UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ______ to ______
Commission file number: 0-27432
CLEAN DIESEL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1393453
(State of Incorporation) (I.R.S. Employer Identification No.)
Clean Diesel Technologies, Inc.
300 Atlantic Street - Suite 702
Stamford, CT 06901-3522
(Address of principal executive offices) (Zip Code)
(203) 327-7050
(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 and (2) has been subject to such filing requirements for
the past 90 days.
Yes _X_ No____
As of August 13, 1999, there were outstanding 2,592,790 shares of Common Stock,
par value $0.05 per share, of the registrant.
=========================================================================
CLEAN DIESEL TECHNOLOGIES, INC.
(A Development-Stage Company)
Form 10-Q for the Quarter Ended June 30, 1999
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets as of June 30, 1999, 1
and December 31, 1998
Statements of Operations for the Three and 2
Six Month Periods Ended June 30, 1999, and
1998, and for the Period from January 1, 1992,
through June 30, 1999
Statements of Cash Flows for the Six Month 3
Periods Ended June 30, 1999, and 1998,
and for the Period from January 1, 1992,
through June 30, 1999
Note to Financial Statements 4
Item 2. Management's Discussion and Analysis of 8
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
- -2-
-1-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CLEAN DIESEL TECHNOLOGIES, INC.
(A Development-Stage Company)
BALANCE SHEETS
(in thousands except share data)
June 30, December 31,
1999 1998
-------- ------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 376 $ 1,663
Inventories 217 219
Other current assets 103 58
-------- --------
Total current assets 696 1,940
Other assets 39 45
-------- --------
Total assets $ 735 $ 1,985
======== ========
Liabilities and stockholders' equity
Current Liabilities:
Accounts payable and accrued expenses $ 611 $ 686
-------- --------
Stockholders' equity:
Preferred Stock, par value $0.05 per share,
authorized 90,000 shares, no shares issued
and outstanding -- --
Series A Convertible Preferred Stock, par
value $0.05 per share, $500 per share
liquidation preference, authorized 10,000
shares, issued and outstanding 7,582 shares,
involuntary liquidation value $4,054,000
and $3,840,000 1 1
Common Stock, par value $0.05 per share,
authorized 15,000,000 shares, issued and
outstanding 2,591,124 and 2,544,443 shares 130 127
Additional paid-in capital 15,198 15,008
Deficit accumulated during development stage (15,205) (13,837)
-------- --------
Total stockholders' equity 124 1,299
-------- --------
Total liabilities and stockholders' equity $ 735 $ 1,985
======== ========
See note to financial statements.
-1-
CLEAN DIESEL TECHNOLOGIES, INC.
(A Development-Stage Company)
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands except per share data)
Period from
Three Months Ended Six Months Ended January 1, 1992,
June 30, June 30, Through
1999 1998 1999 1998 June 30, 1999
-------- -------- -------- -------- ----------------
Sales $ 50 $ 9 $ 59 $ 9 $ 304
Costs and expenses:
Cost of sales 33 5 38 5 199
General and administrative 371 304 752 755 7,309
Research and development 184 179 452 415 6,778
Patent filing and maintenance 28 24 52 80 1,146
-------- -------- -------- -------- --------
Loss from operations 566 503 1,235 1,246 15,128
Interest income (7) (8) (22) (21) (644)
Interest expense -- 21 1 32 303
Cost of withdrawn Rights Offering -- -- -- -- 264
-------- -------- -------- -------- --------
Net loss during development stage 559 516 1,214 1,257 15,051
Preferred Stock dividend 105 -- 154 -- 154
-------- -------- -------- -------- --------
Net loss attributable to
Common Stockholders $ 664 $ 516 $ 1,368 $ 1,257 $ 15,205
======== ======== ======== ======== ========
Basic and diluted loss per
Common Share $ 0.26 $ 0.21 $ 0.53 $ 0.50 N/A
======== ======== ======== ======== ========
Average number of Common Shares
outstanding 2,591 2,517 2,567 2,517 N/A
======== ======== ======== ======== ========
See note to financial statements.
-2-
CLEAN DIESEL TECHNOLOGIES, INC.
