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 March 31, 2011ORo
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 o  No o




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 o                                                                                                      Accelerated Filer o


Non-Accelerated Filer o                                                                                                     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        o                No        x




The number of shares outstanding of registrant’s only class of stock as of May 11, 2011: Common stock, par value $0.01 per share – 101,342,284 shares outstanding.










INDEX


PAGE NO.PART I.  FINANCIAL INFORMATIONItem 1.
Financial StatementsBalance Sheets — March 31, 2011 (unaudited) and December 31, 2010
2Statements of Operations (unaudited) — Three-Month Periods Ended March 31, 2011 and March 31, 2010
3Statement of Stockholders’ Equity (Deficit) (unaudited) — Three-Month Period Ended March 31, 2011
4Statements of Cash Flows (unaudited) — Three-Month Periods Ended March 31, 2011 and March 31, 2010
5Notes to Financial Statements
6Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
10Item 4.
Controls and Procedures
18PART II.  OTHER INFORMATIONItem 1.
Legal Proceedings
19Item 5.
Other Information
19Item 6.
Exhibits
20




INTERNATIONAL FUEL TECHNOLOGY, INC.


BALANCE SHEETS




March 31,


December 31,2011


2010ASSETS

(Unaudited)Current assetsCash and cash equivalents

$
303,252


$
751,911Accounts receivable


103,999



110,464Inventory


94,450



112,430Prepaid expenses and other assets


20,267



39,399Total Current Assets


521,968



1,014,204Property and equipmentMachinery, equipment and office furniture


63,706



63,706Accumulated depreciation


(63,275
)


(62,284
)Net Property and Equipment


431



1,422Goodwill


2,211,805



2,211,805Total Assets

$
2,734,204


$
3,227,431LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)Current liabilitiesAccounts payable

$
181,660


$
183,239Accrued compensation


31,506



17,915Deferred revenue (Note 7)


2,998,242



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


190,000



190,000Total Current Liabilities


3,401,408



3,389,396Deferrred income taxes (Note 8)


546,000



530,000Total Liabilities


3,947,408



3,919,396Commitments and contingenciesStockholders’ equity (deficit) (Notes 4 and 5)

Common stock, $0.01 par value; 150,000,000 shares authorized; 101,342,284 (net of 1,440,000 shares held in treasury) shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively


1,027,823



1,027,823Treasury stock (Notes 6 and 9)


(664,600
)


(664,600
)Discount on common stock


(819,923
)


(819,923
)Additional paid-in capital


64,992,959



64,990,874Accumulated deficit


(65,749,463
)


(65,226,139
)Total Stockholders’ Equity (Deficit)


(1,213,204
)


(691,965
)Total Liabilities and Stockholders’ Equity (Deficit)

$
2,734,204


$
3,227,431
  See Notes to Financial Statements.
  2




INTERNATIONAL FUEL TECHNOLOGY, INC.
  STATEMENTS OF OPERATIONS


(Unaudited)


Three Months EndedMarch 31,


March 31,2011


2010Revenues

$
62,930


$
48,696Operating expenses:Cost of operations (exclusive of depreciation)


43,707



36,049Selling, general and administrative expense (including non-cash stock-based compensation expense) (Note 4)


525,950



650,577Depreciation


991



1,148Total operating expenses


570,648



687,774Net loss from operations


(507,718
)


(639,078
)Interest income


394



4,714Net loss before income taxes

$
(507,324
)

$
(634,364
)Income tax provision (Note 8)


16,000



16,333Net loss

$
(523,324
)

$
(650,697
)Basic and diluted net loss per common share

$
(0.01
)

$
(0.01
)Weighted-average common shares outstanding, basic and diluted


102,782,284



102,732,284


See Notes to Financial Statements.
  3


INTERNATIONAL FUEL TECHNOLOGY, INC.




STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)


FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2011


(Unaudited)


Common

Stock Shares


Common

Stock

Amount


Treasury

Stock


Discount on Common

Stock


Additional

Paid-in

Capital


Accumulated

Deficit


TotalBalance, December 31, 2010


102,782,284


$
1,027,823


$
(664,600
)

$
(819,923
)

$
64,990,874


$
(65,226,139
)

$
(691,965
)Expense relating to non-cash stock-based compensation (Note 4)


—



—



—



—



2,085



—



2,085Net loss


—



—



—



—



—



(523,324
)


(523,324
)Balance, March 31, 2011


102,782,284


$
1,027,823


$
(664,600
)

$
(819,923
)

$
64,992,959


$
(65,749,463
)

$
(1,213,204
)




See Notes to Financial Statements.




4


INTERNATIONAL FUEL TECHNOLOGY, INC.




STATEMENTS OF CASH FLOWS
 (Unaudited)


Three Months

Ended

March 31,

2011


Three Months

Ended

March 31,

2010Cash flows from operating activities:Net loss

$
(523,324
)

$
(650,697
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation


991



1,148Non-cash stock-based compensation


2,085



107,750Deferred income tax provision


16,000



16,333Change in assets and liabilities:Accounts receivable


6,465



(31,814
)Accrued interest receivable


—



(3,086
)Inventory


17,980



7,691Prepaid expenses and other assets


19,132



9,323Accounts payable


(1,579
)


68,093Accrued compensation


13,591



14,511Other accrued expenses


—



(60,000
)Net cash used in operating activities


(448,659
)


(520,748
)Cash flows from investing activities:Redemptions of certificates of deposit


—



1,000,000Net cash provided by investing activities


—



1,000,000Net (decrease) increase in cash and cash equivalents


(448,659
)


479,252Cash and cash equivalents, beginning


751,911



1,828,024Cash and cash equivalents, ending

$
303,252


$
2,307,276
  See Notes to Financial Statements.




5


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-based demonstration trials.  In addition, we are continuing to strengthen our distributor and customer contact base.  Marketing and sales efforts, in conjunction with the additional industry specific testing, will complete our transition to a commercial enterprise.




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, 2010 (the “2010 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 March 31, 2011 and March 31, 2010, 21,578,920 and 30,401,392 shares, respectively, of common stock equivalents were excluded from the computation of diluted net loss per share since their effect would be anti-dilutive.




Note 2. Ability to Continue as a Going Concern




Our financial statements are presented on the going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have incurred significant losses since inception and currently have and previously from time to time have had limited funds with which to operate. Management is in the process of executing a strategy based upon marketing technologies that offer enhanced engine performance and greater fuel economy along with pollution control benefits. We have several technologies in the commercialization phase and in development. We have received necessary regulatory and commercial acceptance for our products currently in the commercialization phase. During the first quarter of 2002, we began selling our products directly to the commercial marketplace. We expect to increase our sales to the marketplace, eventually generating a level of revenues sufficient to meet our cash flow and earnings requirements.  While we cannot make any assurances as to the accuracy of our projections of future capital needs, we believe that based on our current cash position, projected sales for 2011 and a remaining equity commitment of $1,000,000 (entered into with a related party Board member and significant shareholder of IFT during 2008), we have adequate cash and cash equivalents balances and commitments to fund operations through at least September 2011.  However, if we are unable to meet our projections and generate positive and sustainable operating cash flows by this time, we may need to raise additional capital to fund our future operations.





6





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.




Recently Issued Accounting Pronouncements




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




7


Note 4 – Stock-based Compensation




Non-cash stock-based compensation expense recorded in the three months ended March 31, 2011 and March 31, 2010 is as follows:




Three Months Ended

March 31, 2011


Three Months Ended

March 31, 2010Awards to employees/Directors

$
—


$
87,544Stock option modifications


2,085



20,206Total non-cash stock-based compensation expense

$
2,085


$
107,750




Employee and Director awards




No stock options were granted to employees during the first quarter of 2011.




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 options were granted to Directors for Director-related services in the first quarters of 2011 or 2010.




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 March 31, 2011, 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 quarters of 2011 or 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.




Other




No shares of our common stock were sold or issued to employees or non-employees for services during the first quarters of 2011 and 2010.




8




No stock options were exercised during the first quarters of 2011 or 2010.




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 March 31, 2011.




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.  The total amount available under this commitment is $1,000,000 as of March 31, 2011.




