UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2006
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-27432
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CLEAN DIESEL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1393453
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(State of Incorporation) (I.R.S. Employer Identification No.)
Clean Diesel Technologies, Inc.
300 Atlantic Street - Suite 702
Stamford, CT 06901-3522
(Address of principal executive offices) (Zip Code)
(203) 327-7050
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for 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
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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. (Check
one):
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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As of May 11, 2006, there were outstanding 26,100,268 shares of Common Stock,
par value $0.05 per share, of the registrant.
======================================================================
CLEAN DIESEL TECHNOLOGIES, INC.
Form 10-Q for the Quarter Ended March 31, 2006
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Balance Sheets as of March 31, 2006 (Unaudited), 3
and December 31, 2005
Statements of Operations for the Three Months 4
Ended March 31, 2006 and 2005 (Unaudited)
Statements of Cash Flows for the Three Months 5
Ended March 31, 2006 and 2005 (Unaudited)
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of 12
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES & CERTIFICATIONS 16
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
CLEAN DIESEL TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
(in thousands, except share data)
MARCH 31, December 31,
2006 2005
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,895 $ 4,513
Accounts receivable, net of allowance of $18 and $11 in
2006 and 2005, respectively 166 125
Inventories 263 285
Other current assets 111 94
Subscription receivable, net 0 488
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TOTAL CURRENT ASSETS 4,435 5,505
Patents, net 576 567
Fixed assets, net of accumulated depreciation of $285
and $259 in 2006 and 2005, respectively 150 175
Other assets 27 27
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TOTAL ASSETS $ 5,188 $ 6,274
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Deferred revenue 11 9
Accounts payable and accrued expenses 909 487
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TOTAL CURRENT LIABILITIES 920 496
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $0.05 per share,
100,000 shares authorized, no shares issued
and outstanding -- --
Common Stock, par value $0.05 per share, authorized
30,000,000 shares, issued and outstanding
26,100,268 and 25,369,358 shares respectively 1,304 1,268
Common Stock, par value $0.05 per share, subscribed
and to be issued; 705,113 shares in 2005 0 35
Additional paid-in capital 44,141 44,068
Accumulated deficit (41,177) (39,593)
------------------- -------------------
TOTAL STOCKHOLDERS' EQUITY 4,268 5,778
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,188 $ 6,274
=================== ===================
<FN>
- --------------------------------------------------------------------------------------------------
See notes to condensed financial statements.
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CLEAN DIESEL TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands except per share data)
Three Months Ended
March 31,
2006 2005
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REVENUE:
Additive revenue $ 150 $ 95
Hardware revenue 45 92
License, royalty and other revenue 74 5
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Total revenue 269 192
COSTS AND EXPENSES:
Cost of revenue 116 110
General and administrative 1,529 1,165
Research and development 218 59
Patent amortization and other expense 43 39
----------- -----------
Loss from operations (1,637) (1,181)
Other income (expense):
Foreign currency exchange gain/(loss) 14 (19)
Interest income 27 9
Miscellaneous income 12 0
----------- -----------
Net loss attributable to common stockholders $ (1,584) $ (1,191)
=========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.06) $ (0.07)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 26,085 17,166
=========== ===========
<FN>
See notes to condensed financial statements.
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CLEAN DIESEL TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
March 31,
2006 2005
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OPERATING ACTIVITIES
Net loss $ (1,584) $ (1,191)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 42 42
Write-off patents and bad debt 17 2
Non-cash compensation expense for stock options 53 --
Changes in operating assets and liabilities:
Accounts receivable (49) (13)
Inventories 22 92
Other current assets and security deposits (18) (54)
Accounts payable and accrued expenses 431 (7)
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Net cash used in operating activities (1,086) (1,129)
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INVESTING ACTIVITIES
Patent costs (34) (90)
Purchase of fixed assets -- (50)
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Net cash used in investing activities (34) (140)
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FINANCING ACTIVITIES
Proceeds from exercise of stock options 14 --
Proceeds from receipt of subscription receivable 488 --
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Net cash provided by financing activities 502 --
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NET DECREASE IN CASH AND CASH EQUIVALENTS (618) (1,269)
Cash and cash equivalents at beginning of period 4,513 4,265
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,895 $ 2,996
========== ============
<FN>
See notes to condensed financial statements.
