SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 (Fee Required)
For the fiscal year ended June 30, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No Fee Required)
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)
300 Delaware Avenue, #1704, Wilmington, Delaware 19801-1622
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (302) 427-5957
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par value $.01 Boston Stock Exchange
Series A Redeemable Common
Stock Purchase Warrant ("A Warrants") Boston Stock Exchange
Series B Redeemable Common
Stock Purchase Warrant ("B Warrants") Boston Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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 twelve (12) months or for
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such shorter period that the registrant was required to file such reports,
and (2) has been subject to such filing requirements for the past ninety
(90) days. Yes: x No:
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing.
Aggregate market value of securities held by non-affiliates as of September 16,
1998 - $3,385,405.
.
Indicate the number of shares outstanding of each of the registrant's class of
common stock, as of the latest practicable date. At September 16, 1998, there
were 6,417,655 common shares, 1,200,000 Series A Warrants, 1,172,700 Series B
Warrants and 189,000 Underwriters' Warrants, 771,883 Series C Warrants, 150,000
Consultant's Warrants outstanding.
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) any annual report to security-holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security-holders
for fiscal year ended December 24, 1980)
1. Part III incorporates by reference the Company's Proxy Statement to
stockholders for the Annual Meeting to be held November 12, 1998.
2. Part IV, Item 14, incorporated by reference the following Exhibits: 3.1, 3.2,
4.1, 4.2, 4.3 and 10.1.
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PART I
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.
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 fuel consumption
ranging from 2.5% to 7%, a reduction in CO2 emissions ranging from 2.5% to 7%, a
reduction in CO emissions ranging from 6% to 80%, a reduction in NOx emissions
ranging from 6% to 40%. 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 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.
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MARKETING AND SALES
Performance Trials
The Company initially sought to performance test its System in
locations where a sale 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 Lowenbrau brewery by the German test
authority TUV and showed that with the IFT System the boiler was able to operate
with less combustion air thereby improving the thermal efficiency. 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.
During 1998 the company received further endorsements from BP
Energy; BP Chemicals; Degussa AG and Texaco following extensive operation of IFT
Systems at their respective sites.
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, vehicle manufactures, 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
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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 though dealers who are assigned a specific territory and compensated
on a commission basis. This marketing method is generally used in Europe.
During the year the Company signed agreements with Cockerill Mechanical
Industries, a division of Cockerill Sambre, Belgium and BP Energy, the energy
management division of BP PLC. CMI is the market leader in boiler servicing in
Belgium BP Energy has 70 customers in the United Kingdom.
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.
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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 plans to launch an enhanced
IFT System in 1999 developed to meet the anticipated requirements of the oil
industry, with further developments later in the year following discussions with
UK utility companies.
The Company's research and development costs increased to $46,248 during the
year ended June 30, 1998 from $3,973 in the year ended June 30, 1997 and $17,532
during the year ended June 30, 1996. This increase is due to new models under
development, research and development costs are written off as incurred.
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 $.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
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"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 licence 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. More recently emphasis has been placed on
reductions of Carbon Dioxide (CO2), often referred to as "Greenhouse gas" and
International programs are being established to achieve reductions of this
particular gas.
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 may be 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 working
with customers on an individual basis prior to and during its process of
negotiating permits where the System "accepted" by such regulatory agencies.
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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 is
required to achieve the final lower NOx level.
While the Company believes that it's 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
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System. There can be no assurance that the Company would not be adversely
affected by such technological change.
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 2007, the base
rent for this facility is approximately $7,743 per month for 1998 to December
2000, with the rent to be reviewed for the January 2001 and January 2005
periods.
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 was renewed in December 1997 on the same terms.
The Company believes that its facilities are adequate for its present
and anticipated needs.
Item 3. LEGAL PROCEEDINGS
Not applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
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PART II
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 Company is not currently in compliance
with all NASDAQ listing requirements.
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.
The Class A Warrants expire September 30, 1998.
