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 1934For the quarterly period ended September 30, 2010OR ̈
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For 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.





Large accelerated filer
 ̈

Accelerated filer
 ̈Non-accelerated filer
 ̈

Smaller reporting company
x(Do not check if 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, 2010: Common stock, par value $0.01 per share – 101,322,284 shares outstanding.







INDEX








PAGE NO.PART I.  FINANCIAL INFORMATIONItem 1.
Financial StatementsBalance Sheets — September 30, 2010 (unaudited) and December 31, 2009
2Statements of Operations (unaudited) — Three-Month and Nine-Month Periods Ended September 30, 2010 and September 30, 2009
3Statement of Stockholders’ Equity (Deficit) (unaudited) — Nine-Month Period Ended September 30, 2010
4Statements of Cash Flows (unaudited) — Nine-Month Periods Ended September 30, 2010 and September 30, 2009
5Notes to Financial Statements
6Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
12Item 4.
Controls and Procedures
20PART II.  OTHER INFORMATIONItem 1.
Legal Proceedings
22Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
23Item 5.
Other Information
23Item 6.
Exhibits
23


Index


PART I.  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 INTERNATIONAL FUEL TECHNOLOGY, INC.
 
 BALANCE SHEETS
  September 30,


December 31,2010


2009ASSETS

(Unaudited)Current assetsCash and cash equivalents

$
1,213,845


$
1,828,024Investments in certificates of deposit


-



1,000,000Accounts receivable


90,489



2,440Accrued interest receivable


158



8,210Inventory


135,527



157,465Prepaid expenses and other assets


20,435



28,681Total Current Assets


1,460,454



3,024,820Property and equipmentMachinery, equipment and office furniture


63,706



63,706Accumulated depreciation


(61,136
)


(57,690
)Net Property and Equipment


2,570



6,016Goodwill


2,211,805



2,211,805Total Assets

$
3,674,829


$
5,242,641LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)Current liabilitiesAccounts payable

$
160,112


$
193,074Accrued compensation


36,496



14,144Deferred revenue (Note 8)


2,998,242



2,998,242Other accrued expenses (Note 5)


190,000



310,000Total Current Liabilities


3,384,850



3,515,460Deferrred income taxes (Note 10)


514,000



465,000Total Liabilities


3,898,850



3,980,460Commitments and contingenciesStockholders' equity (deficit) (Notes 4 and 5)Common stock, $0.01 par value; 150,000,000 authorized, 101,322,284 (net of 1,440,000 shares held in treasury) and 101,292,284 (net of 1,440,000 shares held in treasury) shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively


1,027,623



1,027,323Treasury stock (Notes 6 and 7)


(664,600
)


(664,600
)Discount on common stock


(819,923
)


(819,923
)Additional paid-in capital


64,951,096



64,731,026Accumulated deficit


(64,718,217
)


(63,011,645
)Total Stockholders' Equity (Deficit)


(224,021
)


1,262,181Total Liabilities and Stockholders' Equity (Deficit)

$
3,674,829


$
5,242,641





See Notes to Financial Statements.


2
 Index





INTERNATIONAL FUEL TECHNOLOGY, INC.





STATEMENTS OF OPERATIONS


(Unaudited)


Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2010


2009


2010


2009Revenues

$
5,301


$
14,317


$
229,392


$
105,386Operating expenses:Cost of operations (exclusive of depreciation)


2,451



7,023



85,775



28,976Selling, general and administrative expense (including non-cash stock-based compensation expense) (Note 4)


574,146



2,284,943



1,807,256



4,381,932Depreciation


1,148



1,148



3,446



3,914Total operating expenses


577,745



2,293,114



1,896,477



4,414,822Net loss from operations


(572,444
)


(2,278,797
)


(1,667,085
)


(4,309,436
)Interest income


952



8,513



9,513



12,673Net loss before income taxes

$
(571,492
)

$
(2,270,284
)

$
(1,657,572
)

$
(4,296,763
)Income tax provision (Note 10)


16,334



-



49,000



-Net loss

$
(587,826
)

$
(2,270,284
)

$
(1,706,572
)

$
(4,296,763
)Basic and diluted net loss per common share

$
(0.01
)

$
(0.02
)

$
(0.02
)

$
(0.04
)Weighted-average common shares outstanding, basic and diluted


102,762,284



101,256,284



102,743,383



99,224,409





See Notes to Financial Statements.


3
 Index


INTERNATIONAL FUEL TECHNOLOGY, INC.





STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)


FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2010


(Unaudited)




Common
Stock Shares


Common
Stock
Amount


Treasury
Stock


Discount on
Common
Stock


Additional
Paid-in
Capital


Accumulated
Deficit


TotalBalance, December 31, 2009


102,732,284


$
1,027,323


$
(664,600
)

$
(819,923
)

$
64,731,026


$
(63,011,645
)

$
1,262,181Expense relating to non-cash stock-based compensation (Note 4)


-



-



-



-



211,370



-



211,370Common shares issued for services (Note 4)


30,000



300



-



-



8,700



-



9,000Net loss


-



-



-



-



-



(1,706,572
)


(1,706,572
)Balance, September 30, 2010


102,762,284


$
1,027,623


$
(664,600
)

$
(819,923
)

$
64,951,096


$
(64,718,217
)

$
(224,021
)





See Notes to Financial Statements.


