SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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COMMISSION FILE NO. 0-27432
CLEAN DIESEL TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 06-1393453
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(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification Number)
SUITE 702, 300 ATLANTIC STREET
STAMFORD, CT 06901
(203) 327-7050
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(Address and telephone number of principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK $0.05 PAR VALUE PER SHARE
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(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in rule 405 of the Securities Act.
Yes No X
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Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes No X
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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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
---
Indicate by check mark whether the registrant is a large accelerated filer,
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer Accelerated Filer Non-Accelerated Filer X
--- --- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
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The Aggregate market value of the voting stock held by non-affiliates of the
registrant based on the average bid and asked prices as of June 30, 2005 was
$25,908,000. The Aggregate market value of the voting stock held by
non-affiliates of the registrant based on the average bid and asked prices as
March 22, 2006 was $27,050,000.
Indicate number of shares outstanding of each of the registered classes of
Common Stock at March 24, 2006: 26,085,268 shares Common Stock, $0.05 par value.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the Proxy Statement for the annual meeting of stockholders
to be held in 2006 are incorporated by reference into parts II, III and IV
hereof.
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TABLE OF DEFINED TERMS
After-Treatment Device Engine pollutant emissions are generally reduced by engine modifications, fuel specifications or
exhaust gas after-treatment. An after-treatment device is a component used to reduce engine
pollutant emissions downstream of the combustion chamber. Catalytic converters and particulate
traps are examples of after-treatment devices.
Alternative Fuel An alternative fuel is any fuel other than gasoline and diesel fuels, such as methanol, ethanol,
compressed natural gas, and other gaseous fuels. Generally, alternative fuels burn more cleanly
and result in less air pollution.
BUWAL Bundesamt f r Umwelt, Wald und Landschaft (Swiss Agency for the Environment, Forest and
Landscape).
Catalytic Converter A catalytic converter consists of a metal housing filled with a ceramic or metallic honeycomb
material which is covered with a catalytic compound. The presence of the catalytic converter in
the engine exhaust system breaks down the chemicals in the exhaust and reduces harmful
pollutant emissions.
CO Carbon monoxide is a colorless, odorless and poisonous gas produced by the burning of fuels.
Automobiles are the primary source of carbon monoxide pollution. When carbon monoxide
nters the bloodstream, it reduces the delivery of oxygen to the body's organs and tissues. Health
threats are most serious for those who suffer from cardiovascular disease, particularly those with
angina or peripheral vascular disease. Exposure to elevated carbon monoxide levels can cause
impairment of visual perception, manual dexterity, learning ability and performance of complex
tasks.
CO(2) Carbon dioxide is a colorless, odorless, incombustible gas formed during respiration, combustion
and organic decomposition.
CWMF Catalyzed Wire Mesh Filter, a form of diesel particulate filter.
Diesel Engine An engine that operates on diesel fuel and principally relies on compression-ignition for engine
operation. The nonuse of a throttle during normal operation is indicative of a diesel engine.
DOCs Diesel Oxidizing Catalysts - see "Oxidation Catalyst."
DPFs Diesel Particulate Filters - see "Particulate Trap/Filter."
FBC Fuel Borne Catalyst. A chemical compound of an organic and a metal added to fuel to make a
metal ash that promotes the more complete combustion of soot collected with it in a diesel
particulate filter. The primary metals used are platinum, iron and cerium.
HC An exhaust and evaporative pollutant of hydrogen and carbon atoms resulting from unburnt fuel.
HC contributes to the formation of ozone, which is responsible for the choking, coughing and
stinging eyes associated with smog. Ozone damages lung tissue, aggravates respiratory disease
and makes people susceptible to respiratory infections. Children are especially vulnerable to
ozone's harmful effects, as are adults with existing disease.
NOx Oxides of nitrogen are a family of reactive gaseous compounds that contribute to air pollution in
both urban and rural environments. Emissions of nitrogen oxides are produced during the
combustion of fuels at high temperatures. The primary sources of atmospheric nitrogen oxides
include highway sources (such as light-duty and heavy-duty vehicles), nonroad sources (such as
construction and agricultural equipment, and locomotives) and stationary sources (such as power
plants and industrial boilers). Nitrogen oxides are an important precursor to both ozone and acid
rain, and may affect both terrestrial and aquatic ecosystems.
Oxidation Catalyst A type of catalyst (catalytic converter) that chemically converts hydrocarbons and carbon
monoxide to water vapor and carbon dioxide.
Particulate Trap/Filter An after-treatment device that filters or traps diesel particulate matter from engine exhaust until
the trap becomes loaded so that a regeneration cycle is implemented to burn off the trapped
particulate matter.
PFCs Platinum Fuel Catalysts. A form of fuel-borne catalyst that employs platinum to control vehicle
exhaust emissions of hydrocarbons, carbon monoxide, oxides of nitrogen and particulate matter.
2
PM Particulate matter includes dust, dirt, soot, smoke and liquid droplets emitted directly into the air
by sources such as factories, power plants, cars, engines, construction activity, fires and natural
windblown dust. Particles formed in the atmosphere by condensation or the transformation of
emitted gases are also considered particulate matter.
Registration In the U.S., fuels and fuel additives are required to be registered with federal, state or local
regulatory authorities for on-highway use before the fuel/fuel additive may be "introduced into
commerce." The registration issued by the U.S. Environmental Protection Agency specifically
does not permit the registrant to make any claims regarding the registrant's fuel's diesel emissions
reduction performance.
Retrofit An engine "retrofit" includes (but is not limited to) any of these activities:
adding of new/better pollution control after-treatment equipment to certified engines;
upgrading a certified engine to a cleaner certified configuration;
upgrading an uncertified engine to a cleaner "certified-like" configuration;
converting of any engine to a cleaner fuel;
early replacement of older engines with newer (presumably cleaner) engines (in lieu of
regular expected rebuilding); and
use of cleaner fuel and/or emission-reducing fuel additive (without engine conversion).
SCR Selective Catalytic Reduction, a technology that reduces emissions of nitrogen oxides and allows
the engine to be tuned for maximum fuel economy.
Ultra Low Sulfur Fuel Current EPA regulations specify that diesel test fuel contain 300 - 500 ppm sulfur for highway
engines and 300 - 4000 ppm sulfur for nonroad engines. Significant reductions from these
current sulfur levels are necessary in order for many retrofit technologies to provide meaningful,
lasting emissions reductions. The U.S. Environmental Protection Agency has mandated sulfur
reductions to 15 ppm beginning in January 2006. In addition to enabling a wide array of
emissions control technologies, the use of ultra low sulfur diesel alone reduces emissions of
particulate matter. Sulfate, a major constituent of particulate matter, is produced as a byproduct
of burning diesel fuel containing sulfur. Reducing the sulfur content of fuel in turn reduces
sulfate byproducts of combustion and therefore particulate matter emissions.
Verification The U.S. Environmental Protection Agency established the Environmental Technology
Verification Program to verify the performance of innovative environmental technologies that
can be used to monitor, prevent, control and clean pollution. The verification program provides
credible, high-quality data on the performance of innovative commercial environmental
technologies. In the market for diesel emission reduction technologies, the EPA's Retrofit
Technology Verification Program is designed to encourage owners of existing public and private
fleets of diesel powered vehicles and equipment to install new or enhanced emissions control
technologies on their engines. Through the Retrofit Technology Verification Process, the EPA
qualifies manufacturers' retrofit technologies to be posted on the Office of Transportation and Air
Quality (OTAQ's) Verified Technology List. In order for manufacturers to qualify, the
manufacturer must undergo product testing (under standardized protocols or other developed
protocols, including the appropriate federal test procedures) to provide proof to federal, state and
local regulatory authorities that the manufacturer's product does in fact perform as claimed.
VERT Verminderung der Emissionen von Real-Dieselmotoren im Tunnelbau (Curtailing Emissions
from Diesel Engines in Tunnel Construction). A research program conducted between 1994-
2000, sponsored by Swiss, German and Austrian occupational health authorities, which
developed performance criteria and specifications for diesel particulate filters. VERT develops,
tests and certifies diesel particulate filter systems.
3
PART I
FORWARD-LOOKING STATEMENTS
Statements in this Form 10-K 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 Clean Diesel Technologies' 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."
ITEM 1. BUSINESS
GENERAL
Clean Diesel Technologies, Inc., a Delaware corporation with a principal
place of business at 300 Atlantic Street, Stamford, CT 06901, was formed in 1994
as a wholly owned subsidiary of Fuel-Tech N.V., incorporated under the laws of
the Netherlands Antilles (Fuel Tech), to develop technologies that reduce
harmful emissions from diesel engines while reducing fuel consumption and
improving fuel economy. CDT was spun-off by Fuel Tech in a rights offering in
December 1995. Over the past ten years, CDT has developed its technologies in
the areas of platinum fuel catalysts (PFCs) for emissions control and fuel
economy improvement in diesel engines, and nitrogen oxide (NOx) reduction
systems for control of NOx emissions from diesel engines.
CDT is now commercializing the Platinum Plus(R) fuel-borne catalyst (FBC),
a diesel fuel PFC additive, the ARIS(R) NOx reduction system, an advanced
reagent injection system used in catalytic NOx reduction systems , and Clean
Diesel's diesel particulate filter technology based on catalyzed wire mesh
filter elements. CDT has 26 U.S. patents issued and 17 U.S. patent applications
pending, as well as 106 foreign patents issued and 65 foreign patent
applications pending. Increasingly, combustion engine development is influenced
by concern over global warming caused by carbon dioxide (CO2) emissions from
fossil fuels and toxic exhaust emissions. Because carbon dioxide results from
the combustion of fossil fuels, reducing fuel consumption is often cited as the
primary way to reduce carbon dioxide emissions. Diesel engines are as much as
40% more fuel-efficient than gasoline engines. Thus, increased use of diesel
engines relative to gasoline engines is one way to reduce overall fuel
consumption and thereby significantly reduce carbon dioxide emissions. Diesel
engines, however, emit higher levels of two toxic pollutants than gasoline
engines fitted with catalytic converters, specifically, particulate matter (PM)
and nitrogen oxides. Both of these pollutants affect human health and also
damage the environment.
TECHNOLOGIES AND PRODUCTS
CDT has succeeded in developing technologies and products that, when
combined with other after-treatment devices, can reduce particulate emissions
and nitrogen oxides from diesel engines to or below the emission levels of
natural gas engines, while also reducing fuel consumption. This results in a
reduction in fuel costs and greenhouse gas emissions, primarily carbon dioxide,
as well as a reduction in emissions of particulates, nitrogen oxides, carbon
monoxide and un-burnt hydrocarbons.
PLATINUM PLUS FBC
CDT has successfully developed and patented the Platinum Plus additive as a
diesel fuel soluble, fuel-borne catalyst, which contains minute amounts of
platinum and cerium catalysts and is used to improve combustion, reduce
emissions and improve the performance and reliability of emission control
equipment. Platinum Plus FBC takes the catalytic action into engine cylinders
where it improves combustion thereby reducing particulates, un-burnt
hydrocarbons and carbon monoxide emissions and improves fuel economy. Fleet
tests using Platinum Plus FBC have shown improvements in fuel economy of between
3% and 12%. Platinum Plus FBC can be used alone or with either regular or ultra
low-sulfur diesel fuel to reduce particulate emissions by 10% to 25% within the
engine while also improving the performance of diesel oxidation catalysts and
particulate filters (which trap up to 95% of particulates but in doing so become
clogged with soot) by burning off the soot particles at lower temperatures and
further reducing toxic emissions of carbon monoxide and un-burnt hydrocarbons.
From 1996 to 1999, CDT defined and managed several research and development
programs on platinum fuel catalysts which were conducted by Delft Technical
University (Netherlands), Ricardo Consulting Engineers (U.K.), Cummins Engine
Company (USA) and Southwest Research Institute (USA). Through a strategy of
using independent test houses, CDT's small technical team has been able to run
several programs on a cost effective basis while bringing in a wide range of
expertise. Most importantly, the results have been independently derived.
4
CDT completed the first stage of development of the Platinum Plus FBC in
1999. In December of that year, CDT received EPA registration for the Platinum
Plus FBC for use in bulk fuel by refiners, distributors and truck fleets. In
2000, CDT completed the certification protocol for particulate filters and
additives for use with particulate filters with VERT, the main recognized
authority in Europe that tests and verifies diesel particulate filters for
emissions and health effects. In 2001, the Swiss Authority BUWAL approved the
Platinum Plus fuel-borne catalyst for use with particulate filters. In 2002,
the U.S. Mining, Safety and Health Administration (MSHA) accepted the Platinum
Plus fuel-borne catalyst for use in mines, with or without diesel particulate
filter after-treatment.