- 5 -
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2006
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited, condensed, consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. All such adjustments are
of a normal recurring nature. Operating results for the three-month period ended
March 31, 2006, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2006. The balance sheet at December
31, 2005 has been derived from the audited financial statements at that date but
does not include all the information and notes required by generally accepted
accounting principles for complete financial statement presentation. For
further information, refer to the Financial Statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2005.
Clean Diesel Technologies, Inc. (the "Company" or "CDT") was incorporated in the
State of Delaware on January 19, 1994, as a wholly owned subsidiary of Fuel-Tech
N.V. ("Fuel Tech"). Effective December 12, 1995, Fuel Tech completed a Rights
Offering of the Company's Common Stock that reduced its ownership in the Company
to 27.6%. Fuel Tech currently holds a 7.0% interest in the Company as of March
31, 2006.
The Company is a specialty chemical and energy technology company supplying fuel
additives and proprietary systems that reduce harmful emissions from internal
combustion engines while improving fuel economy. The Company's Platinum Plus
FBC fuel additive is registered with the EPA for on-highway use and is approved
under the VERT-VSET procedure. The Platinum Plus FBC in combination with a
diesel oxidation catalyst or a catalyzed wire mesh filter have both been
verified by the EPA for retrofit emission reduction. The success of the
Company's technologies will depend upon the market acceptance of the
technologies and governmental regulations including corresponding foreign and
state agencies.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
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 gain of $14,000 on its UK bank holdings for the
three months ended March 31, 2006.
INVENTORIES
Inventories are stated at the lower of cost or market and consist of the
following:
MARCH 31, December 31,
(in thousands) 2006 2005
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Finished Platinum Plus FBC $ 125 $ 59
Platinum concentrate/metal 23 119
Hardware (ARIS and Purifier) 55 55
Other 60 52
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Total inventory $ 263 $ 285
REVENUE RECOGNITION
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Clean Diesel Technologies generates revenue from the sale of additives including
the Platinum Plus FBC products and concentrate; hardware including the EPA
verified Purifier System and catalyzed wire mesh filter, ARIS injectors and
dosing systems; and license, royalty fees and other revenue from the ARIS 2000
System and market analysis/consulting. CDT sells to end-user fleets,
municipalities and construction companies, as well as fuel resellers, additive
distribution companies and emission reduction companies.
CDT shipping terms are FOB shipping point 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 of hardware.
For hardware projects where CDT is responsible for installation either directly
or indirectly (third-party contractor), revenue is recognized when the hardware
is installed and/or accepted if the project requires inspection/acceptance.
License revenue is recognized when the license agreement is entered into, the
license period commences, the technology rights, information and know-how have
been transferred to the licensee and CDT does not have any ongoing
responsibilities or performance requirements and collection is reasonably
assured. Royalty income is recognized when earned.
In May 2005, CDT and Mitsui Ltd mutually agreed to transfer both Mitsui's
exclusive ARIS mobile and stationary licenses to DENOX Inc of Japan. DENOX is a
former joint venture of Mitsui. No additional license fees or payments were
involved and DENOX agreed to same per unit royalties and terms of the original
license agreement.
DEFERRED REVENUE
In January 2006 Clean Diesel signed a one year contract with a new customer to
provide certain consulting and market analysis services for a fee of 130,000 GBP
(approximately $230,000). The Company is recognizing the revenue ratably over
the 12 month term of the contract. During the three months ended March 31,
2006, the Company recorded $58,000 of revenues relating to this contract and at
March 31, 2006 recorded deferred revenue of $11,000.
