10-Q 1 doc1.txt United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-Q (MARK ONE) [x] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the period ended December 31, 2001 ----------------- or [ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the Transition Period From to --------- --------- Commission file 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) Not applicable --------------------------------------------------------------------------- (Former name, former address and former year, if changed since last report) 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 --- --- Applicable Only to Issuers Involved in Bankruptcy Proceedings During the Preceding Five Years Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by the court. Yes No --- --- Applicable Only to Corporate Issuers 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 December 31, 2001. Page 1 of 19 IONIC FUEL TECHNOLOGY, INC. INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated balance sheets - December 31, 2001 and June 30, 2001 Consolidated statements of operations - Three months ended December 31, 2001 and 2000; six months ended December 31, 2001 and 2000. Consolidated statements of cash flows - Six months ended December 31, 2001 and 2000. Notes to consolidated financial statements - December 31, 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 Page 2 of 19

PART I. FINANCIAL INFORMATION IONIC FUEL TECHNOLOGY, INC. CONSOLIDATED BALANCE SHEETS ~~SEPTEMBER~~DECEMBER ~~30,~~31 JUNE 30, ~~2001~~2000 2001 --------------- ------------- ASSETS (UNAUDITED) (AUDITED) Current assets Cash and cash equivalents (Note 3) $ 5354,~~913~~620 $ 204,979 Trade accounts receivable 4459,~~251~~874 158,881 Inventory (Note 4) 27,~~529~~642 26,829 Prepaid expenses 2526,~~275~~661 18,802 --------------- ------------- Total current assets ~~150~~168,~~968~~797 409,491 Equipment and vehicles, net of accumulated depreciation of $5654,~~478~~966 at ~~September~~December 3031, 2001 and $49,964 at June 30, 2001 7164,~~905~~584 66,522 --------------- ------------- TOTAL ASSETS $ ~~222~~233,~~873~~381 $ 476,013 =============== ============= LIABILITIES AND STOCKHOLDERS' ~~DEFICIENCY~~EQUITY Current liabilities ~~Accounts~~Bank ~~payable~~overdraft $ ~~124,866~~- $ 136,887 Current portion of long term debt - 95,409 Accounts payable 162,310 122,249 Accrued expenses 2039,~~214~~540 119,826 Deferred income 2137,~~376~~249 27,494 ~~Bank~~Provisions ~~overdraft~~for -warranties ~~136,887~~and ~~Current~~returns ~~portion of bank loan~~ - 9590,~~409~~076 ~~Provisions~~Provision for ~~warranties~~refurbishment and ~~returns~~inventory ~~- 90~~2,~~076~~174 - Accrued royalty, ~~due to officer~~ 27,200 27,200 Current portion of royalty agreement 12,600 12,600 Accrued salary, benefits and payroll taxes 132,~~057~~752 23,103 Current portion of capital lease obligations 1916,~~840~~945 10,531 --------------- ------------- Total current liabilities ~~227~~330,~~153~~770 665,375 Long-term liabilities Debentures (net of debt discount of $~~586~~628,~~668~~891) 73131,~~332~~109 18,333 Long-term obligations, less current portion 4238,~~460~~476 27,017 ~~Other~~Long ~~long-~~term ~~liabilities~~royalty ~~291~~agreement obligations,~~775~~ less current portion 288,625 292,825 --------------- ------------- Total long-term liabilities ~~407~~458,~~567~~210 338,175 Stockholders' ~~deficiency~~equity Common stock, $.01 par value: 50,000,000 shares authorized; issued and outstanding 22,518,796 shares at December 31, 2001 and at June 30, 2001 225,188 225,188 Capital in excess of par value 15,~~092~~192,312 15,092,312 Accumulated deficit (15,~~595~~837,~~121~~344) (15,676,210) Accumulated other comprehensive income - cumulative translation adjustment (~~134~~135,~~226~~755) (168,827) --------------- ------------- Total stockholders' deficit (~~411~~555,~~847~~599) (527,537) --------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' ~~DEFICIENCY~~EQUITY $ ~~222~~233,~~873~~381 $ 476,013 =============== ============= SEE ACCOMPANYING NOTES Note: The balance sheet at June 30, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

SEE ACCOMPANYING NOTES Note: The balance sheet at June 30, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Page 3 of 19