(A Development-Stage Company)
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Period from
Six Months Ended January 1, 1992,
June 30, through
1999 1998 June 30, 1999
------------- ------------- ------------------
Operating activities
Net cash used in operating activities $ (1,282) $ (1,477) $(14,621)
-------- -------- --------
Financing activities
Proceeds from 1995 Rights Offering, net
of $630 of brokerage commissions -- -- 11,156
Expenses of 1995 Rights Offering -- -- (425)
Repayment of expenses of 1995 Rights
Offering paid by Fuel-Tech N.V -- -- (200)
Issuance of common stock to parent -- -- 250
Net parent company investment -- -- 469
Proceeds of loan from Fuel-Tech N.V. -- -- 2,874
Repayment of loan to Fuel-Tech N.V. -- -- (2,313)
Proceeds from exercise of stock options 1 -- 5
Proceeds from bridge loan -- 1,250 1,400
Proceeds from issuance of preferred stock -- -- 1,876
-------- -------- --------
Net cash provided from financing activities 1 1,250 15,092
-------- -------- --------
Investing activities
Purchase of fixed assets (6) (2) (95)
-------- -------- --------
Net cash used in investing activities (6) (2) (95)
-------- -------- --------
Net (decrease) increase in cash
and cash equivalents (1,287) (229) 376
Cash and cash equivalents at beginning
of period 1,663 1,239 --
-------- -------- --------
Cash and cash equivalents at
end of period $ 376 $ 1,010 $ 376
======== ======== ========
See note to financial statements.
-3-
CLEAN DIESEL TECHNOLOGIES, INC.
(A Development-Stage Company)
NOTE TO FINANCIAL STATEMENTS
JUNE 30, 1999
(Unaudited)
Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. All such adjustments are
of a normal recurring nature. Operating results for the three and six month
periods ended June 30, 1999, are not necessarily indicative of the results that
may be expected for the year ending December 31, 1999. For further information,
refer to the Financial Statements and footnotes thereto included in the
Company's Form 10-K for the year ended December 31, 1998.
The balance sheet at December 31, 1998, has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
Clean Diesel Technologies, Inc. (the "Company") was incorporated in the
State of Delaware on January 19, 1994, as a wholly owned subsidiary of Fuel-Tech
N.V. ("Fuel Tech"). Effective December 12, 1995, Fuel Tech completed a Rights
Offering of the Company's Common Stock, and reduced its ownership in the Company
to 27.6%.
In 1998, the Company raised net proceeds of $3.2 million by way of
private placements of its Series A Convertible Preferred Stock (the "Preferred
Stock"). At December 31, 1998, the Company had 7,582 shares of Preferred Stock
outstanding. As more fully described in "Series A Convertible Preferred Stock"
below, the Preferred Stock carries, by resolution of the Board of Directors of
the Company, either an annual dividend of 9% payable in cash or 11% payable in
kind. The Directors have resolved that until further notice such dividend will
be paid in kind. At June 30, 1999, as a result of the 1999 quarterly in-kind
dividends paid on January 1, 1999, and April 1, 1999, the Company has accounted
for 7,880 shares of Preferred Stock (7,582 shares of which are issued and
outstanding and 298 shares are issuable upon demand). Fuel Tech would retain an
approximate 26.7% interest in the Company on a fully converted basis at June 30,
1999.
The Company is a development stage enterprise, and its efforts from
January 1, 1992, through June 30, 1999, have been devoted to the research,
development, and commercialization of its products. Its products include
advanced catalytic fuel additives and systems that reduce harmful emissions from
internal combustion engines while improving fuel economy in diesel- and
gasoline-fueled engines. They also include nitrogen oxide ("NOx") reduction
systems and chemicals for the control of NOx emissions from diesel engines.
During 1998, the Company began a shift in emphasis from research and
development toward commercialization of its technologies. In late 1998 and the
first half of 1999, the Company shipped pre-production commercial units of its
Advanced Reagent Injection System, the ARIS(TM) 2000, to several engine
manufacturers, catalyst companies, and industrial end-users. The Company also
began several commercial field trials of its Platinum Plus(R) diesel fuel
catalyst for fuel economy. Further commercialization of the Company's
technologies will depend upon the success of field tests and governmental
regulations, principally by the US Environmental Protection Agency and
corresponding foreign and state agencies.
-4-
In December 1997, the Company identified a need to raise an additional $5
million to aid in its commercialization efforts. As noted above, the Company
received net proceeds of approximately $3.2 million in 1998 through private
placements of its Preferred Stock. In July/August 1999, the Company received
commitments for the remainder, or $1.75 million, from private European investors
for the further issuance of 3,500 shares of the Company's Preferred Stock. This
financing is expected to close in August 1999 subject to approval by 60% of the
current Preferred Stockholders to an increase in the number of authorized shares
of Series A Convertible Preferred Stock. See "Going Concern" and "Series A
Convertible Preferred Stock" below for additional information.
Going Concern
The financial statements have been prepared assuming that the Company
will continue as a going concern and do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
and the amount and classification of liabilities that may result from the
possible inability of the Company to continue as a going concern.
The Company has received orders for its entire pre-production schedule
for the ARIS 2000 diesel NOx reduction technology and expects to deliver
commercial orders in the fall of 1999. Additionally, the Company is seeking to
license distributors for its ARIS 2000 technology for on-highway and off-road
diesel applications. Commercial field trials of the Company's Platinum Plus
diesel fuel catalyst have also begun.