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:
First Quarter
(in thousands) 2006 2005
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REVENUE:
US $ 173 $ 180
UK/Europe 85 12
Asia 11 0
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Total Revenue $ 269 $ 192
Foreign assets held by Clean Diesel Technologies consist of capitalized foreign
patents net of accumulated amortization and are as follows:
MARCH 31, December 31,
(in thousands) 2006 2005
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US patents, net $ 151 $ 138
Foreign patents, net 425 429
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Total patents, net $ 576 $ 567
PATENT EXPENSE
CDT capitalizes all direct incremental costs associated with initial patent
filing costs and amortizes the cost over the estimated remaining life of such
patent. Patents are reviewed regularly and the remaining carrying value of any
patents deemed not commercial or cost effective are written off. The expiration
dates of CDT's patents, in numerous countries throughout the world, range from
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.
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GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense is summarized as the following:
First Quarter
(in thousands) 2006 2005
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Compensation and benefits $ 1,126 $ 763
Occupancy 106 112
Professional 201 182
Other 96 108
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Total general and administrative expense $ 1,529 $ 1,165
During the three months ended March 31, 2006, the Company recorded severance
compensation of $375,475 relating to the departure of its former President and
Chief Operating Officer, which is being paid in twelve monthly installments. At
March 31, 2006, accrued expenses include $284,750 relating to this obligation.
STOCK-BASED COMPENSATION
Effective January 1, 2006, Clean Diesel adopted Statement of Financial
Accounting Standards No. 123 (Revised 2004), Share Based Payment (SFAS No.
123R), which requires a public entity to measure the cost of employee, officer
and director services received in exchanged for an award of equity instruments
based on the grant-date fair value of the award. SFAS No. 123R supersedes the
Company's previous accounting under SFAS No. 123, accounting for Stock-Based
Compensation (SFAS No. 123), which permitted the Company to account for such
compensation under Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB No. 25). Pursuant to APB No. 25, and related
interpretations, no compensation cost had been recognized in connection with the
issuance of stock options, as all options granted under the Company's stock
option plan had an exercise price equal to or greater than the market value of
the underlying common stock on the date of the grant.
The Company adopted SFAS No. 123R using the modified prospective transition
method, which requires that compensation cost be recorded as earned for all
unvested stock options outstanding at the beginning of the first fiscal year of
adoption of SFAS No. 123R based upon the grant date fair value estimated in
accordance with the original provisions of SFAS No. 123 and for compensation
cost for all share-based payments granted or modified subsequent to the
adoption, based on fair value estimated in accordance with the provisions of
SFAS No. 123R. The Company's Financial Statements as of and for the three
months ended March 31, 2006 reflect the impact of SFAS No. 123R. In accordance
with the modified prospective transition method, the Company's Financial
Statements for prior periods have not been restated to reflect, and do not
include, the impact of SFAS No. 123R. In the three months ended March 31, 2006,
Clean Diesel recorded share-based compensation for options attributable to
employees and officers of $53,000, or $0.00 per share which is included in the
Company's net loss for the period.
Clean Diesel has a 1994 stock option plan approved by shareholders for officers,
directors, key employees of the Company, and consultants to the Company.
Participants are eligible to receive incentive and/or nonqualified stock
options. The stock option plan allows for total options granted to be up to
17.5% of outstanding common shares. The stock option plan is administered by
the Compensation Committee of the Board of Directors. The selection of
participants, grant of options, determination of price and other conditions
relating to the exercise of options are determined by the Compensation Committee
of the Board of Directors and administered in accordance with the 1994 stock
option plan.
Both incentive stock options and non-qualified options granted to employees,
officers and directors under this plan are exercisable for a period of up to 10
years from the date of grant at an exercise price which is not less than the
fair market value of the common stock on the date of the grant. The options
typically grant one-third on grant date and one-third on the first and second
grant anniversary dates except for Non-Executive Directors for which options
fully vest upon granting.