IONIC FUEL TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED ~~SEPTEMBER~~SIX 30MONTHS ENDED DECEMBER 31 DECEMBER 31 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Revenues ~~Engineering~~Sales ~~consulting~~$ 2,696 $ 1312,~~885~~276 $ ~~118~~2,~~703~~697 ~~Sales~~$ -36,895 24Rentals 78,~~619~~370 ~~Rental~~88,526 55133,~~508~~997 72161,~~587~~113 Engineering consulting - 231,843 13,885 350,546 ------------ ------------ ------------ ------------ Total revenues 6981,~~393~~066 ~~215~~332,~~909~~645 150,579 548,554 Cost of revenues ~~Engineering~~Sales ~~consulting~~- 81,~~331~~989 43- 7,246 Rentals 73,953 80,383 147,103 256,530 ~~Sales~~Engineering - 5155,~~257~~271 ~~Rental 73~~8,~~008~~331 ~~176~~198,~~148~~528 ------------ ------------ ------------ ------------ Total cost of revenues 8173,~~339~~953 ~~224~~237,~~661~~644 155,434 462,304 ------------ ------------ ~~(11~~------------ ------------ 7,~~946)~~113 95,002 (84,~~752~~855) 86,250 Operating expenses General and administrative ~~315~~129,~~347~~180 ~~193~~168,~~545~~342 445,406 361,887 Sales and marketing 2046,~~848~~281 46126,~~429~~606 ~~Research~~67,148 ~~and~~173,035 ~~development~~ ------------ ------------ ------------ ------------ ~~336~~175,~~195~~461 ~~239~~294,~~974~~948 512,554 534,922 ------------ ------------ ------------ ------------ Operating (loss) (168,348) (199,~~141~~946) (~~248~~517,~~726~~409) (448,672) Other income (expense) Interest income 50151 -2,100 202 2,100 Interest (expense) adjustment (7174,~~104~~027) (5,850) (144,212) (11,700) ------------ ------------ ------------ ------------ (7173,~~054~~876) (53,~~850~~750) (144,010) (9,600) ------------ ------------ ------------ ------------ Loss before extraordinary ~~item~~(242,224) (~~419~~203,~~195~~696) (~~254~~661,~~576~~419) (458,272) Item ------------ ------------ ------------ ------------ Extraordinary gain on ~~settlement~~- of- ~~debt~~ 500,282 - Settlement of debt ------------ ------------ ------------ ------------ Net ~~profit/~~(loss) $ 81(242,~~087~~224) $ (~~254~~203,~~576~~696) $ (161,137) $ (458,272) ============ ============ ============ ============ Loss per share before ~~extraordinary~~Extraordinary item (0.0201) (0.01) (0.03) (0.02) ------------ ------------ ------------ ------------ Extraordinary gain on ~~settlement~~Settlement of debt 0.00 0.00 0.02 0.00 ------------ ------------ ------------ ------------ Net ~~profit/(~~loss) per share (0.0001) (0.01) (0.01) (0.02) ------------ ------------ ------------ ------------ Weighted average number of common shares 22,518,796 1821,~~516~~261,~~463~~789 22,518,796 19,889,126 ============ ============ ============ ============

