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IFUE > SEC Filings for IFUE > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for INTERNATIONAL FUEL TECHNOLOGY INC

Form 10-Q for INTERNATIONAL FUEL TECHNOLOGY INC


14-Nov-2012

Quarterly Report


Item 2. 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 the financial condition, results of operations and cash flows of International Fuel Technology, Inc. ("IFT" or the "Company") during the periods included in the accompanying financial statements. This discussion should be read in conjunction with the financial statements and notes included in our annual report on Form 10-K for the year ended December 31, 2011 (the "2011 10-K").

Forward-looking Statements and Associated Risks

This quarterly report on Form 10-Q contains forward-looking statements that are based largely on our expectations and are subject to a number of risks and uncertainties, many of which are beyond our control, including, but not limited to, economic, competitive and other factors affecting our operations, markets, products and services, expansion strategies, our ability to raise additional capital and other factors described elsewhere in this report and documents filed by us with the Securities and Exchange Commission ("SEC"), including in our 2011 10-K under the "Risk Factors" section. Words such as "expects," "anticipates," "intends," "plans," "believes," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. Actual results could differ materially from these forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this report will, in fact, prove accurate. We do not undertake any obligation to revise these forward-looking statements to reflect future events or circumstances.

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. We believe 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.

To date, our commercialization efforts have focused primarily on two proprietary products: DiesoLiFTTM 10 and the PerfoLiFTTM BD-Series. DiesoLiFTTM 10 was developed to increase fuel economy, reduce harmful emissions and reduce maintenance costs when mixed with diesel fuel and bio-diesel fuel blends. The PerfoLiFTTM BD-Series was developed to address oxidation stability and deposit formation control issues associated with bio-diesel fuel use, both pure or in blends.

The potential market for DiesoLiFTTM 10 and the PerfoLiFTTM BD-Series is massive. Virtually every gallon of diesel and bio-diesel fuel consumed in the world today is a potential market for IFT fuel additive technologies.

IFT's proprietary technology has been extensively tested and verified at a number of prominent independent test laboratories all over the world. IFT believes this separates it from most of the other fuel additive companies in the marketplace today.

For example, DiesoLiFTTM 10 has been tested at the following independent test laboratories and has consistently demonstrated the ability to increase fuel economy, on average by 5%:

· mi Technology, United Kingdom;

· Southwest Research Institute, United States;


· Forest Engineering Research Institute of Canada - FERIC;

· Motive Power, United States;

· Gerotek, South Africa;

· Prodrive Ltd, United Kingdom;

· Technological Institute for Development - LacTec, Brazil;

· Technological Research Institute (IPT) of São Paulo, Brazil;

· MTEC, Thailand; and

†† Tsinghua University, China.

In addition, numerous field trials all over the world have validated these independent laboratories' test results. DiesoLiFTTM 10 has been tested in the field with road transport, rail and stationary power generation applications and has consistently demonstrated the ability to improve fuel economy, on average by 5%.

The PerfoLiFTTM BD-Series has been tested at the following independent test laboratories and has consistently demonstrated that it is the top performing fuel additive technology in the market today for addressing oxidation stability and deposit formation control in bio-diesel fuel blends:

· BfB Laboratories, Belgium;

· National Institute of Technology - INT, Brazil; and

· Montana State University - Northern, United States.

Both products are easy to use. Once the additive is splash blended with a base fuel, the mixture forms into and remains a stable solution. Unlike traditional fuel additives, which are derived from petroleum, DiesoLiFTTM 10 and the PerfoLiFTTM BD-Series are derived from a complex mixture of detergent substances that utilize, in part, naturally occurring fractions that are bio-degradable.

The manufacture of IFT's additive formulations is outsourced to Multisol (France) ("Multisol") and Air Products and Chemicals, Inc. (United States). These relationships allow IFT to consistently deliver quantities of quality additive formulations on a timely basis.

The commercial goal of IFT is the bulk sale (by the ton) of DiesoLiFTTM 10 and the PerfoLiFTTM BD-Series to the following major end-users of diesel fuel and bio-diesel fuel blends:

· railroads;

· stationary power generation operators;

· centrally-fueled truck/bus fleets; and

· marine vessel operators.

IFT's primary strategy to achieve this goal is to outsource marketing and distribution by partnering with oil companies and prominent fuel additive distribution companies with existing customers and distribution channels. For example, IFT has distribution relationships with Multisol (France), Unipart Rail ("Unipart") (United Kindgom), Nordmann Rassmann ("Nordmann") (Germany) and Environmental Fuel Conditioners (United Kingdom).

