Item 1. BUSINESS
INTRODUCTION
The Company is an environmental technology company engaged in the design, assembly, marketing, sale and leasing of its patented, proprietary IFT System designed to reduce harmful airborne emissions from and increase fuel efficiency of heating and power generation systems. The Company currently markets the System to various industries in the U.K. and Europe.
The IFT System, which is attached to a customer's heating or power generation equipment, produces negatively charged ions ("Ions") by passing an air flow over a body of vibrating liquid and into the combustion chamber or air intake of the customer's machinery. The ionized air supply accelerates the normal combustion process. As a result of the improved combustion, the amount of air and fuel supplied to the burner can be reduced while still maintaining a constant measure of power output. This reduction of air and fuel decreases fuel consumption as well as the production of NOX CO and CO2 and when burning fuel oil, fireside coking and particulate emissions are also reduced.
THE SYSTEM
The IFT System is self contained in a cube-shaped metal cabinet. The System's interior mechanism vibrates the surface of a liquid contained inside the cabinet. The vibrating liquid releases negatively charged Ions that are then delivered to the customer's equipment through a connection placed either adjacent to the boiler's combustion chamber or to the boiler's air intake mechanism.
The System is available in eight sizes ranging from 15" x 12" x 16" to 43" x 3 1-5" x 35". Such sizes are suitable for boilers generating from approximately 1,000 lbs. of steam per hour to approximately 96,000 lbs. of steam per hour. Multiple Systems are used when either the boiler has more than one burner or the boiler's power generating capacity exceeds the capacity of the largest IFT System. The System generally requires only a routine servicing every six months and may be leased or purchased.
Typical performance results of the System reveal a reduction in NOx. emissions ranging from 6% to 60%, a reduction in CO emissions ranging from 6% to 80%, a reduction in CO2 emissions ranging from 2 1/2% to 7%, a reduction in particulate emissions ranging from 6%
to 40% and a reduction in fuel consumption ranging from 2 1/2% to 7%. The exact performance of the System depends upon the customer's existing equipment and desired objectives; customers may achieve less favorable results or no improvement if their equipment requires repair or if fuel and air flows cannot be closely controlled. If NOx and CO emissions have been reduced by the use of other equipment, the System may be used to reduce CO2 emissions and fuel consumption. CO2 emission reduction correlates directly with the fuel savings which the IFT System provides.
MARKETING AND SALES
Performance Trials
The Company initially sought to performance test its System in locations where a sales or lease contract could result. It also has performance tested the System in certain locations solely to develop performance test data. The Company has now phased out uncompensated performance testing because the Company's data from its numerous sites supports the claims regarding the benefits offered by the IFT System. The Company has now developed new application software enabling on site performance to be evaluated in real time to show the immediate improvements to the customer resulting in reducing the lead time between performance trials and customer acceptance of the System.
The performance trial results obtained at a customer's location enable the Company to use such results to confirm the price of the IFT System to such customer. In setting the price, the Company considers the potential fuel savings and emissions reduction to be realized by that customer from use of the System, thereby enabling a customer to offset the cost of the System.
The Company has also participated in a laboratory test conducted by The Building Services Research and Information Association ("BSRIA"), an independent U.K. organization. The BSRIA test was instigated and primarily funded by the British government to generate data on the emissions of various power generation systems and ancillary equipment. BSRIA rendered a favorable report on the IFT System and such report was disseminated to BSRIA's members.
Tests were conducted at the Lownebrau brewery by the German test authority TUV and showed that with IFT System the boiler was able to operate with less combustion air thereby improving the thermal effidency. A review on ionisation processes conducted by Portsmouth University sponsored by the Energy Technical Support
Unit, ETSU, reported that fuel savings could be achieved by use of the IFT technology.
Marketing
The Company currently markets the IFT System to (a) large scale commercial power plant and industrial manufacturers such as breweries, oil refiners, textile plants, chemical plants and paper mills and (b) commercial industrial heat processors including municipal authorities and universities.
The Company had found that its technology was often not readily understood by power plant managers who therefore hesitated to test the IFT System. The Company devised a four step approach to educate the power generation community about its technology. First, it employed people experienced in boiler and burner applications to market the System. Second, the Company has marketed the System to large multiple plant users, with emphasis on well known international companies, so that such companies may be used as references for other potential customers and also that such customers will consider using the IFT System in their other plants. Third, the Company utilizes the services of a recognized authority in flame chemistry to specifically explain the scientific principles behind the System. Fourth the Company has introduced a reporting system using sophisticated statistical modeling to present the test results to potential customers in a succinct, concise manner. This reporting system computerizes data derived from testing flue gases, monitors fuel to steam performance and then presents in graphic form the benefits offered by the IFT System to the customer.
Sales and Rentals
The Company has adopted two approaches to its sales efforts. First, it sells directly to industrial users with its own employees in the UK and Belgium supplemented by the use of independent sales agents. Secondly the Company sells the System through dealers who are assigned a specific territory and compensated on a commission basis. This marketing method is generally used in Europe.