A summary of the Company's stock option plans activity as of March 31, 2006, and
changes during the three months then ended is as follows:
- 8 -
Weighted
Weighted average
average remaining Aggregate
exercise contractual intrinsic
Shares price term (years) value
---------- ------------ ------------- ----------
Outstanding, January 1, 2006 3,245,936 $ 2.06
Granted -- N/A
Exercised 15,000 0.90
Forfeited 47,167 2.00
Expired -- N/A
---------- ------------
Outstanding and expects to
vest, March 31, 2006 3,183,769 $ 2.07 7.7 $ 86,000
========== ============ ============= ==========
Exercisable, March 31, 2006 2,814,437 $ 2.18 6.6 $ 66,000
========== ============ ============= ==========
In connection with the adoption of SFAS No. 123R, the Company reassessed its
valuation technique and related assumptions. The Company estimates the fair
value of stock options using a Black-Scholes valuation model, consistent with
the provisions of SFAS No. 123R, Securities and Exchange Commission (SEC) Staff
Accounting Bulletin No. 107 and the Company's prior period pro forma disclosures
of net earnings, including the fair value of stock-based compensation. Key
input assumptions used to estimate the fair value of stock options include the
expected term until exercise of the option, expected volatility of the Company's
stock, the risk free interest rate, option forfeiture rates, and dividends, if
any. The expected term of the options is based on a historical weighted average
of exercised options. The expected volatility is derived from the historical
volatility of the Company's stock on the UK London Stock Exchange AIM listing
and the US Over the Counter listings for a period that matches the expected life
of the option. The risk-free interest rate is the yield from a treasury bond or
note corresponding to the expected term of the option. Option forfeiture rates
are based on the Company's historical forfeiture rates. The Company has not
paid dividends and does not expect to pay dividends in the future.
Compensation costs for stock options with graded vesting are recognized over the
vesting period. As of March 31, 2006, there was $253,000 of total unrecognized
compensation costs related to granted stock options. These costs are expected
to be recognized over a weighted average period of 1.4 years.
The weighted-average grant-date fair value of options granted for the three
months ended March 31, 2005 was $1.06. The total intrinsic value of stock
options exercised for the three months ended March 31, 2006 and 2005 was $3,000
and $0, respectively. In March 2005, the Company accelerated vesting of 363,000
options with fair market value of $498,000 in response to the issuance by FASB
of SFAS No. 123R.
The fair value of each option grant in 2005 was estimated on the date of grant
using the Black-Scholes options-pricing model with the following weighted
average assumptions:
Expected volatility 101.9%
Weighted average expected volatility 101.9%
Expected dividends N/A%
Expected term (in years) 4.3
Risk-free interest rates 4.28%
SFAS No. 123 required disclosure of net income, on a pro forma basis, as if
expense treatment had been applied. Had the Company elected to recognize
compensation expense for the stock option plan, consistent with the method
prescribed by SFAS No. 123R, the Company's net income for the previous period
presented would have changed to the pro forma amounts as follows:
Three Months Ended
March 31, 2005
------------------------
(Amounts in thousands,
except per share data)
Net loss attributable to common stockholders as reported $ (1,191)
Deduct: Total stock based employee compensation expense
Under fair value method for all awards, determined
Net of related tax effects (537)
------------------------
Pro forma net income $ (1,728)
========================
Basic and diluted net loss per common share - as reported $ (0.07)
Basic and diluted net loss per common share - pro forma $ (0.10)
- 9 -
BASIC AND DILUTED LOSS PER COMMON SHARE
Basic and diluted loss per share is calculated in accordance with SFAS No. 128,
"Earnings Per Share." Basic loss per share is computed by dividing net loss by
the weighted-average shares outstanding during the reporting period. Diluted
loss per share is computed similar to basic earnings per share, except that the
weighted-average shares outstanding are increased to include additional shares
from the assumed exercise of stock options and warrants, if dilutive, using the
treasury stock method. CDT's computation of diluted net loss per share does not
include common share equivalents associated with 3,184,000 and 2,713,000
options, respectively, and 507,000 and 532,000 warrants, respectively for the
2006 and 2005 periods, as the result would be anti-dilutive.
STOCKHOLDERS' EQUITY
Pursuant to a Regulation S exemption with respect to an offshore placement,
Clean Diesel Technologies sold, effective November 11, 2005, 8.174 million
shares of its common stock. The price of the common stock was 40 pence (GBP) per
share (approximately $0.704 per share). The proceeds of the common stock
issuance, was $5.5 million (net of $232,000 in expenses).