In 2003, CDT received EPA verification for the Platinum Plus FBC and a
diesel-oxidation catalyst (the Purifier System). In June 2004, CDT received EPA
verification for the Catalyzed Wire Mesh Filter System, which combines the
Platinum Plus fuel borne catalysts with a catalyzed wire mesh filter (CWMF).
CDT has also applied to the California Air Resources Board (CARB) for
verification of these combination systems. In 2005, CDT applied for CARB
verification of Platinum Plus FBC in combination with high efficiency diesel
particulate filter. Verification is given for specific engine groups, and the
initial verification and applications are for older engines (pre-1994
manufactured), which are higher emitters of particulates and nitrogen oxides
than newer engines. CDT also received verification extension for fuel-borne
catalysts and diesel-oxidizing catalysts to cover engines manufactured between
1994 and 2003. Verification is needed for the end user of the Platinum Plus FBC
to get emissions reduction credit from the EPA's voluntary retrofit program or
CARB's mandatory retrofit program. In the U.S., truck fleets, municipalities
and off-road equipment operators are generally moving toward using only verified
technologies when installing retrofit emissions reduction systems.
Over the past several years, CDT has carried out 11 large fleet fuel
economy demonstration trials in the U.S. in a range of industries, including the
waste hauling, beverage, grocery and fuel delivery industries. The improvements
in fuel economy from using Platinum Plus FBC in these demonstrations ranged from
3% to 12%, with an average 8% improvement. The best results were generally
attributable to short-haul "stop-and-go" driving, as is generally the pattern
for local delivery vehicles, buses and garbage trucks. Lab engine test beds run
at both Cummins Engine Company and the Southwest Research Institute showed a 2%
to 8% improvement in fuel economy, respectively, which have been confirmed by
field testing programs. Platinum Plus FBC is effective with normal sulfur
diesel, ultra low sulfur diesel, arctic diesel (kerosene) and biodiesel. When
used with biodiesel and kerosene, Platinum Plus FBC prevents the normal increase
in nitrogen oxides associated with biodiesel.
ARIS SCR
The ARIS (Advanced Reagent Injection System) is the patented injection
system for the reduction of nitrogen oxide emissions from diesel engines. The
system comprises of a single fluid computer-controlled injector that provides
precise injection of nontoxic urea-based reagents into the exhaust of a
stationary or mobile engine, where the system then converts nitrogen oxides
across a catalyst to nitrogen and water vapor. The system has shown reduction
of nitrogen oxides of up to 90% and, on occasion, higher percentages on a steady
state operation and of up to 85% in transient operations. This process, known
as selective catalytic reduction (SCR), has been in use for many years in power
stations, and it is well proven in mobile and stationary applications. The ARIS
system is a compact version of the selective catalytic reduction injection
system. The principal advantage of the patented ARIS system is that compressed
air is not required to operate the system and that a single fluid is used for
both NOx reduction and injector cooling. The system is designed for high-volume
production and is very compact, with very few components, making it inherently
cheaper to manufacture, install and operate than the compressed air systems,
which were first developed for heavy-duty vehicles. The ARIS system may be used
in both stationary diesel engines for power generation and mobile diesel engines
used in trucks, buses, trains and boats.
CATALYZED WIRE MESH DIESEL PARTICULATE FILTER
Clean Diesel had partnered with Mitsui and PUREarth in the development and
testing of catalyzed wire mesh filter (CWMF) technology. The CWMF technology
was initially developed by Mitsui/PUREarth for use in conjunction with CDT's FBC
as a lower cost and reliable alternative to the traditional heavily catalyzed
filter systems. The system has been verified by CDT under the EPA's
Environmental Technology Verification protocol as reducing toxic particulates by
up to 75 percent, carbon monoxide by 60 percent, hydrocarbons by 80 percent, and
NOx by 9 percent. It also provides lower NO2 emissions levels relative to
traditional, heavily catalyzed filter systems. In 2005 the CWMF technology was
transferred to CDT under a technology transfer agreement with Mitsui and
PUREarth. Under the agreement CDT acquired the worldwide title to the patents
and other intellectual properties, excluding Japan. The CWMF technology is
designed for use in a wide range of diesel engine particulate emission control
applications.
The CWMF technology is a durable, low-cost filter design to bridge the gap
between low efficiency diesel-oxidation catalysts and expensive, heavily
catalyzed particulate filters. The wire-mesh filter system is designed to work
synergistically with a FBC for reliable performance. This combined FBC/CWMF
technology is especially suited to solving the challenging
5
problem of delivering a reliable pollution control solution which can be easily
retrofitted for the older, higher-emission diesel engines expected to be in
service for years to come.
In addition to reducing the cost to achieve these emissions improvements,
the patented combination with a FBC permits the CWMF to operate effectively at
the lower exhaust temperatures found in stop-and-go service applications. The
FBC reduces the engine-out emissions and allows soot captured in the CWMF to be
reliably combusted at lower exhaust temperatures. Commercial systems of
Platinum Plus FBC with this durable CWMF have demonstrated performance in
beverage delivery vehicles, refuse trucks and buses.
THE MARKET AND THE REGULATORY ENVIRONMENT
CDT estimates that worldwide annual consumption of diesel fuel amounts to
approximately 200 billion USG, including approximately 50 billion in the United
States, 60 billion in Europe and 50 billion in Asia.
NEW DIESEL ENGINES
While engine manufacturers have, to date, generally met emissions
regulations by engine design changes (which tend to increase fuel consumption),
CDT believes that further reduction in emissions can be achieved best by using
combinations of cleaner-burning fuels and after-treatment systems such as
diesel-particulate filters and catalytic systems for reducing nitrogen oxides.
In the last several years, emissions regulations for new mobile diesel
engines in the major markets of North America, Asia and Europe have continued to
tighten and are now 40% to 90% lower than the mid-1980s regulations.
Regulations proposed through 2010 in the U.S., Europe and Asia are expected to
reduce the emissions level for new mobile diesel engines to 85 to 99% of the
levels mandated in the mid-1980s. The market for mobile NOx reduction systems
is expected by management to develop between 2006 and 2010. European engine
manufacturers have decided to use urea SCR in 2006, at least on heavy duty
vehicles and very likely on medium and light trucks in later years. There is a
clear preference to use a single fluid system for the medium and light trucks
which have no compressed air system. It also seems probable that European
manufacturers will adopt particulate filters to meet 2010 regulations which are
being formulated.
In May 2004 the U.S. Environmental Protection Agency (EPA) announced
proposals to regulate 'nonroad' engines. The regulations are planned to be
phased in from 2008 to 2014. Proposals include a wide range of construction
equipment, agricultural equipment, as well as railroad and marine applications.
CDT believes the U.S. market for diesel engines is poised for significant
growth because of the favorable fuel economy performance of diesel engines
coupled with the increased ability to control effectively, particulate and
emissions of nitrogen oxides from such engines. Europe and Asia already use
significantly more mobile diesel engines, particularly for passenger and
light-duty vehicles. Most U.S. engine manufacturers have indicated that they
intend to use particulate filters, to meet new diesel vehicle regulations in the
2007 to 2010 time period. European engine manufacturers have committed to adopt
urea-selective catalytic reduction by the 2007 to 2010 period. CDT believes it
is probable that both particulate filters and some emissions of nitrogen oxides
control technology will be required in Europe and the U.S. by the 2010 to 2015
period.
EXISTING DIESEL ENGINES AND THE RETROFIT MARKET
While much of the regulatory pressure and the response from engine
manufacturers has focused on reducing emissions from new engines, there is
increasing concern over pollution from existing diesel engines that have 20- to
30-year life cycles. CDT believes this trend underlies the growing interest in
the potential market that may exist for retrofitting diesel engines with
emissions reduction systems. Stationary diesel engines, construction equipment
and public transportation vehicles such as buses and commercial and municipal
truck fleets will all be included in such a retrofit diesel engine market.
In 1998, the California Air Resources Board (CARB) declared diesel
particulates to be toxic and in 2000 it proposed reductions in particulate
emissions from over one million existing engines in California as well as more
stringent controls for new engines. The EPA stated its objective for
retrofitting vehicles with particulate controls and developed the Clean School
Bus U.S.A program to reduce emissions on school buses and the Smartway Transport
Program to reduce both diesel emissions and fuel consumption on over-the-road
trucks.
6
COMPETITION
There is significant competition among companies that provide solutions for
pollutant emissions from diesel engines. Several companies market products that
compete directly with CDT's products and other companies offer products that
potential customers may consider to be acceptable alternatives. In addition,
newly developed products could be more effective and cost-efficient than CDT's
current products or those developed in the future.
CDT faces direct competition from companies with far greater financial,
technological, manufacturing and personnel resources, including Engelhard,
Donaldson, Fleetguard, Octel, Rhodia and Johnson Matthey. Moreover, many of the
current and potential future competitors have substantially more engineering,
sales and marketing capabilities and broader product lines than CDT does. CDT
also faces indirect competition in the form of alternative fuel consumption
vehicles such as those using methanol, hydrogen, ethanol and electricity.
CDT believes that its technologies and products occupy a strong competitive
position relative to others in the diesel emissions reduction technology market.
Competition in verified particulate reduction systems for retrofit is from
catalyst systems suppliers like Johnson Matthey and Engelhard. These companies
employ systems that rely on much greater quantities of platinum and that have
the undesirable effect of increasing emissions of NO2, a component of NOx.
Competition in the diesel fuel additive market is from additive suppliers such
as Associated Octel, who markets an iron product and Rhodia and Oxonica , who
market cerium products. The Platinum Plus FBC competes on performance in
regenerating filters and lower metal usage which results in less ash buildup on
filters. Platinum Plus FBC also offers better performance in terms of carbon
monoxide reduction and hydrocarbon reduction. In addition, Platinum Plus FBC is
the only fuel additive to provide fuel economy improvement. Finally, in the NOx
control market, competition is from other suppliers of reagent-based
post-combustion NOx control systems such as KleenAir Systems for retrofit and
Robert Bosch for OEMs. Bosch has stated that it will offer a single fluid
system after 2007. CDT, however, already has proprietary technology for a
single fluid system, which requires no compressed air and involves fewer
components.
MARKET OPPORTUNITY
The two principal market drivers for CDT's products are emission reduction
and fuel economy improvement. Platinum Plus FBC is an "enabling technology"
that enables emission reductions from the engine itself and enhances performance
of the exhaust treatment system while improving fuel economy. The continued
tightening of clean air standards, emissions control regulations, pressure for
fuel efficiency and growing international awareness of the greenhouse effect
should provide CDT with substantial opportunities in local markets throughout
North America, Asia and Europe.
Without compromising the fuel economy benefits of diesel, a significant
reduction of particulate and NOx emissions can only be achieved by using
combinations of improved engine design, cleaner burning fuels and
after-treatment systems such as diesel particulate filters and catalytic
systems. The Platinum Plus FBC (which improves combustion catalytically and
enables higher performance of exhaust treatment devices) and the ARIS 2000
technology can form key components of both of these after-treatment systems.
The convergence of requirements for emissions compliance and the high cost
of fuel make the use of the products economical. With diesel fuel selling at
approximately $2.50 per USG, or more, in the United States as of December 2005,
a fuel savings of at least 2% corresponds to $0.05 per USG and effectively pays
the cost of dosing with Platinum Plus FBC by truck fleet operators. Platinum
Plus FBC in controlled fleet tests showed an average of 7% fuel economy
improvement. In Europe, where diesel fuel retails in some countries for as much
as $7.50 per USG because of the high tax on fuels, potential fuel economy
benefits are even more pronounced.
MARKETING STRATEGY AND COMMERCIALIZATION
The market for after-treatment systems for emissions control from diesel
engines is currently moving from the demonstration and development phase to a
commercialization phase. The only exception to this general trend is in the
market for passenger cars in France, where PSA Peugeot has taken the lead and
has already begun offering particulate filter systems with fuel-borne catalysts
on several of its models. EPA and CARB programs are only now beginning to
result in the creation of active markets for diesel emissions reduction
technologies and products. Thus, the market for diesel emissions reduction
technologies and products is relatively new. CDT expects opportunities and
demand for verified diesel emissions reduction technologies and products from
both larger companies with established distribution channels to the diesel
engine market and owners of existing public and private fleets of diesel-powered
vehicles. At the same time, engine manufacturers are looking to subsystem
suppliers to provide complete exhaust subsystems including particulate filters
and/or NOx abatement systems and eventually both.
