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 September 30, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number: 0-27432
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CLEAN DIESEL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1393453
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(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 October 29, 2001, there were outstanding 2,698,787 shares of Common Stock,
par value $0.05 per share, of the registrant.
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CLEAN DIESEL TECHNOLOGIES, INC.
Form 10-Q for the Quarter Ended September 30, 2001
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets as of September 30, 2001, 3
and December 31, 2000
Statements of Operations for the Three and Nine 4
Months Ended September 30, 2001 and 2000
Statements of Cash Flows for the Three and Nine 5
Months Ended September 30, 2001 and 2000
Note to Financial Statements 6
Item 2. Management's Discussion and Analysis of 11
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-
PART I. FINANCIAL INFORMATION
Item1. Financial Statements
CLEAN DIESEL TECHNOLOGIES, INC.
BALANCE SHEETS
(in thousands except share data)
September 30, December 31,
2001 2000
--------------- --------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 430 $ 541
Accounts Receivable 192 50
Inventories 294 287
Other current assets 62 87
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Total current assets 978 965
Other assets 99 92
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Total assets $ 1,077 $ 1,057
=============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 229 $ 400
Notes payable 1,000 500
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Total current liabilities 1,229 900
Deferred compensation and pension benefits 356 308
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Total long-term liabilities 356 308
Stockholders' deficit:
Preferred stock, par value $0.05 per share,
authorized 80,000 shares, no shares issued
and outstanding -- --
Series A Convertible Preferred Stock, par
value $0.05 per share, $500 per share
liquidation preference, authorized 20,000
shares, issued and outstanding 14,623 and 13,218
respectively, involuntary liquidation value (including
unissued dividend shares of 1,230 and 1,424)
$7,926,500 and $7,321,000 1 1
Common Stock, par value $0.05 per share,
authorized 15,000,000 shares, issued and
outstanding 2,698,787 shares 135 133
Additional paid-in capital 21,572 20,849
Accumulated Deficit (22,216) (21,134)
--------------- --------------
Total Stockholders' Deficit (508) (151)
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Total Liabilities and Stockholders' Deficit $ 1,077 $ 1,057
=============== ==============
See notes to financial statements
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CLEAN DIESEL TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
-------- -------- -------- --------
Revenue:
Product revenue $ 65 $ 52 $ 153 $ 137
License and royalty revenue 434 60 1,290 340
-------- -------- -------- --------
Total revenue 499 112 1,443 477
Costs and expenses:
Cost of sales 50 41 109 88
General and administrative 461 448 1,346 1,366
Research and development 78 110 254 415
Patent filing and maintenance 38 20 138 97
-------- -------- -------- --------
Loss from operations 128 507 404 1,489
Interest income (3) (11) (9) (34)
Interest expense 26 1 64 2
-------- -------- -------- --------
Net loss before preferred stock
dividend 151 497 459 1,457
Preferred stock dividend (non-cash) 213 185 621 516
-------- -------- -------- --------
Net loss attributed to common
stockholders $ 364 $ 682 $ 1,080 $ 1,973
======== ======== ======== ========
Basic and diluted loss per common share $ 0.13 $ 0.26 $ 0.40 $ 0.75
======== ======== ======== ========
Weighted average number of common shares
outstanding 2,699 2,662 2,680 2,622
======== ======== ======== ========
See notes to financial statements.
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CLEAN DIESEL TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
2001 2000
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OPERATING ACTIVITIES
Net Loss before preferred stock dividend $(459) $(1,457)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation 8 8
Amortization of deferred financing expense 59 0
Changes in operating assets and liabilities:
Accounts receivable (142) 38
Inventories (7) 13
Other current assets 25 6
Unrecognized license revenue 0 41
Accounts payable and accrued expenses (86) (41)
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Net cash used in operating activities $(602) $(1,392)
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FINANCING ACTIVITIES
Proceeds from exercise of stock options
Preferred stocks 0 1,022
Common stocks 3 7
Proceeds from term loan 500 0
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Net cash provided by financing activities 503 1,029
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INVESTING ACTIVITIES
Purchase of fixed assets (12) (3)
------ --------
Net cash used in investing activities (12) (3)
------ --------
NET (DECREASE)/INCREASE IN CASH AND
CASH EQUIVALENTS (111) (366)
------ --------
Cash and cash equivalents at beginning of period 541 892
------ --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 430 $ 526
====== ========
NON-CASH ACTIVITIES
Preferred dividend $ 621 $ 516
See notes to financial statements.
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CLEAN DIESEL TECHNOLOGIES, INC.
