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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, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number: 0-27432
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CLEAN DIESEL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1393453
-------------------- --------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
Clean Diesel Technologies, Inc.
300 Atlantic Street - Suite 702
Stamford, CT 06901-3522
(Address of principal executive offices) (Zip Code)
(203) 327-7050
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes No X
--- ---
As of May 11, 2004, there were outstanding 15,679,337 shares of Common Stock,
par value $0.05 per share, of the registrant.
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CLEAN DIESEL TECHNOLOGIES, INC.
Form 10-Q for the Quarter Ended March 31, 2004
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of March 31, 2004 (Unaudited), 3
and December 31, 2003
Statements of Operations for the Three Months 4
Ended March 31, 2004 and 2003 (Unaudited)
Statements of Cash Flows for the Three Months 5
Ended March 31, 2004 and 2003 (Unaudited)
Note to Financial Statements 6
Item 2. Management's Discussion and Analysis of 10
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES & CERTIFICATIONS 13
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CLEAN DIESEL TECHNOLOGIES, INC.
BALANCE SHEETS
(in thousands)
MARCH 31, December 31,
----------------------------
2004 2003
(Unaudited)
------------ --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,559 $ 6,515
Accounts receivable, net of allowance of $6 and $3 in
2004 and 2003, respectively 160 115
Inventories 273 320
Other current assets 131 73
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TOTAL CURRENT ASSETS 6,123 7,023
Patents, net 271 274
Fixed assets, net of accumulated depreciation of $131 in
2004 and $123 in 2003, respectively 139 126
Other assets 28 18
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TOTAL ASSETS $ 6,561 $ 7,441
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Deferred compensation and pension benefits $ 441 $ 441
Accounts payable and accrued expenses 352 427
------------ --------------
TOTAL CURRENT LIABILITIES 793 868
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $0.05 per share,
authorized 80,000 , no shares issued and outstanding -- --
Series A Convertible Preferred Stock, par value $0.05 per
share, $500 per share liquidation preference, authorized
20,000 shares, no shares issued and outstanding -- --
Common Stock, par value $0.05 per share, authorized
30,000,000 shares, issued and outstanding 15,679,337
shares 784 784
Additional paid-in capital 35,816 35,813
Accumulated deficit (30,832) (30,024)
------------ --------------
TOTAL STOCKHOLDERS' EQUITY 5,768 6,573
------------ --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,561 $ 7,441
============ ==============
See note to financial statements.
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CLEAN DIESEL TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands except per share data)
Three Months Ended
March 31,
2004 2003
----------- -----------
REVENUE:
Product revenue $ 176 $ 88
License and royalty revenue 18 8
----------- -----------
Total revenue 194 96
COSTS AND EXPENSES:
Cost of revenue 132 57
General and administrative 790 692
Research and development 80 248
Patent amortization and other expense 12 10
----------- -----------
Loss from operations (820) (911)
Interest income (12) (4)
Interest expense -- --
----------- -----------
Net loss $ (808) $ (907)
=========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.05) $ (0.08)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 15,679 11,968
=========== ===========
See note to financial statements.
-4-
CLEAN DIESEL TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
March 31
2004 2003
----------- -----------
OPERATING ACTIVITIES
Net loss $ (808) $ (907)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 24 16
Changes in operating assets and liabilities:
Accounts receivable (45) 208
Inventories 47 19
Other current assets and security deposit (68) (49)
Accounts payable and accrued expenses (75) 118
----------- -----------
Net cash used in operating activities (925) (595)
----------- -----------
INVESTING ACTIVITIES
Patent costs (4) (69)
Purchase of fixed assets (30) (10)
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Net cash used in investing activities (34) (79)
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FINANCING ACTIVITIES
Proceeds from broker fee credit (2003 fundraising) 3 --
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Net cash provided by financing activities 3 --
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NET DECREASE IN CASH AND CASH EQUIVALENTS (956) (674)
----------- -----------
Cash and cash equivalents at beginning of period 6,515 2,083
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,559 $ 1,409
=========== ===========
See note to financial statements.
-5-
CLEAN DIESEL TECHNOLOGIES, INC.