7
It is an essential requirement of the U.S. retrofit market that emissions
control products and systems are verified under the EPA or CARB protocols to
qualify for credits within the EPA and CARB programs. Funding for these
emissions control products and systems is mostly limited to those products and
technologies that have already been verified. CDT has received verification
from the US EPA for two systems based upon the use of the Platinum Plus FBC.
The Platinum Plus Purifier System uses the FBC and a DOC for up to a 50%
particulate reduction. A second system is verified for up to 75% reduction and
uses a CWMF and the Platinum Plus FBC. CDT may seek to verify its Platinum
Plus FBC in combination with additional emissions control devices manufactured
by other vendors. CDT may receive royalties from sales of such devices in the
event sales of such devices include the Platinum Plus FBC product as part of the
devices' verification.
CDT currently manufactures and ships the Platinum Plus FBC product from a
toll blender in Pittsburg, Pennsylvania and from a small warehouse in Milford,
Connecticut. However, as demand for the product increases, CDT intends to
expand the manufacturing and shipping points by supplying platinum concentrate
to large chemical and additive manufacturing companies. These companies will
then blend and market the finished Platinum Plus FBC products to fuel suppliers
and end users.
CDT has licensed the ARIS 2000 NOx reduction technology in both the U.S.
and Japan. CDT plans to widen distribution to Europe and Asia by selling key
components with the technology licenses. CDT believes this strategy of
licensing the products and technologies represents the most efficient way to
gain widespread distribution quickly and to exploit demand for the technologies
in North America, Asia and Europe.
In 2005 CDT acquired the rights to several worldwide patents from the Mitsui
Company of Japan relating to catalized wire mesh filter technology. CDT is in
the process of commercializing the technology in combination with its Platinum
Plus FBC.
HEALTH EFFECTS AND REGISTRATION OF ADDITIVES
Metallic additives have come under scrutiny for their possible effects on
health. CDT registered its platinum additive in 1997 in both the U.S. and the
U.K. The platinum-cerium bimetallic additive required further registration in
the U.S. and that process involved a 1,000-hour engine test and extensive
emission measurements and analysis. The registration was completed in 1999 and
issued in December 1999.
Germany, Austria and Switzerland have set up a protocol (VERT) for
approving diesel particulate filters and additive systems used with them. CDT
completed the required tests under the VERT protocol in 2000 and in January
2001, the Swiss authority BUWAL approved the Platinum Plus FBC fuel additive for
use with a filter.
Engine tests in the U.S. and Switzerland show that 95% to 99% of the
catalyst metal introduced to the fuel by the FBC is retained within the engine
and exhaust after a filter and that the amount of platinum emitted from the use
of Platinum Plus FBC is roughly equivalent to platinum attrition from automotive
catalytic converters.
In December 1996, the United Kingdom Ministry of Health's Committee on
Toxicity reviewed the product and all the data submitted by CDT and stated "The
Committee is satisfied that the platinum emission from vehicles would not be in
an allergenic form and that the concentrations are well below those known to
cause human toxicity." In 1997, Radian Associates, an independent research
consulting firm, reviewed our data and the literature on platinum health effects
and concluded, "the use of Clean Diesel Technologies' Platinum containing diesel
fuel additive is not expected to have an adverse health effect on the population
under the condition reviewed." Radian also concluded that emissions of platinum
from the additive had a margin of safety ranging from 2,000 to 2,000,000 times
below workplace standards.
In 2002, the U.S. Mining Safety and Health Administration (MSHA) accepted
the use of Platinum Plus FBC with particulate filters and also allowed its use
in all fuel used in underground mining, even without filters.
In October 2003, the EPA verified the Platinum Plus FBC Purifier System,
which is the first time the EPA has verified a metal catalyst additive-based
system.
In January 2005 CDT announced it had initiated independent tests to address
recent questions from the EPA on the use of its fuel borne catalyst as a result
of growing commercial interest in its diesel emission control products. The
results from testing of the Platinum Plus FBC over eight months at EPA approved
laboratories confirmed that any potentially allergenic platinum emissions from
the use of the Platinum Plus FBC were hundreds to thousands of times below the
lowest published safe level and were consistent with reported platinum emissions
from catalyzed control devices.
8
SOURCES OF SUPPLY
Platinum and cerium are the principal raw materials used in the production
of the Platinum Plus fuel borne catalyst. These metals are generally available
from multiple sources in the market place. CDT does not anticipate a shortage
in the supply of the raw materials used in the production of the FBC in the
foreseeable future. While CDT has outsourcing arrangements with two companies
in the precious metal refining industry to procure this precious metal, there
are no fixed commitments with these parties to provide supplies and CDT may make
procurement arrangements with others to fulfill the raw materials requirements.
In the past, CDT manufactured the product internally but now considers
outsourcing of the manufacturing process to a precious metal refinery to be more
cost effective.
RESEARCH AND DEVELOPMENT
During 2005, CDT employed several individuals in engineering and product
development. During the years ended December 31, 2005, 2004, and 2003, the
research and development expenses, exclusive of patent costs, totaled
approximately $439,000, $506,000, $855,000 respectively. The 2005 decrease
resulted from lower personnel allocation and consultant use, partially offset by
higher EPA testing expense. In addition, 2004 expense was lower as a result of
the completion of verification testing expense in 2003. CDT expenses all
research and development costs as incurred.
PROTECTION OF PROPRIETARY INFORMATION
CDT holds the rights to a number of patents and patent applications
pending. There can be no assurance that pending patent applications will be
approved or that the issued patents or pending applications will not be
challenged or circumvented by competitors. Certain critical technology
incorporated in the products is protected by trademark and trade secret laws and
confidentiality and licensing agreements. There can be no assurance that such
protection will prove adequate or that CDT will have adequate remedies for
disclosure of the trade secrets or violations of the intellectual property
rights.
INSURANCE
CDT maintains coverage for the customary risks inherent in its operations.
Although CDT believes the insurance policies to be adequate in the amount and
coverage for the current operations, no assurance can be given that this
coverage will, in fact, be or continue to be available in adequate amounts, or
at a reasonable cost or that such insurance will be adequate to cover any future
claims.
EMPLOYEES
CDT has 13 full-time employees. In addition, one executive officer of Fuel
Tech provides management and legal services to CDT on an "as needed" basis
pursuant to a Management and Services Agreement with Fuel Tech Inc. CDT also
retains several outside technical consultants and marketing agents for specific
projects related to platinum, engines and NOx reduction and fuel additive
selling.
CDT enjoys good relations with its employees and is not a party to any
labor management agreements.
RISK FACTORS OF THE BUSINESS
Investors in Clean Diesel Technologies should be mindful of the following
risk factors relative to Clean Diesel Technologies' business:
CDT HAS INCURRED LOSSES IN THE PAST AND EXPECTS TO INCUR LOSSES IN THE FUTURE.
Prior to 2000, Clean Diesel Technologies was a development stage business
and has incurred losses since inception totaling $34,841,000 (excluding the
effect of non-cash preferred stock dividends). At the date of this report,
Clean Diesel Technologies has cash resources estimated to be sufficient for its
needs into the first quarter of 2007.
CDT has had minimal revenues through December 31, 2005 and expects to
continue to incur operating losses at least through 2006. There can be no
assurance that CDT will achieve or sustain significant revenues or profitability
in the future. See the text below under the captions "Liquidity and Sources of
Capital" in Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations," elsewhere herein.
9
CDT FACES CONSTANT CHANGES IN GOVERNMENTAL STANDARDS BY WHICH ITS PRODUCTS ARE
EVALUATED.
CDT believes that, due to the constant focus on the environment and clean
air standards throughout the world, a requirement in the future to adhere to new
and more stringent regulations both domestically and abroad is possible as
governmental agencies seek to improve standards required for certification of
products intended to promote clean air. In the event CDT's products fail to
meet these ever-changing standards, some or all of the products may become
obsolete.
FUTURE GROWTH OF CDT'S BUSINESS DEPENDS IN PART ON ENFORCEMENT OF EXISTING
EMISSIONS-RELATED ENVIRONMENTAL REGULATIONS AND FURTHER TIGHTENING OF EMISSION
STANDARDS WORLDWIDE.
CDT expects that the future business growth will be driven, in part, by the
enforcement of existing emissions-related environmental regulations and
tightening of emissions standards worldwide. If such standards do not continue
to become stricter or are loosened or are not enforced by governmental
authorities, it could have a material adverse effect on business, operating
results, financial condition and long-term prospects.
THE POSSIBILITY OF NEW METAL STANDARDS, ,LOWER ENVIRONMENTAL LIMITS OR STRICTER
REGULATION FOR HEALTH REASONS OF PLATINUM OR CERIUM EXISTS.
New standards or environmental limits on the use of platinum and / or
cerium metal by a governmental agency could adversely affect the ability of CDT
to use its Platinum Plus FBC in some applications. In addition CARB will
require "multimedia" analysis of the FBC. The EPA could require a "Tier III"
test of the Platinum Plus FBC at any time to determine additional health effects
of platinum or cerium which tests would likely involve costs beyond the current
resources of Clean Diesel.
CDT FACES COMPETITION AND TECHNOLOGICAL ADVANCES BY COMPETITORS.
There is significant competition among companies that provide solutions for
pollutant emissions from diesel engines. Several companies market products that
compete directly with CDT's products. Other companies offer products that
potential customers may consider to be acceptable alternatives to CDT's products
and services. CDT faces direct competition from companies with far greater
financial, technological, manufacturing and personnel resources, including
Engelhard, Donaldson, Fleetguard, Octel, Rhodia, Bosch and Johnson Matthey.
Newly developed products could be more effective and cost efficient than CDT's
current or future products. Many of the current and potential future
competitors have substantially more engineering, sales and marketing
capabilities and broader product lines than CDT does. CDT also faces indirect
competition in the form of alternative fuel consumption vehicles such as those
using methanol, hydrogen, ethanol and electricity.
CDT DEPENDS ON INTELLECTUAL PROPERTY AND THE FAILURE TO PROTECT THE INTELLECTUAL
PROPERTY COULD ADVERSELY AFFECT FUTURE GROWTH AND SUCCESS.
CDT relies on patent, trademark and copyright law, trade secret protection,
and confidentiality and other agreements with employees, customers, partners and
others to protect its intellectual property. However, some of the intellectual
property is not covered by any patent or patent application, and, despite
precautions, it may be possible for third parties to obtain and use the
intellectual property without authorization.
CDT does not know whether any patents will be issued from the pending or
future patent applications or whether the scope of the issued patents is
sufficiently broad to protect the technologies or processes. Moreover, patent
applications and issued patents may be challenged or invalidated. CDT could
incur substantial costs in prosecuting or defending patent infringement suits.
Furthermore, the laws of some foreign countries may not protect intellectual
property rights to the same extent as do the laws of the United States.
Some of the key patents, including the fundamental platinum additive
patent, will expire during the period 2006-2008. However, CDT believes that
other longer lived patents, including those for platinum additives in
combination with after-treatment devices, will provide adequate protection of
the proprietary technology, but there can be no assurances CDT will be
successful in protecting the proprietary technology.
As part of the confidentiality procedures, CDT generally has entered into
nondisclosure agreements with employees, consultants and corporate partners and
has attempted to control access to and distribution of the technologies,
documentation and other proprietary information. CDT plans to continue these
procedures. Despite these procedures, third parties could copy or otherwise
obtain and make unauthorized use of the technologies or independently develop
similar technologies. The steps that have been taken and that may occur in the
future might not prevent misappropriation of the solutions or technologies,
particularly in foreign countries where laws or law enforcement practices may
not protect the proprietary rights as fully as in the United States.
10
There can be no assurance that CDT will be successful in protecting its
proprietary rights. Any infringement on any of the intellectual rights could
have an adverse effect on the ability to develop and sell successfully
commercially competitive systems and components.
IF THIRD PARTIES CLAIM THAT THE PRODUCTS INFRINGE UPON THEIR INTELLECTUAL
PROPERTY RIGHTS, CDT MAY BE FORCED TO EXPEND SIGNIFICANT FINANCIAL RESOURCES AND
MANAGEMENT TIME LITIGATING SUCH CLAIMS AND THE OPERATING RESULTS COULD SUFFER.
Third parties may claim that the products and systems infringe upon
third-party patents and other intellectual property rights. Identifying
third-party patent rights can be particularly difficult, especially since patent
applications are not published until up to 18 months after their filing dates.
