (e.g., improved lubricity). These are common focus areas for the full range of gasoline and distillate fuels. Additives designed to address specific problem areas in specific fuel applications (e.g., Cetane improver in diesel fuel) and static electricity dissipation in turbine engines are also significant.
The primary market for IFT is fuel economy improvement. Although many companies make claims regarding the ability of their respective products to improve fuel economy, we are not aware of any fuel additive formulation that has consistently demonstrated the ability to achieve the fuel economy improvement demonstrated by IFT products in independent laboratory testing and field-based demonstrations. The potential market for IFT products is virtually every gallon of diesel fuel, bio-diesel fuel blend, gasoline and kerosene consumed in the world today.
The breadth of existing technologies making claims to have solved engine emissions problems runs the gamut from alternative fueled vehicles (e.g. 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 incentives coupled with issues such as lack of appropriate infrastructure (e.g., compressed natural gas storage and delivery systems) and technical limitations (e.g., keeping alternative fuels emulsified, significant loss of power and fuel economy with present alternative fuels), currently makes market acceptance of many technologies not economically feasible over the long term.
Given these limitations, it is unlikely that the global marketplace will accept just one technology, or a limited number of technologies to solve the harmful engine emissions problem. We believe the “natural selection” expected to take place over the coming decade for new technologies may evolve on a market-by-market basis and will be largely dependent upon local regulatory conditions. Signs of the changing emissions regulatory environment can be seen in:
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EU, where the bio-fuels directive imposes a minimum of 5.75% bio-fuel content in 2010 (bio-diesel and bio-ethanol) on the basis of energy content of all gasoline and diesel for transport purposes;
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EU, where several countries, including the United Kingdom, France and Italy have enacted legislation providing tax breaks to companies that use fuel emulsions blending diesel and water;
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United States, where legislation has been enacted in Texas granting tax incentives to diesel – water-based emulsions and in California, where low-sulfur diesel is being phased in and agricultural lobbies are promoting the use of alternative fuels such as bio-diesel and ethanol;
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China, where the central government has supported fuel ethanol development in certain provinces which have responded by building and operating ethanol distilleries, including the largest corn-derived ethanol distillery in the world in Jilin province; and
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Brazil, with a long history of fuel ethanol, where regulations require a fuel blend with up to 25% ethanol; and where flex fuel vehicles capable of using any blend of hydrous ethanol and the ethanol-containing gasoline are the top sellers in the market. Also, the fully-implemented national bio-diesel program requires blends increasing from 5% (and upwards in years to come) of bio-diesel in diesel.
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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:
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Fuel blends (including bio-diesel, water and ethanol);
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Additive technologies (catalysts such as metallic or precious metal additives);
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Alternative fuels (compressed natural gas, bio-diesel, and others); and
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After-market systems (catalytic converters).
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As a result of the pursuit, primarily by governments around the world, to mandate cleaner fuels and less dependence on hydrocarbon-based fuels through all the disparate efforts currently underway, we believe no one competitor or technology will come to dominate world market demand for additive technology. Rather, we believe a combination of technologies that maximizes individual product and technology strengths, limits their weaknesses, and delivers the highest cost/value relationship will be used.
Our industry and competitor product slate and technology is constantly evolving. Many competitors make very similar product benefit claims; such as detergency, lubricity and anti-corrosion, with a few now beginning to make fuel economy claims as well. Our challenge is to increase our product visibility and to rise above all the industry claims “clutter” by differentiating our products from our competitors’ products. We believe the multi-functional nature of our technology, focusing on fuel economy and providing all other traditional fuel and fuel system benefits together with the capability to mitigate adverse performance impacts of emerging alternative fuels and fuel blends, packaged into one product, differentiates our products from those of our competitors.
MARKETING AND SALES
Our primary marketing and sales focus is to identify and work with industry peers and established in-country or global commercial distributors to partner with us to secure an expanding and sustainable revenue stream. We continue to pursue direct sales to end-users where we deem direct sales to be the most efficient customer reach platform. However, where direct sale to end-users is not an efficient model for us, we seek out industry distribution partners whose focus is end-user sales. We believe established fuel and lubricant additive companies will have an interest in using our products either as a line extension of their existing products or as blend stock, either replacing existing raw materials used to formulate existing blends or as an addition to existing product blends.
Our marketing and sales efforts are primarily directed at commercial industrial users of diesel fuels within specific market segments like rail, power generation and road transport vehicles (trucks and buses). We have no current plans on attempting to penetrate the retail market either on a branded or unbranded basis. In North America, we believe direct sales to commercial industrial customers and to industry distribution partners provide the best sales and distribution model. Direct sales to end-users allow us to maximize the product value chain benefits for the end-user and us. In other areas around the world, sales to in-country distributors will likely provide the most cost-effective and efficient marketing and sales model and allows us to leverage our marketing and sales resources to the greatest benefit. This distribution model adds tremendous value to us by reaching customers we could not efficiently sell to directly, economically or politically. Utilization of distributors in these circumstances extends our product reach and boosts sales. Several distribution agreements are now in place.
We market our products within identified targeted markets and industry segments. The marketing efforts focus on those companies within the preferred industry segments that will benefit the most from usage of our products. These efforts are supplemented by sharing test data with targeted companies in order to generate industry interest in our products. Marketing efforts include sponsorship of field-based demonstration trials, communication through trade media with messages directed at both technical and non-technical business professionals emphasizing fuel performance enhancement through technical innovation, fuel efficiency, maintenance cost savings, improved air quality and “no harm” to engine or environment evidence. Communication openness, transparency and willingness to share trial and testing data are the keys to the engagement process.
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We have assembled a marketing and technology team of experienced industry professionals to pursue commercial opportunities for our fuel additive technology. We believe significant gains are being achieved in product exposure to the targeted markets and industry segments.
We believe an expeditious means of achieving product awareness and market acceptance is through field engagements with strategic commercial users of motor fuels. We are always seeking companies recognized as leaders in their industry to try our products in a field-based demonstration trial setting. Formal field-based demonstration trials have been completed with several such companies and the efficacy of our technology has been validated. Additional field-based demonstration trials are currently underway, or have been committed to, which upon completion should lead to additional commercial opportunities.
Commercial Update
Our primary commercial goal continues to be the bulk sale (by the ton) of DiesoLIFTTM 10 and the PerfoLIFT BD-Series to major end-users of diesel fuel and bio-diesel fuel blends, including: railroads; stationary power generation operators; centrally-fueled truck/bus fleets; and marine vessel operators. Our primary strategy to achieve this goal is to outsource marketing and distribution by partnering with prominent fuel additive distribution companies and oil companies with existing customers and distribution channels.
IFT has emerged from the research and development phase and is in the early stages of commercializing its technology. Through distribution partners, IFT has clients that are purchasing and using DiesoLIFTTM 10, the PerfoLIFT BD-Series, GasoLIFTTM, DiesoLIFTTM EM-1 and KeroLIFTTM. IFT products are marketed to end-users either relabeled or under IFT brand names.
Railroads
The Association of Train Operating Companies in the United Kingdom (“ATOC”) and the Rail Safety and Standards Board (“RSSB”) under the independent management of world-renowned railroad consultant Interfleet Technology (“Interfleet”) has been evaluating IFT’s DiesoLIFTTM 10 fuel additive since 2005. Four rounds of extensive laboratory testing, using strict industry protocol, clearly demonstrated that use of DiesoLIFTTM 10 not only improves fuel economy but also, and as important, has a measured effect improving engine performance and reducing carbon particulates. In two of the laboratory tests, improvements in fuel economy of 6.9% and 5.9% were achieved. In three of the laboratory tests, a power increase ranging from 2%-3.5% was achieved.
Subsequently, a number of field-based demonstration trials with ATOC members have demonstrated that use of DiesoLIFTTM 10 significantly improves fuel economy. As part of the ATOC field evaluation, one ATOC member ran two extensive field-based demonstrations utilizing its entire fleet of light rail engines (approximately 90 units). In both cases, use of DiesoLIFTTM 10 demonstrated an approximate 4% improvement in fuel economy.
Commercial discussions with numerous ATOC members have been ongoing and one operator has already placed an order for DiesoLIFTTM 10. We expect numerous other ATOC members to place orders and begin using DiesoLIFTTM 10 throughout 2011.
In addition, due to our progress and success with ATOC, we are in discussions with numerous European rail operators and expect to begin formal field-based demonstrations with these operators throughout 2011. We are also in the evaluation process with one of the largest rail operators in Brazil.
9
Distribution Partners
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Multisol: We signed a manufacturing, marketing and distribution agreement with Multisol in July 2008 providing Multisol with distribution rights to market and sell IFT’s products in France, Spain, Portugal and Belgium. Multisol is selling our additive formulations to numerous accounts, including prominent fuel additive companies who are re-packaging the formulations for resale into retail markets.
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Nordmann Rassmann (“Nordmann”): We signed a marketing and distribution agreement with Nordmann in August 2008 providing Nordmann with the right to market and sell IFT’s products in Germany, Austria, Switzerland, Sweden, Norway, Finland, Denmark, Poland, The Czech Republic, Slovakia, Slovenia, Hungary, Serbia, Romania and Bulgaria. Nordmann has introduced our products to numerous customers and made sales of PerfoLIFT BD-Series in 2010.
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Caldic U.K. (“Caldic”): We signed a marketing and distribution agreement with Caldic in May 2008 providing Caldic with distribution rights to IFT’s products in the United Kingdom. Caldic has introduced our products to numerous end-user customers and is currently in the process of running field-based demonstration trials with selected end-users.
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Tide Water Oil Co. India Ltd (“Tidewater”): Headquartered in India, Tidewater is a prominent manufacturer and distributor of additives and lubricants to the automotive and industrial markets. Tidewater purchases and then re-packages DiesoLIFTTM 10 for sale into these targeted markets in India: power generation set users; tractor operators; the agricultural industry; and retail distribution markets. Tidewater has made several purchases of DiesoLIFTTM 10 in 2010.
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Nulon India (“Nulon”): We signed a marketing and distribution with Nulon in March 2007 providing Nulon with the right to market and sell IFT’s products in India. Nulon has conducted numerous field-based demonstration trials with DiesoLIFTTM 10, realizing positive results. Nulon had limited success selling our products in 2010 but expects volumes to increase in 2011.
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PerfoLIFT BD-Series
Extensive research, development, product validation testing and “no harm” testing has been completed. The PerfoLIFT BD-Series has clearly demonstrated that it is a top performing technology in the market. The product was certified in Europe by AGQM, the German Agency for Quality of Bio-diesel, as one of the few authorized antioxidants to be used in bio-diesel after production. The product has already been approved for use by a number of bio-diesel producers around the world. IFT distribution partners have begun to market and sell the product in their respective territories.
In Europe, the worldwide economic downturn has negatively impacted the rapid increase in production and end-user demand for bio-diesel, and therefore, the demand for new age antioxidant products like PerfoLIFT BD-Series. We believe the proliferation of bio-diesel in Europe will continue to progress during 2011 and, through our distribution partner network, most notably Nordmann, we are well-positioned to capitalize on current demand and the imminent increase in demand.
United States Progress
Multiple fleets with over the road tractors and fleets of heavy-duty equipment have been purchasing and using DiesoLIFTTM 10 for many years. For example, a large regional supermarket chain has been using DiesoLIFTTM 10 in their entire fleet of road tractor-trailers for over four years and a regional construction and aggregate company has been using DiesoLIFTTM 10 in their fleet of heavy-duty off road equipment for approximately two years.
Other Opportunities
Efforts to improve the performance of IFT fuel additive formulations are ongoing. IFT has partnered with prominent independent test laboratories, chemical companies, fuel additive distribution companies and oil companies to further the development of and enhance the performance of its products on a stand-alone basis, or as part of a fuel additive package.
10
Summary
We believe IFT has two of the top performing fuel additive technologies in the world today, DiesoLIFTTM 10 and the PerfoLIFT BD-series, that target markets where consumption is massive and growing and environmental concerns and pressures to reduce harmful emissions are real. A number of end-users and distribution partners are buying our products. In addition, the time consuming process of tests and trials has generated opportunities that should produce additional revenue streams in 2011.
Available Information
Our website is www.internationalfuel.com. We make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”).
Item 1A. Risk Factors
Because we have transitioned from a development stage to a commercialization phase for our products with a new technology and little market and sales visibility, we may not be able to create market demand for our products.
We are currently engaged in extensive marketing and sales efforts, including additional laboratory testing and customer field-based demonstration trials to generate purchasing interest in our products. We have only a limited marketing history. There is a substantial risk of failure associated with development stage businesses attempting to make the transition to self-sustaining commercial entities because of the lack of established customer relationships and knowledge and acceptance of the new products being marketed. We have experienced in the past, are continuing to experience, and may experience in the future, some of the problems, delays and expenses associated with this transition, many of which are beyond our control, including but not limited to those depicted below:
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substantial delays and expenses related to testing and further development of our products;
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customer resistance relating to the marketing of a new product in the fuel additive marketplace;
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competition from larger and more established companies; and
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lack of market acceptance of our new products and technologies.
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We have a history of operating losses and due to our current lack of sustainable sales and the possibility of not achieving our sales goals, we may not become profitable or be able to sustain profitability.
Since our inception we have incurred significant net losses. We reported net losses of $2,214,494 and $5,366,774 for the twelve months ended December 31, 2010 and December 31, 2009, respectively. Our accumulated deficit as of December 31, 2010 was $65,226,139. We expect to continue to incur net losses in the near to mid-term future. The magnitude of these losses will depend, in large part, on our ability to realize product sales revenue from the marketing and sale of our products. To date, we have not had any material operating revenue from the sale of our products and there can be no assurance we will be able generate material revenues. Our ability to generate revenues will be dependent upon, among other things, being able to (1) overcome negative connotations on the part of industrial fuel consumers regarding fuel additives in general; (2) convince potential customers of the efficacy and economic and environmental benefits of our products; and (3) generate the acceptance of our technology and products by potential customers and thereby create the opportunity to sell our products at a sufficient profit margin. Because we do not yet have a material, recurring revenue stream resulting from the sale of our products, there can be no assurance that we will be successful in these efforts. Should we achieve profitability, there is no assurance we can maintain, or increase, our level of profitability in the future.
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Our independent registered public accounting firm has doubt as to our ability to continue as a going concern.
As a result of our losses to date, potential losses in the future, current limited capital resources and accumulated deficit, our independent registered public accounting firm has concluded that there is substantial doubt as to our ability to continue as a going concern, and accordingly, has modified their report on our December 31, 2010 financial statements included in this annual report on Form 10-K in the form of an explanatory paragraph describing the events that have given rise to this uncertainty. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. These factors may make it more difficult for us to obtain additional funding to meet our obligations. Our continuation is dependent upon our ability to generate or obtain sufficient cash to meet our obligations on a timely basis and ultimately to attain profitable operations. We anticipate that we will continue to incur significant losses at least until successful commercialization of one or more of our products, and we may never operate profitably in the future.
We have identified a material weakness in our internal control over financial reporting and as such, a material misstatement of the annual or interim financial statements may not be prevented or detected on a timely basis.
We identified a material weakness in our internal control over financial reporting in 2009 and 2010. The material weakness relates to the fact that IFT has limited accounting personnel with sufficient expertise, accounting knowledge and training in United States generally accepted accounting principles (“GAAP”) and financial reporting requirements. Specifically, IFT lacks sufficient personnel to anticipate, identify, resolve and review complex accounting issues and to complete a timely review of the financial statements. This material weakness was not corrected during 2010. See Item 9A, “Controls and Procedures” for additional information. We cannot be assured that additional material weaknesses, significant deficiencies and control deficiencies in our internal control over financial reporting will not be identified in the future. If we fail to achieve and maintain effective controls and procedures for financial reporting, we may be unable to provide timely and accurate financial information. This may cause investors to lose confidence in our reported financial information. This may also have an adverse effect on the trading price of our common stock, give rise to an investigation by the SEC, and possible civil or criminal sanctions. Additionally, ineffective internal control over financial reporting could place us at increased risk of fraud or misuse of corporate assets.
We have only a limited product sales history upon which to base any projection of the likelihood we will prove successful; therefore, we may not achieve profitable operations, or even generate meaningful operating revenues.