More recently the company has been working with energy management companies who undertake to operate a customer's power or boiler plant, the benefit to these companies is to reduce their operating costs by reducing their fuel bills. Generally these organizations prefer to rent the IFT System, as their payback is immediate.
The Company will rent or sell the System. In the general industrial market customers prefer to rent, in the oil and petrochemical industry the preference is to purchase.
Warranty and Service
The Company provides a one year warranty on parts and labor to purchasers of the System and thereafter servicing under a service contract. Lessees of the system receive service without additional charge within the terms of the rental agreement.
Assembly and Suppliers
The IFT System is assembled in the U.K. at the Company's facility in Laindon, Essex under strict quality control procedures. Although there have been no sourcing problems, the Company has a policy of dual sourcing where this is deemed advantageous for cost and continuity of supply. Single sourcing is currently confined to vibrators and air pumps that are widely produced for use in other industries and therefore readily available.
Research and Development
The Company's research and development efforts are a continuing process and are focused primarily on refining the vibration technology that forms the basis of the IFT System. To that end, the Company has studied such areas as the interaction of the charged particles and the combustion process, the delivery of the charged particles to the combustion chamber, the optimum volume of the charge, the optimum ratio of air to liquid surface and the impact of pressure and temperature on delivery of the charge. The Company's efforts resulted in an enhancement to the patented vibration technology for which a European patent application was filed in January 1994.
The Company's research and development costs are written off as incurred. Employees engaged in engineering and manufacturing also perform R & D functions, therefore it is unrealistic to isolate these specific costs since they were not material in 1997.
Patents
The first U.S. Patent for the Ion generating technology utilized by the IFT System was issued in 1975 to F.A. Wentworth, Jr. ("Wentworth"). This original technology employed a "bubble" process whereby the air was "bubbled" through liquid to release Ions at the surface of the liquid. A subsequent patent was issued
to Wentworth in December 1990 employing a "vibration" process which substantially enhanced the commercial potential of the technology by increasing the negative charge. The "vibration" technology involves vibrating the surface of the water to release the Charged Particles. In January 1994, an additional patent application was filed in Europe on behalf of the Company covering an enhancement to the vibration technology. This improved "Vibration" technology allows for a more powerful and more consistent negative charge than the initial Wentworth vibration patent. This improvement has been incorporated into the IFT System. The Company filed counterpart applications to its latest European patent application in the United States and several other foreign countries in 1995.
The Company entered into a Royalty Agreement ("Royalty Agreement") dated June 2, 1994 (effective as of December 5, 1991) with Wentworth pursuant to which Wentworth sold all of his interest in the patents relating to the ion generating technology to the Company. As consideration for the assignment and sale, Wentworth received a $50,000 initial payment and a $6,000 per month royalty fee during the life of the patents. In addition, Wentworth purchased 80,000 shares of the Company's Common Stock at S. 125 per share in December 1991. Wentworth has retained a security interest in the patent rights transferred to the Company pursuant to the Royalty Agreement.
The Company owns six U.S. Patents, twelve foreign patents and five foreign patent applications covering, in the aggregate, up to twenty different countries. Several of the earlier "bubble" technology patents have expired. However, improvement patents covering the "bubble" technology still exist in the United States and several foreign countries, and the more important "vibration" technology patents, which form the basis of the IFT System, run to at least 2007. The Company was also granted a patent in Japan.
While the Company intends to vigorously enforce its patent rights against infringement by third parties, no assurance can be given that such rights will be enforceable or will provide the Company with meaningful protection from competitors or that any pending patent applications will be allowed. Even if a competitor's products were to infringe patents owned by the Company, it could be damaging to the Company to enforce its rights because such action would divert funds and resources which otherwise could be used in the Company's operations. No assurance can be given that the Company would be successful in enforcing such rights, that the Company's products or processes do not infringe the patent or intellectual property rights of a third party, or that, if the Company is not successful in a suit involving patents or other intellectual property rights of a third party, a license for such technology from such third party would be available on
commercially reasonable terms, if at all.
Regulations
Concern over environmental pollution has led to legislation introducing tougher and tighter controls on emissions. NOx, for example, is now understood to be a key element in the formation of ground level ozone, widely recognized as a hazard to health and a precursor to urban smog. The problem for industry is to reduce NOx levels as is currently demanded while not increasing emissions of the equally undesirable carbon monoxide or reducing power generation capacity. According to available statistics, approximately 55% of the 20 million tons of annual Nox production comes from utilities, industrial boilers and furnaces the balance is from motor vehicles.
The Federal Clean Air Act, initially adopted in 1970 and extensively amended in 1990 and European Community regulations require compliance with specified air quality standards and empower government to establish and enforce limits on the emission of various pollutants from specific types of industrial facilities. In the USA, the states have primary responsibility for implementing these standards, and, in some cases, have adopted standards more stringent than those established by Federal regulation.
