10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

     For the quarterly period ended September 30, 2012

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

     For the transition period from __________ to ____________________

Commission File No. 000-25367

INTERNATIONAL FUEL TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)

Nevada	88-0357508
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
7777 Bonhomme, Suite 1920 St. Louis, Missouri (Address of principal executive offices)	63105 (Zip Code)
(314) 727-3333 (Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes      ­ x                           No     o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of  “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

(Check one) Large Accelerated Filer o	Accelerated Filer o
Non-Accelerated Filer o	Smaller Reporting Company x
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 

Yes      ­ o                           No     x

The number of shares outstanding of registrant's only class of stock as of November 12, 2012: Common stock, par value $0.01 per share – 124,385,284 shares outstanding.

PART I.  FINANCIAL INFORMATION	PAGE NO.
Item 1.  Financial Statements
Balance Sheets — September 30, 2012 (unaudited) and December 31, 2011	2
Statements of Operations (unaudited) — Three-Month and Nine-Month Periods Ended September 30, 2012 and September 30, 2011	3
Statement of Stockholders’ Deficit (unaudited) — Nine-Month Period Ended September 30, 2012	4
Statements of Cash Flows (unaudited) — Nine-Month Periods Ended September 30, 2012 and September 30, 2011	5
Notes to Financial Statements	6
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 4.  Controls and Procedures	22
PART II.  OTHER INFORMATION
Item 1.  Legal Proceedings	23
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 5.  Other Information	25
Item 6.  Exhibits	25

INTERNATIONAL FUEL TECHNOLOGY, INC.

BALANCE SHEETS

	September 30,			December 31,
	2012			2011
ASSETS	(Unaudited)
Current assets
Cash and cash equivalents	$	146,209		$	316,895
Accounts receivable		10,241			85,222
Inventory		67,912			72,563
Prepaid expenses and other assets		22,792			19,612
Total Current Assets		247,154			494,292
Property and equipment
Machinery, equipment and office furniture		63,706			63,706
Accumulated depreciation		(63,706	)		(63,706	)
Net Property and Equipment		-			-
Goodwill		2,211,805			2,211,805
Total Assets	$	2,458,959		$	2,706,097
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable	$	323,858		$	272,846
Accrued compensation		378,151			175,078
Deferred revenue (Note 7)		2,998,242			2,998,242
Note payable to a related party (Note 6)		200,000			-
Other accrued expenses (Note 5)		190,000			190,000
Total Current Liabilities		4,090,251			3,636,166
Deferred rent		14,263			-
Deferred income taxes (Note 8)		643,000			595,000
Total Long-term Liabilities		657,263			595,000
Total Liabilities		4,747,514			4,231,166
Commitments and contingencies
Stockholders' deficit (Notes 4 and 5)      Common stock, $0.01 par value; 250,000,000 shares authorized; 122,322,784 and      114,435,284 (both net of 1,440,000 shares held in treasury) shares issued and      outstanding at September 30, 2012 and December 31, 2011, respectively		1,237,628			1,158,753
Treasury stock		(664,600	)		(664,600	)
Discount on common stock		(819,923	)		(819,923	)
Additional paid-in capital		67,191,218			66,603,635
Accumulated deficit		(69,232,878	)		(67,802,934	)
Total Stockholders' Deficit		(2,288,555	)		(1,525,069	)
Total Liabilities and Stockholders' Deficit	$	2,458,959		$	2,706,097
See Notes to Financial Statements.

2

INTERNATIONAL FUEL TECHNOLOGY, INC.

STATEMENTS OF OPERATIONS

(Unaudited)	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2012			2011			2012			2011
Net Revenues	$	47,614		$	59,281		$	204,612		$	167,785
Operating expenses:
Cost of operations (exclusive of depreciation)		34,022			41,396			132,949			115,466
Selling, general and administrative expense (including      non-cash stock-based compensation expense) (Note 4)		492,984			673,815			1,453,730			1,792,435
Depreciation		-			-			-			1,422
Total operating expenses		527,006			715,211			1,586,679			1,909,323
Loss from operations		(479,392	)		(655,930	)		(1,382,067	)		(1,741,538	)
Interest income		41			237			123			674
Loss before income taxes		(479,351	)		(655,693	)		(1,381,944	)		(1,740,864	)
Income tax provision (Note 8)		16,000			16,333			48,000			48,333
Net loss	$	(495,351	)	$	(672,026	)	$	(1,429,944	)	$	(1,789,197	)
Basic and diluted net loss per common share	$	(0.00	)	$	(0.01	)	$	(0.01	)	$	(0.02	)
Weighted-average common shares outstanding, basic and diluted		120,544,713			111,144,936			117,907,538			105,611,456
See Notes to Financial Statements.

3

INTERNATIONAL FUEL TECHNOLOGY, INC.

STATEMENT OF STOCKHOLDERS’ DEFICIT

FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2012

(Unaudited)

	Common Stock Shares		Common Stock Amount		Treasury Stock			Discount on Common Stock			Additional Paid-in Capital		Accumulated Deficit			Total
Balance, December 31, 2011		115,875,284	$	1,158,753	$	(664,600	)	$	(819,923	)	$	66,603,635	$	(67,802,934	)	$	(1,525,069	)
Sales of common stock		7,287,500		72,875		-			-			522,125		-			595,000
Conversion of related party notes to equity (Note 6)		600,000		6,000		-			-			54,000		-			60,000
Expense relating to non-cash stock-based compensation (Note 4)		-		-		-			-			11,458		-			11,458
Net loss		-		-		-			-			-		(1,429,944	)		(1,429,944	)
Balance, September 30, 2012		123,762,784	$	1,237,628	$	(664,600	)	$	(819,923	)	$	67,191,218	$	(69,232,878	)	$	(2,288,555	)

See Notes to Financial Statements.

4

INTERNATIONAL FUEL TECHNOLOGY, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months  Ended			Nine Months  Ended
	September 30,			September 30,
	2012			2011
Cash flows from operating activities:
Net loss	$	(1,429,944	)	$	(1,789,197	)
Adjustments to reconcile net loss to net cash used in
operating activities:
Bad debt provision		-			88,655
Depreciation		-			1,422
Deferred rent		14,263			-
Non-cash stock-based compensation		11,458			183,433
Deferred income tax provision		48,000			48,999
Change in assets and liabilities:
Accounts receivable		74,981			(38,822	)
Inventory		4,651			31,791
Prepaid expenses and other assets		(3,180	)		20,017
Accounts payable		51,012			91,301
Accrued compensation		203,073			115,867
Net cash used in operating activities		(1,025,686	)		(1,246,534	)
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants		595,000			1,028,300
Note payable from related party		260,000			-
Net cash provided by financing activities		855,000			1,028,300
Net decrease in cash and cash equivalents		(170,686	)		(218,234	)
Cash and cash equivalents, beginning		316,895			751,911
Cash and cash equivalents, ending	$	146,209		$	533,677
Supplemental Disclosure of Cash Flow Information:    Conversion of related party notes to equity	$	60,000		$	-
See Notes to Financial Statements.

5

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Basis of Presentation

International Fuel Technology, Inc. ("IFT" or the “Company”) is a company that was incorporated under the laws of the State of Nevada on April 9, 1996.  We have developed a family of fuel additive product formulations. These unique fuel blends have been created to improve fuel economy, enhance lubricity (reducing engine wear and tear) and lower harmful engine emissions, while decreasing reliance on petroleum-based fuels through the use of more efficient, alternative and renewable fuels.

We began transitioning from a development stage technology company to a commercial entity during 2002 and have been increasing our product marketing and sales efforts since.  We are now focused on continuing to develop the body of evidence of the efficacy of our products applicable to a wide range of markets and industries within these markets through additional industry specific laboratory testing and customer field-based demonstration trials.  In addition, we are continuing to strengthen our distributor and customer contact base.  Marketing and sales efforts, in conjunction with the additional industry specific testing, will complete our transition to a commercial enterprise.

The interim financial statements included herein have been prepared by IFT, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to make the information presented not misleading.

These statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary for fair presentation of the information contained therein.  Interim results are not necessarily indicative of results for a full year.  We suggest that these financial statements be read in conjunction with the financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2011 (the “2011 10-K”).  We follow the same accounting policies in preparation of interim reports as we do in our annual reports.

Basic earnings (loss) per share are based upon the weighted-average number of common shares outstanding for the period.  Diluted earnings (loss) per share are based upon the weighted-average number of common and potentially dilutive common shares outstanding for the period.  Pursuant to the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) subtopic No. 260-10, Earnings per Share, no adjustment is made for diluted earnings (loss) per share purposes since we are reporting a net loss, and common stock equivalents would have an anti-dilutive effect.  As of September 30, 2012 and September 30, 2011, 30,953,970 and 24,036,470 shares, respectively, of common stock equivalents were excluded from the computation of diluted net loss per share since their effect would be anti-dilutive.

Note 2 - Substantial Doubt About Ability to Continue as a Going Concern

Our financial statements are presented on the going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  We have incurred significant losses since inception and currently have, and previously from time to time, have had limited funds with which to operate.  Management is in the process of executing a strategy based upon marketing technologies that offer enhanced engine performance and greater fuel economy along with pollution control benefits.  We have several technologies in the commercialization phase and in development.  We have received necessary regulatory approvals for our products currently in the commercialization phase.  We are selling our products directly to the commercial marketplace. We expect to increase our sales to the marketplace, eventually generating a level of revenues sufficient to meet our cash flow and earnings requirements.  Until such time, we are dependent on external sources of capital to help fund the operations of the Company.

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While we cannot make any assurances as to the accuracy of our projections of future capital needs, we believe that based on our current cash position, projected sales for the remainder of 2012, a remaining equity commitment of $800,000 (entered into during 2007 with a related party Board member of IFT and significant shareholder) and discussions we are currently having with additional external capital sources, we have adequate cash and cash equivalents balances and commitments to fund operations through at least December 2012.

Management implemented a salary deferral program for all employees in 2011 to conserve our cash position.  The salary deferral program continues to operate in 2012.  Our current cash available as of November 14, 2012 is approximately $140,000, including $165,000 of equity raise proceeds (see Note 10 – Subsequent Events), approximately $24,000 of receivables collected and operational cash burn subsequent to September 30, 2012.

On July 16, 2012, we signed a Letter of Intent (“LOI”) with Black Diamond Financial Group LLC (“Black Diamond”).  Pursuant to the terms of the LOI, Black Diamond and its affiliates intend to invest up to $4,500,000 in IFT.  As of November 14, 2012, we have received $300,000 of this intended investment amount.  In addition, as of November 14, 2012, we have received $300,000 of equity funding from a small group of accredited investors independent from (but with similar terms to) the Black Diamond LOI.

If we are unable to close the Black Diamond financing and absent a very near-term cash infusion from the remaining $800,000 equity commitment or otherwise, our cash will be exhausted by early December 2012.  If this future financing is not available, our business may fail.  We cannot make assurances that capital financing will be available to us on acceptable terms, or at all.  Although we are exploring our options regarding other capital sources, we currently have no other firm commitments from third parties to provide any additional funding.

The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of IFT to continue as a going concern.

Note 3 – New Accounting Pronouncements

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

Note 4 – Stock-based Compensation

Non-cash stock-based compensation expense recorded in the three and nine months ended September 30, 2012 and September 30, 2011 is as follows:

	Three Months Ended September 30, 2012		Three Months Ended September 30, 2011		Nine Months Ended September 30, 2012		Nine Months Ended September 30, 2011
Awards to non-employees	$	-	$	144,000	$	11,458	$	174,448
Stock option modifications		-		4,815		-		8,985
Total non-cash stock-based compensation expense	$	-	$	148,815	$	11,458	$	183,433

7

Employee and Director awards

No stock options were granted to employees during the first three quarters of 2012 or 2011.  208,000 and 31,200 options previously granted to employees expired during the second quarters of 2012 and 2011, respectively. 78,000 options previously granted to employees expired during the third quarter of 2011.