Our fuel performance enhancing technology is a relatively new approach to increasing fuel performance in internal combustion engines and, therefore, may never prove commercially viable on a wide-scale basis. It is possible that we may not be able to reproduce, on a sustainable basis, the preliminary performance results achieved in certain of our research and development and field-based demonstration trial efforts.
We are not certain how many laboratory and customer field-based demonstration trial test programs will be necessary to demonstrate to potential customers sufficient fuel economy and other economic and environmental benefit from our products, nor is there any assurance that such test programs, even if positive results are observed, will convince potential customers of the efficacy of our products leading to subsequent sales orders. The success of any given product in the marketplace is dependent upon many factors, with one of the most important factors being the ability to demonstrate a sustainable and meaningful economic benefit to product end-users. If our products are unable to provide this sustainable economic benefit, or potential customers do not recognize these economic benefits, our business could fail.
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If projected sales and revenues do not materialize as planned, we will require additional financing to continue operations.
Based on our current cash position and a remaining $1,000,000 equity commitment from one of our Directors, we believe we have sufficient funds available to provide resources for our operations through at least September 2011. However, failure to achieve significant, sustained sales and revenues by the end of this period would require us to obtain additional financing. Our budget for the next twelve months emphasizes continued field and laboratory testing and customer support marketing of our products. Cash requirements during the next twelve-month period are expected to average approximately $180,000 per month, plus potentially approximately $1,500,000 to fulfill a 2009 prepaid sales order from Vision Oil Services Ltd (“VOS”), who has not requested delivery of the product. However, we have not had any communication with VOS in over eighteen (18) months and believe they have ceased all activities on behalf of IFT. In addition, unexpected changes may occur in our current operations that could exhaust available cash resources sooner than anticipated. If anticipated product sales do not materialize, or are significantly less than anticipated, we may need to raise additional funds to continue operations. If this future financing is not available, our business may fail. We currently have no other firm commitments from third parties to provide any additional financing. Consequently, we cannot assure investors that additional financing, if necessary, will be available to us on acceptable terms, or at all.
Global economic conditions have created turmoil in the credit and general industrial markets that could have a significant adverse impact on our operations.
During 2008 and 2009, United States and worldwide economic conditions resulted in an extraordinary tightening of credit markets, coupled with higher interest rates. These economic conditions were characterized as a global economic crisis that was marked by dramatic shifts in market conditions and government responses, and resulted in unprecedented intervention in financial institutions and markets by governments throughout the world. The adverse economic conditions spread to markets other than the financial and credit markets, including the industrial and labor markets.
Our financial performance depends on varying conditions in the markets we are trying to penetrate, particularly the general industrial markets. Demand in these markets fluctuates in response to overall economic conditions. A weakened economy may result in decreased demand for our products, and economic uncertainties may cause our customers or prospective customers to continue to defer or reduce spending on the products we provide, which could reduce future earnings and cash flow.
Furthermore, adverse economic conditions or economic uncertainty may cause some of our customers or vendors to reduce or discontinue operations, which may adversely affect our operations. If, as a result of adverse economic conditions, any of our customers enter bankruptcy or liquidate their operations, our revenues and accounts receivable could be materially adversely affected.
We are dependent on third parties for the distribution of our products outside North America and they may experience the same delays, customer acceptance problems or other product commercialization issues we have experienced, which could negatively impact our commercialization efforts in these regions.
We have entered into distribution and sales agency agreements with certain third parties to help us achieve rapid customer trialing and acceptance of our products, and to oversee certain elements of our field-demonstration testing program. If these third parties elect to discontinue their efforts, we may not be able to commercialize our products in a timely manner, or to commercialize them at all.
Although certain of these agreements contain progress milestones, we are not able to control the amount of time and effort these third parties put forth on our behalf. It is possible that any of these third parties may not perform as expected, may not achieve the contractual milestones and may breach or terminate their agreements with us before completing their work. Any failure of a third party to provide the services for which we have contracted could prevent or significantly delay us from commercializing our products.
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As we currently purchase all of our product supply requirements from outside sources and have no in-house product manufacturing capability, any business complications arising with either our suppliers or with our relationships with our suppliers could create adverse consequences with our product supply chain.
We currently contract with outside specialty chemical manufacturing companies for the production and supply of 100% of our product needs. We have no in-house product manufacturing capability and, therefore, are exposed to potential product supply disruptions caused by adverse business circumstances with our suppliers (for example, raw material shortages, plant breakdowns and other adverse circumstances affecting the supply of our products from suppliers). There can be no assurances that, in the event of a supply disruption, we would be able to quickly contract with another manufacturer for the continued supply of our products. We, therefore, could be without adequate supply of our products and could lose sales for an extended period of time as a result.
There is a risk that one or more of the raw material suppliers currently supplying raw materials to our contract manufacturer could stop making a building block raw material necessary for production of our product and, therefore, cause a supply shortage until substitution raw materials could be identified and located.
If the supplier were no longer able to obtain building block raw materials necessary for production of our product, suitable substitutes would have to be identified and obtained. There can be no assurances that, in the event of a raw material supply disruption, our manufacturers would be able to quickly identify and obtain a suitable substitute component and, therefore, we could be without product inventory and could lose sales for an extended period of time.
Products developed by our competitors could severely impact our product commercialization and customer acceptance efforts, thereby reducing the sales of our products and severely impacting our ability to meet our sales goals or to continue operations.
We face competition from companies who are developing and marketing products similar to those we are developing and marketing. The petroleum/fossil fuels industry has spawned a large number of efforts to create technologies that help improve the performance of internal combustion engines and reduce harmful emissions. Some of these companies have significantly greater marketing, financial and managerial resources than us. We cannot provide any assurance that our competitors will not succeed in developing and distributing products that will render our products obsolete or non-competitive. Such competition could potentially force us out of business.
Our products are designed for use in internal combustion engines and the development of alternative engine design and technology could severely reduce the market potential for our products.
Our products are designed for, and marketed to, customers utilizing internal combustion engines. Significant efforts now exist to develop alternatives to internal combustion engines. In addition, the regulatory environment is becoming increasingly restrictive with regard to the performance of internal combustion engines and the harmful emissions they produce. If alternatives to internal combustion engines become commercially viable, it is possible that the potential market for our products could be reduced, if not eliminated.
If we are unable to protect our technology and intellectual property from use by competitors, there is a risk that we will sustain losses, or that our business could fail.
Our success will depend, in part, on our ability to obtain and enforce intellectual property protection for our technology in both the United States and other countries. We have taken steps to protect our intellectual property through patent applications in the United States Patent and Trademark Office and its international counterparts under the Patent Cooperation Treaty. We cannot provide any assurance that patents will be issued as a result of these applications or that, with respect to any patents, issued or pending, the claims allowed are, or will be, sufficiently broad enough to protect the key aspects of our technology, or that the patent laws will provide effective legal or injunctive remedies to stop any infringement of our patents. In addition, we cannot provide assurance that any patent rights owned by us will not be challenged, invalidated or circumvented, or that our competitors will not independently develop or patent technologies that are substantially equivalent or superior to our technology. If we are forced to defend our patents in court, well-funded adversaries could use such actions as part of a strategy for depleting the resources of a small company such as ours. We cannot provide assurance that we will have sufficient resources to successfully prosecute our interests in any litigation that may be brought.
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Because of the nature of our products, we may be subject to government approvals and regulations that reduce or prevent our ability to commercialize our products, increase our costs of operations and decrease our ability to generate income.
We are subject to United States and international laws and regulations regarding the products we sell. There is no single regulatory authority to which we must apply for certification or approval to sell our products in the United States, or outside its borders. Any changes in policy or regulations by regulatory agencies in countries in which we intend to do business may cause delays or rejections of our attempts to obtain necessary approvals for the sale of our products.
There can be no assurance that we will obtain regulatory approvals and certifications for our products in all of the markets we seek to conduct business. Even if we are granted such regulatory approvals and certifications, we may be subject to limitations imposed on the use of our products. In the future, we may be required to comply with certain restrictive regulations, or potential future regulations, rules, or directives that could adversely impact our ability to sell our products. We cannot guarantee that restrictive regulations will not, in the future, be imposed. Such potential regulatory conditions or compliance with such regulations may increase our cost of operations or decrease our ability to generate income.
We create products that may have harmful effects on the environment if not stored and handled properly prior to use, which could result in significant liability and compliance expense.
The blending of base fuels with our current or future products involves the controlled use of materials that could be hazardous to the environment. We cannot eliminate the risk of accidental contamination or discharge to the environment of these materials and any resulting problems that occur. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We may be named a defendant in any suit that arises from the improper handling, storage or disposal of these products. We could be subject to civil damages in the event of an improper or unauthorized release of, or exposure of individuals to, these materials. Claimants may sue us for injury or contamination that results from use by third parties of our products, and our liability may exceed our total assets. Compliance with environmental laws and regulations may be expensive, and current or future environmental regulations may impair our research, development and sales and marketing efforts. Although we carry product and general liability insurance with limits we deem sufficient, there can be no assurance that an event, or series of events, will not occur that will require, in the aggregate, resources in excess of these limits.
If we lose any key personnel or are unable to attract qualified personnel and consultants, we may lose business prospects and sales, or be unable to otherwise fully operate our business.
We are dependent on the principal members of our management staff, the loss of any of whom could impair our product development and commercialization efforts underway. Furthermore, we depend on our ability to attract and retain additional qualified personnel to develop and manage our future business and markets. We may have to recruit qualified personnel with competitive compensation packages, equity participation and other benefits that may reduce the working capital available for our operations. We cannot provide assurance that we will be able to obtain qualified personnel on reasonable terms, or that we will be able to retain our existing management staff.
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We may have difficulties managing growth, which could lead to lost sales opportunities.
While we have not yet achieved any meaningful, sustained revenues through the sale of our products, should certain events occur, such as a large recurring order from a well-known company or endorsement of our products from a well-known commercial entity, sales may escalate rapidly. Rapid growth could strain our human and infrastructure resources, potentially leading to higher operating costs, lost sales opportunities, or both. Our ability to manage operations and control growth will be dependent upon our ability to improve our operational, financial and management controls, reporting systems and procedures, and to attract and retain adequate numbers of qualified employees. Should we be unable to successfully provide the resources needed to manage growth, product sales and customer satisfaction could suffer and higher costs and losses could occur.
Our shares are quoted on the Over-The-Counter Bulletin Board and are subject to a high degree of volatility and liquidity risk.
Our common stock is currently quoted on the OTC Bulletin Board. As such, we believe our stock price is more volatile and the share liquidity characteristics to be of higher risk than if we were listed on one of the national exchanges. Also, if our stock were no longer quoted on the OTC Bulletin Board, the ability to trade our stock would become even more limited and investors may not be able to sell their shares.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
We maintain our administrative offices at 7777 Bonhomme Avenue, Suite 1920, St. Louis, Missouri 63105. On January 1, 2002, we entered into a five-year lease agreement for office space and administrative services of $4,249 per month for approximately 2,100 square feet. On July 21, 2006, this lease agreement was extended an additional five years through December 31, 2011. The new base rent beginning January 1, 2009 was $3,907 per month and increased annually to $4,082 per month beginning January 1, 2011.
We believe our current facilities are adequate to meet current and near-term operating requirements.
Item 3. Legal Proceedings
We are 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 it is more likely than not that the ultimate liabilities resulting from such lawsuits and claims will not materially affect our financial position, results of operations or liquidity.
On July 31, 2006, we received notice from the American Arbitration Association ("AAA") of a Demand for Arbitration dated July 27, 2006 received by the AAA naming IFT as Respondent and TPG Capital Partners (“TPG”), the prior Blencathia Acquisition Corporation (“Blencathia”) owner, as the Claimant. The arbitration had been requested by TPG to resolve an alleged aggregate proceeds shortfall from the sale of IFT securities issued in the Blencathia merger. TPG has claimed they sold some or all of the 312,000 shares and the sales have not generated at least $500,000 of proceeds, as guaranteed in the merger documents.
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In an effort to resolve this matter prior to submission to binding arbitration, both TPG and IFT participated in a non-binding mediation conference on January 30, 2007, which did not resolve the matter. Informal discussions are ongoing. It is not expected that the ultimate settlement of this matter, considering we have recorded a liability for the shortfall amount, will have an additional adverse material effect on IFT. Since 2009, IFT has made payments to TPG totaling $160,000 to reduce the recorded liability.
Item 4. (Removed and Reserved)
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is quoted on the OTC Bulletin Board system under the symbol “IFUE.OB.” The table below shows the range of high and low bid prices on a quarterly basis for the two most recently completed fiscal years. The quotations shown reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
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First Quarter
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$ | 0.19 | $ | 0.10 | $ | 0.34 | $ | 0.16 | ||||||||
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Second Quarter
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$ | 0.32 | $ | 0.10 | $ | 0.34 | $ | 0.17 | ||||||||
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Third Quarter
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$ | 0.30 | $ | 0.17 | $ | 0.25 | $ | 0.15 | ||||||||
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Fourth Quarter
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$ | 0.30 | $ | 0.10 | $ | 0.23 | $ | 0.15 | ||||||||
As of the close of business on March 24, 2011, the last reported sales price per share of our common stock was $0.13. As of March 24, 2011, we estimate there were 1,663 record holders of our 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.
We have not declared or paid a cash dividend to shareholders. The Board of Directors presently intends to retain any future earnings to finance our operations and does not expect to authorize cash dividends in the foreseeable future.
Item 6. Selected Financial Data
Not applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is management’s discussion and analysis of certain significant factors that have affected our financial condition, results of operations and cash flows during the periods included in the accompanying financial statements. This discussion should be read in conjunction with the financial statements and notes included elsewhere in this annual report on Form 10-K.
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Overview
We are a fuel performance enhancement technology company transitioning to a commercial enterprise. We believe the macro economic environment for our technology and products is excellent now and will continue to be so for the foreseeable future. We believe ever-increasing fuel environmental regulations will likely result in increased demand for additive products to help offset adverse fuel performance and engine impacts resulting from these regulations. Our products and technology are uniquely positioned to benefit from this macro environment by offering fuel performance enhancement solutions that specifically address these macro developments and trends.
Results of Operations
Comparison of the Twelve Months Ended December 31, 2010 and the Twelve Months Ended December 31, 2009
Revenues
Net revenue for the twelve months ended December 31, 2010 was $298,366, as compared to $184,851 for the twelve-month period ended December 31, 2009. This increase in net revenue was primarily due to increased sales volume from our distributor network ($91,643) and increased sales volume to end-user customers ($21,871). Sales revenue for 2010 was split between sales to our distributor network (75% of sales revenue) and end-user customers (25% of sales revenue).
Sales revenue generated during 2010 and 2009 resulted primarily from the sale of DiesoLIFTTM 10.
Operating Expenses
Total operating expense was $2,454,834 for the twelve months ended December 31, 2010 (including non-cash stock-based compensation expense of $260,348), as compared to $5,105,516 for the twelve-month period ended December 31, 2009 (including non-cash stock-based compensation expense of $2,667,125). This represents a $2,650,682 decrease from the prior period, and was primarily attributable to a decrease in non-cash stock-based compensation expense and other selling, general and administrative expense, partially offset by an increase in cost of operations. These fluctuations are more fully described below.
Selling, General and Administrative Expense
Selling, general and administrative expense for the twelve months ended December 31, 2010 was $2,312,396 (including non-cash stock-based compensation expense of $260,348), as compared to $5,035,115 (including non-cash stock-based compensation of $2,667,125) for the twelve-month period ended December 31, 2009, representing a $2,722,719 decrease from the prior period.
The non-cash stock-based compensation expense decrease of $2,406,777 between 2010 and 2009 was primarily due to:
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a decrease of $1,516,581 due to less expense recorded related to the modification of terms to options previously granted;
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a decrease of $409,444 recorded in 2010 versus 2009 for newly issued (within the applicable reporting period) non-cash stock-based compensation with immediate vesting to non-employees;
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(3)
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a decrease of $132,951 recorded in 2010 versus 2009 primarily due to the mid-year 2010 vesting of certain options granted to employees/directors in 2009 and less new option grants to employees/directors with immediate vesting in 2010 as compared to 2009; and
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a decrease of $180,400 due to treasury stock repurchases made during 2009 at prices in excess of the then-market price.