In addition, Clean Diesel Technologies received subscriptions for an additional
$487,500 (net of $12,500 in expenses) related to the November 11th fund-raising
above for 0.7 million shares of common stock. The 487,500 was received in the
first quarter 2006.
NOTE 3: RELATED PARTY TRANSACTIONS
The Company has a Management and Services Agreement with Fuel Tech. The
agreement requires CDT to reimburse Fuel Tech for management, services and
administrative expenses incurred on our behalf. The Company has agreed to pay
Fuel Tech a fee equal to an additional 3% of the costs paid on behalf of
administration (approximately $500 for the quarter). Currently, and for the
last three years CDT has reimbursed Fuel Tech for the expenses associated with
one Fuel Tech officer/director who also serves as an officer/director of CDT.
The Company believes the charges under the Management and Services Agreement are
reasonable and fair. The Management and Services Agreement may be cancelled by
either party by notifying the other in writing of the cancellation on or before
May 15 in any year.
NOTE 4: COMMITMENTS
Clean Diesel Technologies leases 3,925 square feet of administrative office
space at 300 Atlantic Street, Stamford, Connecticut. The five year lease through
March 2009 has an annual cost of approximately $125,000, including rent,
utilities and parking.
CDT leases 400 square feet of administrative space at 23 Bourne House, 475
Godstone Road in Surrey, England. The two and half year lease through September
2007 has an annual cost of approximately $33,000 including utilities and
communication services.
CDT has signed a four year lease (through July 2008) for 2,750 square feet of
warehouse space in Milford, Connecticut. Annual rent including utilities will
be approximately $21,000.
Effective October 28, 1994, Fuel Tech granted two licenses to the Company for
all patents and rights associated with its platinum fuel catalyst technology.
Effective November 24, 1997, the licenses were canceled and Fuel Tech assigned
to the Company all such patents and rights on terms substantially similar to the
licenses. In exchange for the assignment, the Company pays Fuel Tech a royalty
of 2.5% of its annual gross revenue from sales of the platinum fuel catalysts
commencing in 1998. The royalty obligation expires in 2008. The Company may
terminate the royalty obligation to Fuel Tech by payment of $3.3 million in
2006, and declining annually to $2.2 million in 2007 and $1.1 million in 2008.
The Company as assignee and owner is responsible for maintaining the technology
at its own expense. Royalty expense was $3,756 and $2,404 for the three months
ended March 31, 2006 and 2005 respectively, and the royalty expense payable to
Fuel Tech at March 31, 2006 and 2005 is $3,756 and $2,404, respectively.
- 10 -
NOTE 5: CONCENTRATION
For the quarter ended March 31, 2006 and 2005, Clean Diesel's largest customers
as a percentage of sales were as follows:
First Quarter
REVENUE: 2006 2005
-------- -------
Customer A 22% *
Customer B 13% 13%
Customer C * 12%
Customer D 12% *
Customer E * 24%
* Represents less than 10% revenue for that customer in the applicable period.
There were no other customers that represented 10% or more of revenue for the
shown periods.
In addition to the revenue concentration, at March 31, 2006 Clean Diesel has
three customers that represents 55% of its gross accounts receivable balance.
Two of the three customers are the same customers listed in the revenue
concentration chart above.
- 11 -
CLEAN DIESEL TECHNOLOGIES, INC.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
FORWARD-LOOKING STATEMENTS
Statements in this Form 10-Q that are not historical facts, so-called
"forward-looking statements," are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Investors are cautioned
that all forward-looking statements involve risks and uncertainties, including
those detailed in the Company's filings with the Securities and Exchange
Commission. See "Risk Factors of the Business" in Item 1, "Business," and also
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in the Company's Annual Report on Form 10-K for the year ended
December 31, 2005.