4
 Index


INTERNATIONAL FUEL TECHNOLOGY, INC.





STATEMENTS OF CASH FLOWS


(Unaudited)





Nine Months Ended


Nine Months EndedSeptember 30,


September 30,2010


2009Cash flows from operating activities:Net loss

$
(1,706,572
)

$
(4,296,763
)Adjustments to reconcile net loss to net cash (used in) provided by operating activities:Depreciation


3,446



3,914Non-cash stock-based compensation


220,370



2,556,440Deferred income tax provision


49,000



-Change in assets and liabilities:Accounts receivable


(88,049
)


(282,539
)Accrued interest receivable


8,052



-Inventory


21,938



22,415Prepaid expenses and other assets


8,246



1,112Accounts payable


(32,962
)


349,803Accrued compensation


22,352



18,563Deferred revenue


-



2,998,242Other accrued expenses


(120,000
)


-Net cash (used in) provided by operating activities


(1,614,179
)


1,371,187Cash flows from investing activities:Redemptions (purchases) of investment in certificates of deposit


1,000,000



(1,000,000
)Net cash provided by (used in) investing activities


1,000,000



(1,000,000
)Cash flows from financing activities:Proceeds from issuance of common stock


-



2,162,500Purchase of treasury stock


-



(450,000
)Net cash provided by financing activities


-



1,712,500Net (decrease) increase in cash and cash equivalents


(614,179
)


2,083,687Cash and cash equivalents, beginning


1,828,024



299,127Cash and cash equivalents, ending

$
1,213,845


$
2,382,814





See Notes to Financial Statements.


5
 Index





NOTES TO FINANCIAL STATEMENTS


(Unaudited)





Note 1 – Basis of Presentation





International Fuel Technology, Inc. (“IFT”) is a company that was incorporated under the laws of the State of Nevada on April 9, 1996.  We have developed a family of fuel additive product formulations. These unique fuel blends have been created to improve fuel economy, enhance lubricity (reducing engine wear and tear) and lower harmful engine emissions, while decreasing reliance on petroleum-based fuels through the use of more efficient, alternative and renewable fuels.





We began transitioning from a development stage technology company to a commercial entity during 2002 and have been increasing our product marketing and sales efforts since.  We are now focused on continuing to develop the body of evidence of the efficacy of our products applicable to a wide range of markets and industries within these markets through additional industry specific laboratory testing and customer field trials.  In addition, we are continuing to strengthen our distributor and customer contact base.  Marketing and sales efforts, in conjunction with additional industry specific testing, will complete our transition to a commercial enterprise.





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.  We suggest that these financial statements be 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, 2009 (the “2009 10-K”).  We follow the same accounting policies in preparation of interim reports as we do in our annual reports.
 
 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, 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, 2010 and 2009, 21,548,920 and 34,825,555 shares, respectively, of common stock equivalents were excluded from the computation of diluted net loss per share since their effect would be anti-dilutive.


Note 2. Ability to Continue as a Going Concern





Our financial statements are presented on the going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The independent registered public accounting firm’s report included with the financial statements filed with our 2009 10-K, filed with the SEC on March 31, 2010, indicated substantial doubt that IFT could continue as a going concern. We have incurred significant losses since inception and currently have and previously from time to time have had limited funds with which to operate. Management is in the process of executing a strategy based upon marketing technologies that offer enhanced engine performance and greater fuel economy along with pollution control benefits. We have several technologies in the commercialization phase and in development. We have received necessary regulatory approval and commercial acceptance for our products currently in the commercialization phase. During the first quarter of 2002, we began selling our products directly to the commercial marketplace. We expect to increase our direct sales to the marketplace, eventually generating a level of revenues sufficient to meet our cash flow and earnings requirements. However, it is possible that this may take a few years or may never occur. 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 if the order is filled), projected sales for 2010 and the first quarter of 2011 and a remaining equity commitment of $1,000,000 (entered into with a related party Board member of IFT and significant shareholder during 2008), we have adequate cash and cash equivalents balances and commitments to fund operations through at least the first quarter of 2011.  However, if we are unable to meet our projections and generate positive and sustainable operating cash flows by this time, we may need to raise additional capital to fund our future operations.
 6
 Index
 Our current cash and cash equivalents balance plus our remaining committed funding of $1,000,000 is not sufficient to support the remaining 2010 operations if we manufacture inventory to fulfill the requirements of a 2009 prepaid sales order with Vision Oil Services Ltd. (“VOS”).  If necessary, we believe we would be able to secure additional funding through private placements of equity and/or debt securities with existing shareholders/investors of IFT, as well as other external sources. However, there is the possibility that these sales of equity, if needed, may not happen at all or may end at some point in the future. If we are unable to secure this additional funding, we will need to significantly curtail operations.