Bid
Period Ended Type of Security High Low
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
September 1997 Common Stock 3 1 5/8
Class A Warrant 3/32 1/16
Class B Warrant 5/32 1/8
December 1997 Common Stock 5 9/16 2 3/8
Class A Warrant 9/16 3/32
Class B Warrant 9/16 1/8
March 1998 Common Stock 4 1/16 3
Class A Warrant 7/16 9/32
Class B Warrant 3/4 9/32
June 1998 Common Stock 3 1 1/4
Class A Warrant 1/8 1/16
Class B Warrant 5/16 3/32
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At September 16, 1998 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. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Year Ended Year Ended Year Ended Year Ended
June 30, 1994 June 30, 1995 June 30, 1996 June 30, 1997
Statement of
Operations Data:
Revenues $1,190,291 $ 476,161 $ 593,959 $ 628,694
Cost of Revenues 445,355 344,868 537,110 723,327
Operating Expenses 2,631,912 2,974,998 1,669,145 882,524
Net Loss (1,928,987) (2,725,744) (1,563,667) (1,004,425)
Net Loss per
sh are $ (.46) $ (.51) $ (.29) $ (.19)
Weighted average
number of 4,210,668 5,318,445 5,400,000 5,401,600
common shares
Cash Dividend
per common share --- ---- --- ---
Balance Sheet:
Total Assets $2,601,471 $4,463,543 $2,659,185 $1,549,619
Working Capital 636,096 2,687,338 1,306,293 434,686
Long-term
liabilities 422,521 394,625 364,773 346,249
Total
liabilities 1,318,560 1,106,581 886,274 705,062
Accumulated
deficit (4,609,831) (7,335,575) (8,899,242) (9,903,667)
Cumulative
translation
adjustment (161,817) (130,436) (150,820) (143,199)
Stockholders'
Equity 1,282,911 3,356,962 1,772,911 844,557
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Statement of Operations Year Ended
Data: June 30, 1998
Revenues......................... $ 437,650
Cost of Revenues............ 692,952
Operating Expenses.......... 1,106,406
Net (loss)......................... (1,348,156)
Net (loss) per share.......... $ (0.22)
Weighted average number
of common shares......... 6,251,376
Cash dividend per common
share............................... --
Balance Sheet
Data:
Total assets.............................. $ 2,427,717
Working capital....................... 1,323,540
Long-term liabilities................. 393,376
Total liabilities......................... 701,111
Accumulated deficit................. (11,251,823)
Cumulative translation
adjustment............................. (133,579)
Stockholders' equity................ 1,726,606
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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 on 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.
In early 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. Likewise initial installations have been
completed at sites with British Petroleum and Degussa. An average size refinery
or petrochemical plant could utilize IFT technology and equipment valued at
approximately $1,000,000. During 1998 marketing and alliance agreements were
reached with CMI Servicing, a unit of the Cockerill Sambre Group, one of
Belgium's largest companies and with BP Energy a unit of BP PLC. In addition
Land Rover, a unit of BMW and Degussa were added as new customers.
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, 1998 and June 30, 1997
Total revenues decreased to approximately $438,000 during the year
ended June 30, 1998 from $629,000 in the fiscal year ended June 30, 1997. The
net decrease relates to a decrease in system sales to approximately $89,000
($261,000 in 1997), a decrease in rental income to approximately
$349,000 ($368,000 in 1997). The decrease in system sales relates to one
purchase in the prior year not repeated in the current year. The decrease in
rental income relates to the phasing out of those leases which fell
below an acceptable monthly income.
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There was a gross loss of approximately $255,000 during the year ended
June 30, 1998 compared to a loss of approximately $95,000 during the year ended
June 30, 1997. The increased gross loss related primarily to the decline in
revenues being greater than the decline in cost of sales, which are primarily
fixed. Cost of sales decreased approximately $30,000 to $693,000 ($723,000 for
fiscal 1997) whereas revenues decreased by approximately $191,000.
General and administrative expenses increased to approximately $793,000
during the year ended June 30, 1998 from approximately $657,000 in the year
ended June 30, 1997, an increase of $136,000. This increase is primarily due to:
an increase of approximately $42,000 in stock market related expenses,
specifically public relation fees and stock registration fees; an increase of
approximately $18,000 in legal and professional fees and an increase of general
and administrative expenses that had been allocated to cost of sales in 1997 but
not in 1998, due to the reduction in manufacturing activities.
Sales and marketing expenses increased to $217,000 during the year
ended June 30, 1998 from approximately $161,000 during the year ended June 30,
1997. The increase of $56,000 is primarily due to additional marketing
consulting and staff costs.
Other income was approximately $14,000 during the year ended June 30,
1998 compared to expense of $27,000 during the year ended June 30, 1997, an
increase of $41,000, primarily due to an increase in interest income as a result
of capital issued during fiscal 1998.
