10-Q 1 doc1.txt United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the period ended September 30, 2001 ------------------ Commission file number 1-13234 ------- Ionic Fuel Technology, Inc. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 06-1333140 --------------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 300 Delaware Avenue, Suite 1704 Wilmington, Delaware 19801-1622 ---------------------------------------- ------------------------------------ (Address of principal executive offices) (Zip Code) (302) 427-5957 -------------------------------------------------------------------------------- (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 periods 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 the number of shares outstanding of each of the Issuer's classes of common stock, as of the latest practical date Common Stock, $.01 Par Value - 22,518,796 shares outstanding as of September 30, 2001. 1 IONIC FUEL TECHNOLOGY, INC. INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated balance sheets - September 30, 2001 and June 30, 2001 Consolidated statements of operations - Three months ended September 30, 2001 and 2000 Consolidated statements of cash flows - Three months ended September 30, 2001 and 2000 Notes to consolidated financial statements - September 30, 2001 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signatures 2

SEE ACCOMPANYING NOTES 4

SEE ACCOMPANYING NOTES 5 IONIC FUEL TECHNOLOGY, INC. Notes to Consolidated Financial Statements (Unaudited) September 30, 2001 1. GOING CONCERN The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. Ionic Fuel Technology, Inc. ("Company") has incurred recurring operating losses, and its operations have not produced positive cash flow. As such, this condition raises substantial doubt about the Company's ability to continue as a going concern. On August 31, 2001 the Company's UK subsidiary, Ionic Fuel Technology Limited ("IFT Ltd.") was placed into Creditors' Voluntary Liquidation ("CVL") pursuant to the United Kingdom Insolvency Act 1986 after it was determined that, in the absence of continued support from the Company, IFT Ltd. would not have sufficient liquid assets to allow it to continue in operations. As a result of the voluntary liquidation, the lender of IFT Ltd.'s bank loan gave notice of its right and intention to call for payment of the loan. No additional debt financing was currently available to the Company. A liquidator was appointed and has taken possession of the assets and liabilities of IFT Ltd. IFT Ltd. has terminated all contracts of employment. As a result of the placement into CVL, the appointed liquidator has the duty to sell or otherwise realize assets and liquidate or settle the liabilities of IFT Ltd. The assets and liabilities were therefore outside the control of the Company with effect from August 31, 2001. Following the CVL, in August 2001 the Company announced a reorganization of its European operations to reduce costs commensurate with its ongoing activities. As part of the reorganization, the Company formed a new operating subsidiary (Ionic Fuel Technology (Europe) Limited ("IFT Europe")) based in England to conduct its European operations. On September 24, 2001 this new corporation reached an agreement with the liquidator of IFT Ltd. to purchase some of the assets and liabilities of IFT Ltd. together with the trade for consideration of $10,800 cash and deferred payment of $18,000. The Company is currently carrying on the operations in Europe under IFT Europe. Following the repurchase of certain assets, liabilities and the trade by IFT Europe on September 24, 2001, the liquidator and creditors of IFT Ltd. have no further recourse to the Company in respect of the liquidation of IFT Ltd. except for the entitlement to deferred purchase consideration of $18,000. Consequently the net liabilities remaining in the liquidation have ceased to be recognised in these financial statements as liabilities of the Company. 6 IONIC FUEL TECHNOLOGY, INC. Notes to Consolidated Financial Statements (Unaudited) September 30, 2001 (Continued) 2. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ending June 30, 2002. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended June 30, 2001. 3. CASH EQUIVALENTS The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. 4. INVENTORY Inventory is comprised of the following: SEPTEMBER 30 JUNE 30 2001 2001 ------------- ------------- Material and supplies $ - $ 117,786 Finished goods 27,529 178,824 Provision for impairment - (269,781) ------------- ------------- $ 27,529 $ 26,829 ============= ============= Included in finished goods inventory are units, at customer sites, on a short-term trial basis. 