No options were granted to Directors for Director-related services during the first three quarters of 2012 or 2011.

Non-employee awards

The value of options and warrants issued to non-employees upon the date of issuance is expensed over the related service periods.  For non-employee options that are not subject to a performance criterion, we recompute the value of the unvested options each quarter-end and adjust the related compensation expense for the new value. That new value is based on various assumptions using end-of-quarter information. For non-employee options subject to a performance criterion, of which we had 5,200 options outstanding as of September 30, 2012, expense is recognized when it becomes probable that the performance criterion will be met.

150,000 fully-vested stock options were granted to a non-employee consultant for services during the first quarter of 2012.  Assumptions used to determine the average fair value of these awards ($0.08 per option) included an expected term of 1.89 years, a volatility rate of 99% and a risk-free interest rate of 0.25%.

No stock options were granted to non-employee consultants for services during the second or third quarters of 2012.

No stock options were granted to non-employee consultants for services during the first or third quarters of 2011.

During the second quarter of 2011, we issued 100,000 fully-vested options to non-employee consultants for services.  Assumptions used to determine the average fair value of these awards ($0.06 per option) included an expected term of 5 years, a volatility rate of 93% and a risk free interest rate of 2.28%.

During the first quarter of 2012, 50,000 stock options previously granted to a non-employee consultant for services expired.  These options had vested before expiration.

During the first quarter of 2011, a total of 104,000 stock options previously granted to non-employee consultants for services expired.  These options had vested before expiration.

Sales of common stock

During the third quarter of 2012, we received proceeds of $435,000 for the sale of 5,687,500 restricted shares of our common stock to a small group of accredited investors. In connection with this equity raise, we issued warrants to purchase an additional 5,687,500 shares of our common stock at a price of $0.10 per share. The warrants became immediately exercisable upon issuance and have five-year expiration terms. These warrants do not qualify as derivatives and, accordingly, are accounted for as equity instruments.

During the second quarter of 2012, we received proceeds of $145,000 for the sale of 1,450,000 restricted shares of our common stock to a small group of accredited investors. In connection with this equity raise, we issued warrants to purchase an additional 1,450,000 shares of our common stock at a price of $0.10 per share. The warrants became immediately exercisable upon issuance and have expiration dates ranging between April 24, 2017 and May 31, 2017.

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Also, during the second quarter of 2012, we sold 150,000 restricted shares of our common stock to a Director for $15,000.

During the third quarter of 2011, we received proceeds of $1,028,300 for the sale of 10,283,000 restricted shares of our common stock to a small group of accredited investors. In connection with this equity raise, we issued warrants to purchase an additional 2,570,750 shares of our common stock at a price of $0.25 per share. The warrants became immediately exercisable upon issuance and expire on July 31, 2016.

No shares of our common stock were sold or issued to employees or Directors for services during the first three quarters of 2012 or 2011.

No shares of our common stock were sold or issued to non-employees for services during the first three quarters of 2012 or first quarter of 2011.  During the second quarter of 2011, we issued 150,000 unrestricted shares of our common stock to a non-employee for consulting services and recorded $24,000 of non-cash stock-based compensation expense.  During the third quarter of 2011, we issued 750,000 unrestricted shares of our common stock to a non-employee for consulting services and recorded $144,000 of non-cash stock-based compensation expense.
 

No stock options were exercised during the first three quarters of 2012 or 2011.

See Note 6 – Equity Commitment and Related Party Transactions for a description of other equity transactions IFT has entered into during 2012.

Note 5 – Blencathia Merger

Effective October 27, 1999, we merged with Blencathia Acquisition Corporation (“Blencathia”).  Blencathia was a public shell company with immaterial assets and liabilities and 312,000 shares outstanding at the time of the merger, which it redeemed and cancelled upon the merger.  In exchange, we issued 312,000 of our common shares to the prior Blencathia owner with the contractual understanding that such shares were to be sold by that owner to achieve gross cash proceeds of $500,000.  Any excess proceeds were to be returned to us and any deficiency was to be made up by us issuing additional shares or paying the difference in cash.  As we believed that we controlled the ultimate timing of the sale of these 312,000 shares by the prior Blencathia owner, we did not consider these shares as issued or outstanding for purposes of computing earnings per share prior to 2006.

In 2006, we learned that the prior Blencathia owner had, in fact, sold the 312,000 shares for aggregate proceeds of approximately $150,000, without our consent.  Accordingly, in the fourth quarter of 2006, we recorded $500,000 of general expenses (representing the cost of the 1999 merger) and the deemed issuance of approximately $150,000 of common stock.  The remaining $350,000 obligation was reflected as a current accrued expense.  Beginning in 2006, the 312,000 shares have been reflected as outstanding for earnings per share computations.  During 2009 and 2010, we made payments totaling $160,000 to the prior Blencathia owner.  We did not make any payments to the prior Blencathia owner during 2011 or during the first three quarters of 2012.  The related current accrued expense balance remains at $190,000 at September 30, 2012.  We are in negotiations with the prior Blencathia owner to resolve this obligation and may ultimately settle the obligation with either cash or equity securities with a lower market value.

Note 6 - Equity Commitment and Related Party Transactions

Effective December 11, 2007, we received an investment commitment from Rex Carr, a Director of IFT and a holder of over 5% of our common stock.  Pursuant to the terms of the commitment, Mr. Carr has agreed to invest up to an aggregate of $1,000,000 in IFT, at such time or times as we may request, in the form of a purchase or purchases of restricted common stock of IFT.  IFT may elect to draw from the commitment at one time or from time to time; provided, however, that the aggregate of such draws may not exceed $1,000,000.  If and when we elect to utilize available commitment funds, we will issue to Mr. Carr that number of shares of restricted common stock of IFT equal to the value of the investment then provided to IFT.  The number of shares to be issued will be calculated based on the closing price of our common stock as quoted on The OTC Bulletin Board on the date of the sale.  There is no stipulation regarding the duration of this commitment.  The total amount available under this commitment was $800,000 as of September 30, 2012.

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On March 13, 2012, Mr. Carr loaned IFT $50,000.  On April 2, 2012, Mr. Carr loaned IFT an additional $40,000, bringing the aggregate amounts owed to Mr. Carr as of that date to $90,000.  The terms of these loans did not require the payment of interest and did not require repayment of the principal by a certain date.  On May 10, 2012, Mr. Carr converted $50,000 of the outstanding loan balance to equity at the then-market price of $0.10 per share, pursuant to the equity commitment arrangement in place with Mr. Carr.

On June 12, 2012, Mr. Carr loaned IFT $100,000, bringing the aggregate amounts owed to Mr. Carr as of that date to $140,000.  The terms of the June 2012 loan do not require the payment of interest and do not require repayment of the principal by a certain date.

On July 6, 2012, Mr. Carr loaned IFT $25,000, bringing the aggregate amounts owed to Mr. Carr as of that date to $165,000.  The terms of the July 2012 loan do not require the payment of interest and do not require repayment of the principal by a certain date.

On August 7, 2012, Mr. Carr loaned IFT $25,000, bringing the aggregate amounts owed to Mr. Carr as of that date to $190,000.  On August 8, 2012, Mr. Carr loaned IFT an additional $10,000, bringing the aggregate amounts owed to Mr. Carr as of that date to $200,000.  The terms of these August 2012 loans do not require the payment of interest and do not require repayment of the principal by a certain date.

The outstanding loan balance of $200,000 as of September 30, 2012 does not require the payment of interest or the repayment of principal by a certain date and is being treated independent from the equity commitment arrangement in place with Mr. Carr.

On August 20, 2012, IFT agreed to sell an affiliate of Mr. Carr 1,875,000 restricted shares of our common stock at a price of $0.08 per share and received $150,000 cash proceeds. These shares have not yet been issued by IFT as of November 14, 2012. This equity transaction is being treated pursuant to the equity commitment arrangement in place with Mr. Carr.

On April 25, 2012, Jonathan R. Burst, our Chief Executive Officer and Board Chairman and a beneficial owner of over 5% of our common stock, loaned IFT $10,000.  The terms of the loan did not require the payment of interest, and did not require repayment of the principal by a certain date.  On May 10, 2012, in exchange for the cancellation of this $10,000 loan with Mr. Burst and for the receipt by IFT from Mr. Burst of an additional $15,000 in cash, we agreed to sell 250,000 restricted shares of our common stock to Mr. Burst.  No principal or interest relating to the cancelled loan was paid by IFT.  These shares have not yet been issued by IFT as of November 14, 2012.

Note 7 – Deferred Revenue

On February 26, 2009, we received the first purchase order pursuant to a memorandum of understanding (“MOU”) with Libya Oil Holdings Limited, Tamoil, Libya Africa Investment Portfolio and Vision Oil Services Ltd (“VOS”).  Pursuant to the MOU, VOS paid for the purchase of 600 metric tons of DiesoLiFTTM 10 at a price of 6,000 Euros (approximately $7,600) per metric ton from IFT.  We received cash proceeds of approximately $3 million from VOS in February 2009, net of the related selling expenses, for this purchase order and expect a net cash margin of approximately $1.5 million if the product is ever manufactured and delivered.  We will recognize gross revenues of approximately $4.5 million if all of the DiesoLiFTTM 10 is delivered.  No such revenues have been recorded to date relating to this order. We have had no communication with VOS in over 39 months and believe they have ceased all activities on behalf of IFT. It is our belief that we will never deliver this product, nor will we be requested to do so.  Nonetheless, the financial statements continue to reflect this deferred revenue pending a more formal resolution or expiration of relevant statutes of limitations.

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Note 8 – Income Taxes

We file income tax returns in various federal, state and local jurisdictions.  At September 30, 2012, and December 31, 2011, we had potential federal and state income tax benefits from net operating loss (“NOL”) carry-forwards, which expire in various years beginning in 2012 and ending in 2031.  NOL carry-forwards available to us for federal tax purposes are approximately $43 million as of September 30, 2012.

A valuation allowance must be established for a deferred income tax asset if it is more likely than not that a tax benefit may not be realized from the asset in the future.  We have established a valuation allowance to the extent of our deferred income tax asset since it is not yet certain that absorption of the asset through future earnings will occur.  The basis difference created from our deductible goodwill has an indefinite life and is not treated as an offset when establishing our valuation allowance.  As a result, we have recorded a deferred tax liability that increases by approximately $16,000 from the non-cash deferred income tax expense recorded each quarter.

We do not believe the equity raises and sales of common stock that we have completed have triggered an ownership change which might serve to limit the amount of NOL carry-forwards we can utilize each year.  Furthermore, a limitation would not have an impact on our financial statements as we have recorded a valuation allowance for the entire amount of our deferred tax assets.

No uncertain tax positions have been identified through September 30, 2012.  If we did identify any uncertain tax positions, any interest and penalties related to unrecognized tax benefits would be recorded in income tax expense.

Note 9 – Legal Proceedings

We are subject to various lawsuits and claims with respect to matters arising out of the normal course of business.  While the impact on future financial results is not subject to reasonable estimation because considerable uncertainty exists, management believes, after consulting with counsel, that it is more likely than not that the ultimate liabilities resulting from such lawsuits and claims will not materially affect our financial position, results of operations or liquidity.

On July 31, 2006, we received notice from the American Arbitration Association ("AAA") of a Demand for Arbitration dated July 27, 2006 received by the AAA naming IFT as Respondent and TPG Capital Partners (“TPG”), the prior Blencathia owner, as the Claimant.  The arbitration had been requested by TPG to resolve an alleged aggregate proceeds shortfall from the sale of IFT securities issued in the Blencathia merger.  TPG has claimed they sold some or all of the 312,000 shares and the sales have not generated at least $500,000 of proceeds, as guaranteed in the merger documents.