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/service income to approximately
$368, 000 ($404,000 in 1996), an increase in system sales to approximately $261,
000 ($190,000 in 1996). The decrease in rental income is due to rentals being
convened 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.
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
the 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.
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General and administrative expenses decreased to approximately $657,000
during the year ended June 30, 1997 from approximately $1,230,000 in the year
ended 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 administrative as stated
above. Other items in the 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,
199 6. 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 expense of approximately $27,000 during the year
ended June 30, 1997 decreased from income of $49,000 during the year ended
June 30, 1996, a decrease of $76,000 primarily due to the use of funds in
operations of the Company and reduced interest income.
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 net proceeds of $1,552,116 and on
March 31, 1998 the Company sold an additional 147,800 shares of common stock
with gross proceeds of $300,750.
Net cash used in operations was approximately $1.2 million, $900,000
and $1.3 million for the years ended June 30, 1998, 1997 and 1996, respectively.
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 $1.3 million, $435,000 and $1.3 million at
June 30, 1998, 1997 and 1996, respectively. Fluctuations in working capital have
been primarily due to fluctuations in cash, decreases in accounts payable and
other accruals.
The Company liquidated its U.S. Treasury investments during the year
ended June 30, 1996. Capital expenditures amounted to approximately $88,000 and
$29,000 during fiscal years 1998 and 1997, 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.
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 the
Royalty Agreement, the Company pays an executive officer/director of the Company
a royalty override of $5,000 per month.
15
<PAGE>
The Company believes that the proceeds from the above offerings
together with anticipated funds from operations, will satisfy the company's
working capital requirements and capital expenditures through fiscal 1999. The
Company intends to focus its operations primarily on continued expansion within
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). With
the recent introduction of the European common currency, the euro, the Company
also expects to invoice revenues in this currency for those sales to States
within Europe who have joined the European Monetary System. Revenues invoiced to
customers within the United Kingdom will continue to be in Pounds Sterling.
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, 1998 and 1997, currency fluctuations were not significant and were not
an influence on the Company's revenues and expenses. Currently, the Company does
not enter into derivative contracts to hedge currency risks.
During the year ended June 30, 1998 the average rate of exchange used
to translate revenues and expenses denominated in Pounds Sterling has remained
at approximately 1.65 U.S. dollars to 1 Pound Sterling, consistent with
the year ended June 30, 1997.
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
16
<PAGE>
Company's products, risks associated with the 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.
Impact of Year 2000
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any computer
programs that have time or date sensitive software may recognize a date defined
as "0(Y' as being the Year 1900 rather than the Year 2000. This could cause
system failure, miscalculations or other disruptions of operations, including,
among other things an inability to process transactions, obtain supplies or raw
materials from vendors or otherwise engage in normal business activities.
The Company has reviewed the impact of the Year 2000 on both the
hardware and software applications affecting the Company's operations. Based on
such review. management does not expect the cost of any required software
changes to have a material impact on the Company's operations and such changes
can be implemented prior to the Year 2000 in the normal course of business.
Management cannot predict the impact of the Year 2000 on its vendors business or
whether such impact will have a material effect on the Company's operations.
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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable
17
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K
Page
A. (1) Financial Statements
Report of Independent Auditors F-1
Consolidated Balance Sheet - June 30, 1998 and 1997 F-2
Consolidated Statement of Operations - Years Ended F-3
June 30, 1998, 1997 and 1996
Consolidated Statement of Stockholders' Equity - F-4
Years Ended June 30, 1998, 1997 and 1996
Consolidated Statement of Cash Flows - Years Ended F-5
June 30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements F-6
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.
18
<PAGE>
(3) Exhibits
3.1 Certificate of Incorporation
Incorporated by reference to the filing of such Exhibit with
Registrants Annual Report on Form 10-K 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 10-K 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 10-K
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 10-K
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 10-K
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 10-K for the
fiscal year ended June 30, 1996.
23.1 Consent of Independent Auditors
27 Financial Data Schedule
B. Reports on Form 8-K
Form 8-K 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 8-K 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.
19
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
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, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 1998. 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, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended June 30, 1998, 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
presents fairly in all material respects, the information set forth therein.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
August 28, 1998
F-1
<PAGE>
Ionic Fuel Technology, Inc.