In general, emitters of pollution are required to obtain permits issued by the appropriate environmental agency. A typical permit would set forth the amount of pollutants that the "source" may emit, mandatory emission control device description and installation deadlines plus monitoring/reporting requirements. Pollution sources maybe charged a fee proportional to the amount of pollution the source creates each year. This provides an incentive for the polluter to acquire technology which will reduce its emissions. IFT is attempting to work with customers on an individual basis prior to and during its process of negotiating permits in an attempt to have the System "accepted" by such regulatory agencies.
Domestic and international environmental laws and regulations are, and will continue to be, a principal factor affecting demand for the IFT System. Although the Company believes there is a trend toward increasing regulation and enforcement by all levels of government, a decline in enforcement and related expenditures by businesses subject to such laws and regulations could have a significant adverse effect on the demand for the IFT System. In addition, there can be no assurance that the IFT System currently, or as adjusted or enhanced, will enable others to comply with specified or yet unspecified emissions standards implemented by any
amendments to present laws and regulations or any future legislation.
Competition
While most other pollution control technologies are aimed at reducing airborne emissions, the Company is not aware of any technology which enhances combustion efficiency and reduces noxious emissions. The technology used by the Company's competitors can be divided into three categories: pre-combustion, combustion and post-combustion.
Pre-combustion techniques include chemical additives, low NOx burners, and water/steam injection added to the fuel. Such techniques can achieve reduction in particulate and NOx emissions but do not result in material fuel savings.
Combustion techniques include air/fuel control systems, chemical additives (i.e. urea injection) and flue gas recirculation. These methods reduce NOx emissions but may result in higher particulate emissions and/or reduced boiler efficiency. Furthermore, they are generally more expensive to install than the IFT System.
Post-combustion systems include precipitators, bag filters and scrubbers. These systems require large capital expenses often involve high maintenance and operating costs and do not address fuel efficiency. Some have the added disadvantage of producing by-products which may present disposal problems.
The IFT technology is not, by itself, a solution to all emissions problems. More frequently the technology is complementary to solutions a customer may wish to utilize. For example, to achieve extremely low NOx emission, ammonia injection might be selected. IFT could enhance combustion efficiency so that less NOx is produced and subsequently less ammonia required to achieve the final lower NOx level.
While the Company believes that its System enjoys significant advantages as compared to its competitors' products, many of the Company's competitors have greater resources, both financial and otherwise, than the Company and therefore may be capable of testing, enhancing, marketing and distributing their products on a wider basis than the Company. In addition, future technological developments and novel approaches in the flame combustion field as well as enhancements of current technology will, in all likelihood, create new products and services that directly compete with the IFT System. There can be no assurance that the Company would not be
adversely affected by such technological change.
Item 2.
Item 2. PROPERTY
The Company leases approximately 10,000 square feet of space for its principal executive offices, manufacturing and research and development facilities in Laindon, Essex, U.K. This lease expires in December 1997, the terms for renewal are currently being negotiated. The base rent for this facility is approximately $6,000 per month for 1995, approximately $6,655 per month for 1996 and approximately $7,375 per month for 1997.
The Company maintains one office in New Canaan, Connecticut on a month to month basis at $105 per month and a sales office in Gent, Belgium pursuant to a three year lease at $360 per month plus utilities.
The Company maintains its corporate office in Wilmington, Delaware pursuant to an annual lease with an annual rental of $3,000 plus utilities. The lease expires in December 1997 and will be renewed.
The Company believes that its facilities are adequate for its present and anticipated needs.
Item 3.
Item 3. LEGAL PROCEEDINGS
Not applicable.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT'S SECURITIES AND RELATED STOCKHOLDER MATTERS
The Company's common stock, Class A and Class B Warrants are quoted on the Nasdaq SmallCap Market and Boston Stock Exchange under the symbols "IFTI", "IFTIW", and "IFTIZ" respectively.
The table set forth below shows, for the period indicated, the high and low bid quotations on the Nasdaq SmallCap Market for the Company's Securities. These amounts represent quotation between dealers in securities, and do not include retail mark-ups, mark-downs or commissions and may not represent actual transactions.
Bid Period Ended Type of Security High Low
September 1995 Common Stock 1 3/16 11/32 Class A Warrant 5/32 3/32 Class B Warrant 3/32 3/32
December 1995 Common Stock 7/16 1/4 Class A Warrant 3/32 1/64 Class B Warrant 3/32 1/64
March 1996 Common Stock 1 1/8 1/4 Class A Warrant 3/16 3/32 Class B Warrant 5/32 3/32
June 1996 Common Stock 2 25/32 5/8 Class A Warrant 9/32 5/32 Class B Warrant 7/32 1/8
September 1996 Common Stock 2 3/4 1 Class A Warrant 1/4 3/32 Class B Warrant 1/4 3/16
December 1996 Common Stock 21/2 1 Class A Warrant 1/8 3/32 Class B Warrant 3/16 3/32
March 1997 Common Stock 2 3/4 1 5/32 Class A Warrant 3/16 1/16 Class B Warrant 3/16 3/32
June 1997 Common Stock 3 13/16 2 1/8 Class A Warrant 1/8 1/16 Class B Warrant 7/32 1/8
At September 19, 1997 the number of shareholders of record and in street name of the Company's common stock and Class A Warrants and Class B Warrants were 99, 28 and 29, respectively.