We believe IFT has two of the top performing fuel additive technologies in the world today, DiesoLiFTTM 10 and the PerfoLiFTTM 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, we believe the time consuming process of tests and trials has generated opportunities that should produce additional revenue streams in the fourth quarter of 2012 and 2013.


Recent Developments

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 particulate and other emissions. In 2 of the laboratory tests, improvements in fuel economy of 6.9% and 5.9% were achieved. In 3 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-based evaluation, one ATOC member ran 2 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.

Our success with ATOC has triggered a number of commercial developments:

· IFT has been working with most of the passenger rail operators in the United Kingdom. One such operator, East Midlands, a division of Stagecoach Group is already using our product in its light rail division and is expected to begin field-based demonstration testing in their other 2 rail divisions in 2013;

· More than 10 other passenger and freight operators in the United Kingdom are expected to commence field-based demonstration testing beginning in the remainder of 2012 and 2013;

· Unipart, an IFT distribution partner (see further discussion below), has already made a substantial investment on sales and marketing and has an extensive sales force in the field calling on prospective customers in the United Kingdom and Ireland. Internally, they are projecting significant revenues of DiesoLiFTTM 10 to passenger and freight rail operators in 2013; and

· Belgian National Rail System - SNCB recently completed phase I testing and is moving forward with Phase II testing, a far more comprehensive field validation process.

In addition, we are in discussions with and expect field-based demonstration testing to commence with rail operators in Romania, Poland, the Czech Republic, Australia, New Zealand, Africa and Brazil in 2013.

Road Transport

In the United States, 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 5 years and a regional construction and aggregate company has been using DiesoLiFTTM 10 in their fleet of heavy-duty off road equipment for approximately 2 years. In addition, one of the largest municipal fleets in the United States is in the process of evaluating DiesoLiFTTM 10 in a field-based demonstration test.

In the United Kingdom, over a dozen road transport operators have either commenced or have agreed to commence field validation trials. One such operator, one of the largest public transport companies in the United Kingdom, has completed a field trial which demonstrated over 7% improvement in fuel economy.


In Europe, one of the largest and most prestigious transport authorities is expected to start field-based demonstration testing in the first or second quarter of 2013. Numerous additional road transport operators have also agreed to commence field validation processes in 2013.

PerfoLiFTTM BD-Series

Extensive research, development, product validation testing and "no harm" testing has been completed. The PerfoLiFTTM BD-Series has clearly demonstrated that it is a top performing technology in the market. Two products in the PerfoLiFTTM BD-Series, PerfoLiFTTM BD-3 and PerfoLiFTTM BD-4, have received the coveted "No Harm & Relative Efficiency" certification from the German Agency for Quality of Bio-diesel ("AGQM") under its renowned "No Harm and Efficiency" program. AGQM is an independent German-based organization formed in 1999 to monitor the quality of bio-diesel. 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.

Currently, the PerfoLiFTTM BD-Series is being used or tested by a number of United States and Canadian bio-diesel manufacturers.

In Europe, the worldwide economic downturn has negatively impacted the increase in production and end-user demand for bio-diesel, and therefore, the demand for new age antioxidant products like the PerfoLiFTTM BD-Series. However, we believe the proliferation of bio-diesel in Europe will continue to progress during the remainder of 2012 and 2013 and, through our distribution partner network, most notably Nordmann, we are well-positioned to capitalize on current demand and the anticipated increase in demand. We are currently selling the PerfoLiFTTM BD-Series to eight European-based bio-diesel manufacturers, including a bio-diesel production division of Cargill.

Distribution Partners

· 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.

· Unipart: We signed a marketing and distribution agreement with Unipart in June 2011 providing Unipart with the rights to sell IFT's products to the United Kingdom rail market. IFT is in the process of arranging field-based demonstration testing with several major rail operators.

· 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 has been making sales of the PerfoLiFTTM BD-Series since 2010.

· Environmental Fuel Conditioners: We signed a marketing and distribution agreement with Environmental Fuel Conditioners in February 2012 providing Environmental Fuel Conditioners the right to market and sell IFT's products in the United Kingdom.

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.