The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of IFT to continue as a going concern.





Note 3 – New Accounting Pronouncements





New Accounting Pronouncements Adopted





ASC 820—In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures About Fair Value Measurements.” This guidance amends Subtopic 820-10 to require new disclosures and clarify existing disclosures. This guidance requires new disclosures of amounts and reasons for significant transfers between Level 1 and Level 2 fair value measurements. Additionally, in the reconciliation for fair value measurements using significant unobservable inputs (Level 3), separate presentation of information about purchases, sales, issuances and settlements is required. The guidance clarifies that fair value measurement disclosures for each class of assets and liabilities may constitute a subset of assets and liabilities within a line item on a reporting entity’s balance sheet. The guidance also clarifies disclosure requirements about inputs and valuation techniques for both recurring and nonrecurring fair value measurements (Level 2 or Level 3). The ASU also amends guidance on employers’ disclosures about post-retirement benefit plan assets under ASC 715 to require that disclosures be provided by classes of assets instead of by major categories of assets. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity for Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, including interim periods within those fiscal years. The adoption of this guidance did not have a material effect on our financial position, results of operations or cash flows.


7
 Index




Recently Issued Accounting Pronouncements





ASC 605-25 - In October 2009, the FASB issued ASU No. 2009-13 for updated revenue recognition guidance under the provisions of ASC 605-25, “Multiple-Element Arrangements.” The previous guidance has been retained for criteria to determine when delivered items in a multiple-deliverable arrangement should be considered separate units of accounting.  However, the updated guidance removes the 48 previous separation criteria that objective and reliable evidence of fair value of any undelivered items must exist for the delivered items to be considered a separate unit or separate units of accounting. This guidance is effective for fiscal years beginning on or after June 15, 2010. We do not expect that the adoption of this guidance will have a material effect on our financial position, results of operations or cash flows.





Note 4 – Stock-based Compensation
 
 Non-cash stock-based compensation expense recorded in the three and nine months ended September 30, 2010 and 2009 is as follows:
 
 Three Months Ended September 30, 2010


Three Months Ended September 30, 2009


Nine Months Ended September 30, 2010


Nine Months Ended September 30, 2009Awards to employees/Directors

$
-


$
147,473


$
178,201


$
307,881Awards to non-employees


-



420



9,000



486,857Stock option modifications


6,443



1,581,302



33,169



1,581,302Treasury stock purchases


-



-



-



180,400Total non-cash stock-based compensation expense

$
6,443


$
1,729,195


$
220,370


$
2,556,440





Employee and Director awards





During the first quarter of 2010, 250,000 employee options were granted.  Assumptions used to determine the average fair value of these awards ($0.06 per option) included an expected term of 3.83 years, a volatility rate of 88% and a risk free interest rate of 1.86%.





In addition, during the first quarter of 2010, we modified the terms of 156,000 options that were previously granted and fully-vested to an employee.  The modification of terms for these options extended the expiration date, changed the vesting periods and reduced the exercise price to $0.48 from $1.68.  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 will result in $15,422 of non-cash stock-based compensation expense through December 31, 2011.





No employee options were granted during the second and third quarters of 2010.





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%.
 8
 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 extendedexpiration dates and reduced the exercise price to $0.48 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 non-cash stock-based compensation expense.


No options were granted to Directors for Director-related services in the first three quarters of 2010 or first quarter of 2009. During the second quarter of 2009, 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%.
 
 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%.


Non-employee awards





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 5,200 options outstanding as of September 30, 2010, expense is recognized when it becomes probable that the performance criterion will be met.





No stock options were granted to non-employee consultants for services during the first quarter of 2010.





However, during the first quarter of 2010, IFT modified the terms of 416,000 options that were previously granted and fully-vested to a non-employee.  The modification of terms for these options extended the expiration date, changed the vesting periods and reduced the exercise price to $0.48 from $1.81.  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 will result in $32,439 of non-cash stock-based compensation expense through December 31, 2011.





No stock options were granted to non-employee consultants for services during the second and third quarters of 2010.





During the third quarter of 2010, 104,000 stock options previously granted to a non-employee consultant for services expired.  These options had vested before expiration.





During the second quarter of 2010, a total of 7,592,000 stock options previously granted to non-employee consultants for services expired.  4,680,000 of these options had vested before expiration.  The remaining 2,912,000 options expired prior to vesting as certain vesting triggering events were not achieved.





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%.  These options subsequently expired during the first quarter of 2010.





9
 Index


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 $0.48 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 non-cash stock-based compensation expense.
 
 Other
 
 No shares of our common stock were sold or issued to employees or non-employees for services during the first and third quarters of 2010 and first three quarters of 2009. During the second quarter of 2010, we issued 30,000 shares of our common stock to non-employees for services.
 
 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.
 
 During the second and third quarters of 2010, 225,758 and 930,714 warrants related to a 2005 equity issuance expired, respectively.
 
 No stock options were exercised during the first three quarters of 2010 or 2009.


