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, 2005
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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes No X
--- ---
As of November 10, 2005, there were outstanding 17,193,047 shares of Common
Stock, par value $0.05 per share, of the registrant.
=========================================================================
CLEAN DIESEL TECHNOLOGIES, INC.
Form 10-Q for the Quarter Ended September 30, 2005
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Balance Sheets as of September 30, 2005 (Unaudited), 3
and December 31, 2004
Statements of Operations for the Three and Nine Months 4
Ended September 30, 2005 and 2004 (Unaudited)
Statements of Cash Flows for the Three and Nine Months 5
Ended September 30, 2005 and 2004 (Unaudited)
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of 12
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES & CERTIFICATIONS
- 2 -
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
CLEAN DIESEL TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
(in thousands, except share data)
SEPTEMBER 30, December 31,
---------------------------------
2005 2004
(Unaudited)
---------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 494 $ 4,265
Accounts receivable, net of allowance of $8 and $12 in
2005 and 2004, respectively 101 145
Inventories 265 387
Other current assets 85 71
---------------- ---------------
TOTAL CURRENT ASSETS 945 4,868
Patents, net 530 418
Fixed assets, net of accumulated depreciation of $233 in
2005 and $188 in 2004, respectively 193 200
Other assets 27 27
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TOTAL ASSETS $ 1,695 $ 5,513
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses 468 391
---------------- ---------------
TOTAL CURRENT LIABILITIES 468 391
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $0.05 per share,
100,000 shares authorized, no shares issued
and outstanding -- --
Common Stock, par value $0.05 per share, authorized
30,000,000 shares, issued and outstanding
17,193,047 and 17,165,868 shares respectively 860 858
Additional paid-in capital 38,500 38,431
Accumulated deficit (38,133) (34,167)
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TOTAL STOCKHOLDERS' EQUITY 1,227 5,122
---------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,695 $ 5,513
================ ===============
See notes to condensed financial statements.
- 3 -
CLEAN DIESEL TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Revenue:
Additive revenue $ 97 $ 88 $ 283 $ 199
Hardware revenue 56 135 314 280
License and royalty revenue 13 18 29 49
----------- ----------- ----------- -----------
Total revenue 166 241 626 528
Costs and expenses:
Cost of revenue 102 149 373 334
General and administrative 1,260 1,150 3,635 2,761
Research and development 222 174 369 344
Patent amortization and other expense 61 22 125 61
----------- ----------- ----------- -----------
Loss from operations (1,479) (1,254) (3,876) (2,972)
Foreign currency exchange gain/(loss) (12) -- (106) --
Interest income 2 11 16 36
----------- ----------- ----------- -----------
Net loss attributable to common stockholders $ (1,489) $ (1,243) $ (3,966) $ (2,936)
=========== =========== =========== ===========
Basic and diluted loss per common share $ (0.09) $ (0.08) $ (0.23) $ (0.19)
=========== =========== =========== ===========
Weighted average number of common shares
outstanding - basic and diluted 17,193 15,757 17,176 15,719
=========== =========== =========== ===========
See notes to condensed financial statements.
- 4 -
CLEAN DIESEL TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
2005 2004
----------- -----------
OPERATING ACTIVITIES
Net loss $ (3,966) $ (2,936)
Adjustments to reconcile net loss to cash used in
operating activities:
Bad debt 9 --
Depreciation and amortization 126 95
Write-off inventory and patents 76 --
Changes in operating assets and liabilities:
Accounts receivable 35 (63)
Inventories 79 (123)
Other current assets (14) 10
Accounts payable and accrued expenses 148 347
----------- -----------
Net cash used in operating activities (3,507) (2,670)
----------- -----------
INVESTING ACTIVITIES
Patent costs (185) (82)
Purchase of fixed assets (79) (143)
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Net cash used in investing activities (264) (225)
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FINANCING ACTIVITIES
Proceeds from issuance of common stock, net 1,785
Proceeds from broker fee credit (2003 fundraising) -- 3
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Net cash provided by financing activities -- 1,788
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,771) (1,107)
----------- -----------
Cash and cash equivalents at beginning of period 4,265 6,515
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 494 $ 5,408
=========== ===========
Non-cash activities
Accrued expenses settled in common stock $ 71 $ 57
See notes to condensed financial statements.