See accompanying notes Page 4 of 19

IONIC FUEL TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) ~~THREE~~Six ~~MONTHS~~Months ~~ENDED~~Ended ~~SEPTEMBER~~December 3031 2001 2000 --------------- -------------- ~~OPERATING~~Operating ~~ACTIVITIES~~activities Net ~~profit/~~(loss) $ 81(161,~~087~~137) $ (~~254~~458,~~576~~272) Adjustments to reconcile net loss to net cash used byin operating activities: Depreciation 48,~~111~~112 1025,~~322~~176 Extraordinary item (500,282) - Amortization of debentures 54112,~~999~~776 ~~Extraordinary~~- ~~item~~Loss ~~(500,282)~~on disposal of vehicle - 11,967 (Increase) decrease in: Accounts receivable (7085,~~046~~669) (25132,~~030~~586) Inventory (~~700~~983) 35,~~868~~232 Prepaid expenses (2830,~~787~~173) (1218,~~541~~213) Increase ~~(decrease)~~ in: Accounts payable and accrued expenses ~~353~~451,~~569~~774 ~~(40~~87,~~698)~~014 ------------- -- ------------- Net cash used by operating activities (~~106~~205,~~049~~582) (~~318~~479,~~655~~682) ~~INVESTING~~Investing ~~ACTIVITY~~activities Acquisition of equipment (1,649) (10,740) --------------- ------------- Cash used by investing activities (1,~~378~~649) ~~FINANCING~~(10,740) ~~ACTIVITIES~~Financing activities Reduction of bank overdraft (1,108) (118,661) Principal payments on capital leases (8,~~415~~615) (26,~~411~~029) Principal payments under licensing agreement (14,~~050~~200) (36,~~150~~300) Payment for ~~extinguishment~~extinguishments of debt (10,800) - ~~Reduction~~Proceeds infrom ~~bank~~long ~~overdraft~~term ~~(11,908)~~debt ~~(143~~- 112,~~512)~~028 Proceeds from ~~sale~~capital ofleases ~~stock~~- - ~~200~~Proceeds from issuance of debentures 100,000 - Proceeds from ~~note~~sale ~~payable,~~of ~~bank~~stock - ~~111~~349,~~223~~841 ------------- -- ------------- Net cash provided (used) by financing activities ~~(32~~75,~~173)~~277 ~~162~~330,~~150~~879 Effects of exchange rate differences on cash (1218,~~844~~405) ~~(9,534)~~955 ------------- -- ------------- Decrease in cash and cash equivalents (~~151~~150,~~066~~359) (~~167~~158,~~417~~588) ~~------------- --------------~~ Cash and cash equivalents, beginning of period 204,979 231,202 ------------- -- ------------- Cash and cash equivalents, end of period $ 5354,~~913~~620 $ 6372,~~785~~614 ============= == ============= Interest paid $ 27,~~869~~800 $ 58,~~850~~101 ============= == ============= ~~NONCASH~~Noncash ~~INVESTING~~financing ~~AND FINANCING ACTIVITIES~~activity: Acquisition of vehicles with capital leases $ 26,~~227~~334 $ 2751,~~544~~706 =============== ============= Stock subscriptions receivable $ - $ 1,000 =============== =============

See accompanying notes Page 5 of 19 Page 6 of 19 IONIC FUEL TECHNOLOGY, INC. Notes to Consolidated Financial Statements (Unaudited) December 31, 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 recognized in these financial statements as liabilities of the Company. During the past period, the principal use of the Company's cash has been to fund its operating losses and to secure its customers and contracts. The Company has been utilizing approximately $34,000 per month to fund operations. In November 2001, the Company issued $100,000 in 6% senior debentures. The debentures were issued at par and have warrants attached entitling the holder to 10 times the value of debentures issued in common shares at an exercise price of $0.10 per share. The warrants were issued for the nominal amount of $1 per investor. The fair value of the warrants issued exceeded the debenture price, therefore the full proceeds of $100,000 from the sale of debentures has been recognized as Additional Paid-In Capital, and a debt discount will be amortized over the life of the debt through interest expense. The Company has recognized interest expense of $2777 arising from the amortization of this debt discount in the three months ended December 31, 2001. Interest on the debentures accumulates at 6% from the date of issue on the unpaid principal balance. There are no fixed dates of repayment of interest. The debentures mature in November 2004. Under the terms of the subscription agreement, the holder can accelerate the maturity date to use the outstanding principal and accumulated interest to exercise the attached warrants. The Company may repay the debentures prior to the maturity date, subject to 60 days notice. The Company is presently attempting to raise additional capital to fund operations. If additional capital is not secured within the next few months, it will be necessary to substantially curtail or cease operations. Page 7 of 19 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 Regulations 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 six month period ended December 31, 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. Page 8 of 19 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:

Included in finished goods inventory are units, at customer sites, on a short-term trial basis. Page 9 of 19

At December 31, 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. 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 conform with the current year 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 a majority of the Company's operations, as it is engaged in the design and assembly of its patented IFT system. In the following table, adjustments and eliminations represent the elimination, on consolidation, of intra-group balances and investments. Page 10 of 19