Note 5 – 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 was reflected as a current accrued expense. We are in negotiations with the prior Blencathia owner to resolve this obligation and may ultimately settle the obligation with either cash or equity securities with a lower market value.  Beginning in 2006, the 312,000 shares have been reflected as outstanding for earnings per share computations.  Since the second half of 2009, we have made payments totaling $160,000 to the prior Blencathia owner, reducing the related current accrued expense balance to $190,000 as of September 30, 2010.


10
 Index




Note 6 – Note Payable to a Related Party
 
 During the fourth quarter of 2007, we obtained an unsecured $500,000 loan from Harry F. Demetriou, who was then a Director of IFT and the holder of over 5% of our common stock. Pursuant to the terms of the loan, a promissory note was executed by IFT in favor of Mr. Demetriou in connection with the loan. Terms of the loan included interest to be accrued at a rate of 15% per year in arrears with principal and interest due and payable on January 1, 2009. The loan was guaranteed by Rex Carr, a Director of IFT and the holder of over 5% percent of our common stock. All IFT obligations related to this note were extinguished effective March 31, 2008 with the issuance of 1,040,000 restricted common shares of IFT stock to Mr. Demetriou.
 
 The shares issued were valued at $400,000 (based on a $0.40/share previous day closing price) and extinguished the $500,000 of principal balance and $23,836 of accrued interest.  The difference was deemed a contribution from Mr. Demetriou representing the excess of the aggregate liabilities over the fair value of the shares.
  During the second quarter of 2008, IFT purchased 520,000 shares of its common stock from Mr. Demetriou for $250,000. We 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 date of purchase), the difference was recorded to additional paid-in capital as Mr. Demetriou was considered a holder of economic interest in IFT in accordance with ASC 718-10. During the first quarter of 2009, IFT repurchased the remaining 520,000 shares granted for the debt settlement for $250,000.  In conjunction with these transactions, IFT reimbursed Mr. Demetriou $56,000 in 2009 for accumulated loan and bank fees.





Note 7 - 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 common stock.  We repurchased these shares from Mr. Carr during 2009, bringing the total available under this commitment back up to $1,000,000 as of September 30, 2010.  During 2009, we recognized $54,400 of non-cash stock-based compensation expense associated with this treasury stock repurchase, representing the excess of the payment over the fair value of the shares.





Note 8 – 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 VOS. Pursuant to the MOU, VOS paid for the purchase of 600 metric tons of DiesoLiFTTM 10 at a price of 6,000 Euros (approximately $7,600) per metric ton from IFT. We received cash proceeds of approximately $3 million from VOS in February 2009, net of the related selling expenses, for this purchase order and expect a net cash margin of approximately $1.5 million if 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 have been recorded and we have had no communication with VOS in over thirteen months and believe they have ceased all activities on behalf of IFT.





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Note 9 - 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.





Note 10 – Income Taxes





We file income tax returns in various federal, state and local jurisdictions.  At September 30, 2010, and December 31, 2009, we had potential federal and state income tax benefits from net operating loss carry-forwards, which expire in various years through 2029.





A valuation allowance must be established for a deferred income tax asset if it is more likely than not that a tax benefit may not be realized from the asset in the future.  We have established a valuation allowance to the extent of our deferred income tax asset since it is not yet certain that absorption of the asset through future earnings will occur.  In 2009, we recognized that the goodwill basis difference has an indefinite life and therefore should not have been treated as an offset when establishing our valuation allowance.  Accordingly, at the end of 2009, we recorded a $465,000 increase of our valuation allowance and a corresponding non-cash deferred income tax expense which increases approximately $16,000 each quarter.  The impact of this revised accounting was not material to any prior periods.





No uncertain tax positions have been identified through September 30, 2010.  If we did identify any uncertain tax positions, any accrued interest related to unrecognized tax expenses and penalties would be recorded in income tax expense.





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”) 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, 2009 (the “2009 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 2009 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.





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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.





We believe the macro economic environment for our technology and products is excellent now and will continue to be so for the foreseeable future.  We believe ever-increasing fuel environmental regulations will likely result in increased demand for additive products to help offset adverse fuel performance and engine impacts resulting from these regulations.  Our products and technology are uniquely positioned to benefit from this macro environment by offering fuel performance enhancement solutions that specifically address these macro developments and trends.





To date, our commercialization efforts have focused primarily on two proprietary products: DiesoLiFTTM10 and the DiesoLiFTTMBD-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 DiesoLiFTTM 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 DiesoLiFTTM10 and the DiesoLiFTTMBD-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, DiesoLiFTTM10 has been tested at the following independent test laboratories and has consistently demonstrated the ability to increase fuel economy, on average by 5%:





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


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


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


·
In South Africa: Gerotek Test Facilities; and


·
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:





·
In Belgium:  BfB Laboratories; and


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





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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 DiesoLiFTTM BD-series 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 the DiesoLiFTTM 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), Caldic (U.K.), Nordmann Rassmann (Germany), Tide Water Oil Co. (India) (“Tide Water”) and Nulon India (India).