- 5 -
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(Unaudited)
NOTE 1: 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 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, 2005, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2005. The balance sheet at December
31, 2004 has been derived from the audited financial statements at that date but
does not include all the information and notes required by generally accepted
accounting principles for complete financial statement presentation. For further
information, refer to the Financial Statements and footnotes thereto included in
CDT's Annual Report on Form 10-K for the year ended December 31, 2004.
Clean Diesel Technologies, Inc. ("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 CDT's Common Stock that reduced its ownership in CDT to 27.6%. Fuel
Tech currently holds a 10.6% interest in CDT as of September 30, 2005.
CDT 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. CDT's Platinum Plus FBC fuel
additive, in the US, is registered with the EPA for on-highway use and in
Europe, is approved under the VERT-VSET procedure. The Platinum Plus FBC in
combination with a diesel oxidation catalyst or a catalyzed wire mesh filter
have both been verified by the EPA for retrofit emission reduction. The success
of CDT's technologies will depend upon the market acceptance of the technologies
and governmental regulations including corresponding foreign and state agencies.
At the present time, CDT cannot estimate when, or if, its operations will
generate positive cash flows from operations. CDT does not have any credit
facilities available with financial institutions or other third parties. If CDT
cannot generate cash flow from operations, CDT will be dependent upon external
sources of best-efforts financing, of which there are no firm commitments or
arrangements. Based on the current operating plan, the $6.0 million net
fundraising from a private common stock placing completed on November 7, 2005
(see Note 7) and the cash balance of $494,000 as of September 30, 2005
management believes it has sufficient resources to meet the cash needs of Clean
Diesel into the first quarter of 2007. In the future, unless operating revenues
are sufficient to meet operating expenses, CDT will need to access capital
markets to fund operations by incurring indebtedness or issuing equity
securities.
CDT can provide no assurance that it will be successful in any future financing
effort to obtain the necessary working capital to support operations or if such
financing is available, it will be on acceptable terms. If management is unable
to obtain the necessary financing from external sources, CDT may need to manage
any cash shortfalls by taking measures which may include deferring or reducing
the scope of commercialization efforts, reducing costs and overhead expenses, or
otherwise curtailing operations, or obtaining funds by a disposal of assets or
through arrangements with others that may require CDT to relinquish rights to
certain of its technologies, or to license the rights to such technologies on
terms that are less favorable to CDT than might otherwise be available. If CDT
is unable to generate cash from operations or find alternative sources of
funding, it would have an adverse impact on liquidity and operations and CDT may
be unable to continue as a going concern. The consolidated financial statements
have been prepared on a going concern basis and do not reflect any adjustments
that might result from the outcome of this uncertainty.
- 6 -
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
FOREIGN CURRENCY
The US dollar is considered the functional currency for CDT. CDT maintains a
sterling bank account for its UK representative office. Foreign currency
translation gains or losses are recognized in the period incurred. CDT recorded
a foreign currency loss on its UK bank holdings of $12,000 and $106,000 in the
third quarter 2005 and year to date, respectively.
INVENTORIES
Inventories are stated at the lower of cost or market and consist of the
following:
SEPTEMBER 30, December 31,
(in thousands) 2005 2004
-------------- -------------
Finished Platinum Plus FBC $ 71 $ 142
Platinum concentrate/metal 74 150
Hardware (ARIS and Purifier) 65 77
Other 55 18
-------------- -------------
Total inventory $ 265 $ 387
REVENUE RECOGNITION
Clean Diesel Technologies generates revenue from the sale of additives including
the Platinum Plus FBC products and concentrate; hardware including the EPA
verified Purifier System, ARIS injectors and dosing systems; and license and
royalty fees from the ARIS 2000 System. CDT sells to end-user fleets,
municipalities and construction companies, as well as fuel resellers, additive
distribution companies and emission reduction companies.