NOTE TO FINANCIAL STATEMENTS
MARCH 31, 2004
(Unaudited)
BASIS OF PRESENTATION
The accompanying unaudited, condensed, consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. All such adjustments are
of a normal recurring nature. Operating results for the three-month period ended
March 31, 2004, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2004. For further information, refer
to the Financial Statements and footnotes thereto included in the Company's Form
10-K for the year ended December 31, 2003.
Clean Diesel Technologies, Inc. (the "Company") was incorporated in the State of
Delaware on January 19, 1994, as a wholly owned subsidiary of Fuel-Tech N.V.
("Fuel Tech"). Effective December 12, 1995, Fuel Tech completed a Rights
Offering of the Company's Common Stock that reduced its ownership in the
Company to 27.6%. Fuel Tech currently holds an 11.6% interest in the Company as
of March 31, 2004.
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. The Platinum
Plus FBC in combination with a diesel oxidation catalyst has 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.
SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES
Inventories including raw materials and finished product are stated at the lower
of cost or market. Cost is determined using the first-in, first-out (FIFO)
method.
REVENUE RECOGNITION
The Company recognizes revenue from sales of Platinum Plus fuel borne catalyst
and ARIS systems upon shipment.
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 and
Mitsui committed to spend an additional $200,000 in developing, testing and
demonstrating ARIS mobile prototypes. CDT recognized the $250,000 license
revenue in the fourth quarter of 2002, as there were no significant ongoing
services required to be performed by CDT at that time. The Company will also
receive ongoing royalty payments on a per unit basis.
In April 2003, Clean Diesel Technologies completed a non-exclusive license
agreement with Combustion Component Associates Inc. (CCA) of Monroe,
Connecticut, for the mobile ARIS technology in the US. Under terms of the
agreement CCA agreed to pay CDT a $150,000 license fee and 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.
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CDT recognized the $150,000 license revenue in the second quarter of 2003, as
there were no significant ongoing services required to be performed by CDT at
that time.
Royalty fees are recognized by the Company when earned.
RESEARCH AND DEVELOPMENT COSTS
Costs relating to the research, development and testing of products including
verification expenses for testing programs with the California Air Resources
Board (CARB) and the Environmental Protection Agency (EPA), 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
Effective January 1, 2002, CDT began capitalizing all direct incremental costs
associated with initial patent filing costs and amortized the cost over the
remaining life of each patent. Patents are reviewed regularly and any patents
deemed not commercially feasible or cost effective are dropped and the
cumulative capitalized cost is written off at that time. Prior to this all
patent related costs were expensed as incurred. The expiration of CDT's patents
range from 2008 to 2021.
STOCKHOLDERS' EQUITY
Pursuant to a Regulation S exemption with respect to an offshore placement,
Clean Diesel Technologies sold, effective December 1, 2003, 1,282,600 shares of
its Common Stock. The price of the Common Stock was 1.70 GBP per share
(approximately $2.92 per share). The proceeds of the Common Stock issuance,
$3.583 million (net of $170,000 in expenses), are being 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 26, 2003, 2,395,597 shares
of its Common Stock. The price of the Common Stock was $1.63 per share. The
proceeds of the Common Stock issuance, $3.866 million (net of $39,000 in
expenses), are being used for the general corporate purposes of Clean Diesel
Technologies.
STOCK-BASED COMPENSATION
Clean Diesel Technologies accounts for stock option grants in accordance with
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees. 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. In December 2002, the
FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition
and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, the Statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
has adopted the disclosure requirements of SFAS 123 on December 31, 2002.
If compensation expense for CDT's plan had been determined based on the fair
value at the grant dates for awards under its plan, consistent with the method
described in SFAS No. 123, CDT's net loss and basic and diluted loss per common
share would have been increased to the pro forma amounts indicated below for the
three months ended March 31:
-7-
2004 2003
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Net loss attributable to common stockholders as reported $ (808) $ (907)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (203) (134)
-------- --------
Pro forma net loss $(1,011) $(1,041)
Net loss per share:
Basic and diluted loss per common share-as reported $ (0.05) $ (0.08)
Basic and diluted per common share-pro forma $ (0.06) $ (0.09)
In accordance with the provisions of SFAS No. 123, for purposes of the pro forma
disclosures the estimated fair value of the options is amortized over the option
vesting period. The application of the pro forma disclosures presented above
are not representative of the effects SFAS No. 123 may have on operating results
and earnings (loss) per share in future years due to the timing of stock option
grants and considering that options vest over a period of three years.