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, 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 ever manufactured and delivered. We will recognize gross revenues of approximately $4.5 million if the product is ever delivered. No such revenues have been recorded and we have had no communication with VOS in over twenty months and believe they have ceased all activities on behalf of IFT.  It is our belief that we will never deliver this product, nor will we be requested to do so.  Nonetheless, the financial statements continue to reflect this deferred revenue pending a more formal resolution or expiration of relevant statutes of limitations.




9


Note 8 – Income Taxes




We file income tax returns in various federal, state and local jurisdictions.  At March 31, 2011, and December 31, 2010, we had potential federal and state income tax benefits from net operating loss carry-forwards, which expire in various years through 2030.




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.  The basis difference created from our goodwill has an indefinite life and is not treated as an offset when establishing our valuation allowance.  As a result, we have recorded a deferred tax liability that increases by approximately $16,000 from the non-cash deferred income tax expense recorded each quarter.




No uncertain tax positions have been identified through March 31, 2011.  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.


Note 9 – Treasury Stock
 
 During 2008, we received $200,000 from Mr. Carr for the sale of common stock pursuant to an equity commitment arrangement between Mr. Carr and IFT.  We repurchased these shares from Mr. Carr during the second quarter of 2009, recognizing $54,400 of non-cash stock-based compensation expense associated with this treasury stock repurchase, representing the excess of the payment over the fair values of the shares.
 
 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.  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.
 
 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 repurchased the remaining 520,000 shares granted for the debt settlement for $250,000 and recognized $126,000 of non-cash based stock compensation expense associated with this treasury stock repurchase representing the excess of the payment over the fair value of the shares.





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, 2010 (the “2010 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 2010 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 fuel performance enhancement technology company transitioning to a commercial enterprise. We believe the macro economic environment for our technology and products is excellent now and will continue to be so for the foreseeable future.  We believe ever-increasing fuel environmental regulations will likely result in increased demand for additive products to help offset adverse fuel performance and engine impacts resulting from these regulations.  Our products and technology are uniquely positioned to benefit from this macro environment by offering fuel performance enhancement solutions that specifically address these macro developments and trends.





10





To date, our commercialization efforts have focused primarily on two proprietary products: DiesoLiFTTM10 and the PerfoLiFTBD-series. DiesoLiFTTM 10 was developed to increase fuel economy, reduce harmfulemissions 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 PerfoLiFTBD-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%:




●
mi Technology, United Kingdom;


●
Southwest Research Institute, United States;


●
Forest Engineering Research Institute of Canada – FERIC;


●
Motive Power, United States;


●
Gerotek, South Africa;


●
Prodrive Ltd, United Kingdom;


●
Technological Institute for Development - LacTec, Brazil;


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


●
MTEC, Thailand; and


●
Tsinghua University, China.




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




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




●
BfB Laboratories, Belgium;


●
National Institute of Technology – INT, Brazil; and


●
Montana State University – Northern, United States.




Both products are easy to use. Once the additive is splash blended with a base fuel, the mixture forms into and remains a stable solution. Unlike traditional fuel additives, which are derived from petroleum, DiesoLiFTTM 10 and the PerfoLiFT 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.




11


The commercial goal of IFT is the bulk sale (by the ton) of DiesoLiFTTM 10 and the PerfoLiFT 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) and Nulon India (India).




We believe IFT has two of the top performing fuel additive technologies in the world today, DiesoLiFTTM 10 and the PerfoLiFT BD-series, that target markets where consumption is massive and growing and environmental concerns and pressures to reduce harmful emissions are real. A number of end-users and distribution partners are buying our products. In addition, we believe the time consuming process of tests and trials has generated opportunities that should produce additional revenue streams in 2011.




Recent Developments




Railroads




The Association of Train Operating Companies in the United Kingdom. (“ATOC”) and the Rail Safety and Standards Board (“RSSB”) under the independent management of world-renowned railroad consultant Interfleet Technology (“Interfleet”) has been evaluating IFT’s DiesoLiFTTM 10 fuel additive since 2005.  Four rounds of extensive laboratory testing, using strict industry protocol, clearly demonstrated that use of DiesoLiFTTM 10 not only improves fuel economy but also, and as important, has a measured effect improving engine performance and reducing carbon particulates.  In two of the laboratory tests, improvements in fuel economy of 6.9% and 5.9% were achieved. In three of the laboratory tests, a power increase ranging from 2%-3.5% was achieved.