CDT shipping terms are FOB shipping point and revenue is recognized when its
products are shipped and collections are reasonably assured unless the purchase
order or contract specifically requires CDT to provide installation of hardware.
For hardware projects where CDT is responsible for installation either directly
or indirectly (third-party contractor), revenue is recognized when the hardware
is installed and/or accepted if the project requires inspection/acceptance.
License revenue is recognized when the license agreement is entered into, the
license period commences, the technology rights, information and know-how have
been transferred to the licensee and CDT does not have any ongoing
responsibilities or performance requirements and collection is reasonably
assured. Royalty income is recognized when earned.
During the third quarter of 2004, the RJM Corporation ceased operations and
consequently their ARIS stationary license for the North American market
reverted back to CDT and thus CDT will not receive any future royalties from
RJM. CDT had previously received and recognized $1.1 million in license revenue
from RJM in 2000 and 2001 for the exclusive ARIS stationary license in the North
American market.
In April 2003, Clean Diesel Technologies completed a non-exclusive license
agreement with Combustion Component Associates Inc. (CCA) of Monroe,
Connecticut, for the mobile ARIS technology in the US for the remaining life of
the patents, through 2018. Under terms of the agreement, CCA agreed to pay CDT a
$150,000 non-refundable license fee and the licensee committed to spend an
additional $100,000 in developing, testing and demonstrating ARIS mobile
prototypes. CDT also receives ongoing royalty payments on a per unit basis. CDT
recognized the $150,000 license revenue in the second quarter of 2003, as there
are no significant ongoing services required to be performed by CDT.
In September 2004, CCA was granted a limited two-year non-exclusive ARIS
stationary license for the US market. The license fee of $150,000 is due by the
end of a two-year trial period. Similar to the other ARIS license agreements for
stationary applications, a per unit royalty of approximately $1,500 (based on
percentage of sales price) is due for each ARIS system sold.
In August 2001, Clean Diesel Technologies completed an exclusive license
agreement with Mitsui Ltd for CDT's ARIS 2000 NOx control system for all
stationary diesel power generators in Japan for the remaining life of the
patents, through 2018. Under the agreement, CDT received a nonrefundable
up-front license payment of $495,000, and will receive ongoing standard
royalties of between $1,500 and $2,500 on each system sold by Mitsui. CDT
recognized the license payment as revenue in 2001, as there are no significant
ongoing services to be performed by CDT.
- 7 -
In December 2002, Clean Diesel Technologies completed an additional exclusive
license agreement with Mitsui for the mobile ARIS technology for Japan for the
remaining life of the patents, through 2018. Under terms of the agreement Mitsui
agreed to pay CDT a $250,000 license fee and Mitsui committed to spend an
additional $200,000 in developing, testing and demonstrating ARIS mobile
prototypes. CDT recognized the $250,000 license revenue in the fourth quarter of
2002, as there are no significant ongoing services to be performed by CDT.
In May 2005, CDT and Mitsui Ltd mutually agreed to transfer both Mitsui's
exclusive ARIS mobile and stationary licenses to DENOX Inc of Japan. DENOX is a
former joint venture of Mitsui. No additional license fees or payments were
involved and DENOX agreed to same per unit royalties and terms of the original
license agreement.