Results of Operations

Three and Nine Months Ended September 30, 2012 Compared to the Three and Nine Months Ended September 30, 2011

Net Revenues

Net revenue for the three months ended September 30, 2012 was $47,614, as compared to $59,281 for the three-month period ended September 30, 2011. This decrease is primarily attributable to decreased sales of DiesoLiFTTM 10 to end-user customers caused by timing of shipments to existing customers ($22,851 decrease for the comparable periods), partially offset by increased sales of the PerfoLiFTTM BD-Series ($8,428 increase for the comparable periods).

Net revenue for the three months ended September 30, 2012 was split between sales to distributors (55%) and end-user customers (45%). Net revenue for the three months ended September 30, 2011 was split between sales to end-user customers (70%) and distributors (30%). Net revenue generated during the three months ended September 30, 2012 and September 30, 2011 was primarily generated from the sale of DiesoLiFTTM 10 and the PerfoLiFTTM BD-Series.

Net revenue for the nine months ended September 30, 2012 was $204,612, as compared to $167,785 for the nine-month period ended September 30, 2011. This increase is primarily attributable to increased sales of DiesoLiFTTM 10 to end-user customers ($7,439 increase for the comparable periods) and increased sales of the PerfoLiFTTM BD-Series through our distributor network ($19,162 increase for the comparable periods). We also had a $12,122 increase in commission revenues with Multisol France for the comparable periods as Multisol increased sales to its customers selling IFT's products under non-IFT branded names to end-user retail customers.

Net revenue for the nine months ended September 30, 2012 was split between sales to distributors (51%) and end-user customers (49%). Net revenue for the nine months ended September 30, 2011 was split between sales to end-user customers (56%) and distributors (44%). Net revenue generated during the nine months ended September 30, 2012 and September 30, 2011 was primarily generated from the sale of DiesoLiFTTM 10 and the PerfoLiFTTM BD-Series.

Operating Expenses

Total operating expense was $527,006 for the three months ended September 30, 2012, as compared to $715,211 for the three-month period ended September 30, 2011. This $188,205 decrease from the prior period was primarily attributable to an overall decrease in selling, general and administrative expense and in cost of operations (exclusive of depreciation) due to timing of shipments/sales to existing customers. These fluctuations are more fully described below.

Total operating expense was $1,586,679 for the nine months ended September 30, 2012, as compared to $1,909,323 for the nine-month period ended September 30, 2011. This $322,644 decrease from the prior period was primarily attributable to a decrease in bad debt expense and an overall decrease in selling, general and administrative expense, partially offset by an increase in cost of operations (exclusive of depreciation) due to increased sales. These fluctuations are more fully described below.


Cost of Operations (Exclusive of Depreciation)

Cost of operations (exclusive of depreciation) was $34,022 for the three months ended September 30, 2012, as compared to $41,396 for the three-month period ended September 30, 2011. This decrease was due to decreased sales for the three months ended September 30, 2012, compared to the three months ended September 30, 2011.

Cost of operations (exclusive of depreciation) was $132,949 for the nine months ended September 30, 2012, as compared to $115,466 for the nine-month period ended September 30, 2011. This increase was due to increased sales for the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011.

Selling, General and Administrative Expense

Selling, general and administrative expense for the three months ended September 30, 2012 was $492,984 (including non-cash stock-based compensation of $0), as compared to $673,815 (including non-cash stock-based compensation of $148,815) for the three-month period ended September 30, 2011. This decrease of $180,831 was primarily attributable to the following activities:

· a decrease in non-cash stock-based compensation expense ($148,815) as we did not issue any new stock options during the third quarter of 2012 and all prior stock option grants requiring expense recognition were fully expensed prior to the third quarter of 2012;

· a decrease in professional services expenses ($51,020) due to a reduction in investor relations expense ($33,483) caused by timing of our 2012 annual meeting (to be held in December 2012) versus our 2011 annual meeting (held in October 2011) and a decrease in legal fees ($11,201) primarily due to a reduced scope in intellectual property legal activities for European efforts during the third quarter of 2012, compared to the third quarter of 2011; and

· an increase in research and development expense ($47,614) due to external vendors assisting with third quarter 2012 United Kingdom and western Europe field trial/testing.