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The $315,942 decrease in other selling, general and administrative expense was primarily due to:
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a decrease of $215,415 in legal expense primarily due to the 2010 litigation settlement with a former distributor and the related 2010 legal fees mostly being covered by our D&O insurance once the deductible level was achieved; reduced intellectual property protection efforts and initiatives in 2010 compared to 2009, as we had no intellectual property litigation during 2010 and reduced our protection efforts for certain intellectual property items during 2010; and less SEC legal fees since we did not have equity raise and stock dividend issuance external legal reviews in 2010, like we did during 2009;
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a decrease of $79,772 in consulting expense due to a one-time reimbursement payment to a former consultant during 2009 and less commercialization assistance from consultants in 2010 as compared to 2009; and
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a decrease of $62,721 in research and development expense primarily due to less United Kingdom rail support testing in 2010 as compared to 2009.
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Depreciation
Depreciation was $4,594 for the twelve months ended December 31, 2010, as compared to $5,062 for the twelve months ended December 31, 2009. Depreciation has been relatively small since our intellectual property became fully amortized during 2007.
Interest Income (Expense)
Net interest income for the twelve months ended December 31, 2010 was $9,157, compared to $18,891 for the twelve-month period ended December 31, 2009. The change in net interest income is primarily attributable to a decrease in invested funds during 2010 as compared to 2009, as 2009 equity raise proceeds were used to fund ongoing operations.
Provision for Income Taxes
We have operated at a net loss since inception and have not recorded or paid any income taxes, other than for non-cash deferred tax expense related to a basis difference between financial reporting and tax reporting goodwill. We have significant net operating loss carry-forwards that would be recognized at such time as we demonstrate the ability to operate on a profitable basis for an extended period of time. The deferred income tax asset resulting primarily from the net operating loss carry-forwards has been fully reserved with a valuation allowance.
Net Loss
Net loss for the twelve months ended December 31, 2010 was $2,214,494, as compared to $5,366,774 for the twelve months ended December 31, 2009. The decrease in net loss was primarily due to decreases in non-cash stock-based compensation expense, other selling, general and administrative (as described above) and income tax expense of $397,817. This was partially offset by an increase in cost of operations. The basic and diluted net loss per common share for the twelve months ended December 31, 2010 and 2009 was $(0.02) and $(0.05), respectively.
New Accounting Pronouncements
New Accounting Pronouncements Adopted
ASC 820—In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures About Fair Value Measurements.” This guidance amends Subtopic 820-10 to require new disclosures and clarify existing disclosures. This guidance requires new disclosures of amounts and reasons for significant transfers between Level 1 and Level 2 fair value measurements. Additionally, in the reconciliation for fair value measurements using significant unobservable inputs (Level 3), separate presentation of information about purchases, sales, issuances and settlements is required. The guidance clarifies that fair value measurement disclosures for each class of assets and liabilities may constitute a subset of assets and liabilities within a line item on a reporting entity’s balance sheet. The guidance also clarifies disclosure requirements about inputs and valuation techniques for both recurring and nonrecurring fair value measurements (Level 2 or Level 3). The ASU also amends guidance on employers’ disclosures about post-retirement benefit plan assets under ASC 715 to require that disclosures be provided by classes of assets instead of by major categories of assets. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity for Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, including interim periods within those fiscal years. The adoption of this guidance did not have a material effect on our financial position, results of operations or cash flows.
19
ASC 815—In March 2010, the FASB issued ASU 2010-11, “Scope Exception Related to Embedded Credit Derivatives” to address questions that have been raised in practice about the intended breadth of the embedded credit derivative scope exception in paragraphs 815-15-15-8 through 815-15-15-9 of ASC 815, “Derivatives and Hedging.” The amended guidance clarifies that the scope exception applies to contracts that contain an embedded credit derivative that is only in the form of subordination of one financial instrument to another. This guidance became effective for us on July 1, 2010. The adoption of this guidance did not have a material effect on our financial position, results of operations or cash flows.
Recently Issued Accounting Pronouncements
ASC 605-25 - In October 2009, the FASB issued ASU No. 2009-13 for updated revenue recognition guidance under the provisions of ASC 605-25, “Multiple-Element Arrangements.” The previous guidance has been retained for criteria to determine when delivered items in a multiple-deliverable arrangement should be considered separate units of accounting. However, the updated guidance removes the 48 previous separation criteria that objective and reliable evidence of fair value of any undelivered items must exist for the delivered items to be considered a separate unit or separate units of accounting. This guidance is effective for fiscal years beginning on or after June 15, 2010. We do not expect that the adoption of this guidance will have a material effect on our financial position, results of operations or cash flows.
ASC 350—In December 2010, the FASB issued ASU 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units With Zero or Negative Carrying Amounts” to modify step one of the goodwill impairment test for entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing step one of the goodwill impairment test is zero or negative. For those entities which have one or more reporting units, the entity is required to perform step two of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. The ASU is effective for impairment tests performed during an entity’s fiscal years (and interim periods within those years) that begin after December 15, 2010. We are currently evaluating the impact the adoption of this guidance could have on our financial position, results of operations or cash flows.
Critical Accounting Policies and Estimates
Revenue Recognition
We recognize revenue from the sale of our products when the products are shipped, and title and risk of loss has passed to the buyer. The majority of our revenues is from sales to product distributors. Product distributors do not have the option to return product that is not immediately sold to an end-user.
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Therefore, our revenue recognition is not conditional on whether a distributor is able to sell product to an ultimate product end-user. Our sales policies for end-users are consistent with product distributor sales policies.
Valuation of goodwill
We test goodwill for impairment at least annually in the fourth quarter. We will also review goodwill for impairment throughout the year if any events or changes in circumstances indicate the carrying value may not be recoverable.
Factors we consider important, which could trigger an impairment review, include the following:
|
1.
|
Significant under-performance relative to expected historical or projected future operating results;
|
|
2.
|
Significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
|
|
3.
|
Significant negative industry or economic trends;
|
|
4.
5.
|
Significant decline in our stock price for a sustained period; and
Our market capitalization relative to net book value.
|
To test impairment, we use the market approach to determine the fair value of the Company. Following this approach, the fair value of the business exceeded the carrying value of the business as of December 31, 2010 by $24,300,000. 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 December 31, 2010, our deferred income tax assets consisted principally of net operating loss carry-forwards, and have been fully offset with a valuation allowance because it is more likely than not that a tax benefit will not be realized from the assets in the future.
Liquidity and Capital Resources
A critical component of our operating plan affecting our ability to execute the product commercialization process is the cash resources needed to pursue our marketing and sales objectives. Until we are able to generate positive and sustainable operating cash flow, our ability to attract additional capital resources in the future will be critical to continue the funding of our operations.
In its March 31, 2011 report, our independent registered public accounting firm expressed substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.
While we cannot make any assurances as to the accuracy of our projections of future capital needs, we believe that, based on our current cash position, projected sales during 2011 and a remaining equity commitment of $1,000,000 (entered into with a related party Board member of IFT and significant shareholder during 2008), we have adequate cash and cash equivalents balances and commitments to fund operations through at least September 2011. However, if we are unable to meet our projections and generate positive and sustainable operating cash flows by this time, we may need to raise additional capital to fund our future operations.
Cash used in operating activities was $2,076,113 for the twelve months ended December 31, 2010, compared to cash provided by operating activities of $816,397 for the twelve months ended December 31, 2009. The decrease in cash flow from operating activities was due primarily to cash received from a prepaid sales order from VOS during the first quarter of 2009. IFT would need to expend approximately $1,500,000 to manufacture inventory required to fulfill this sales order. We have had no communication with VOS in over eighteen (18) months and believe they have ceased all activities on behalf of IFT.
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Cash provided by investing activities was $1,000,000 for the twelve months ended December 31, 2010, as compared to cash used in investing activities of $1,000,000 for the twelve months ended December 31, 2009. During 2010, we redeemed $1,000,000 of investments previously made during the second quarter of 2009. During the second quarter of 2009, we invested $3,200,000 ($3,000,000 of which had maturities greater than 90 days) of the proceeds received from earlier 2009 equity raise activities into a certificate of deposit program that was insured 100% by the FDIC. We redeemed $2,200,000 ($2,000,000 of which had maturities greater than 90 days) of investments upon maturities during 2009. At December 31, 2010, we did not have any certificates of deposit with maturities less than 90 days classified on our balance sheet in cash and cash equivalents, nor did we have any investments in certificates of deposit having maturities greater than 90 days.
Cash provided by financing activities was $0 for the twelve months ended December 31, 2010, as compared to $1,712,500 for the twelve months ended December 31, 2009. We did not have any equity raise activities during the twelve months ended December 31, 2010. During 2009, we raised $2,162,500 upon the private placement of 8,650,000 restricted shares of our common stock to accredited investors. During 2009, we also had treasury stock acquisitions of $450,000, related to the repurchases of shares previously owned by IFT Directors.
Net cash decreased by $1,076,113 for the twelve months ended December 31, 2010, as compared to an increase in net cash of $1,528,897 for the twelve months ended December 31, 2009.
During the twelve months ended December 31, 2010 and December 31, 2009, we did not make significant investments in property and equipment and do not anticipate doing so in the immediate future.
Working capital at December 31, 2010 was $(2,374,859), as compared to $(490,640) at December 31, 2009. This decrease was primarily attributable to funding cash operating expenses for 2010. The negative working capital amount for 2010 is strongly impacted by the approximate $3 million deferred revenue liability recorded on our balance sheet at December 31, 2010.
On January 20, 2009, our Board of Directors declared a restricted stock dividend to shareholders of record at the close of business on February 4, 2009 (the “Record Date”) in the amount of 1 restricted share for every 25 common shares owned. The distribution date was February 10, 2009. The restricted stock dividend is subject to resale conditions pursuant to Rule 144 of the Exchange Act. This stock dividend has been retroactively reflected in our financial statements and notes to the financial statements.
Effective October 27, 1999, we merged with Blencathia. Blencathia was a public shell company with immaterial assets and liabilities and 312,000 shares outstanding at the time of the merger, which it redeemed and cancelled upon the merger. In exchange, we issued 312,000 of our common shares to the prior Blencathia owner with the contractual understanding that such shares were to be sold by that owner to achieve gross cash proceeds of $500,000. Any excess proceeds were to be returned to us and any deficiency was to be made up by us issuing additional shares or paying the difference in cash. As we believed that we controlled the ultimate timing of the sale of these 312,000 shares by the prior Blencathia owner, we did not consider these shares as issued or outstanding for purposes of computing loss per share.
In 2006, we learned that the prior Blencathia owner had, in fact, sold the 312,000 shares for aggregate proceeds of approximately $150,000, without our consent. Accordingly, in the fourth quarter of 2006, we recorded $500,000 of general expenses (representing the cost of the 1999 merger) and the deemed issuance of approximately $150,000 of common stock. Since 2009, we have made payments to the prior Blencathia owner in the aggregate of $160,000 reducing this obligation. The remaining $190,000 obligation has been reflected as a current accrued expense. We are in negotiations with the prior Blencathia owner to resolve this obligation and may ultimately settle the obligation with either cash or equity securities with a lower market value. Beginning in 2006, the 312,000 shares have been reflected as outstanding for earnings per share computations.
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Item 8. Financial Statements and Supplementary Data
Financial statements specified by this Item, together with the report relating thereto of BDO USA, LLP, are presented following Item 15 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Our management has evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2010. Based on this evaluation, the principal executive officer and principal financial officer have identified a material weakness in our internal control over financial reporting. Therefore, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective at December 31, 2010.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and Rule 15d-15(f) promulgated under the Exchange Act. Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2010, based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control-Integrated Framework, we have identified a material weakness in our internal control over financial reporting. As a result, our management has concluded that our internal control over financial reporting was not effective as of December 31, 2010.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
During our 2009 and 2008 reviews of internal controls, management identified the following material weakness: IFT has limited accounting personnel with sufficient expertise, accounting knowledge and training in United States GAAP financial reporting requirements. Specifically, IFT lacks sufficient personnel to anticipate, identify, resolve and review complex accounting issues and to complete a timely review of the financial statements. This material weakness was not corrected during 2010.
This control deficiency resulted in recorded material adjustments to the financial statements for non-cash stock-based compensation and also resulted in adjustments to financial statement presentation in both 2008 and 2009. There is a reasonable possibility that a material misstatement of the annual or interim financial statements would not be prevented or detected on a timely basis. However, our management team performed analysis and procedures to ensure that the financial statements included in this annual report on Form 10-K were prepared in conformity with United States GAAP, with specific focus on those areas that would be impacted by the material weakness identified. As a result, our management believes that the financial statements included in this annual report on Form 10-K present fairly, in all material respects, our financial position, results of operations and our cash flows for the periods presented.
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Management does consult with outside advisers, external SEC counsel and its independent registered public accounting firm regarding certain reporting issues.
Management has discussed the material weakness and related corrective actions with the Audit Committee and our independent registered public accounting firm. Other than as described above, we are not aware of any other material weakness in our internal control over financial reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Remediation Plan
Although as of December 31, 2010 we have not yet remediated the material weakness in our internal control over financial reporting originally identified during our 2008, 2009 and 2010 reviews, we have made and will continue to make, improvements to our policies, procedures, systems and staffing who have significant roles in internal control to address the identified internal control deficiencies. Consequently, management has initiated the following remediation steps to address the material weakness described above:
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·
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We will continue to focus on improving the skill sets of our accounting and finance function, through education and training;
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·
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We will continue to consider the engagement of qualified professional consultants to assist us in cases where we do not have sufficient internal resources, with management reviewing both the inputs and outputs of the services;
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·
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Upon the successful completion of a financing sufficient to support operations for at least two years, we will consider the hiring of additional accounting and finance staff with the commensurate knowledge, experience and training necessary to complement the current staff in the financial reporting functions; and
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·
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We will further develop our financial statement closing and reporting practices to include additional levels of checks and balances in our procedures and timely review.
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Changes in Internal Control Over Financial Reporting
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 quarter ended December 31, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. However, as discussed above, we have identified a material weakness in our internal control over financial reporting.
Item 9B. Other Information
Not applicable.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
The following are the names of our current Directors and executive officers, their present positions with IFT and biographical information.
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Name
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Age
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Position(s) and
offices held with IFT
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Dates in position
or office
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|||
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Jonathan R. Burst
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52
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Chief Executive Officer,
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1999 - Present
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|||
| Director, Chairman | 2000 - Present | |||||
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Rex Carr
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84
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Director
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2002 - Present
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Fer Eren, M.D.
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48
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Director
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2009 - Present
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|||
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Gary Kirk
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49
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Director, Director of Sales and Marketing *
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2003 - Present
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|||
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David B. Norris
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62
|
Director
|
2000 - Present
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|||
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Stuart D. Beath
|
52
|
Chief Financial Officer
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2007 - Present
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*This is a non-executive officer position.
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 nine directors. Currently, we have five 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 our Chief Executive Officer since 1999, and as the President of IFT from 1999 to 2000 and 2002 to 2005. Mr. Burst has also served as a Director and Chairman of the Board since 2000. Mr. Burst founded Burcor International in 1998, primarily an insurance brokerage firm, and has served as President since its inception. Mr. Burst received a bachelor of arts degree in Economics from the University of Missouri in 1981.
REX CARR has served as a Director of IFT since 2002. Mr. Carr has been the managing partner of the Rex Carr Law Firm, a law firm with offices in East St. Louis, Illinois, St. Louis, Missouri and Belleville, Illinois, since 2004. Until 2003, Mr. Carr was the senior partner of a 36-person law firm, Carr, Korein, and Tillery, with offices in Missouri and Illinois, for more than five years. Mr. Carr is admitted to practice in the United States Supreme Court and the Illinois and Missouri Supreme Courts.
FER EREN, M.D. has served as a Director of IFT since 2009. Dr. Eren is a member of and a practicing physician in the medical practice of Eren and Atluri, M.D.s, LLC, having served in such role since 2003. Previously, Dr. Eren founded and was the Managing Director of Medcheck Diagnostic Center, Inc., a diagnostic clinic, and an owner of Medplus, a medical equipment sales and distribution company.
GARY KIRK has served as a Director of IFT since 2003. Mr. Kirk has served as our Director of Sales and Marketing since 2003. Mr. Kirk has extensive experience (1980 to 2003) 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 remainder in Petrochem Carless’ marketing department. From 1988 to 2003, Mr. Kirk reported directly to the President of Petrochem Carless as the Marketing Manager for Performance Fuels, covering accounts in Europe and the rest of the world.