In an effort to resolve this matter prior to submission to binding arbitration, both TPG and IFT participated in a non-binding mediation conference on January 30, 2007, which did not resolve the matter.  Informal discussions are ongoing.  It is not expected that the ultimate settlement of this matter, considering we have recorded a liability for the shortfall amount, will have an additional adverse material effect on IFT.

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Note 10 - Subsequent Events

On October 1, 2012, we received proceeds of $10,000 for the sale of 125,000 restricted shares of our common stock to an accredited investor. In connection with this equity raise, we issued warrants to purchase an additional 125,000 shares of our common stock at a price of $0.10 per share. The warrants became immediately exercisable upon issuance and have a five-year expiration term. These warrants do not qualify as derivatives and, accordingly, are accounted for as equity instruments. 

On October 23, 2012, we received proceeds of $75,000 for the sale of 937,500 restricted shares of our common stock to an accredited investor. In connection with this equity raise, we issued warrants to purchase an additional 937,500 shares of our common stock at a price of $0.10 per share. The warrants became immediately exercisable upon issuance and have a five-year expiration term. These warrants do not qualify as derivatives and, accordingly, are accounted for as equity instruments.

On October 24, 2012, we received proceeds of $75,000 for the sale of 937,500 restricted shares of our common stock to an accredited investor. In connection with this equity raise, we issued warrants to purchase an additional 937,500 shares of our common stock at a price of $0.10 per share. The warrants became immediately exercisable upon issuance and have a five-year expiration term. These warrants do not qualify as derivatives and, accordingly, are accounted for as equity instruments.

On November 6, 2012, we received proceeds of $5,000 for the sale of 62,500 restricted shares of our common stock to an accredited investor. In connection with this equity raise, we issued warrants to purchase an additional 62,500 shares of our common stock at a price of $0.10 per share. The warrants became immediately exercisable upon issuance and have a five-year expiration term. These warrants do not qualify as derivatives and, accordingly, are accounted for as equity instruments.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is management’s discussion and analysis of certain significant factors that have affected the financial condition, results of operations and cash flows of International Fuel Technology, Inc. (“IFT” or the “Company”) during the periods included in the accompanying financial statements.  This discussion should be read in conjunction with the financial statements and notes included in our annual report on Form 10-K for the year ended December 31, 2011 (the “2011 10-K”).

Forward-looking Statements and Associated Risks

This quarterly report on Form 10-Q contains forward-looking statements that are based largely on our expectations and are subject to a number of risks and uncertainties, many of which are beyond our control, including, but not limited to, economic, competitive and other factors affecting our operations, markets, products and services, expansion strategies, our ability to raise additional capital and other factors described elsewhere in this report and documents filed by us with the Securities and Exchange Commission (“SEC”), including in our 2011 10-K under the “Risk Factors” section.  Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” variations of such words and similar expressions are intended to identify such forward-looking statements.  Actual results could differ materially from these forward-looking statements.  In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this report will, in fact, prove accurate.  We do not undertake any obligation to revise these forward-looking statements to reflect future events or circumstances.

Overview

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

To date, our commercialization efforts have focused primarily on two proprietary products: DiesoLiFTTM10 and the PerfoLiFTTMBD-Series. DiesoLiFTTM 10 was developed to increase fuel economy, reduce harmful emissions and reduce maintenance costs when mixed with diesel fuel and bio-diesel fuel blends.  The PerfoLiFTTM BD-Series was developed to address oxidation stability and deposit formation control issues associated with bio-diesel fuel use, both pure or in blends.

The potential market for DiesoLiFTTM10 and the PerfoLiFTTM BD-Series is massive.  Virtually every gallon of diesel and bio-diesel fuel consumed in the world today is a potential market for IFT fuel additive technologies.

IFT’s proprietary technology has been extensively tested and verified at a number of prominent independent test laboratories all over the world.  IFT believes this separates it from most of the other fuel additive companies in the marketplace today.

For example, DiesoLiFTTM10 has been tested at the following independent test laboratories and has consistently demonstrated the ability to increase fuel economy, on average by 5%:

·       mi Technology, United Kingdom;

·       Southwest Research Institute, United States;

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·       Forest Engineering Research Institute of Canada – FERIC;

·       Motive Power, United States;

·       Gerotek, South Africa;

·       Prodrive Ltd, United Kingdom;

·       Technological Institute for Development - LacTec, Brazil;

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

·       MTEC, Thailand; and

·     Tsinghua University, China.

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

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

·       BfB Laboratories, Belgium;

·       National Institute of Technology – INT, Brazil; and

·       Montana State University – Northern, United States.

Both products are easy to use.  Once the additive is splash blended with a base fuel, the mixture forms into and remains a stable solution.  Unlike traditional fuel additives, which are derived from petroleum, DiesoLiFTTM 10 and the PerfoLiFTTM BD-Series are derived from a complex mixture of detergent substances that utilize, in part, naturally occurring fractions that are bio-degradable.

The manufacture of IFT’s additive formulations is outsourced to Multisol (France) (“Multisol”) and Air Products and Chemicals, Inc. (United States).  These relationships allow IFT to consistently deliver quantities of quality additive formulations on a timely basis.

The commercial goal of IFT is the bulk sale (by the ton) of DiesoLiFTTM 10 and the PerfoLiFTTM BD-Series to the following major end-users of diesel fuel and bio-diesel fuel blends:

·       railroads;

·       stationary power generation operators;

·       centrally-fueled truck/bus fleets; and

·       marine vessel operators.

IFT’s primary strategy to achieve this goal is to outsource marketing and distribution by partnering with oil companies and prominent fuel additive distribution companies with existing customers and distribution channels. For example, IFT has distribution relationships with Multisol (France), Unipart Rail (“Unipart”) (United Kindgom), Nordmann Rassmann (“Nordmann”) (Germany) and Environmental Fuel Conditioners (United Kingdom).

We believe IFT has two of the top performing fuel additive technologies in the world today, DiesoLiFTTM 10 and the PerfoLiFTTM BD-Series, that target markets where consumption is massive and growing and environmental concerns and pressures to reduce harmful emissions are real.  A number of end-users and distribution partners are buying our products.  In addition, we believe the time consuming process of tests and trials has generated opportunities that should produce additional revenue streams in the fourth quarter of 2012 and 2013.

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Recent Developments

Railroads

The Association of Train Operating Companies in the United Kingdom (“ATOC”) and the Rail Safety and Standards Board (“RSSB”) under the independent management of world-renowned railroad consultant Interfleet Technology (“Interfleet”) has been evaluating IFT’s DiesoLiFTTM 10 fuel additive since 2005.  Four rounds of extensive laboratory testing, using strict industry protocol, clearly demonstrated that use of DiesoLiFTTM 10 not only improves fuel economy but also, and as important, has a measured effect improving engine performance and reducing particulate and other emissions.  In 2 of the laboratory tests, improvements in fuel economy of 6.9% and 5.9% were achieved.  In 3 of the laboratory tests, a power increase ranging from 2%-3.5% was achieved.

Subsequently, a number of field-based demonstration trials with ATOC members have demonstrated that use of DiesoLiFTTM 10 significantly improves fuel economy.  As part of the ATOC field-based evaluation, one ATOC member ran 2 extensive field-based demonstrations utilizing its entire fleet of light rail engines (approximately 90 units).  In both cases, use of DiesoLiFTTM 10 demonstrated an approximate 4% improvement in fuel economy.

Our success with ATOC has triggered a number of commercial developments:

·       IFT has been working with most of the passenger rail operators in the United Kingdom. One such operator, East Midlands, a division of Stagecoach Group is already using our product in its light rail division and is expected to begin field-based demonstration testing in their other 2 rail divisions in 2013;

·       More than 10 other passenger and freight operators in the United Kingdom are expected to commence field-based demonstration testing beginning in the remainder of 2012 and 2013;

·       Unipart, an IFT distribution partner (see further discussion below), has already made a substantial investment on sales and marketing and has an extensive sales force in the field calling on prospective customers in the United Kingdom and Ireland. Internally, they are projecting significant revenues of DiesoLiFTTM10 to passenger and freight rail operators in 2013; and

·       Belgian National Rail System - SNCB recently completed phase I testing and is moving forward with Phase II testing, a far more comprehensive field validation process.

In addition, we are in discussions with and expect field-based demonstration testing to commence with rail operators in Romania, Poland, the Czech Republic, Australia, New Zealand, Africa and Brazil in 2013.

Road Transport

In the United States, multiple fleets with over the road tractors and fleets of heavy-duty equipment have been purchasing and using DiesoLiFTTM 10 for many years.  For example, a large regional supermarket chain has been using DiesoLiFTTM 10 in their entire fleet of road tractor-trailers for 5 years and a regional construction and aggregate company has been using DiesoLiFTTM 10 in their fleet of heavy-duty off road equipment for approximately 2 years.  In addition, one of the largest municipal fleets in the United States is in the process of evaluating DiesoLiFTTM 10 in a field-based demonstration test.

In the United Kingdom, over a dozen road transport operators have either commenced or have agreed to commence field validation trials.  One such operator, one of the largest public transport companies in the United Kingdom, has completed a field trial which demonstrated over 7% improvement in fuel economy.

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In Europe, one of the largest and most prestigious transport authorities is expected to start field-based demonstration testing in the first or second quarter of 2013.  Numerous additional road transport operators have also agreed to commence field validation processes in 2013.

PerfoLiFTTM BD-Series

Extensive research, development, product validation testing and “no harm” testing has been completed.  The PerfoLiFTTM BD-Series has clearly demonstrated that it is a top performing technology in the market.  Two products in the PerfoLiFTTMBD-Series, PerfoLiFTTMBD-3 and PerfoLiFTTMBD-4, have received the coveted “No Harm & Relative Efficiency” certification from the German Agency for Quality of Bio-diesel (“AGQM”) under its renowned “No Harm and Efficiency” program.  AGQM is an independent German-based organization formed in 1999 to monitor the quality of bio-diesel.  The product has already been approved for use by a number of bio-diesel producers around the world.  IFT distribution partners have begun to market and sell the product in their respective territories.

Currently, the PerfoLiFTTM BD-Series is being used or tested by a number of United States and Canadian bio-diesel manufacturers.

In Europe, the worldwide economic downturn has negatively impacted the increase in production and end-user demand for bio-diesel, and therefore, the demand for new age antioxidant products like the PerfoLiFTTM BD-Series.  However, we believe the proliferation of bio-diesel in Europe will continue to progress during the remainder of 2012 and 2013 and, through our distribution partner network, most notably Nordmann, we are well-positioned to capitalize on current demand and the anticipated increase in demand.  We are currently selling the PerfoLiFTTM BD-Series to eight European-based bio-diesel manufacturers, including a bio-diesel production division of Cargill.

Distribution Partners

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

·       Unipart:  We signed a marketing and distribution agreement with Unipart in June 2011 providing Unipart with the rights to sell IFT’s products to the United Kingdom rail market.  IFT is in the process of arranging field-based demonstration testing with several major rail operators.

·       Nordmann:  We signed a marketing and distribution agreement with Nordmann in August 2008 providing Nordmann with the right to market and sell IFT’s products in Germany, Austria, Switzerland, Sweden, Norway, Finland, Denmark, Poland, The Czech Republic, Slovakia, Slovenia, Hungary, Serbia, Romania and Bulgaria.  Nordmann has introduced our products to numerous customers and has been making sales of the PerfoLiFTTM BD-Series since 2010.

·       Environmental Fuel Conditioners:  We signed a marketing and distribution agreement with Environmental Fuel Conditioners in February 2012 providing Environmental Fuel Conditioners the right to market and sell IFT’s products in the United Kingdom.