GEOGRAPHIC INFORMATION
CDT sells its Platinum Plus additives and licenses its ARIS systems throughout
the world. A geographic breakdown of revenue consists of the following:
Third Quarter Year to Date
(in thousands) 2005 2004 2005 2004
------ ------ ------ ------
REVENUE:
US $ 104 $ 180 $ 531 $ 302
UK/Europe 8 0 28 0
Asia 54 61 67 226
------ ------ ------ ------
Total Revenue $ 166 $ 241 $ 626 $ 528
Foreign assets held by Clean Diesel Technologies consist of capitalized foreign
patents net of accumulated amortization and are as follows:
SEPTEMBER 30, December 31,
(in thousands) 2005 2004
-------------- --------------
US patents, net $ 127 $ 79
Foreign patents, net 403 339
-------------- --------------
Total patents, net $ 530 $ 418
PATENT EXPENSE
CDT capitalizes all direct incremental costs associated with initial patent
filing costs and amortizes the cost over the estimated remaining life of such
patent. Patents are reviewed regularly and the remaining carrying value of any
patents deemed not commercial or cost effective are written off. The expiration
dates of CDT's patents, in numerous countries throughout the world, range from
2005 to 2022.
RESEARCH AND DEVELOPMENT COSTS
Costs relating to the research, development and testing of products are charged
to operations as they are incurred. These costs include test programs, salary
and benefits, consultancy fees, materials and certain testing equipment.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense is summarized as the following:
Third Quarter Year to Date
(in thousands) 2005 2004 2005 2004
------- ------- ------- -------
Compensation and benefits $ 809 $ 580 $ 2,363 $ 1,658
Occupancy 128 125 369 311
Professional 241 381 639 603
Other 82 64 264 189
------- ------- ------- -------
Total general and administrative expense $ 1,260 $ 1,150 $ 3,635 $ 2,761
- 8 -
STOCK-BASED COMPENSATION
Clean Diesel Technologies accounts for employee/director stock option grants in
accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees" and its related interpretations. Under CDT's
current plan, options may be granted at not less than the fair market value on
the date of grant and therefore no compensation expense is recognized for the
stock options granted to employees.
If compensation expense for CDT's plan had been determined based on the fair
value at the grant dates for awards under its plan, consistent with the method
described in SFAS No. 123, CDT's net loss and basic and diluted loss per common
share would have been as follows on a pro forma basis:
Third Quarter Nine months YTD
2005 2004 2005 2004
-------- -------- -------- --------
Net loss attributable to common stockholders as reported $(1,489) $(1,243) $(3,966) $(2,936)
Deduct: Total stock-based employee compensation expense
determined under fair value-based method for all awards,
net of related tax effects ( 61 ) (140) ( 678 ) (463)
-------- -------- -------- --------
Pro forma net loss attributable to common stockholders $(1,550) $(1,383) $(4,644) $(3,399)
Net loss per share attributable to common stockholders:
Basic and diluted net loss per common share-as reported $ (0.09) $ (0.08) $ (0.23) $ (0.19)
Basic and diluted per common share-pro forma $ (0.09) $ (0.09) $ (0.27) $ (0.22)
In August 2005 the Clean Diesel Board awarded Walter Copan, newly hired Chief
Technology Officer, 100,000 options at the then current market price of $1.39.
Clean Diesel's standard vesting policy for employees is one-third at grant and
the remaining two-thirds on the first and second anniversary dates. Using the
Black-Scholes option valuation model a non-cash compensation value of $104,500
was calculated of which $40,700 is included in the above pro forma table for the
three and nine months ended September 30, 2005.
In June 2005 upon his election to CDT's Board of Directors at its annual general
meeting, John McCloy II was awarded 50,000 options at the current market price
of $1.58. As with CDT's policy, non-executive director's options fully vest upon
grant and using the Black-Scholes option valuation model a non-cash compensation
value of $59,000 was calculated and included in the above pro forma table for
the nine months ended September 30, 2005.
In March 2005, the Board of Directors elected to accelerate the vesting on
363,000 unvested employee option grants representing all unvested 2003 employee
option grants and certain unvested 2004 option grants. Since the market price at
the time of the vesting modification was below the option grant price no
additional expense was recognized on CDT's statement of operations. The
remaining fair value for the 363,000 option grants was $498,000 and is included
in the pro forma table above for the nine months ended September 30, 2005. The
363,000 of accelerated option grants represent less than 14 percent of the 2.7
million option grants outstanding and 81% of the accelerated option grants would
have vested in 2005.
