UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, DC 20549


_________________





FORM 10-Q





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





For the quarterly period ended September 30, 2009





OR





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





For the transition period from _____________ to _____________





Commission File No. 000-25367


________________





INTERNATIONAL FUEL TECHNOLOGY, INC.


(Exact name of registrant as specified in its charter)





Nevada
88-0357508(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)7777 Bonhomme, Suite 1920
St. Louis, Missouri
63105(Address of principal executive offices)
(Zip Code)(314) 727-3333
(Registrant’s telephone number, including area code)


_________________





Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes   x    No    ̈





Indicate by check mark 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 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
Large accelerated filer
 ̈
Accelerated filer
 ̈Non-accelerated filer
 ̈
Smaller reporting company
x


(Do not check if a smaller reporting company)





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes    ̈    No   x





The number of shares outstanding of registrant's only class of stock as of November 11, 2009: Common stock, par value $0.01 per share – 101,256,284 shares outstanding.








INDEX








PAGE NO.PART I.  FINANCIAL INFORMATIONItem 1.    Financial StatementsBalance Sheets — September 30, 2009 (unaudited) and December 31, 2008
2Statements of Operations (unaudited) — Three-Month and Nine-Month Periods Ended September 30, 2009 and September 30, 2008
3Statement of Stockholders’ Equity (unaudited) — Nine-Month Period Ended September 30, 2009
4Statements of Cash Flows (unaudited) — Nine-Month Periods Ended September 30, 2009 and September 30, 2008
5Notes to Financial Statements
6Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
16Item 4.    Controls and Procedures
25PART II.  OTHER INFORMATIONItem 1.    Legal Proceedings
26Item 5.    Other Information
26Item 6.    Exhibits
27











Index





PART I.  FINANCIAL INFORMATION





Item 1. Financial Statements





INTERNATIONAL FUEL TECHNOLOGY, INC.BALANCE SHEETSSeptember 30,


December 31,2009


2008ASSETS

(Unaudited)Current assetsCash and cash equivalents

$
2,382,814


$
299,127Investments in certificates of deposit


1,000,000



-Accounts receivable


8,463



94,318Director and officer insurance receivable (Note 9)


368,394



-Inventory


199,355



221,770Prepaid expenses and other assets


18,040



19,152Total Current Assets


3,977,066



634,367Property and equipmentMachinery, equipment and office furniture


63,706



63,706Accumulated depreciation


(56,542
)


(52,628
)Net Property and Equipment


7,164



11,078Goodwill


2,211,805



2,211,805Total Assets

$
6,196,035


$
2,857,250LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilitiesAccounts payable

$
602,675


$
252,872Accrued compensation


23,611



5,048Deferred revenue (Note 7)


2,998,242



-Other accrued expenses (Note 4)


350,000



350,000Total Current Liabilities


3,974,528



607,920Total Liabilities


3,974,528



607,920Commitments and contingenciesStockholders' equity (Notes 3 and 4)Common stock, $0.01 par value; 150,000,000 authorized, 101,256,284 (net of 1,456,000 shares held in treasury) and 93,542,284 (net of 520,000 shares held in treasury) shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively


1,027,123



940,623Treasury stock (Notes 5 and 6)


(664,600
)


(395,000
)Discount on common stock


(819,923
)


(819,923
)Additional paid-in capital


64,620,541



60,168,501Accumulated deficit


(61,941,634
)


(57,644,871
)Total Stockholders' Equity


2,221,507



2,249,330Total Liabilities and Stockholders' Equity

$
6,196,035


$
2,857,250See Notes to Financial Statements.





2






INTERNATIONAL FUEL TECHNOLOGY, INC.  STATEMENTS OF OPERATIONS(Unaudited)

Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2009


2008


2009


2008Revenues

$
14,317


$
76,451


$
105,386


$
112,848Operating expenses:Cost of operations (exclusive of depreciation)


7,023



49,147



28,976



76,965Selling, general and administrative expense (including stock-based compensation expense) (Note 3)


2,284,943



585,867



4,381,932



4,532,567Depreciation


1,148



1,976



3,914



5,957Total operating expenses


2,293,114



636,990



4,414,822



4,615,489Net loss from operations


(2,278,797
)


(560,539
)


(4,309,436
)


(4,502,641
)Interest income (expense), net


8,513



3,135



12,673



(14,018
)Net loss

$
(2,270,284
)

$
(557,404
)

$
(4,296,763
)

$
(4,516,659
)Basic and diluted net loss per common share

$
(0.02
)

$
(0.01
)

$
(0.04
)

$
(0.05
)Weighted-average common shares outstanding


101,256,284



93,507,780



99,224,409



90,978,378See Notes to Financial Statements.





3








INTERNATIONAL FUEL TECHNOLOGY, INC.





STATEMENT OF STOCKHOLDERS’ EQUITY


FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2009


(Unaudited)




Common
Stock
Shares

Common
Stock
Amount

Common
Stock
Amount


Discount
On
Common
Stock


Additional
Paid-in
Capital

Accumulated
Deficit


TotalBalance, December 31, 2008 (Note 8)
94,062,284

$
940,623

$
(395,000
)

$
(819,923
)

$
60,168,501

$
(57,644,871
)

$
2,249,330Proceeds from issuance of stock
8,650,000


86,500


-



-



2,076,000


-



2,162,500Shares repurchased from Directors (Notes 5 and 6)
-


-


(269,600
)


-



-


-



(269,600
)Expense relating to stock-based compensation (Note 3)
-


-


-



-



2,376,040


-



2,376,040Net loss
-


-


-



-



-


(4,296,763
)


(4,296,763
)Balance, September 30, 2009
102,712,284

$
1,027,123

$
(664,600
)

$
(819,923
)

$
64,620,541

$
(61,941,634
)

$
2,221,507See Notes to Financial Statements.







4


Index





INTERNATIONAL FUEL TECHNOLOGY, INC.STATEMENTS OF CASH FLOWS(Unaudited)





Nine Months Ended
September 30,
2009


Nine Months Ended
September 30,
2008Cash flows from operating activities:Net loss

$
(4,296,763
)

$
(4,516,659
)Adjustments to reconcile net loss to net cash provided by (used in)operating activities:Depreciation


3,914



5,957Non-cash stock-based compensation


2,556,440



2,858,612Change in assets and liabilities:Accounts receivable and Director and officer insurance receivable


(282,539
)


5,552Inventory


22,415



83,964Prepaid expenses and other assets


1,112



(1,408
)Accounts payable


349,803



32,510Accrued interest payable


-



18,699Accrued compensation


18,563



(7,633
)Deferred revenue


2,998,242



-Net cash provided by (used in) operating activities


1,371,187



(1,520,406
)Cash flows from investing activities:Net (purchase)/redemptions of investment in certificates of deposit


(1,000,000
)


-Net cash used in investing activities


(1,000,000
)


-Cash flows from financing activities:Proceeds from issuance of common stock


2,162,500



2,250,000Purchase of treasury stock (Notes 5 and 6)


(450,000
)


(250,000
)Net cash provided by financing activities


1,712,500



2,000,000Net increase in cash and cash equivalents


2,083,687



479,594Cash and cash equivalents, beginning


299,127



364,242Cash and cash equivalents, ending

$
2,382,814


$
843,836See Notes to Financial Statements.