Other Opportunities

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

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Results of Operations

Three and Nine Months Ended September 30, 2012 Compared to the Three and Nine Months Ended September 30, 2011

Net Revenues

Net revenue for the three months ended September 30, 2012 was $47,614, as compared to $59,281 for the three-month period ended September 30, 2011.  This decrease is primarily attributable to decreased sales of DiesoLiFTTM 10 to end-user customers caused by timing of shipments to existing customers ($22,851 decrease for the comparable periods), partially offset by increased sales of the PerfoLiFTTM BD-Series ($8,428 increase for the comparable periods).
 

Net revenue for the three months ended September 30, 2012 was split between sales to distributors (55%) and end-user customers (45%).  Net revenue for the three months ended September 30, 2011 was split between sales to end-user customers (70%) and distributors (30%).  Net revenue generated during the three months ended September 30, 2012 and September 30, 2011 was primarily generated from the sale of DiesoLiFTTM10 and the PerfoLiFTTM BD-Series.

Net revenue for the nine months ended September 30, 2012 was $204,612, as compared to $167,785 for the nine-month period ended September 30, 2011.  This increase is primarily attributable to increased sales of DiesoLiFTTM 10 to end-user customers ($7,439 increase for the comparable periods) and increased sales of the PerfoLiFTTM BD-Series through our distributor network ($19,162 increase for the comparable periods).  We also had a $12,122 increase in commission revenues with Multisol France for the comparable periods as Multisol increased sales to its customers selling IFT’s products under non-IFT branded names to end-user retail customers.
 

Net revenue for the nine months ended September 30, 2012 was split between sales to distributors (51%) and end-user customers (49%).  Net revenue for the nine months ended September 30, 2011 was split between sales to end-user customers (56%) and distributors (44%).  Net revenue generated during the nine months ended September 30, 2012 and September 30, 2011 was primarily generated from the sale of DiesoLiFTTM 10 and the PerfoLiFTTM BD-Series.

Operating Expenses

Total operating expense was $527,006 for the three months ended September 30, 2012, as compared to $715,211 for the three-month period ended September 30, 2011.  This $188,205 decrease from the prior period was primarily attributable to an overall decrease in selling, general and administrative expense and in cost of operations (exclusive of depreciation) due to timing of shipments/sales to existing customers.  These fluctuations are more fully described below.

Total operating expense was $1,586,679 for the nine months ended September 30, 2012, as compared to $1,909,323 for the nine-month period ended September 30, 2011.  This $322,644 decrease from the prior period was primarily attributable to a decrease in bad debt expense and an overall decrease in selling, general and administrative expense, partially offset by an increase in cost of operations (exclusive of depreciation) due to increased sales.  These fluctuations are more fully described below.

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Cost of Operations (Exclusive of Depreciation)

Cost of operations (exclusive of depreciation) was $34,022 for the three months ended September 30, 2012, as compared to $41,396 for the three-month period ended September 30, 2011.  This decrease was due to decreased sales for the three months ended September 30, 2012, compared to the three months ended September 30, 2011.

Cost of operations (exclusive of depreciation) was $132,949 for the nine months ended September 30, 2012, as compared to $115,466 for the nine-month period ended September 30, 2011.  This increase was due to increased sales for the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011.

Selling, General and Administrative Expense

Selling, general and administrative expense for the three months ended September 30, 2012 was $492,984 (including non-cash stock-based compensation of $0), as compared to $673,815 (including non-cash stock-based compensation of $148,815) for the three-month period ended September 30, 2011.  This decrease of $180,831 was primarily attributable to the following activities:

·       a decrease in non-cash stock-based compensation expense ($148,815) as we did not issue any new stock options during the third quarter of 2012 and all prior stock option grants requiring expense recognition were fully expensed prior to the third quarter of 2012;

·       a decrease in professional services expenses ($51,020) due to a reduction in investor relations expense ($33,483) caused by timing of our 2012 annual meeting (to be held in December 2012) versus our 2011 annual meeting (held in October 2011) and a decrease in legal fees ($11,201) primarily due to a reduced scope in intellectual property legal activities for European efforts during the third quarter of 2012, compared to the third quarter of 2011; and

·       an increase in research and development expense ($47,614) due to external vendors assisting with third quarter 2012 United Kingdom and western Europe field trial/testing.

Selling, general and administrative expense for the nine months ended September 30, 2012 was $1,453,730 (including non-cash stock-based compensation of $11,458), as compared to $1,792,435 (including non-cash stock-based compensation of $183,433) for the nine-month period ended September 30, 2011.  This decrease of $338,705 was primarily attributable to the following activities:

a decrease in non-cash stock-based compensation expense ($171,975) primarily due to the granting of 900,000 shares of our common stock to a non-employee consultant for services during the second and third quarters of 2011 which resulted in $168,000 of immediate expense recognition;

·       a decrease in bad debt expense ($88,655) related to a second quarter 2011 receivables write off for product sold to a distributor;

·       a decrease in professional services expenses ($104,745) primarily due to a reduction in investor relations expense due to timing of our 2012 annual meeting (compared to our 2011 annual meeting) and not retaining an investor relations firm during the first three quarters of 2012, as was done during the first two quarters of 2011 and reduced legal fees due to timing of intellectual property activities and less SEC legal expense associated with equity raise related efforts compared to the prior year;

·       a decrease in consulting fees ($25,790) due to reduced commercial efforts in India during the first three quarters of 2012, compared to the first three quarters of 2011; and

·       an increase in research and development expense ($58,161) primarily due to increased usage of external vendors assisting with field trials/testing in the United Kingdom and western Europe during the first three quarters of 2012.

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Depreciation Expense

Depreciation expense was $0 for both the three months ended September 30, 2012 and September 30, 2011.

Depreciation expense was $0 and $1,422 for the nine months ended September 30, 2012 and September 30, 2011, respectively.

Interest Income

Interest income was $41 and $237 for the three months ended September 30, 2012 and September 30, 2011, respectively.   The decrease in interest income is primarily attributable to a reduction in invested cash and cash equivalents as cash has been used to fund ongoing operations.

Interest income for the nine months ended September 30, 2012 was $123, as compared to $674 for the nine-month period ended September 30, 2011.  The decrease in interest income is primarily attributable to a reduction in invested cash and cash equivalents as cash has been used to fund ongoing operations.

Provision for Income Taxes

We have operated at a net loss since inception and have not recorded or paid any income taxes, other than for non-cash deferred tax expense related to a basis difference between financial reporting and tax reporting deductible goodwill.  We have significant net operating loss (“NOL”) carry-forwards that would be recognized at such time as we demonstrate the ability to operate on a profitable basis for an extended period of time.  The deferred income tax asset resulting primarily from the NOL carry-forwards has been fully reserved with a valuation allowance.  Because goodwill is not depreciated and has an indefinite life for book purposes, the deferred tax liability related to the book to tax basis difference is not offset against the deferred tax assets when establishing our valuation allowance.  Accordingly, we record non-cash deferred income tax expense, which increases the deferred tax liability, of approximately $16,000 each quarter.

We do not believe the equity raises and sales of common stock that we have completed have triggered an ownership change which might serve to limit the amount of NOL carry-forwards we can utilize each year.  Furthermore, a limitation would not have an impact on our financial statements as we have recorded a valuation allowance for the entire amount of our deferred tax assets.

Net Loss

Net loss for the three months ended September 30, 2012 was $495,351, as compared to $672,026 for the three months ended September 30, 2011.  The decrease in net loss was primarily due to decreases in non-cash based stock compensation and professional services expenses, partially offset by an increase in research and development expense, as described above.  The basic and diluted net loss per common share for the three months ended September 30, 2012 and September 30, 2011 was $(0.00) and $(0.01), respectively.

Net loss for the nine months ended September 30, 2012 was $1,429,944, as compared to $1,789,197 for the nine months ended September 30, 2011.  The decrease in net loss was primarily due to an increase in gross margin from sales ($19,344), decreases in bad debt, professional services, non-cash based stock compensation and consulting fee expenses, partially offset by an increase in research and development expense, as described above.  The basic and diluted net loss per common share for the nine months ended September 30, 2012 and September 30, 2011 was $(0.01) and $(0.02), respectively.

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New Accounting Pronouncements

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

Critical Accounting Policies and Estimates

Preparation of our financial statements and related disclosures in compliance with United States generally accepted accounting principles (“GAAP”) requires the application of appropriate technical accounting rules and guidance, as well as the use of estimates.  Our application of these policies involves judgments regarding many factors, which in and of themselves could materially affect the financial statements and disclosures. We have outlined below the critical accounting policies that we believe are most difficult, subjective or complex.  Any change in the assumptions or judgments applied in determining the following matters, among others, could have a material impact on future financial results.

Revenue recognition

We recognize revenue from the sale of our products when the products are shipped, and title and risk of loss has passed to the buyer.  Some of our revenues is derived from sales to product distributors.  Product distributors do not have the option to return product that is not immediately sold to an end-user.  Therefore, our revenue recognition is not conditional on whether a distributor is able to sell product to an ultimate product end-user.  Our sales policies for end-users are consistent with product distributor sales policies.

Valuation of goodwill

We test goodwill for impairment at least annually in the fourth quarter.  We will also review goodwill for impairment throughout the year if any events or changes in circumstances indicate the carrying value may not be recoverable.

Factors we consider important, which could trigger an impairment review, include the following:

1.      Significant under-performance relative to expected historical or projected future operating results;

2.      Significant changes in the manner of our use of the acquired assets or the strategy for our overall business;

3.      Significant negative industry or economic trends;

4.      Significant decline in our stock price for a sustained period; and

5.      Our market capitalization relative to net book value.

As prescribed by Accounting Standards Updates (“ASU”) 2010-28, for each reporting period in 2012 and 2011, we identified adverse qualitative factors that indicated that impairment may exist, which required the Company’s goodwill to be tested for impairment.  Because the Company’s carrying amount is negative, we performed Step 2 of the goodwill impairment test using the market approach to determine the fair value of the Company.  The goodwill analyses performed during 2012 and 2011 did not indicate any goodwill impairment.

Deferred income taxes

Deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities.  At September 30, 2012, our deferred income tax assets consisted principally of NOL carry-forwards, and have been fully offset with a valuation allowance because it is more likely than not that a tax benefit will not be realized from the assets in the future.

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Liquidity and Capital Resources

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

In its report included in our 2011 10-K filed with the SEC on March 30, 2012, our independent registered public accounting firm expressed substantial doubt about our ability to continue as a going concern.  Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

While we cannot make any assurances as to the accuracy of our projections of future capital needs, we believe that, based on our current cash position, projected sales for the remainder of 2012, a remaining equity commitment of $800,000 (entered into during 2007 with a related party Board member of IFT and significant shareholder) and discussions we are currently having with additional external capital sources, we have adequate cash and cash equivalents balances and commitments to fund operations through at least December 2012.

Management implemented a salary deferral program for all employees in 2011 to conserve our cash position.  The salary deferral program continues to operate in 2012.  Our current cash available as of November 14, 2012 is approximately $140,000, including $165,000 of equity raise proceeds (see Note 10 – Subsequent Events), approximately $24,000 of receivables collected and operational cash burn subsequent to September 30, 2012.  Absent a very near-term cash infusion from the remaining $800,000 equity commitment or otherwise, our cash will be exhausted by early December 2012.  If this future financing is not available, our business may fail.  Although we are exploring our options regarding other capital sources, we currently have no other firm commitments from third parties to provide any additional funding.

Although we cannot make assurances that additional capital financing will be available to us on acceptable terms, or at all, management is in the process of executing a plan that we believe will provide us with sufficient funds to, at a minimum, allow us to continue operations through the remainder of 2012.  Specifically, we are in negotiations with certain existing investors and others and believe we will secure additional financing in the fourth quarter of 2012.  However, if we are unable to raise additional capital, we will need to significantly curtail operations.