The CDT Board's decision to accelerate the vesting of these option grants was in
response to the issuance by the FASB of SFAS No. 123R, "share based payment." As
a result of this measure, CDT will not be required to recognize any compensation
expense with respect to these option grants in the statements of operations in
future periods.
In accordance with the provisions of SFAS No. 123, for purposes of the pro forma
disclosure the estimated fair value of the options are amortized over the option
vesting period. The application of the pro forma disclosures presented above is
not representative of the effects SFAS No. 123 may have on operating results and
earnings (loss) per share in future years due to the timing of stock option
grants and considering that options vest over a period of two years for
employees (one third at grant, and one-third on the first and second anniversary
respectively) and immediately for directors.
BASIC AND DILUTED LOSS PER COMMON SHARE
Basic and diluted loss per share is calculated in accordance with SFAS No. 128,
"Earnings Per Share." Basic loss per share is computed by dividing net loss by
the weighted-average shares outstanding during the reporting period. Diluted
loss per share is computed similar to basic earnings per share, except that the
weighted-average shares outstanding are increased to include additional shares
from the assumed exercise of stock options and warrants, if dilutive using the
treasury stock method. CDT's computation of diluted net loss per share does not
include common share equivalents associated with 2,823,387 and 2,235,000
options, respectively, and 507,000 and 532,000 warrants, respectively for the
2005 and 2004 periods, as the result would be anti-dilutive.
- 9 -
STOCKHOLDERS' EQUITY
Pursuant to a Regulation S exemption with respect to an offshore placement,
Clean Diesel Technologies sold, effective September 28, 2004, 1,000,000 shares
of its common stock. The price of the common stock was 1.025 sterling (GBP) per
share (approximately $1.82 per share). The proceeds of the common stock
issuance, was $1.785 million (net of $65,000 in expenses).
NOTE 3: RELATED PARTY TRANSACTIONS
CDT has a Management and Services Agreement with Fuel Tech. The agreement
requires CDT to reimburse Fuel Tech for management, services and administrative
expenses incurred on our behalf. CDT has agreed to pay Fuel Tech a fee equal to
an additional 3% of the costs paid on behalf of administration (approximately
$500 for the quarter). Currently, and for the last three years CDT has
reimbursed Fuel Tech for the expenses associated with one Fuel Tech
officer/director who also serves as an officer/director of CDT. CDT believes the
charges under the Management and Services Agreement are reasonable and fair. The
Management and Services Agreement may be cancelled by either party by notifying
the other in writing of the cancellation on or before May 15 in any year. For
the three months ended September 30, 2005 and 2004, CDT incurred $500 in
management fees and for the nine months ended 2005 and 2004 CDT incurred $1,500
of management fees.
NOTE 4: COMMITMENTS
Clean Diesel Technologies leases 3,925 square feet of administrative office
space at 300 Atlantic Street, Stamford, Connecticut. The five year lease through
March 2009 has an annual cost of approximately $123,000, including rent,
utilities and parking.
CDT leases 400 square feet of administrative space at 23 Bourne House, 475
Godstone Road in Surrey England. The two and half year lease through September
2007 has an annual cost of approximately $33,000 including utilities and
communication services.
CDT has signed a four year lease (through July 2008) for 2,750 square feet of
warehouse space in Milford, Connecticut. Annual rent including utilities will be
approximately $21,000.
Effective October 28, 1994, Fuel Tech granted two licenses to CDT 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 CDT all such patents and rights on terms substantially similar to the
licenses. In exchange for the assignment, CDT pays 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. CDT may terminate the royalty
obligation to Fuel Tech by payment of $4.4 million in 2005 and declining
annually to $3.3 million in 2006, $2.2 million in 2007 and $1.1 million in 2008.
CDT as assignee and owner is responsible for maintaining the technology at its
own expense. A royalty of $7,450 was paid to Fuel Tech for 2004 and the royalty
payable to Fuel Tech at September 30, 2005 and 2004 is $ 6,970 and $4,950,
respectively.