During this period of field trials, product evaluations, and development,
the Company has had recurring operating losses and has been unable to generate a
positive cash flow. In management's opinion, the funding secured in mid-1999,
along with the existing funds, and outstanding orders will be sufficient to fund
the Company's operations until at least June 2000. In June 1999, the Company
announced plans to license its NOx reduction business, which has started to
generate commercial sales. If the Company is successful in licensing this
business and in meeting its sales targets for its Platinum Plus fuel catalyst
over the next twelve months, the Company's management believes that it will have
sufficient cash balances to finance its operations beyond this date. If the
Company is unable to license its NOx reduction business and/or realize
commercial sales of its Platinum Plus additives or ARIS 2000 systems, the
Company will require additional capital to fund its operations beyond June 2000.
Although the Company believes that it will be successful in its capital-raising
efforts, should they be necessary, there is no guarantee that it will be able to
raise such funds on terms that will be satisfactory to the Company. The Company
will develop contingency plans in the event future financing efforts, if
required, are not successful. Such plans may include reducing expenses and
selling or licensing some of the Company's technologies. Accordingly, at June
30, 1999, there is substantial doubt as to the Company's ability to continue as
a going concern. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Sources of Capital"
elsewhere herein for additional information.
Inventories
Inventories are stated at the lower of cost or market and consist of
finished products. Cost is determined using the first-in, first-out (FIFO)
method.
Series A Convertible Preferred Stock
During 1998, the Company received $1.4 million, exclusive of $45,000 of
commissions and expenses, through a Bridge Loan. In November 1998, the Company
received an additional $1.85 million in net proceeds through a private placement
of 3,753 shares of its Preferred Stock. As the net proceeds exceeded the $1.75
million minimum stipulated in the terms of the Bridge Loan, the loan
automatically converted into 2,800 shares of Preferred Stock. Concurrently, in
November 1998, Fuel Tech elected to convert its $495,000 Term Note due from the
Company, as well as $20,000 of associated accrued interest from the Bridge Loan
and Term Note (described below), into 1,029 shares of the Preferred Stock. In
July/August 1999, the Company received commitments of $1.75 million from private
investors against the issuance of an additional 3,500 shares of Preferred Stock
(See "Note to Financial Statements -- Subsequent Event" below).
5
The Preferred Stock has a stated value and liquidation preference of $500
per share plus accrued and unpaid dividends. Holders of the Preferred Stock are
entitled to receive, when and if declared by the Board of Directors of the
Company out of funds of the Company legally available therefor, cash dividends
at the annual rate of 9% or dividends in kind at the annual rate of 11%. Cash
dividends and dividends in kind are each deemed "Preferred Dividends". Preferred
Dividends are payable quarterly in arrears.
In order to conserve cash, on February 4, 1999, the Company's Board of
Directors adopted a resolution that all dividends declared on the Preferred
Stock be payable in kind at the annual rate of 11%. The dividends will be paid
in the form of additional shares of Preferred Stock in accordance with the terms
and conditions of the Certificate of Designation on the first business day of
January, April, July, and October to stockholders of record on the first
business day of the prior December, March, June, and September. Dividends in
kind are evidenced by a stock certificate for full share amounts of such
dividends, with fractional amounts accruing and paid in full shares on a
subsequent dividend. The directors further resolved to issue certificates for
stock dividends annually rather than quarterly, unless a stockholder requests
certificates to be issued more frequently. These resolutions will remain in
effect until revoked by the Company's Board of Directors.
During 1999, stock dividends which were payable on January 1, 1999, and
April 1, 1999, were paid in-kind as 88 and 210 additional shares of the
Preferred Stock, respectively. At June 30, 1999, the Company had 7,582 shares of
Preferred Stock issued and outstanding with another 298 shares issuable upon
demand. Additionally, on June 30, 1999 the Company had earned but undeclared
dividends of approximately $108,000.
Each share of the Preferred Stock is convertible into 333.33 shares of
the Company's Common Stock, which is equivalent to $1.50 per Common Share.
Assuming full conversion of the Preferred Stock, at June 30, 1999, the Company
would have approximately 5.2 million shares of Common Stock outstanding, of
which Fuel Tech would own approximately 1.4 million shares, or a 26.7% interest
in the Company.
The Company can force the holder of Preferred Stock to convert its
shares, in whole or in part, into Common Stock at any time on, or after, the
date that the average Closing Price (as defined in the Certificate of
Designation) of the Common Stock equals or exceeds $4.50 for 20 consecutive
trading days. Such conversion may, at the election of the holders of 60% of the
issued and outstanding shares of the Preferred Stock, be scheduled to occur on a
pro-rata basis quarterly over 18 months. The Preferred Stock shall be
automatically converted into Common Stock should the Company consummate a public
offering of its Common Stock in excess of certain prescribed amounts. In the
event of such mandatory conversion, accrued and unpaid dividends will also
convert into Common Stock, on the same terms as the underlying shares of
Preferred Stock.