Cash used in operating activities was $(1,025,686) for the nine months ended September 30, 2012, compared to cash used in operating activities of $(1,246,534) for the nine months ended September 30, 2011.  The decrease in cash used in operating activities was due primarily to an increase in accrued payroll due to our salary deferral program and an increase in customer receivables collected, partially offset by a decrease in accounts payable due to timing of vendor payments.  During 2009, IFT received cash proceeds from Vision Oil Services Ltd. (“VOS”) for a prepaid sales order, which to date has not been requested to be fulfilled.  IFT would need to expend approximately $1,500,000 to manufacture inventory required to fulfill this sales order.  However, we have had no communication with VOS in over 39 months and believe they have ceased all activities on behalf of IFT.

Cash provided by financing activities was $855,000 for the nine months ended September 30, 2012, compared to $1,028,300 cash provided by financing activities for the nine months ended September 30, 2011.  We received cash proceeds of $260,000 from related party Board members during the first three quarters of 2012.  Of this amount, $200,000 has been classified as a note payable to a related party and $60,000 has been converted to equity.  Also during the nine months ended September 30, 2012, we received $580,000 from the sale of 7,137,500 shares of our common stock to a small group of accredited investors and $15,000 from the sale of 150,000 shares of our common stock to a Board member.  During the nine months ended September 30, 2011, cash provided by financing activities of $1,028,300 was received from the sale of 10,283,000 shares of our common stock to a group of accredited investors.

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Net cash decreased by $(170,686) and $(218,234) for the nine months ended September 30, 2012 and September 30, 2011, respectively.

During the nine months ended September 30, 2012 and September 30, 2011, we did not make significant investments in property and equipment and do not anticipate doing so in the immediate future.

Working capital deficit at September 30, 2012 was $(3,843,097), as compared to $(3,141,874) at December 31, 2011.  This deficit increase was primarily attributable to funding cash operating expenses for the first three quarters of 2012.  The negative working capital amount for 2012 and 2011 is strongly impacted by the approximate $3 million deferred revenue liability recorded on our balance sheet at both September 30, 2012 and December 31, 2011.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our management has evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended(the “Exchange Act”)) as of September 30, 2012.  In their December 31, 2011 evaluation of our internal controls over financial reporting, our principal executive officer and principal financial officer identified a material weakness which has yet to be remediated.  Therefore, the principal executive officer and principal financial officer’s current evaluation of our disclosure controls and procedures resulted in the conclusion that they were not effective at September 30, 2012.

Material Weakness
 

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

During our 2011 review of internal controls, management identified the following material weakness:  IFT has limited accounting personnel with sufficient expertise, accounting knowledge and training in United States GAAP and financial reporting requirements.  Specifically, IFT lacks sufficient personnel to anticipate, identify, resolve and review complex accounting issues and to complete a timely review of the financial statements.  This material weakness was not corrected by September 30, 2012.
 

This control deficiency resulted in recorded material adjustments to the financial statements for non-cash stock-based compensation and also resulted in adjustments to financial statement presentation.  There is a reasonable possibility that a material misstatement of the annual or interim financial statements would not be prevented or detected on a timely basis.  However, our management team performed analysis and procedures to ensure that the financial statements included in this quarterly report on Form 10-Q were prepared in conformity with United States GAAP, with specific focus on those areas that would be impacted by the material weakness identified.  As a result, our management believes that the financial statements included in this quarterly report on Form 10-Q present fairly, in all material respects, our financial position, results of operations and our cash flows for the periods presented.

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

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

The Remediation Plan

Although as of September 30, 2012 we have not yet remediated the material weakness in our internal control over financial reporting originally identified during our 2008, 2009, 2010 and 2011 reviews, management has initiated the following remediation steps to address the material weakness described above:

·       We will continue to focus on improving the skill sets of our accounting and finance function, through education and training;

·       We will continue to consider the engagement of qualified professional consultants to assist us in cases where we do not have sufficient internal resources, with management reviewing both the inputs and outputs of the services;

·       Upon the successful completion of a financing sufficient to support operations for at least 2 years, we will consider the hiring of additional accounting and finance staff with the commensurate knowledge, experience and training necessary to complement the current staff in the financial reporting functions; and

·       We will further develop our financial statement closing and reporting practices to include additional levels of checks and balances in our procedures and timely review.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. However, as discussed above, we have identified a material weakness in our internal control over financial reporting.

PART II.  OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to various lawsuits and claims with respect to matters arising out of the normal course of business.  While the impact on future financial results is not subject to reasonable estimation because considerable uncertainty exists, management believes, after consulting with counsel, that it is more likely than not that the ultimate liabilities resulting from such lawsuits and claims will not materially affect our financial position, results of operations or liquidity.

23

On July 31, 2006, we received notice from the American Arbitration Association ("AAA") of a Demand for Arbitration dated July 27, 2006 received by the AAA naming IFT as Respondent and TPG Capital Partners (“TPG”), the prior Blencathia Acquisition Corporation (“Blencathia”) owner, as the Claimant.  The arbitration had been requested by TPG to resolve an alleged aggregate proceeds shortfall from the sale of IFT securities issued in the Blencathia merger.  TPG has claimed they sold some or all of the 312,000 shares and the sales have not generated at least $500,000 of proceeds, as guaranteed in the merger documents.

In an effort to resolve this matter prior to submission to binding arbitration, both TPG and IFT participated in a non-binding mediation conference on January 30, 2007, which did not resolve the matter.  Informal discussions are ongoing.  It is not expected that the ultimate settlement of this matter, considering we have recorded a liability for the shortfall amount, will have an additional adverse material effect on IFT.  Since 2009, IFT has made payments to TPG totaling $160,000 to reduce the recorded liability.  The remaining liability balance is $190,000 at September 30, 2012.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

During the third quarter of 2012, we sold the following securities that were not registered under the Securities Act of 1933, as amended.  All of such securities were sold to accredited investors.  Each of the transactions below was exempt from registration pursuant to Rule 506 of Regulation D promulgated under the Securities Act of 1933.

Date	No. of Restricted Shares		No. of Warrants			Aggregate Purchase Price
August 16, 2012		2,812,500		2,812,500	(1)	$	225,000
August 20, 2012		1,875,000		1,875,000	(2)	$	150,000
August 31, 2012		125,000		125,000	(3)	$	10,000
August 31, 2012		562,500		562,500	(4)	$	25,000
September 17, 2012		125,000		125,000	(1)	$	10,000
September 17, 2012		62,500		62,500	(1)	$	5,000
September 20, 2012		125,000		125,000	(5)	$	10,000

1 Represents warrants to purchase the indicated number of shares of our common stock at an exercise price of $0.10 per share.  The warrants were immediately exercisable and expire five years from the applicable securities purchase agreement date.

2 Represents warrants to purchase the indicated number of shares of our common stock at an exercise price of $0.10 per share.  The warrants were immediately exercisable and expire on August 20, 2017.

3 Represents warrants to purchase the indicated number of shares of our common stock at an exercise price of $0.10 per share.  The warrants were immediately exercisable and expire on September 5, 2017.

4 Represents warrants to purchase the indicated number of shares of our common stock at an exercise price of $0.10 per share.  The warrants were immediately exercisable and expire on August 31, 2017.

5 Represents warrants to purchase the indicated number of shares of our common stock at an exercise price of $0.10 per share.  The warrants were immediately exercisable and expire on October 5, 2017.

24

Item 5.  Other Information

There have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors since the filing of our quarterly report on Form 10-Q for the quarter ended June 30, 2012.

Item 6.  Exhibits

(a) The following exhibits are filed as part of this report:

31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.

31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.

32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS  XBRL Instance Document

101.SCH  XBRL Taxonomy Extension Schema

101.PRE  XBRL Taxonomy Extension Presentation Linkbase

101.LAB  XBRL Taxonomy Extension Labe Linkbase

101.CAL  XBRL Taxonomy Extension Calculation Linkbase

101.DEF  XBRL Taxonomy Extension Definition Linkbase

25

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

INTERNATIONAL FUEL TECHNOLOGY, INC.

(Registrant)

By:	/s/ Jonathan R. Burst	Date:	November 14, 2012
	Jonathan R. Burst
	Chief Executive Officer
	(Principal Executive Officer)
By:	/s/ Stuart D. Beath	Date:	November 14, 2012
	Stuart D. Beath
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

26

EX-31.1

International Fuel Technology, Inc 10-Q

EXHIBIT 31.1

CERTIFICATIONS

I, Jonathan R. Burst, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of International Fuel Technology, Inc.;

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

November 14, 2012	By:	/s/ Jonathan R. Burst
		Jonathan R. Burst
		Chief Executive Officer

EX-31.2

International Fuel Technology, Inc 10-Q

EXHIBIT 31.2

CERTIFICATIONS

 

I, Stuart D. Beath, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of International Fuel Technology, Inc.;

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s internal controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s disclosure control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

November 14, 2012	By:	/s/ Stuart D. Beath
		Stuart D. Beath
		Chief Financial Officer

EX-32.1

International Fuel Technology, Inc 10-Q

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In conjunction with the quarterly report on Form 10-Q of International Fuel Technology, Inc. (the “Company”) for the period ended September 30, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”),

I, Jonathan R. Burst, the Chief Executive Officer of the Company certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1)           The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)           The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:  November 14, 2012	By:	/s/ Jonathan R. Burst
		Jonathan R. Burst
		Chief Executive Officer

EX-32.2

International Fuel Technology, Inc 10-Q

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In conjunction with the quarterly report on Form 10-Q of International Fuel Technology, Inc. (the “Company”) for the period ended September 30, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”),

I, Stuart D. Beath, the Chief Financial Officer of the Company certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1)           The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)           The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:  November 14, 2012	By:	/s/ Stuart D. Beath
		Stuart D. Beath
		Chief Financial Officer

XML

Deferred Revenue (Details Narrative) (USD $)	1 Months Ended
	Feb. 28, 2009 Mg
Deferred Revenue Details Narrative
Deferred revenue description	We received the first purchase order pursuant to a memorandum of understanding ("MOU") with Libya Oil Holdings Limited, Tamoil, Libya Africa Investment Portfolio and Vision Oil Services Ltd ("VOS"). Pursuant to the MOU, VOS paid for the purchase of 600 metric tons of DiesoLiFT 10 at a price of 6,000 Euros (approximately $7,600) per metric ton from IFT. We received cash proceeds of approximately $3 million from VOS in February 2009, net of the related selling expenses, for this purchase order and expect a net cash margin of approximately $1.5 million if the product is ever manufactured and delivered. We will recognize gross revenues of approximately $4.5 million if all of the DiesoLiFT10 is delivered.  No such revenues have been recorded to date relating to this order. We have had no communication with VOS in over 39 months and believe they have ceased all activities on behalf of IFT. It is our belief that we will never deliver this product, nor will we be requested to do so. Nonetheless, the financial statements continue to reflect this deferred revenue pending a more formal resolution or expiration of relevant statutes of limitations.
Purchased amount of DiesoLiFT10, metric tons	600
Purchased amount of DiesoLiFT10, per metric tons	7,600
Cash proceeds received from VOS, net of related selling expenses	$ 3,000,000,000,000
Cash margin expected	1,500,000,000,000
Gross revenue expected	$ 4,500,000,000,000

