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 March 31, 2002 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) (ZipCode) (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 May 7, 2002, there were outstanding 11,241,379 shares of Common Stock, par value $0.05 per share, of the registrant. ================================================================================ CLEAN DIESEL TECHNOLOGIES, INC. Form 10-Q for the Quarter Ended March 31, 2002 INDEX Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Balance Sheets as of March 31, 2002, 3 and December 31, 2001 Statements of Operations for the Three 4 Months Ended March 31, 2002 and 2001 Statements of Cash Flows for the Three 5 Months Ended March 31, 2002 and 2001 Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis of 9 Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings 12 Item 2. Changes in Securities 12 Item 3. Defaults upon Senior Securities 12 Item 4. Submission of Matters to a Vote of Security Holders 12 Item 5. Other Information 12 Item 6. Exhibits and Reports on Form 8-K 12 SIGNATURES 13 -2- PART I. FINANCIAL INFORMATION Item 1. Financial Statements CLEAN DIESEL TECHNOLOGIES, INC. BALANCE SHEETS (in thousands except share data) March 31, December 31, 2002 2001 ----------- -------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 3,254 $ 4,023 Accounts receivable 13 197 Inventories 291 296 Other current assets 105 96 ----------- -------------- Total current assets 3,663 4,612 Other assets 44 46 ----------- -------------- Total assets $ 3,707 $ 4,658 =========== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ -- 250 Accounts payable and accrued expenses 411 558 ----------- -------------- Total current liabilities 411 808 Deferred compensation and pension benefits 381 368 ----------- -------------- Total long term liabilities 381 368 Stockholders' deficit: Preferred stock, par value $.05 per share, authorized 80,000 shares, no shares issued and outstanding -- -- Series A convertible preferred stock, par value $.05 per share, $500 per share liquidation preference, authorized 20,000 shares, no shares issued and outstanding -- -- Common stock, par value $0.05 per share, authorized 15,000,000 shares, issued and outstanding 11,214,280 shares 561 561 Additional paid-in capital 27,153 27,058 Accumulated deficit (24,799) (24,137) ----------- -------------- Total stockholders' equity 2,915 3,482 ----------- -------------- Total liabilities and stockholders' equity $ 3,707 $ 4,658 =========== ============== See notes to financial statements. -3- CLEAN DIESEL TECHNOLOGIES, INC. STATEMENTS OF OPERATIONS (Unaudited) (in thousands except per share data) Three Months Ended March 31 2002 2001 -------- ------- Revenue: Product revenue $ 60 $ 13 License and royalty revenue 11 11 -------- ------- Total revenue 71 24 Costs and expenses: Cost of sales 44 7 General and administrative 556 435 Research and development 111 84 Patent filing and maintenance 28 48 -------- ------- Loss from operations (668) (550) Interest income (15) (3) Interest expense 9 12 -------- ------- Net loss before preferred stock dividend (662) (559) Preferred stock dividend (non-cash) -- 201 -------- ------- Net loss attributed to common stockholders $ (662) $ (760) ======== ======= Basic and diluted loss per common share $ (0.06) $(0.29) ======== ======= Weighted average number of common shares Outstanding - basic and diluted 11,214 2,661 ======== ======= See notes to financial statements. -4- CLEAN DIESEL TECHNOLOGIES, INC. STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Three Months Ended March 31 2002 2001 ----------- ----------- OPERATING ACTIVITIES Net loss before preferred stock dividend $ (662) $ (559) Adjustments to reconcile net loss to cash used in operating activities: Depreciation 3 3 Amortization of deferred financing cost 7 12 Compensatory stock warrants 95 -- Changes in operating assets and liabilities: Accounts receivable 184 34 Inventories 5 11 Other current assets (9) 18 Accounts payable and accrued expenses (134) (8) ----------- ----------- Net cash used in operating activities (511) (489) ----------- ----------- FINANCING ACTIVITIES Proceeds/(repayment) from/(of) term loan (250) 500 ----------- ----------- Net cash (used in) provided by financing activities (250) 500 ----------- ----------- INVESTING ACTIVITIES Purchase of fixed assets (8) (2) ----------- ----------- Net cash used in investing activities (8) (2) ----------- ----------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (769) 9 ----------- ----------- Cash and cash equivalents at beginning of period 4,023 541 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,254 $ 550 =========== =========== NON-CASH ACTIVITIES Preferred stock dividend -- 201 See notes to financial statements. -5- CLEAN DIESEL TECHNOLOGIES, INC. NOTEs TO FINANCIAL STATEMENTS MARCH 31, 2002 (Unaudited) BASIS OF PRESENTATION The accompanying unaudited, consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States 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-month period ended March 31, 2002, are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. 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, 2001. Clean Diesel Technologies, Inc. (the "Company" or "CDT") 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 16.3% interest in the Company as of March 31, 2002. The Company is a specialty chemical and energy technology company supplying fuel additives and proprietary systems that reduce harmful emissions from internal combustion engines while improving fuel economy. Prior to 2000, the Company was a development stage enterprise devoted to research, development, and commercialization of platinum fuel catalysts (PFCs) and Nitrogen Oxide (NOx) reduction technologies for diesel engines. During December 1999, the Company received its EPA registration for its platinum - cerium product and recorded its first commercial sales. Accordingly, in the opinion of management the Company was no longer a development stage enterprise. The success of the Company's technologies will depend upon the commercialization opportunities of the technologies and governmental regulations, and corresponding foreign and state agencies. Prior to 2000, the Company was primarily engaged in research and development and has incurred losses since inception totaling $20,047,000 (excluding non-cash preferred stock dividends). In management's opinion, the Company's cash balance at March 31, 2002 will be sufficient to fund the Company's operations through the second quarter 2003. The Company may require additional capital to fund its future operations and working capital needs. Although the Company believes that it would be successful in raising additional capital, 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 are not successful. Such plans may include reducing expenses and selling or licensing some of the Company's technologies. 