RESULTS OF OPERATIONS
2006 VERSUS 2005
Revenues and cost of revenue in the first quarter of 2006 were $269,000 and
$116,000, respectively, versus $192,000 and $110,000, respectively for the 2005
first quarter. Revenues consist of the following:
First Quarter
(in thousands) 2006 2005
----- -----
REVENUE:
Additive $ 150 $ 95
Hardware 45 92
License, royalty and other 74 5
----- -----
Total revenue $ 269 $ 192
In the foregoing table "Additive" includes the Platinum Plus FBC products
and concentrate; "Hardware" includes the EPA verified Purifier System, ARIS
injectors and dosing systems.
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.
Clean Diesel Technologies has also completed VERT and BUWAL testing in
Europe for use of the Platinum Plus FBC with a diesel particulate filter.
Additive revenue has increased as a result of the addition of new customers
and expanding sales in several niche markets particularly mining. The decrease
in hardware sales is primarily the result of the timing of ARIS injector sales
and the 2005 State of Pennsylvania grant project.
License, royalty and other revenue increased as a result of the income
recognized for a consulting and market analysis project performed by Clean
Diesel for a new International customer.
Clean Diesel's strategy is to license the ARIS 2000 NOx reduction system to
other companies for an up-front fee for the technology and information transfer
and a separate on-going royalty per unit payment. CDT currently has an
exclusive license agreement for both stationary and mobile ARIS applications
with DENOX, Inc. (transferred from Mitsui Ltd) for Japan. CDT has a
non-exclusive license for both stationary and mobile ARIS applications in the
United States with Combustion Components Associates of Monroe, Connecticut. CDT
previously had an ARIS stationary license agreement for North America with the
RJM Corporation of Norwalk, Connecticut, but as of August 2004 RJM was out of
business and the ARIS license reverted back to CDT. CDT believes that the ARIS
2000 system can most effectively be commercialized through
- 12 -
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 $1,529,000 in 2006 from
$1,165,000 in 2005 as summarized in the following table:
First Quarter
in thousands) 2006 2005
-------- -------
Compensation and benefits $ 1,126 $ 763
Occupancy 106 112
Professional 201 182
Other 96 108
-------- -------
Total general and administrative expenses $ 1,529 $ 1,165
Compensation and benefit expense increased as a result of the recognition of
$53,000 in non-cash compensation expense relating to stock options granted prior
to January 1, 2006 as required under Financial Accounting Standards 123R.
Professional expense fees also increased primarily due to additional investor
relations activity in Germany and continental Europe.
Included in the 2006 first quarter compensation and benefit expense is $357,475
of severance charges related to the departure of James Valentine, President and
Chief Operating Officer. Clean Diesel announced in January 2006 that Mr.
Valentine had been "released from employment and resigned as director of the
company." The first quarter 2006 financials include accrued severance charges
of $284,750 representing salary and benefit costs for the remainder of the one
year employment contract between Clean Diesel and Mr. Valentine which is to be
paid on a monthly basis.
Research and development expenses increased to $218,000 in 2006 from $59,000 in
2005. The increase in research and development in 2005 is due to the timing of
expenses and projects from year to year and additional laboratory testing on the
CWMF technology acquired from Mitsui and a new bio-fuel additive formulation.
Patent amortization and other costs increased to $43,000 in 2006 versus $39,000
in 2005. The 2006 increase is related to higher amortization related to prior
period capitalization.
Interest income increased to $27,000 in 2006 from $9,000 in 2005 due to higher
rates of return and the higher amount of invested funds in the first quarter of
2006 related to the November 2005 fund-raising.
LIQUIDITY AND SOURCES OF CAPITAL
Prior to 2000, the Company was primarily engaged in research and development and
has incurred losses since inception aggregating $36,425,000 (excluding the
effect of the non-cash preferred stock dividends on preferred shares prior to
conversion to common). The Company expects to incur losses through the
foreseeable future as it further pursues its commercialization efforts.
Although the Company started selling limited quantities of Platinum Plus
additive and the verified Purifier system and generating some ARIS licensing
fees and royalties, operating revenue to date has been insufficient to cover
operating expenses and the Company continues to be dependent upon proceeds from
fund raising to finance its working capital requirements.
For the three months ended March 31, 2006 and 2005, the Company used cash of
$1,086,000 and $1,129,000, respectively, in operating activities.