XML

New Accounting Pronouncements

9 Months Ended

Sep. 30, 2012

New Accounting Pronouncements

New Accounting Pronouncements

Note 3 – New Accounting Pronouncements

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

XML

Subsequent Events (Details Narrative) (USD $)	3 Months Ended			9 Months Ended
	Sep. 30, 2012	Jun. 30, 2012	Sep. 30, 2011	Sep. 30, 2012
Sales of Common Stock				$ 595,000
Sales of Common Stock, shares	5,687,500	1,450,000	10,283,000
Warrants to purchase additional shares, shares			2,570,750
Equity Proceeds October 1, 2012
Subsequent events, date				Oct. 01, 2012
Sales of Common Stock				10,000
Sales of Common Stock, shares				125,000
Warrants to purchase additional shares, shares	125,000			125,000
Warrants to purchase additional shares, price per share				$ 0.10
Equity Proceeds October 23, 2012
Subsequent events, date				Oct. 23, 2012
Sales of Common Stock				75,000
Sales of Common Stock, shares				937,500
Warrants to purchase additional shares, shares	937,500			937,500
Warrants to purchase additional shares, price per share				$ 0.10
Equity Proceeds October 24, 2012
Subsequent events, date				Oct. 24, 2012
Sales of Common Stock				75,000
Sales of Common Stock, shares				937,500
Warrants to purchase additional shares, shares	937,500			937,500
Warrants to purchase additional shares, price per share				$ 0.10
Equity Proceeds November 6, 2012
Subsequent events, date				Nov. 06, 2012
Sales of Common Stock				$ 5,000
Sales of Common Stock, shares				62,500
Warrants to purchase additional shares, shares	62,500			62,500
Warrants to purchase additional shares, price per share				$ 0.10

XML

Substantial Doubt About Ability to Continue as a Going Concern

9 Months Ended

Sep. 30, 2012

Substantial Doubt About Ability To Continue As Going Concern

Substantial Doubt About Ability to Continue as a Going Concern

Note 2 - Substantial Doubt About Ability to Continue as a Going Concern

Our financial statements are presented on the going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  We have incurred significant losses since inception and currently have, and previously from time to time, have had limited funds with which to operate.  Management is in the process of executing a strategy based upon marketing technologies that offer enhanced engine performance and greater fuel economy along with pollution control benefits.  We have several technologies in the commercialization phase and in development.  We have received necessary regulatory approvals for our products currently in the commercialization phase.  We are selling our products directly to the commercial marketplace. We expect to increase our sales to the marketplace, eventually generating a level of revenues sufficient to meet our cash flow and earnings requirements.  Until such time, we are dependent on external sources of capital to help fund the operations of the Company.

While we cannot make any assurances as to the accuracy of our projections of future capital needs, we believe that based on our current cash position, projected sales for the remainder of 2012, a remaining equity commitment of $800,000 (entered into during 2007 with a related party Board member of IFT and significant shareholder) and discussions we are currently having with additional external capital sources, we have adequate cash and cash equivalents balances and commitments to fund operations through at least December 2012.

Management implemented a salary deferral program for all employees in 2011 to conserve our cash position.  The salary deferral program continues to operate in 2012.  Our current cash available as of November 14, 2012 is approximately $140,000, including $165,000 of equity raise proceeds (see Note 10 – Subsequent Events), approximately $24,000 of receivables collected and operational cash burn subsequent to September 30, 2012.

On July 16, 2012, we signed a Letter of Intent (“LOI”) with Black Diamond Financial Group LLC (“Black Diamond”).  Pursuant to the terms of the LOI, Black Diamond and its affiliates intend to invest up to $4,500,000 in IFT.  As of November 14, 2012, we have received $300,000 of this intended investment amount.  In addition, as of November 14, 2012, we have received $300,000 of equity funding from a small group of accredited investors independent from (but with similar terms to) the Black Diamond LOI.

If we are unable to close the Black Diamond financing and absent a very near-term cash infusion from the remaining $800,000 equity commitment or otherwise, our cash will be exhausted by early December 2012.  If this future financing is not available, our business may fail.  We cannot make assurances that capital financing will be available to us on acceptable terms, or at all.  Although we are exploring our options regarding other capital sources, we currently have no other firm commitments from third parties to provide any additional funding.

The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of IFT to continue as a going concern.

XML

BALANCE SHEETS (Unaudited) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Current assets
Cash and cash equivalents	$ 146,209	$ 316,895
Accounts receivable	10,241	85,222
Inventory	67,912	72,563
Prepaid expenses and other assets	22,792	19,612
Total Current Assets	247,154	494,292
Property and equipment
Machinery, equipment and office furniture	63,706	63,706
Accumulated depreciation	(63,706)	(63,706)
Net Property and Equipment
Goodwill	2,211,805	2,211,805
Total Assets	2,458,959	2,706,097
Current liabilities
Accounts payable	323,858	272,846
Accrued compensation	378,151	175,078
Deferred revenue (Note 7)	2,998,242	2,998,242
Note payable to a related party (Note 6)	200,000
Other accrued expenses (Note 5)	190,000	190,000
Total Current Liabilities	4,090,251	3,636,166
Deferred rent	14,263
Deferrred income taxes (Note 8)	643,000	595,000
Total Long-term Liabilities	657,263	595,000
Total Liabilities	4,747,514	4,231,166
Commitments and contingencies
Stockholders' (deficit) (Notes 4 and 5)
Common stock, $0.01 par value; 250,000,000 shares authorized; 122,322,784 and 114,435,284 (both net of 1,440,000 shares held in treasury) shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively	1,237,628	1,158,753
Treasury stock	(664,600)	(664,600)
Discount on common stock	(819,923)	(819,923)
Additional paid-in capital	67,191,218	66,603,635
Accumulated deficit	(69,232,878)	(67,802,934)
Total Stockholders' Deficit	(2,288,555)	(1,525,069)
Total Liabilities and Stockholders' Deficit	$ 2,458,959	$ 2,706,097

XML

STATEMENTS OF CASH FLOWS (Unaudited) (USD $)	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Cash flows from operating activities:
Net loss	$ (1,429,944)	$ (1,789,197)
Adjustments to reconcile net loss to net cash used in operating activities:
Bad debt provision		88,655
Depreciation		1,422
Deferred rent	14,263
Non-cash stock-based compensation	11,458	183,433
Deferred income tax provision	48,000	48,999
Change in assets and liabilities:
Accounts receivable	74,981	(38,822)
Inventory	4,651	31,791
Prepaid expenses and other assets	(3,180)	20,017
Accounts payable	51,012	91,301
Accrued compensation	203,073	115,867
Net cash used in operating activities	(1,025,686)	(1,246,534)
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants	595,000	1,028,300
Note payable from related party	260,000
Net cash provided by financing activities	855,000	1,028,300
Net decrease in cash and cash equivalents	(170,686)	(218,234)
Cash and cash equivalents, beginning	316,895	751,911
Cash and cash equivalents, ending	146,209	533,677
Conversion of related party notes to equity	$ 60,000

XML

Stock-based Compensation (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Non-cash stock-based compensation:
Awards to non-employees		$ 144,000	$ 11,458	$ 174,448
Stock option modifications		4,815		8,985
Total non-cash stock-based compensation expense		$ 148,815	$ 11,458	$ 183,433

XML

Equity Commitment and Related Party Transactions (Details Narrative) (USD $)	3 Months Ended			9 Months Ended	0 Months Ended								1 Months Ended			0 Months Ended		3 Months Ended
	Sep. 30, 2012	Jun. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Aug. 08, 2012 Rex Carr, Director	Aug. 07, 2012 Rex Carr, Director	Jul. 06, 2012 Rex Carr, Director	Jun. 12, 2012 Rex Carr, Director	May 10, 2012 Rex Carr, Director	Apr. 02, 2012 Rex Carr, Director	Mar. 13, 2012 Rex Carr, Director	Dec. 27, 2007 Rex Carr, Director	Aug. 20, 2012 Rex Carr, Director	Sep. 30, 2012 Rex Carr, Director	Aug. 09, 2012 Rex Carr, Director	May 10, 2012 Jonathan R. Burst, Board Chairman	Apr. 25, 2012 Jonathan R. Burst, Board Chairman	Sep. 30, 2012 Jonathan R. Burst, Board Chairman	Jun. 30, 2012 Jonathan R. Burst, Board Chairman
Director ownership, percentage													8.00%	5.00%					5.00%
Investment commitment				$ 800,000								$ 1,000,000
Availabilty to draw from commitment, maximum												1,000,000
Commitment Remaining Borrowing Capacity														800,000
Related Party Loan, balance						190,000	165,000	140,000	40,000	90,000				200,000	200,000
Loans from Related Parties					10,000	25,000	25,000	100,000		40,000	50,000						10,000
Related Party loans converted, loan balance									50,000
Related Party loans converted, conversion price									$ 0.10
Sale of Common Stock				595,000									150,000			15,000
Sale of Common Stock, shares	5,687,500	1,450,000	10,283,000										1,875,000			250,000		150,000
Note cancelled in exchange for common stock																$ 10,000		$ 10,000

XML

Basis of Presentation

9 Months Ended

Sep. 30, 2012

Basis Of Presentation

Basis of Presentation

Note 1 - Basis of Presentation

International Fuel Technology, Inc. (“IFT” or the “Company”) is a company that was incorporated under the laws of the State of Nevada on April 9, 1996. We have developed a family of fuel additive product formulations. These unique fuel blends have been created to improve fuel economy, enhance lubricity (reducing engine wear and tear) and lower harmful engine emissions, while decreasing reliance on petroleum-based fuels through the use of more efficient, alternative and renewable fuels.

We began transitioning from a development stage technology company to a commercial entity during 2002 and have been increasing our product marketing and sales efforts since. We are now focused on continuing to develop the body of evidence of the efficacy of our products applicable to a wide range of markets and industries within these markets through additional industry specific laboratory testing and customer field-based demonstration trials. In addition, we are continuing to strengthen our distributor and customer contact base. Marketing and sales efforts, in conjunction with the additional industry specific testing, will complete our transition to a commercial enterprise.

The interim financial statements included herein have been prepared by IFT, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles (‘GAAP”) have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to make the information presented not misleading.

These statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary for fair presentation of the information contained therein. Interim results are not necessarily indicative of results for a full year. We suggest that these financial statements be read in conjunction with the financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2011 (the “2011 10-K”). We follow the same accounting policies in preparation of interim reports as we do in our annual reports.

Basic earnings (loss) per share are based upon the weighted-average number of common shares outstanding for the period. Diluted earnings (loss) per share are based upon the weighted-average number of common and potentially dilutive common shares outstanding for the period. Pursuant to the Financial Accounting Standards Board”s (“FASB”) Accounting Standards Codification (“ASC”) subtopic No. 260-10, Earnings per Share, no adjustment is made for diluted earnings (loss) per share purposes since we are reporting a net loss, and common stock equivalents would have an anti-dilutive effect. As of September 30, 2012 and September 30, 2011, 30,953,970 and 24,036,470 shares, respectively, of common stock equivalents were excluded from the computation of diluted net loss per share since their effect would be anti-dilutive.

XML

BALANCE SHEETS (Unaudited) (Parenthetical) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Balance Sheets
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	250,000,000	250,000,000
Common stock, shares issued	123,762,784	115,875,284
Common stock, shares outstanding	122,322,784	114,435,284
Treasury stock, shares	1,440,000	1,440,000

XML

Basis of Presentation (Policies)

9 Months Ended

Sep. 30, 2012

Basis Of Presentation Policies

Basis of Accounting Policy

We began transitioning from a development stage technology company to a commercial entity during 2002 and have been increasing our product marketing and sales efforts since.  We are now focused on continuing to develop the body of evidence of the efficacy of our products applicable to a wide range of markets and industries within these markets through additional industry specific laboratory testing and customer field-based demonstration trials.  In addition, we are continuing to strengthen our distributor and customer contact base.  Marketing and sales efforts, in conjunction with the additional industry specific testing, will complete our transition to a commercial enterprise.

The interim financial statements included herein have been prepared by IFT, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to make the information presented not misleading.

These statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary for fair presentation of the information contained therein.  Interim results are not necessarily indicative of results for a full year.  We suggest that these financial statements be read in conjunction with the financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2011 (the “2011 10-K”).  We follow the same accounting policies in preparation of interim reports as we do in our annual repor

Basic Earnings Policy

Basic earnings (loss) per share are based upon the weighted-average number of common shares outstanding for the period. Diluted earnings (loss) per share are based upon the weighted-average number of common and potentially dilutive common shares outstanding for the period. Pursuant to the Financial Accounting Standards Board”s (“FASB”) Accounting Standards Codification (“ASC”) subtopic No. 260-10, Earnings per Share, no adjustment is made for diluted earnings (loss) per share purposes since we are reporting a net loss, and common stock equivalents would have an anti-dilutive effect. As of September 30, 2012 and September 30, 2011, 30,953,970 and 24,036,470 shares, respectively, of common stock equivalents were excluded from the computation of diluted net loss per share since their effect would be anti-dilutive.

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Document and Entity Information	9 Months Ended
	Sep. 30, 2012	Nov. 12, 2012
Document And Entity Information
Entity Registrant Name	INTERNATIONAL FUEL TECHNOLOGY INC
Entity Central Index Key	0001078723
Document Type	10-Q
Document Period End Date	Sep. 30, 2012
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		124,385,284
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2012

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Stock-based Compensation (Tables)

9 Months Ended

Sep. 30, 2012

Stock-Based Compensation Tables

Non-cash stock-based compensation:

Non-cash stock-based compensation expense recorded in the three and nine months ended September 30, 2012 and September 30, 2011 is as follows:

	Three Months Ended September 30, 2012		Three Months Ended September 30, 2011		Nine Months Ended September 30, 2012		Nine Months Ended September 30, 2011
Awards to non-employees	$	—	$	144,000	$	11,458	$	174,448
Stock option modifications		—		4,815		—		8,985
Total non-cash stock-based compensation expense	$	—	$	148,815	$	11,458	$	183,433

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STATEMENTS OF OPERATIONS (Unaudited) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Statements Of Operations
Revenues	$ 47,614	$ 59,281	$ 204,612	$ 167,785
Operating expenses:
Cost of operations (exclusive of depreciation)	34,022	41,396	132,949	115,466
Selling, general and administrative expense (including non-cash stock-based compensation expense) (Note 4)	492,984	673,815	1,453,730	1,792,435
Depreciation				1,422
Total operating expenses	527,006	715,211	1,586,679	1,909,323
Loss from operations	(479,392)	(655,930)	(1,382,067)	(1,741,538)
Interest income	41	237	123	674
Loss before income taxes	(479,351)	(655,693)	(1,381,944)	(1,740,864)
Income tax provision (Note 8)	16,000	16,333	48,000	48,333
Net loss	$ (495,351)	$ (672,026)	$ (1,429,944)	$ (1,789,197)
Basic and diluted net loss per common share	$ 0.00	$ (0.01)	$ (0.01)	$ (0.02)
Weighted-average common shares outstanding, basic and diluted	120,544,713	111,144,936	117,907,538	105,611,456

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Equity and Related Party Transactions

9 Months Ended

Sep. 30, 2012

Equity And Related Party Transactions

Equity and Related Party Transactions

Note 6 - Equity Commitment and Related Party Transactions

Effective December 11, 2007, we received an investment commitment from Rex Carr, a Director of IFT and a holder of over 5% of our common stock.  Pursuant to the terms of the commitment, Mr. Carr has agreed to invest up to an aggregate of $1,000,000 in IFT, at such time or times as we may request, in the form of a purchase or purchases of restricted common stock of IFT.  IFT may elect to draw from the commitment at one time or from time to time; provided, however, that the aggregate of such draws may not exceed $1,000,000.  If and when we elect to utilize available commitment funds, we will issue to Mr. Carr that number of shares of restricted common stock of IFT equal to the value of the investment then provided to IFT.  The number of shares to be issued will be calculated based on the closing price of our common stock as quoted on The OTC Bulletin Board on the date of the sale.  There is no stipulation regarding the duration of this commitment.  The total amount available under this commitment was $800,000 as of September 30, 2012.

On March 13, 2012, Mr. Carr loaned IFT $50,000.  On April 2, 2012, Mr. Carr loaned IFT an additional $40,000, bringing the aggregate amounts owed to Mr. Carr as of that date to $90,000.  The terms of these loans did not require the payment of interest and did not require repayment of the principal by a certain date.  On May 10, 2012, Mr. Carr converted $50,000 of the outstanding loan balance to equity at the then-market price of $0.10 per share, pursuant to the equity commitment arrangement in place with Mr. Carr.

On June 12, 2012, Mr. Carr loaned IFT $100,000, bringing the aggregate amounts owed to Mr. Carr as of that date to $140,000.  The terms of the June 2012 loan do not require the payment of interest and do not require repayment of the principal by a certain date.

On July 6, 2012, Mr. Carr loaned IFT $25,000, bringing the aggregate amounts owed to Mr. Carr as of that date to $165,000.  The terms of the July 2012 loan do not require the payment of interest and do not require repayment of the principal by a certain date.

On August 7, 2012, Mr. Carr loaned IFT $25,000, bringing the aggregate amounts owed to Mr. Carr as of that date to $190,000.  On August 8, 2012, Mr. Carr loaned IFT an additional $10,000, bringing the aggregate amounts owed to Mr. Carr as of that date to $200,000.  The terms of these August 2012 loans do not require the payment of interest and do not require repayment of the principal by a certain date.

The outstanding loan balance of $200,000 as of September 30, 2012 does not require the payment of interest or the repayment of principal by a certain date and is being treated independent from the equity commitment arrangement in place with Mr. Carr.

On August 20, 2012, IFT agreed to sell an affiliate of Mr. Carr 1,875,000 restricted shares of our common stock at a price of $0.08 per share and received $150,000 cash proceeds. These shares have not yet been issued by IFT as of November 14, 2012. This equity transaction is being treated pursuant to the equity commitment arrangement in place with Mr. Carr.

On April 25, 2012, Jonathan R. Burst, our Chief Executive Officer and Board Chairman and a beneficial owner of over 5% of our common stock, loaned IFT $10,000.  The terms of the loan did not require the payment of interest, and did not require repayment of the principal by a certain date.  On May 10, 2012, in exchange for the cancellation of this $10,000 loan with Mr. Burst and for the receipt by IFT from Mr. Burst of an additional $15,000 in cash, we agreed to sell 250,000 restricted shares of our common stock to Mr. Burst.  No principal or interest relating to the cancelled loan was paid by IFT.  These shares have not yet been issued by IFT as of November 14, 2012.

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Blencathia Merger

9 Months Ended

Sep. 30, 2012

Blencathia Merger

Blencathia Merger

Note 5 – Blencathia Merger

Effective October 27, 1999, we merged with Blencathia Acquisition Corporation (“Blencathia”).  Blencathia was a public shell company with immaterial assets and liabilities and 312,000 shares outstanding at the time of the merger, which it redeemed and cancelled upon the merger.  In exchange, we issued 312,000 of our common shares to the prior Blencathia owner with the contractual understanding that such shares were to be sold by that owner to achieve gross cash proceeds of $500,000.  Any excess proceeds were to be returned to us and any deficiency was to be made up by us issuing additional shares or paying the difference in cash.  As we believed that we controlled the ultimate timing of the sale of these 312,000 shares by the prior Blencathia owner, we did not consider these shares as issued or outstanding for purposes of computing earnings per share prior to 2006.

In 2006, we learned that the prior Blencathia owner had, in fact, sold the 312,000 shares for aggregate proceeds of approximately $150,000, without our consent.  Accordingly, in the fourth quarter of 2006, we recorded $500,000 of general expenses (representing the cost of the 1999 merger) and the deemed issuance of approximately $150,000 of common stock.  The remaining $350,000 obligation was reflected as a current accrued expense.  Beginning in 2006, the 312,000 shares have been reflected as outstanding for earnings per share computations.  During 2009 and 2010, we made payments totaling $160,000 to the prior Blencathia owner.  We did not make any payments to the prior Blencathia owner during 2011 or during the first three quarters of 2012.  The related current accrued expense balance remains at $190,000 at September 30, 2012.  We are in negotiations with the prior Blencathia owner to resolve this obligation and may ultimately settle the obligation with either cash or equity securities with a lower market value.

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Blencathia Merger (Details Narrative) (USD $)	2 Months Ended	3 Months Ended	24 Months Ended
	Dec. 31, 1999	Dec. 31, 2006	Dec. 31, 2010	Sep. 30, 2012	Oct. 27, 1999
Blencathia Merger Details Narrative
Shares issued for merger	312,000
Gross cash proceeds					$ 500,000
General expenses, cost of 1999 merger		500,000
Issuance of common stock, merger		150,000
Accrued expense, current obligation of merger		350,000		190,000
Number of Shares Issued Merger, Basic		312,000
Payments to prior Blencathia owner			$ 160,000

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Basis of Presentation (Details Narrative)	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Basis Of Presentation Policies
Anti-dilutive common stock equivalents excluded from the EPS calculation	30,953,970	24,036,470

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Legal Proceedings

9 Months Ended

Sep. 30, 2012

Legal Proceedings

Legal Proceedings

Note 9 – Legal Proceedings

We are subject to various lawsuits and claims with respect to matters arising out of the normal course of business.  While the impact on future financial results is not subject to reasonable estimation because considerable uncertainty exists, management believes, after consulting with counsel, that it is more likely than not that the ultimate liabilities resulting from such lawsuits and claims will not materially affect our financial position, results of operations or liquidity.

On July 31, 2006, we received notice from the American Arbitration Association ("AAA") of a Demand for Arbitration dated July 27, 2006 received by the AAA naming IFT as Respondent and TPG Capital Partners (“TPG”), the prior Blencathia owner, as the Claimant.  The arbitration had been requested by TPG to resolve an alleged aggregate proceeds shortfall from the sale of IFT securities issued in the Blencathia merger.  TPG has claimed they sold some or all of the 312,000 shares and the sales have not generated at least $500,000 of proceeds, as guaranteed in the merger documents.

In an effort to resolve this matter prior to submission to binding arbitration, both TPG and IFT participated in a non-binding mediation conference on January 30, 2007, which did not resolve the matter.  Informal discussions are ongoing.  It is not expected that the ultimate settlement of this matter, considering we have recorded a liability for the shortfall amount, will have an additional adverse material effect on IFT.

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Deferred Revenue

9 Months Ended

Sep. 30, 2012

Deferred Revenue [Abstract]

Deferred Revenue

Note 7 – Deferred Revenue

On February 26, 2009, we received the first purchase order pursuant to a memorandum of understanding (“MOU”) with Libya Oil Holdings Limited, Tamoil, Libya Africa Investment Portfolio and Vision Oil Services Ltd (“VOS”).  Pursuant to the MOU, VOS paid for the purchase of 600 metric tons of DiesoLiFTTM 10 at a price of 6,000 Euros (approximately $7,600) per metric ton from IFT.  We received cash proceeds of approximately $3 million from VOS in February 2009, net of the related selling expenses, for this purchase order and expect a net cash margin of approximately $1.5 million if the product is ever manufactured and delivered.  We will recognize gross revenues of approximately $4.5 million if all of the DiesoLiFTTM 10 is delivered.  No such revenues have been recorded to date relating to this order. We have had no communication with VOS in over 39 months and believe they have ceased all activities on behalf of IFT. It is our belief that we will never deliver this product, nor will we be requested to do so.  Nonetheless, the financial statements continue to reflect this deferred revenue pending a more formal resolution or expiration of relevant statutes of limitations.