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 April 2001, the Company amended its February 2000 ARIS Stationary NOx Reduction license agreement with the RJM Corporation. Under the amended terms of the license agreement, the Company received two fixed non-refundable payments of $412,500 each on June 1 and September 1 in lieu of potentially receiving $1,040,000 on the second or third anniversary. The Company recognized the $825,000 as license revenue in 2001. The Company receives unit royalties on all ARIS sales of stationary, marine or locomotive applications by RJM. -6- In August 2001, the Company completed a license agreement with Mitsui & Co. Ltd for CDT's ARIS 2000 NOx control system for all stationary diesel power generators in Japan. Under the agreement, the Company received a non-refundable upfront license payment of $495,000, and will receive ongoing standard royalties on each system sold by Mitsui. The Company recognized the license payment as revenue in 2001, as there were no significant ongoing services to be performed by the Company. Mitsui also has an option to license the ARIS technology for mobile applications in Japan for an additional license fee. Royalty fees are recognized by the Company when earned. NOTES PAYABLE In November 2000, the Company arranged a $1,000,000 term loan with three private lenders. The term loan had a 10% interest rate and was payable in full on May 14, 2002. The Company drew down $500,000 in November 2000 and the remaining $500,000 in March of 2001. As part of the private placement stock transaction in December 2001, $750,000 of the outstanding term loan plus accrued interest was converted to common stock. The remaining $250,000 portion of the term loan plus accrued interest was paid in cash on January 18, 2002. STOCKHOLDERS' EQUITY During December 2001, the Company received proceeds of $3.721 million (net of $0.644 million in expenses and $0.817 million in term loan re-payment) through private placements of 2,580,664 of its Common Stock. In 2000, the Company received $1.021 million through private placements of 1,362 shares of its Series A Preferred Stock. In addition, in 1999 $1.75 million was raised through a private placement of 3,500 Series A preferred stock shares and in 1998, $1.4 million of bridge loans and $.5 million of term loans were converted into 2,800 and 1,029 shares of Series A Preferred Stock. During 2001, $1,897,000 of dividend and conversion premium were declared for the Series A preferred stock and converted into the Company's Common Stock. On December 28, 2001, the Company converted all outstanding Series A Preferred Stock (15,897 shares) including accrued stock dividends, into Common Stock (5,934,829 shares). EARNINGS PER SHARE Employee stock options and stock purchase warrants were not included in the computation of diluted earnings per share because either 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 antidilutive. RELATED PARTY TRANSACTIONS In November 2000, the Company secured a $1,000,000 term loan facility at a 10% interest rate from several preferred shareholders, including Fuel Tech Inc. which pledged $250,000. In 2000 and 2001 the Company drew down the entire $1,000,000 term loan. In December 2001, $750,000 of term loan and accrued interest was repaid as part of the December 2001 private placement of common stock discussed in the stock holders equity note. In January 2002, the Company repaid the remaining $250,000 term loan payable to Fuel Tech Inc. plus accrued interest. 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 first quarter of 2002 and 2001. -7- COMMITMENTS Effective October 28, 1994, Fuel Tech granted two licenses to the Company for all patents and rights associated with its platinum fuel catalyst 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 platinum fuel catalysts commencing in 1998. The royalty obligation expires in 2008. The Company may terminate the royalty obligation to Fuel Tech by payment of $7,636,364 in 2002 and declining annually to $1,090,910 in 2008. The Company as assignee and owner will maintain the technology at its own expense. The 2001 royalties of $2,673 were paid to Fuel Tech in 2002 and royalties payable to Fuel Tech at March 31, 2002 were not significant. 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 August 2001, the Company completed a license agreement with Mitsui & Co. Ltd for CDT's ARIS 2000 NOx control system for all stationary diesel power generators in Japan. Under the agreement, the Company received non-refundable upfront license payments of $495,000 and will receive ongoing standard royalties on each system sold by Mitsui. Mitsui also has an option to license the ARIS technology for mobile applications in Japan for an additional license fee. 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. -8- 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, 2001. 