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DAVID B. NORRIS has served as a Director of IFT since 1999. Mr. Norris founded and owns Addicks Services, Inc., a construction company, and has served as its Vice President since 1983.
STUART D. BEATH has served as our Chief Financial Officer since 2007. From 2001 until his appointment to Chief Financial Officer, Mr. Beath served as our Director of Corporate Development. Prior to coming to IFT, Mr. Beath was a First Vice President and served in the Corporate Finance Department of Stifel, Nicolaus & Company, Incorporated, a brokerage and investment banking firm, from 1993 to 1997. Mr. Beath was also a member of the Board of Directors of Anchor Gaming from 1994 to 2001, serving on the Board’s Audit Committee. From 1987 to 1993, Mr. Beath served in the Corporate Finance Department of A.G. Edwards & Sons, Inc., a brokerage and investment banking firm, where he was an Assistant Vice President of the Firm. Mr. Beath earned a bachelor of arts degree from Williams College in 1981 and a masters in business administration degree from the Darden School at the University of Virginia in 1987.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act, requires our executive officers and Directors, and persons who beneficially own more than ten percent of our 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 shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.
Based solely upon our review of copies of such forms received by us, we believe that, during fiscal year ended December 31, 2010, the following persons did not timely file Forms 3, Forms 4 and Forms 5 reporting transactions affecting their beneficial ownership:
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Reporting Person
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Number of Known Failures to File Required Form
|
Number of Transactions Not Reported
|
||
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Jonathan R. Burst
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2
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3
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||
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Stuart D. Beath
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1
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2
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||
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Rex Carr
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3
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5
|
||
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Gary Kirk
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3
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5
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||
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David B. Norris
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3
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5
|
||
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Fer Eren, M.D.
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1
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1
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Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics that applies to the Chief Executive Officer, the Chief Financial Officer, senior financial officers and employees with financial reporting responsibilities. A copy will be provided at no charge. Requests can be sent to International Fuel Technology, Inc., 7777 Bonhomme Avenue, Suite 1920, St. Louis, Missouri 63105, attention Thomas M. Powell.
Audit Committee
We have a separately designated Audit Committee. Mr. Norris currently is the only member of our Audit Committee.
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The Board of Directors has determined that Mr. Norris, an independent member of the Board, satisfies all of the criteria to be an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K.
Procedures for Nominating Directors
There have been no material changes to the procedures by which security holders may recommend nominees to the Board of Directors since the filing of our quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2010.
Item 11. Executive Compensation
2010 Summary Compensation Table
The following table sets forth information concerning all cash and non-cash compensation paid or to be paid by us as well as certain other compensation awarded, earned by and paid, during the indicated fiscal year, to the Chief Executive Officer and Chief Financial Officer.
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Name and Principal Position
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Year
|
Salary
($)
|
Option
Awards ($) |
All Other Compensation
($) |
Total
($) |
|||||||||||||
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Jonathan R. Burst,
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2010
|
$ | 307,692 | $ | 24,270 | 1 | $ | 126,761 | 2 | $ | 458,723 | |||||||
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CEO
|
2009
|
$ | 400,000 | $ | 1,111,003 | $ | 52,512 | $ | 1,563,515 | |||||||||
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Stuart D. Beath,
|
2010
|
$ | 175,000 | $ | 17,335 | 3 | $ | 25,219 | 4 | $ | 217,554 | |||||||
|
CFO
|
2009
|
$ | 168,269 | $ | 102,497 | $ | 21,981 | $ | 292,747 | |||||||||
1) Represents the aggregate grant date fair value amount attributable to options previously granted not pursuant to our Amended and Restated Long-Term Incentive Plan (the “Amended and Restated LTIP”) that were subsequently replaced with options granted pursuant to our Amended and Restated LTIP in January 2010. Assumptions used to determine this amount include a fair value of $0.07, a risk-free interest rate of 1.93%, a dividend yield of 0%, a volatility factor of 0.87 and an expected option life of 3.92 years.
2) Includes $92,308 of payments made to Burcor Capital, LLC, a company owned by Mr. Burst, in lieu of salary owed to Mr. Burst pursuant to his employment agreement. See discussion of Mr. Burst’s employment agreement in the Executive Officer Employment Agreements section below. Also includes $6,934 for a prior year discretionary option grant for Board services for options previously granted not pursuant to our Amended and Restated LTIP that were subsequently replaced with options granted pursuant to our Amended and Restated LTIP in January 2010. Assumptions used to determine this amount include a fair value of $0.07, a risk-free interest rate of 1.93%, a dividend yield of 0%, a volatility factor of 0.87 and an expected option life of 3.92 years. Also includes $2,300 of non-cash expense recorded for the grant of 10,000 shares of our common stock for 2010 Board services provided. This amount represents the aggregate grant date fair value computed in accordance with FASB ASC Topic 718 Share-based payment (“FASB ASC 718”). These fully-vested shares were valued based on the closing price of our stock on grant date ($0.23 on December 31, 2010). Also includes $25,219 of health insurance coverage for Mr. Burst and his family and $4,826 of life insurance premiums paid by IFT.
3) Represents the aggregate grant date fair value amount attributable to options previously granted not pursuant to our Amended and Restated LTIP that were subsequently replaced with options granted pursuant to our Amended and Restated LTIP in January 2010. Assumptions used to determine this amount include a fair value of $0.07, a risk-free interest rate of 1.93%, a dividend yield of 0%, a volatility factor of 0.87 and an expected option life of 3.92 years.
4) Represents $25,219 of health insurance coverage for Mr. Beath and his family.
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During 2009, the Board granted Messrs. Burst and Beath options to purchase 450,000 and 250,000 shares, respectively, of our common stock. The portion of Mr. Burst’s option relating to 350,000 shares was granted as compensation for Mr. Burst’s services as our Chief Executive Officer, and the portion of Mr. Burst’s option relating to 100,000 shares was granted as compensation for Mr. Burst’s services as a Director. Mr. Burst’s and Mr. Beath’s options were not granted pursuant to the Consultant and Employee Stock Compensation Plan or the Amended and Restated LTIP. In 2010, each of Messrs. Burst and Beath agreed to cancel his respective option in exchange for the grant of a new option with the same material terms issued pursuant to the Amended and Restated LTIP. The replacement options were granted on January 22, 2010. Each option has an exercise price of $0.50 and expires on December 31, 2013.
Executive Officer Employment Agreements
Jonathan R. Burst
On May 15, 2009, we entered into an employment agreement with Mr. Burst (the “Burst Agreement”) to serve as our Chief Executive Officer. The Burst Agreement has a term beginning May 15, 2009 through May 14, 2012.
Pursuant to the terms of the Burst Agreement, Mr. Burst will receive an annual base salary of $400,000. Mr. Burst is also eligible to receive a cash bonus and stock options at the discretion of our Board.
Under the Burst Agreement, if Mr. Burst’s employment is terminated by us for “cause,” or if Mr. Burst terminates his employment other than for “good cause shown,” as defined in the Burst Agreement, and which includes the occurrence of a change in control, we will pay Mr. Burst the salary accrued for the pay period in which the termination occurred, unless termination was for cause and the cause involved fraud, embezzlement or disclosure of confidential information, in which case, IFT would not be liable for any payments to Mr. Burst. “Cause” is defined in the Burst Agreement as (i) any fraud, embezzlement or other dishonesty of Mr. Burst that materially and adversely affects our business or reputation, (ii) disclosure of confidential information to any third party, (iii) Mr. Burst’s refusal to perform his material duties and obligations under the Burst Agreement, or (iv) Mr. Burst’s willful and intentional misconduct in the performance of his material duties and obligations.
Pursuant to the terms of the Burst Agreement, if we terminate Mr. Burst other than for cause, death or disability, or if Mr. Burst terminates his employment for good cause shown, IFT must pay Mr. Burst’s accrued but unpaid portion of his annual base salary in a lump sum, and will continue to pay Mr. Burst’s annual base salary through May 14, 2012. In addition, if we do not extend Mr. Burst’s contract beyond the terms of the Burst Agreement, we will pay Mr. Burst his current salary over the one-year period after the Burst Agreement expires.
Under the Burst Agreement, if Mr. Burst’s employment is terminated by us by reason of his death or disability, we will pay Mr. Burst’s accrued but unpaid portion of his annual base salary in a lump sum. In addition, if Mr. Burst’s employment is terminated by reason of disability, we will continue to pay Mr. Burst’s annual base salary, less any amounts received by Mr. Burst under any disability insurance coverage maintained by us, until the earlier of (i) May 14, 2012, (ii) six months after a determination of disability has been made, or (iii) the date of Mr. Burst’s death.
Pursuant to the Burst Agreement, during Mr. Burst’s employment, and for a period of five years following termination of Mr. Burst’s employment (i) by Mr. Burst other than for good cause shown, or (ii) by us for cause, Mr. Burst is bound by a non-competition clause. The Burst Agreement also provides for a non-solicitation period ending one year following Mr. Burst’s termination for any reason.
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In addition, Mr. Burst is entitled to receive additional compensation for serving on our Board of Directors.
Stuart D. Beath
On May 15, 2009, we entered into an employment agreement with Mr. Beath (the “Beath Agreement”). Pursuant to the Beath Agreement, Mr. Beath is to serve as our Chief Financial Officer. The term of the Beath Agreement begins May 15, 2009 and extends to May 14, 2012.
Pursuant to the terms of the Beath Agreement, Mr. Beath will receive an annual base salary of $175,000. Mr. Beath is also eligible to receive a cash bonus and stock option grants at the discretion of our Board.
Under the Beath Agreement, if Mr. Beath’s employment is terminated by us for “cause,” or if Mr. Beath terminates his employment other than for “good cause shown,” as defined in the Beath Agreement, and which includes the occurrence of a change in control, we will pay Mr. Beath the salary accrued for the pay period in which the termination occurred, unless termination was for cause and the cause involved fraud, embezzlement or disclosure of confidential information, in which case, IFT would not be liable for any payments to Mr. Beath. “Cause” is defined in the Beath Agreement as (i) any fraud, embezzlement or other dishonesty of Mr. Beath that materially and adversely affects our business or reputation, (ii) disclosure of confidential information to any third party, (iii) Mr. Beath’s refusal to perform his material duties and obligations under the Beath Agreement, or (iv) Mr. Beath’s willful and intentional misconduct in the performance of his material duties and obligations.
Pursuant to the terms of the Beath Agreement, if we terminate Mr. Beath other than for cause, death or disability, or if Mr. Beath terminates his employment for good cause shown, IFT must pay Mr. Beath’s accrued but unpaid portion of his annual base salary in a lump sum, and will continue to pay Mr. Beath’s annual base salary through May 14, 2012.
Under the Beath Agreement, if Mr. Beath’s employment is terminated by us by reason of his death or disability, we will pay Mr. Beath’s accrued but unpaid portion of his annual base salary in a lump sum. In addition, if Mr. Beath’s employment is terminated by reason of disability, we will continue to pay Mr. Beath’s annual base salary, less any amounts received by Mr. Beath under any disability insurance coverage maintained by us, until the earlier of (i) May 14, 2012, (ii) six months after a determination of disability has been made, or (iii) the date of Mr. Beath’s death.
Pursuant to the Beath Agreement, during Mr. Beath’s employment, and for a period of five years following termination of Mr. Beath’s employment (i) by Mr. Beath other than for good cause shown, or (ii) by us for cause, Mr. Beath is bound by a non-competition clause. The Beath Agreement also provides for a non-solicitation period ending one year following Mr. Beath’s termination for any reason.
29
Outstanding Equity Awards at 2010 Fiscal Year-End
The following table provides information on all restricted stock, stock options and SAR awards (if any) held by our named executive officers (“NEOs”) as of December 31, 2010.
|
Option Awards
|
|||||||||||||
|
Name
|
No. of Securities Underlying Unexercised Options Exercisable
(#)
|
No. of Securities Underlying Unexercised Options Unexercisable
(#)
|
Option Exercise Price
($)
|
Option Expiration Date
|
|||||||||
|
Jonathan R. Burst
|
10,400 | - | $ | 0.49 |
12/28/2011
|
||||||||
| 10,400 | - | $ | 0.15 |
12/31/2012
|
|||||||||
| 10,400 | - | $ | 0.21 |
12/31/2013
|
|||||||||
| 450,000 | - | $ | 0.50 |
12/31/2013
|
|||||||||
| 780,000 | - | $ | 0.13 |
12/31/2014
|
|||||||||
| 1,040,000 | - | $ | 0.24 |
12/31/2014
|
|||||||||
| 5,200,000 | - | $ | 0.48 |
12/31/2014
|
|||||||||
|
Stuart D. Beath
|
208,000 | - | $ | 0.72 |
6/30/2012
|
||||||||
| 250,000 | - | $ | 0.50 |
12/31/2013
|
|||||||||
| 200,000 | - | $ | 0.25 |
8/2/2014
|
|||||||||
| 1,352,000 | - | $ | 0.48 |
12/31/2014
|
|||||||||
2010 Director Compensation
Directors do not receive any cash compensation for their services as members of the Board, although they are reimbursed for certain expenses incurred in connection with attendance at Board and Committee meetings.
Each non-employee and employee Director is entitled to an annual award of 10,000 restricted shares or an immediately vesting option to purchase 10,000 shares of our common stock as compensation for their services as Board members. In addition, each Board member is entitled to receive 1,000 shares of restricted stock or an option to purchase 1,000 shares of our common stock for every three Board meetings attended. For 2010 Board services, Messrs. Burst and Norris elected restricted shares and Messrs. Carr, Kirk and Eren elected options as compensation for their services.
Board members are also eligible to receive discretionary grants of common stock under the Consultant and Employee Stock Compensation Plan and grants of stock options, stock appreciation rights and restricted stock pursuant to the Amended and Restated LTIP.
Replacement Options
During 2009, the Board granted each of the Directors an option to purchase 100,000 shares of our common stock. These options were not granted pursuant to the Consultant and Employee Stock Compensation Plan or the Amended and Restated LTIP. In 2010, each of Messrs. Kirk, Carr and Norris agreed to cancel his respective option in exchange for the grant of a new option with the same material terms issued pursuant to the Amended and Restated LTIP. The replacement options were granted on January 22, 2010. Each option has an exercise price of $0.50 and expires on December 31, 2013. See “Executive Compensation” above for a discussion of the cancelation of Mr. Burst’s option and the grant of a new option to Mr. Burst.
30
Modified Options
During the fiscal year ended December 31, 2010, we modified the terms of certain options previously granted to Messrs. Carr, Kirk and Norris. The options were originally granted on December 30, 2005 as compensation for Board services provided in 2005 and in prior years. In each case, the expiration date was extended from December 31, 2010 to December 31, 2015. In addition, in certain instances, the exercise price of the option was also reduced.