Consolidated Balance Sheet
June 30
1998 1997
---------------------------------------
---------------------------------------
Assets
Current assets:
Cash and cash equivalents (Note 1) $ 1,082,872 $ 191,629
Trade accounts receivable 66,839 59,420
Inventory (Note 2) 348,496 404,774
Prepaid expenses 133,068 137,676
---------------------------------------
Total current assets 1,631,275 793,499
Equipment and vehicles, net (Notes 1 and 3) 245,551 153,117
Patents, net (Notes 1 and 4) 550,891 603,003
=======================================
Total assets $ 2,427,717 $ 1,549,619
=======================================
=======================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 87,324 $ 87,155
Accrued expenses 115,920 162,155
Provisions for warranties and returns 20,272 16,380
Accrued royalty - due to officer (Note 4) 4,800 40,000
Current portion of royalty agreement (Note 4) 21,464 18,720
Accrued salary, benefits and payroll taxes 19,834 19,419
Current portion of capital lease obligations (Note 5) 38,121 14,984
---------------------------------------
---------------------------------------
Total current liabilities 307,735 358,813
Long-term liabilities (Notes 4 and 5):
Long-term obligations less current portion 68,362 -
Other long-term liabilities 325,014 346,249
---------------------------------------
Total long-term liabilities 393,376 346,249
Commitments and contingencies (Note 5)
Stockholders' equity (Note 7): Common stock, $.01 par value:
20,000,000 shares authorized; issued and outstanding 6,444,955 shares and
5,401,600 shares, respectively (Note 7) 64,450 54,016
Capital in excess of par value 13,047,558 10,837,407
Accumulated deficit (11,251,823) (9,903,667)
Cumulative translation adjustment (Note 1) (133,579) (143,199)
---------------------------------------
Total stockholders' equity 1,726,606 844,557
---------------------------------------
=======================================
Total liabilities and stockholders' equity $ 2,427,717 $ 1,549,619
=======================================
See accompanying notes.
F-2
<PAGE>
Ionic Fuel Technology, Inc.
Consolidated Statement of Operations
Year ended June 30
1998 1997 1996
-----------------------------------------------------------
Revenues (Note 1):
Sales $ 88,870 $ 260,679 $ 190,443
Rentals 348,780 368,015 403,516
-----------------------------------------------------------
Total revenues 437,650 628,694 593,959
Sales 205,484 184,063 116,818
Rentals 487,468 539,264 420,292
-----------------------------------------------------------
Cost of revenues 692,952 723,327 537,110
-----------------------------------------------------------
(255,302) (94,633) 56,849
Operating expenses:
General and administrative 792,690 657,133 1,229,969
Sales and marketing 217,468 161,418 361,644
Royalty charges 60,000 60,000 60,000
Research and development 36,248 3,973 17,532
-----------------------------------------------------------
1,106,406 882,524 1,669,145
-----------------------------------------------------------
Loss from operations (1,361,708) (977,157) (1,612,296)
Other income (expense):
Interest income 67,060 28,801 106,905
Interest expense (53,508) (56,069) (58,276)
-----------------------------------------------------------
13,552 (27,268) 48,629
-----------------------------------------------------------
Net (loss) $(1,348,156) $(1,004,425) $(1,563,667)
===========================================================
Net (loss) per share - basic and diluted (Note 1) $ (0.22) $ (0.19) $ (0.29)
============================================================
Weighted average number of common shares
(Note 1) 6,251,376 5,401,600 5,400,000
===========================================================
See accompanying notes.
F-3
<PAGE>
Ionic Fuel Technology, Inc.
Consolidated Statement of Stockholders' Equity
Common Stock Capital in Cumulative
-----------------------------
Par Excess of Accumulated Translation
Shares Value Par Value Deficit Adjustment Total
---------------------------------------------------------------------------------
Balance at June 30, 1995 5,400,000 $54,000 $10,768,973 $(7,335,575) $(130,436) $3,356,962
Net loss (1,563,667) (1,563,667)
Translation adjustment (20,384) (20,384)
---------------------------------------------------------------------------------
Balance at June 30, 1996 5,400,000 54,000 10,768,973 (8,899,242) (150,820) 1,772,911
Net loss (1,004,425) (1,004,425)
Issuance of compensatory stock options and
warrants 68,000 68,000
Exercise of stock options 1,600 16 434 450
Translation adjustment 7,621 7,621
---------------------------------------------------------------------------------
Balance at June 30, 1997 5,401,600 54,016 10,837,407 (9,903,667) (143,199) 844,557
Net loss (1,348,156) (1,348,156)
Exercise of stock options and warrants
148,722 1,487 367,981 369,468
Sale of stock 894,633 8,947 1,842,170 1,851,117
Translation adjustment 9,620 9,620
---------------------------------------------------------------------------------
Balance at June 30, 1998 6,444,955 $64,450 $13,047,558 $(11,251,823) $(133,579) $ 1,726,606
================================================================================
See accompanying notes.