In summary, IFT has clearly demonstrated that it has two of the top performing fuel additive formulations in the world today, DiesoLiFTTM 10 and the DiesoLiFTTM BD-series. 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 that are generating revenues for IFT.





Recent Developments





U.K. Railroads:During the first half of 2010, IFT completed over four years of rail engine testing at mi Technology in the U.K. and then completed a large in-service field demonstration with East Midlands Trains, a U.K.-based passenger rail operator and subsidiary of Stagecoach Group.  Due to positive test results and a 4.4% improvement in fuel economy in the field demonstration, East Midlands Trains issued IFT a purchase order for DiesoLiFTTM 10 and is using the product in its entire fleet (89 units) of light rail engines.





We are in discussions with a number of additional U.K.-based and European-based rail operators regarding our progress with East Midlands Trains and expect many of them to begin using DiesoLiFTTM 10 in the first half of 2011.





Tide Water:  During the second quarter of 2010, Tide Water received a third delivery of DiesoLiFTTM 10. Tide Water repackages and resells the product to its customers in India. We expect Tide Water to continue to be a successful distribution partner and take consistent deliveries of DiesoLiFTTM10.





Grocery Store Chain:  A regional U.S.-based grocery chain operating a fleet of 100 distribution trucks recently completed their 44th consecutive month of using DiesoLiFTTM 10 in their entire fleet. This company has stated that use of DiesoLiFTTM 10 continues to provide significant savings on fuel costs, and in addition, since switching to ultra low sulfur diesel, significant annual savings on fuel injector costs.





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Swire Beverages:  During the first three quarters of 2010, Swire Beverages, a major Coca-Cola franchisee, has purchased DiesoLiFTTM 10 for use in selected distribution outlets in China. IFT expects additional distribution outlets in China to purchase DiesoLiFTTM 10, and expects the use of DiesoLiFTTM 10 in each distribution outlet to increase significantly in the future.





Results of Operations


Three and Nine Months Ended September 30, 2010 Compared to the Three and Nine Months Ended September 30, 2009
 
 Revenues
 
 Net revenue for the three months ended September 30, 2010 was $5,301, as compared to $14,317 for the three-month period ended September 30, 2009.  This decrease is primarily due to timing of recurring sales to end-user customers.
 
 Sales revenue for the three months ended September 30, 2010 and 2009, respectively, was primarily due to sales to end-user customers.  Sales revenue generated during the three months ended September 30, 2010 and 2009, respectively, was primarily generated from the sale of DiesoLiFTTM10.
 
 Net revenue for the nine months ended September 30, 2010 was $229,392, as compared to $105,386 for the nine-month period ended September 30, 2009. Sales revenue in the first nine months of 2010 and 2009, respectively, was due to sales to distribution partners and end-user customers. Sales revenue generated during the first nine months of 2010 and 2009 was primarily generated from the sale of DiesoLiFTTM 10 and DiesoLiFTTMBD-3.
 
 Operating Expenses
 
 Total operating expense was $577,745 for the three months ended September 30, 2010, as compared to $2,293,114 for the three-month period ended September 30, 2009.  This $1,715,369 decrease from the prior period was primarily attributable to decreases in non-cash stock-based compensation expense and legal fees.  These decreases were partially offset by an increase in investor relations expense.  These fluctuations are more fully described below.
 
 Total operating expense was $1,896,477 for the nine months ended September 30, 2010, as compared to $4,414,822 for the nine-month period ended September 30, 2009. This $2,518,345 decrease from the prior period was primarily attributable to decreases in non-cash stock-based compensation expense, legal fees and bank charges, partially offset by an increase in cost of operations (exclusive of depreciation) due to increased sales revenues. These fluctuations are more fully described below.
 
 Cost of Operations (exclusive of depreciation)
 
 Cost of operations (exclusive of depreciation) was $2,451 for the three months ended September 30, 2010, as compared to $7,023 for the three-month period ended September 30, 2009. This decrease was due to decreased sales for the three months ended September 30, 2010, compared to the three months ended September 30, 2009.
 
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  Cost of operations (exclusive of depreciation) was $85,775 for the nine months ended September 30, 2010, as compared to $28,976 for the nine-month period ended September 30, 2009. This increase was due to increased sales in the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009.
 
 Our gross margin percentages for the three and nine months ended September 30, 2010 versus the three and nine months ended September 30, 2009 were favorably impacted by favorable re-purchases of existing DiesoLiFTTM 10 from a former distributor in the second quarter of 2010 and the first quarter of 2009.
 
 Selling, General and Administrative Expense
 
 Selling, general and administrative expense for the three months ended September 30, 2010 was $574,146 (including non-cash stock-based compensation of $6,443), as compared to $2,284,943 (including non-cash stock-based compensation of $1,729,195) for the three-month period ended September 30, 2009. This decrease of $1,710,797 was primarily attributable to the following activities:
 
 ·
a decrease in non-cash stock-based compensation expense ($1,722,752) primarily due to the third quarter of 2009 modification of terms to options previously granted and vested and the corresponding immediate expense recognition (approximately $1,581,000) and second quarter of 2009 option grants to employees and Directors that had no further expense recognition upon their June 30, 2010 vesting (approximately $81,000 of expense recorded during the third quarter of 2009);
 ·
a decrease in legal expense ($47,885) primarily due to litigation with a former distributor that began late during the third quarter of 2008 being settled during 2010 and with most of the fees charged during 2010 through the settlement date being covered by our insurance carrier; and
 ·
an increase in investor relations expense ($33,095) primarily due to an increased emphasis in investor relations activities during the third quarter of 2010.
 