NOTE 5: CONCENTRATION
For the quarter ended September 30, 2005, one customer (customer "A") accounted
for 33% of Clean Diesel's revenue. For the comparable three month period in 2004
customer A also accounted for 25% of Clean Diesel's revenue. For the nine month
period in 2005 a different customer (customer "B") accounted for 30% of revenue
while customer A accounted for 11% of revenue. For the nine-month year-to-date
period in 2004, customer A also accounted for 43% of Clean Diesel's revenue.
NOTE 6: ISSUANCE OF STOCK TO DIRECTOR FOR DIRECTOR'S FEES
In June 2005 CDT issued 27,000 shares of common stock for payment of the $70,000
of accrued 2004 non-executive director's fees due to the director. The shares
are determined based on the average of the high and low price of the stock each
quarter.
- 10 -
NOTE 7: SUBSEQUENT EVENTS
On November 7, 2005 Clean Diesel Technologies, Inc. completed a private
placement of its common stock in which it raised approximately $6.0 million (net
of $250,000 of expenses) and issued approximately 8.89 million shares of its
common stock at approximately $0.70 per share. Of these proceeds, $620,000 is
subject to delayed delivery and will be received within 90 days. In addition,
approximately $268,000 (380,000 shares) of the placement was raised from
directors and management.
- 11 -
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 CDT'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 CDT's Annual Report on Form 10-K for the year ended December 31,
2004.
RESULTS OF OPERATIONS
2005 VERSUS 2004
Revenues and cost of revenue in the second quarter of 2005 were $166,000 and
$102,000, respectively, versus 2004 revenues and cost of revenues of $241,000
and $149,000, respectively. For the nine months to date, 2005 revenue and cost
of revenue were $626,000 and $373,000, respectively, versus $528,000 and
$334,000, respectively for the same nine month period in 2004. Revenues consist
of the following:
Third Quarter Year to Date
(in thousands) 2005 2004 2005 2004
------ ------ ------ ------
REVENUE:
Additive revenue $ 97 $ 88 $ 283 $ 199
Hardware revenue 56 135 314 280
License and royalty revenue 13 18 29 49
------ ------ ------ ------
Total Revenue $ 166 $ 241 $ 626 $ 528
In the foregoing table "Additive" includes the Platinum Plus FBC products and
concentrate; "Hardware" includes the EPA verified Purifier System, ARIS
injectors and dosing systems.
Clean Diesel received EPA verification of its Purifier System (FBC and DOC) in
October 2003, and a second verification for its catalyzed wire mesh filter
system (FBC and CWMF) in June 2004. Clean Diesel Technologies has applied for
verification for emission reduction by CARB for the CWMF/FBC system as well. The
Platinum Plus FBC is registered with the EPA.
Additive revenue has increased in the third quarter 2005 and year to date as a
result of successful demonstration programs and sales of the verified Purifier
System which requires the use of the Platinum Plus FBC. Clean Diesel also saw
significant increases in additive sales in the mining sector. Hardware sales of
the Purifier system increased year to date as a result of the completion of the
State of Pennsylvania grant project, partially offset by a decrease in ARIS
injector sales.
Clean Diesel Technologies identified a market opportunity for its urea selective
catalytic reduction (SCR) system, The ARIS 2000, to reduce NOx in stationary
power generation diesel engines. The ARIS 2000 NOx reduction system is a
single-fluid injection and metering system complete with an electronic control
unit that can be integrated with engine electronic and diagnostic systems. CDT's
business strategy is to license the ARIS 2000 NOx reduction system to other
companies for an up-front fee for the technology and information transfer and a
separate on-going royalty per unit payment. CDT currently has an exclusive
license agreement for both stationary and mobile ARIS applications for Japan
with DENOX Inc (transferred from Mitsui Ltd in May 2005). CDT has a
non-exclusive license for both stationary and mobile ARIS applications in the
United States with Combustion Components Associates of Monroe, Connecticut. CDT
previously had an ARIS stationary license agreement for North America with the
RJM Corporation of Norwalk Connecticut, but as of August 2004 RJM was out of
business and the ARIS license reverted back to CDT. CDT believes that the ARIS
2000 system can most effectively be commercialized through licensing several
companies with a related business in these markets. Clean Diesel Technologies is
actively seeking additional ARIS licensees for both mobile and stationary
applications in the US, Europe and Asia.