Subsequently, a number of field-based demonstration trials with ATOC members have demonstrated that use of DiesoLiFTTM 10 significantly improves fuel economy.  As part of the ATOC field evaluation, one ATOC member ran two extensive field-based demonstrations utilizing its entire fleet of light rail engines (approximately 90 units).  In both cases, use of DiesoLiFTTM 10 demonstrated an approximate 4% improvement in fuel economy.




Commercial discussions with numerous ATOC members have been ongoing and one operator has already placed an order for DiesoLiFTTM 10.  We expect numerous other ATOC members to place orders and begin using DiesoLiFTTM 10 throughout 2011.




In addition, due to our progress and success with ATOC, we are in discussions with numerous European rail operators and expect to begin formal field-based demonstrations with these operators throughout 2011.  We are also in the evaluation process with one of the largest rail operators in Brazil.




12


Distribution Partners




●
Multisol: We signed a manufacturing, marketing and distribution agreement with Multisol in July 2008 providing Multisol with distribution rights to market and sell IFT’s products in France, Spain, Portugal and Belgium. Multisol is selling our additive formulations to numerous accounts, including prominent fuel additive companies who are re-packaging the formulations for resale into retail markets.


●
Nordmann Rassmann (“Nordmann”): We signed a marketing and distribution agreement with Nordmann in August 2008 providing Nordmann with the right to market and sell IFT’s products in Germany, Austria, Switzerland, Sweden, Norway, Finland, Denmark, Poland, The Czech Republic, Slovakia, Slovenia, Hungary, Serbia, Romania and Bulgaria. Nordmann has introduced our products to numerous customers and made sales of the PerfoLiFT BD-series during the first quarter of 2011 and during 2010.


●
Caldic U.K. (“Caldic”): We signed a marketing and distribution agreement with Caldic in May 2008 providing Caldic with distribution rights to IFT’s products in the United Kingdom. Caldic has introduced our products to numerous end-user customers and is in the process of running field-based demonstration trials with selected end-users.


●
Tide Water Oil Co. India Ltd (“Tidewater”): Headquartered in India, Tidewater is a prominent manufacturer and distributor of additives and lubricants to the automotive and industrial markets.  Tidewater purchases and then re-packages DiesoLiFTTM 10 for sale into these targeted markets in India: power generation set users; tractor operators; the agricultural industry; and retail distribution markets. Tidewater made several purchases of DiesoLiFTTM 10 in 2010.


●
Nulon India (“Nulon”): We signed a marketing and distribution with Nulon in March 2007 providing Nulon with the right to market and sell IFT’s products in India. Nulon has conducted numerous field-based demonstration trials with DiesoLiFTTM 10, realizing positive results.  Nulon had limited success selling our products in 2010 but expects volumes to increase in 2011.




PerfoLiFT BD-series




Extensive research, development, product validation testing and “no harm” testing has been completed. The PerfoLiFT BD-series has clearly demonstrated that it is a top performing technology in the market.  The product was certified in Europe by AGQM, the German Agency for Quality of Bio-diesel, as one of the few authorized antioxidants to be used in bio-diesel after production. The product has already been approved for use by a number of bio-diesel producers around the world. IFT distribution partners have begun to market and sell the product in their respective territories.




In Europe, the worldwide economic downturn has negatively impacted the increase in production and end-user demand for bio-diesel, and therefore, the demand for new age antioxidant products like PerfoLiFT BD-series.  We believe the proliferation of bio-diesel in Europe will continue to progress during 2011and, through our distribution partner network, most notably Nordmann, we are well-positioned to capitalize on current demand and the anticipated increase in demand.




United States Progress




Multiple fleets with over the road tractors and fleets of heavy-duty equipment have been purchasing and using DiesoLiFTTM 10 for many years. For example, a large regional supermarket chain has been using DiesoLiFTTM 10 in their entire fleet of road tractor-trailers for over four years and a regional construction and aggregate company has been using DiesoLiFTTM 10 in their fleet of heavy-duty off road equipment for approximately two years.