In the event a competitor were to challenge the patents, or assert that the
products or processes infringe its patent or other intellectual property rights,
CDT could incur substantial litigation costs, be forced to make expensive
product modifications, pay substantial damages, or even be forced to cease some
operations. Third-party infringement claims, regardless of their outcome, would
not only drain financial resources but also divert the time and effort of
management and could result in customers or potential customers deferring or
limiting their purchase or use of the affected products or services until
resolution of the litigation.
AN EXTENDED INTERRUPTION OF THE SUPPLY OR A SUBSTANTIAL INCREASE IN THE PRICE OF
PLATINUM COULD HAVE AN ADVERSE EFFECT ON BUSINESS.
The cost of platinum or the processing cost associated with converting the
metal may have a direct impact on the future pricing and profitability of the
Platinum Plus FBC. Although in the future, CDT intends to minimize this risk
through various purchasing and hedging strategies, there can be no assurance
that this will be successful. A shortage in the supply of platinum or a
significant prolonged increase in the price of platinum, in each case, could
have a material adverse effect on the business, operating results and financial
condition.
FAILURE TO ATTRACT AND RETAIN KEY PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT
ON FUTURE SUCCESS.
CDT's success will depend, in large part, on the ability to retain current
key personnel, attract and retain additional qualified management, scientific,
and manufacturing personnel, and develop and maintain relationships with
research institutions and other outside consultants. The loss of key personnel
or the inability to hire or retain qualified personnel, or the failure to
assimilate effectively such personnel could have a material adverse effect on
the business, operating results and financial condition.
CDT'S RESULTS MAY FLUCTUATE DUE TO CERTAIN REGULATORY, MARKETING AND COMPETITIVE
FACTORS FROM WHICH CDT HAS LITTLE OR NO CONTROL OVER.
The factors listed below, some of which CDT cannot control, may cause the
revenues and results of operations to fluctuate significantly:
- Actions taken by regulatory bodies relating to the verification or
registration of the products.
- The extent to which the Platinum Plus FBC and ARIS 2000 NOx reduction
products obtain market acceptance.
- The timing and size of customer purchases.
- Customer concerns about the stability of the business which could
cause them to seek alternatives to CDT's product.
CDT IS CURRENTLY DEPENDENT ON A FEW MAJOR CUSTOMERS FOR A SIGNIFICANT PORTION OF
REVENUES AND THE REVENUES COULD DECLINE IF CDT IS UNABLE TO MAINTAIN OR DEVELOP
RELATIONSHIPS WITH CURRENT OR POTENTIAL CUSTOMERS.
A few customers currently account for a significant portion of revenues.
For the three-year period ended December 31, 2005, three customers accounted for
approximately 43% of revenues. The majority of the revenues received from these
three customers consisted of license fees and ARIS hardware purchases. CDT
intends to establish long-term relationships with existing customers and
continue to expand its customer base. While CDT diligently seeks to become less
dependent on any single customer, it is likely that certain contractual
relationships may result in one or more customers contributing to a significant
portion of the revenue in any given year for the foreseeable future. The loss of
one or more of these significant customers may result in a material adverse
effect on revenues, the ability to become profitable or the ability to continue
the business operations.
11
CDT DEPENDS ON THE MARKETABILITY OF THREE PRIMARY PRODUCTS - PLATINUM PLUS FBC,
ARIS SYSTEMS AND CATALYZED WIRE MESH FILTERS.
The Platinum Plus fuel borne catalyst, ARIS advanced reagent injection
system for selective catalytic reduction and the catalyzed wire mesh filter are
the three primary products of Clean Diesel. Failure of any of the products to
achieve market acceptance may limit the company's growth potential. Clean
Diesel may have to cease operations if all of the primary products fail to
achieve market acceptance and/or fail to generate significant revenues.
Additionally, the marketability of the products is dependent upon obtaining
verifications from agencies such as the EPA, CARB, or similar European agencies
as well as the effectiveness of the products in relation to various
environmental regulations in the many jurisdictions in which Clean Diesel
markets and sells its products.
CDT MAY NOT BE ABLE TO SUCCESSFULLY MARKET NEW PRODUCTS THAT ARE DEVELOPED AND
OR OBTAIN DIRECT OR INDIRECT VERIFICATION OR APPROVALS OF THE NEW PRODUCTS.
CDT plans to market other emissions reduction devices used in combination
with the Platinum Plus fuel borne catalyst and ARIS injector. There are
numerous development and verification issues that may preclude the introduction
of these products into commercial sale. If CDT is unable to demonstrate the
feasibility of these products or obtain verification or approval for the
products from agencies such as the EPA, CARB or similar European agencies, CDT
may have to abandon the products or alter the business plan. Such modifications
to the business plan will likely delay achievement of milestones related to
revenue increases and achievement of profitability.
NO ASSURANCES OF ADDITIONAL FUNDING
Clean Diesel Technologies may seek additional funding in the form of a
private or public offering of additional shares of equity securities. Any such
funding will depend on prior stockholder approval of an amendment to the Clean
Diesel certificate of incorporation authorizing additional equity. Any offering
of such securities would result in dilution to the stockholders of Clean Diesel
Technologies. The ability of CDT to consummate financing will depend on the
status of CDT's marketing programs and commercialization progress, as well as
conditions then prevailing in the relevant capital markets. There can be no
assurance that such funding will be available if needed, or on acceptable terms.
In the event that CDT needs additional funds and is unable to raise such funds,
CDT may be required to delay, scale back, or severely curtail its operations or
otherwise impede its ongoing commercialization, which could have a material
adverse effect on the business, operating results, financial condition and
long-term prospects. See the text below under the captions "Liquidity and
Sources of Capital" in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," elsewhere herein.
CURRENCY FLUCTUATIONS COULD IMPACT FINANCIAL PERFORMANCE.
The majority of recent activities have been in the U.S. However, CDT has
increased its activities in Europe and Asia, and thus potential for currency
exposure exists. CDT intends to manage the risk to such exposure, if any, by
entering into foreign currency futures and options contracts. There can be no
assurance that currency fluctuation will not have a significant effect on the
operations in the future.
CDT HAS NOT AND DOES NOT INTEND TO PAY DIVIDENDS ON THE COMMON STOCK SHARES.
CDT has not paid dividends on its common stock since inception, and does
not intend to pay any dividends to the holders of common stock in the
foreseeable future. CDT intends to reinvest earnings, if any, in the
development and expansion of the business.
THE PRICE OF THE COMMON STOCK SHARES MAY BE ADVERSELY AFFECTED BY THE SALE OF A
SIGNIFICANT NUMBER OF NEW SHARES.
The sale, or availability for sale, of substantial amounts of common stock,
including shares issued upon exercise of outstanding options and warrants, or in
the event that CDT elects to sell shares of common stock in the future to fund
continuing operations, in the public market or a private placement, or the
perception by the market that these sales could occur, could adversely affect
the market price of the common stock and could impair the ability to raise
additional capital through the sale of equity securities or debt financing. The
perceived risk of dilution may cause the existing stockholders and other holders
to sell their shares of stock, which would contribute to a decrease in the stock
price. In that regard, significant downward pressure on the trading price of
CDT's common stock may also cause investors to engage in short sales, which
would further contribute to significant downward pressure on the trading price
of the stock.
12
CDT'S COMMON STOCK IS CURRENTLY TRADED ON THE OVER-THE COUNTER MARKET, THE
ALTERNATIVE INVESTMENT MARKET OF THE LONDON EXCHANGE AND THE FRANKFURT STOCK
EXCHANGE AND AN INVESTOR'S ABILITY TO TRADE THE STOCK MAY BE LIMITED BY TRADING
VOLUME AND PRICE VOLATILITY.
The trading volume in CDT's common stock has been relatively limited. A
consistently active trading market for its common stock may not continue on the
OTC market or on the Alternative Investment Market of the London Stock Exchange.
The average daily trading volume in the common stock on the OTC market for the
month ended January, 2006 was approximately 4,140 shares. The average daily
trading volume in the common stock on Alternative Investment Market of the
London Stock Exchange for the month ended January, 2006 was approximately 494
shares. In February 2006, clean Diesel began trading on the Frankfurt stock
exchange in Germany.
There has been significant volatility in the market prices of publicly
traded shares of emerging growth technology companies, including CDT. Factors
such as announcements of technical developments, verifications, establishment of
distribution agreements, significant sales orders, changes in governmental
regulation and developments in patent or proprietary rights may have a
significant effect on the market price of CDT's common stock. In addition,
there has been a low average daily trading volume of the common stock. To the
extent this trading pattern continues, the price of the common stock may
fluctuate significantly as a result of relatively minor changes in demand for
such shares and sales of stock by holders.
ITEM 2. PROPERTIES
FACILITIES
Clean Diesel Technologies has a 5 year lease expiring in March 2009 for
3,925 square feet of administrative office space at 300 Atlantic Street,
Stamford, Connecticut. The annual cost of the lease including rent, utilities
and parking is approximately $125,000. CDT has a lease for 400 feet of office
space outside London, UK through September 2007 at an annual cost of
approximately $33,000. Clean Diesel Technologies also leases 2,750 square feet
of warehouse space in Milford, Connecticut. The annual cost of the lease
excluding utilities is estimated at $20,000 and runs through July 2008.
PATENTS AND TECHNOLOGY ASSIGNMENTS
CDT's technology is comprised of patents, patent applications, trade or
service marks, data, and know-how. This technology was acquired by assignment
from Fuel Tech or developed internally. The assignment agreement provides for
annual royalties of 2.5% of gross revenues derived from the sale of the Platinum
Plus FBC, commencing in 1998 and terminating in 2008. Clean Diesel Technologies
may at any time terminate this royalty obligation by payment to Fuel Tech of
amounts in 2006 of $3.3 million, in 2007 of $2.2 million or $1.1 million in
2008. CDT, as owner, maintains the technology at its expense.
During 2005, Clean Diesel Technologies filed 10 additional US patent
applications and 2 foreign patent applications. In addition Clean Diesel
acquired 11 foreign granted patents and 2 US and 8 foreign patent applications
from Mitsui. Clean Diesel Technologies now has a total of 26 US patents
granted and 106 foreign patents. There are currently 17 US and 65 foreign patent
applications pending. The patents expire in various years through 2025. These
patents and patent applications cover the means of controlling the four
principal emissions from diesel engines (NOx, particulates, CO, and HC).
ITEM 3. LEGAL PROCEEDINGS
Clean Diesel Technologies is not involved in any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no submissions of matter to a vote of security holders in
the fourth quarter of 2005.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
COMMON STOCK
Clean Diesel Technologies' Common Stock is traded in the US on the
over-the-counter (OTC) market, on the London Stock Exchange through the
Alternative Investment Market (AIM) and in Germany on the Frankfurt stock
exchange. Reports of transactions of Clean Diesel Technologies' shares are
available on the OTC Electronic Bulletin Board (Symbol CDTI), on the AIM (Symbol
CDT and CDTS) and on the Frankfurt exchange (Symbol CDI). At December 29, 2005
there were 369 registered holders and approximately 750 beneficial holders of
Common Stock.
13
No dividends have been paid on CDT's Common Stock and Clean Diesel
Technologies does not intend to pay dividends on these shares in the foreseeable
future. Prices indicated below with respect to the Clean Diesel share price
include inter-dealer prices , without retail mark up, mark down or commission
and may not necessarily represent actual transactions.
OTC LONDON STOCK EXCHANGE
BULLETIN BOARD AIM
(IN US$) (IN GBP)
STOCK PRICE DATE: HIGH LOW HIGH LOW
----------------- ------- -------- ----------- ---------
1st Quarter 2004. . . 3.38 2.80 1.90 1.35
2nd Quarter 2004. . . 2.90 2.00 1.45 1.18
3rd Quarter 2004. . . 3.19 2.00 1.30 0.86
4th Quarter 2004. . . 3.60 1.50 1.40 0.90
1st Quarter 2005. . . 1.90 1.15 0.90 0.48
2nd Quarter 2005. . . 2.30 1.01 0.97 0.33
3rd Quarter 2005. . . 1.95 1.20 0.92 0.50
4th Quarter 2005. . . 1.80 1.00 0.55 0.41
SALES AND USES OF UNREGISTERED SECURITIES DURING THE PERIOD
Pursuant to a Regulation S exemption for offshore placements and Regulation
D exemption for private placements to U.S. accredited investors, Clean Diesel
Technologies sold, effective November 4, 2005, 8.2 million of its Common Stock.