The Black-Scholes option-pricing model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the input of highly
subjective assumptions including the expected stock price volatility. Because
CDT's employee stock options have characteristics significantly different from
those of traded options and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
The fair value of each option grant, for pro forma disclosure purposes, was
estimated on the date of grant using the modified Black-Scholes option-pricing
model with the following weighted-average assumptions for the 2004 grants,
expected dividend yield 0%, risk free interest rate 5.05%, expected volatility
99.41% and expected life of the option 4 years. 35,000 options were granted in
the first quarter of 2004.
LOSS PER SHARE
Employee stock options and stock purchase warrants were not included in the
computation of diluted loss per share for 2004 or 2003, because the Company
reported a loss for the period and the effect would be antidilutive.
RELATED PARTY TRANSACTIONS
The Company has a Management and Services Agreement with Fuel Tech. Under the
agreement, the Company pays Fuel Tech a fee equal to an additional 3 - 10% of
the costs paid on the Company's behalf, dependent upon the nature of the costs
incurred. Currently, a fee of 3% is assessed on all costs billed to the Company
from Fuel Tech. Charges to the Company, inclusive of the administrative fee,
were approximately $17,300 in both the first quarter of 2004 and 2003,
respectively.
The Company had a deferred salary plan with its Chief Executive Officer in which
he deferred $62,500 of his annual salary until the Company reaches $5 million in
revenue. This agreement was terminated in March 2001 and the executive's salary
was returned to full pay. At March 31, 2004 total obligations were $135,400
pertaining to this plan. This expense has been classified as a current
liability on the balance sheet as of March 31, 2004.
The Company makes annual pension payments or accruals pursuant to a deferred
compensation plan on behalf of its Chief Executive Officer. This agreement was
voluntarily suspended by the executive as of June 15, 2003 and the company does
not plan to make any additional accruals in the future. At March 31, 2004 total
obligations were $305,616 pertaining to this plan. This expense has been
classified as a current liability on the balance sheet as of March 31, 2004.
-8-
COMMITMENTS
Clean Diesel Technologies has a month to month lease of 2,900 square feet of
office space for administrative purposes at 300 Atlantic Street, Stamford,
Connecticut. CDT has signed a lease in the same building for 3,925 square feet
of administrative space beginning in May 2004. The 5 year lease will have annual
cost of $115,875, including rent, utilities and parking.
Effective October 28, 1994, Fuel Tech granted two licenses to the Company for
all patents and rights associated with its platinum fuel catalyst technology.
Effective November 24, 1997, the licenses were canceled and Fuel Tech assigned
to the Company all such patents and rights on terms substantially similar to the
licenses. In exchange for the assignment, the Company will pay Fuel Tech a
royalty of 2.5% of its annual gross revenue from sales of the platinum fuel
catalysts commencing in 1998. The royalty obligation expires in 2008. The
Company may terminate the royalty obligation to Fuel Tech by payment of
$5,454,546 in 2004 and declining annually to $1,090,910 in 2008. The Company as
assignee and owner will maintain the technology at its own expense. Minimum
royalties were paid to Fuel Tech in 2003 and royalties payable to Fuel Tech at
March 31, 2004 are $1,400.
CONCENTRATION
For the quarter ended March 31, 2004, one customer accounted for 65% of the
Company's revenue.
-9-
CLEAN DIESEL TECHNOLOGIES, INC.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
FORWARD-LOOKING STATEMENTS
Statements in this Form 10-Q that are not historical facts, so-called
"forward-looking statements," are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Investors are cautioned
that all forward-looking statements involve risks and uncertainties, including
those detailed in the Company's filings with the Securities and Exchange
Commission. See "Risk Factors of the Business" in Item 1, "Business," and also
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in the Company's Form 10-K for the year ended December 31, 2003.