5








NOTES TO FINANCIAL STATEMENTS


(Unaudited)





Note 1 – Basis of Presentation





International Fuel Technology, Inc. (“IFT”) is a technology company incorporated under the laws of the State of Nevada on April 9, 1996. We have developed a number of liquid fuel additive formulations that enhance the performance of petroleum-based fuels and petroleum-based fuels that are mixed with alternative
fuels such as bio-diesel and ethanol. Our proprietary fuel additive formulations have been extensively tested and proven, when mixed with a host fuel, to: increase fuel economy; reduce harmful emissions, including green house gas emissions; enhance lubricity (reducing engine wear); act as a detergent in the fuel system; co-solve free water in the fuel system; and provide oxidation stability and deposit formation control in bio-diesel and bio-diesel fuel blends.





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 that time. Since the beginning of 2005, our efforts have been directed to commercializing our product slate, primarily our DiesoLIFTTM line
of products developed for use with diesel fuel and bio-diesel fuel blends, by focusing on marketing, sales and distribution efforts.





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





These statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management, are necessary for fair presentation of the information contained therein. Interim results are not necessarily indicative of results for a full year. It is suggested that these financial statements
are read in conjunction with the financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2008 (the “2008 10-K”).  We follow the same accounting policies in preparation of interim reports as we do in our annual statements.  We have evaluated subsequent events through November 16, 2009, the date these financial statements were issued.





Basic earnings per share are based upon the weighted-average number of common shares outstanding for the period.  Diluted earnings per share are based upon the weighted-average number of common and potentially dilutive common shares outstanding for the period.  Pursuant to the Financial Accounting
Standards Board’s (“FASB”) Accounting Standards Codification subtopic (“ASC”) No. 260-10, Earnings per Share(“ASC 260-10”), no adjustment is made for diluted earnings per share purposes since we are reporting a net loss, and common stock equivalents would have an anti-dilutive effect.  As of September 30, 2009 and 2008, 34,825,555 and 28,608,556 shares, respectively, of common stock equivalents were excluded
from the computation of diluted net loss per share since their effect would be anti-dilutive.





6


Index





Note 2 – New Accounting Pronouncements





New Accounting Pronouncements Adopted





ASC 805 – In December 2007, the FASB issued transition guidance ASC 805-10-65-1, “Transition Related to FASB Statement No. 141 (revised 2007), Business Combinations.” This guidance defines the acquirer in a business combination as the
entity that obtains control of one or more businesses, and establishes the acquisition date as the date the acquirer achieves this control. This statement also refines the application of the purchase method by requiring the acquirer to recognize assets acquired and liabilities assumed at fair value and replacing the cost allocation process previously required. Furthermore, acquisition-related costs and restructuring costs that are expected, but not obligatory, are required to be recognized separately from the
business combination. This guidance is effective prospectively for business combinations with acquisition dates on or after January 1, 2009. There was no material impact to our financial position, results of operations, or cash flows as a result of adoption of this guidance.





ASC 805 – In April 2009, the FASB amended its guidance related to the accounting for assets and liabilities arising from contingencies in a business combination. The amended guidance requires that an asset or a liability arising from a contingency in a business combination be recognized at fair value if fair value
can be reasonably determined and provides guidance on how to make that determination. If the fair value of an asset or liability cannot be reasonably determined, an asset or liability is to be recognized at the amount that would be recognized in accordance with ASC 450, “Contingencies,” for liabilities and an amount using similar criteria for assets. The guidance is effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after December 15, 2008. There was no material impact to our financial position, results of operations, or cash flows as a result of the adoption of this guidance.





ASC 810 – In December 2007, the FASB issued ASC 810, Non-Controlling Interests in Consolidated Financial Statements - an amendment of ARB No. 51.  ASC 810 establishes new standards for the accounting for and reporting of non-controlling interests
(formerly minority interests) and for the loss of control of partially owned and consolidated subsidiaries. ASC 810 does not change the criteria for consolidating a partially owned entity.  ASC 810 is effective for fiscal years beginning after December 15, 2008.  The provisions of ASC 810 are applied prospectively upon adoption except for the presentation and disclosure requirements, which are applied retrospectively.  The provisions of ASC 810 did not apply to IFT and therefore
had no impact on our financial position, results of operations or cash flows.





ASC 820 – Effective January 1, 2008, we partially adopted ASC 820, “Fair Value Measurements and Disclosures.”  ASC 820 applies to most current accounting rules requiring or permitting fair value measurements. ASC 820 provides a
framework for measuring fair value and requires expanded disclosures about fair value methods and inputs by establishing a hierarchy for ranking the quality and reliability of the information used by management to measure and report amounts at fair value.





We had only partially applied the provisions of ASC 820 as management elected the deferral provisions of ASC 820-10-65-1, “Transition Related to FASB Staff Position FAS 157-2,” as it applies to non-financial assets and liabilities that are recognized
or disclosed at fair value in the financial statements on a non-recurring basis. ASC 820-10-65-1 delayed the effective date of ASC 820 for non-financial assets and liabilities which are not measured at fair value on a recurring basis (at least annually) until January 1, 2009 for IFT.  The major categories of assets and liabilities that are recognized or disclosed at fair value on a non-recurring basis include certain amounts of property and equipment, intangibles and goodwill reported at fair value
as a result of impairment testing, and certain other assets, liabilities and equity instruments recognized as a result of prior business combinations. There was no impact to our financial position, results of operations, or cash flows as a result of the adoption of ASC 820 for non-financial assets and liabilities.


7








ASC 820-10 emphasizes that fair value is a market-based measurement, not an entity-specific measurement.  Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant
assumptions in fair value measurements, ASC 820-10 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).  The fair value hierarchy, as defined by ASC 820-10,
contains three levels of inputs that may be used to measure fair value as follows:





Ÿ
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that IFT has the ability to access;





Ÿ
Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals; and





Ÿ
Level 3 inputs are unobservable inputs for the asset or liability which are typically based on an entity’s own assumptions, as there is little, if any, related market activity.





In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its
entirety.  Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.





Beginning June 18, 2009, we purchased $3,000,000 of certificates of deposit with maturities greater than 90 days.  As of September 30, 2009, we have $1,000,000 of 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.  We have determined that the inputs used to value these contracts fall within Level 1 of the fair value hierarchy.