At March 31, 2006 and December 31, 2005, the Company had cash and cash
equivalents of $3,895,000 and $4,513,000, respectively. The decrease in cash
and cash equivalents in 2006 was the result of limited revenues and on-going
operating costs. The Company anticipates incurring additional losses through at
least 2006 as it further pursues its commercialization efforts.
Pursuant to a Regulation S exemption with respect to an offshore placement,
Clean Diesel Technologies sold, effective November 11, 2005, 8.174 million
shares of its common stock. The price of the common stock was 40 pence (GBP) per
share (approximately $0.704 per share). The proceeds of the common stock
issuance, was $5.5 million (net of $232,000 in expenses).
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In addition, Clean Diesel Technologies received subscriptions for an additional
$487,500 (net of $12,500 in expense) related to the November 11th fund-raising
above for 0.7 million shares of common stock. The $487,500 had been received as
of March 3, 2006.
In October 2004, Clean Diesel Technologies received $754,000 (net of $25,000 in
expenses) through a private placement of 426,500 shares of its common stock. The
price of the common stock was 1.025 GBP per share (approximately $1.82 per
share). The proceeds of the common stock issuance are being used for the
general corporate purposes of Clean Diesel Technologies.
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. The price of the common stock was 1.025 GBP per share
(approximately $1.82 per share). The proceeds of the common stock issuance are
being used for the general corporate purposes of Clean Diesel Technologies.
At the present time, the Company cannot estimate when, or if, its operations
will generate positive cash flows from operations. The Company does not have
any credit facilities available with financial institutions or other third
parties. If the Company cannot generate cash flow from operations, CDT will be
dependent upon external sources of best-efforts financing, of which there are no
firm commitments or arrangements. Based on the current operating plan,
management believes that the cash balance as of March 31, 2006 of $3.9 million
will be sufficient to meet the cash needs through the first quarter of 2007. In
the future, unless operating revenues are sufficient to meet operating expenses,
the Company may need to access capital markets to fund operations by incurring
indebtedness or issuing equity securities. The Company can provide no assurance
that it will be successful in any future financing effort to obtain the
necessary working capital to support operations or if such financing is
available, it will be on acceptable terms. If management is unable to obtain
the necessary financing from external sources, the Company may need to manage
any cash shortfalls by taking measures which may include deferring or reducing
the scope of commercialization efforts, reducing costs and overhead expenses, or
otherwise curtailing operations, or obtaining funds by a disposition of assets
or through arrangements with others that may require CDT to relinquish rights to
certain of its technologies, or to license the rights to such technologies on
terms that are less favorable to CDT than might otherwise be available.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the opinion of management, with the exception of exposure to fluctuations in
the cost of platinum and the British Sterling exchange rate, the Company is not
subject to any significant market risk exposure.
The Company generally receives most income in United States dollars. Clean
Diesel Technologies maintains a UK bank account and typically makes several
payments monthly in various foreign currencies for patent expenses, product
tests and registration, local marketing and promotion, consultants and
employees.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures and internal controls
designed to ensure that information required to be disclosed in the Company's
filings under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. The Company's management, with the
participation of its principal executive and financial officers, has evaluated
the effectiveness of the Company's disclosure controls and procedures as of the
end of the period covered by this Quarterly Report on form 10Q. The Company's
principal executive and financial officers have concluded, based on such
evaluation, that such disclosure controls and procedures were effective for the
purpose for which they were designed as of the end of such period.
There was no change in the Company's internal control over financial reporting
that was identified in connection with such evaluation that occurred during the
period covered by this Quarterly Report on form 10Q that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
None
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CLEAN DIESEL TECHNOLOGIES, INC.
SIGNATURES & CERTIFICATIONS
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 11, 2006 By: /s/Bernhard Steiner
------------------------------
Bernhard Steiner
Director, President and
Chief Executive Officer
Date: May 11, 2006 By: /s/David W. Whitwell
------------------------------
David W. Whitwell
Chief Financial Officer,
Senior Vice President and Treasurer
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