- 12 -
General and administrative expenses increased $110,000 to $1,260,000 in the
third quarter 2005 from $1,150,000 in 2004 and year to date the increase was
874,000 to $3,635,000 versus $2,761,000 in the same 2004 period as summarized in
the following table:
Third Quarter Year to Date
(in thousands) 2005 2004 2005 2004
------ ------ ------ ------
Compensation and benefits $ 809 $ 580 $2,363 $1,658
Occupancy 128 125 369 311
Professional 241 381 639 603
Other 82 64 264 189
------ ------ ------ ------
Total general and administrative expense $1,260 $1,150 $3,635 $2,761
Compensation and benefit expense increased as a result of several staff
additions in the US and in Europe in 2005 related to increased sales and
marketing efforts and a new Chief Technology Officer. Occupancy increased in
2005 as a result of the establishment of a UK representative office.
Professional fees also increased primarily due to the creation of a technical
advisory board, additional UK advisors and Sarbanes Oxley section 404 compliance
work.
Research and development expenses increased $48,000 to $222,000 in the third
quarter 2005 from $174,000 in 2004. For the nine months year to date in 2005
research and development increased $25,000 to $399,000 from $344,000 in 2004.
The increase in research and development in third quarter 2005 is due to the
additional requested EPA testing on the Platinum Plus FBC.
Patent amortization and other costs increased to $61,000 in the third quarter
2005 versus $22,000 in 2004. For the nine months to date in 2005 patent
amortization and other costs increased to $125,000 from $61,000 in 2004. The
2005 increase is related to higher amortization related to prior period
capitalization and non-capitalizable patent expenses incurred in 2005. In
addition in the third quarter 2005 the Company wrote-off several international
patents determined to be commercially unviable which amounted to $32,500.
Interest income decreased to $2,000 in the third quarter 2005 from $11,000 in
2004. For the nine months to date in 2005 interest income decreased to $16,000
from $36,000 in 2004. The decrease is due to the higher amount of invested funds
in the first half of 2004 related to the November 2003 fund-raising.
LIQUIDITY AND SOURCES OF CAPITAL
Prior to 2000, CDT was primarily engaged in research and development and has
incurred losses since inception aggregating $33,381,000 (excluding the effect of
the non-cash preferred stock dividends on preferred shares prior to conversion
to common). CDT expects to incur losses through the foreseeable future as it
further pursues its commercialization efforts. Although CDT started selling
limited quantities of Platinum Plus additive and the verified Purifier system
and generating some ARIS licensing fees and royalties, operating revenue to date
has been insufficient to cover operating expenses and CDT continues to be
dependent upon proceeds from fund raising to finance its working capital
requirements.
For the nine months ended September 30, 2005 and 2004, CDT used cash of
$3,507,000 and $2,670,000 respectively, in operating activities.
At September 30, 2005 and December 31, 2004, CDT had cash and cash equivalents
of $494,000 and $4,265,000, respectively. The decrease in cash and cash
equivalents in 2005 was the result of limited revenues and on-going operating
costs. CDT anticipates incurring additional losses through at least 2006 as it
further pursues its commercialization efforts.
In November 2005 Clean Diesel Technologies received $6 million (net of $250,000)
expenses through a private placement of its common. The price of the common
stock was 0.40 GBP per share (approximately $0.70 per share). The proceeds of
the common stock issuance are being used for the general corporate purposes of
Clean Diesel Technologies.