 Selling, general and administrative expense for the nine months ended September 30, 2010 was $1,807,256 (including non-cash stock-based compensation of $220,370), as compared to $4,381,932 (including non-cash stock-based compensation of $2,556,440) for the nine-month period ended September 30, 2009. This decrease of $2,574,676 was primarily attributable to the following activities:
 
 ·
a decrease in non-cash stock-based compensation expense ($2,336,070) primarily related to the immediate vesting and expense recognition associated with a third quarter of 2009 modification of terms to options previously granted (approximately $1,581,000), with certain employee (approximately $49,000) and non-employee (approximately $418,000) options granted in the nine months ended September 30, 2009 and treasury stock repurchases ($180,400) occurring during the nine months ended September 30, 2009;
 ·
a decrease in legal expense ($181,193) primarily due to litigation with a former distributor that began late during the third quarter of 2008 being settled during 2010 and with most of the fees charged during 2010 through the settlement date being covered by our insurance carrier; and
 ·
a decrease in bank fees ($54,847) primarily related to the first quarter 2009 prepaid cash receipt of a sales order from Vision Oil Services Ltd. (“VOS”).
 
 Depreciation Expense
 
 Depreciation expense was $1,148 for both the three months ended September 30, 2010 and September 30, 2009, respectively.
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  Depreciation expense was $3,446 and $3,914 for the nine months ended September 30, 2010 and September 30, 2009, respectively. This decrease was primarily attributable to certain property and equipment becoming fully depreciated in the first quarter of 2009.
 
 Interest Income
 
 Interest income was $952 and $8,513 for the three months ended September 30, 2010 and September 30, 2009, respectively.
 
 Interest income for the nine months ended September 30, 2010 was $9,513, as compared to $12,673 for the nine-month period ended September 30, 2009. The decrease in interest income is primarily attributable to first quarter 2009 equity raise activities and cash received from VOS related to a prepaid sales order forthe sale of 600 metric tons of DiesoLiFTTM 10 being fully invested in securities late in the second quarter of 2009 and the investment balance gradually diminishing to fund ongoing operations.
 
 Provision for Income Taxes
 
 We have operated at a net loss since inception and have not recorded or paid any income taxes, other than for non-cash deferred tax expense related to a basis difference between financial reporting and tax reporting goodwill.  We have significant net operating loss carry-forwards that would be recognized at such time as we demonstrate the ability to operate on a profitable basis for an extended period of time. The deferred income tax asset resulting primarily from the net operating loss carry-forwards has been fully reserved with a valuation allowance.Because goodwill has an indefinite life, the book to tax basis difference is not offset against the deferred tax assets when establishing our valuation allowance. Accordingly, the deferred tax liability related to goodwill is recorded to non-cash deferred income tax expense which increases approximately $16,000 each quarter.
 
 Net Loss
 
 Net loss for the three months ended September 30, 2010 was $587,826, as compared to $2,270,284 for the three months ended September 30, 2009.  The decrease in net loss was primarily due to decreases in non-cash stock-based compensation expense and legal fees and an increase in investor relations expense as described above.  The basic and diluted net loss per common share for the three months ended September 30, 2010 and 2009 was $(0.01) and $(0.02), respectively.
 
 Net loss for the nine months ended September 30, 2010 was $1,706,572, as compared to $4,296,763 for the nine months ended September 30, 2009. The decrease in net loss was primarily due to decreases in non-cash stock-based compensation expense, legal fees and bank charges as described above. The basic and diluted net loss per common share for the nine months ended September 30, 2010 and 2009 was $(0.02) and $(0.04), respectively.
  New Accounting Pronouncements





New Accounting Pronouncements Adopted





ASC 820—In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures About Fair Value Measurements.” This guidance amends Subtopic 820-10 to require new disclosures and clarify existing disclosures. This guidance requires new disclosures of amounts and reasons for significant transfers between Level 1 and Level 2 fair value measurements. Additionally, in the reconciliation for fair value measurements using significant unobservable inputs (Level 3), separate presentation of information about purchases, sales, issuances and settlements is required. The guidance clarifies that fair value measurement disclosures for each class of assets and liabilities may constitute a subset of assets and liabilities within a line item on a reporting entity’s balance sheet. The guidance also clarifies disclosure requirements about inputs and valuation techniques for both recurring and nonrecurring fair value measurements (Level 2 or Level 3). The ASU also amends guidance on employers’ disclosures about post-retirement benefit plan assets under ASC 715 to require that disclosures be provided by classes of assets instead of by major categories of assets. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity for Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, including interim periods within those fiscal years. The adoption of this guidance did not have a material effect on our financial position, results of operations or cash flows.