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Other Opportunities




Efforts to improve the performance of IFT fuel additive formulations are ongoing. IFT has partnered with prominent independent test laboratories, chemical companies, fuel additive distribution companies and oil companies to further the development of and enhance the performance of its products on a stand-alone basis, or as part of a fuel additive package.




Results of Operations




Three Months Ended March 31, 2011 Compared to the Three Months Ended March 31, 2010




Revenues




Net revenue for the three months ended March 31, 2011 was $62,930, as compared to $48,696 for the three-month period ended March 31, 2010.  This increase is primarily due to sales to new customers subsequent to the first quarter of 2010.




Sales revenue for the three months ended March 31, 2011 and March 31, 2010, respectively, was reasonably split between sales to distributors and to end-user customers.  Sales revenue generated during the three months ended March 31, 2011 and March 31, 2010, respectively, was generated from the sale of DiesoLiFTTM10 and the PerfoLiFT BD-series product.




Operating Expenses




Total operating expense was $570,648 for the three months ended March 31, 2011, as compared to $687,774 for the three-month period ended March 31, 2010.  This $117,126 decrease from the prior period was primarily attributable to a decrease in non-cash stock-based compensation expense, which is more fully described below.




Cost of Operations (exclusive of depreciation)




Cost of operations (exclusive of depreciation) was $43,707 for the three months ended March 31, 2011, as compared to $36,049 for the three-month period ended March 31, 2010. This increase was due to increased sales for the three months ended March 31, 2011, compared to the three months ended March 31, 2010.




Selling, General and Administrative Expense




Selling, general and administrative expense for the three months ended March 31, 2011 was $525,950 (including non-cash stock-based compensation of $2,085), as compared to $650,577 (including non-cash stock-based compensation of $107,750) for the three-month period ended March 31, 2010. This decrease of $124,627 was primarily attributable to the following activities:




●
a decrease in non-cash stock-based compensation expense ($105,665) primarily due to certain option grants made to employees during 2009 that had no further expense recognition upon their June 30, 2010 vesting (approximately $81,000 of expense recorded during the first quarter of 2010) and decreased expense recognition during the first quarter of 2011 compared to the first quarter of 2010 related to first quarter 2010 modifications to certain options previously granted (approximate $18,000 decrease); and


●
a decrease in accounting fees ($23,927) primarily due to a negotiated fee reduction for our 2010 annual audit services.




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Depreciation Expense




Depreciation expense was $991 and $1,148 for the three months ended March 31, 2011 and March 31, 2010, respectively.




Interest Income




Interest income was $394 and $4,714 for the three months ended March 31, 2011 and March 31, 2010, respectively.  The decrease in interest income is primarily attributable to a reduction in invested cash and cash equivalents as cash as been used to fund ongoing operations.




Provision for Income Taxes




We have operated at a net loss since inception and have not recorded or paid any income taxes, other than for non-cash deferred tax expense related to a basis difference between financial reporting and tax reporting 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 March 31, 2011 was $523,324, as compared to $650,697 for the three months ended March 31, 2010.  The decrease in net loss was primarily due to decreases in non-cash stock-based compensation expense and accounting fees, as described above.  The basic and diluted net loss per common share was $(0.01) for the three months ended March 31, 2011 and March 31, 2010, 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




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




Critical Accounting Policies and Estimates




Preparation of our financial statements and related disclosures in compliance with 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.




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 March 31, 2011.  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 March 31, 2011, 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.





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Liquidity and Capital Resources




A critical component of our operating plan affecting our ability to execute the product commercialization process is the cash resources needed to pursue our marketing and sales objectives.  Until we are able to generate positive and sustainable operating cash flow, our ability to attract additional capital resources in the future will be critical to continue the funding of our operations.




In its March 31, 2011 report, our independent registered public accounting firm expressed substantial doubt about our ability to continue as a going concern.  Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.