The table below summarizes the material changes to the affected options.
|
Director
|
Number of Shares
Subject to Option
|
Original Exercise Price
|
Original Expiration Date
|
Exercise Price
After Modification
|
Expiration Date
After Modification
|
|||||||||
|
Rex Carr
|
11,440 | $ | 0.10 |
12/31/2010
|
$ | 0.10 |
12/31/2015
|
|||||||
| 11,440 | $ | 0.38 |
12/31/2010
|
$ | 0.38 |
12/31/2015
|
||||||||
| 11,440 | $ | 1.85 |
12/31/2010
|
$ | 0.50 |
12/31/2015
|
||||||||
| 11,440 | $ | 1.89 |
12/31/2010
|
$ | 0.50 |
12/31/2015
|
||||||||
|
Gary Kirk
|
11,440 | $ | 0.38 |
12/31/2010
|
$ | 0.38 |
12/31/2015
|
|||||||
| 11,440 | $ | 1.85 |
12/31/2010
|
$ | 0.50 |
12/31/2015
|
||||||||
| 11,440 | $ | 1.89 |
12/31/2010
|
$ | 0.50 |
12/31/2015
|
||||||||
|
David B Norris
|
11,440 | $ | 0.33 |
12/31/2010
|
$ | 0.33 |
12/31/2015
|
|||||||
| 11,440 | $ | 0.45 |
12/31/2010
|
$ | 0.45 |
12/31/2015
|
||||||||
| 11,440 | $ | 0.10 |
12/31/2010
|
$ | 0.10 |
12/31/2015
|
||||||||
| 11,440 | $ | 0.38 |
12/31/2010
|
$ | 0.38 |
12/31/2015
|
||||||||
| 11,440 | $ | 1.85 |
12/31/2010
|
$ | 0.50 |
12/31/2015
|
||||||||
| 11,440 | $ | 1.89 |
12/31/2010
|
$ | 0.50 |
12/31/2015
|
||||||||
The following table provides information related to the compensation of our non-NEO Directors for fiscal 2010. For information regarding our Chairman and Chief Executive Officer’s 2010 compensation, see the 2010 Summary Compensation table.
|
Name
|
Stock Awards ($)
|
Option Awards ($)
|
All Other Compensation ($)
|
Total ($)
|
||||||||||||
|
Rex Carr1
|
$ | -- | $ | 13,666 | 2,4 | $ | -- | $ | 13,666 | |||||||
|
Fer Eren, M.D.3
|
$ | -- | $ | 1,633 | 4 | $ | -- | $ | 1,633 | |||||||
|
David B. Norris5
|
$ | 2,300 | 6 | $ | 14,466 | 2 | $ | -- | $ | 16,766 | ||||||
|
Gary Kirk7
|
$ | -- | $ | 12,037 | 2, 4 | $ | 158,669 | 8 | $ | 170,706 | ||||||
|
1)
|
Mr. Carr’s IFT equity holdings as of December 31, 2010 include 14,820,298 shares of restricted common stock owned by R.C. Holding Company, of which Mr. Carr is a Director, President and 41% stockholder. Mr. Carr is deemed to be the beneficial owner of these shares. Mr. Carr also owns 130,000 shares of common stock and 4,319,901 shares of restricted common stock. Mr. Carr also has 186,960 vested options to purchase shares of IFT common stock and 10,000 restricted common shares obtained from Board services provided from 2002 to date.
|
31
|
2)
|
For each Director, includes $6,934, which represents the grant date fair value of options granted on January 22, 2010 (see “Replacement Options” above). Key assumptions used in determining the fair value (pursuant to FASB ASC 718) of these replacement options include the following:
|
|
Measurement date:
|
January 22, 2010
|
|
Fair value per option:
|
$0.07
|
|
Risk-free interest rate:
|
1.93%
|
|
Dividend yield:
|
0%
|
|
Volatility factor:
|
0.87
|
|
Expected option life:
|
3.92 years.
|
For each Director, also includes the following amounts, which represent the grant date fair value of options modified on December 6, 2010 (see “Modified Options” above):
|
Rex Carr
|
$5,099
|
|
David B. Norris
|
$7,532
|
|
Gary Kirk
|
$3,470.
|
Key assumptions used in determining the fair value (pursuant to FASB ASC 718) of these modified options include the following:
|
Measurement date:
|
December 6, 2010
|
|
Fair value per option:
|
$0.10
|
|
Risk-free interest rate:
|
1.59%
|
|
Dividend yield:
|
0%
|
|
Volatility factor:
|
0.92
|
|
Expected option life:
|
5 years.
|
|
3)
|
Dr. Eren’s IFT equity holdings as of December 31, 2010 include 642,899 shares of common stock. Dr. Eren also holds 120,000 vested options to purchase shares of IFT common stock, obtained from Board services provided from 2009 to date.
|
|
4)
|
Includes $1,633, which represents the grant date fair value for options granted as compensation for 2010 Board services. Key assumptions used in determining the fair value (pursuant to FASB ASC 718) of these options include the following:
|
|
Measurement date:
|
December 31, 2010
|
|
Fair value per option:
|
$0.16
|
|
Risk-free interest rate:
|
2.01%
|
|
Dividend yield:
|
0%
|
|
Volatility factor:
|
0.92
|
|
Expected option life:
|
5 years.
|
|
5)
|
Mr. Norris’ IFT equity holdings as of December 31, 2010 include 1,244,425 shares of restricted common stock. Mr. Norris also holds 208,000 vested options to purchase shares of IFT common stock for non-director related services provided. Mr. Norris also holds 209,840 vested options to purchase shares of IFT common stock and 10,000 restricted common shares obtained from Board services provided from 2000 to date.
|
32
|
6)
|
Represents the grant date fair value for restricted stock granted to Mr. Norris for 2010 Board services. Key assumptions used in determining the fair value (pursuant to FASB ASC 718) of these shares include a measurement date of December 31, 2010 and a closing stock price on that date of $0.23.
|
|
7)
|
Mr. Kirk’s IFT equity holdings as of December 31, 2010 include 2,330,000 vested options to purchase shares of IFT common stock granted for employee services. Mr. Kirk also holds 85,520 vested options to purchase shares of IFT common stock, obtained from Board services provided from 2003 to date.
|
|
8)
|
Pursuant to his employment agreement in effect during 2009, Mr. Kirk was to receive an annual salary of 75,000 British Pounds, receive 3,750 British Pounds for retirement contributions, receive a health insurance stipend of 3,000 British Pounds and receive an annual auto allowance of $9,600. Effective April 2009, Mr. Kirk received an incremental annual salary increase of 5,000 British Pounds and 250 British Pounds for retirement contributions. Effective November 2009, Mr. Kirk received another incremental annual salary increase of $10,000. Amount represents $158,669 for Mr. Kirk’s employment salary considering foreign currency conversion to United States Dollars based on when payments were made to Mr. Kirk throughout the year.
|
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth information regarding the ownership of our common stock as of March 24, 2011 by (i) each person known by IFT to own beneficially more than five percent of our common stock; (ii) each Director of 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.
|
Name and Address of Beneficial Owner 1
|
Amount and Nature of Beneficial Ownership
|
Percent of
Common Stock 2
|
||||||
|
Jonathan R. Burst
|
9,888,344 | 3 | 9.08 | % | ||||
|
David B. Norris
|
1,672,265 | 4 | 1.64 | % | ||||
|
Fer Eren, M.D.
|
762,899 | 5 | 0.75 | % | ||||
|
Gary Kirk
|
2,415,520 | 6 | 2.33 | % | ||||
|
Rex Carr
|
19,467,159 | 7 | 19.17 | % | ||||
|
Stuart D. Beath
|
2,359,024 | 8 | 2.28 | % | ||||
|
All Directors and executive officers as a group (6 persons)
|
36,565,211 | 9 | 32.08 | % | ||||
|
John M. Hennessy
|
6,000,000 | 10 | 5.81 | % | ||||
|
Observor Acceptances, Ltd.
|
5,259,840 | 11 | 5.13 | % | ||||
1This table is based upon information supplied by officers, directors and principal stockholders. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, we believe that each of the stockholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned. Unless otherwise indicated, the principal address of each of the stockholders named in this table is: c/o International Fuel Technology, Inc., 7777 Bonhomme Avenue, Suite 1920, St. Louis, Missouri 63105. The number of shares beneficially owned includes shares of common stock that the owner or owners had the right to acquire on or within 60 days of March 24, 2011, including through the exercise of options or warrants. Also included are restricted shares of common stock, over which the owner or owners have voting power, but no investment power.
33
2Calculation based on 101,342,284 common shares outstanding as of March 24, 2011 and calculated in accordance with Rule 13d-3 under the Exchange Act.
3Includes 52,000 restricted shares of common stock owned by Burcor Capital, LLC, of which Mr. Burst is an executive officer. Mr. Burst is deemed to be the beneficial owner of such shares. It also includes 7,501,200 shares issuable upon the exercise of options.
4 Includes 417,840 shares issuable upon exercise of options.
5Represents 642,899 shares of common stock and 120,000 shares issuable upon exercise of options.
6Represents 2,415,520 shares issuable upon exercise of options.
7Includes 14,820,298 shares of restricted common stock owned by R.C. Holding Company, of which Mr. Carr is a director, President and 41% stockholder. Mr. Carr is deemed to be the beneficial owner of these shares. Also includes 130,000 shares of common stock and 4,329,901 shares of restricted common stock owned by Mr. Carr. Amount also includes 186,960 shares issuable upon exercise of options.
8Represents 349,024 shares of common stock and 2,010,000 shares issuable upon exercise of options.
9Includes 12,651,520 shares issuable upon exercise of options.
10Represents 2,000,000 shares of common stock held directly by Mr. Hennessy, 2,000,000 shares of common stock held by a grantor retained annuity trust, of which Mr. Hennessy serves as trustee (the "GRAT"), 1,000,000 shares issuable upon exercise of warrants held directly by Mr. Hennessy, and 1,000,000 shares issuable upon exercise of warrants held by the GRAT. Mr. Hennessy's principal address is 47 West Lake Road, Tuxedo Park, NY 10987.
11Includes 4,160,000 shares of restricted common stock and 1,099,840 shares issuable upon the exercise of options. Observor Acceptances, Ltd.’s principal address is C/O Rob Douglas, Sir Walter Raleigh House, 48/50 Esplanade, St. Helier, Jersey JE1 4HH, Channel Islands.
Securities Authorized for Issuance Under Equity Compensation Plans
|
Plan category
|
Number of securities to be issued upon exercise of outstanding options, warrants and rights
|
Weighted-average exercise price of outstanding options, warrants and rights
|
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
|
|||||||||
|
(a)
|
(b)
|
(c)
|
||||||||||
|
Equity compensation plans approved by security holders
|
- | $ | - | - | ||||||||
|
Equity compensation plans not approved by security holders (1) (2)
|
21,578,919 | $ | 0.42 | 997,255 | ||||||||
|
Total
|
21,578,919 | $ | 0.42 | 997,255 | ||||||||
|
(1)
|
Includes options granted to employees, Directors and non-employees under our original Long Term Incentive Plan, our Amended and Restated LTIP and under other arrangements, and options and warrants issued to non-employees under other arrangements. Other arrangements include warrants issued to non-employees in relation to certain equity raise activities and option grants to certain employees and non-employees whose underlying common shares are not registered under the Securities Act of 1933, as amended, or any state securities laws.
|
34
|
(2)
|
See Notes 3 and 4 to our financial statements.
|
Item 13. Certain Relationships and Related Transactions, and Director Independence
During the fourth quarter of 2007, we obtained a $500,000 loan from Harry F. Demetriou, who was then a Director of IFT and the holder of over five (5%) percent of IFT’s common stock. Pursuant to the terms of the loan, a promissory note was executed by IFT in favor of Mr. Demetriou in connection with the loan. The loan was to accrue interest at the rate of 15% per year in arrears, was to become due and payable on January 1, 2009, and was guaranteed by Rex Carr, a Director of IFT and the holder of over five (5%) percent of IFT’s common stock. IFT also was obligated to pay any related loan fees incurred by Mr. Demetriou. On March 31, 2008, Mr. Demetriou agreed to accept 1,040,000 shares of IFT common stock in settlement of the $500,000 note. The trading price of the common stock was $0.41 per share as of March 31, 2008. As such, the settlement represented a 22% premium compared to the current stock price. The premium was incentive for the settlement in shares rather than in cash and was based on negotiations between IFT and Mr. Demetriou. On June 18, 2008, IFT repurchased 520,000 of the shares granted for the debt settlement described above for $250,000. During the first quarter of 2009, IFT repurchased the remaining 520,000 shares granted for the debt settlement for $250,000. In conjunction with these transactions, IFT reimbursed Mr. Demetriou $56,000 in 2009 for accumulated loan and bank fees.
On December 11, 2007, we obtained an investment commitment from Mr. Carr for up to $1,000,000 of equity purchases from time to time commencing after March 1, 2008. During the first quarter of 2008, IFT sold 416,000 shares to Mr. Carr under this arrangement for $200,000. 400,000 of these shares were subsequently repurchased by IFT for $200,000 during 2009.
From January 1, 2009 to May 26, 2009, Messrs. Demetriou and Norris served on our Audit Committee and our Compensation Committee. Mr. Demetriou ceased to be a Director upon his death on May 26, 2009. Mr. Norris is an independent Director, as such term is defined in the listing standards of The Nasdaq Stock Market, Inc. (“Nasdaq”). Mr. Demetriou was not an independent Director, as such term is defined in the Nasdaq listing standards.
IFT does not have a separately designated nominating committee for its Board. Each of the following directors is not deemed to be independent, as such term is defined in the Nasdaq listing standards: Mr. Burst, Mr. Carr and Mr. Kirk.
Item 14. Principal Accountant Fees and Services
Services Provided by our Independent Registered Public Accountants
BDO USA, LLP served as our independent registered public accountants for the fiscal years ended December 31, 2010 and 2009. Aggregate fees for professional services rendered for IFT by BDO USA, LLP for the fiscal years ended December 31, 2010 and 2009 were as follows:
35
|
Fiscal year ended December 31, 2010
|
Fiscal year ended December 31, 2009
|
|||||||
|
Audit fees
|
$ | 94,110 | $ | 117,054 | ||||
|
Audit-related fees
|
- | - | ||||||
|
Tax fees
|
- | - | ||||||
|
All other fees
|
- | - | ||||||
| $ | 94,110 | $ | 117,054 | |||||
Audit Fees
Audit fees were for professional services rendered for the audits of our financial statements and for review of the financial statements included in our quarterly reports on Form 10-Q for the quarterly periods during the 2010 and 2009 fiscal years.
Audit-related Fees
During the 2010 and 2009 fiscal years, BDO USA, LLP did not provide any assurance and related services that are reasonably related to the performance of the audit or review of our financial statements that are not reported under the caption “Audit Fees” above. Therefore, there were no audit-related fees billed or paid during the 2010 and 2009 fiscal years.
Tax Fees
As BDO USA, LLP did not provide any services to us for tax compliance, tax advice and tax planning during the fiscal years ended December 31, 2010 and 2009, no tax fees were billed or paid during those fiscal years.
All Other Fees
BDO USA, LLP did not provide any products and services not disclosed in the table above during the 2010 and 2009 fiscal years. As a result, there were no other fees billed or paid during those fiscal years.
Audit Committee Pre-approval Policies and Procedures
The Audit Committee has certain policies and procedures in place requiring the pre-approval of audit and non-audit services to be performed by our independent registered public accountants. Such pre-approval can be given as part of the Audit Committee’s approval of the scope of the engagement of the independent public registered accountants or on an individual basis. The approved non-audit services must be disclosed in our periodic reports filed with the SEC. The Audit Committee can delegate the pre-approval of non-auditing services to one or more of its members, but the decision must be presented to the full Audit Committee at the next scheduled meeting. The charter prohibits us from retaining our independent registered public accounting firm to perform specified non-audit functions, including (i) bookkeeping, financial information systems design and implementation; (ii) appraisal or valuation services, fairness opinions, or contribution-in-kind reports; (iii) actuarial services; and (iv) internal audit outsourcing services. All work performed by BDO USA, LLP for us in 2010 and 2009 was pre-approved by the Audit Committee.
36
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this report
|
|
1.
|
Financial statements
|
See index to financial statements and supporting schedules on page F-1 of this annual report on Form 10-K.
|
|
2.
|
Financial statement schedules
|
All 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
|
The following exhibits are filed as part of the report or are incorporated by reference:
EXHIBITS
3.1 Certificate of Incorporation of International Fuel Technology, Inc. and all amendments. (Filed as Exhibit 3.1 to the registrant’s annual report on Form 10-K for the fiscal year ended December 31, 1999 and incorporated herein by reference).
3.2 By-laws of International Fuel Technology, Inc. (Filed as Exhibit 3.2 to the registrant’s annual report on Form 10-K for the fiscal year ended December 31, 1999 and incorporated herein by reference).