NOTE TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(Unaudited)
BASIS OF PRESENTATION
The accompanying unaudited, condensed, consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
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
nine-month period ended September 30, 2001, are not necessarily indicative of
the results that may be expected for the year ending December 31, 2001. 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, 2000.
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 that reduced its ownership in the
Company to 27.6%. Fuel Tech currently holds a 21.3% interest in the Company on a
fully converted basis.
The Company is a specialty chemical company supplying fuel additives and
proprietary systems that reduce harmful emissions from internal combustion
engines while improving fuel economy. Prior to December 1999, the Company was a
development stage enterprise devoted to research, development, and
commercialization of Platinum Fuel Catalysts (PFC's) and Nitrogen Oxide (NOx)
reduction technologies for diesel engines. During December 1999, the Company
received its EPA registration for its platinum - cerium diesel fuel combustion
catalyst and recorded its first commercial sales for this Platinum Plus(R)
diesel fuel catalyst product. Accordingly, in the opinion of management the
Company was no longer a development stage enterprise.
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.
Prior to 2000, the Company was primarily engaged in research and
development and has incurred losses since inception totaling $18,738,000
(excluding non-cash preferred stock dividends). The Company expects to incur
losses through the foreseeable future as it further pursues its
commercialization efforts and thus is unable to generate a positive cash flow.
The Company will require additional capital in the future in order to fund its
operations. The Company's current cash position, including the Mitsui license
payment received to date and expected in the fourth quarter, will fund
operations through December 2001. Although, the Company believes that it will
be successful in its capital raising efforts, there is no guarantee that it will
be able to raise such funds on terms that will be satisfactory to the Company.
The Company has developed contingency plans in the event its financing efforts
are not successful. Such plans include reducing expenses and selling or
licensing the Company's technologies. Accordingly, at September 30, 2001, there
is substantial doubt as to the Company's ability to continue as a going concern.
- 6-
INVENTORIES
Inventories are stated at the lower of cost or market and consist of
finished product. Cost is determined using the first-in, first-out (FIFO)
method.
REVENUE RECOGNITION
The Company recognizes revenue from sales of Platinum Plus fuel borne
catalyst and ARIS 2000 systems upon shipment.
In February 2000, the Company completed a license agreement with the RJM
Corporation for CDT's ARIS 2000 NOx control system for all stationary, marine
and locomotive applications in North, Central, and South America. The Company
received a $260,000 license payment in return for transferring the ARIS 2000
technology to the RJM Corporation. The company also received $100,000 from the
RJM Corporation for the remaining ARIS 2000 inventory. The license payment is
non-refundable and requires no ongoing services to be performed by CDT.
In April 2001, the Company amended its February 2000 ARIS Stationary
NOx Reduction License agreement with the RJM Corporation. The previous terms of
the RJM ARIS license agreement provided the Company the opportunity to earn up
to a total of $1,040,000 in additional ARIS license revenue on the first, second
and third anniversary of the license agreement if RJM's sales exceeded certain
levels. No additional license revenue was earned or paid on the first
anniversary in February 2001. Under the amended terms of the RJM ARIS license
agreement, the Company received $412,500 on June 1, 2001 and another $412,500
payment on September 1, 2001 in lieu of potentially receiving $1,040,000 on the
second or third anniversary. The Company recognized both $412,500 payments as
revenue in the second quarter of 2001.
In July 2001, the Company finalized an agreement with Mitsui & Co. Ltd. to
exclusively license the Company's patented ARIS NOx reduction technology,
exclusively in Japan for stationary applications. To date the Company has
received $305,000 in license payments from Mitsui related to this agreement, and
will receive an additional $190,000 in October 2001. The Company has recognized
$482,500 of revenue from Mitsui to date and will recognize an additional $12,500
in revenue in the 4th quarter 2001. In addition, the Company will receive an
ongoing unit royalty on each system Mitsui sells.
NOTES PAYABLE
In November 2000, the Company arranged a $1,000,000 term loan with three
private lenders. The term loan has a 10% interest rate, is payable in full on
May 14, 2002 and can be drawn down in increments of $200,000. The Company drew
down $500,000 in November 2000 and the remaining $500,000 in March of 2001. The
$1,000,000 term loan is classified as short term on the Company's balance sheet
at September 30, 2001.