F-4
<PAGE>
Ionic Fuel Technology, Inc.
Consolidated Statement of Cash Flows
Year ended June 30
1998 1997 1996
-----------------------------------------------------------
Operating activities
Net (loss) $(1,348,156) $(1,004,425) $(1,563,667)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 80,899 66,241 111,316
Amortization 64,155 62,661 85,653
Non cash compensation - 16,000 -
Changes in operating assets and liabilities:
Accounts receivable (7,178) 26,128 112,352
Other receivables (13,203) 8,674 2,311
Inventory 152,547 121,136 (9,058)
Prepaid expenses 25,247 19,211 61,750
Other assets (6,882) 2,195 33,374
Accounts payable and accrued expenses (100,674) (208,793) (174,440)
-----------------------------------------------------------
Net cash (used) in operating activities (1,153,245) (890,972) (1,340,409)
Investing activities
Acquisition of patents and license (12,043) (25,885) (18,703)
Acquisition of equipment (88,084) (29,239) -
Accretion of interest - - (13,949)
Proceeds from maturity of investments - - 1,300,000
-----------------------------------------------------------
Net cash (used in) provided by investing activities (100,127) (55,124) 1,267,348
Financing activities
Principal payments on capital leases (11,232) - (14,707)
Principal payments under licensing agreement (18,393) (15,931) (13,725)
Net proceeds from issuance of stock 2,166,085 450 -
-----------------------------------------------------------
Net cash provided by (used in) financing activities 2,136,460 (15,481) (28,432)
-----------------------------------------------------------
Effects of exchange rate differences on cash 8,155 (19,882) (6,677)
-----------------------------------------------------------
Increase (decrease) in cash 891,243 (981,459) (108,170)
Cash, beginning of year 191,629 1,173,088 1,281,258
===========================================================
Cash, end of year $ 1,082,872 $ 191,629 $ 1,173,088
===========================================================
Interest paid $ 53,508 $ 56,069 $ 58,276
===========================================================
See accompanying notes.
F-5
<PAGE>
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, 1998 and 1997, the Company maintained cash balances of approximately
$1,080,000 and $69,000, 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.
F-6
<PAGE>
Ionic Fuel Technology, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Intangible Assets
Patents are carried at acquisition 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 $64,155, $62,661 and $61,732 for the years ended June 30,
1998, 1997 and 1996, respectively. Accumulated amortization amounted to $376,423
and $322,272 at June 30, 1998 and 1997, respectively. The carrying value of the
patents are reviewed by management on a periodic basis and when facts and
circumstances suggest the value may be impaired. If this review indicates that
the carrying amounts will not be recoverable, as determined based on the
undiscounted cash flows of revenues generated as a result of such patents over
the remaining amortization period, management will reduce the carrying amount by
the estimated shortfall in cash flows.
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 for the year ended June 30, 1996.
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, accounts payable and capital
lease obligations and other long-term liabilities: The carrying amounts reported
in the balance sheet for cash and cash equivalents, accounts receivable,
accounts payable and capital lease obligations and other long-term liabilities
approximate their fair value.
Stock Compensation
The Company applies the recognition and measurement provisions of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees" and the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" in accounting for stock options.
F-7
<PAGE>
Ionic Fuel Technology, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Per Share Data
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128 "Earnings per Share" ("Statement 128"). Statement 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. The Company's net loss per share calculated under the basic earnings
per share method is the same as under the primary earnings per share method.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share. As a result of having incurred losses, all dilutive
securities have been omitted from the calculation of diluted net loss per share
since their inclusion would be anti-dilutive. Therefore, basic and diluted net
loss per share are the same for all periods. Given this set of facts, the net
loss per share amounts as previously reported did not require restatement.
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
Sales are recognized upon shipment of the equipment and are recorded net of an
allowance for returns. 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.
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 employees caused by the maturing of the Company's
system from a developmental state to a mature product.
New Accounting Pronouncements
During 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 130 is effective for the first quarter of fiscal 1999,
while SFAS No. 131 is effective for year end financial reporting in fiscal
1999 and on an interim basis thereafter. Both of these pronouncements require
additional disclosures and the Company expects no material impact upon adoption.