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Recently Issued Accounting Pronouncements





ASC 605-25 - In October 2009, the FASB issued ASU No. 2009-13 for updated revenue recognition guidance under the provisions of ASC 605-25, “Multiple-Element Arrangements.” The previous guidance has been retained for criteria to determine when delivered items in a multiple-deliverable arrangement should be considered separate units of accounting. However, the updated guidance removes the 48 previous separation criteria that objective and reliable evidence of fair value of any undelivered items must exist for the delivered items to be considered a separate unit or separate units of accounting. This guidance is effective for fiscal years beginning on or after June 15, 2010. We do not expect that the adoption of this guidance will have a material effect on our financial position, results of operations or cash flows.


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.





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.




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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, 2010.  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, 2010, our deferred income tax assets consisted principally of net operating loss carry-forwards, and have been fully offset with a valuation allowance because it is more likely than not that a tax benefit will not be realized from the assets in the future.
 
 Liquidity and Capital Resources
 
 A critical component of our operating plan affecting our ability to execute the product commercialization process is the cash resources needed to pursue our marketing and sales objectives.  Until we are able to generate positive and sustainable operating cash flow, our ability to attract additional capital resources in the future will be critical to continue the funding of our operations.
 
 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 if the order is filled), projected sales for 2010 and the first quarter of 2011 and a remaining equity commitment of $1,000,000 (entered into with a related party Board member of IFT and significant shareholder during 2008), we have adequate cash and cash equivalents balances and commitments to fund operations through at least the first quarter of 2011.  However, if we are unable to meet our projections and generate positive and sustainable operating cash flows by this time, we may need to raise additional capital to fund our future operations.  Our current cash and cash equivalents balance plus our remaining committed funding of $1,000,000 is not sufficient to support the remaining 2010 operations if we manufacture inventory to fulfill the requirements of a 2009 prepaid sales order with VOS.
 
 Cash used in operating activities was $(1,614,179) for the nine months ended September 30, 2010, compared to cash provided by operating activities of $1,371,187 for the nine months ended September 30, 2009.The decrease in cash flow from operating activities was due primarily to cash received from a prepaid sales order from VOS during the first quarter of 2009.  IFT would need to expend approximately $1,500,000 to manufacture inventory required to fulfill this sales order. We have had no communication with VOS in over thirteen months and believe they have ceased all activities on behalf of IFT.
 
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 Cash provided by investing activities was $1,000,000 for the nine months ended September 30, 2010, compared to cash used in investing activities of $1,000,000 for the nine months ended September 30, 2009.  During the second quarter of 2009, we invested $3,200,000 ($3,000,000 of which had maturities greater than 90 days) of the proceeds received from earlier 2009 equity raise activities into a certificate of deposit program that is insured 100% by the Federal Deposit Insurance Corporation.  During the nine months ended September 30, 2010, we redeemed $1,450,000 of investments upon maturities. At September 30, 2010, $750,000 of certificates of deposit with maturities less than 90 days are classified on our balance sheet in cash and cash equivalents.
 
 Cash provided by financing activities was $0 and $1,712,500, respectively, for the nine months ended September 30, 2010 and 2009.  The decrease in financing cash flow was due to first quarter 2009 equity raise activities that raised $2,162,500 upon the private placement of 8,650,000 restricted shares of our common stock to accredited investors.  During the nine months ended September 30, 2009, we also had treasury stock acquisitions of $450,000 related to the repurchases of shares previously owned by IFT Directors.
 
 Net cash (decreased) increased by $(614,179) and $2,083,687 for the nine months ended September 30, 2010 and 2009, respectively.
 
 During the nine months ended September 30, 2010 and September 30, 2009, we did not make significant investments in property and equipment and do not anticipate doing so in the immediate future.
 
 Working capital at September 30, 2010 was $(1,924,396), as compared to $(490,640) at December 31, 2009.  This decrease was primarily attributable to funding cash operating expenses for 2010.
 
 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, 2010.  Based on this evaluation, the principal executive officer and principal financial officer have identified a material weakness in our internal control over financial reporting.  Therefore, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective at September 30, 2010.
 
 Management’s Report on Internal Control Over Financial Reporting
 Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and Rule 15d-15(f) promulgated under the Exchange Act.  Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of September 30, 2010, based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on our evaluation under the framework in Internal Control-Integrated Framework, we have identified a material weakness in our internal control over financial reporting.  As a result, our management has concluded that our internal control over financial reporting was not effective as of September 30, 2010.
 
 A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.




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During our 2009, 2008 and 2007 review of internal controls, management identified the following material weakness:  IFT has limited accounting personnel with sufficient expertise, accounting knowledge and training in generally accepted accounting principles and financial reporting requirements.  Specifically, IFT lacks sufficient personnel to anticipate, identify, resolve and review complex accounting issues and to complete a timely review of the financial statements.  This material weakness has not been corrected during the first three quarters of 2010.
 
