When Ron Garwood and his associate Tom Tanis assumed control of American Fuel Technologies Inc. in December, the Eastern Shore producer and marketer of ethanol and other fuel "enhancers" was entering the throes of a crisis unmatched in its volatile seven-year history.

For the second quarter that ended Nov. 30, the Federalsburg, Md., company disclosed a financial statement that showed a severely ailing company -- the firm had a negative net worth of $330,706.

The negative equity, Tanis said, was the result of continued heavy losses from its two ethanol production plants and interest on its debt. The losses for the quarter were $1.5 million on sales of $891,764. "That is what you can lose making alcohol," he said.

To make matters worse, the negative equity position prompted the National Association of Securities Dealers to remove AFT from its "over-the-counter" stock listings. The stock, now thinly traded on the so-called "pink sheets," has plummeted from 19 cents on March 4, two days before it was delisted, to 3 cents last week.

Times have not always been so bleak for AFT. Formed in 1979 to capture some of the then-burgeoning market for alternative, renewable energy sources, AFT once held high hopes for its product, an expensive but effective substitute for gasoline.

However, the very concept that gave birth to the alternative-fuels industry -- the notion that ethanol could be a fuel substitute -- prevented the company from flourishing. As it turned out, the price of ethanol was just as unpredictable and unstable as the price of petroleum. Now, ethanol is used primarily as an alternative to lead as an octane booster in gasoline.

Wracked by the high costs of producing the gasoline additive and the turbulence of world petroleum prices, AFT has become another casualty of a booming economy. The firm never has earned a profit, and since its inception, it has written off more than $20 million in accumulated losses, an enormous sum for a company whose annual revenue never has exceeded $10 million.

The resignation in December of company founder O. Wayne Eakin as chief executive officer marked a major change for the company. Tanis and Garwood, a company veteran who assumed Eakin's post, have devised and enacted a strategy that they hope will return the company to solvency.

"When we started," Tanis said of the management shuffle, "the company was completely insolvent, with a negative equity. We are still well down the road from completing our turnaround."

Using the new strategy, AFT has washed its hands of the ethanol production business and is solely a brokerage firm, trading ethanol and, eventually, other fuel additives. Tanis said the firm is close to agreeing to sell its plants in Federalsburg and Hydro, Okla., has drastically cut overhead costs, and has moved its now-skeleton staff of 12 to a new headquarters in Laurel, Del.

"We're trading principally in ethanol, with plans to develop an involvement in other octane additives. So the basic business charter has not changed," Tanis said.

"The tremendous losses stem from production of ethanol at the company's two facilities. When Ron Garwood first came, he had the insight, as a hedge, to start a trading company. We were buying from other producers, some domestic and some off-shore, and reselling. That's a business that has always been profitable but not enough to offset the losses."

It was this strategy that AFT executives outlined in an appeal to remain on the NASD's list of publicly traded securities after the firm was delisted for failing to meet the minimum net worth requirement of $375,000.

The NASD committee that hears such appeals rejected the company's appeal because the committee "didn't think that turnaround was in the near term, or in the offing," according to Douglas F. Parrillo, NASD's chief spokesman.

Tanis said that "the plan will get us back within 'spec.' However, it is a program in the works, instead of one that was complete" and, for that reason, NASD rejected the appeal.

"We fully intend to get relisted as quickly as possible," Tanis said. But Parrillo said the company will have to meet stricter requirements -- including minimum net worth of $1 million and assets of $2 million -- to qualify.

While Tanis argues AFT's planned turnaround is "doable," he acknowledges there are several major "hurdles." The company needs to raise money to pay off its debts and to support its ethanol marketing operations. But, as Tanis says he is finding out, raising capital is next to impossible for a company with a negative equity position like AFT's.

"It's very tough to raise money," he said. "It's a function of getting enough of the turnaround accomplished to give a potential lender a comfort factor, where, in his mind, we have a chance of pulling it off."

In addition, AFT is in the midst of terminating a major marketing agreement announced last May with an Atlanta company, Savannah Food & Industries Inc. The agreement, which was to put together a joint venture for purchasing and importing ethanol, has soured, Tanis said, because of a "massive buildup of unassociated costs" when Savannah got involved. Perhaps the largest hurdle, according to some analysts, will be the recent drop in petroleum prices and the equally precipitous decline in the price of ethanol.

Tanis prefers to focus on the fortuitous timing of AFT's decision to get out of production.

"The company was fortunate in its move to get out of production and into marketing when it did," Tanis said. "We had lost money producing ethanol. . . . The marketing operation, although its [profit] margin is reduced, has not completely lost it.