F-8
<PAGE>
Ionic Fuel Technology, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Reclassification
Certain amounts at years ended June 30, 1997 and 1996 have been reclassified to
conform to the presentation at the year ended June 30, 1998.
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.
2. Inventory
Inventory is comprised of the following:
June 30
1998 1997
-----------------------------------
-----------------------------------
Material and supplies $149,367 $161,817
Finished goods 199,129 242,957
===================================
$348,496 $404,774
===================================
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
1998 1997
-----------------------------------
-----------------------------------
Equipment $501,465 $ 440,540
Vehicles 114,992 35,015
-----------------------------------
616,457 475,555
Accumulated depreciation (403,648) (394,708)
-----------------------------------
212,809 80,847
-----------------------------------
Equipment under lease 109,268 119,667
Accumulated depreciation (76,526) (47,397)
-----------------------------------
32,742 72,270
-----------------------------------
$245,551 $ 153,117
===================================
Depreciation expense, relating to the leased equipment, amounted to $29,129,
$15,247 and $20,898 for the years ended June 30, 1998, 1997 and 1996,
respectively.
F-9
<PAGE>
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 using an interest rate of 15% per annum. The
remaining balance of this obligation, less amounts currently due ($21,464), is
included in other long-term obligations and has the following maturities:
Year ending June 30:
2000 $ 25,246
2001 29,281
2002 33,989
2003 39,472
Thereafter 197,026
-------------
$325,014
=============
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.
The Company's Chairman, Douglas F. Johnston, receives an override royalty of
$5,000 per month until the last of the patents expires in 2007. This expense
amounted to $60,000, for each of the years ended June 30, 1998, 1997 and 1996.
Commencing in 1995, $1,600 per month of this override royalty was deferred
resulting in an accrued royalty expense of $4,800 and $40,000 at June 30, 1998
and 1997, respectively (see Note 7).
5. Commitments and Contingencies
Leases
The Company is the lessee of vehicles under capital leases which expire in 2001.
The Company leases its facility under a noncancelable operating lease expiring
in 2007. The future minimum lease payments under operating and capital leases as
of June 30, 1998 are as follows:
Operating leases Capital leases
----------------------------------
----------------------------------
Year ending June 30:
1999 $ 173,848 $ 36,747
2000 167,730 36,747
2001 110,526 27,942
2002 98,442 3,566
2003 98,442 1,482
Thereafter 418,376 -
----------------------------------
Total minimum lease payments $1,067,364 $106,484
==================================
The cost of assets under capital leases amounted to $106,484 and $15,247 at June
30, 1998 and 1997.
Rent expense amounted to $143,873, $166,118 and $135,720 for the years ended
June 30, 1998, 1997 and 1996, respectively.
F-10
<PAGE>
Ionic Fuel Technology, Inc.
Notes to Consolidated Financial Statements (continued)
5. Commitments and Contingencies (continued)
The future minimum lease payments receivable under noncancelable operating
leases as of June 30, 1998 are as follows:
Operating
leases
--------------
--------------
Year ending June 30:
1999 $43,794
2000 1,147
--------------
Total minimum lease payments receivable $44,941
==============
Long-Term Obligations
Long-term obligations as of June 30, 1998, consist of a 10% chattel note payable
over 36 months that began in December 1997, plus various capital leases.
6. Income Taxes
At June 30, 1998, the Company has available operating loss carryforwards for
United States federal income tax purposes of $2,434,353 which are available to
offset future U.S. taxable income. The losses expire in varying amounts from
2007 through 2013 and are subject to limitations on utilization resulting from
prior changes in the ownership of the Company. The Company's subsidiary has
unused operating loss carryforwards, with no expiration date, for United Kingdom
income tax purposes, of $8,758,145 at June 30, 1998.
Significant components of the Company's deferred tax assets are as follows:
June 30
1998 1997
--------------------------------------
Deferred tax assets:
Benefit of net operating loss carryforwards - U.S. $ 827,680 $ 695,353
Benefit of net operating loss carryforwards - U.K. 1,839,210 1,854,745
Depreciation in excess of capital allowances 31,658 16,904
Other 15,608 41,477
--------------------------------------
Total deferred tax assets 2,714,156 2,608,479
Valuation allowance (2,714,156) (2,608,479)
======================================
Total net deferred tax assets (liabilities) $ - $ -
======================================
F-11
<PAGE>
Ionic Fuel Technology, Inc.