Selling, general and administrative expense for the nine months ended September 30, 2012 was $1,453,730 (including non-cash stock-based compensation of $11,458), as compared to $1,792,435 (including non-cash stock-based compensation of $183,433) for the nine-month period ended September 30, 2011. This decrease of $338,705 was primarily attributable to the following activities:

a decrease in non-cash stock-based compensation expense ($171,975) primarily due to the granting of 900,000 shares of our common stock to a non-employee consultant for services during the second and third quarters of 2011 which resulted in $168,000 of immediate expense recognition;

· a decrease in bad debt expense ($88,655) related to a second quarter 2011 receivables write off for product sold to a distributor;

· a decrease in professional services expenses ($104,745) primarily due to a reduction in investor relations expense due to timing of our 2012 annual meeting (compared to our 2011 annual meeting) and not retaining an investor relations firm during the first three quarters of 2012, as was done during the first two quarters of 2011 and reduced legal fees due to timing of intellectual property activities and less SEC legal expense associated with equity raise related efforts compared to the prior year;

· a decrease in consulting fees ($25,790) due to reduced commercial efforts in India during the first three quarters of 2012, compared to the first three quarters of 2011; and

· an increase in research and development expense ($58,161) primarily due to increased usage of external vendors assisting with field trials/testing in the United Kingdom and western Europe during the first three quarters of 2012.


Depreciation Expense

Depreciation expense was $0 for both the three months ended September 30, 2012 and September 30, 2011.

Depreciation expense was $0 and $1,422 for the nine months ended September 30, 2012 and September 30, 2011, respectively.

Interest Income

Interest income was $41 and $237 for the three months ended September 30, 2012 and September 30, 2011, respectively. The decrease in interest income is primarily attributable to a reduction in invested cash and cash equivalents as cash has been used to fund ongoing operations.

Interest income for the nine months ended September 30, 2012 was $123, as compared to $674 for the nine-month period ended September 30, 2011. The decrease in interest income is primarily attributable to a reduction in invested cash and cash equivalents as cash has been 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 deductible goodwill. We have significant net operating loss ("NOL") 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 NOL carry-forwards has been fully reserved with a valuation allowance. Because goodwill is not depreciated and has an indefinite life for book purposes, the deferred tax liability related to the book to tax basis difference is not offset against the deferred tax assets when establishing our valuation allowance. Accordingly, we record non-cash deferred income tax expense, which increases the deferred tax liability, of approximately $16,000 each quarter.

We do not believe the equity raises and sales of common stock that we have completed have triggered an ownership change which might serve to limit the amount of NOL carry-forwards we can utilize each year. Furthermore, a limitation would not have an impact on our financial statements as we have recorded a valuation allowance for the entire amount of our deferred tax assets.

Net Loss

Net loss for the three months ended September 30, 2012 was $495,351, as compared to $672,026 for the three months ended September 30, 2011. The decrease in net loss was primarily due to decreases in non-cash based stock compensation and professional services expenses, partially offset by an increase in research and development expense, as described above. The basic and diluted net loss per common share for the three months ended September 30, 2012 and September 30, 2011 was $(0.00) and $(0.01), respectively.

Net loss for the nine months ended September 30, 2012 was $1,429,944, as compared to $1,789,197 for the nine months ended September 30, 2011. The decrease in net loss was primarily due to an increase in gross margin from sales ($19,344), decreases in bad debt, professional services, non-cash based stock compensation and consulting fee expenses, partially offset by an increase in research and development expense, as described above. The basic and diluted net loss per common share for the nine months ended September 30, 2012 and September 30, 2011 was $(0.01) and $(0.02), respectively.


New Accounting Pronouncements

There are no recently issued accounting standards that are expected to have a material effect on our financial position, results of operations or cash flows.

Critical Accounting Policies and Estimates

Preparation of our financial statements and related disclosures in compliance with United States generally accepted accounting principles ("GAAP") requires the application of appropriate technical accounting rules and guidance, as well as the use of estimates. Our application of these policies involves judgments regarding many factors, which in and of themselves could materially affect the financial statements and disclosures. We have outlined below the critical accounting policies that we believe are most difficult, subjective or complex. Any change in the assumptions or judgments applied in determining the following matters, among others, could have a material impact on future financial results.

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. Some of our revenues is derived 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.

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. Significant decline in our stock price for a sustained period; and

5. Our market capitalization relative to net book value.

As prescribed by Accounting Standards Updates ("ASU") 2010-28, for each reporting period in 2012 and 2011, we identified adverse qualitative factors that indicated that impairment may exist, which required the Company's goodwill to be tested for impairment. Because the Company's carrying amount is negative, we performed Step 2 of the goodwill impairment test using the market approach to determine the fair value of the Company. The goodwill analyses performed during 2012 and 2011 did not indicate any goodwill impairment.

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 September 30, 2012, our deferred income tax assets consisted principally of NOL carry-forwards, and have been fully . . .

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