Pursuant to a Registration Rights Agreement and Consent, these Common
Shares will be entitled to registrations under the Securities Act of 1933, as
amended, (a) three on demand, if not less than $500,000 in value and not more
often than once in every twelve months, and (b) an unlimited number, if
incidental or "piggy-back."
Effective February 10, 1999, Section 3(a) of the Certificate of
Designation (the "Certificate") of the Preferred Stock was revoked by the filing
of a Certificate of Amendment with the Secretary of the State of Delaware. The
effect of this resolution was to eliminate the requirement in Section 3(a) of
the Certificate that the Preferred Stock be subject to redemption at the option
of a stockholder on or after May 8, 2002. The revocation had previously been
approved by the holders of the Preferred Stock.
Related Party Transactions
The Company entered into a Management and Services Agreement with Fuel
Tech. Under the agreement, the Company agreed to pay Fuel Tech a fee equal to an
additional 3 - 10% of the costs paid on the Company's behalf, dependent upon the
nature of the costs incurred. Currently, a fee of 3% is assessed on all costs
billed to the Company. Charges to the Company, inclusive of the administrative
fee, were approximately $27,000 and $41,000 in the second quarter of 1999 and
1998, respectively.
6
Commitments
In January 1999, the Company agreed to an extension of its sublease. The
annual fixed rent amount under the sublease extension, which runs from March 1,
1999, through February 28, 2002 (unless terminated sooner pursuant to the terms
of the agreement), is $81,200.
Effective October 28, 1994, Fuel Tech granted two licenses to the Company
for all patents and rights associated with its Platinum Fuel Catalyst ("PFC")
technology. Effective November 24, 1997, the licenses were canceled and Fuel
Tech assigned to the Company all such patents and rights on terms substantially
similar to the licenses. In exchange for the assignment, the Company will pay
Fuel Tech a royalty of 2.5% of its annual gross revenue from sales of the PFCs
commencing in 1998. The royalty obligation expires in 2008. The Company may
terminate the royalty obligation to Fuel Tech by payment of $10,909,091 in 1999
and declining annually to $1,090,910 in 2008. The Company as assignee and owner
will maintain the technology at its own expense. To date no royalties have been
paid to Fuel Tech.
Subsequent Event
In July/August 1999, the Company received commitments of $1.75 million
from private investors for the issuance of 3,500 shares of the Company's
Preferred Stock at $500 per share. The issue is expected to be closed in August
1999 following approval by 60% of the holders of the outstanding Preferred Stock
to an increase in the authorized number of shares of the Preferred Stock from
10,000 to 15,000 and appropriate legal documentation.
Upon receipt of the proceeds from the sale of the Preferred Stock, the
Company has agreed to pay commission fees totaling $26,250. Additionally, on
June 14, 1999, subject to completion of the 1999 funding, the Company further
agreed to grant to Mr. Derek Gray and Mr. John de Havilland 58,333 and 29,167,
respectively, warrants for the purchase of the Company's Common Stock at the
exercise price of $1.50 per share. The warrants have a term of ten years.
If the $1.75 million financing had been received by the Company as of
June 30, 1999, the Company's condensed balance sheet would appear as follows:
As Reported Pro Forma
----------- ---------
Assets:
Cash $376,000 $2,100,000
Other Current Assets 320,000 320,000
Other Assets 39,000 39,000
-------- ----------
Total Assets $735,000 $2,459,000
======== ==========
Liabilities & Stockholders' Equity:
Accounts Payable & Accrued Expenses $611,000 $ 611,000
Stockholders' Equity 124,000 1,848,000
-------- ----------
Total Liabilities & Stockholders' Equity $735,000 $2,459,000
======== ==========
7
CLEAN DIESEL TECHNOLOGIES, INC.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Forward-Looking Statements
Statements in this Form 10-Q that are not historical facts, so-called
"forward-looking statements," are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Investors are cautioned
that all forward-looking statements involve risks and uncertainties, including
those detailed in the Company's filings with the Securities and Exchange
Commission. See "Risk Factors of the Business" in Item 1, "Business," and also
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in the Company's Form 10-K for the year ended December 31, 1998.
Results of Operations
Sales for the second quarter and first six months of 1999 increased to
$50,000 and $59,000 respectively, from $9,000 in each of the comparable periods
in 1998. Cost of Sales increased to $33,000 and $38,000 in the second quarter
and first six months of 1999, respectively, from $5,000 in each of the
respective comparable periods in 1998.
The 1999 sales related primarily to sales to several engine
manufacturers, catalyst companies, and industrial end-users of the Company's
pre-production commercial ARIS(TM) 2000 units, Advanced Reagent Injection
System. The Company in 1999 also recorded some of its first commercial sales of
its Platinum Plus(R) additives for use with particulate filters both in Korea
and in Taiwan and for a stationary diesel application in the U.S.