SERIES A PREFERRED STOCK
During the year ended December 31, 2000 the Company received proceeds of
$1.021 million through private placements of 1,362 shares of its Series A
Preferred Stock. During the third quarter of 2001, $213,000 (426 shares) of
preferred stock dividends were declared, but unissued. In May 2001 the company
issued 1,405 of preferred stock shares for the previously declared 2000
preferred dividends. At September 30, 2001, the Company had 14,623 shares of
Series A Preferred Stock issued and outstanding and an additional 1,230 of
preferred stock shares issueable for the 2001 preferred stock dividends
declared. As of September 30, 2001 there were earned but undeclared dividends
of approximately $218,000 (436 shares).
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 cash dividends at the annual rate of 9% or dividends in kind
at the annual rate of 11%, when and if declared by the Board of Directors of the
Company out of funds of the Company legally available therefore. Cash dividends
and dividends in kind are each deemed "Preferred Stock Dividends". Preferred
Stock Dividends are payable quarterly in arrears.
- 7-
In order to conserve cash, the Company's Board of Directors adopted a
resolution on February 4, 1999 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.
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 September 30, 2001, the Company would
have approximately 8.0 million shares of Common Stock outstanding, of which Fuel
Tech would own approximately 1.7 million shares, or a 21.3% 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.
On August 4, 2001 CDT requested the Preferred Stock holders to consent to
an amendment of the Certificate of Designation for the Preferred Stock. The
amendment will cause the mandatory conversion of the Preferred Stock to Common
Stock at the rate of 366.66 shares of Common Stock to one Share of Preferred
Stock, if the Company raises at least $3 million from the sale of Common Stock
by December 3, 2001. The amendment was approved by 75% of Preferred Stock
shareholders voting to convert, 1% opposing and 24% failing to respond.
EARNINGS PER SHARE
Employee stock options and stock purchase warrants were not included in the
computation of diluted earnings per common share because to do so would have
been anti-dilutive for the period. Diluted earnings per share is not presented
for prior periods because the Company reported a loss for the period or their
exercise prices were greater than the average market price of the common stock
and therefore would be anti-dilutive.
RELATED PARTY TRANSACTIONS
The Company has a Management and Services Agreement with Fuel Tech. Under
the agreement, the Company pays 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 from Fuel Tech. Charges to the Company, inclusive of the administrative
fee, were approximately $17,300 in both the third quarter of 2001 and 2000,
respectively.
COMMITMENTS
Effective October 28, 1994, Fuel Tech granted two licenses to the Company
for all patents and rights associated with its PFC technology. Effective
November 24, 1997, the licenses were canceled and Fuel Tech assigned to the
- 8-
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 Platinum Plus(R)
FBC commencing in 1998. The royalty obligation expires in 2008. The Company
may terminate the royalty obligation to Fuel Tech by payment of $8,727,273 in
2001 and declining annually to approximately $1,090,910 in 2008. The Company as
assignee and owner will maintain the technology at its own expense.
MARKETING AND LICENSE AGREEMENTS
In March 2001, the Company licensed the Lubrizol Corporation to distribute
and blend the Company's patented Platinum Plus fuel borne catalyst in Europe for
use with particulate filters. The seven-year exclusive agreement includes
minimum annual sales performance requirements.
In June 2001 the company announced a non-exclusive distribution license
agreement with Baker Petrolite, a division of Baker Hughes. Baker Petrolite
will distribute CDT's patented Platinum Plus diesel fuel combustion catalyst to
refineries and fuel terminals in the U.S. and Canada.
In July 2001, the Company finalized an agreement with Mitsui & Co. Ltd. to
exclusively license the Company's patented ARIS NOx reduction technology,
exclusively in Japan for stationary applications. To date the Company has
received $305,000 in license payments from Mitsui related to this agreement, and
will receive an additional $190,000 in October 2001. In addition, the Company
will receive an ongoing unit royalty on each system Mitsui sells.
In September 2001 the company signed a license agreement with Global
Companies LLC for bulk treatment of diesel fuel with the Platinum Plus fuel
additive. Global Companies LLC of Waltham, MA will be the exclusive terminal
blender of the Platinum Plus diesel fuel combustion catalyst in New England for
delivery to select fuel marketers and fleet customers.
SUBSEQUENT EVENTS
None
- 9-
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, 2000.
RESULTS OF OPERATIONS
Prior to 2000, the Company was a development stage enterprise and its
efforts were devoted to the research, development and commercialization of
platinum fuel catalysts and nitrogen oxide reduction technologies to reduce
emissions from diesel engines. During December 1999, the Company received its
US EPA registration for its platinum-cerium fuel catalyst product and completed
its first commercial sales.