The table below presents our assets measured at fair value on a recurring basis as of September 30, 2009, aggregated by the level in the fair value hierarchy within which those measurements fall.








Quoted Prices in Active Marketsfor Identical Assets and Liabilities(Level 1)

Significant Other
Observable Inputs
(Level 2)


Significant
Unobservable Inputs
(Level 3)

Balance at
September 30,
2009Assets :Certificates of deposit
$ 1,000,000

$
-


$
-

$  1,000,000





8








We do not have any fair value measurements using significant unobservable inputs (Level 3) as of September 30, 2009.





ASC 815 – During June 2008, the FASB issued 815-10-65-3, “Transition Related to EITF Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock,” which became effective for IFT on January 1,
2009. This guidance addresses the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock, which is the first part of the scope exception in ASC 815, “Derivatives and Hedging.”  If an instrument (or an embedded feature) that has the characteristics of a derivative instrument under ASC 815 is indexed to an entity’s own stock, it is still necessary to evaluate whether it is classified
in stockholders’ equity (or would be classified in stockholders’ equity if it were a freestanding instrument). Other applicable authoritative accounting literature provides guidance for determining whether an instrument (or an embedded feature) is classified in stockholders’ equity (or would be classified in stockholders’ equity if it were a freestanding instrument). This guidance did not have a material impact to our financial position, results of operations, or cash flows upon its effective
date.





ASC 260 – In June 2008, the FASB issued ASC 260-10-65-2 “Transition Related to FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities.” This guidance concludes that non-vested
shares with non-forfeitable dividend rights are considered participating securities and, thus, subject to the two-class method pursuant to ASC 260, “Earnings per Share,” when computing basic and diluted earnings per share.  We adopted this guidance effective January 1, 2009 with no impact to our financial position, results of operations or cash flows.





ASC 825 – In April 2009, the FASB issued ASC 825-10-65-1 “Transition Related to FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments,” which enhances consistency in financial reporting by increasing the
frequency of fair value disclosures. This guidance is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for interim and annual periods ending after March 15, 2009 subject to certain restrictions.  We did not elect early adoption in the quarter ended March 31, 2009.  We applied the provisions of this guidance for the quarter ending June 30, 2009 with no impact to our financial position, results of operations or cash flows.





ASC 855 – In May 2009, the FASB issued ASC 855, “Subsequent Events.” ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are
available to be issued. ASC 855 is effective for interim or annual reporting periods ending after June 15, 2009. The adoption of ASC 855 did not have a material impact on our financial position, results of operations or cash flows.





ASC 105 – In June 2009, the FASB issued ASC 105-10-65, “Transition Related to FASB Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.” The Accounting Standards Codification
will become the single source of authoritative non-governmental U.S. generally accepted accounting principles, superseding existing accounting literature. While not intended to change U.S. GAAP, the ASC significantly changes the way in which accounting literature is organized. This guidance is effective for interim or annual reporting periods ending after September 15, 2009. The adoption of this guidance did not have an impact on our financial position, results of operations or cash flows. However, because
the Codification completely replaces existing standards, it affects the way U.S. GAAP is disclosed in our financial statements.














9





Recently Issued Accounting Pronouncements




ASC 860 and ASC 810 – On June 12, 2009, the FASB published two new accounting standards that determine whether securitizations and other transfers of financial instruments are given off-balance sheet treatment.  SFAS 166, Accounting for Transfers of Financial
Assets (“ASC 860”) will amend SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities – a replacement of FASB Statement No. 125, and SFAS 167, Amendments to FASB Interpretation (FIN) No. 46(R)(“ASC 810”), will amend FIN 46(R). The revisions to the standards,
expected to be effective January 1, 2010 for issuers with calendar year ends, will result in many existing off-balance sheet securitizations being treated as secured financing and returning on-balance sheet. The adoption of ASC 860 and ASC 810 will not have an impact on our financial position, results of operations or cash flows.





Note 3 – Stock-based Compensation





Effective January 1, 2006, we adopted ASC 718-10 (SFAS No. 123 (revised)), Share-Based Payment, an amendment of FASB Statements Nos. 123 and 95 (“ASC 718-10”), applying the modified prospective method.  Under the modified prospective method,
ASC 718-10 applies to awards made on or after the effective date and awards that were outstanding as of December 31, 2005 that are subsequently vested, modified, repurchased, forfeited or cancelled.




ASC 718-10 requires companies to estimate the fair value of share-based employee awards on the grant date using an option-pricing model and to expense that value over the requisite service period for each related employee.  We use the Black-Scholes option-pricing model as the method of valuation for our stock-based
compensation.





The value of options and warrants issued to non-employees upon the date of issuance is expensed over the related service periods.  For non-employee options that are not subject to a performance criterion, we recompute 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 using end-of-quarter information. For non-employee options subject to a performance criterion, of which we had 317,200 options outstanding as of September 30, 2009, expense is recognized when it becomes probable that the performance criterion will be met.





Stock-based compensation expense recorded in the three and nine months ended September 30, 2009 and 2008 is as follows:






Three Months Ended
September 30,2009

Three Months Ended
September 30,2008

Nine Months Ended
September 30,2009

Nine Months Ended
September 30,2008Stock-based compensation to employees/Directors

$
1,500,283

$
36,251

$
1,841,091

$
89,683Stock-based compensation to non-employees


228,912


35,915


715,349


2,768,929Total stock-based compensation expense

$
1,729,195

$
72,166

$
2,556,440

$
2,858,612







Employee and Director awards





During the first quarter of 2009, 20,000 employee options were granted.  Assumptions used to determine the average fair value of these awards ($0.18 per option) included an expected term of 5 years, a volatility rate of 106% and a risk free interest rate of 1.79%.





During the second quarter of 2009, 1,350,000 employee options were granted.  Assumptions used to determine the average fair value of these awards ($0.26 per option) included an expected term of 4.75 years, a volatility rate of 107% and a risk free interest rate of 1.85%.





During the third quarter of 2009, 200,000 employee options were granted. Assumptions used to determine the average fair value of these awards ($0.18 per option) included an expected term of 5 years, a volatility rate of 105% and a risk free interest rate of 2.65%.


10


Index





In addition, during the third quarter of 2009, IFT modified the terms of 9,100,000 options that were previously granted and fully-vested to employees.  The modification of terms for these options extended expiration dates and reduced the exercise price to $0.50 from various exercise prices above that level.  The
excess of the fair value of the modified awards immediately after the modification over the fair value of the original awards immediately before the modification resulted in $1,352,810 of stock-based compensation expense.





During the first quarter of 2008, 182,000 employee options were granted.  Assumptions used to determine the average fair value of these awards ($0.23 per option) included an expected term of 5 years, a volatility rate of 118% and a risk free interest rate of 2.73%.