The Company had minimal sales of its platinum-cerium bimetallic additive
in 1998. These sales were for field trials and the Company expects retrofit
markets to develop in Taiwan and Korea during 1999. The Company believes its
platinum-cerium additive has demonstrated better trap regeneration performance
than other additive systems and has the benefit of being effective at much lower
dose rates than other competitive additives of cerium or iron alone. Dose rates
are important because they result in lower ash buildup and longer filter life.
The Company's platinum-cerium bimetallic additive with diesel flow
through oxidizers has also proven in testing to be effective in reducing the
"carbon fraction" of diesel particulate emissions, whereas oxidizers alone are
effective only on the soluble organic fraction from oil and fuel residues. Many
engine manufacturers plan to meet the new nitrogen oxide ("NOx") limits by means
of Exhaust Gas Recirculation ("EGR"), which has the disadvantage of increasing
particulates and especially the "carbon fraction" content.
The Company is completing its Tier 1 registration of the platinum-cerium
additive and already has effective registration of its platinum-only additives.
Field trials of the platinum-cerium additive started in the first quarter of
1999 and are continuing. Based on trials that were completed in the first half
of 1999, the Company expects commercial sales to start in late 1999 or the first
half of 2000.
The US EPA and Engine Manufacturers Settlement of October 1998 mandates
the expenditure by engine companies of $109.5 million in projects to reduce NOx
emissions, including research and development to design low-emitting engines and
new emission control technologies. The Company has prepared a demonstration
program of its ARIS 2000 system. The Company has submitted proposals to the US
EPA and engine companies for four projects totaling approximately $6 million,
two of which pertain to the ARIS system and two to the Company's bimetallic fuel
additive.
8
The Company identified a market opportunity for urea selective catalytic
reduction (SCR) systems for use with stationary diesel engines primarily for
power generation. The ARIS 2000 is a single fluid injection and metering system
complete with an electronic control unit that can be integrated with engine
electronic and diagnostic systems. The Company has completed development of the
ARIS 2000 system for stationary diesel engines and sold initial units to major
engine manufacturers for evaluation purposes in late 1998. It has since sold and
installed the first commercial ARIS systems.
The Company believes that the ARIS 2000 NOx reduction system has
applications for both stationary engines and mobile engines. While the ARIS 2000
for stationary use has completed development and is now being sold commercially,
the ARIS system for mobile applications needs further development from the
present prototype stage. The Company believes that the ARIS 2000 system can most
effectively be commercialized through licensing a company or companies with a
related business in these markets. The Company is actively seeking to license
this technology.
Thus, the Company believes that it is extremely well placed to sell both
its platinum-cerium additive technology and its ARIS 2000 urea injection system
technology as part of the overall emission control strategy for a very wide
range of diesel engines.
The Company expects revenues from sales of its Platinum Plus additives to
start in late 1999 or the first half of 2000, initially from sales to fleets and
aftermarket products and later to engine manufacturers for inclusion with an
"onboard dosing" system on new vehicles. The Company expects revenues from sales
of commercial ARIS 2000 systems for stationary diesel installations in the
second half of 1999. The Company also expects revenues from demonstration
programs and joint development agreements (both for its ARIS 2000 system and its
Platinum Plus additives for particulate filters and oxidizers), but will not
know whether its programs are accepted until sometime in 1999.
General and administrative expenses increased to $371,000 in the second
quarter of 1999 from $304,000 in the comparable period in 1998. General and
administrative expenses remained relatively flat in the first six months of 1999
as compared to the same period in 1998. The increase in the second quarter of
1999 is due primarily to the costs associated with the Company's efforts to
commercialize its products (e.g., marketing and travel expenses). Additionally,
in 1998, Fuel Tech required the use of some of the Company's management's time
and the associated costs were allocated and charged to Fuel Tech in 1998.
Research and development expenses remained relatively flat, increasing to
$184,000 in the second quarter of 1999 from $179,000 in the comparable period in
1998. Research and development expenses increased in the first six months of
1999 to $452,000 from $415,000 in the comparable period in 1998. The slight
increase in 1999 is due in part to increased travel costs and the costs
associated with completing the US EPA Tier 1 registration testing of the
Company's platinum-cerium bimetallic product. This project began in mid-year
1998 and testing was completed in March 1999.
Patent filing and maintenance expenses remained relatively flat,
increasing to $28,000 in the second quarter of 1999 from $24,000 in the
comparable period in 1998. Patent costs decreased to $52,000 in the first six
months of 1999 from $80,000 in the comparable periods in 1998. The decrease is
due in part to the shift in emphasis toward commercialization as noted above.