The Company has not paid any cash dividends.
Item 6.
Item 6. SELECTED FINANCIAL DATA
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company commenced operations in late December 1991. During 1992, the Company's primary focus was completing the design and testing of the IFT System. In 1993, the first production equipment was made available and a customer testing program was commenced. Simultaneously, the Company stepped-up its marketing and promotional activities.
In 1993, the Company changed its year end to June 30. During Fiscal 1994 the Company increased its staffing levels and acquired the Vapormid business from EcoLab, BVBA, a distributor of the Company's earlier "bubble technology".
On July 18, 1994 the Company's Initial Public Offering was completed generating net proceeds of $4,768,414. In conjunction with the public offering, the Company increased its operational and marketing activities in an effort to achieve cash flow break even by fiscal year end. This objective was not accomplished in part because of long lead times experienced between initial sales presentations and invoicing, together with a lack of positive test data on three very large pulverized coal facilities. Therefore a sharp reduction in expenses, including staff cuts, was implemented in May which reduced annual costs by approximately $1,200,000 during fiscal 1996. A leading international oil company completed testing the IFT System in its central research facility with positive results and recommendations to its operating units to utilize the technology. As a consequence the Company has installed an IFT System on a large Texaco boiler with follow on orders expected in Fiscal '98. Likewise initial installations have been completed at sites with British Petroleum and Amoco. An average size refinery or petrochemical plant could utilize IFT technology and equipment valued at approximately $1,000,000. With this large market opportunity, fiscal '98 revenues are estimated to be higher than in the past year providing positive cash flow and net income. The additional volume of business can be accommodated within the existing capacity of the Company allowing for increases in material purchases. The attainment of positive cash flow remains the Company's primary financial objective and the immediate focus of operations will be the European Community where the IFT technology has achieved market recognition.
Year ended June 30, 1997 and June 30, 1996
Total revenues increased to approximately $629,000 during
the year ended June 30, 1997 from $594,000 in the fiscal year ended June 30, 1996. The net increase relates to a decrease in rental income to approximately $307,000 ($347,000 in 1996), an increase in system sales to approximately $171,000 ($123,000 in 1996) and an increase in service income to approximately $151,000 ($124,000 in 1996). The decrease in rental income is due to rentals being converted to sales during the year. The increase in system sales is primarily attributable to UK activity in 1997 where larger companies may prefer to purchase the IFT System rather than rent, however, system sales occur on an irregular basis. The increase in service income reflects increased installation fees in 1997.
There was a gross loss of approximately $95,000 during the year ended June 30, 1997 compared to a profit of $57,000 during the year ended June 30, 1996. The gross loss related primarily to field engineering and service costs of approximately $269,000 in 1997 which in the previous year were classified, for nine months, in general and administrative expenses. Total field engineering and service costs were $716,000 in 1996 and $443,000 in 1997. The reduction of $273,000 was from staff reductions in the United States and Belgium and the transfer of support activities to England. Other items in cost of goods sold in aggregate, were reduced $83,000 for the year ended June 30, 1997. The different classification relates to the maturing of the Company's technology from a development state requiring extensive engineering support to complete the sales process to a mature product. The Company has discontinued free or conditional testing and all trial installations are paid for by the customer.
General and adminstrative expenses decreased to approximately $657,000 during the year ended June 30, 1997 from approximately $1,230,000 in the year ending June 30, 1996, a reduction of $573,000. Field engineering and service costs of $541,000 which represents nine months of charges in the year ended June 30, 1996 are no longer classified as general and adminstrative as stated above. Other items in aggregate were reduced $32,000.
Sales and marketing expenses decreased to $161,000 during the year ended June 30, 1997 from approximately $362,000 during the year ended June 30, 1996. The decrease of $201,000 is primarily due to the termination of sales and marketing arrangements in Eastern Europe and Germany and the substitution of geographic coverage by existing sales staff and top management.
Other income was a loss of approximately $27,000 during the
year ended June 30, 1997 from a profit of $49,000 during the year ended June 30, 1995, a decrease of $75,000 primarily due to the use of funds in operations of the Company and reduced interest income.
Year ended June 30, 1996 and June 30, 1995
Total revenues increased to approximately $594,000 during the year ended June 30, 1996. The increase relates to an increase in rental income to approximately $347,000 ($277,000 in 1995), an increase in system sales to approximately $123,000 ($81,000 in 1995) and an increase in service income to approximately $124,000 ($118,000 in 1995). The increase in rental income is due to trials being converted to normal rentals during the year. The increase in system sales is primarily attributable to UK activity in 1996 where larger companies may prefer to purchase the IFT system rather than rent. System sales occur on an irregular basis. The increase in service income reflects the increased sales and rentals in 1996.