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Income Taxes

9 Months Ended

Sep. 30, 2012

Income Taxes

Income Taxes

Note 8 – Income Taxes

We file income tax returns in various federal, state and local jurisdictions.  At September 30, 2012, and December 31, 2011, we had potential federal and state income tax benefits from net operating loss (“NOL”) carry-forwards, which expire in various years beginning in 2012 and ending in 2031.  NOL carry-forwards available to us for federal tax purposes are approximately $43 million as of September 30, 2012.

A valuation allowance must be established for a deferred income tax asset if it is more likely than not that a tax benefit may not be realized from the asset in the future.  We have established a valuation allowance to the extent of our deferred income tax asset since it is not yet certain that absorption of the asset through future earnings will occur.  The basis difference created from our deductible goodwill has an indefinite life and is not treated as an offset when establishing our valuation allowance.  As a result, we have recorded a deferred tax liability that increases by approximately $16,000 from the non-cash deferred income tax expense recorded each quarter.

We do not believe the equity raises and sales of common stock that we have completed have triggered an ownership change which might serve to limit the amount of NOL carry-forwards we can utilize each year.  Furthermore, a limitation would not have an impact on our financial statements as we have recorded a valuation allowance for the entire amount of our deferred tax assets.

No uncertain tax positions have been identified through September 30, 2012.  If we did identify any uncertain tax positions, any interest and penalties related to unrecognized tax benefits would be recorded in income tax expense.

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Subsequent Events

9 Months Ended

Sep. 30, 2012

Subsequent Events [Abstract]

Subsequent Events

Note 10 - Subsequent Events

On October 1, 2012, we received proceeds of $10,000 for the sale of 125,000 restricted shares of our common stock to an accredited investor. In connection with this equity raise, we issued warrants to purchase an additional 125,000 shares of our common stock at a price of $0.10 per share. The warrants became immediately exercisable upon issuance and have a five-year expiration term. These warrants do not quality as derivatives and, accordingly, are accounted for as equity instruments.

On October 23, 2012, we received proceeds of $75,000 for the sale of 937,500 restricted shares of our common stock to an accredited investor. In connection with this equity raise, we issued warrants to purchase an additional 937,500 shares of our common stock at a price of $0.10 per share. The warrants became immediately exercisable upon issuance and have a five-year expiration term. These warrants do not quality as derivatives and, accordingly, are accounted for as equity instruments.

On October 24, 2012, we received proceeds of $75,000 for the sale of 937,500 restricted shares of our common stock to an accredited investor. In connection with this equity raise, we issued warrants to purchase an additional 937,500 shares of our common stock at a price of $0.10 per share. The warrants became immediately exercisable upon issuance and have a five-year expiration term. These warrants do not quality as derivatives and, accordingly, are accounted for as equity instruments.

On November 6, 2012, we received proceeds of $5,000 for the sale of 62,500 restricted shares of our common stock to an accredited investor. In connection with this equity raise, we issued warrants to purchase an additional 62,500 shares of our common stock at a price of $0.10 per share. The warrants became immediately exercisable upon issuance and have a five-year expiration term. These warrants do not quality as derivatives and, accordingly, are accounted for as equity instruments.

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Stock-based Compensation (Details Narrative) (USD $)	3 Months Ended						9 Months Ended		0 Months Ended	3 Months Ended	1 Months Ended	9 Months Ended
	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Sep. 30, 2012	Sep. 30, 2011	May 10, 2012 Jonathan R. Burst, Board Chairman	Sep. 30, 2012 Jonathan R. Burst, Board Chairman	Aug. 20, 2012 Rex Carr, Director	Sep. 30, 2011 Rex Carr, Director
Non-employee options outstanding	5,200						5,200
Stock options, granted			150,000		100,000		0	0				0
Average fair value of options			$ 0.08		$ 0.06
Expected term			1 year 10 months 21 days		5 years
Volatility rate			99.00%		93.00%
Risk free interest rate			0.25%		2.28%
Expired stock grants		208,000	50,000		31,200	104,000						78,000
Sale of Common Stock	$ 435,000	$ 145,000		$ 1,028,300						$ 15,000
Sale of Common Stock, shares	5,687,500	1,450,000		10,283,000					250,000	150,000	1,875,000
Sale of Common stock, per share price	$ 0.08	$ 0.10		$ 0.25			$ 0.08	$ 0.25
Warrants to purchase additional shares, shares				2,570,750				2,570,750
Note cancelled in exchange for common stock									10,000	10,000
Note cancelled in exchange for common stock, shares										100,000
Shares issued in exchange for services				750,000	150,000
Non-cash stock-based compensation				$ 144,000	$ 24,000		$ 11,458	$ 183,433

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Income Taxes (Details Narrative) (Federal tax, USD $) In Millions, unless otherwise specified	Sep. 30, 2012
Federal tax
Net operating loss carryforwards available, federal taxes	$ 43,000,000
Deferred Tax Liability from Goodwill, quarterly increase	$ 16,000

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STATEMENT OF STOCKHOLDERS' DEFICIT (Unaudited) (USD $)	Common Stock	Treasury Stock	Discount On Common Stock	Additional Paid-in Capital	Accumulated Deficit	Total
Balance beginning at Dec. 31, 2011	$ 1,158,753	$ (664,600)	$ (819,923)	$ 66,603,635	$ (67,802,934)	$ (1,525,069)
Balance beginning, shares at Dec. 31, 2011	115,875,284
Sales of Common Stock	72,875			522,125		595,000
Sales of Common Stock, shares	7,287,500
Conversion of related party notes to equity (Note 6)	6,000			54,000		60,000
Conversion of related party notes to equity (Note 6), shares	600,000
Expense relating to non-cash stock-based compensation (Note 4)				11,458		11,458
Net loss					(1,429,944)	(1,429,944)
Balance, ending at Sep. 30, 2012	$ 1,237,628	$ (664,600)	$ (819,923)	$ 67,191,218	$ (69,232,878)	$ (2,288,555)
Balance ending, shares at Sep. 30, 2012	123,762,784

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Stock-based Compensation

9 Months Ended

Sep. 30, 2012

Stock-Based Compensation

Stock-based Compensation

Note 4 – Stock-based Compensation

Non-cash stock-based compensation expense recorded in the three and nine months ended September 30, 2012 and September 30, 2011 is as follows:

	Three Months Ended September 30, 2012		Three Months Ended September 30, 2011		Nine Months Ended September 30, 2012		Nine Months Ended September 30, 2011
Awards to non-employees	$	—	$	144,000	$	11,458	$	174,448
Stock option modifications		—		4,815		—		8,985
Total non-cash stock-based compensation expense	$	—	$	148,815	$	11,458	$	183,433

Employee and Director awards

No stock options were granted to employees during the first three quarters of 2012 or 2011.  208,000 and 31,200 options previously granted to employees expired during the second quarters of 2012 and 2011, respectively. 78,000 options previously granted to employees expired during the third quarter of 2011.

No options were granted to Directors for Director-related services during the first three quarters of 2012 or 2011.

Non-employee awards

The value of options and warrants issued to non-employees upon the date of issuance is expensed over the related service periods.  For non-employee options that are not subject to a performance criterion, we recompute the value of the unvested options each quarter-end and adjust the related compensation expense for the new value. That new value is based on various assumptions using end-of-quarter information. For non-employee options subject to a performance criterion, of which we had 5,200 options outstanding as of September 30, 2012, expense is recognized when it becomes probable that the performance criterion will be met.

150,000 fully-vested stock options were granted to a non-employee consultant for services during the first quarter of 2012.  Assumptions used to determine the average fair value of these awards ($0.08 per option) included an expected term of 1.89 years, a volatility rate of 99% and a risk-free interest rate of 0.25%.

No stock options were granted to non-employee consultants for services during the second or third quarters of 2012.

No stock options were granted to non-employee consultants for services during the first or third quarters of 2011.

During the second quarter of 2011, we issued 100,000 fully-vested options to non-employee consultants for services.  Assumptions used to determine the average fair value of these awards ($0.06 per option) included an expected term of 5 years, a volatility rate of 93% and a risk free interest rate of 2.28%.

During the first quarter of 2012, 50,000 stock options previously granted to a non-employee consultant for services expired.  These options had vested before expiration.

During the first quarter of 2011, a total of 104,000 stock options previously granted to non-employee consultants for services expired.  These options had vested before expiration.

Sales of common stock

During the third quarter of 2012, we received proceeds of $435,000 for the sale of 5,687,500 restricted shares of our common stock to a small group of accredited investors. In connection with this equity raise, we issued warrants to purchase an additional 5,687,500 shares of our common stock at a price of $0.10 per share. The warrants became immediately exercisable upon issuance and have five-year expiration terms. These warrants do not qualify as derivatives and, accordingly, are accounted for as equity instruments.

During the second quarter of 2012, we received proceeds of $145,000 for the sale of 1,450,000 restricted shares of our common stock to a small group of accredited investors. In connection with this equity raise, we issued warrants to purchase an additional 1,450,000 shares of our common stock at a price of $0.10 per share. The warrants became immediately exercisable upon issuance and have expiration dates ranging between April 24, 2017 and May 31, 2017.

Also, during the second quarter of 2012, we sold 150,000 restricted shares of our common stock to a Director for $15,000.

During the third quarter of 2011, we received proceeds of $1,028,300 for the sale of 10,283,000 restricted shares of our common stock to a small group of accredited investors. In connection with this equity raise, we issued warrants to purchase an additional 2,570,750 shares of our common stock at a price of $0.25 per share. The warrants became immediately exercisable upon issuance and expire on July 31, 2016.

No shares of our common stock were sold or issued to employees or Directors for services during the first three quarters of 2012 or 2011.

No shares of our common stock were sold or issued to non-employees for services during the first three quarters of 2012 or first quarter of 2011.  During the second quarter of 2011, we issued 150,000 unrestricted shares of our common stock to a non-employee for consulting services and recorded $24,000 of non-cash stock-based compensation expense.  During the third quarter of 2011, we issued 750,000 unrestricted shares of our common stock to a non-employee for consulting services and recorded $144,000 of non-cash stock-based compensation expense.
 

No stock options were exercised during the first three quarters of 2012 or 2011.

See Note 6 – Equity Commitment and Related Party Transactions for a description of other equity transactions IFT has entered into during 2012.

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Legal Proceedings (Details Narrative)

9 Months Ended

Sep. 30, 2012

Legal Proceedings Details Narrative

Period of occurrence

On July 31, 2006, we received notice from the American Arbitration Association ("AAA") of a Demand for Arbitration dated July 27, 2006 received by the AAA naming IFT as Respondent and TPG Capital Partners (“TPG”), the prior Blencathia owner, as the Claimant.  The arbitration had been requested by TPG to resolve an alleged aggregate proceeds shortfall from the sale of IFT securities issued in the Blencathia merger.  TPG has claimed they sold some or all of the 312,000 shares and the sales have not generated at least $500,000 of proceeds, as guaranteed in the merger documents.

Allegations

An alleged aggregate proceeds shortfall from the sale of IFT securities issued in the Blencathia merger. TPG Capital Partners, the prior Blencathia owner has claimed they sold some or all of the 312,000 shares and the sales have not generated at least $500,000 of proceeds, as guaranteed in the merger documents.

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Substantial Doubt About Ability to Continue as a Going Concern (Details Narrative) (USD $)	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Jul. 16, 2012
Equity commitment	$ 800,000
Cash available	140,000
Equity raise proceeds	595,000	1,028,300
Equity raise proceeds, subsequent to period	165,000
Receivables Collected	24,000
Intended Equity Investment from Black Diamond Financial Group LLC			4,500,000
Letter of intent
Subsequent events, date	Nov. 14, 2012
Proceeds from equity funding, intended investment amount	300,000
Proceeds from equity funding, accredited investors	$ 300,000