 This deficiency resulted in adjustments to the financial statements for non-cash stock-based compensation and also resulted in adjustments to financial statement presentation in both 2008 and 2009.  This control deficiency, which is pervasive in impact, did result in material adjustments to the financial statements.  There is a reasonable possibility that a material misstatement of the annual or interim financial statements would not be prevented or detected on a timely basis.
 
 Management does consult with outside advisers, external SEC counsel and its independent registered public accounting firm regarding certain reporting issues.
 
 Management has discussed the material weakness with and proposed corrective actions to the Audit Committee and our independent registered public accounting firm.  Other than as described above, we are not aware of any other material weakness in our internal control over financial reporting.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 Plan for Remediation
 
 Some of the remediation action steps discussed in our 2009 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, 2010, 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.
 
 Changes in Internal Control Over Financial Reporting
 
 There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. However, as discussed above, we have identified a material weakness in our internal control over financial reporting.
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PART II.  OTHER INFORMATION





Item 1. Legal Proceedings





On October 2, 2008, Giant Trading, Inc., David R. Friedland, Magnum Select Fund, Ltd., Magnum Growth Fund, Brett Friedland, Lara and Andrew Block, Cherise Metz and Charles Stride (all of which are associates of Dion Friedland, a then-beneficial owner of 5% of IFT’s common stock) filed a lawsuit against us and certain of our Directors (Messrs. Burst, Carr and Demetriou) in the United States District Court, Southern District of Florida.





The lawsuit alleged federal securities fraud violations of Section 10(b) of the Securities Act and Rule 10b-5 promulgated thereunder against all defendants, and violations of Section 20(a) of the Securities Act of 1933 against the individual defendants. The plaintiffs were seeking a judgment for damages of $5 million, interest, costs, and for such other relief the Court deemed just and proper. On May 19, 2009, the Court issued an order granting our motion to transfer venue to St. Louis, Missouri. IFT filed a motion to dismiss and the plaintiffs withdrew their complaint prior to a ruling on said motion.





On August 7, 2009, Charles Stride voluntarily dismissed the complaint against all defendants. On August 10, 2009, the remaining plaintiffs filed a first amended complaint (“FAC”) against IFT, Jonathan R. Burst and Rex Carr in the United States District Court for the Eastern District of Missouri. The FAC, similar to the initial complaint, alleged that the defendants made misrepresentations and omissions in public statements regarding its fuel additive products that induced the plaintiffs to purchase IFT stock, but did not allege any federal securities laws violations. Instead, the FAC alleged eight causes of action under Missouri’s blue sky laws and state common law, and sought in excess of $5 million of compensatory damages, interest and costs. On August 31, 2009, the defendants filed a motion to dismiss the FAC for failure to meet the heightened pleading standards of Rule 9(b) of the Federal Rules of Civil Procedures. On May 4, 2010, the Court issued an order granting in part defendants' motion to dismiss.





On February 6, 2009, we filed an action against Fuel Technologies Ltd, Mega Connections, Ltd., FT Marketing Ltd, and the AAA, Cause No. 09SL-CC00550, in the Circuit Court of the County of St. Louis, Missouri. In this action, IFT sought injunctive relief requiring the defendants to litigate the claims asserted before the AAA in the Circuit Court of St. Louis County, Missouri. On or about February 17, 2009, the Court entered an order transferring these claims out of arbitration and into the Circuit Court of the County of St. Louis. The claims initially filed before the AAA, but later removed to the Circuit Court by IFT, were that IFT breached various marketing and distribution agreements by misrepresenting the state of IFT’s product development. The plaintiffs then filed an amended petition adding Jonathan R. Burst and Rex Carr as additional defendants. The parties participated in a mediation conference on May 11, 2010 but were unsuccessful in settling this action at that time.  Subsequently, IFT, Burst and Carr filed a motion to dismiss this action but the case settled prior to a ruling on this motion.





On August 13, 2010, both cases involving IFT and Dion Friedland were settled.  IFT believes both suits were frivolous in nature and had no legal merit.  For business reasons, IFT’s insurance carrier elected to avoid a potentially costly trial and settle both cases for an amount that was far below the projected expenses of litigation.  IFT did not pay any monies or contribute in any way towards the settlements. Overall, IFT’s total out of pocket expenses, including insurance deductible, associated with these two actions was more than offset by revenue generated from the sale of product returned to IFT by the Dion Friedland entities at no cost to IFT which was then resold to other IFT distributors.




22
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds





On June 22, 2010, we granted 30,000 restricted shares of our common stock to an accredited investor. The transaction was exempt from registration pursuant to Rule 506 of Regulation D promulgated under the Securities Act of 1933 (“Rule 506”). We did not receive any proceeds from the grant of these securities.


Item 5.  Other Information





(a)
None.





(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 annual report on Form 10-K for the fiscal year ended December 31, 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.


23
 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 15, 2010Jonathan R. BurstChief Executive Officer(Principal Executive Officer)







By:
/s/ Stuart D. Beath

Date:
November 15, 2010Stuart D. BeathChief Financial Officer(Principal Financial and Accounting Officer)