During the second quarter of 2008, 156,000 employee options were granted.  Assumptions used to determine the average fair value of these awards ($0.63 per option) included an expected term of 5 years, a volatility rate of 120% and a risk free interest rate of 3.12%.





No employee options were granted during the third quarter of 2008.





No options were granted to Directors for Director-related services in the first quarter of 2009 and the first three quarters of 2008.  During the third quarter of 2009, 100,000 options were granted to a Director for Director-related services. Assumptions used to determine the average fair value of these awards
($0.12 per option) included an expected term of 5 years, a volatility rate of 105% and a risk free interest rate of 2.65%.





During the second quarter of 2009, an aggregate of 200,000 options were granted to Directors for Director-related services. Assumptions used to determine the average fair value of these awards ($0.26 per option) included an expected term of 4.75 years, a volatility rate of 107% and a risk free interest rate of 1.85%.





Non-employee awards





In the first quarter of 2009, 800,000 stock options were granted to non-employee consultants for services.  These options vested immediately and the fair value of the option expense was recognized immediately at the various grant dates. Assumptions used to determine the weighted-average fair value of these
awards ($0.18 per option) included an expected term of 5 years, a volatility rate of 106% and a risk free interest rate of 1.93%.





In the first quarter of 2009, 2,600,000 options previously granted to a non-employee consultant for services vested as contingent triggering events were met.  The fair value of the related option expense was recognized immediately upon vesting. Assumptions used to determine the weighted-average fair value
of these awards ($0.02 per option) included an expected term of 1 year, a volatility rate of 98% and a risk free interest rate of 0.73%.





In the second quarter of 2009, 1,250,000 stock options were granted to non-employee consultants for services.  These options vested immediately and the fair value of the option expense was recognized immediately at the various grant dates. Assumptions used to determine the weighted-average fair value of these
awards ($0.22 per option) included an expected term of 5 years, a volatility rate of 106% and a risk free interest rate of 2.28%.





No options were granted to non-employee consultants for services during the third quarter of 2009.  However, in the third quarter of 2009, IFT modified the terms of 1,456,000 options that were previously granted and fully-vested to non-employee consultants.  The modification of terms for these options
extended expiration dates and reduced the exercise price to $0.50 from various exercise prices above that level.  The excess of the fair value of the modified awards immediately after the modification over the fair value of the original awards immediately before the modification resulted in $228,492 of stock-based compensation expense.


11








In the first quarter of 2008, 104,000 stock options were granted to a non-employee consultant for services.  These options originally had a vesting period of 22.5 months.  The fair value of these options was recomputed at each quarter-end and was being expensed over the vesting period.  During
the first quarter of 2009, these options were modified to have immediate vesting and we recognized full expense for these options.





In the second quarter of 2008, a total of 10,790,000 stock options were granted to non-employee consultants for services and to Directors for consulting services independent of their Directorship responsibilities.  These option grants are explained below.





During the second quarter of 2008, 10,400,000 stock options were granted to a non-employee consultant for future marketing and distribution efforts and completion of an equity raise.  5,200,000 of these options vested during the second quarter of 2008, based on performance criteria being met.  Accordingly,
we immediately recognized expense related to these options.  Assumptions used to determine the average fair value of these options ($0.21 per option) included an expected term of 2 years, a volatility rate of 90% and a risk free interest rate of 2.63%.  2,600,000 of these options had a vesting schedule contingent upon performance criteria which did not occur and these options subsequently expired during the third quarter of 2009.  However, we recognized expense related to these options
during the second quarter of 2008 since no consulting service obligation was associated with these options and based on the fact that a related consulting agreement was executed in March 2008.  Assumptions used to determine the average fair value of these options ($0.21 per option) included an expected term of approximately 3 years, a volatility rate of 88% and a risk free interest rate of 2.18%.  The remaining 2,600,000 options issued to this non-employee consultant had a vesting schedule
contingent upon performance criteria which occurred during the first quarter of 2009 (as explained above).





During the second quarter of 2008, we also granted 390,000 stock options to other non-employee consultants. 182,000 of these options have a vesting schedule contingent upon performance criteria which has not yet occurred.  However, we recognized expense related to these options since they are not linked to
any type of measurable consulting service obligation.  Assumptions used to determine the average fair value of these options (ranging between $0.20 and $0.37 per option) included expected terms of 5 years, volatility rates ranging between 118% and 120% and risk free interest rates ranging between 2.66% and 3.26%.





During the second quarter of 2008, 208,000 stock options were granted to a Director for consulting services independent of his Directorship responsibilities.  104,000 of these options vested immediately upon grant date, triggering immediate expense recognition. Assumptions used to determine the average fair
value of these options ($0.37 per option) included an expected term of 5 years, a volatility rate of 118% and a risk free interest rate of 2.66%.  The remaining 104,000 options vest over a 19.5-month period.  The fair value of these options, which will be recomputed at each quarter-end as described above, will be expensed over the vesting period.





During the third quarter of 2008, 520,000 stock options were granted to a non-employee consultant for services. 104,000 of these options vested during the third quarter of 2008, based on performance criteria being met. Accordingly, we recognized expense related to these options. Assumptions used to determine the average
fair value of these options ($0.25 per option) included an expected term of 2 years, a volatility rate of 99% and a risk free interest rate of 2.47%.  During the first quarter of 2009, 104,000 of these options  vested upon the performance of certain contingent events and expense was recorded accordingly. Assumptions used to determine the average fair value of these options ($0.11 per option) included an expected term of 2 years, a volatility rate of 99% and a risk free interest rate of 0.93%.  312,000
of these options have a vesting schedule contingent upon performance criteria which has not yet occurred. Stock-based compensation expense will not be recognized for any such options until it becomes probable that the performance criterion will be met.


12







Other





No shares of our common stock were sold or issued to employees or non-employees for services during the first three quarters of 2009 and the second and third quarters of 2008.  During the first quarter of 2008, we issued 52,000 shares of our common stock to non-employees for services that were valued at $8,000.





During the first quarter of 2008, we received cash proceeds of $200,000 for the sale of 416,000 shares of our common stock to an accredited investor and Director of IFT.





Late in the first quarter of 2008 we began negotiations with third parties that ultimately culminated in a successful equity raise during the second quarter of 2008.  Specifically, IFT sold 4,160,000 shares of common stock for $2,000,000, or $0.48 per share. This transaction was agreed to on April 22, 2008
at which time the closing price of IFT’s common stock was $0.42 per share.  Pursuant to an agreement, the entire $2,000,000 was received by June 9, 2008.  In accordance with the accounting standards, since the agreement entitled the third party to purchase shares of common stock over a period of time, the agreement was valued based on the fair value of the purchase option resulting in $999,000 of stock-based compensation expense.





In addition, during the second quarter of 2008, we received cash proceeds of $50,000 for the sale of 104,000 shares of our common stock to a Director of IFT.