Gross profit decreased to approximately $57,000 during the year ended June 30, 1996 from $131,000 during the year ended June 30, 1995. The decrease related to field engineering, installation and other field costs of approximately $176,000 incurred during the final quarter of the year ended June 30, 1996 which had been classified as cost of revenues; in previous periods, these costs have been classified as sales and marketing expenses. The different classification relates to the maturing of the Company's system from a development state requiring extensive engineering support to complete the sales process to a mature product. In January, the Company discontinued free or conditional testing and by the fourth quarter all previously free tests had been completed.
General and administrative expenses decreased to approximately $1,230,000 during the year ended June 30, 1996 from approximately $1,855,000 during the year ended June 30, 1995, a decrease of $625,000 due to internal staff and other cost reductions implemented in May 1995. A total one-time cost of $198,000 was incurred in May 1995, related to the personnel reductions.
Sales and marketing expenses decreased to approximately $362,000 during the year ended June 30, 1996 from approximately $853,000 during the year ended June 30, 1995. The decrease of $491,000 is due to cost reductions implemented in May 1995, and continuing through 1996, as well as approximately $176,000 of
engineering and other technical costs incurred in the fourth quarter of the year ended June 30, 1996, which were included in cost of revenues. These technical costs were included in sales and marketing expenses during the year ended June 30, 1995 and the first three quarters of the year ended June 30, 1996. This change is a result of the change in responsibilities of certain employee's caused by the maturing of the Company's system from a developmental state to a mature product.
Other income decreased to approximately $49,000 during the year ended June 30, 1996 from approximately $118,000 during the year ended June 30, 1995, a decrease of $69,000 primarily due to the use of funds in operations of the Company.
Liquidity and Capital Resources
Since inception, the Company's funding requirements have been met through the initial public offering of equity securities totaling approximately $4.8 million, the private placement of equity securities totaling approximately $6 million, and revenue generated from operations. On July 14, 1997 the Company sold an additional 771,833 common shares with gross proceeds of $1,736,624.
Net cash used in operations was approximately $900,000, $1.3 million, and $2.6 million for the years ended June 30, 1997, 1996 and 1995. The principal use of cash was to fund operating losses incurred by the Company in developing the IFT System and sales, marketing and promotional activities. Working capital was approximately $435,000, $1.3 million, and $2.7 million at June 30, 1997, 1996 and 1995, respectively. Fluctuations in working capital have been primarily due to increases in accounts receivable and inventory offset by increases in accounts payable and other accruals.
The Company liquidated its U.S. Treasury investments during the year ended June 30, 1996. The Company's primary investing activity in the year ended June 30, 1995 involved the acquisition and sale of U.S. Treasury obligations. Capital expenditures amounted to approximately $29,000 and $100,000 during fiscal years "97 and "95, respectively. There were no capital expenditures during the year ended June 30, 1996. Capital expenditures were associated with the purchase of equipment used in manufacturing as well as expenditures incurred to produce rental equipment. The Company has no plans for a significant investment in ucapital equipment in fiscal 1998.
Under an Assignment and Royalty Agreement with the inventor of the Technology utilized by the Company's System ("Royalty Agreement"), the Company is required to make payments of $6,000 per month to the inventor over the remaining life of patents relating to the technology. In conjunction with Royalty Agreement, the Company pays an executive officer/director of the Company a royalty override of $5,000 per month.
On July 14, 1997, the Company issued 771,833 units, each unit consisting of one share of common stock, par value $.01 per share and one Series C, Common Stock purchase warrant. As a result, the Company raised $1,571,960 net of discounts, commissions and offering costs of $164,664.
The Company believes that the proceeds from the above offering together with anticipated funds from operations, will satisfy the Company's working capital requirements and capital expenditures through fiscal 1998. The Company intends to focus its operations primarily on continued expansion with the European Community.
Currency Fluctuation
The Company's revenues are invoiced primarily in Pounds Sterling and also currencies of other European countries (Belgium, Austria and Germany). Changes in exchange rates of these currencies relative to the U.S. dollar could affect the Company's operations and cash flow. During the fiscal years ended June 30, '97 and '96, currency fluctuations were not significant and were not an influence on Company revenues and expenses. Currently, the Company does not enter into derivative contracts to hedge currency risks.
During the year ended June 30, 1997, the average rate of exchange used to translate revenues and expenses denominated in Pounds Sterling has increased from approximately $1.55 U.S. dollars to 1 Pound to approximately $1.65 U.S. dollars to 1 Pound.
Inflation
The Company does not believe that inflation has had a significant impact on the results of its operations since inception.
Forward-Looking Statements
Forward-looking statements made in this Annual Report are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that all forward-looking statements involve risks and uncertainties including without limitation risks in technology development, risks in product development and market acceptance of and demand for the Company's products, risks associated with competition and competitive pricing pressures, risks associated with foreign sales and other risks detailed in the Company's filings with the Securities and Exchange Commission.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the consolidated financial statements and the financial statement schedule set forth in Item 14 of this annual report.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable
PART IV
Item 14.