Product sales and cost of sales were $65,000 and $50,000 respectively for
the third quarter of 2001 versus $52,000 and $41,000 for 2000. $16,000 and
$52,000 of Platinum Plus fuel catalyst sales were recorded in the third quarter
of 2001 and 2000 respectively. $434,000 and $60,000 of license and royalty
revenues were recorded in the third quarter of 2001 and 2000 respectively.
Commercial sales of Platinum Plus fuel catalyst began in 2000 and the Company is
in the process of completing distribution agreements with several companies.
Year-to-date sales and cost of sales were $1,443,000 and $109,000 in 2001
versus $477,000 and $88,000 in 2000. Included in the 2001 revenue is $862,000
of royalty and license income from the RJM Corporation and $428,000 from Mitsui
& Co, for the ARIS 2000 NOx reduction technology. CDT will earn a royalty on
all future RJM and Mitsui sales of the ARIS systems. CDT recognized $825,000 of
license revenue from RJM for the amended April 2001 ARIS license agreement
between CDT and RJM in the second quarter. Year-to-date Platinum Plus FBC sales
for 2001 were $101,000 versus $82,000 in 2000.
General and administrative expenses increased $13,000 to $461,000 in the
third quarter 2001 versus $448,000 in the same period of 2000. General and
administrative expenses have decreased $20,000 to $1,346,000 in the first nine
months of 2001 versus $1,366,000 in the comparable period in 2000. The increase
in the third quarter and the decrease in the nine months to date are related to
the timing of marketing programs and lower professional/administrative fees.
Research and development expenses decreased $32,000 to $78,000 in 2001
versus $110,000 in the comparable period in 2000. For the year, research and
development expenses have declined $161,000 to $254,000 versus $415,000 in the
comparable 2000 period. The decrease is attributable to the continued shift
from research and development to commercialization that occurred in 2000. In
addition, two engineers transferred from CDT to RJM as part of the ARIS 2000
license agreement in early 2000.
Patent filing expense increased $18,000 to $38,000 in 2001 versus $20,000
in the comparable 2000 period. For the year, patent expense has increased
- 10-
$41,000 to $138,000 versus $97,000 in the 2000 comparable period. The increase
is due to the filing of several new patents and maintenance fees resulting from
recently filed patents.
Interest income decreased $8,000 in 2001 to $3,000 from $11,000 in the
comparable period in 2000. For the year, interest income has decreased to
$9,000 versus the 2000 comparable interest income of $34,000. This was a result
of a decrease in the amount of cash and cash equivalents on hand in the third
quarter of 2001.
Interest expense increased $25,000 in 2001 to $26,000 from $1,000 in the
comparable period in 2000. For the year, interest expense has increased to
$63,000 versus the 2000 comparable interest expense of $2,000. The increase is
due to interest accrued on the Term loan, which is due in May 2002.
LIQUIDITY AND SOURCES OF CAPITAL
In December 1999, the Company received its U.S. EPA registration for its
platinum - cerium fuel catalyst product and began commercial sales of the
product. Prior to this time the Company was a development stage enterprise.
The Company has been primarily a research and development company that has
incurred losses since inception aggregating $18,738,000 (excluding the effect of
non-cash preferred stock dividends). The Company expects to incur losses
through the foreseeable future as it further pursues its commercialization
efforts. 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 through the 1995 Rights Offering
of its shares by Fuel Tech. The Company then repaid Fuel Tech approximately
$2.3 million in inter-company 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, 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. 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 approximately $1.85 million in net
proceeds against the issuance of 3,753 shares of Preferred Stock through a
private placement. 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 and 2000 quarterly dividends, if converted, along with its Common Stock
ownership would give Fuel Tech an approximate 21.6% interest in the Company on a
fully converted basis at December 31, 2000.
In August/September 1999, the Company received gross proceeds of $1.75
million, excluding expenses of $29,000, from private investors for the issuance
of an additional 3,500 shares of Preferred Stock. In April 2000, the Company
completed a $1.021 million private placement offering of 1,362 Preferred shares,
excluding $13,833 of expenses. Therefore, the Company had 13,218 shares of
Preferred Stock issued and outstanding at December 31, 2000. and issued 1,405
- 11-
of preferred shares in May 2001 for the 2000 quarterly dividends declared in
2000. The Company had an additional 1,230 shares of Preferred Stock issuable
upon demand for the 2001 dividends declared. At September 30, 2001, the Company
had a total of 15,853 issuable shares of Preferred Stock, which are convertible
into approximately 5.3 million shares of the Company's Common Stock, ($0.05 par
convertible at a rate of 1:333.33).