During the first quarter of 2009, we received proceeds of $2,162,500 for the sale of 8,650,000 restricted shares of our common stock.  In connection with this equity raise, we issued warrants to purchase an additional 4,325,000 shares of our common stock at a price of $0.25 per share.  The warrants
became immediately exercisable upon issuance and expire five years from the grant date.





No stock options were exercised during the first three quarters of 2009 and 2008.





Note 4 – Blencathia Merger





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 is 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.  The 312,000 shares are reflected as outstanding for earnings per share computations.


13


Index





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.





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,
through the mediation or binding arbitration process, and considering we have recorded a liability for the shortfall amount, will have an additional material adverse effect on IFT.





Note 5 – 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 a Director of IFT until his death on May 26, 2009 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% 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 price) and extinguished the $500,000 of principal balance and $23,836 of accrued interest.  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 second quarter of 2008, IFT purchased 520,000 shares of its common stock from Mr. Demetriou for $250,000. We 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 purchased the remaining 520,000 common shares outstanding relating to a prior debt settlement with Mr. Demetriou for an aggregate of $250,000. We applied the cost method to account for these treasury stock transactions in our financial statements.  Because the amount paid
by IFT exceeded the fair market value of the stock on the dates of purchase, the cumulative difference of $126,000 was recorded to stock-based compensation expense as Mr. Demetriou was considered a holder of economic interest in IFT in accordance with ASC 718-10.





Note 6 – Equity Commitment from a Related Party





Effective December 11, 2007, we received an investment commitment from Rex Carr, a Director of IFT and a holder of over 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 416,000 restricted shares of our common stock.


14








On April 14, 2009, we repurchased the 416,000 restricted common shares from Mr. Carr for $200,000.  $1,000,000 is now currently available under this equity commitment. We applied the cost method to account for this treasury stock transaction in our financial statements.  Because the amount paid by
IFT exceeded the fair market value of the stock on the date of purchase, the cumulative difference of $54,400 has been recorded to stock-based compensation expense as Mr. Carr is considered a holder of economic interest in IFT in accordance with ASC 718-10.





Note 7 – 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, IFT will sell 600 metric tons of DiesoLIFTTM 10
at a price of 6,000 Euros (approximately $7,600) per metric ton to VOS.  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 the first three quarters of 2009.  The recent guidance we have received from VOS indicates they remain committed to commercializing IFT products and expect to take delivery of the above-mentioned 600 metric ton purchase order in 2010.





VOS is the exclusive distribution partner for sales of IFT’s products to Libya Oil Holdings Limited and Tamoil, which are affiliated with VOS.





Note 8 – Stock Dividend





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.





Stockholders’ Equity presented for 2008 herein has been slightly adjusted from the presentation in our 2008 10-K, reflecting a difference between the actual number of restricted common dividend shares issued (3,650,701) and the estimated restricted common dividend share issuance amount (3,616,197) used for our
2008 10-K disclosures.





Note 9 – Director and Officer Insurance Receivable





On October 2, 2008, Giant Trading, Inc., Dion Friedland, Magnum Select Fund, Ltd., Magnum Growth Fund, Brett Friedland, Lara and Andrew Block and Cherise Metz (the “Plaintiffs”) filed a lawsuit against us and certain of our Directors, Messrs. Burst and Carr (collectively, the “Defendants”), in the United States District Court, Southern District of Florida alleging
federal securities fraud violations. On May 19, 2009, the judge granted Defendants’ Motion to Transfer to the Eastern District of Missouri. The Plaintiffs subsequently dropped their federal securities fraud allegations and amended their lawsuit claiming state securities fraud allegations. On October 5, 2009, we filed a Motion to Dismiss Plaintiffs amended lawsuit. We do not believe the lawsuit has any merit and will continue
to vigorously defend our position.




We recorded legal expenses related to this litigation in our financial statements until our self-insured retention was met.  Now that such threshold has been met, we are recording related legal billings in a manner that shows a legal obligation to pay (an increase to accounts payable) but also as an item
to which we are entitled a reimbursement from our insurance company (an increase to accounts receivable).  The amount reported in director and officer insurance receivable is also included in our accounts payable balance.


15








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 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 in our annual report on Form 10-K for the year ended December 31, 2008 (the “2008 10-K”).





Forward-looking Statements and Associated Risks





This quarterly report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995.  These forward-looking statements are based largely on 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 and other factors described elsewhere in this report and documents filed by us with the Securities and Exchange Commission (“SEC”), including in our 2008 10-K under the “Risk Factors” section.  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 technology company that has developed a number of liquid fuel additive formulations that enhance the performance of petroleum-based fuels and petroleum-based fuels that are mixed with alternative fuels such as bio-diesel and ethanol.





To date, IFT’s commercialization efforts have focused primarily on two proprietary products: DiesoLIFTTM10 and DiesoLIFTTMBD-3.
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. DiesoLIFTTM BD-3 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 DiesoLIFTTM10 and DiesoLIFTTMBD-3
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.


16


Index





For example, DiesoLIFTTM10 has been tested at the following independent test laboratories and has consistently demonstrated the ability
to increase fuel economy, on average by 5%:





Ÿ
In the U.S.:   Southwest Research Institute and Motive Power;


Ÿ
In the U.K.:  MI Technologies and Prodrive;


Ÿ
In Canada:   the Forest Engineering Research Institute of Canada;


Ÿ
In South Africa: Gerotek Test Facilities; and


Ÿ
In China: Tsinghua University.





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 DiesoLIFTTM 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:





Ÿ
In Belgium:  BfB Laboratories; and


Ÿ
In the U.S.: Montana State University - Northern.





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 DiesoLIFTTM BD-3
are derived from a complex mixture of detergent substances (surfactant chemistry) that utilize naturally occurring fractions that are bio-degradable.





The manufacture of IFT’s additive formulations is outsourced to Multisol (France) and Air Products and Chemicals, Inc. (U.S.). These relationships allow IFT to consistently deliver quality additive formulations on a timely basis.





The commercial goal of IFT is the bulk sale (by the ton) of DiesoLIFTTM 10 and DiesoLIFTTM BD-3 to the following major end-users of diesel fuel and bio-diesel
fuel blends:





Ÿ
railroads;


Ÿ
stationary power generation operators;


Ÿ
centrally-fueled truck/bus fleets; and


Ÿ
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), Caldic (U.K.), Nordmann
Rassmann (Germany), Tide Water Oil Co. (India) and Nulon India (India).





The first major commercial breakthrough for IFT occurred in February 2009 when we sold 600 metric tons of DiesoLIFTTM 10 to Vision Oil Services (“VOS”). VOS is IFT’s exclusive distribution partner for sales of IFT products
to Tamoil and Libya Oil Holdings Limited, which are affiliated with VOS. In addition, we continued to make sales of product to multiple distribution partners in the first three quarters of 2009.  We are also in the evaluation phase with numerous large-scale projects all over the world.  If positive results are achieved in these projects, we anticipate that they will lead to meaningful revenue opportunities in 2010.