The price of the Common Stock was 0.40 sterling (GBP) per share (approximately
$.70 per share). The proceeds of the Common Stock issuance, $5.5 million net
of $232,000 in expenses, will be used for the general corporate purposes of
Clean Diesel Technologies.
Pursuant to a Regulation S exemption with respect to an offshore placement,
Clean Diesel Technologies sold, effective October 8, 2004, 426,500 shares of its
Common Stock. The price of the Common Stock was 1.025 sterling (GBP) per share
(approximately $1.83 per share). The proceeds of the Common Stock issuance,
$754,000, net of $25,000 in expenses and including $135,400 of exchanged
deferred salary for the retired CEO, was used for the general corporate purposes
of Clean Diesel Technologies.
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 $1.83 per share). The proceeds of the Common Stock
issuance, $1.789 million, net of $65,000 in expenses, was used for the general
corporate purposes of Clean Diesel Technologies.
ITEM 6. SELECTED FINANCIAL DATA
Clean Diesel Technologies was incorporated on January 19, 1994, as a wholly
owned subsidiary of Fuel Tech. Effective December 12, 1995, Fuel Tech completed
a Rights Offering of CDT's common stock, with Fuel Tech retaining a 27.6%
ownership interest in Clean Diesel Technologies. In 2005 and 2004, CDT obtained
$5.5 million and $2.5 million of proceeds, respectively, through private
placement sales of its common stock. In addition in 2005 the Company had an
additional $0.5 of subscription receivable relating to the 2005 private
placement which was received by the company in 2006. As a result of the
additional stock transactions, Fuel Tech's 1,825,119 shares of CDT's common
stock represent approximately a 7.0% interest in Clean Diesel Technologies at
December 31, 2005.
As discussed elsewhere herein, prior to 2000, Clean Diesel Technologies was
a development-stage business. The following selected data are derived from the
financial statements of CDT. The data should be read in conjunction with the
financial statements, related notes and other financial information herein.
14
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
STATEMENTS OF OPERATIONS DATA (in thousands, except per share data)
Additive revenue $ 411 $ 299 $ 212 $ 40 $ 114
Hardware revenue 349 369 161 102 62
License and royalty revenue 52 54 194 299 1,424
------------------ -------- -------- --------
Total revenues 812 722 567 441 1,600
COSTS AND EXPENSES:
Cost of revenue 471 455 219 86 117
General and administrative 4,963 3,962 2,695 2,291 1,858
Research and development 439 506 855 693 365
Patent amortization and other expense 170 90 58 43 196
------------------ -------- -------- --------
Loss from operations (5,231) (4,291) (3,260) (2,672) (936)
Foreign currency exchange gain(loss) (221) 101 -- -- --
Interest income/(expense), net 26 47 15 30 (170)
------------------ -------- -------- --------
Loss before preferred stock dividend (5,426) (4,143) (3,245) (2,642) (1,106)
Preferred stock dividend (non-cash) -- -- -- -- (621)
Preferred stock conversion premium -- -- -- -- (1,276)
------------------ -------- -------- --------
Net loss $(5,426) $(4,143) $(3,245) $(2,642) $(3,003)
----------======== ======== ======== ========
Basic and diluted loss per common share $ (0.30) $ (0.26) $ (0.26) $ (0.23) $ (1.08)
Weighted-average shares outstanding 18,389 16,071 12,721 11,419 2,777
-----------------------------------------------
2005 2004 2003 2002 2001
------------------ -------- -------- --------
BALANCE SHEET DATA (in thousands)
Current assets $ 5,505 $ 4,868 $ 7,023 $ 2,757 $ 4,612
Total assets 6,274 5,513 7,441 2,979 4,658
Current liabilities 496 391 868 223 808
Long-term liabilities 0 0 0 418 368
Working capital 5,009 4,477 6,155 2,534 3,804
Stockholders' equity 5,778 5,122 6,573 2,338 3,482
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Prior to 2000, Clean Diesel Technologies was a development-stage enterprise
and its efforts were devoted to the research and development of platinum fuel
catalysts and nitrogen oxide reduction technologies to reduce emissions from
diesel engines. During December 1999, CDT received its EPA registration for its
platinum-cerium product and in early 2000 completed its first commercial sales;
accordingly, in the opinion of management, Clean Diesel Technologies was no
longer a development-stage enterprise. Although the Company has been unable to
generate positive cash flows, it has made significant progress in
commercializing its technologies.
RESULTS OF OPERATIONS
2005 VERSUS 2004
Revenues and cost of revenue were $812,000 and $471,000, respectively, in 2005
versus $722,000 and $455,000, respectively, in 2004. The revenues consist of
the following:
15
(in thousands) 2005 2004 2003
------ ------ ------
REVENUE:
Additive $ 411 $ 299 $ 212
Hardware 349 369 161
License and royalty 52 54 194
----------------------
Total revenue $ 812 $ 722 $ 567
In the foregoing table "Additive" includes the Platinum Plus FBC products
and concentrate; and "Hardware" includes the EPA verified Purifier System, ARIS
injectors and dosing systems. CDT 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. The Platinum Plus
FBC is registered with the EPA.
Additive revenue has increased as a result of successful demonstration
programs and sales of the verified Purifier System which requires the use of
Platinum Plus FBC. Both further penetration of the European market and increased
sales to key beverage delivery and waste hauling customers relating to a grant
from the State of Pennsylvania, increased Clean Diesel's additive revenue.
Hardware and license and royalty revenues remained relatively constant.
CDT's business strategy is to sell Platinum Plus FBC concentrate and finished
product to distributors, resellers and end users. The Company's ARIS 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. Clean Diesel is also selling finished ARIS systems to
potential ARIS licensees. CDT currently has an exclusive license agreement for
both stationary and mobile ARIS applications with DENOX Inc. of Japan
(transferred in 2005 from Mitsui Ltd.). CDT has a nonexclusive license for both
stationary and mobile ARIS applications in the United States with Combustion
Components Associates of Monroe, Connecticut. 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. Clean Diesel acquired the rights to
proprietary technology for catalyzed wire mesh filters from Mitsui Ltd. in 2005.
Clean Diesel plans to license the rights to the catalyzed wire mesh technology
as well as sell finished filters for use with the Platinum Plus FBC.
General and administrative expenses increased to $4,963,000 in 2005 from
$3,962,000 in 2004 as summarized in the following table:
(in thousands) 2005 2004 2003
------- ------- -------
Compensation and benefits $ 3,319 $ 2,535 $ 1,650
Occupancy 485 420 320
Professional 831 740 425
Other 328 267 300
------- ------- -------
Total general and administrative expense $ 4,963 $ 3,962 $ 2,695
Compensation and benefit expense increased as a result of increases in
management salaries and related expenses. CDT hired a Chief Technology Officer
in August 2005. An additional director was added to the Board in 2005.
Occupancy increased in 2005 as a result of additional rent and related expenses
in both the US and Europe. Professional fees including financial advisory fees
increased in 2005 along with marketing activities in Europe and Asia.
Research and development expenses decreased to $439,000 in 2005 from
$506,000 in 2004. The decrease in research and development related to the
transition to commercial selling efforts in 2004 was partially offset by
additional costs incurred for testing required by the EPA and additional
hardware systems testing.
Patent amortization and other costs increased to $170,000 in 2005 versus
$90,000 in 2004. The 2005 increase is related to writing off of some patents in
2005,offset by additional patent applications including the acquisition of
additional patents from the Mitsui Company of Japan relating to catalyzed wire
mesh filter technology and the higher amortization related to prior years'
capitalized costs.
Interest income decreased to $26,000 in 2005 from $47,000 in 2004 due to
the lower amount of invested funds prior to the private placement funding
received at the end of 2005.
16
RESULTS OF OPERATIONS
2004 VERSUS 2003
Revenues and cost of revenue were $722,000 and $455,000, respectively, in 2004
versus $567,000 and $219,000, respectively, in 2003. The revenues consist of
the following:
(in thousands) 2004 2003 2002
------ ------ ------
REVENUE:
Additive $ 299 $ 212 $ 40
Hardware 369 161 102
License & royalty 54 194 299
----------------------
Total revenue $ 722 $ 567 $ 441
In the foregoing table "Additive" includes the Platinum Plus FBC products
and concentrate; and "Hardware" includes the EPA verified Purifier System, ARIS
injectors and dosing systems.
CDT 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 as a result of successful demonstration
programs and sales of the verified Purifier System which requires the use of the
Platinum Plus FBC. The increase in hardware sales is primarily the result of
the EPA- sponsored State of Maine school bus retrofit program and increased ARIS
injector sales to Mitsui.
Clean Diesel Technologies identified a market opportunity for urea
selective catalytic reduction (SCR) systems for use with stationary diesel
engines primarily for power generation. The ARIS 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 NOx reduction system to other companies for an
up-front fee for the technology and information transfer and a separate ongoing
royalty per unit payment. CDT currently has an exclusive license agreement for
both stationary and mobile ARIS applications with Mitsui Ltd. for Japan. CDT has
a nonexclusive 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.
General and administrative expenses increased to $3,962,000 in 2004 from
$2,695,000 in 2003 as summarized in the following table:
(in thousands) 2004 2003 2002
------- ------- -------
Compensation and benefits $ 2,535 $ 1,650 $ 1,335
Occupancy 420 320 265
Professional 740 425 325
Other 267 300 366
------- ------- -------
Total general and administrative expenses $ 3,962 $ 2,695 $ 2,291
Compensation and benefit expense increased as of the result of several
staff additions in the US and Europe related to increased sales and marketing
efforts and a new CEO. Occupancy increased in 2004 as a result of the European
activity. Professional fees also increased primarily due to the SEC secondary
registration process and fund-raising, which was terminated in the fall of 2004.
Research and development expenses decreased to $506,000 in 2004 from
$855,000 in 2003. The decrease in research and development in 2004 is due to the
2003 verification testing relating to CARB and EPA testing and the transition to
commercial selling efforts in 2004.
Patent amortization and other costs increased to $90,000 in 2004 versus
$58,000 in 2003. The 2004 increase is related to writing off some patents in
2004 and the higher amortization related to prior years' capitalized costs.
17
Interest income increased to $47,000 in 2004 from $15,000 in 2003 due to
the higher amount of invested funds related to the November 2003 fund-raising.
LIQUIDITY AND SOURCES OF CAPITAL
Prior to 2000, Clean Diesel Technologies was primarily engaged in research
and development and has incurred losses since inception aggregating $34,841,000
(excluding the effect of the preferred stock dividends). CDT expects to incur
losses through the foreseeable future as it further pursues its
commercialization efforts. Although CDT has begun selling limited quantities of
Platinum Plus additive and Purifier Systems and generating ARIS licensing and
royalties, revenue to date has been insufficient to cover operating expenses,
and Clean Diesel Technologies continues to be dependent upon sources other than
operations to finance its working capital requirements.
For the years ended 2005, 2004 and 2003, Clean Diesel Technologies used
cash of $4,956,000, $4,312,000, and $2,744,000, respectively, in operating
activities.
At December 31, 2005, and December 31, 2004, Clean Diesel Technologies had
cash and cash equivalents of $4,513,000 and $4,265,000, respectively. The
increase in cash and cash equivalents in 2005 from 2004 was due to the timing of
Clean Diesel's fundraising. Working capital increased to $4,521,000 at December
31, 2005, from $4,477,000 at December 31, 2004. CDT anticipates incurring
additional losses through at least 2006 as it further pursues its
commercialization efforts. At the date of this report, Clean Diesel Technologies
has cash resources estimated to be sufficient for its needs into the first
quarter of 2007.
In November 2005, Clean Diesel Technologies received $5.5 million (net of
$232,000 in expenses) through a private placement of 8.174 million shares of its
common stock on AIM.
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 on AIM. As part of the transaction, retired CEO Jeremy Peter-Hoblyn
exchanged his deferred salary of $135,400 for 73,587 shares of CDT common stock.
In September 2004, Clean Diesel Technologies received $1.789 million (net
of $65,000 in expenses) through a private placement of 1,000,000 shares of its
common stock on AIM.
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 on AIM.
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 on AIM.
In October 2002, Clean Diesel Technologies received $1.356 million (net of
$69,000 in expenses) through a private placement of 704,349 shares of its common
stock on AIM.
In December 2001, Clean Diesel Technologies received $3.721 million (net of
expenses) through a private placement of 2,580,664 shares of its common stock.