In October 2004, Clean Diesel Technologies received $754,000 (net of $25,000 in
expenses) through a private placement of 426,500 shares of its common stock. The
price of the common stock was 1.025 GBP per share (approximately $1.82 per
share). The proceeds of the common stock issuance are being used for the general
corporate purposes of Clean Diesel Technologies.
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In September 2004, Clean Diesel Technologies received $1.785 million (net of
$65,000 in expenses) through a private placement of 1,000,000 shares of its
common stock. The price of the common stock was 1.025 GBP per share
(approximately $1.82 per share). The proceeds of the common stock issuance are
being used for the general corporate purposes of Clean Diesel Technologies.
In December 2003, Clean Diesel Technologies received $3.583 million (net of
$170,000 in expenses) through a private placement of 1,282,600 shares of its
common stock. The price of the common stock was 1.70 GBP per share
(approximately $2.92 per share).
In September 2003, Clean Diesel Technologies received $3.866 million (net of
$39,000 in expenses) through a private placement of 2,395,597 shares of its
common stock. In conjunction with the private placement, 230,240 ten year
warrants with an exercise price of $1.63 per share were issued.
At the present time, CDT cannot estimate when, or if, its operations will
generate positive cash flows from operations. CDT does not have any credit
facilities available with financial institutions or other third parties. If CDT
cannot generate cash flow from operations, CDT will be dependent upon external
sources of best-efforts financing, of which there are no firm commitments or
arrangements. Based on the current operating plan, the $6.0 million net
fundraising from a private common stock placing completed on November 7, 2005
(see Note 7) and the cash balance of $494,000 as of September 30, 2005
management believes it has sufficient resources to meet the cash needs of Clean
Diesel into the first quarter of 2007. In the future, unless operating revenues
are sufficient to meet operating expenses, CDT will need to access capital
markets to fund operations by incurring indebtedness or issuing equity
securities.
CDT can provide no assurance that it will be successful in any future financing
effort to obtain the necessary working capital to support operations or if such
financing is available, it will be on acceptable terms. If management is unable
to obtain the necessary financing from external sources, CDT may need to manage
any cash shortfalls by taking measures which may include deferring or reducing
the scope of commercialization efforts, reducing costs and overhead expenses, or
otherwise curtailing operations, or obtaining funds by a disposition of assets
or through arrangements with others that may require CDT to relinquish rights to
certain of its technologies, or to license the rights to such technologies on
terms that are less favorable to CDT than might otherwise be available. If CDT
is unable to generate cash from operations or find alternative sources of
funding, it would have an adverse impact on liquidity and operations and CDT may
be unable to continue as a going concern.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the opinion of management, with the exception of exposure to fluctuations in
the cost of platinum, CDT is not subject to any significant market risk
exposure.
CDT generally receives most income in United States dollars. CDT typically makes
several payments monthly in various foreign currencies for patent expenses,
product tests and registration, local marketing and promotion, consultants and
employees.
ITEM 4. CONTROLS AND PROCEDURES
CDT maintains disclosure controls and procedures and internal controls designed
to ensure that information required to be disclosed in it's filings under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms. CDT's management, with the participation of its principal
executive and financial officers, has evaluated the effectiveness of its
disclosure controls and procedures as of the end of the period covered by this
Quarterly Report on form 10Q. CDT's principal executive and financial officers
have concluded, based on such evaluation, that such disclosure controls and
procedures were effective for the purpose for which they were designed as of the
end of such period.
There was no change in CDT's internal control over financial reporting that was
identified in connection with such evaluation that occurred during the period
covered by this Quarterly Report on form 10Q that has materially affected, or is
reasonably likely to materially affect, CDT's internal control over financial
reporting.
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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
None
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 & CERTIFICATIONS
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.
Date: November 14, 2005 By: /s/Bernhard Steiner
----------------------------------
Bernhard Steiner
Director and
Chief Executive Officer
Date: November 14, 2005 By: /s/David W. Whitwell
----------------------------------
David W. Whitwell
Chief Financial Officer,
Vice President and Treasurer
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