17








In summary, IFT has clearly demonstrated that it has two of the top performing fuel additive formulations in the world today, DiesoLIFTTM 10 and DiesoLIFTTM BD-3.
We have emerged from the research and development phase and are in the early stages of commercializing our technology. Through distribution partners, we have clients that are purchasing and using our products. The time consuming process of tests and trials in which we have been engaged has led to real commercial opportunities which have generated revenues in the first three quarters of 2009.





Results of Operations





Three and Nine Months Ended September 30, 2009 Compared to the Three and Nine Months Ended September 30, 2008





Revenues





Net revenue for the three months ended September 30, 2009 was $14,317, as compared to $76,451 for the three-month period ended September 30, 2008.  Sales revenue in the third quarters of 2009 and 2008 was primarily due to sales to distribution partners and end-user customers.  Sales revenue generated
during the third quarters of 2009 and 2008 was primarily generated from the sale of DiesoLIFTTM10.





Net revenue for the nine months ended September 30, 2009 was $105,386, as compared to $112,848 for the nine-month period ended September 30, 2008.  Sales revenue in the first three quarters of 2009 was due to sales to distribution partners and end-user customers.  Sales revenue in the first three
quarters of 2008 was due to sales to end-user customers, distribution partners and customers engaged in field trials, partially offset by a customer return of $6,375.





Sales revenue generated during the first nine months of 2009 and 2008 was primarily generated from the sale of DiesoLIFTTM10.





Operating Expenses





Total operating expense was $2,293,114 for the three months ended September 30, 2009, as compared to $636,990 for the three-month period ended September 30, 2008.  This $1,656,124 increase from the prior period was primarily attributable to an increase in stock-based compensation expense related to the third
quarter of 2009 modification of terms to previously granted (and fully-vested) options and increased legal fees, partially offset by a decrease in cost of operations (exclusive of depreciation).  These fluctuations are  more fully described below.





Total operating expense was $4,414,822 for the nine months ended September 30, 2009, as compared to $4,615,489 for the nine-month period ended September 30, 2008.  This $200,667 decrease from the prior period was primarily attributable to decreases in stock-based compensation expense and cost of operations
(exclusive of depreciation), partially offset by increases in selling, general and administrative expense.  These fluctuations are more fully described below.





Cost of Operations (exclusive of depreciation)





Cost of operations (exclusive of depreciation) was $7,023 for the three months ended September 30, 2009, as compared to $49,147 for the three-month period ended September 30, 2008.  This decrease was due to decreased sales in the current quarter compared to the third quarter of 2008.


18


Index





Cost of operations (exclusive of depreciation) was $28,976 for the nine months ended September 30, 2009, as compared to $76,965 for the nine-month period ended September 30, 2008.  This decrease, despite comparable sales revenue, is primarily due to a favorable re-purchase of existing DiesoLIFTTM10
from a former distributor in the first quarter of 2009.





Selling, General and Administrative Expense





Selling, general and administrative expense for the three months ended September 30, 2009 was $2,284,943 (including stock-based compensation of $1,729,195), as compared to $585,867 (including stock-based compensation of $72,166) for the three-month period ended September 30, 2008. This increase of $1,699,076 was primarily
attributable to the following activities:





Ÿ
an increase in stock-based compensation expense ($1,657,029) primarily due to the modification of terms to options previously granted and vested and the corresponding immediate expense recognition (approximately $1,581,000); and


Ÿ
an increase in legal expense ($51,941) primarily due to litigation with a former distributor that began late during the third quarter of 2008.





Selling, general and administrative expense for the nine months ended September 30, 2009 was $4,381,932  (including stock-based compensation of $2,556,440), as compared to $4,532,567 (including stock-based compensation of $2,858,612) for the nine-month period ended September 30, 2008. This decrease of $150,635
was primarily attributable to the following activities:





Ÿ
a decrease in stock-based compensation expense ($302,172) primarily due to the vesting and immediate expense recognition for options granted during the second quarter of 2008 relating to commercial and equity capital raise activities (approximately $2,600,000). This decrease was partially offset by third quarter of 2009 modification of terms to options previously granted (and fully-vested) (approximately $1,581,000),
expense recorded during the first three quarters of 2009 for 2009 option grants (approximately $634,000) and expense recorded for treasury stock purchases ($180,400);


Ÿ
an increase in consulting expense ($103,125) primarily due to a one-time reimbursement payment to a former consultant during 2009 and increased commercialization assistance from a new consultant starting during the second quarter of 2009;


Ÿ
an increase in legal fees ($74,291) primarily due to litigation with a former distributor that began late during the third quarter of 2008, partially offset by less intellectual property legal activities during 2009;


Ÿ
a decrease in investor relations to ($57,118) primarily due to the use of external firms and recording trailing print service costs for prior proxy statements and registration statements during the first quarter of 2008;


Ÿ
an increase in bank charges ($54,437) primarily related to the first quarter 2009 prepaid cash receipt of a sales order from VOS;


Ÿ
a decrease in research and development expense ($44,384) due to less DiesoLIFTTM BD-3 formulation testing in the current year; and


Ÿ
an increase in salary expense ($41,890) primarily due to salary increases subsequent to the second quarter of 2008.





Depreciation Expense





Depreciation expense was $1,148 for the three months ended September 30, 2009, as compared to $1,976 for the three months ended September 30, 2008.  This decrease was primarily attributable to property and equipment becoming fully depreciated in the first quarter of 2009.





Depreciation expense was $3,914 for the nine months ended September 30, 2009, as compared to $5,957 for the nine months ended September 30, 2008.  This decrease was primarily attributable to property and equipment becoming fully depreciated in the first quarter of 2009.


19








Interest Income (Expense)





Net interest income (expense) for the three months ended September 30, 2009 was $8,513, as compared to $3,135 for the three months ended September 30, 2008. The increase in net interest income (expense) is primarily attributable to increased invested cash due to the first quarter 2009 equity raise activities and cash
received from VOS related to a prepaid sales order for the sale of 600 metric tons of DiesoLIFTTM 10.





Net interest income (expense) for the nine months ended September 30, 2009 was $12,673, as compared to $(14,018) for the nine-month period ended September 30, 2008. The increase in net interest income (expense) is primarily attributable to an increased amount of funds invested in securities in the current period and
interest expense recorded related to debt issued in the fourth quarter of 2007, which was converted to equity effective March 31, 2008.





Provision for Income Taxes





We have operated at a net loss since inception and have not recorded or paid any income taxes. 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 at September 30, 2009 with a valuation allowance.