7 IONIC FUEL TECHNOLOGY, INC. Notes to Consolidated Financial Statements (Unaudited) September 30, 2001 (Continued) 5. COMPREHENSIVE INCOME The Company's comprehensive income is as follows: THREE MONTHS ENDED SEPTEMBER 30 2001 2001 ---------------------------- Net (loss)/profit $ 81,087 $ (254,576) Foreign currency translation adjustment 34,601 (8,654) ------------- ------------- Total comprehensive income/(loss) $ 115,688 $ (263,230) ============= ============= 6. EARNINGS PER SHARE THREE MONTHS ENDED SEPTEMBER 30 2001 2000 --------------- ----------------- Net loss before extraordinary item $ (419,195) $ (254,576) Net profit/(loss) after extraordinary item $ 81,087 $ (254,576) Average common shares outstanding 22,518,796 18,516,463 --------------- ----------------- Net (loss)/profit per common share $ .00 $ (.01) =============== ================= At September 30, 2001 the total number of options outstanding was 795,500. No share options have been included in the calculation of earnings per share as their effect is anti-dilutive. 8 IONIC FUEL TECHNOLOGY, INC. Notes to Consolidated Financial Statements (Unaudited) September 30, 2001 (Continued) 7. SEGMENT REPORTING The Company adopted SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information in 1998, which changes the way the Company reports information about its operating segments. All prior year's information has been restated to confirm with the current year's presentation. The Company has two segments, determined geographically and is made up of the operations of the United States and Europe. The European segment makes up the majority of the Company's operations, as it is engaged in the design and assembly of its patented IFT system. Segment reporting of the Company is as follows: UNITED STATES EUROPE TOTAL -------------------------------------- Three months ended September 30, 2001 ------------------------------------- Revenues Sales $ - $ - $ - Rentals - 55,508 55,508 Engineering services - 13,885 13,885 --------------- ---------- ---------- Total Revenue - 69,393 69,393 Segment loss $ (104,716) $ 185,803 $ 81,807 --------------- ---------- ---------- Three months ended September 30, 2000 ------------------------------------- Revenues Sales $ - $ 24,619 $ 24,619 Rentals - 72,587 72,587 Engineering services - 118,702 118,702 --------------- ---------- ---------- Total Revenue 215,908 215,908 Segment loss $ (70,693) $(183,883) $(254,576) --------------- ---------- ---------- 9 IONIC FUEL TECHNOLOGY, INC. Notes to Consolidated Financial Statements (Unaudited) September 30, 2001 (Continued) 8. EXTRAORDINARY PROFIT ON LIQUIDATION OF SUBSIDIARY The Company recognized an extraordinary profit of $500,828 following the liquidation of IFT Ltd. As detailed in Note 1, this gain results from the extinguishment of debt for less than the face amount. The only funds received by the liquidator, except for the the realization of trade receivables, were the funds from the Company for the purchase of the assets. The assets purchased were previously written down to their net realizable value, which approximated the subsequent repurchase value, during the year ended June 30, 2001. Therefore, the financial statements reflect this transaction as if the funds paid by the Company were for the extinguishment of the debt. The gain on the extinguishment is calculated as follows: Consideration for extinguishment of debt $ (28,800) Reduction in trade accounts receivable (184,676) Reduction in prepaid expenses (98,517) Extinguishment of accounts payable 115,408 Extinguishment of accrued expenses 370,520 Extinguishment of bank overdraft 135,779 Extinguishment of bank loans 96,690 Extinguishment of provisions for warranties and returns 91,285 Extinguishment of capital lease obligations 2,593 ---------- Extraordinary gain on extinguishment of debt $ 500,282 ---------- 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS During the period the Company successfully completed the formation of a new operating subsidiary, Ionic Fuel Technology (Europe) Limited. The new subsidiary was successful in securing the purchase of the stock, certain assets and contracts of Ionic Fuel Technology Limited in liquidation from its liquidator. It commenced trading in September 2001. All customers of IFT products who had dealt with the previous Company have been secured by IFT Europe and all existing rental and maintenance contracts have been honoured. Trading results for this period reflect the results for both Ionic Fuel Technology Limited in liquidation and establishing the new operating subsidiary, Ionic Fuel Technology (Europe) Limited, incurring extraordinary costs of approximately $25,000. There is a further liability to complete the purchase of stock, certain assets and contracts from Ionic Fuel Technology Limited in Liquidation of approximately $18,000 payable from January 2002 through to August 2002. Three Months Ended September 30, 2001 and September 30, 2000 Total revenues decreased to approximately $69,000 during the three month period ended September 30, 2001 from approximately $216,000 for the three month period ended September 30, 2000. The decrease of approximately $147,000 in revenues related principally to the cessation of engineering consulting services and the dislocation to the selling of IFT units which the liquidation of IFT Ltd. caused. Gross profit decreased to a loss of approximately $(12,000) during the three months ended September 30, 2001 (loss of $9,000 in 2000) due to the fall in contribution to gross margins from engineering consulting services and the lack of sales of IFT units. General and administrative expenses increased to approximately $315,000 during the three month period ended September 30, 2001 from approximately $194,000 for the three month period ended September 30, 2000. The increase of approximately $122,000 in general and administrative expenses reflects the additional costs associated with the redundancy of the staff of Ionic Fuel Technology Limited, and a reduction in overhead costs following the liquidation of IFT Ltd. As a result of the liquidation, the redundancies have no cash effect to the Company. Sales and marketing expenses decreased to approximately $21,000 during the three month period ended September 30, 2001 from approximately $46,000 for the three month period ended September 30, 2000. The decrease of approximately $25,000 was due to savings in salary and promotional costs for the period. Other expense (net) increased to approximately $71,000 during the three months ended September 30, 2001 from approximately $6,000 during the same period in 2000, due to the interest payable on debentures, and the amortization of debt discount. The extraordinary item of approximately $500,000 represents the profit recognized by the Company on the settlement of the net debts of IFT Ltd. on liquidation. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND SOURCES OF CAPITAL Net cash used by operations was approximately $117,000 for the three months ended September 30, 2001 and approximately $319,000 for the three months ended September 30, 2000. Cash was utilized in all departments, i.e. sales, marketing, and administration in the United Kingdom and Europe and includes the cost of re-organization and the purchase of stock, certain assets and contracts of Ionic Fuel Technology Limited in liquidation from the Liquidator. Working capital was approximately $(76,000) at September 30, 2001 and approximately $256,000 at June 30, 2001. Working capital has been utilized to fund operations. CURRENCY FLUCTUATION Currency fluctuations were insignificant to the Company's operations for the three months ended September 30, 2001 and 2000. The Company operates in the United States and United Kingdom (Pound Sterling); sales and rentals may also be denominated in other currencies, principally Euros. Changes in the exchange rates of currencies could affect the Company's operations and cash flows. Currently, the Company does not enter into any derivative contracts to hedge these risks. However, the principal revenues are generated in sterling which for the 3 months ended September 30, 2001 have been translated to dollars at a rate of $1.43/ 1. For the same period last year the conversion rate was $1.5/ 1. The fluctuation in the exchange rate should be considered when comparing the revenue for each period. INFLATION Inflation has not had a significant impact on the results of the Company's operations for the three months ended September 30, 2001 and 2000. 12 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. Ionic Fuel Technology, Inc. -------------------------------------------- (Registrant) Date: November 16, 2001 /s/ Anthony J.S. Garner ----------------- -------------------------------------------- Name: Anthony J.S. Garner Title: President and Chief Executive Officer 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings (Not applicable) Item 2. Changes in Securities (Not applicable) Item 3. Defaults upon Senior Securities (Not applicable) Item 4. Submission of Matters to a Vote of Security Holders (Not applicable) Item 5. Other information (Not applicable) Item 6. Exhibits and Reports on Form 8-K (a) The Company filed two reports on Form 8-K during the three months ended September 30, 2001. On August 13th the Company reported the reorganization of its European operations and on September 28th the Company reported the completion of the reorganization of its European operations. (b) The following exhibits are included herein: (1) Statement re: computation of earnings per share 14

IONIC FUEL TECHNOLOGY INC 10-Q