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity
On July 28, 1994, the Company issued 1,200,000 units, each unit consisting of
one share of common stock, par value $0.01 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 until September 30, 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 $0.01 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 expenses of $1,231,586.
On July 14, 1997, the Company completed a private offering of its common stock
and Series C warrants at a price of $2.25 per unit. The Company issued 771,833
units. 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 77,183 Series C Warrants to their
broker in exchange for the services provided. The Company received total
proceeds of $1,552,116, net of offering expenses of $184,508. In December 1997,
97,722 of the Series C warrants were exercised.
On March 31, 1998 the Company completed an offering of 147,800 shares of common
stock, par value $0.01 per share, at a price of $2.50 per share. Concurrent with
the offering, 25,000 warrants issued in April 1997 to a financial consultant
(see discussion below) were exercised at a price of $2.25. Also, a
founder/officer of the Company who receives an override royalty (see Note 4),
received 21,800 shares in consideration of $54,500 of accrued royalties owed to
him by the Company. The Company raised $300,750 net of offering expenses of
$8,000 and the accrued royalty liability of $54,500.
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
granted to directors are exercisable immediately. As of June 30, 1998, 30,000
director options were granted and exercisable. All non-director 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.
Pro forma information regarding net income and net loss per share is required by
SFAS No. 123, which also requires that the information be determined as if the
Company had accounted for its employee stock options granted subsequent to June
30, 1995 under the fair value method of that Statement. The fair value of these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for the years ended June
30, 1998, 1997 and 1996, respectively; risk-free interest rates of 5.8%, 6.7%
and 6.0%; volatility factors of the expected market price of the Company's
common stock of 93%, 129% and 164% and a weighted-average expected life for the
options of 5, 10 and 10 years and no anticipated dividends.
F-12
<PAGE>
Ionic Fuel Technology, Inc.
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
The Black-Scholes option pricing model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
and warrants are amortized to expense over the vesting periods. The Company's
pro forma net loss would have been approximately $1,396,993, $1,010,203,
$1,563,937 and pro forma net loss per share would have been $(0.22), $(0.19) and
$(0.29) for the years ended June 30, 1998, 1997 and 1996, respectively.
In accordance with the provisions of SFAS No. 123, the pro forma disclosures
include only the effect of stock options granted in the years ended June 30,
1998, 1997 and 1996. These pro forma effects may not be representative of the
effects of SFAS No. 123 on future years because of the fact that options vest
over several years and new grants generally are made each year.
The following presents a summary of the Company's stock option activity and
related information:
Weighted
average
Option price exercise price
Number per share per share
of shares
------------------------------------------------
------------------------------------------------
Options outstanding at June 30, 1995 62,000 $2.83-$5.00 $4.62
Granted 64,000 $ .28-$.63 $ .43
Exercised -
Canceled -
---------------
Options outstanding at June 30, 1996 126,000 $ .28-$5.00 $2.49
Granted 206,000 $1.06-$4.00 $2.49
Exercised (1,600) $.28 $ .28
Canceled -
---------------
Options outstanding at June 30, 1997 330,400 $ .28-$5.00 $2.50
Granted 96,000 $1.75-$4.00 $3.44
Exercised (26,000) $ .28- $1.34 $ .96
Canceled (18,000) $ .28- $1.06 $ .79
===============
Options outstanding at June 30, 1998 382,400 $ .28- $5.00 $2.92
===============
At June 30, 1998, options for 67,600 shares were available for future grants and
237,600 options were exercisable.
F-13
<PAGE>
Ionic Fuel Technology, Inc.
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
The following table summarizes information concerning outstanding and
exercisable options, excluding the 150,000 options issued to a financial public
relations firm, as of June 30, 1998:
Options Outstanding Options Exercisable
- --------------------- ----------------------------------------- -------------------- -----------------------------------------
- --------------------- -------------------- -------------------- -------------------- -------------------- --------------------
Weighted-Average
Remaining
Contractual Life Weighted-Average Weighted-Average
Range of Exercise Number Outstanding (in years) Exercise Price Number Exercisable Exercise Price
Prices
- --------------------- -------------------- -------------------- -------------------- -------------------- --------------------
$0.01 - $1.00 26,400 7.39 $0.41 13,600 $0.44
$1.01 - $2.00 56,000 8.86 $1.36 20,400 $1.53
$2.01 - $3.00 20,000 5.00 $2.81 4,000 $2.81
$3.01 - $4.00 72,000 9.50 $4.00 - -
$4.01 - $5.00 58,000 5.37 $4.74 49,600 $4.74
===================== ==================== ==================== ==================== ==================== ====================
232,400 7.85 $2.87 87,600 $3.24
===================== ==================== ==================== ==================== ==================== ====================
The weighted-average fair value of options granted during the years ended June
30, 1998, 1997 and 1996 was $2.56, $1.10 and $0.09, respectively.