In conjunction with the private placement, CDT converted all of its Series A
preferred stock to common stock. All of CDT's common stock shares were
registered to trade on the AIM of the London Stock Exchange.
In April 2003, Clean Diesel Technologies completed a nonexclusive license
agreement with Combustion Component Associates Inc. (CCA) of Monroe,
Connecticut, for the mobile ARIS technology in the US. Under terms of the
agreement CCA agreed to pay CDT a nonrefundable $150,000 license fee and
committed to spend an additional $100,000 in developing, testing and
demonstrating ARIS mobile prototypes. CDT recognized the $150,000 license
revenue in the second quarter of 2003, as there are no ongoing services required
to be performed by CDT.
In September 2004, CCA was granted an additional limited two-year
nonexclusive ARIS stationary license for the US market. The license fee is due
at 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 system. CDT did
not receive any revenue from this license in 2004 or 2005.
In December 2002, Clean Diesel Technologies completed an additional
exclusive license agreement with Mitsui for the mobile ARIS technology for
Japan. Under terms of the agreement Mitsui agreed to pay CDT a $250,000 license
fee
18
and Mitsui committed to spend an additional $200,000 in developing, testing and
demonstrating ARIS mobile prototypes. CDT recognized the $250,000 of license
revenue in the fourth quarter of 2002.
In August 2001, Clean Diesel Technologies 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, CDT received nonrefundable
up-front license payments of $495,000 and will receive ongoing standard
royalties of $1,500 to $2,500 on each system sold by Mitsui. Mitsui also had an
option to license the ARIS technology for mobile applications in Japan for an
additional license fee.
FUTURE CONTRACTUAL OBLIGATIONS
Less than 1 to 3 4 to 5 Over 5
(in thousands) Total 1 year years years years
------ ---------- ------- ------- -------
Operating Leases $ 525 $ 179 $ 346 $ -- $ --
------ ---------- ------- ------- -------
Total $ 525 $ 179 $ 346 $ -- $ --
The operating lease consists of a five-year lease for administrative space
in Stamford, Connecticut, a four-year lease for warehouse space in Milford,
Connecticut, and a 27-month office lease in Whyteleafe, England.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results can differ from those estimates. The
Company believes that of its significant accounting policies (see Note 1 to the
Financial Statements), the following may involve a higher degree of judgment and
complexity.
REVENUE RECOGNITION
Clean Diesel Technologies generates revenue from the sale of additive
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.
Clean Diesel Technologies' shipping terms are FOB shipping point and CDT
recognizes revenue when its products are received unless the purchase order or
contract specifically requires the Company to provide installation for hardware
purchases. 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.
The Company sells to end-user fleets, municipalities and construction
companies as well as fuel resellers, additive distribution companies and
emission reduction companies.
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.
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.
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 amount of any
patents deemed not commercial or cost effective are written off.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the opinion of management, with the exception of exposure to
fluctuations in the cost of platinum and the United Kingdom exchange rate, CDT
is not subject to any significant market risk exposure. See "Risk Factors of the
Business- Platinum Price" in Item 1, "Business."
19
Clean Diesel Technologies generally receives most income in United States
dollars. CDT typically makes several monthly payments in various foreign
currencies for salary expense, patent expenses, product tests and registration,
local marketing and promotion, and consultants. Clean Diesel also received a
portion of its fundraising proceeds in British Sterling, which is subject to
foreign currency fluctuations.
NEW ACCOUNTING PRONOUNCEMENTS
FAS Statement 154, "Accounting Changes and Error Corrections" was issued in
May 2005 and is effective for fiscal years beginning after December 15, 2005.
Unless impracticable, the statement requires the retrospective application of
changes in accounting principle to prior periods' financial statements versus
recognizing the effect in net income of the period of change. The Company does
not expect the statement to have a material impact on its financial statements.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Clean Diesel Technologies, Inc.
We have audited the accompanying balance sheets of Clean Diesel Technologies,
Inc. as of December 31, 2005 and 2004 and the related statements of operations,
changes in stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2005. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Clean Diesel Technologies, Inc.
as of December 31, 2005 and 2004 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2005 in
conformity with accounting principles generally accepted in the United States of
America.
Eisner LLP
New York, New York
February 15, 2006, except for Note 4 as to which the date is March 3, 2006
21
CLEAN DIESEL TECHNOLOGIES, INC.
BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
--------- ---------
2005 2004
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,513 $ 4,265
Accounts receivable, net of allowance of $11 and $12 in 2005 and
2004, respectively 125 145
Inventories 285 387
Other current assets 94 71
Subscription receivable, net 488 --
--------- ---------
TOTAL CURRENT ASSETS 5,505 4,868
Patents, net 567 418
Fixed assets, net of accumulated depreciation of $259 in 2005 and
$188 in 2004, respectively 175 200
Other assets 27 27
--------- ---------
TOTAL ASSETS $ 6,274 $ 5,513
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Deferred revenue $ 9 $ --
Accounts payable and accrued expenses 487 391
--------- ---------
TOTAL CURRENT LIABILITIES 496 391
Commitments (Note 6)
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.05 per share,
authorized 100,000, no shares issued and outstanding --
Common stock, par value $0.05 per share, authorized
30,000,000 shares, issued and outstanding 25,369,358
and 17,165,868 shares, respectively 1,268 858
Common stock, par value $0.05 per share, subscribed and to be
issued; 705,113 shares in 2005 35
Additional paid-in capital 44,068 38,431
Accumulated deficit (39,593) (34,167)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 5,778 5,122
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,274 $ 5,513
========= ==========
<FN>
See accompanying notes.
22
CLEAN DIESEL TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
Revenue: 2005 2004 2003
---------- ---------- ----------
Additive revenue $ 411 $ 299 $ 212
Hardware revenue 349 369 161
License and royalty revenue 52 54 194
---------- ---------- ----------
Total revenue 812 722 567
Costs and expenses:
Cost of revenue 471 455 219
General and administrative 4,963 3,962 2,695
Research and development 439 506 855
Patent amortization and other expense 170 90 58
---------- ---------- ----------
Loss from operations (5,231) (4,291) (3,260)
Other income (expense)
Foreign currency exchange gain (loss) (221) 101 --
Interest income 26 47 15
---------- ---------- ----------
Net loss $ (5,426) $ (4,143) $ (3,245)
========== ========== ==========
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.30) $ (0.26) $ (0.26)
========== ========== ==========
WEIGHTED-AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 18,389 16,071 12,721
========== ========== ==========
<FN>
See accompanying notes.
23
CLEAN DIESEL TECHNOLOGIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS)
Common Stock
Common Stock To be Issued Additional Total
------------------- ------------------- Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
-------- --------- -------- --------- ---------- ------------- ---------------
Balance at December 31, 2002 11,968 $ 598 -- -- $ 28,519 $ ( 26,779) $ 2,338
Net loss for year -- -- -- (3,245) (3,245)
Exercise of warrants 17 1 (1) -- --
Issuance of common stock 3,679 184 7,265 -- 7,449
Payment of directors' fees in
common stock 13 1 26 -- 27
Exercise of warrants 2 -- 4 -- 4
-------- --------- -------- --------- ---------- ------------- ---------------
Balance at December 31, 2003 15,679 $ 784 -- -- $ 35,813 $ ( 30,024) $ 6,573
Net loss for year -- -- -- (4,143) (4,143)
Options exercised 34 2 87 -- 89
Issuance of common stock 1,427 71 2,472 -- 2,543
Payment of directors' fees in 26 1 56 57
common stock --
Broker fee credit from 2003 3 3
-------- --------- -------- --------- ---------- ------------- ---------------
Balance at December 31, 2004 17,166 $ 858 -- -- $ 38,431 $ ( 34,167) $ 5,122
NET LOSS FOR YEAR (5,426) (5,426)
OPTIONS EXERCISED 2 -- 2 -- 2
ISSUANCE OF COMMON STOCK 8,174 409 5,113 -- 5,522
COMMON STOCK SUBSCRIBED AND
TO BE ISSUED 705 35 453 488
-------- --------- -------- --------- ---------- ------------- ---------------
PAYMENT OF DIRECTORS' FEES IN 27 1 69 -- 70
COMMON STOCK
-------- --------- -------- --------- ---------- ------------- ---------------
BALANCE AT DECEMBER 31, 2005 25,369 $ 1,268 705 $ 35 $ 44,068 $ (39,593) $ 5,778
======== ========= ======== ========= ========== ============= ===============
<FN>
See accompanying notes.
24
CLEAN DIESEL TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOW (IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
2005 2004 2003
----------- ----------- -----------
OPERATING ACTIVITIES
Net loss $ (5,426) $ (4,143) $ (3,245)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 163 132 81
Write-off of inventory and patents and bad debt 89 19 --
Non-cash compensation expense for stock options -- 88 --
Changes in operating assets and liabilities:
Accounts receivable 7 (40) 169
Inventories 59 (76) (6)
Other current assets and security deposits (23) (7) 3
Deferred compensation and pension benefits -- (306) --
Accounts payable and accrued expenses 175 21 254
----------- ----------- -----------
Net cash used in operating activities (4,956) (4,312) (2,744)
----------- ----------- -----------
INVESTING ACTIVITIES
Patent costs (235) (186) (192)
Purchase of fixed assets (85) (164) (85)
----------- ----------- -----------
Net cash used in investing activities (320) (350) (277)
----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from exercise of stock options 2 1 4
Proceeds from broker fee credit -- 3 --
Proceeds from issuance of common stock, net 5,522 2,408 7,449
----------- ----------- -----------
Net cash provided by financing activities 5,524 2,412 7,453
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 248 (2,250) 4,432
Cash and cash equivalents at beginning of the year 4,265 6,515 2,083
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF THE YEAR $ 4,513 $ 4,265 $ 6,515
=========== =========== ===========
NON-CASH FINANCING ACTIVITIES
Payment of accrued directors' fees in common stock $ 70 $ 57 $ 28
Stock issued as payment for deferred compensation 135 --
Common stock subscribed 488 -- --
<FN>
See accompanying notes.
25
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND BASIS OF PRESENTATION
Clean Diesel Technologies, Inc. ("CDT" or "Clean Diesel" or "Company"),
located in Stamford Connecticut was incorporated in the State of Delaware on
January 19, 1994. Clean Diesel is a specialty chemical and energy technology
company supplying fuel additives and proprietary systems to reduce harmful
emissions from internal combustion engines while improving fuel economy. Over
the past several years the Company has filed patents, developed its technologies
and is now commercializing Platinum Plus, a fuel borne catalyst (FBC); the
Purifier System, which includes the FBC combined with a traditional diesel
oxidation catalyst; the FBC/catalyzed wire mesh filter (CWMF) system; and the
ARIS NOx reduction system through a direct sales and licensing distribution
strategy. CDT is developing a network of licensed distributors to sell and
market its patented Platinum Plus FBC, EPA verified Purifier System and the EPA
verified FBC/CWMF system. CDT continues to market and sell the FBC, Purifier
and CWMF systems to key corporate fleets to generate demand for its
technologies. CDT's strategy for the ARIS NOx reduction system is to continue
licensing the patented technology to engineering and automotive companies for an
up-front license fee and an ongoing royalty. The success of CDT's technologies
will depend upon the commercialization opportunities of the technologies,
governmental regulations, and corresponding foreign and state agencies. CDT's
raw materials are maintained offsite and the majority of its blending and
manufacturing is performed by third parties.
During 2005, 2004 and 2003, the Company incurred net losses of approximately
$5.4 million, $4.1 million and $3.2 million, respectively, and at December 31,
2005, has an accumulated deficit of approximately $40 million. In addition, net
cash used in operating activities for the year ended December 31, 2005, was
approximately $5 million. Commencing in 2006, the Company initiated a plan to
reduce administrative overhead, primarily through the reduction of cash
compensation to certain employees and the elimination of several consultants.
In addition the Company completed a private placement of its common stock and
raised net proceeds of approximately $6.0 million of which $5.5 million was
received in the fourth quarter of 2005 and $0.5 million was received in the
first quarter of 2006. Based on a forecast of 2006 cash flows and factoring in
cash on hand at December 31, 2005, of $4.5 million and the Company's plans as
described above, management believes that the company will have sufficient
working capital to fund its operations in 2006.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS AND FINANCIAL INSTRUMENTS
Clean Diesel Technologies considers all highly liquid investments with
original maturities of three months or less when purchased to be cash
equivalents. At December 31, 2005, substantially all of CDT's cash and cash
equivalents were on deposit with two financial institutions. All financial
instruments are reflected in the accompanying balance sheets at amounts that
approximate fair market value.