10.1 Consultant and Employee Stock Option Plan (Filed as Exhibit 10 to the registrant’s registration statement on Form S-8 filed on February 7, 2000 and incorporated herein by reference). *
10.2 Long Term Incentive Plan (Filed as Exhibit 10.2 to the registrant’s annual report on Form 10-K for the fiscal year ended December 31, 2005 and incorporated herein by reference). *
10.3 Amended and Restated Long Term Incentive Plan (Filed as Exhibit 10.3 to the registrant’s annual report on Form 10-K for the fiscal year ended December 31, 2006 and incorporated herein by reference). *
10.4 Form of Amended and Restated Long Term Incentive Plan Stock Option Agreement (Filed as Exhibit 10.4 to the registrant’s annual report on Form 10-K for the fiscal year ended December 31, 2009 and incorporated herein by reference). *
10.5 Form of Stock Option Agreement Agreement (Filed as Exhibit 10.5 to the registrant’s annual report on Form 10-K for the fiscal year ended December 31, 2009 and incorporated herein by reference). *
37
10.6 Jonathan R. Burst Employment Agreement (Filed as Exhibit 10.1 to the registrant’s current report on Form 8-K filed on November 13, 2009 and incorporated herein by reference). *
10.7 Stuart D. Beath Employment Agreement (Filed as Exhibit 10.2 to the registrant’s current report on Form 8-K filed on November 13, 2009 and incorporated herein by reference). *
10.8 Non-Statutory Stock Option Agreement between International Fuel Technology, Inc. and Stuart D. Beath, dated July 2, 2007 (Filed as Exhibit 10.2 to the registrant’s current report on Form 8-K filed on July 3, 2007 and incorporated herein by reference). *
10.9 Equity Investment Commitment between Rex Carr and International Fuel Technology, Inc., dated December 11, 2007 (Filed as Exhibit 10.12 to the registrant’s annual report on Form 10-K for the fiscal year ended December 31, 2007, incorporated herein by reference).
14 Code of Business Conduct and Ethics (Filed as Exhibit 14 to the registrant’s annual report on Form 10-K for the fiscal year ended December 31, 2005, incorporated herein by reference).
|
|
* Management contract or other compensatory plan, contract or arrangement.
|
(b) The exhibits filed with this annual report are listed under Item 15(a)(3), immediately above.
(c) None.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the 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, 2011
|
|
|
Jonathan R. Burst
|
||||
|
Chief Executive Officer
|
||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
By:
|
/s/ Jonathan R. Burst
|
Date
|
March 31, 2011
|
|
|
Jonathan R. Burst
|
||||
|
Chairman of the Board and Chief Executive Officer (Principal executive officer)
|
||||
|
By:
|
/s/ Stuart D. Beath
|
Date
|
March 31, 2011
|
|
|
Stuart D. Beath
|
||||
|
Chief Financial Officer (Principal financial and accounting officer)
|
||||
|
By:
|
/s/ Rex Carr
|
Date
|
March 31, 2011
|
|
|
Rex Carr
|
||||
|
Director
|
||||
|
By:
|
/s/ Fer Eren, M.D.
|
Date
|
March 31, 2011
|
|
|
Fer Eren, M.D.
|
||||
|
Director
|
||||
|
By:
|
/s/ Gary Kirk
|
Date
|
March 31, 2011
|
|
|
Gary Kirk
|
||||
|
Director
|
||||
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By:
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/s/ David B. Norris
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Date
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March 31, 2011
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David B. Norris
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Director
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39
INTERNATIONAL FUEL TECHNOLOGY, INC.
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Report of Independent Registered Public Accounting Firm
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F-2
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Financial Statements
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Balance sheets
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F-3
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Statements of operations
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F-4
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Statements of stockholders’ equity (deficit)
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F-5
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Statements of cash flows
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F-6
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Notes to Financial Statements
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F-7
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F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2010 and 2009, and the related statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, 2010 and 2009 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that International Fuel Technology, Inc. will continue as a going concern. As described in Note 2 to the financial statements, International Fuel Technology, Inc. has suffered recurring losses from operations, has a working capital deficit at December 31, 2010 and has cash obligations and outflows from operating activities that raise substantial doubt about its 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.
/s/ BDO USA, LLP
Chicago, Illinois
March 31, 2011
F-2
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INTERNATIONAL FUEL TECHNOLOGY, INC.
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BALANCE SHEETS
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|||||||||
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December 31,
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December 31,
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||||||||
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ASSETS
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2010
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2009
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||||||
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Current assets
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|||||||||
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Cash and cash equivalents
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$ | 751,911 | $ | 1,828,024 | |||||
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Investments in certificates of deposit
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- | 1,000,000 | |||||||
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Accounts receivable
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110,464 | 2,440 | |||||||
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Accrued interest receivable
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- | 8,210 | |||||||
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Inventory
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112,430 | 157,465 | |||||||
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Prepaid expenses and other assets
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39,399 | 28,681 | |||||||
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Total current assets
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1,014,204 | 3,024,820 | |||||||
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Property and equipment
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|||||||||
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Machinery, equipment and office furniture
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63,706 | 63,706 | |||||||
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Accumulated depreciation
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(62,284 | ) | (57,690 | ) | |||||
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Net property and equipment
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1,422 | 6,016 | |||||||
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Goodwill
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2,211,805 | 2,211,805 | |||||||
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Total assets
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$ | 3,227,431 | $ | 5,242,641 | |||||
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
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|||||||||
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Current liabilities
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|||||||||
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Accounts payable
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$ | 183,239 | $ | 193,074 | |||||
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Accrued compensation
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17,915 | 14,144 | |||||||
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Deferred revenue (Note 9)
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2,998,242 | 2,998,242 | |||||||
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Other accrued expenses (Note 3)
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190,000 | 310,000 | |||||||
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Total current liabilities
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3,389,396 | 3,515,460 | |||||||
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Deferred income taxes (Note 5)
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530,000 | 465,000 | |||||||
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Total liabilities
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3,919,396 | 3,980,460 | |||||||
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Commitments and contingencies (Notes 6 and 7)
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|||||||||
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Stockholders’ equity (deficit) (Notes 3 and 4)
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|||||||||
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Common stock, $0.01 par value; 150,000,000 shares authorized; 101,342,284 (net of 1,440,000 shares held in treasury stock) and 101,292,284 (net of 1,440,000 shares held in treasury stock) shares issued and outstanding at December 31, 2010 and December 31, 2009, respectively
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1,027,823 | 1,027,323 | |||||||
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Treasury Stock (Note 8)
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(664,600 | ) | (664,600 | ) | |||||
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Discount on common stock
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(819,923 | ) | (819,923 | ) | |||||
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Additional paid-in capital
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64,990,874 | 64,731,026 | |||||||
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Accumulated deficit
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(65,226,139 | ) | (63,011,645 | ) | |||||
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Total stockholders’ equity (deficit)
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(691,965 | ) | 1,262,181 | ||||||
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Total liabilities and stockholders’ equity (deficit)
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$ | 3,227,431 | $ | 5,242,641 | |||||
See accompanying Notes to Financial Statements.
F-3
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INTERNATIONAL FUEL TECHNOLOGY, INC.
|
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STATEMENTS OF OPERATIONS
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Year
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Year
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|||||||
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Ended
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Ended
|
|||||||
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December 31,
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December 31,
|
|||||||
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2010
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2009
|
|||||||
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Net revenues
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$ | 298,366 | $ | 184,851 | ||||
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Operating expenses:
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||||||||
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Cost of operations (exclusive of depreciation)
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137,844 | 65,339 | ||||||
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Selling, general and administrative expenses, including non-cash stock-based compensation expense of $260,348 and $2,667,125 for 2010 and 2009, respectively
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2,312,396 | 5,035,115 | ||||||
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Depreciation
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4,594 | 5,062 | ||||||
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Total operating expenses
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2,454,834 | 5,105,516 | ||||||
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Net loss from operations
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(2,156,468 | ) | (4,920,665 | ) | ||||
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Interest income, net of (interest expense)
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9,157 | 18,891 | ||||||
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Net loss before income taxes
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(2,147,311 | ) | $ | (4,901,774 | ) | |||
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Income tax provision (Note 5)
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67,183 | 465,000 | ||||||
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Net loss
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$ | (2,214,494 | ) | $ | (5,366,774 | ) | ||
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Basic and diluted net loss per common share
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$ | (0.02 | ) | $ | ( 0.05 | ) | ||
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Weighted-average common shares outstanding, basic and diluted
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102,748,202 | 99,747,994 | ||||||
See accompanying Notes to Financial Statements.
F-4
INTERNATIONAL FUEL TECHNOLOGY, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
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Common
Stock Shares
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Common
Stock Amount
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Treasury
Stock
|
Discount on
Common Stock
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Additional
Paid-In Capital
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Accumulated
Deficit
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Total
|
||||||||||||||||||||||
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Balance, December 31, 2008
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94,062,284 | $ | 940,623 | $ | (395,000 | ) | $ | (819,923 | ) | $ | 60,168,501 | $ | (57,644,871 | ) | $ | 2,249,330 | ||||||||||||
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Issuances of stock
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8,650,000 | 86,500 | - | - | 2,076,000 | - | 2,162,500 | |||||||||||||||||||||
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Shares repurchased from Directors (Notes 4 and 8)
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- | - | (269,600 | ) | - | - | - | (269,600 | ) | |||||||||||||||||||
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Shares issued for Directors’ services (Note 3)
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20,000 | 200 | - | - | 9,000 | - | 9,200 | |||||||||||||||||||||
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Options granted for Directors’ services
(Notes 3 and 4)
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- | - | - | - | 3,724 | - | 3,724 | |||||||||||||||||||||
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Expense relating to stock option grants (Note 4)
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- | - | - | - | 2,473,801 | - | 2,473,801 | |||||||||||||||||||||
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Net loss
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- | - | - | - | - | (5,366,774 | ) | (5,366,774 | ) | |||||||||||||||||||
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Balance, December 31, 2009
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102,732,284 | 1,027,323 | (664,600 | ) | (819,923 | ) | 64,731,026 | (63,011,645 | ) | 1,262,181 | ||||||||||||||||||
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Issuances of stock for services
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30,000 | 300 | - | - | 8,700 | - | 9,000 | |||||||||||||||||||||
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Shares issued for Directors’ services (Note 3)
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20,000 | 200 | - | - | 4,400 | - | 4,600 | |||||||||||||||||||||
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Options granted for Directors’ services
(Notes 3 and 4)
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- | - | - | - | 4,900 | - | 4,900 | |||||||||||||||||||||
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Expense relating to stock option grants (Note 4)
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- | - | - | - | 241,848 | - | 241,848 | |||||||||||||||||||||
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Net loss
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- | - | - | - | - | (2,214,494 | ) | (2,214,494 | ) | |||||||||||||||||||
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Balance, December 31, 2010
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102,782,284 | $ | 1,027,823 | $ | (664,600 | ) | $ | (819,923 | ) | $ | 64,990,874 | $ | (65,226,139 | ) | $ | (691,965 | ) | |||||||||||
See accompanying Notes to Financial Statements.
F-5
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INTERNATIONAL FUEL TECHNOLOGY, INC.
|
||||||||
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STATEMENTS OF CASH FLOWS
|
||||||||
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Year Ended
|
Year Ended
|
|||||||
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December 31,
|
December 31,
|
|||||||
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2010
|
2009
|
|||||||
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Cash flows from operating activities
|
||||||||
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Net loss
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$ | (2,214,494 | ) | $ | (5,366,774 | ) | ||
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Adjustments to reconcile net loss to net cash
|
||||||||
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(used in) provided by operating activities:
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||||||||
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Depreciation
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4,594 | 5,062 | ||||||
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Non-cash stock-based compensation
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260,348 | 2,667,125 | ||||||
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Deferred income tax provision
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65,000 | 465,000 | ||||||
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Change in assets and liabilities:
|
||||||||
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Accounts receivable
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(108,024 | ) | 91,878 | |||||
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Accrued interest receivable
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8,210 | (8,210 | ) | |||||
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Inventory
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45,035 | 64,305 | ||||||
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Prepaid expense and other assets
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(10,718 | ) | (9,529 | ) | ||||
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Accounts payable
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(9,835 | ) | (59,798 | ) | ||||
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Accrued compensation
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3,771 | 9,096 | ||||||
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Deferred revenue
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- | 2,998,242 | ||||||
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Other accrued expenses
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(120,000 | ) | (40,000 | ) | ||||
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Net cash (used in) provided by operating activities
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(2,076,113 | ) | 816,397 | |||||
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Cash flows from investing activities
|
||||||||
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Purchases of certificates of deposit
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- | (3,000,000 | ) | |||||
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Redemptions of certificates of deposit
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1,000,000 | 2,000,000 | ||||||
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Net cash provided by (used in) investing activities
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1,000,000 | (1,000,000 | ) | |||||
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Cash flows from financing activities
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||||||||
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Proceeds from issuance of common stock
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- | 2,162,500 | ||||||
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Purchase of treasury stock (Note 8)
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- | (450,000 | ) | |||||
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Net cash provided by financing activities
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- | 1,712,500 | ||||||
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Net (decrease) increase in cash and cash equivalents
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(1,076,113 | ) | 1,528,897 | |||||
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Cash and cash equivalents, beginning
|
1,828,024 | 299,127 | ||||||
|
Cash and cash equivalents, ending
|
$ | 751,911 | $ | 1,828,024 | ||||
See accompanying Notes to Financial Statements.
F-6
INTERNATIONAL FUEL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of Business
International Fuel Technology, Inc. ("IFT" or the “Company”) is a company that was incorporated under the laws of the State of Nevada on April 9, 1996. We have developed a family of fuel additive product formulations. These unique fuel blends have been created to 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 fuels. We began transitioning from a development stage technology company to a commercial entity during 2002 and have been increasing our product marketing and sales efforts since. We are now focused on continuing to develop the body of evidence of the efficacy of our products applicable to a wide range of markets and industries within these markets through additional industry specific laboratory testing and customer field-based demonstration trials. In addition, we are continuing to strengthen our distributor and customer contact base. Marketing and sales efforts, in conjunction with the additional industry specific testing, will complete our transition to a commercial enterprise.
On January 20, 2009, our Board of Directors declared a restricted stock dividend to shareholders of record at the close of business on February 4, 2009 (the “Record Date”) in the amount of 1 restricted share for every 25 common shares owned. The distribution date was February 10, 2009. The restricted stock dividend is subject to resale conditions pursuant to Rule 144 of the Securities Exchange Act of 1934, as amended. This stock dividend has been retroactively reflected in our financial statements and notes to the financial statements, including a 34,504 share positive adjustment made in the 2009 presentation to accurately reflect the restricted shares actually issued in the stock dividend, as compared to the estimate used in the 2008 presentation.
During 2010, our net revenues were split in the following manner: 16% to United States end-user customers and 84% to international distributors and end-user customers. 87% of our net revenues for 2010 was concentrated between three customers.
During 2009, our net revenues were split in the following manner: 29% to United States end-user customers and 71% to international distributors and end-user customers. 87% of our net revenues for 2009 was concentrated between two customers.
Our product line revenues for 2010 and 2009 have not been significant. For 2010 and 2009, DiesoLIFTTM 10 represented 74% and 93% of our net revenues, respectively.
Net revenues related to shipments into various foreign countries were $249,741 and $131,679 a during 2010 and 2009, respectively. The following table breaks out net revenues by foreign country:
|
Country
|
2010
|
2009
|
||||||
|
India
|
$ | 153,285 | $ | 123,227 | ||||
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Germany
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64,302 | 6,757 | ||||||
| China | 21,372 | - | ||||||
| France | 5,736 | 1,695 | ||||||
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Cyprus
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5,046
|
- | ||||||
| $ | 249,741 | $ | 131,679 | |||||
F-7
We currently utilize Tomah Products, Inc. and Multisol France as our contracted product manufacturers. Both entities independently purchase required raw materials to manufacture our product.
Summaries of our significant accounting policies follow:
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with United States generally accepted accounting principles (“GAAP”) 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
We recognize revenue from the sale of our products when the products are shipped, and title and risk of loss has passed to the buyer. The majority of our revenues is from sales to product distributors. Product distributors do not have the option to return product that is not immediately sold to an end-user. Therefore, our revenue recognition is not conditional on whether a distributor is able to sell product to an ultimate product end-user. Our sales policies for end-users are consistent with product distributor sales policies.
Cash and Cash Equivalents
We maintain cash in a bank account, which, at times, exceeds federally insured limits. We have experienced no losses relating to these excess amounts of cash in a bank.
We utilize a cash management program that assesses daily cash requirements. Excess funds are invested in overnight repurchase agreements backed by United States Treasury securities. Repurchase agreements are not deposits, are not insured or guaranteed by the United States government, the Federal Deposit Insurance Corporation or any other government agency, and involve investment risk including possible loss of principal.