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 each of the years ended June
30, 1998 and 1997, the Company has recognized compensation expense for the fair
value of these options of $10,000.
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 on 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 $24,000
and $6,000 was recognized for the years ended June 30, 1998 and 1997,
respectively. As noted above, 25,000 warrants were exercised at a price of $2.25
per warrant as part of the March 1998 offering.
F-14
<PAGE>
Ionic Fuel Technology, Inc.
Notes to Consolidated Financial Statements (continued)
8. Results of Foreign Operations
Geographic operations of the Company are as follows:
Adjustments and
Eliminations
United States Europe Consolidated
-----------------------------------------------------------------------------
Year ended June 30, 1998
Total revenue $ - $ 427,097 $ 10,553 $ 437,650
Loss from operations (368,189) (993,519) - (1,361,708)
Other income (expense), net 13,552
-------------------
Net (loss) (1,348,156)
Identifiable assets 11,852,985 1,524,899 (10,950,167) 2,427,717
Year ended June 30, 1997
Total revenue - 601,408 27,286 628,694
Loss from operations (263,664) (709,309) (4,184) (977,157)
Other income (expense), net (27,268)
-------------------
Net (loss) (1,004,425)
Identifiable assets 10,039,427 826,780 (9,316,588) 1,549,619
Year ended June 30, 1996
Total revenue - 593,959 - 593,959
Loss from operations (449,066) (1,197,933) 34,703 (1,612,296)
Other income (expense), net 48,629
-------------------
Net (loss) (1,563,667)
Identifiable assets 10,266,606 1,001,869 (8,609,290) 2,659,185
F-15
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions/Deductions
Balance at Charged to Write-Offs
Description Beginning of Costs and Net of
Period Expenses Recoveries Balance at
End of
Period
For the year ended June 30, 1996
Allowance for doubtful accounts $45,004 $ - $ 1,213 $43,791
Inventory reserve $30,755 $26,560 $ - $57,315
For the year ended June 30, 1997
Allowance for doubtful accounts $43,791 $ 510 $44,301 $ -
Inventory reserve $57,315 $37,647 $ - $94,962
For the year ended June 30, 1998
Allowance for doubtful accounts $ - $ 1,714 $ 1,714 $ -
Inventory reserve $94,962 $ 710 $12,332 $83,340
<PAGE>
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 28, 1998
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.
Name Titles Date
Douglas F. Johnston Chairman & Chief Financial September 28, 1998
Officer
Anthony J.S. Garner President, Chief Executive September 28, 1998
Officer and Director
Frank J. Hollendoner Director September 28, 1998
Henry W. Sullivan Director September 28, 1998
</TABLE>
Consent of Independent Auditors
We consent to the incorporation by reference in the Amendment No. 2 to
Registration Statement (Form S-3 No. 333-45847) of Ionic Fuel Technology, Inc.
and in the related Prospectus of our report dated August 28, 1998, with respect
to the consolidated financial statements and schedule of Ionic Fuel Technology,
Inc. included in this Annual Report (Form 10-K) for the year ended June 30,
1998.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
September 28, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFOMRATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-k AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 1,082,872
<SECURITIES> 0
<RECEIVABLES> 66,839
<ALLOWANCES> 0
<INVENTORY> 348,496
<CURRENT-ASSETS> 1,631,275
<PP&E> 725,725
<DEPRECIATION> 480,174
<TOTAL-ASSETS> 2,427,717
<CURRENT-LIABILITIES> 307,735
<BONDS> 0
0
0
<COMMON> 64,450
<OTHER-SE> 1,662,156
<TOTAL-LIABILITY-AND-EQUITY> 2,427,717
<SALES> 88,870
<TOTAL-REVENUES> 437,650
<CGS> 692,952
<TOTAL-COSTS> 1,106,406
<OTHER-EXPENSES> (67,060)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 53,508
<INCOME-PRETAX> (1,348,156)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,348,156)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,348,156)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> (.22)
</TABLE>