RESULTS OF OPERATIONS
2004 VERSUS 2003
Product sales and cost of sales were $176,000 and $132,000 respectively for the
first quarter of 2004 versus $88,000 and $57,000 for 2003. Platinum Plus fuel
catalyst sales of $56,000 and $41,000 were recorded in the first quarter of 2004
and 2003, respectively. ARIS product sales of $107,000, primarily to Mitsui &
Co., Ltd., were recorded in the first quarter of 2004. The remainder of product
revenue in 2004 consists of CDT Purifier Systems.
Included in the 2004 and 2003 first quarter revenue is $18,000 and $8,000,
respectively, of license and royalty income. The 2004 license and royalty
income is from continuing ARIS system royalties from Mitsui & Co., Ltd.
General and administrative expenses increased $98,000 to $790,000 in the first
quarter 2004 versus $692,000 in the same period of 2003. The year-to-date 2004
increase in general and administrative expenses is related to increases in
marketing and sales activities in both the US and Europe and higher professional
fees including financial advisory services.
Research and development expenses decreased $168,000 to $80,000 in the first
quarter 2004 versus $248,000 in the comparable period in 2003. The decrease is
attributable to the timing of expenses related to several verification and
certification programs for the Platinum Plus FBC in 2003.
Patent filing costs increased $2,000 to $12,000 in the first quarter of 2004
versus $10,000 in the comparable 2003 period. The increase is related to
increased amortization of patent expenses as the patents near retirement and the
addition of new patents.
First quarter interest income increased $8,000 in 2004 to $12,000 versus $4,000
in the comparable period in 2003. This was a result of an increase in the
amount of cash and cash equivalents on hand in 2004.
LIQUIDITY AND SOURCES OF CAPITAL
Prior to 2000, the Company was primarily engaged in research and development and
has incurred losses since inception aggregating $26,080,000 (excluding the
effect of the non-cash preferred stock dividends). The Company expects to incur
losses through the foreseeable future as it further pursues its
commercialization efforts. Although the Company started selling limited
quantities of product and generating some licensing revenue, sales and revenue
to date have been insufficient to cover operating expenses, and the Company
continues to be dependent upon sources other than operations to finance its
working capital requirements.
-10-
For the three months ended March 31, 2004 and 2003, the Company used cash of
$925,000 and $595,000 respectively, in operating activities.
At March 31, 2004 and December 31, 2003, the Company had cash and cash
equivalents of $5,559,000 and $6,515,000, respectively. The decrease in cash
and cash equivalents in 2004 was the result of the increased verification
programs with EPA and CARB and the on-going marketing and operation costs. The
Company anticipates incurring additional losses through at least 2004 as it
further pursues its commercialization efforts.
In December 2003, Clean Diesel Technologies received $3.583 million (net of
$170,000 in expenses) through a private placement of 1,282,600 shares of its
Common Stock. The price of the Common Stock was 1.70 GBP per share
(approximately $2.92 per share). The proceeds of the Common Stock issuance are
being used for the general corporate purposes of Clean Diesel Technologies.
In September 2003, Clean Diesel Technologies received $3.865 million (net of
$39,000 in expenses) through a private placement of 2,395,597 shares of its
Common Stock. In conjunction with the private placement, 230,240 ten year
warrants with an exercise price of $1.63 per share were issued.
As a result of the Company's recurring operating losses, the Company has been
unable to generate positive cash flow. In management's opinion, the Company's
cash balance at March 31, 2004 will be sufficient to fund the Company's
operations into 2005. The Company may require additional capital to fund its
future operations. Although the Company believes that it will be successful in
its capital-raising efforts, there is no guarantee that it will be able to raise
such funds on terms that will be satisfactory to the Company. The Company will
develop contingency plans in the event future financing efforts are not
successful. Such plans may include reducing expenses and selling or licensing
some of the Company's technologies.
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, the Company is not subject to any significant market risk
exposure.
The Company generally receives all income in United States dollars. The Company
typically makes several small payments monthly in various foreign currencies for
patent expenses, product tests and registration, local marketing and promotion
and consultants.
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.
-11-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
None
b. Reports on Form 8-K
None
-12-
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, 2004 By: /s/Jeremy D. Peter-Hoblyn
-------------------------------
Jeremy D. Peter-Hoblyn
Director and
Chief Executive Officer
Date: May 11, 2004 By: /s/David W. Whitwell
-------------------------------
David W. Whitwell
Chief Financial Officer,
Vice President and Treasurer
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