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K
Page A. (1) Financial Statements
Report of Independent Auditors
Consolidated Balance Sheet - June 30, 1997 and 1996
Consolidated Statement of Operations - Years Ended June 30, 1997, 1996 and 1995
Consolidated Statement of Stockholders' Equity - Years Ended June 30, 1997, 1996 and 1995
Consolidated Statement of Cash Flows - Years Ended June 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
The following consolidated financial statement schedule of Ionic Fuel Technology, Inc. is included in Item 14(d):
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
(3) Exhibits
3.1 Certificate of Incorporation Incorporated by reference to the filing of such Exhibit with Registrants Annual Report on Form 10K for the fiscal year ended June 30, 1996.
3.2 By-Laws Incorporated by reference to the filing of such Exhibit with Registrants Annual Report on Form 10K for the fiscal year ended June 30, 1996.
4.1 Specimen Certificate of Common Stock Incorporated by reference to the filing of such Exhibit with Registrants Annual Report on Form 10K for the fiscal year ended June 30, 1996.
4.2 Specimen Certificate of A Warrant Incorporated by reference to the filing of such Exhibit with Registrants Annual Report on Form 10K for the fiscal year ended June 30, 1996.
4.3 Specimen Certificate of B Warrant Incorporated by reference to the filing of such Exhibit with Registrants Annual Report on Form 10K for the fiscal year ended June 30, 1996.
10.1 Stock Option Plan Incorporated by reference to the filing of such Exhibit with Registrants Annual Report on Form 10K for the fiscal year ended June 30, 1996.
27 Financial Data Schedule
B. Reports on Form 8-K
Form 8K dated July 10, 1997 electronically filed and accepted on July 15, 1997; Accession No. 0001012118-97-000095. Reference Item 5. Other Events: On July 10, 1997, the Registrant concluded a private placement of Units pursuant to Regulation S promulgated under the Securities Act of 1933, as amended.
Form 8K dated July 24, 1997 electronically filed and accepted on July 24, 1997; Accession No. 0001012118-97-000105. Item 5, Other Events: Extending the expiration date of the Class A Warrants.
Report of Independent Auditors
To the Board of Directors and Stockholders Ionic Fuel Technology, Inc.
We have audited the accompanying consolidated balance sheet of Ionic Fuel Technology, Inc. as of June 30, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ionic Fuel Technology, Inc. at June,30, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects, the information set forth therein.
/s/ Ernst & Young LLP
September 5, 1997
Ionic Fuel Technology, Inc.
Consolidated Balance Sheet
See accompanying notes.
Ionic Fuel Technology, Inc.
Consolidated Statement of Operations
See accompanying notes.
Ionic Fuel Technology, Inc.
Consolidated Statement of Stockholders' Equity
See accompanying notes.
Ionic Fuel Technology, Inc.
Consolidated Statement of Stockholders' Equity
See accompanying notes.
Ionic Fuel Technology, Inc.
Consolidated Statement of Cash Flows
See accompanying notes.
Ionic Fuel Technology, Inc.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Presentation
Ionic Fuel Technology, Inc. ("Company"), a Delaware corporation formed on December 10, 1991, manufactures ion generating equipment for sale or lease to entities in various industries, in the United Kingdom and Europe, to reduce airborne emissions and fuel consumption.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Ionic Fuel Technology USA, Inc. ("IFT, USA"), a company incorporated in the U.S. and Ionic Fuel Technology Ltd. ("IFT Ltd."), a company incorporated in the United Kingdom. All significant intercompany accounts and transactions have been eliminated in consolidation.
Concentration of Credit Risk
At June 30, 1997 and 1996, the Company maintained cash balances of approximately $69,000 and $980,000, respectively, at a bank in excess of the insurance limits ($100,000) of the Federal Deposit Insurance Corporation.
The Company performs periodic evaluations of its customers financial condition and generally does not require collateral.
Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.
Inventory
Inventory is valued at the lower of cost, determined by the first-in, first-out method, or net realizable value.
Equipment and Vehicles
Equipment and vehicles are stated at cost less accumulated depreciation and amortization provided on the straight-line basis over the estimated useful lives of the assets, which range from three to ten years. Equipment under lease to third parties is depreciated over the life of the lease, generally five years.
Ionic Fuel Technology, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Intangible Assets
Patents are carried at cost, less accumulated amortization provided on the straight-line basis over the estimated useful lives of the assets which range from five to fifteen years. Amortization expense of these intangible assets amounted to $62,661, $61,732 and $59,410 for the years ended June 30, 1997, 1996 and 1995, respectively. Accumulated amortization amounted to $322,272 and $259,611 at June 30, 1997 and 1996, respectively.
The value of rental and maintenance contracts acquired was amortized over the lives of the contracts, which ranged from one to four years. The original lives of all contracts purchased expired in 1996. This amortization expense amounted to $23,921 and $20,004 for the years ended June 30, 1996 and 1995, respectively.