The Company signed an agreement with the RJM Corporation on February 2,
2000 that licensed RJM to sell CDT's ARIS 2000 NOx control system for all
stationary, marine, and locomotive applications in North, Central, and South
America. Under terms of the agreement CDT received an initial $360,000 license
and inventory payment and the opportunity to earn an additional $1,040,000 in
license revenue over the next three years based on the performance of the ARIS
2000. In addition to license revenue, CDT will earn a royalty on all future
ARIS 2000 sales. In April 2001, the Company amended the February 2000 ARIS
Stationary NOx Reduction License agreement with the RJM Corporation. Under the
amended terms of the RJM ARIS license agreement, the Company will receive
$825,000 in ARIS license revenue, payable in two equal $412,500 payments on June
1, 2001 and September 1, 2001 in lieu of potentially receiving $1,040,000 on the
second or third anniversary.
In June 2000, the Company received a $160,000 payment from Mitsui & Co. Ltd
for a short-term exclusive license for Platinum Plus fuel borne catalyst and
ARIS 2000 diesel emission reduction technologies. In addition to the exclusive
license, Mitsui & Co. received an ARIS 2000 system, Platinum Plus product and
diesel emissions consulting services from CDT. The Company recognized sales
revenues for these products when they shipped and the license revenue was
prorated over the six-month license period.
In July 2001, the Company finalized an agreement with Mitsui & Co. Ltd. to
exclusively license the Company's patented ARIS NOx reduction technology,
exclusively in Japan for stationary applications. To date the Company has
received $305,000 in license payments from Mitsui related to this agreement, and
will receive an additional $190,000 in October 2001. In addition, the Company
will receive an ongoing unit royalty on each system Mitsui sells.
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 Platinum Plus(R) FBC's, commencing in 1998. The royalty obligation
expires in 2008. The Company may terminate the royalty obligation to Fuel Tech
by payment of $8,727,273 in 2001 and declining annually to $1,090,910 in 2008.
The Company as assignee and owner will maintain the technology at its own
expense.
For the nine months ended September 30, 2001 and 2000, the Company used
cash of $602,000 and $1,392,000 respectively, in operating activities.
At September 30, 2001, and December 31, 2000, the Company had cash and cash
equivalents of $430,000 and $541,000, respectively. The decrease in cash and
cash equivalents in 2001 was the result of the Company's use of its resources to
fund operations. The Company anticipates incurring additional losses through at
least 2001 as it further pursues its commercialization efforts.
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
Company's cash balance at September 30, 2001, including the license payment from
Mitsui, will be sufficient to fund the Company's operations through December
2001. The Company will require additional funds to meet its working capital
needs in 2002. Although the Company believes that it will be successful in its
capital-raising efforts, there is no guarantee that it will be able to raise
such funds on terms that will be satisfactory to the Company. The Company has
developed contingency plans in the event future financing efforts are not
successful. Such plans include reducing expenses and selling or licensing some
- 12-
of the Company's technologies. Accordingly, at September 30, 2001, there is
substantial doubt as to the Company's ability to continue as a going concern.
See "Liquidity Going Concern" elsewhere herein for additional information.
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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
On the record date of August 4, 2001, CDT solicited holders of CDT's
Series A Convertible Preferred Stock to sign and return to CDT forms
of written consent.
CDT requested the Preferred Stock holders to consent to an amendment
of the Certificate of Designation for the Preferred Stock. The
amendment adds a new section 3 (v) to the Certificate entitled
"Mandatory Conversion by Vote." This new section will cause the
mandatory conversion of the Preferred Stock to Common Stock at the
rate of 366.66 shares of Common Stock to one Share of Preferred Stock,
if the Company raises at least $3 million from the sale of Common
Stock by December 3, 2001.
The amendment was approved. CDT received consents including 3,685,629
(75%) affirmative votes and 50,999 (1%) negative votes. The holders of
1,188,655 (24%) votes did not return their consents. According to the
Certificate, 2,924,570 (60%) votes were required to adopt the
amendment. The Preferred Stock votes on the basis of 333.33 votes for
each share of Preferred Stock of which there were 14,623 shares
outstanding and of record on August 4, 2001 entitled to a total of
4,874,284 votes.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
None
b. Reports on Form 8-K
None
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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: November 2, 2001 By: /s/ Jeremy D. Peter-Hoblyn
-------------------------------------
Jeremy D. Peter-Hoblyn
President and Chief Executive Officer
Date: November 2, 2001 By: /s/ David W. Whitwell
-------------------------------------
David W. Whitwell
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