Page 12 of 19 IONIC FUEL TECHNOLOGY, INC. Notes to Consolidated Financial Statements (Unaudited) December 31, 2001 (Continued) 8. EXTRAORDINARY PROFIT ON LIQUIDATION OF SUBSIDIARY During the quarter ended September 30, 2001, 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 extinguishments of debt for less than the face amount. The only funds received by the liquidator, except for 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 31, 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 extinguishments is calculated as follows:

Page 13 of 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS During the six month period to December 31, 2001 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. Six Months Ended December 31, 2001 and December 31, 2000 Total revenues decreased to approximately $151,000 during the six month period ended December 31, 2001 from approximately $549,000 for the six month period ended December 31, 2000. The decrease of approximately $398,000 in revenues related primarily to the cessation of engineering services and a shortfall of approximately $34,000 in sales of IFT units. Gross loss increased from a profit of approximately $86,000 during the six months ended December 31, 2000 to a loss of approximately $5,000 during the six months ended December 31, 2001 due to the decline in revenues. General and administrative expenses increased to approximately $445,000 during the six months ended December 31, 2001 from approximately $361,000 during the six months ended December 31, 2000. The increase of approximately $84,000 in general and administrative expenses relates principally to the cost of redundancy and liquidation of Ionic Fuel Technology Limited. The increase principally relates to the period prior to the group reorganization and accordingly has no cash effect to the Company. Sales and marketing expenses decreased to approximately $67,000 during the six month period ended December 31, 2001 from approximately $173,000 for the six month period ended December 31, 2000. This decrease of approximately $106,000 is due to the reduction in staff levels and traveling costs in Europe. Interest expense increased to approximately $144,000 in the six month period ended December 31, 2001 from approximately $12,000 for the same period in the previous year. This increase is due to accrued interest and the amortization of debt discount due to the debentures issued in May 2001 and the new subscription in November 2001. 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. Three Months Ended December 31, 2001 and December 31, 2000 Total revenues decreased to approximately $81,000 during the three month period ended December 31, 2001 from approximately $333,000 for the three month period ended December 31, 2000. The decrease of approximately $252,000 in revenues is primarily due to the cessation of engineering consulting services. Gross profit decreased to a profit of approximately $7,000 during the three months ended December 31, 2001 (profit of approximately $95,000 in 2000) due to decreased sales of engineering services. Page 14 of 19 General and administrative expenses decreased to approximately $129,000 during the three months ended December 31, 2001 from approximately $168,000 during the three months ended December 31, 2000. The decrease of approximately $39,000 in general and administrative related to decreases in office costs and savings on property expenses. Sales and marketing expenses fell to approximately $46,000 for the three months ended December 31, 2001 from approximately $127,000 for the three months ended December 31,2000. This decrease of $81,000 relates to the decrease in cost associated with promoting engineering services and the reduction in staff numbers in Europe. Interest expense increased by $68,000 to approximately $74,000 in the three months ended December 31, 2001. This is due to the accrued interest and debt discount amortization on the two debentures issued in May and November 2001. Page 15 of 19 LIQUIDITY AND SOURCES OF CAPITAL Net cash used by operations was approximately $206,000 for the six months ended December 31, 2001 and approximately $480,000 for the six months ended December 31, 2000. Cash was utilized in all departments, i.e. sales, marketing and administration in the United Kingdom and Europe. Working capital was approximately $(162,000) at December 31, 2001 and approximately $(256,000) at June 30, 2001. Working capital has been utilized primarily to fund operations. In November 2001, the Company issued a second 6% debenture. As a result, the Company raised approximately $100,000. The Company is presently attempting to raise additional capital to fund operations. If additional capital is not raised within the next three months, it will be necessary to substantially curtail or cease operations. CURRENCY FLUCTUATION Currency fluctuations were insignificant to the Company's operations for the six months ended December 31, 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, most commonly the Euro. Changes in the exchange rates of these 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 6 months ended December 31, 2001 have been translated to dollars at a rate of $1.44/ 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 six months ended December 31, 2001 and 2000. Page 16 of 19 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 The following exhibits are included herein: (1) Statement re: computation of earnings per share The Company did not file any reports on Form 8-k during the six months ended December 31, 2001. Page 17 of 19

Page 18 of 19 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: February 11, 2002 /s/ Anthony J. S. Garner ------------------- ---------------------------- Chief Executive Officer Page 19 of 19

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