Interest income remained relatively flat decreasing to $7,000 in the
second quarter of 1999 from $8,000 in the comparable year earlier period, and
increasing to $22,000 in the first six months of 1999 from $21,000 in the
comparable period in 1998. Interest expense decreased to zero and $1,000 in the
second quarter and first six months of 1999 from $21,000 and $32,000,
respectively, in the comparable periods in 1998 due to the conversion of the
Company's outstanding debt into shares of the Company's Series A Convertible
Preferred Stock (the "Preferred Stock") in November 1998. See "Note to Financial
Statements" above and "Liquidity and Sources of Capital" below for further
information.
9
Liquidity and Sources of Capital
The Company is a development stage enterprise and has incurred losses
since inception (January 1, 1992 through June 30, 1999) aggregating $15,051,000
(excluding the effect of the dividends on the Preferred Stock) and $13,837,000
at December 31, 1998, respectively. The Company expects to incur losses through
the foreseeable future as it further pursues its research, development, and
commercialization efforts. Although the Company started selling product in 1997,
sales to date have been minimal and the Company continues to be dependent upon
sources other than operations to finance its working capital requirements.
In December 1995, the Company raised approximately $10.5 million, net of
offering expenses and broker-dealer commissions of approximately $1.3 million,
through the 1995 Rights Offering of its shares by Fuel Tech. The Company then
repaid Fuel Tech approximately $2.3 million in intercompany loans.
On February 17, 1998, Fuel Tech agreed to provide the Company with up to
$500,000 in order to fund its cash requirements until such time as the Company
obtained the long-term financing it was seeking. On May 20, 1998, the $500,000
commitment was converted into a bridge loan (the "Bridge Loan"). The Bridge Loan
stipulated an automatic conversion into shares of Preferred Stock upon the
conclusion of a public or private financing that contributed a minimum of $1.75
million of additional net proceeds to the Company. In mid-1998, the Company also
received an additional $900,000 of financing under the same Bridge Loan (having
the same terms and conditions) from outside investors. As more fully described
below and in the "Note to Financial Statements" above, in November 1998, the
Bridge Loan automatically converted into 2,800 shares of Preferred Stock.
In 1997, the Company repaid $250,000 of a $745,000 promissory demand note
with Fuel Tech and restructured the remaining amount into a $495,000 promissory
note (the "Term Note") with Platinum Plus, Inc. ("Platinum Plus"), a wholly
owned subsidiary of Fuel Tech. The principal amount of the Term Note was payable
in three annual installments of $100,000 each on July 1 of each of the years
1998 through 2000, with a final installment of $195,000 due on July 1, 2001. On
July 1, 1998, Platinum Plus elected to defer the repayment of the $100,000 of
principal, which was payable on that date. Interest at a rate of 8% per annum
was payable on the unpaid balance on each principal payment date. The interest
accrued on the note as of July 1, 1998, was paid by the Company. See below for
further information concerning the exchange of the Term Note for shares of the
Company's Preferred Stock.
In November 1998, the Company obtained through a private placement
approximately $1.85 million in net proceeds against the issuance of 3,753 shares
of Preferred Stock. As the Company received net proceeds in excess of the $1.75
million minimum, and in accordance with the terms of the Bridge Loan agreement,
the $1.4 million Bridge Loan, mentioned above, converted into 2,800 shares of
Preferred Stock. Additionally, in an effort to retain its approximate 27%
interest in the Company (assuming conversion of the Preferred Stock into the
Company's Common Shares), Fuel Tech elected to exchange its $495,000 Term Note,
and $20,000 of associated accrued interest from its Bridge Loan and Term Note,
for 1,029 shares of Preferred Stock. As a result, Fuel Tech owned 2,029 shares
of the Company's Preferred Stock at December 31, 1998. These shares plus the
1999 quarterly dividends, if converted, along with its Common Stock ownership
would give Fuel Tech an approximate 26.7% interest in the Company on a fully
converted basis at June 30, 1999.
As a result of the foregoing transactions, the Company had 7,582 shares
of Preferred Stock issued and outstanding at June 30, 1999 and at December 31,
1998. As a result of the 1999 quarterly dividends, the Company had 7,582
shares of Preferred Stock outstanding at June 30, 1999 (with an additional 298
shares issuable upon demand), which are convertible into approximately 2.6
million shares of the Company's Common Stock, $0.05 par (convertible at a rate
of 1:333.33). In July/August 1999, the Company received commitments of $1.75
million, excluding expenses of $26,000, from private investors against the
issuance of an additional 3,500 shares of Preferred Stock. The Company expects
this financing to close in August 1999, subject to approval by the existing
Preferred Stockholders to an increase in the number of authorized shares of
Series A Convertible Preferred Stock.
10
Effective as of October 28, 1994, Fuel Tech granted two licenses to the
Company for all patents and rights associated with its Platinum Fuel Catalyst
("PFC") technology. Effective November 24, 1997, the licenses were canceled and
Fuel Tech assigned to the Company all such patents and rights on terms
substantially similar to the licenses. In exchange for the assignment, the
Company will pay Fuel Tech a royalty of 2.5% of its annual gross revenue from
sales of the PFCs, commencing in 1998. The royalty obligation expires in 2008.