Income Taxes
The Company accounts for income taxes under the liability method in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under this method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Under SFAS 109, the effect upon deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
Fair Value
Cash and cash equivalents, accounts receivable and accounts payable: The carrying amounts reported in the balance sheet for cash and cash equivalents, accounts receivable and accounts payable approximate their fair value.
Stock Compensation
The Company accounts for stock option grants in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees". Under the Company's current plan, options may be granted at not less than the fair market value on the date of grant and therefore, no compensation expense is recognized for the stock options granted. In the year ended June 30, 1997, the Company adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". The effect of applying SFAS No. 123's fair value method to the Company's stock- based awards results in net loss and per share data amounts for the years ended June 30, 1997 and 1996, respectively, that are not materially different from amounts reported.
Per Share Data
Net loss per share of common stock is computed using the treasury stock method based on the weighted average number of shares of common stock and dilutive common equivalent shares outstanding during the period.
Ionic Fuel Technology, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Foreign Currencies
Adjustments resulting from the translation of the financial statements of the Company's foreign subsidiary are excluded from the determination of income (loss) and are accumulated in a separate component of stockholders' equity.
Revenue Recognition
Rental income under operating leases is recognized on a straight-line basis over the lease term. The equipment leased is owned by the Company and, accordingly, the Company bears all repairs and maintenance costs incurred. The lease term is generally five years with an option for renewal. Equipment sales are recognized upon shipment of the equipment and are recorded net of an allowance for returns.
Warranty Costs
Estimated warranty costs are provided for when the product is sold.
Field Engineering Costs
Cost of revenues reflects approximately $176,000 of field engineering, installation, and other field costs incurred in the fourth quarter of the year ended June 30, 1996. Similar costs incurred prior to these periods were included in sales and marketing expenses because extensive engineering support was required to complete the sales process. This change was a result of the change in responsibilities of certain employee's caused by the maturing of the Company's system from a developmental state to a mature product.
Reclassification
Certain amounts at year ended June 30, 1996 have been reclassified to conform to the presentation at the year ended June 30, 1997.
Use of Estimates
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and as such, include amounts based on judgments and estimates made by management, which may differ from actual results.
Ionic Fuel Technology, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128 "Earnings per Share"which the Company will adopt for it second quarter ending December 31, 1997. SFAS No. 128 requires the Company to change the method it currently uses to compute earnings per share and requires restatement of all prior periods. Under the new requirements, the dilutive effect of stock options are excluded from computing "basic" earnings per share and remain in the diluted computation. The impact of SFAS No. 128 is not expected to be material.
2. Inventory
Inventory is comprised of the following: June 30
1997 1996 ----------------------------------------
Material and supplies $161,817 $152,721 Finished goods 320,629 311,372 ---------------------------------------- $482,446 $464,093 ========================================
Included in finished goods inventory are units, at customer sites, on a short-term trial basis.
3. Equipment and Vehicles
Equipment and vehicles are comprised of the following:
June 30
1997 1996 ----------------------------------------
Equipment $ 440,540 $ 404,994 Vehicles 35,015 22,754 ---------------------------------------- 475,555 427,748 Accumulated depreciation (394,708) (321,242) ---------------------------------------- 80,847 106,506 ----------------------------------------
Equipment under lease 119,667 126,072 Accumulated depreciation (47,397) (39,970) ---------------------------------------- 72,270 86,102 ---------------------------------------- $ 153,117 $ 192,608 ========================================
Amortization expense included in depreciation expense, relating to the leased equipment, amounted to $15,247, $20,898 and $18,208 for the years ended June 30, 1997, 1996 and 1995, respectively.
Ionic Fuel Technology, Inc.
Notes to Consolidated Financial Statements (continued)
4. Royalty Agreement
Under an agreement effective as of December 1991, the Company purchased certain patents and inventions for $50,000 and agreed to make payments of $6,000 per month over the remaining life of the patents (initially 15 years). The Company has valued these patent rights ($428,698) based upon the present value of the future minimum royalty payments. The remaining balance of this obligation, less amounts currently due, is included in other long-term obligations. If certain annual profitability levels are achieved, an additional royalty of $24,000 per annum will be payable. In conjunction with this agreement, the Company granted the inventor a security interest in the patents and inventions during the royalty period.
A founder/officer of the Company receives an override royalty of $5,000 per month. This expense amounted to $60,000, for each of the years ended June 30, 1997, 1996 and 1995. During 1995, $1,600 per month of this override royalty was deferred resulting in an accrued royalty expense of $40,000 and $20,800 at June 30, 1997 and 1996, respectively.
5. Leases
The Company leases its facility under a noncancelable operating lease expiring in 1997. The future minimum lease payments under operating and capital leases as of June 30, 1997 are as follows:
The cost of assets under capital leases amounted to $15,247 at June 30, 1997. There was no cost of assets under capital leases at June 30, 1996.
Rent expense amounted to $166,118, $135,720 and $102,439 for the years ended June 30, 1997, 1996 and 1995, respectively.