Net Loss





Net loss for the three months ended September 30, 2009 was $2,270,284, as compared to $557,404 for the three months ended September 30, 2008.  The increase in net loss was primarily due to an increase in stock-based compensation expense and legal fees, partially offset by a decrease in cost of operations (exclusive
of depreciation) as described above.  The basic and diluted net loss per common share for the three months ended September 30, 2009 and 2008 was $(0.02) and $(0.01), respectively.





Net loss for the nine months ended September 30, 2009 was a net loss of $4,296,763, as compared to a net loss of $4,516,659 for the nine months ended September 30, 2008. The decrease in net loss was primarily due to a decrease in stock-based compensation expense, investor relations and research and development expense,
partially offset by increases in consulting fees, legal fees, bank charges and salary expense as described above.  The basic and diluted net loss per common share for the nine months ended September 30, 2009 and 2008 was $(0.04) and $(0.05), respectively.





New Accounting Pronouncements





New Accounting Pronouncements Adopted





Accounting Standards Codification (“ASC”) ASC 805 – In December 2007, the Financial Accounting Standards Board (“FASB”) issued transition guidance ASC 805-10-65-1, “Transition Related to FASB Statement No. 141 (revised 2007),
Business Combinations.” This guidance defines the acquirer in a business combination as the entity that obtains control of one or more businesses, and establishes the acquisition date as the date the acquirer achieves this control. This statement also refines the application of the purchase method by requiring the acquirer to recognize assets acquired and liabilities assumed at fair value and replacing the cost-allocation process previously required. Furthermore, acquisition-related costs and restructuring
costs that are expected, but not obligatory, are required to be recognized separately from the business combination. This guidance is effective prospectively for business combinations with acquisition dates on or after January 1, 2009. There was no material impact to our financial position, results of operations, or cash flows as a result of adoption of this guidance.


20


Index





ASC 805 – In April 2009, the FASB amended its guidance related to the accounting for assets and liabilities arising from contingencies in a business combination. The amended guidance requires that an asset or a liability arising from a contingency in a business combination be recognized at fair value if fair value
can be reasonably determined and provides guidance on how to make that determination. If the fair value of an asset or liability cannot be reasonably determined, an asset or liability is to be recognized at the amount that would be recognized in accordance with ASC 450, “Contingencies,” for liabilities and an amount using similar criteria for assets. The guidance is effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after December 15, 2008. There was no material impact to our financial position, results of operations, or cash flows as a result of the adoption of this guidance.





ASC 810 – In December 2007, the FASB issued ASC 810, Non-Controlling Interests in Consolidated Financial Statements - an amendment of ARB No. 51.  ASC 810 establishes new standards for the accounting for and reporting of non-controlling interests
(formerly minority interests) and for the loss of control of partially owned and consolidated subsidiaries. ASC 810 does not change the criteria for consolidating a partially owned entity.  ASC 810 is effective for fiscal years beginning after December 15, 2008.  The provisions of ASC 810 are applied prospectively upon adoption except for the presentation and disclosure requirements, which are applied retrospectively.  The provisions of ASC 810 did not apply to IFT and therefore
had no impact on our financial position, results of operations or cash flows.





ASC 820 – Effective January 1, 2008, we partially adopted ASC 820, “Fair Value Measurements and Disclosures.”  ASC 820 applies to most current accounting rules requiring or permitting fair value measurements. ASC 820 provides a
framework for measuring fair value and requires expanded disclosures about fair value methods and inputs by establishing a hierarchy for ranking the quality and reliability of the information used by management to measure and report amounts at fair value.





We had only partially applied the provisions of ASC 820 as management elected the deferral provisions of ASC 820-10-65-1, “Transition Related to FASB Staff Position FAS 157-2,” as it applies to non-financial assets and liabilities that are recognized
or disclosed at fair value in the financial statements on a non-recurring basis. ASC 820-10-65-1 delayed the effective date of ASC 820 for non-financial assets and liabilities which are not measured at fair value on a recurring basis (at least annually) until January 1, 2009 for IFT.  The major categories of assets and liabilities that are recognized or disclosed at fair value on a non-recurring basis include certain amounts of property and equipment, intangibles and goodwill reported at fair value
as a result of impairment testing, and certain other assets, liabilities and equity instruments recognized as a result of prior business combinations. There was no impact to our financial position, results of operations, or cash flows as a result of the adoption of ASC 820 for non-financial assets and liabilities.





ASC 820-10 emphasizes that fair value is a market-based measurement, not an entity-specific measurement.  Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant
assumptions in fair value measurements, ASC 820-10 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).  The fair value hierarchy, as defined by ASC 820-10,
contains three levels of inputs that may be used to measure fair value as follows:


21


Index







Ÿ
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that IFT has the ability to access;





Ÿ
Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals; and





Ÿ
Level 3 inputs are unobservable inputs for the asset or liability which are typically based on an entity’s own assumptions, as there is little, if any, related market activity.





In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its
entirety.  Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.





Beginning June 18, 2009, we purchased $3,000,000 of certificates of deposit with maturities greater than 90 days.  As of September 30, 2009, we have $1,000,000 of 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.  We have determined that the inputs used to value these contracts fall within Level 1 of the fair value hierarchy.





The table below presents our assets measured at fair value on a recurring basis as of September 30, 2009, aggregated by the level in the fair value hierarchy within which those measurements fall.








Quoted Prices in Active Markets for Identical Assets and Liabilities
(Level 1)

Significant Other
Observable Inputs
(Level 2)


Significant
Unobservable Inputs
(Level 3)

Balance at
September 30,
2009Assets :Certificates of deposit
$ 1,000,000

$
-


$
-

$  1,000,000








We do not have any fair value measurements using significant unobservable inputs (Level 3) as of September 30, 2009.





ASC 815 – During June 2008, the FASB issued 815-10-65-3, “Transition Related to EITF Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock,” which became effective for IFT on January 1,
2009. This guidance addresses the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock, which is the first part of the scope exception in ASC 815, “Derivatives and Hedging.”  If an instrument (or an embedded feature) that has the characteristics of a derivative instrument under ASC 815 is indexed to an entity’s own stock, it is still necessary to evaluate whether it is classified
in stockholders’ equity (or would be classified in stockholders’ equity if it were a freestanding instrument). Other applicable authoritative accounting literature provides guidance for determining whether an instrument (or an embedded feature) is classified in stockholders’ equity (or would be classified in stockholders’ equity if it were a freestanding instrument). This guidance did not have a material impact to our financial position, results of operations, or cash flows upon its effective
date.





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Index





ASC 260 – In June 2008, the FASB issued ASC 260-10-65-2 “Transition Related to FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities.” This guidance concludes that non-vested
shares with non-forfeitable dividend rights are considered participating securities and, thus, subject to the two-class method pursuant to ASC 260, “Earnings per Share,” when computing basic and diluted earnings per share.  We adopted this guidance effective January 1, 2009 with no impact to our financial position, results of operations or cash flows.