While we cannot make any assurances as to the accuracy of our projections of future capital needs, we believe that, based on our current cash position, projected sales during 2011 and a remaining equity commitment of $1,000,000 (entered into with a related party Board member and significant shareholder of IFT during 2008), we have adequate cash and cash equivalents balances and commitments to fund operations through at least September 2011.  However, if we are unable to meet our projections and generate positive and sustainable operating cash flows by this time, we may need to raise additional capital to fund our future operations.  Our current cash and cash equivalents balance plus our remaining committed funding of $1,000,000 is not sufficient to support the remaining 2011 operations if we manufacture inventory to fulfill the requirements of a 2009 prepaid sales order with Vision Oil Services Ltd (“VOS”).  IFT would need to expend approximately $1,500,000 to manufacture inventory required to fulfill this sales order. However we have had no communication with VOS in over twenty months and believe they have ceased all activities on behalf of IFT.  It is our belief that we will never deliver this product, nor will we be requested to do so.  Nonetheless, the financial statements continue to reflect this deferred revenue pending a more formal resolution or expiration of relevant statutes of limitations.




Cash used in operating activities was $(448,659) for the three months ended March 31, 2011, compared to cash used in operating activities of $(520,748) for the three months ended March 31, 2010. The decrease in cash used in operating activities was due primarily to no Blencathia Acquisition Corporation (“Blencathia”) accrued liability payments made during the first quarter of 2011, compared to $60,000 of payments made during the first quarter of 2010.




Cash provided by investing activities was $0 for the three months ended March 31, 2011, compared to cash provided by investing activities of $1,000,000 for the three months ended March 31, 2010.  During the second quarter of 2009, we invested $3,200,000 ($3,000,000 of which had maturities greater than 90 days) of the proceeds received from earlier 2009 equity raise activities into a certificate of deposit program that was insured 100% by the Federal Deposit Insurance Corporation.  During the three months ended March 31, 2010, we redeemed $1,000,000 of investments upon maturities. These investing activities have been subsequently liquidated to fund ongoing operations.




Net cash (decreased) increased by $(448,659) and $479,252 for the three months ended March 31, 2011 and March 31, 2010, respectively.




During the three months ended March 31, 2011 and March 31, 2010, we did not make significant investments in property and equipment and do not anticipate doing so in the immediate future.




Our working capital deficiency at March 31, 2011 was $(2,879,440), as compared to $(2,375,192) at December 31, 2010.  This decrease was primarily attributable to funding cash operating expenses for the first quarter of 2011.




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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(the “Exchange Act”)) as of March 31, 2011.  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 March 31, 2011.




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 March 31, 2011, 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 March 31, 2011.




A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.





During our 2009 and 2008 reviews of internal controls, management identified the following material weakness:  IFT has limited accounting personnel with sufficient expertise, accounting knowledge and training in GAAP and financial reporting requirements.  Specifically, IFT lacks sufficient personnel to anticipate, identify, resolve and review complex accounting issues and to complete a timely review of the financial statements.  This material weakness was not corrected during the quarter ended March 31, 2011.




This control deficiency resulted in recorded material adjustments to the financial statements for non-cash stock-based compensation and also resulted in adjustments to financial statement presentation in both 2008 and 2009.  There is a reasonable possibility that a material misstatement of the annual or interim financial statements would not be prevented or detected on a timely basis.




Management does consult with outside advisers, external SEC counsel and its independent registered public accounting firm regarding certain reporting issues.




Management has discussed the material weakness and related corrective actions with the Audit Committee and our independent registered public accounting firm.  Other than as described above, we are not aware of any other material weakness in our internal control over financial reporting.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.




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The Remediation Plan




Some of the remediation action steps discussed in our 2010 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 March 31, 2011, 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 March 31, 2011, 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.




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.




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, considering we have recorded a liability for the shortfall amount, will have an additional adverse material effect on IFT.  Since 2009, IFT has made payments to TPG totaling $160,000 to reduce the recorded liability.




Item 5.  Other Information




(a)
None.




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(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, 2010.




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.


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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: May 16, 2011Jonathan R. BurstChief Executive Officer(Principal Executive Officer)By:
/s/ Stuart D. Beath

Date: May 16, 2011Stuart D. BeathChief Financial Officer(Principal Financial and Accounting Officer)




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