The Company may terminate the royalty obligation to Fuel Tech by payment of
$10,909,091 in 1999 and declining annually to $1,090,910 in 2008. The Company as
assignee and owner will maintain the technology at its own expense. To date no
royalties have been paid to Fuel Tech.
For the six months ended June 30, 1999 and 1998, and for the period from
January 1, 1992, through June 30, 1999, the Company used cash of $1,282,000,
$1,477,000, and $14,621,000, respectively, in operating activities.
At June 30, 1999, and December 31, 1998, the Company had cash and cash
equivalents of $376,000 and $1,663,000, respectively. Working capital decreased
to $85,000 at June 30, 1999, from $1,254,000, at December 31, 1998. The decrease
in cash and cash equivalents, and working capital in the first six months of
1999 was the result of the Company's use of the resources to fund its operations
in 1999. The Company anticipates incurring additional losses through at least
1999 as it further pursues its commercialization efforts. In light of this, the
Company is taking steps to minimize expenditures until such time as it is able
to generate a positive cash flow.
As a result of the Company's recurring operating losses, the Company has
been unable to generate a positive cash flow. In management's opinion, the
funding secured in mid-1999 along with the existing cash and booked sales will
be sufficient to fund the Company's operations until at least June 2000. In June
1999, the Company announced plans to license its NOx reduction business, which
has started to generate commercial sales. If the Company is successful in
licensing this business and in meeting its sales targets for its Platinum Plus
fuel catalyst over the next twelve months, the Company's management believes
that it will have sufficient cash balances to finance its operations beyond this
date. If the Company is unable to license its NOx reduction business and/or
realize commercial sales from its Platinum Plus additives or ARIS 2000 systems,
the Company will require additional capital to fund its operations beyond June
2000. Although the Company believes that it will be successful in its
capital-raising efforts, should they be necessary, there is no guarantee that it
will be able to raise such funds on terms that will be satisfactory to the
Company. The Company will develop contingency plans in the event future
financing efforts, if required, are not successful. Such plans may include
reducing expenses and selling or licensing some of the Company's technologies.
Accordingly, at June 30, 1999, there is substantial doubt as to the Company's
ability to continue as a going concern. See "Note to Financial Statements --
Going Concern" elsewhere herein for additional information.
Impact of Year 2000
The costs of the planned Year 2000 ("Y2K") modifications and the dates by
which the Company expects to complete its plans are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including continued availability of certain resources, third-party modification
plans, and other factors. Specific factors that might cause differences between
the estimates and actual results include, but are not limited to, the
availability and cost of personnel trained in these areas, the ability to locate
and correct all relevant computer codes, changes in consulting fees and costs to
remediate and replace hardware and software, as well as non-incremental costs
resulting from redeployment of internal resources, timely responses to and
corrections by third parties, such as significant customers and suppliers, and
similar uncertainties.
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. The issue
arises if date-sensitive software recognizes a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
11
The Company has identified three information technology ("IT") and non-IT
areas for which Y2K compliance is critical to the normal and routine operations
of the Company. These areas are:
1) commercial off-the-shelf software
2) computer hardware and embedded processors
3) facilities-related applications and processes, such as communications
and equipment with embedded chips
The Company uses commercial off-the-shelf software and hardware, which,
based on the representations of the vendors and consultants, are or will be Y2K
compliant. The Company is also evaluating the possible effects of the Y2K issue
on its key suppliers, contractors, and vendors. Although the possible effects of
the Y2K issue on these parties are beyond the control of the Company, the
Company has initiated a process to communicate with these parties to inform them
of the Company's Y2K strategy and to determine their own Y2K strategies and
readiness. The Company estimates that the total cost of its Year 2000 compliance
program will be insignificant, and will primarily require the purchase of new
hardware and/or software (although a portion of the hardware and software would
have been purchased by the Company through the regular and routine upgrading of
systems). Such hardware and software will be capitalized and depreciated over
the estimated useful life of the related asset. All other expenditures will be
charged to expense. At June 30, 1999, the Company has not expended any funds
specifically for the Y2K problem.
Year 2000 Program
At June 30, 1999, the Company is actively engaged in one or more
compliance phases with respect to each of the three areas described above.
Although there can be no guarantee of complete readiness by the year 2000, the
Company believes each of the areas described above will be Y2K compliant by
November 30, 1999, or will be substantially compliant by that time, such that
further remediation and testing, if any, will not be significant to its
operations. However, as discussed above, the Company has not completed its Year
2000 compliance program. In the event the Company does not complete its program,
or fails to identify and modify critical business applications, there may be an
interruption to the Company's business that may have a materially adverse impact
on its future financial condition and results of operations. In addition,
Y2K-related disruptions in the economy in general may also have a materially
adverse impact on the Company's future financial condition and results of
operations.