Beginning June 18, 2009, we purchased $3,000,000 of certificates of deposit with maturities greater than 90 days. As of December 31, 2010, we do not have any certificates of deposit with maturities greater than 90 days. Certificates of deposit with maturities less than 90 days are classified on our balance sheet as cash and cash equivalents.
Accounts Receivable
An allowance for doubtful accounts is maintained at a level we believe sufficient to cover potential losses based on historical trends and known current factors impacting our customers. We have determined that an allowance for doubtful accounts was not necessary as of December 31, 2010 and 2009.
Inventory
Inventory, which consists of finished product, is valued at the lower of cost or market, based on the first-in, first-out (“FIFO”) method, or market, and represents purchased cost from vendors.
F-8
Machinery, Equipment and Office Furniture
Machinery, equipment and office furniture is stated at cost. Depreciation is calculated using the straight-line method over an asset’s appropriate estimated useful life, generally 3 to 5 years.
We review the carrying values of our machinery, equipment and office furniture for possible impairment whenever events or changes in circumstances (such as changes in operations or estimated future cash flows) indicate that the carrying amount of the assets may not be recoverable. As of December 31, 2010, there has been no impairment of our long-lived assets.
Goodwill
We test goodwill for impairment at least annually in the fourth quarter. We will also review goodwill for impairment throughout the year if any events or changes in circumstances indicate the carrying value may not be recoverable.
Factors we consider important, which could trigger an impairment review, include the following:
|
1.
|
Significant under-performance relative to expected historical or projected future operating results;
|
|
2.
|
Significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
|
|
3.
|
Significant negative industry or economic trends;
|
|
4.
|
Significant decline in our stock price for a sustained period; and
|
|
5.
|
Our market capitalization relative to net book value.
|
To test impairment, we use the market approach to determine the fair value of the Company. Following this approach, the fair value of the business exceeded the carrying value of the business as of December 31, 2010 by $24,300,000. As a result, no impairment of goodwill was recorded.
Deferred Income Taxes
Deferred income taxes are provided on a liability method whereby deferred income tax assets are recognized for deductible temporary differences, operating losses and tax credit carry-forwards, and deferred income 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 income 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 income tax assets will not be realized. Deferred income 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 as incurred. Expense for services received from external vendors for 2010 and 2009 was $52,429 and $115,151, respectively.
Advertising Expenses
Advertising costs are expensed as incurred and amounted to $46,837 and $30,447 in 2010 and 2009, respectively.
F-9
Basic and Diluted Net Earnings (Loss) Per Common Share
Basic earnings (loss) per share are based upon the weighted-average number of common shares outstanding for the period. Diluted earnings (loss) per share are based upon the weighted-average number of common and potentially dilutive common shares outstanding for the period. For the fiscal years ended December 31, 2010 and 2009, 21,578,920 and 32,751,392 shares, respectively, of common stock equivalents were excluded from the computation of diluted net loss per share since their effect would be anti-dilutive.
Fair Value of Financial Instruments
The carrying amounts of certificates of deposit, accounts receivable and accounts payable approximate fair value because of their short maturity.
Accounting for Stock-based Compensation
We estimate the fair value of share-based awards on the grant date using an option-pricing model. We use the Black-Scholes option-pricing model. The model requires the use of various assumptions. The key assumptions are summarized as follows:
Expected volatility – we estimate the volatility of our common stock at the date of grant based on the historical volatility of our common stock for the expected term of our stock options.
Dividend yield – we estimate the dividend yield assumption based on our historical and projected dividend payouts.
Risk-free interest rate – we base the risk-free interest rate on the observed interest rates appropriate for the expected term of our stock options.
Expected option life – we base the expected option life on historical experience.
Forfeiture rate assumption - we have assumed a 0% forfeiture rate based on historical experience.
The benefits of tax deductions in excess of recognized compensation cost would be reported as cash flow from financing activities rather than as cash flow from operations. However, there has been no net income tax impact related to stock compensation expense or exercising of stock options primarily due to our maintaining a full valuation allowance against our net deferred income tax assets.
The value of options and warrants issued to non-employees upon date of issuance are expensed over the related service periods. For non-employee options that are not subject to a performance criteria, we re-compute the value of the unvested options each quarter-end and adjust the related compensation expense for the new value. That new value is based on various assumptions (similar to those listed above) using end-of-quarter information.
New Accounting Pronouncements Adopted
ASC 820—In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures About Fair Value Measurements.” This guidance amends Subtopic 820-10 to require new disclosures and clarify existing disclosures. This guidance requires new disclosures of amounts and reasons for significant transfers between Level 1 and Level 2 fair value measurements. Additionally, in the reconciliation for fair value measurements using significant unobservable inputs (Level 3), separate presentation of information about purchases, sales, issuances and settlements is required. The guidance clarifies that fair value measurement disclosures for each class of assets and liabilities may constitute a subset of assets and liabilities within a line item on a reporting entity’s balance sheet. The guidance also clarifies disclosure requirements about inputs and valuation techniques for both recurring and nonrecurring fair value measurements (Level 2 or Level 3). The ASU also amends guidance on employers’ disclosures about post-retirement benefit plan assets under ASC 715 to require that disclosures be provided by classes of assets instead of by major categories of assets. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity for Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, including interim periods within those fiscal years. The adoption of this guidance did not have a material effect on our financial position, results of operations or cash flows.
F-10
ASC 815—In March 2010, the FASB issued ASU 2010-11, “Scope Exception Related to Embedded Credit Derivatives” to address questions that have been raised in practice about the intended breadth of the embedded credit derivative scope exception in paragraphs 815-15-15-8 through 815-15-15-9 of ASC 815, “Derivatives and Hedging.” The amended guidance clarifies that the scope exception applies to contracts that contain an embedded credit derivative that is only in the form of subordination of one financial instrument to another. This guidance became effective for us on July 1, 2010. The adoption of this guidance did not have a material effect on our financial position, results of operations or cash flows.
Recently Issued Accounting Pronouncements
ASC 605-25 - In October 2009, the FASB issued ASU No. 2009-13 for updated revenue recognition guidance under the provisions of ASC 605-25, “Multiple-Element Arrangements.” The previous guidance has been retained for criteria to determine when delivered items in a multiple-deliverable arrangement should be considered separate units of accounting. However, the updated guidance removes the 48 previous separation criteria that objective and reliable evidence of fair value of any undelivered items must exist for the delivered items to be considered a separate unit or separate units of accounting. This guidance is effective for fiscal years beginning on or after June 15, 2010. We do not expect that the adoption of this guidance will have a material effect on our financial position, results of operations or cash flows.
ASC 350—In December 2010, the FASB issued ASU 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units With Zero or Negative Carrying Amounts” to modify step one of the goodwill impairment test for entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing step one of the goodwill impairment test is zero or negative. For those entities which have one or more reporting units, the entity is required to perform step two of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. The ASU is effective for impairment tests performed during an entity’s fiscal years (and interim periods within those years) that begin after December 15, 2010. We are currently evaluating the impact the adoption of this guidance could have on our financial position, results of operations or cash flows.
Note 2. Ability to Continue as a Going Concern
Our 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. We have incurred significant losses since inception and currently have and previously from time to time have had limited funds with which to operate. Management is in the process of executing a strategy based upon marketing technologies that offer enhanced engine performance and greater fuel economy along with pollution control benefits. We have several technologies in the commercialization phase and in development. We have received necessary regulatory and commercial acceptance for our products currently in the commercialization phase. During the first quarter of 2002, we began selling our products directly to the commercial marketplace. We expect to increase our sales to the marketplace, eventually generating a level of revenues sufficient to meet our cash flow and earnings requirements. While we cannot make any assurances as to the accuracy of our projections of future capital needs, we believe that based on our current cash position, projected sales for 2011 and a remaining equity commitment of $1,000,000 (entered into with a related party Board member of IFT and significant shareholder during 2008), we have adequate cash and cash equivalents balances and commitments to fund operations through at least September 2011. However, if we are unable to meet our projections and generate positive and sustainable operating cash flows by this time, we may need to raise additional capital to fund our future operations.
F-11
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. Stockholders' Equity
Effective October 27, 1999, we merged with Blencathia Acquisition Corporation (“Blencathia”). Blencathia was a public shell company with immaterial assets and liabilities and 312,000 shares outstanding at the time of the merger, which it redeemed and cancelled upon the merger. In exchange, we issued 312,000 of our common shares to the prior Blencathia owner with the contractual understanding that such shares were to be sold by that owner to achieve gross cash proceeds of $500,000. Any excess proceeds were to be returned to us and any deficiency was to be made up by us issuing additional shares or paying the difference in cash. As we believed that we controlled the ultimate timing of the sale of these 312,000 shares by the prior Blencathia owner, we did not consider these shares as issued or outstanding for purposes of computing earnings per share.
In 2006, we learned that the prior Blencathia owner had, in fact, sold the 312,000 shares for aggregate proceeds of approximately $150,000, without our consent. Accordingly, in the fourth quarter of 2006, we recorded $500,000 of general expenses (representing the cost of the 1999 merger) and the deemed issuance of approximately $150,000 of common stock. The remaining $350,000 obligation was reflected as a current accrued expense. We are in negotiations with the prior Blencathia owner to resolve this obligation and may ultimately settle the obligation with either cash or equity securities with a lower market value. Beginning in 2006, the 312,000 shares have been reflected as outstanding for earnings per share computations. During 2009 and 2010, we made payments totaling $160,000 to the prior Blencathia owner, bringing the related current accrued expense balance to $190,000 at the end of 2010.
During 2010, we issued 30,000 common shares, valued at the settlement date’s quoted market price of $9,000 for services provided by a consulting entity.
During 2009, we sold a total of 8,650,000 shares of common stock to accredited investors for $0.25 per share, aggregating to proceeds of $2,162,500. A detachable warrant to purchase a share of our common stock accompanied every two shares purchased in this offering. The 4,325,000 aggregate warrants each have an exercise price of $0.25 and were exercisable immediately and for up to 5 years.
During 2008, we issued 1,040,000 common shares to a Director in settlement of a $523,836 note payable plus unpaid accrued interest, which resulted in a deemed contribution from that Director of $145,000 representing the excess of the aggregate liabilities over the fair value of the shares. During 2008, we repurchased 520,000 of these shares for $250,000, which resulted in a $145,000 deemed contribution representing the excess of the value of the 520,000 over their repurchase price. During the first quarter of 2009, we repurchased the remaining 520,000 shares for $250,000, and recognized $126,000 of non-cash stock-based compensation expense associated with this treasury stock repurchase representing the excess of the payment over the fair value of the shares. In 2010 and 2009, 20,000 shares were issued to Directors which resulted in non-cash stock-based compensation expense of $4,600 and $9,200, respectively.
F-12
We currently have 4,325,000 warrants outstanding that expire in 2014 and have an exercise price of $0.25. These warrants were issued as part of a first quarter 2009 equity funding. During 2010, 1,156,473 warrants issued as part of a 2005 equity funding expired. No warrants were exercised during 2010 or 2009.
Equity Commitment
Effective December 11, 2007, we received an investment commitment from Rex Carr, a Director of IFT and a holder of over five (5%) of our common stock. Pursuant to the terms of the commitment, Mr. Carr has agreed to invest up to an aggregate of $1,000,000 in IFT, at such time or times as we may request, in the form of a purchase or purchases of restricted common stock of IFT. IFT may elect to draw from the commitment at one time or from time to time; provided, however, that the aggregate of such draws may not exceed $1,000,000. If and when we elect to utilize available commitment funds, we will issue to Mr. Carr that number of shares of restricted common stock of IFT equal to the value of the investment then provided to IFT. The number of shares to be issued will be calculated based on the closing price of our common stock as quoted on The OTC Bulletin Board on the date of the sale. There is no stipulation regarding the duration of this commitment.
During 2008, we received $200,000 from Mr. Carr for the sale of common stock. We repurchased these shares from Mr. Carr during 2009, bringing the total available under this commitment back up to $1,000,000 as of December 31, 2010. During the second quarter of 2009, we recognized $54,400 of non-cash stock-based compensation expense associated with this treasury stock repurchase, representing the excess of the payment over the fair values of the shares.
Long-Term Incentive Plan
On October 23, 2001, the Board of Directors adopted our Long Term Incentive Plan (“LTIP”). The Board of Directors is responsible for the administration of this LTIP, and is the approval authority for all option grant awards under this plan. Subject to the express provisions of the LTIP, the Board of Directors shall have full authority and sole and absolute discretion to interpret and amend this LTIP, 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 LTIP.
On October 22, 2006, our Board of Directors adopted the Amended and Restated LTIP. This plan expires on October 21, 2016.
The maximum number of shares of common stock as to which awards may be granted under this plan, subject to subsequent amendments, is 18,200,000 shares (updated to reflect the 4 percent dividend issued during the first quarter of 2009). The common stock issued upon exercise of options or on grant of stock awards may be shares previously authorized but not yet issued or shares which have been issued and reacquired by IFT as treasury stock. 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.
F-13
The following tables summarize information about stock options issued to employees and Directors during the two years ended December 31, 2010:
|
Shares
|
Exercise price
per share
|
Weighted-average exercise price
|
||||||||||
|
Outstanding at December 31, 2008
|
12,538,482 | $ | 0.10-2.14 | $ | 1.04 | |||||||
|
Granted
|
1,900,000 | $ | 0.18-0.50 | $ | 0.45 | |||||||
|
Expired
|
(2,104,162 | ) | $ | 0.48-2.14 | $ | 1.63 | ||||||
|
Outstanding at December 31, 2009
|
12,334,320 | $ | 0.10-1.89 | $ | 0.47 | |||||||
|
Granted
|
280,000 | $ | 0.23-0.50 | $ | 0.47 | |||||||
|
Outstanding at December 31, 2010
|
12,614,320 | $ | 0.10-1.20 | (1) | $ | 0.45 | ||||||
|
Options exercisable at December 31, 2010
|
12,562,320 | $ | 0.10-1.20 | (1) | $ | 0.45 | ||||||
|
Options exercisable at December 31, 2009
|
10,784,320 | $ | 0.10-1.89 | $ | 0.47 | |||||||
(1) During the fiscal year ended December 31, 2010, we modified the terms of certain options previously granted to certain Directors. The difference between the upper threshold limits of the exercise price per share range for options outstanding and exercisable at December 31, 2010 versus the options outstanding and exercisable at December 31, 2009 is primarily attributable to these modifications. See Note 4 for additional information regarding the modified options.
The following table summarizes information about employee stock outstanding at December 31, 2010:
|
Options outstanding
|
Options exercisable
|
|||||||||||||||||||
|
Exercise price range
|
Number outstanding at December 31, 2010
|
Weighted-average remaining contractual life (years)
|
Weighted-average exercise price
|
Number exercisable at December 31, 2010
|
Weighted-average exercise price
|
|||||||||||||||
|
$0.10 - $0.50
|
12,037,120 | 4 | $ | 0.43 | 11,985,120 | $ | 0.42 | |||||||||||||
|
$0.51 - $1.00
|
468,000 | 2 | $ | 0.80 | 468,000 | $ | 0.80 | |||||||||||||
|
$1.01 - $1.50
|
109,200 | 1 | $ | 1.20 | 109,200 | $ | 1.20 | |||||||||||||
| 12,614,320 | 4 | $ | 0.45 | 12,562,320 | $ | 0.45 | ||||||||||||||
F-14
The following table summarizes information about stock options issued to non-employees during the two years ended December 31, 2010:
|
Shares
|
Exercise price per share
|
Weighted-average exercise price
|
||||||||||
|
Outstanding at December 31, 2008
|
15,485,599 | $ | 0.29-2.26 | $ | 0.80 | |||||||
|
Granted
|
2,050,000 | $ | 0.25-0.50 | $ | 0.46 | |||||||
|
Expired
|
(2,600,000 | ) | $ | 0.58 | $ | 0.58 | ||||||
|
Outstanding at December 31, 2009
|
14,935,599 | $ | 0.25-2.26 | $ | 0.77 | |||||||
|
Expired
|
(10,296,000 | ) | $ | 0.58-2.26 | $ | 0.84 | ||||||
|
Outstanding at December 31, 2010
|
4,639,599 | $ | 0.25-0.96 | $ | 0.49 | |||||||
|
Options excercisable at December 31, 2010
|
4,495,733 | $ | 0.25-0.96 | $ | 0.49 | |||||||
|
Options excercisable at December 31, 2009
|
14,618,399 | $ | 0.25-2.26 | $ | 0.77 | |||||||
In addition to the non-employee option activity presented above, IFT’s Board has authorized 750,000 options to non-employees which have not yet been granted.