FOREIGN CURRENCY
The US dollar is considered the functional currency for CDT. CDT maintains
a UK bank account for its UK representative office. Foreign currency
translation gains or losses are recognized in the period incurred, which is
included in other income/(expense) in the accompanying statements of operations.
CDT recorded a foreign currency loss of $221,000 on its UK bank holding in 2005
versus a gain of $101,000 in 2004.
INVENTORIES
Inventories are stated at the lower of cost or market and consist of the
following:
(in thousands) 2005 2004
----- -----
Finished Platinum Plus FBC $ 59 $ 142
Platinum concentrate/metal 119 150
Hardware (ARIS and Purifier) 55 77
Other 52 18
----- -----
Total inventory $ 285 $ 387
26
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
REVENUE RECOGNITION
Clean Diesel 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 System.
CDT shipping terms are FOB shipping point, but revenue is recognized when
its products are received and collections are reasonably assured unless the
purchase order or contract specifically requires CDT to provide installation for
hardware purchases. 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.
For 2005, a single customer accounted for 24% of Clean Diesel's revenue.
For 2004, a different customer accounted for 35% of Clean Diesel's revenue. For
2003, two customers, including the 2004 key customer, accounted for 59% of Clean
Diesel's revenue.
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.
In August 2001, Clean Diesel Technologies completed an exclusive license
agreement with Mitsui Ltd. for CDT's ARIS 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.
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.
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 the same per unit royalties and terms of the
original license agreement.
In April 2003, Clean Diesel Technologies completed a nonexclusive 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 nonrefundable license fee and the licensee committed to spend an
additional $100,000 in developing, testing and demonstrating ARIS mobile
prototypes. CDT will also receive 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 nonexclusive 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. CDT did not
recognize any revenue from this license in 2004 and 2005.
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:
27
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(in thousands) 2005 2004 2003
------ ------ ------
REVENUE:
US $ 675 $ 468 $ 364
UK/Europe 48 2 9
Asia 89 252 194
------ ------ ------
Total revenue $ 812 $ 722 $ 567
Patents held by Clean Diesel consist of capitalized patent costs net of
accumulated amortization and are as follows:
(in thousands) 2005 2004
----- -----
US patents, net $ 138 $ 79
Foreign patents, net 429 339
----- -----
Total patents, net $ 567 $ 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, ranges from
2006 to 2025.
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:
(in thousands) 2005 2004 2003
------ ------ ------
Compensation and benefits $3,319 $2,535 $1,650
Occupancy 485 420 320
Professional 831 740 425
Other 328 267 300
------ ------ ------
Total general and administrative expense $4,963 $3,962 2,695
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 as amended, CDT's net loss and basic and
diluted loss per common share would have been as follows on a pro forma basis:
2005 2004 2003
-------- -------- --------
Net loss attributable to common stockholders as reported $(5,426) $(4,143) $(3,245)
Add: Stock-based compensation expense included in reported
net loss, net of related tax effects -- 88 --
Deduct: Total stock-based employee compensation expense
determined under fair value-based method for all awards,
net of related tax effects (875) (826) (1,176)
----------------------------
Pro forma net loss attributable to common stockholders $(6,301) $(4,881) $(4,421)
Net loss per share attributable to common stockholders:
Basic and diluted net loss per common share-as reported $ (0.30) $ (0.26) $ (0.26)
Basic and diluted per common share-pro forma $ (0.34) $ (0.30) $ (0.35)
28
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In December 2004, the FASB issued SFAS No 123R, "Share-Based Payment,"
which requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement as an operating
expense, based on their fair values on the grant date. Pro forma disclosure is
no longer an alternative. That cost will be recognized as compensation expense
over the service period, which would normally be the vesting period of the
options. The effective date of SFAS No. 123R for the Company is January 1, 2006.
As permitted by SFAS No. 123, the Company currently accounts for share-based
payments to employees using APB Opinion No. 25's intrinsic value method and, as
such, recognizes no compensation cost for employee stock options unless options
granted have an exercise price below market value on the date of grant.
Accordingly, the adoption of SFAS No. 123R's fair value method could have a
significant impact on the Company's results of operations, although it will have
no impact on the Company's overall financial position. The impact of adoption
of SFAS No. 123R cannot be predicted at this time because it will depend on
various factors including levels of share-based payments granted in the future.
In March 2005, the Board of Directors elected to vest all employees'
outstanding, unvested 2003 option grants and up to 25,000 unvested 2004 option
grants. Since the market price at the time of the vesting was below the option
grant price, no additional expense was recognized on the Company's statement of
operations. The remaining compensation value for the 363,000 of accelerated
unvested option grants was $498,000 and is included in the pro forma table
above. 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 in future periods associated with these
option grants.
The fair value of each option grant, for pro forma disclosure purposes, was
estimated based on the date of grant using the modified Black-Scholes
option-pricing model with the following weighted-average assumptions:
2005 2004 2003
--------- --------- ---------
Expected dividend yield 0.0% 0.0% 0.0%
Risk-free interest rate 4.2% 4.2% 4.1%
Expected volatility 106.9% 99.4% 99.4%
Expected life of option 4 YEARS 4 years 4 years
The weighted-average fair value per option granted was calculated as $0.86,
$1.39 and $2.10 in 2005, 2004 and 2003, respectively.
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 for 2005, 2004 and 2003 does not include common share equivalents
associated with 3,246,000, 2,668,000 and 2,248,000 options, respectively, and
507,000, 532,000 and 557,000 warrants, respectively, as the result would be
anti-dilutive.
3. INCOME TAXES
The Company follows the liability method of accounting for income taxes. Such
method requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse.
At December 31, 2005, Clean Diesel had tax losses available for offset
against future years' taxable income of approximately $32.5 million, expiring
between 2009 and 2025. Temporary differences were insignificant as of the
balance sheet dates. CDT has provided a full valuation allowance to reduce the
related deferred tax asset to zero because of the uncertainty relating to
realizing these tax benefits in the future.
29
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Under the provisions of the United States Tax Reform Act of 1986,
utilization of CDT's US federal tax loss carry forwards for the period prior to
December 12, 1995, may be limited as a result of the ownership change in excess
of 50% related to the 1995 Fuel Tech Rights Offering. Losses subsequent to the
aforementioned date may be limited due to cumulative ownership changes in any
three-year period.
4. STOCKHOLDERS' EQUITY
During 2005, Clean Diesel received proceeds of $5.5 million (net of
expenses) through a private placement of approximately 8.2 million shares of its
common stock on the AIM of the London Stock Exchange. In addition, Clean Diesel
received subscriptions for an additional $487,500 (net of expense) related to
the above transaction for 0.7 million shares of its common stock of which all
$487,500 had been received by March 3, 2006. In 2004, Clean Diesel received
cash proceeds of $2.4 million (net of expenses) through two private placements
totaling approximately 1.4 million shares of its common stock on the AIM of the
London Stock Exchange. In 2003, proceeds of $7.5 million (net of expenses)
through two private placements totaling approximately 3.7 million shares of its
common stock on the AIM of the London Stock Exchange were received.
In June 2005, July 2004 and October 2003, CDT issued 27,179, 26,031 and
13,276 shares, respectively, of common stock to its Board of Directors in lieu
of approximately $70,000, $56,500 and $27,500 of directors' fees pertaining to
their services for the years ended December 31, 2004, 2003 and 2002. The share
price used represented the average of CDT's quarter-end high and low trading
prices. Such directors' fees had been accrued and charged to expense during
2004, 2003 and 2002.
5. STOCK OPTIONS AND WARRANTS
Clean Diesel maintains a stock award plan, the 1994 Incentive Plan (the
"Plan"). Under the Plan, awards may be granted to participants in the form of
incentive stock options, non-qualified stock options, stock appreciation rights,
restricted stock, performance awards, bonuses or other forms of share-based or
non-share-based awards, or combinations thereof. CDT grants awards at fair
market value on the date of grant with expiration dates of typically 10 years.
Participants in the Plan may include CDT's directors, officers, employees,
consultants and advisors (except consultants or advisors in capital-raising
transactions) as the directors determine are key to the success of the business.
The percentage of outstanding common shares of CDT used to determine the maximum
number of awards to participants is 17.5%. In general, the policy of the Board
was to grant stock options vesting in three equal portions on the first through
third anniversaries of the grant date for grants prior to 1997, and in equal
portions on the grant date and the first and second anniversaries of the grant
date for grants awarded after 1997.
The following table presents a summary of Clean Diesel's stock option
activity and related information for the years ended December 31:
2005 2004 2003
---------------------------------------------------------------- -------------------------------
OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE
(000'S) EXERCISE PRICE (000'S) EXERCISE PRICE (000'S) EXERCISE PRICE
---------------------------------------------------------------- -------------------------------
Outstanding, beginning
of year 2,668 $ 2.39 2,248 $ 2.45 1,567 $ 2.60
Granted 674 1.17 469 1.97 681 2.12
Exercised (2) 0.90 (49) 1.22 -- --
Forfeited (94) 4.93 -- -- -- --
---------------------------------------------------------------- -------------------------------
Outstanding, end
of year 3,246 $ 2.06 2,668 $ 2.39 2,248 $ 2.45
================================================================ ===============================
Exercisable, end
of year 2,835 $ 2.19 2,197 $ 2.47 1,711 $ 2.49
Weighted-average fair value of
options granted during the year $ 0.86 $ 1.39 $ 2.10
30
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about stock options outstanding at
December 31, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
===================================================================== ============================
WEIGHTED-AVERAGE
RANGE OF NUMBER OF REMAINING CONTRACTUAL WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
EXERCISE PRICES OPTIONS LIFE IN YEARS EXERCISE PRICE OPTIONS EXERCISE PRICE
- --------------------------------------------------------------------- ----------------------------
$ .20 - $2.49 2,177,437 7.55 $1.54 1,766,435 $1.62
2.50 - 4.63 1,063,500 5.42 3.11 1,063,500 3.11
5.63 - 6.82 5,000 0.42 5.63 5,000 5.63
- ---------------------------------------------------------------------------------------------------
$0.20 - $6.82 3,245,937 6.84 $2.06 2,834,935 $2.19
In conjunction with the September 2003 stock offering, Clean Diesel granted
the private placement investors 230,240 warrants (approximately one warrant for
each 10 shares of common stock purchased) at the same $1.63 price as the common
stock issued.
The following table presents a summary of Clean Diesel warrant activity and
related information for the years ended December 31:
Clean Diesel Warrants
2005 2004 2003
-------------------------- -------------------------- --------------------------
Warrants EXERCISE PRICE Warrants EXERCISE PRICE Warrants EXERCISE PRICE
(000'S) PER SHARE (000'S) PER SHARE (000'S) PER SHARE
-------------------------- -------------------------- --------------------------
Outstanding, beginning
of year 532 $1.50 - $10.00 557 $ 1.50 - $10.00 379 $ 1.50 - $10.00
Granted - - -- -- 230 $ 1.63
Exercised - - -- -- (19) $ 1.50 - 2.00
Forfeited or expired (25) $ 3.00 (25) $ 10.00 (33) -
----------------------------------------------------------------------------------
Outstanding, end
of year 507 $ 1.50 - $2.25 532 $ 1.50 - $10.00 557 $ 1.50 - $10.00
==================================================================================
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
================================================================ ===============================
WEIGHTED-AVERAGE
RANGE OF NUMBER OF REMAINING YEARS WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES WARRANTS EXERCISE LIFE EXERCISE PRICE EXERCISABLE PRICE
- ---------------------------------------------------------------- ------------------------------
$1.50 - $2.00 466,908 5.58 $1.73 466,908 $1.73
2.25 39,825 4.40 2.25 39,825 2.25
- ------------------------------------------------------------------------------------------
$1.50 - $2.25 506,733 5.49 $1.77 506,733 $1.77
6. COMMITMENTS
Clean Diesel is obligated under a sublease agreement through March 2009 for
its principal office, through July 2008 for its Connecticut warehouse space,
and through September 2007 for its Surrey, England, administrative space.
Annual rent including utilities is $125,000 for the US administrative space,
$21,000 for the warehouse space and $33,000 for the UK administrative space.
For the years ended December 31, 2005, 2004 and 2003, rental expense
approximated $162,000, $128,000 and $111,000, respectively.