Risks
The failure to identify and correct a Year 2000 problem could result in
an interruption in, or failure of, certain normal business activities or
operations. The Company does not expect such failures to have a materially
adverse impact on its results of operations or financial condition. However,
because of the general uncertainty about Year 2000 readiness throughout the
world economy, which results in uncertainties regarding the readiness of the
Company's vendors, contractors, and potential customers, the Company is
currently unable to determine whether Year 2000 problems may have a materially
adverse impact on its results of operations or financial condition. As the
Company's Year 2000 compliance program progresses, the level of uncertainty
about this matter will reduce, especially as to uncertainties concerning the
Company's own degree of Y2K compliance and the compliance of its suppliers and
contractors.
Worst Case Scenario
It is not possible to describe a reasonably likely "worst case Year 2000
scenario" without making numerous assumptions. The Company presently believes
that a most likely worst case scenario would make it necessary for the Company
to replace some suppliers and contractors, rearrange work plans, or, perhaps,
interrupt some office and field activities. Assuming this assessment is correct,
the Company does not believe that such circumstances would have a materially
adverse impact on its financial condition or results of operations, even if it
is necessary to incur additional costs to correct unanticipated compliance
failures.
12
Contingency Plans
The Company currently has no contingency plans in place in the event it
does not complete all phases of its Y2K compliance program by December 31, 1999.
However, it expects to have completed enough of its compliance program by
September 1999 that it will be able to identify those areas for which
contingency plans will be necessary, and it will develop the required
contingency plans at that time. The Company continues to monitor carefully the
progress of its Year 2000 program and its state of readiness. Any future
contingency plan will be based on its best estimate of numerous factors, which,
in turn will be derived by relying on numerous assumptions of future events.
However, there can be no assurance that these assumptions or estimates will have
been made correctly, or that the Company will have anticipated all relevant
factors, or that there will not be a delay in or increased costs associated with
the Company's Y2K program. Any delay in implementation of the Year 2000 program
could affect the Company's Year 2000 readiness. Specific factors that might
cause the actual outcome to differ from the projected outcome include, without
limitation, the continued availability of personnel and consultants trained in
the computer programming skills necessary for remediation of Year 2000 problems,
the ability to locate and correct all relevant computer codes and embedded
software, timely responses by third parties, including suppliers, contractors,
and potential customers, and the ability to implement interfaces between new
systems and systems not being replaced.
This discussion regarding the Year 2000 Issue is a "Year 2000 Readiness
Disclosure" as the term is described in the Year 2000 Information and Readiness
Disclosure Act of 1998.
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of the Company, held on June 9, 1999:
a. The proposal to elect seven (7) directors was approved by a vote
of a majority of the common and preferred shareholders present and
voting, and, specifically with respect to each individual nominee,
as follows:
Name Votes Cast Votes for Votes Withheld Unvoted
---- ---------- --------- -------------- -------
Ralph E. Bailey 3,184,381 3,182,881 1,500 0
Douglas G. Bailey 3,184,381 3,182,881 1,500 0
Derek R. Gray 3,184,381 3,182,881 1,500 0
John A. de Havilland 3,184,381 3,182,881 1,500 0
Charles W. Grinnell 3,184,381 3,182,881 1,500 0
Jeremy D. Peter-Hoblyn 3,184,381 3,182,881 1,500 0
James M. Valentine 3,184,381 3,182,881 1,500 0
Additionally, Messrs. de Havilland and Gray were elected as
nominees of the Series A Convertible Preferred Stockholders, voting
as a class, by a vote of 1,676,982 in favor, no votes being
withheld and no abstentions.
b. The appointment of Ernst & Young LLP as independent auditors of
the Company for the year 1999 was approved by a vote of 3,183,681
shares in favor, 700 shares against, and no shares abstaining.
c. The proposal to amend the 1994 Incentive Plan of the Company to
include in the definition of "outstanding shares" the number of
commons shares into which issued and outstanding convertible
securities of the Company may be converted for purposes of
determining the authorized number of shares available for granting
stock awards was approved by a vote of 3,152,470 shares in favor,
23,911 shares against, and 8,000 shares abstaining.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
None
b. Reports on Form 8-K
None
14
CLEAN DIESEL TECHNOLOGIES, INC.
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.
CLEAN DIESEL TECHNOLOGIES, INC.
Date: August 13, 1999 By: /s/Jeremy D. Peter-Hoblyn
---------------------------------------
Jeremy D. Peter-Hoblyn
Chief Executive Officer, President
and Director
Date: August 13, 1999 By: /s/Scott M. Schecter
---------------------------------------
Scott M. Schecter
Chief Financial Officer, Vice President and
Treasurer
15