Note 4. Stock-based Compensation
Non-cash stock-based compensation expense recorded in 2010 and 2009 is as follows:
|
Year Ended
December 31, 2010
|
Year Ended
December 31, 2009
|
|||||||
|
Awards to employees/Directors
|
$ | 186,627 | $ | 418,896 | ||||
|
Awards to non-employees
|
9,000 | 486,527 | ||||||
|
Treasury stock purchases
|
- | 180,400 | ||||||
|
Stock option modifications
|
64,721 | 1,581,302 | ||||||
|
|
|
|||||||
|
Total non-cash stock-based compensation expense
|
$ | 260,348 | $ | 2,667,125 | ||||
Employee and Director awards
In 2010, we granted 250,000 options to employees and 30,000 to Directors in their capacity as Directors, totaling 280,000 options. These grants vested in 2010 and expire in 2013 and 2015, respectively. In addition, we modified the terms of 263,120 options previously granted to Directors in their capacity as Directors, resulting in $25,108 of non-cash stock-based compensation expense as a result of extending the expiration date of certain options from December 2010 to December 2015, and reducing the exercise price of certain options previously granted to $0.48. In 2010, we also modified the terms of 156,000 options previously granted to an employee, resulting in $12,747 of non-cash stock-based compensation expense as a result of extending the expiration date of certain options from July 2010 to December 2014, changing the vesting periods of certain options previously granted and reducing the exercise price of certain options previously granted to $0.48. No employee options expired during 2010.
F-15
In 2009, we granted 1,370,000 options to employees and 530,000 to Directors in their capacity as Directors, totaling 1,900,000 options. 350,000 of these options vested immediately, with the remaining options vesting on June 30, 2010 and expiring in 2013 and 2014. In addition, we modified the terms of 9,100,000 options previously granted to employees, resulting in $1,352,810 of non-cash stock-based compensation expense as a result of extending the expiration date of certain options from December 2009 to December 2014, and reducing the exercise price of certain options previously granted to $0.48. During 2009, 2,104,162 fully-vested employee options expired.
The following table provides the primary assumptions used to value employee and Director non-cash stock-based compensation for the years indicated:
|
Year Ended
December 31, 2010
|
Year Ended
December 31, 2009
|
|||||||
|
Weighted-average fair value of options granted
|
$ | 0.07 | $ | 0.24 | ||||
|
Weighted-average assumptions:
|
||||||||
|
Risk-free interest rate
|
1.88 | % | 1.98 | % | ||||
|
Dividend yield
|
- | - | ||||||
|
Expected volatility
|
0.88 | 1.1 | ||||||
|
Expected option life (years)
|
4 | 5 | ||||||
As of December 31, 2010, there was $2,683 of total unrecognized compensation cost related to outstanding options granted to employees and Directors. This cost is expected to be recognized through December 31, 2011.
Non-employee awards
During 2010, we did not grant any stock options to non-employees. However, we modified the terms of 416,000 options previously granted to non-employees, resulting in $26,866 of non-cash stock-based compensation expense as a result of extending the expiration date of certain options from January 2011 to December 2014, modifying the vesting periods for certain options previously granted and reducing the exercise price of certain options previously granted to $0.48. During 2010, a total of 10,296,000 non-employee options expired. 9,880,000 of these expired non-employee options were fully-vested and not exercised before the expiration date. The remaining 416,000 non-employee options expired due to triggering events related to certain equity raise activities not being achieved within the stipulated time period.
During 2009, we granted 2,050,000 stock options to non-employees. All of these options vested immediately during 2009 and expire in 2012 and 2014. We also modified the terms of 1,456,000 options previously granted to non-employees, resulting in $228,492 of non-cash stock-based compensation expense as a result of extending the expiration date of certain options from December 2009 to December 2014, and reducing the exercise price of certain options previously granted to $0.48. In addition, we modified the terms (accelerated the vesting period) for 104,000 previously granted options to a non-employee for services performed for product and technology consulting. These options previously had been subject to quarterly revaluation since they did not include a measurable performance commitment to determine vesting. We recognized full expense ($2,984) upon the modification of terms to these options during 2009 and they are no longer subject to quarterly revaluation assessment. During 2009, 2,600,000 non-employee options expired due to triggering events related to prior commercial and equity raise activities not being achieved within the stipulated time period.
Services performed by non-employees who were granted options include product/distribution consulting, technology consulting, investor relations and legal services. The weighted-average fair value for such options that have had a fair value calculation applied (not applicable for 2010 and $0.20 for 2009) was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the 2009 grants: risk-free interest rate of 2.14%, volatility factor of 1.06, and a weighted-average expected life of the option of approximately 4.95 years.
F-16
As of December 31, 2010, there was $5,655 of total unrecognized compensation cost related to outstanding options granted to non-employees. This cost is expected to be recognized through December 31, 2011. This amount excludes an immaterial amount of unrecognized compensation expense that may be incurred if certain triggering events occur.
The weighted-average remaining contractual term (in years) of the non-employee options outstanding at December 31, 2010 and 2009 is 3.35 and 1.43, respectively. The weighted-average remaining contractual term (in years) for non-employee options outstanding at December 31, 2009 calculation excluded 312,000 options that did not yet have an established expiration date due to the expiration being dependent on contingent vesting triggering events. As these triggering events did not occur within the specified period, these options have subsequently expired.
The aggregate intrinsic value (defined as the excess of the market price of our common stock as of the end of the period over the exercise price of the related stock options) for all stock options (employee, Director and non-employee) outstanding and exercisable as of December 31, 2010 was $90,781.
We did not receive proceeds for stock options exercised during 2010 or 2009, as no options were exercised.
Note 5. Income Taxes
Deferred income taxes reflect the net income tax effects of temporary differences between the amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes as well as income tax credit carry-forwards. The tax effects of temporary differences and credits that give rise to significant portions of the net deferred income tax asset are as follows:
|
Year ended December 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Net operating loss carry-forwards
|
$ | 16,788,000 | $ | 15,809,000 | ||||
|
Book basis in goodwill in excess of tax basis
|
(530,000 | ) | (465,000 | ) | ||||
|
Other intangible assets
|
621,000 | 736,000 | ||||||
|
Stock-based compensation expense
|
4,400,000 | 4,298,000 | ||||||
|
Non-deductible accruals
|
132,000 | 175,000 | ||||||
|
Less: Valuation allowance
|
(21,941,000 | ) | (21,018,000 | ) | ||||
|
Net deferred tax liability
|
$ | (530,000 | ) | $ | (465,000 | ) | ||
A valuation allowance must be established for a deferred income tax asset if it is more likely than not that a tax benefit may not be realized from the asset in the future. We have established a valuation allowance to the extent of our deferred income tax assets since it is not yet certain that absorption of the asset through future earnings will occur. In 2009, we recognized that the goodwill basis difference has an indefinite life and therefore should not have been treated as an offset when establishing our valuation allowance. Accordingly, at the end of 2009, we recorded a $465,000 increase of our valuation allowance and a corresponding non-cash deferred income tax expense. The impact of this revised accounting was not material to any prior periods.
F-17
At December 31, 2010, we had United States federal net operating loss carry forwards available to offset future taxable income of approximately $42 million, which expire in the years 2012 through 2030. Under Section 382 of the Internal Revenue Code ("IRC") of 1986, as amended, the utilization of United States net operating loss carry forwards may be limited under the change in stock ownership rules of the IRC.
The reconciliation of income tax computed at the United States federal statutory tax rate of 34% to the income tax benefit is as follows:
|
Year ended December 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Tax benefit at federal statutory rate
|
$ | (730,000 | ) | $ | (1,667,000 | ) | ||
|
State taxes, net of federal income tax
|
(126,000 | ) | (294,000 | ) | ||||
|
Change in deferred tax valuation allowance
|
923,000 | 2,426,000 | ||||||
|
Income tax expense
|
$ | 67,000 | $ | 465,000 | ||||
The effects of a tax position taken or expected to be taken in a tax return are to be recognized in the financial statements when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. No uncertain tax positions have been identified through December 31, 2010. If we did identify any uncertain tax positions, any accrued interest related to unrecognized tax expenses and penalties would be recorded in income tax expense. Tax years going back to 2001 could remain open depending on how we utilize net operating loss carry-forwards in the future.
Note 6. Lease Commitment
We entered into a five-year operating lease for office space on January 1, 2002 that was scheduled to expire December 31, 2006. During 2006, we amended this lease, extending the term through December 31, 2011. Rent expense was $47,925 and $47,693 during the fiscal years ended December 31, 2010 and 2009, respectively. A five-year office equipment lease entered into in 2005 expired in October 2010 and was replaced with a four-year office equipment lease in November 2010. Future minimum lease payments as of December 31, 2010 are displayed below:
|
Year Ending December 31,
|
||||
|
2011
|
$ | 50,431 | ||
|
2012
|
$ | 1,443 | ||
|
2013
|
$ | 1,443 | ||
|
2014
|
$ | 1,203 | ||
|
Total Minimum Lease Payments
|
$ | 54,520 | ||
Note 7. Legal Proceedings
We are 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 it is more likely than not that the ultimate liabilities resulting from such lawsuits and claims will not materially affect our financial position, results of operations or liquidity.
On July 31, 2006, we received notice from the American Arbitration Association ("AAA") of a Demand for Arbitration dated July 27, 2006 received by the AAA naming IFT as Respondent and TPG Capital Partners (“TPG”), the prior Blencathia owner, as the Claimant. The arbitration had been requested by TPG to resolve an alleged aggregate proceeds shortfall from the sale of IFT securities issued in the Blencathia merger. TPG has claimed they sold some or all of the 312,000 shares and the sales have not generated at least $500,000 of proceeds, as guaranteed in the merger documents.
F-18
In an effort to resolve this matter prior to submission to binding arbitration, both TPG and IFT participated in a non-binding mediation conference on January 30, 2007, which did not resolve the matter. Informal discussions are ongoing. It is not expected that the ultimate settlement of this matter, considering we have recorded a liability for the shortfall amount, will have an additional adverse material effect on IFT. Since 2009, IFT has made payments to TPG totaling $160,000 to reduce the recorded liability.
On October 2, 2008, Giant Trading, Inc., David R. Friedland, Magnum Select Fund, Ltd., Magnum Growth Fund, Brett Friedland, Lara and Andrew Block, Cherise Metz and Charles Stride (all of which are associates of Dion Friedland, a then-beneficial owner of 5% of IFT’s common stock) filed a lawsuit against us and certain of our Directors (Messrs. Burst, Carr and Demetriou) in the United States District Court, Southern District of Florida.
The lawsuit alleged federal securities fraud violations of Section 10(b) of the Securities Act and Rule 10b-5 promulgated thereunder against all defendants, and violations of Section 20(a) of the Securities Act of 1933 against the individual defendants. The plaintiffs were seeking a judgment for damages of $5 million, interest, costs, and for such other relief the Court deemed just and proper. On May 19, 2009, the Court issued an order granting our motion to transfer venue to St. Louis, Missouri. IFT filed a motion to dismiss and the plaintiffs withdrew their complaint prior to a ruling on said motion.
On August 7, 2009, Charles Stride voluntarily dismissed the complaint against all defendants. On August 10, 2009, the remaining plaintiffs filed a first amended complaint (“FAC”) against IFT, Jonathan R. Burst and Rex Carr in the United States District Court for the Eastern District of Missouri. The FAC, similar to the initial complaint, alleged that the defendants made misrepresentations and omissions in public statements regarding its fuel additive products that induced the plaintiffs to purchase IFT stock, but did not allege any federal securities laws violations. Instead, the FAC alleged eight causes of action under Missouri’s blue sky laws and state common law, and sought in excess of $5 million of compensatory damages, interest and costs. On August 31, 2009, the defendants filed a motion to dismiss the FAC for failure to meet the heightened pleading standards of Rule 9(b) of the Federal Rules of Civil Procedures. On May 4, 2010, the Court issued an order granting in part defendants' motion to dismiss.
On February 6, 2009, we filed an action against Fuel Technologies Ltd, Mega Connections, Ltd., FT Marketing Ltd, and the AAA, Cause No. 09SL-CC00550, in the Circuit Court of the County of St. Louis, Missouri. In this action, IFT sought injunctive relief requiring the defendants to litigate the claims asserted before the AAA in the Circuit Court of St. Louis County, Missouri. On or about February 17, 2009, the Court entered an order transferring these claims out of arbitration and into the Circuit Court of the County of St. Louis. The claims initially filed before the AAA, but later removed to the Circuit Court by IFT, were that IFT breached various marketing and distribution agreements by misrepresenting the state of IFT’s product development. The plaintiffs then filed an amended petition adding Jonathan R. Burst and Rex Carr as additional defendants. The parties participated in a mediation conference on May 11, 2010 but were unsuccessful in settling this action at that time. Subsequently, IFT, Burst and Carr filed a motion to dismiss this action but the case settled prior to a ruling on this motion.
On August 13, 2010, both cases involving IFT and Dion Friedland were settled. IFT believes both suits were frivolous in nature and had no legal merit. For business reasons, IFT’s insurance carrier elected to avoid a potentially costly trial and settle both cases for an amount that was far below the projected expenses of litigation. IFT did not pay any monies or contribute in any way towards the settlements. Overall, IFT’s total out of pocket expenses, including insurance deductible, associated with these two actions was more than offset by revenue generated from the sale of product returned to IFT by the Dion Friedland entities at no cost to IFT which was then resold to other IFT distributors.
F-19
Note 8. Note payable to a Related Party
During the fourth quarter of 2007, we obtained an unsecured $500,000 loan from Harry F. Demetriou, who was then a Director of IFT and the holder of over 5% of our common stock. Pursuant to the terms of the loan, a promissory note was executed by IFT in favor of Mr. Demetriou in connection with the loan. Terms of the loan included interest to be accrued at a rate of 15% per year in arrears with principal and interest due and payable on January 1, 2009. The loan was guaranteed by Rex Carr, a Director of IFT and the holder of over 5% percent of our common stock. All IFT obligations related to this note were extinguished effective March 31, 2008 with the issuance of 1,040,000 restricted common shares of IFT stock to Mr. Demetriou. The shares issued were valued at $400,000 (based on a $0.40/share previous day closing) and extinguished the $500,000 of principal balance and $23,836 of accrued interest. The difference was deemed a contribution from Mr. Demetriou representing the excess of the aggregate liabilities over the fair value of the shares.
During the second quarter of 2008, IFT purchased 520,000 shares of its common stock from Mr. Demetriou for $250,000. We have applied the cost method to account for this treasury stock transaction in our financial statements. Because the amount paid by IFT was less than the fair market value of the stock on the date of purchase (the closing price of our stock was $0.79 on June 18, 2008), the difference was recorded to additional paid-in capital as Mr. Demetriou was considered a holder of economic interest in IFT in accordance with ASC 718-10. During the first quarter of 2009, IFT repurchased the remaining 520,000 shares granted for the debt settlement for $250,000 and recognized $126,000 of non-cash based stock compensation expense associated with this treasury stock repurchase representing the excess of the payment over the fair value of the shares. In conjunction with these transactions, IFT reimbursed Mr. Demetriou $56,000 in 2009 for accumulated loan and bank fees.
Note 9. Deferred Revenue
On February 26, 2009, we received the first purchase order pursuant to a Memorandum of Understanding (“MOU”) with Libya Oil Holdings Limited, Tamoil, Libya Africa Investment Portfolio and Vision Oil Services Ltd (“VOS”). Pursuant to the MOU, VOS paid for the purchase of 600 metric tons of DiesoLIFTTM 10 at a price of 6,000 Euros (approximately $7,600) per metric ton from IFT. We received cash proceeds of approximately $3 million from VOS in February 2009, net of the related selling expenses, for this purchase order and expect a net cash margin of approximately $1.5 million once the product is manufactured and delivered. We will recognize gross revenues of approximately $4.5 million after all of the DiesoLIFTTM 10 has been delivered. No such revenues were recorded during 2009. We have had no communication with VOS in over eighteen (18) months and believe they have ceased all activities on behalf of IFT.
F-20