ASC 825 – In April 2009, the FASB issued ASC 825-10-65-1 “Transition Related to FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments,” which enhances consistency in financial reporting by increasing the
frequency of fair value disclosures. This guidance is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for interim and annual periods ending after March 15, 2009 subject to certain restrictions.  We did not elect early adoption in the quarter ended March 31, 2009.  We applied the provisions of this guidance for the quarter ending June 30, 2009 with no impact to our financial position, results of operations or cash flows.





ASC 855 – In May 2009, the FASB issued ASC 855, “Subsequent Events.” ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are
available to be issued. ASC 855 is effective for interim or annual reporting periods ending after June 15, 2009. The adoption of ASC 855 did not have a material impact on our financial position, results of operations or cash flows.





ASC 105 – In June 2009, the FASB issued ASC 105-10-65, “Transition Related to FASB Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.” The Accounting Standards Codification
will become the single source of authoritative non-governmental U.S. generally accepted accounting principles, superseding existing accounting literature. While not intended to change U.S. GAAP, the ASC significantly changes the way in which accounting literature is organized. This guidance is effective for interim or annual reporting periods ending after September 15, 2009. The adoption of this guidance did not have an impact on our financial position, results of operations or cash flows. However, because
the Codification completely replaces existing standards, it affects the way U.S. GAAP is disclosed in our financial statements.





Recently Issued Accounting Pronouncements





ASC 860 and ASC 810 – On June 12, 2009, the FASB published two new accounting standards that determine whether securitizations and other transfers of financial instruments are given off-balance sheet treatment.  SFAS 166, Accounting for Transfers of Financial
Assets (“ASC 860”) will amend SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities – a replacement of FASB Statement No. 125, and SFAS 167, Amendments to FASB Interpretation (FIN) No. 46(R)(“ASC 810”), will amend FIN 46(R). The revisions
to the standards, expected to be effective January 1, 2010 for issuers with calendar year ends, will result in many existing off-balance sheet securitizations being treated as secured financing and returning on-balance sheet. The adoption of ASC 860 and ASC 810 will not have an impact 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 U.S. 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.


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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.





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.





To test impairment, we use the market approach to determine the fair value of IFT.  Following this approach, the fair value of the business exceeded the carrying value of the business as of September 30, 2009.  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 September 30, 2009, 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.  Current U.S. and worldwide adverse economic conditions and the tightening of credit markets may hinder our ability to attract additional capital resources in the future.





While we cannot make any assurances as to the accuracy of our projections of future capital needs, we believe that, as a result of first quarter 2009 equity raise activities ($2,162,500), cash received for a prepaid sales purchase order during the first quarter of 2009 (net cash margin expected of approximately $1,500,000)
and the 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 the end of 2010.  Subsequent to the end of 2010, we would need to raise additional capital to fund our future operations if we are unable to generate positive and sustainable operating
cash flows.


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Cash provided by (used in) operating activities was $1,371,187 for the nine months ended September 30, 2009, compared to $(1,520,406) for the nine months ended September 30, 2008.  The increase 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.





Cash used in investing activities was $1,000,000 for the nine months ended September 30, 2009, compared to $0 for the nine months ended September 30, 2008.  During the second quarter of 2009, we invested a portion of the proceeds received from earlier 2009 equity raise activities into a certificate of deposit
program that is insured 100% by the FDIC.  We redeemed $590,000 of investments upon maturities during the third quarter of 2009.  At September 30, 2009, $1,700,000 of certificates of deposit with maturities less than 90 days are classified on our balance sheet in cash and cash equivalents and $1,000,000 is invested in certificates of deposit having maturities greater than 90 days.





Cash provided by financing activities was $1,712,500 for the nine months ended September 30, 2009, as compared to $2,000,000 for the nine months ended September 30, 2008.  The decrease in financing cash flow was primarily due to slightly less cash proceeds obtained from the issuance of equity, and increased
levels of treasury stock purchases during the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008.  During the first three quarters of 2009, we raised $2,162,500 with the issuance of 8,650,000 restricted shares of our common stock to accredited investors.  During the first three quarters of 2008, we raised $2,000,000 with the issuance of 4,160,000 shares of common stock to accredited investors and $250,000 with the issuance of 520,000 restricted shares
of our common stock to a related party.  During the first three quarters of 2009 and 2008, we also had treasury stock acquisitions of $450,000 and $250,000, respectively, related to the re-purchases of shares previously owned by IFT Directors.





Net cash increased by $2,083,687 for the nine months ended September 30, 2009, as compared to an increase in net cash of $479,594 for the nine months ended September 30, 2008.





Working capital at September 30, 2009 was $2,538, as compared to $26,447 at December 31, 2008.  This decrease was primarily attributable to a first quarter 2009 equity funding of $2,162,500, partially offset by cash operating expenses incurred during the first nine months of 2009.





During the nine months ended September 30, 2009 and September 30, 2008, we did not make significant investments in property and equipment and do not anticipate doing so in the immediate future.





Item 4. 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 Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of September
30, 2009.  Disclosure controls and procedures are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this quarterly report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without





25


Index





limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, or persons performing similar functions, as appropriate, to allow timely decisions regarding required
disclosure.  Our disclosure controls and procedures include some, but not all, components of our internal control over financial reporting.  Based on this evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of September 30, 2009 due to an existing material weakness in our internal control over financial reporting as discussed below.





Change in Internal Control over Financial Reporting





In our 2008 10-K, management identified a material weakness related to IFT’s limited accounting personnel with sufficient expertise, accounting knowledge and training in 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.





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.





There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended September 30, 2009, 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.





Plan for Remediation





Some of the remediation action steps discussed in our 2008 10-K are dependent on the completion of a financing to support operations for at least two years.  As such financing has not yet been fully achieved, we have not yet been able to 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.





During the fiscal quarter ended September 30, 2009, we were unable to further develop our financial statement closing and reporting practices to include additional levels of checks and balances in our procedures and a timely review.  The actions we plan to take are subject to continued management review supported
by confirmation and testing, as well as audit committee oversight.








PART II.  OTHER INFORMATION





Item 1. 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.





Item 5. Other Information





(a) None.


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Index





(b)   There have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors since the filing of our quarterly report on Form 10-Q for the quarter ended June 30, 2009.





Item 6.  Exhibits





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





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





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





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





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


27


Index





SIGNATURES








Pursuant to the requirements 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: November 16, 2009Name:
Jonathan R. BurstTitle:
Chief Executive Officer
(Principal Executive Officer)








By:
/s/ Stuart D. Beath

Date: November 16, 2009Name:
Stuart D. BeathTitle:
Chief Financial Officer
(Principal Financial Officer)









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