Effective October 28, 1994, Fuel Tech granted two licenses to Clean Diesel
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 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. CDT may
terminate the royalty obligation to Fuel Tech by payment of $3.3 million in
2006, $2.2 million in 2007 or $1.1 million in 2008. CDT as assignee and owner
will maintain the technology at its own expense. Royalties incurred in 2005,
2004 and 2003 amounted to $10,300 $7,450 and $4,800, respectively. Royalties
payable to Fuel Tech at December 31, 2005, 2004 and 2003 were $10,300, $7,450
and $4,800, respectively.
7. RELATED PARTY TRANSACTIONS
Clean Diesel has a Management and Services Agreement with Fuel Tech. The
agreement requires Clean Diesel to reimburse Fuel Tech for management, services
and administrative expenses incurred on behalf of Clean Diesel. Clean Diesel
agreed to pay Fuel Tech a fee equal to an additional 3 to10% of the costs paid
on Clean Diesel's behalf, dependent
31
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
upon the nature of the costs incurred. One Fuel Tech officer/director serves as
an officer/director of Clean Diesel. The financial statements include charges
from Fuel Tech of certain management and administrative costs, which approximate
$71,000, $69,000 and $69,000 for the years ended December 31, 2005, 2004 and
2003, respectively.
Clean Diesel had a deferred salary plan with its former Chief Executive
Officer in which he deferred $62,500 of his annual salary until CDT reaches $5
million in revenue. This agreement was terminated in March 2001 and the
executive's salary was returned to full pay. In October 2004 as part of Clean
Diesel's private placement on the AIM exchange, the former CEO exchanged all of
his outstanding $135,400 of deferred compensation for 73,587 shares of CDT's
common stock.
Clean Diesel made annual pension payments or accruals pursuant to a
deferred compensation plan on behalf of its former Chief Executive Officer. The
former CEO also agreed to defer payment of the deferred compensation plan until
the Company reached $5 million in revenue or he retired. In June 2003 the CEO
elected to discontinue his deferred compensation plan. For the year ended
December 31, 2003, $22,900 of expense was recognized in connection with the
plan. In September 2004, the CEO retired and in October 2004 the full $305,600
balance was paid.
8. MARKETING AND JOINT DEVELOPMENT AGREEMENTS
Clean Diesel and AMBAC International reached an agreement in December 1997
under which the parties will jointly share in the cost of development of the
ARIS injector for urea SCR (selective catalytic reduction).
CDT holds the exclusive marketing rights to the injector for a period of five
years subject to certain minimum purchases of injectors from AMBAC. CDT agreed
to purchase injectors exclusively from AMBAC until November 3, 2002, or to pay
AMBAC for 50% of AMBAC's development cost and a royalty on injectors made
elsewhere for CDT. No rights or licenses have been granted by either party to
the other on patents or inventions conceived prior to the agreement. However,
the parties have filed a joint patent on the specific ARIS injector. CDT has
retained all rights to its underlying patents including the fundamental
return-flow injection concept on which the US Patent Office has granted CDT a
patent.
9. RECENT ACCOUNTING PRONOUNCEMENTS
FAS Statement 154, "Accounting Changes and Error Corrections" was issued in
May 2005 and is effective for fiscal years beginning after December 15, 2005.
Unless impracticable, the statement requires the retrospective application of
changes in accounting principle to prior periods' financial statements versus
recognizing the effect in net income of the period of change. The Company does
not expect the statement to have a material impact on its financial statements.
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Ended 3/31/05 Ended 6/30/05 Ended 9/30/05 Ended 12/31/05 Total Year
Unaudited Unaudited Unaudited Unaudited 2005
---------------------------------------------------------------------------------
TOTAL REVENUE $ 192 $ 268 $ 166 $ 186 $ 812
GROSS PROFIT * 82 107 64 88 341
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS (1,191) (1,286) (1,489) (1,460) (5,426)
BASIC NET LOSS PER COMMON SHARE (0.07) (0.07) (0.09) (0.07) (0.30)
DILUTED NET LOSS PER COMMON SHARE (0.07) (0.07) (0.09) (0.07) (0.30)
32
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Ended 3/31/04 Ended 6/30/04 Ended 9/30/04 Ended 12/31/04 Total Year
Unaudited Unaudited Unaudited Unaudited 2004
---------------------------------------------------------------------------------
Total revenue $ 194 $ 93 $ 241 $ 194 $ 722
Gross profit * 62 40 92 73 267
Net loss attributable to
common stockholders (808) (885) (1,243) (1,207) (4,143)
Basic net loss per common share (0.05) (0.06) (0.08) (0.07) (0.26)
Diluted net loss per common share (0.05) (0.06) (0.08) (0.07) (0.26)
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
Note: The sum of the quarters' earnings per share may not equal the full-year per share amounts.
* Gross profit is defined as total revenue less cost of revenue.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of the date of this filing, an evaluation was performed under the
supervision and with the participation of the Company's management, including
its CEO and CFO, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on that evaluation, the
Company's management, including its CEO and CFO concluded that the Company's
disclosure controls and procedures were effective as of December 31, 2005.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
December 31, 2005.
ITEM 9B. OTHER INFORMATION
NONE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of CDT will be set
forth under the captions "Election of Directors", "Directors and Executive
Officers of Clean Diesel Technologies" and "Committees of the Board" in CDT's
Proxy Statement related to the 2006 annual meeting of stockholders (the "Proxy
Statement") and is incorporated by reference herein.
Clean Diesel has adopted a code of Ethics and Business Conduct (the "Code")
that applies to all employees, officers and Directors, including the Chief
Executive Officer, Chief Financial Officer and Controller. A copy of the code
is available free of charge on written or telephone request to the Secretary of
the Company at the address or telephone number of the Company set out in Clean
Diesel's annual report to Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item will be set forth under the caption
"Executive Compensation" in the Proxy Statement and is incorporated by reference
herein excluding, however, the information under the captions "Report of the
Board of Directors on Executive Compensation" and "Performance Graph," which is
not incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDERS MATTERS
Information required by this item will be set forth under the caption
"Principal Stockholders and Stock Ownership of Management" in the Proxy
Statement and is incorporated by reference herein.
33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item will be set forth under the captions
"Compensation Committee Interlocks and Insider Participation" and "Certain
Relationships and Related Transactions" in the Proxy Statement and is
incorporated by reference herein.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this item will be set forth under the caption
"Audit Fees" in the Proxy Statement and is incorporated by reference herein.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) (1) FINANCIAL STATEMENTS
The Financial Statements identified below and required by Part II, Item
8 of this Form 10-K are set forth above.
Report of Independent Registered Public Accounting Firm
Balance Sheets as of December 31, 2005, and 2004
Statements of Operations for the years ended December 31, 2005,
2004, and 2003
Statements of Changes in Stockholders' Equity for the years ended
December 31, 2005, 2004, and 2003
Statements of Cash Flows for the years ended December 31, 2005,
2004, and 2003
(2) FINANCIAL STATEMENT SCHEDULES
Schedules have been omitted because of the absence of the conditions under
which they are required or because the required information where material
is shown in the financial statements or the notes thereto.
34
(B) EXHIBITS
The following exhibits are, as indicated by reference symbol, filed herewith or
incorporated by refernce. Portions of Exhibits 10 (o) and 10(p) have been
omitted pursuant to a request for confidential treatment.
*3(i)(a) Restated Certificate of Incorporation of June 18, 2004.
*3(i)(b) Certificate of Elimination of Series A Convertible Preferred Stock of June 18, 2004.
*3(ii) By-Laws.
**4 Specimen Stock Certificate, Common Stock.
***10(a) Assignment of Intellectual Property Rights Fuel Tech N.V. to Platinum Plus, Inc. As of November 5, 1997.
***10(b) Assignment of Intellectual Property Rights by Fuel Tech, Inc. to Clean Diesel Technologies, Inc. as of
November 5, 1997.
***10(c) Assignment Agreement as of November 5, 1997 among Platinum Plus, Inc., Fuel-Tech N.V. and Clean
Diesel Technologies, Inc.
****10(d) 1994 Incentive Plan as amended through August 8, 1996.
*****10(e) Amendment of Section 5.1 of 1994 Incentive Plan, effective June 9, 1999.
*10(f) Amendment of Section 6.11 of 1994 Incentive Plan, effective June 11, 2004.
*10(g) Form of Incentive Stock Option Agreement.
*10(h) Form of Non-Qualified Stock Option Agreement.
*10(i) Form of Non-Executive Director Stock Option Agreement.
+10(j) Management Services Agreement between Clean Diesel Technologies, Inc., Fuel Tech, Inc. and Fuel-
Tech N.V. as of June 1, 1996.
++10(k) Office Premises Lease of January 29, 2004.
***10(l) Registration Rights Agreement between Clean Diesel Technologies, Inc. and Fuel-Tech N.V. of
November 5, 1997.
+++10(m) Registration Rights Agreement between Clean Diesel Technologies, Inc. and Fuel-Tech N.V. of March
24, 1997.
++++10(n) Registration Rights Agreement between Clean Diesel Technologies, Inc. and the holders of Series A
Convertible Preferred Stock as of November 11, 1998.
++10(0) License Agreement of July 13, 2001 between Clean Diesel Technologies, Inc. and Mitsui Co., Ltd as
amended by Amendment No. 1 of December 18, 2002.
++10(p) License Agreement of March 31, 2003 between Clean Diesel Technologies, Inc. and Combustion
Components Associates, Inc.
++10(t) Agreement by and between David W. Whitwell and Clean Diesel Technologies, Inc. dated as of
March 1, 2001.
++10(u) Agreement by and between R. Glen Reid and Clean Diesel Technologies, Inc. dated as of April 1, 2002.
@10(s) Agreement by and between Bernhard Steiner and Clean Diesel Technologies, Inc., dated as of September
13, 2004.
#10(v) Amendment No.1 of 1 March 2006 to agreement of September 13, 2004 between Bernhard Steiner and
Clean Diesel Technologies Inc.
@@ Separation Agreement of January 19, 2006 between James M. Valentine and Clean Diesel Technologies,
Inc.
14@@@ Codes of Ethics and Business Conduct
#23(a) Consent of Eisner LLP.
#31(a) Bernhard Steiner Certification
#31(b) David Whitwell Certification
#32 Certification by CEO and CFO
- - - - - - - - - - - - - - - -
# Filed herewith.
* Previously filed as Exhibit to Registration Statement on Form S-8 (No. 333-117057) of July 1, 2004.
** Previously filed as Exhibit to Registration Statement on Form S-1 (No. 33-95840) of August 16, 1995.
*** Previously filed as Exhibit to Form 10-K for the year ended December 31, 1997.
**** Previously filed as Exhibit to Form 10-K for the year ended December 31, 1996.
***** Previously filed as Exhibit to Form 10-K for the year ended December 31, 2000.
+ Previously filed as Exhibit to Form 10-Q for the period ended September 30, 1996.
++ Previously filed as Exhibit to Form 10-Q for period ended June 30, 2004.
+++ Previously filed as Exhibit to Registration Statement on Form S-1 of August 7, 1998.
++++ Previously filed as Exhibit to Form 10-Q for the period ended September 30, 1998.
@ Previously filed as Exhibit to Form 8-K of July 30, 2004.
@@ Previously filed as Exhibit to Form 8-K of January 19, 2006.
@@@ Previously filed as Exhibit to Form 10-K for the year ended December 31, 2004.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Clean Diesel Technologies, Inc. has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
CLEAN DIESEL TECHNOLOGIES, INC.
March 28, 2006 By: /s/ Bernhard Steiner
- -------------- -------------------------------------
Date Bernhard Steiner
Chief Executive Officer and
Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
the following persons on behalf of Clean Diesel Technologies, Inc. and in the
capacities and on the date indicated have duly signed this report below.
/s/ Bernhard Steiner Chief Executive Officer, President and Director
- -------------------------- (principal executive officer)
Bernhard Steiner
/s/ David W. Whitwell Chief Financial Officer, Sr. Vice President, and Treasurer
- -------------------------- (principal financial and accounting officer)
David W. Whitwell
/s/ Jeremy D. Peter-Hoblyn Director
- --------------------------
Jeremy D. Peter-Hoblyn
/s/ John A. de Havilland Director
- --------------------------
John A. de Havilland
/s/ Derek R. Gray Director, Non-Executive Chairman of the Board of Directors
- --------------------------
Derek R. Gray
/s/ Charles W. Grinnell Director, Vice President, and Corporate Secretary
- --------------------------
Charles W. Grinnell
/s/ John J. McCloy Director
- --------------------------
John J. McCloy
Dated: March 28, 2006
36