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 $71,000 and $44,000 respectively for the first quarter of 2002 versus $24,000 and $7,000 for 2001. Platinum Plus fuel catalyst sales of $13,000 were recorded in the first quarter of 2002 and 2001, respectively. Commercial sales of Platinum Plus fuel catalyst began in December 1999 and the Company is in the process of completing additional distribution agreements with several companies. ARIS product sales of $47,000 were recorded in the first quarter of 2002. Included in the 2002 and 2001 revenue is $11,000 of royalty income from the RJM Corporation for the ARIS 2000 NOx reduction technology. CDT will earn a royalty on all future RJM sales of the ARIS 2000. General and administrative expenses increased $121,000 to $556,000 in the first quarter 2002 versus $435,000 in the same period of 2001. The rise in spending is related to increases in salaries and travel related to the marketing of the Company's products as well as the expensing of non-cash compensatory stock warrants ($95,000) issued in 2001 but vesting in 2002 for public relation services. Research and development expenses increased $27,000 to $111,000 in 2002 versus $84,000 in the comparable period in 2001. The increase is attributable to the start of several verification and certification projects for Platinum Plus. Patent filing expense decreased $20,000 to $28,000 in 2002 versus $48,000 in the comparable 2001 period. The decrease is due the timing of patent filing and when the annuity payments come due. Interest income increased $12,000 in 2002 to $15,000 from $3,000 in the comparable period in 2001. This was a result of an increase in the amount of cash and cash equivalents on hand in the first quarter of 2002. -9- LIQUIDITY AND SOURCES OF CAPITAL Prior to 2000, the Company was primarily engaged in research and development and has incurred losses since inception aggregating $ 20,047,000 (excluding the effect of the preferred stock dividends). The Company expects to incur losses through the foreseeable future as it further pursues its commercialization efforts. Although the Company started selling limited quantities of product in 1999 and licensing revenue in 2000 and 2001, sales and revenue to date have been insufficient to cover operating expenses, and the Company continues to be dependent upon sources other than operations to finance its working capital requirements. For the three months ended March 31, 2002 and 2001, the Company used cash of $511,000 and $489,000 respectively, in operating activities. At March 31, 2002 and December 31, 2001, the Company had cash and cash equivalents of $3,254,000 and $4,023,000, respectively. The decrease in cash and cash equivalents in 2002 was the result of payments made for expenses related to the stock offering in December 2001 and the normal on-going operations of the Company. The Company anticipates incurring additional losses through at least 2002 as it further pursues its commercialization efforts. The Company signed an agreement with the RJM Corporation on February 2, 2000 which 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 fee and inventory payment. In April 2001, the Company amended its February 2000 ARIS Stationary NOx Reduction license agreement with the RJM Corporation. Under the amended terms of the license agreement, the Company received two fixed non-refundable payments of $412,500 each on June 1 and September 1 in lieu of potentially receiving $1,040,000 on the second or third anniversary of the license agreement. The Company will continue to receive unit royalties on future sales of stationary, marine or locomotive applications by RJM. In August 2001, the Company completed a license agreement with Mitsui for CDT's ARIS 2000 NOx control system for all stationary diesel power generators in Japan. Under the agreement, the Company received non-refundable upfront license payments of $495,000 and will receive ongoing standard royalties on each system sold by Mitsui. Mitsui also has an option to license the ARIS technology for mobile applications in Japan for an additional license fee. In November 2000, the Company secured a $1,000,000 privately financed term loan facility. In December 2000, the Company drew down $500,000 of the term loan facility and in March 2001 the remaining $500,000 of the term loan was drawn down. As part of the private placement stock transaction in December 2001, $750,000 of the outstanding term loan plus accrued interest was converted to common stock. The remaining $250,000 plus accrued interest was paid in cash in January 2002. In December 2001, the Company received $3.721 million (net of expenses and term loan repayment) through a private placement of 2,580,664 shares of its common stock. In conjunction with the private placement, the Company converted all of its Series A Preferred Stock to Common Stock. All of the Company's Common Stock shares were registered to trade on the AIM of the London Stock Exchange. -10- 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 March 31, 2002 will be sufficient to fund the Company's operations through the second quarter 2003. The Company may require additional capital to fund its future operations. 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 will develop contingency plans in the event future financing efforts are not successful. Such plans may include reducing expenses and selling or licensing some of the Company's technologies. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the opinion of management, with the exception of exposure to fluctuations in the cost of platinum, the Company is not subject to any significant market risk exposure. The Company generally receives all income in United States dollars. The Company typically makes several small payments monthly in various foreign currencies for patent expenses, product tests and registration, local marketing and promotion and consultants. -11- PART II. OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K a. Exhibits None b. Reports on Form 8-K January 10, 2002 -12- 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: May 7, 2002 By: /s/ Jeremy D. Peter-Hoblyn --------------------------- Jeremy D. Peter-Hoblyn Chairman and Chief Executive Officer Date: May 7, 2002 By: /s/ David W. Whitwell ---------------------------- David W. Whitwell Vice President and Chief Financial Officer -13-