The future minimum lease payments receivable under noncancelable operating leases as of June 30, 1997 are as follows:
Operating leases ---------------- Year ending June 30: 1998 $134,223 1999 66,871 2000 4,926 ---------------- Total minimum lease payments receivable $206,020 ================
Ionic Fuel Technology, Inc.
Notes to Consolidated Financial Statements (continued)
6. Income Taxes
At June 30, 1997, the Company has available operating loss carryforwards for United States federal income tax purposes of $2,045,157 which are available to offset future taxable income, if any, through the indicated years: $6,082 in 2006, $54,766 in 2007, $95,812 in 2008, $600,574 in 2009, $615,511 in 2010, $380,431 in 2011 and $291,981 in 2012. The amount and timing upon which the Company may realize future tax benefits from its net operating loss is affected by prior changes in ownership of the Company. The Company's subsidiary has unused operating loss carryforwards, with no expiration date, for United Kingdom income tax purposes, of $7,728,104 at June 30, 1997. The statutory tax rates during the year ended June 30, 1997 are 34% and 24% in the U.S. and U.K. During the years ended June 30, 1996 and 1995 the statutory tax rates were 34% and 25% in the U.S. and U.K., respectively.
Significant components of the Company's deferred tax assets and liabilities are as follows:
7. Stockholders' Equity
Effective March 28, 1994, an amendment and restatement of the Company's Restated Certificate of Incorporation was approved by the Board of Directors of the Company providing for an increase in the authorized common stock of the Company to 20,000,000 shares.
On July 28, 1994, the Company issued 1,200,000 units, each unit consisting of one share of common stock, par value $.01 per share, one Series A redeemable common stock purchase warrant and one Series B redeemable common stock purchase warrant. Two Series A Warrants entitle the holder, to purchase one share of Common Stock for $6.50, which rights been extended for a year until July 28, 1998. Two Series B Warrants entitle the holder, to purchase one share of Common Stock for $7.50 until July 28, 1999. Each Series of Redeemable Warrants is redeemable at a price of $.01 per two Redeemable Warrants, upon not less than 30 days prior written notice, if the last sale price of the Common Stock has been at least $9.50 with respect to the Series A Warrants and $10.50 with respect to the Series B Warrants for the 20 consecutive trading days ending on the third day prior to the notice of redemption. As a result of the offering, the Company raised $4,768,414, net of discounts, commissions and offering costs of $1,231,586.
Ionic Fuel Technology, Inc.
Notes to Consolidated Financial Statements (continued)
7. Stockholders Equity (continued)
Stock Options
The Company's 1992 Stock Option Plan, as amended, (the "Plan"), provides for the granting of qualified or nonqualified options to acquire up to 450,000 common shares by certain key employees of the Company or its subsidiary. Options are exercisable one year after the date of grant at a rate of 20% per annum, on a cumulative basis. Options may be granted through November 30, 2002, although the Plan may be terminated at any time.
The following presents a summary of the Company's stock option activity and related information:
At June 30, 1997, options for 119,600 shares were available for future grants and 212,000 options were exercisable.
In April 1997, the Company issued 150,000 options to a financial public relations firm in lieu of a $20,000 fee required under a written contract for annual services commencing January 1, 1997. The options were divided into thirds and are exercisable at $2, $3 and $4 a share, respectively. They are exercisable immediately and expire on December 31, 2002. For the year ended June 30, 1997, the Company has recognized compensation expense for the fair value of these options of $10,000.
Ionic Fuel Technology, Inc.
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
Warrants
In April 1997, the Company issued 150,000 warrants to a financial consultant in lieu of present and future compensation for services. Each warrant entitles the holder to purchase one share of Common Stock. The exercise price of 75,000 of the warrants is $2.25 per warrant and the exercise price of the remaining 75,000 warrants is $3.50 per warrant. The warrants were exercisable immediately and expire in March 15, 2001. The fair value of the warrants, $48,000 was based on contract value of the services to be provided. Compensation expense of $6,000 was recognized for the year ended June 30, 1997. 8. Results of Foreign Operations
Total assets and liabilities and results of operations for IFT Ltd. were as follows:
9. Restructuring Charges
During 1995, IFT Ltd. undertook a fundamental restructuring, leading to the termination of over half of its workforce. Other costs relating to this restructuring included inventory writedowns and early termination payments on certain motor vehicle leases.
10. Subsequent Event
On July 14, 1997, the Company completed a private offering of 771,833 shares of its common stock and Series C Warrants at a price of $2.25 per unit. Each unit is comprised of one share of common stock, par value $0.01 per share and one warrant to purchase one share of common stock at a price of $2.95, expiring July 10, 2000. The Company granted 71,183 Series C Warrants to their broker in exchange for the services provided. The Company received total proceeds of $1,736,624 which, net of offering expenses of $165,965, will be used for general working capital.
Ionic Fuel Technology, Inc.
Schedule II-Valuation and Qualifying Accounts
SIGNATURES
Pursuant to the requirements of Section 13 or 15(b) 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.
Dated: September , 1997
IONIC FUEL TECHNOLOGY, INC.
By: Douglas F. Johnston
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the date indicated.