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EX-32.1 - EXHIBIT 32.1 - CDTI ADVANCED MATERIALS, INC. | c08508exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - CDTI ADVANCED MATERIALS, INC. | c08508exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - CDTI ADVANCED MATERIALS, INC. | c08508exv31w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
or
o | 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: 001-33710
CLEAN DIESEL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware | 06-1393453 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
4567 Telephone Road, Suite 206, Ventura, CA | 93003 | |
(Address of principal executive offices) | (Zip Code) |
(Registrants telephone number, including area code) (805) 639-9458
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company.) |
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As
of November 12, 2010, there were 3,788,354 outstanding shares of the registrants common
stock, par value $0.01 per share.
CLEAN DIESEL TECHNOLOGIES, INC.
TABLE OF CONTENTS
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Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 |
EXPLANATORY NOTE
On October 15, 2010, we completed the merger of our wholly-owned subsidiary, CDTI Merger Sub,
Inc., with and into Catalytic Solutions, Inc., a California corporation (CSI), as
contemplated by that certain Agreement and Plan of Merger dated May 13, 2010, as amended by
letter agreements dated September 1, 2010 and September 14, 2010 (the Merger Agreement).
We refer to this transaction as the Merger, see Note 14 to our Notes to Condensed
Consolidated Financial Statements. On October 15, 2010, we also effected a one-for-six
reverse stock split of the shares of our common stock. When we refer to our shares of common
stock on post-split basis, it means after giving effect to the one-for-six reverse stock
split. The Merger was accounted for as a reverse acquisition and, as a result, our companys
(the legal acquirer) consolidated financial statements will, in substance, be those of CSI
(the accounting acquirer), with the assets and liabilities, and revenues and expenses, of our
company being included effective from the date of the closing of the Merger. However, because
the Merger was not completed until October 15, 2010, after the end of our most recent fiscal
quarter on September 30, 2010, we are required to include in this quarterly report on Form
10-Q for the quarter ended September 30, 2010, the unaudited consolidated financial
statements (and discussion thereof in Item 2 Managements Discussion and Analysis of
Financial Condition and Results of Operations) of our company, the legal acquirer, as of
September 30, 2010 (i.e., prior to the closing of the Merger). CSIs unaudited financial
statements for the nine months ended September 30, 2010 will be filed on a current report on
Form 8-K.
As used in this quarterly report on Form 10-Q and unless otherwise indicated, the terms the
company, we, us, and our refer to Clean Diesel Technologies, Inc. after giving effect
to the Merger, unless the context requires otherwise.
2
Table of Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this report are forward-looking statements. You can sometimes identify
forward-looking statements by our use of forward-looking words like may, should, expects,
intends, plans, anticipates, believes, estimates, predicts, potential, or continue
or the negative of these terms and other similar expressions.
Although we believe that the plans and expectations reflected in or suggested by our
forward-looking statements are reasonable, those statements are based only on the current beliefs
and assumptions of our management and on information currently available to us and, therefore, they
involve uncertainties and risks as to what may happen in the future. Accordingly, we cannot
guarantee that our plans and expectations will be achieved. Our actual results could differ from
those expressed in or implied by any forward-looking statement in this report as a result of many
known and unknown factors, many of which are beyond our ability to predict or control. These
factors include, but are not limited to, those described under the caption Risk Factors in our
Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and
Exchange Commission (the SEC) on March 24, 2010, as amended on April 30, 2010 (the Form 10-K),
and in Amendment No. 4 to our Registration Statement on Form S-4/A filed with the SEC on September
23, 2010 (the Form S-4/A) including without limitation the following:
| our ability to successfully integrate the operations of Catalytic Solutions, Inc.
(CSI) and realize the benefits of the Merger; |
||
| our need to refinance CSIs credit facility and obtain additional financing to support
our business; |
||
| any failure of our new management team to operate effectively; |
All written and oral forward-looking statements attributable to us are expressly qualified in their
entirety by these cautionary statements.
Our forward-looking statements speak only as of the date they are made and should not be relied
upon as representing our plans and expectations as of any subsequent date. Although we may elect
to update or revise forward-looking statements at some time in the future, we specifically disclaim
any obligation to do so, even if our plans and expectations change.
3
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CLEAN DIESEL TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except share data)
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except share data)
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
(Restated) | ||||||||
Note 1 | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 3,525 | $ | 2,772 | ||||
Investments |
| 11,725 | ||||||
Accounts receivable, net of allowance of $248 and $232, respectively |
198 | 148 | ||||||
Inventories, net |
907 | 1,059 | ||||||
Other current assets |
172 | 294 | ||||||
Total current assets |
4,802 | 15,998 | ||||||
Patents, net |
968 | 898 | ||||||
Fixed assets, net of accumulated depreciation of $424 and $369, respectively |
219 | 294 | ||||||
Other assets |
56 | 57 | ||||||
Total assets |
$ | 6,045 | $ | 17,247 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 665 | $ | 301 | ||||
Accrued expenses |
563 | 675 | ||||||
Short-term debt |
| 7,693 | ||||||
Total current liabilities |
1,228 | 8,669 | ||||||
Commitments and contingencies (Note 7) |
||||||||
Stockholders equity: |
||||||||
Preferred stock, par value $0.01 per share: authorized 100,000; no shares issued and outstanding |
| | ||||||
Common stock, par value $0.01 per share: authorized 12,000,000; issued and outstanding
1,368,998 and 1,368,988 shares, respectively |
14 | 14 | ||||||
Additional paid-in capital |
74,846 | 74,762 | ||||||
Accumulated other comprehensive loss |
(407 | ) | (381 | ) | ||||
Accumulated deficit |
(69,636 | ) | (65,817 | ) | ||||
Total stockholders equity |
4,817 | 8,578 | ||||||
Total liabilities and stockholders equity |
$ | 6,045 | $ | 17,247 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Restated) | (Restated) | |||||||||||||||
Note 1 | Note 1 | |||||||||||||||
Revenue: |
||||||||||||||||
Product sales |
$ | 283 | $ | 225 | $ | 1,265 | $ | 879 | ||||||||
Technology licensing fees and royalties |
58 | 28 | 132 | 95 | ||||||||||||
Total revenue |
341 | 253 | 1,397 | 974 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Cost of product sales |
131 | 217 | 816 | 668 | ||||||||||||
Cost of licensing fees and royalties |
| | | | ||||||||||||
Selling, general and administrative |
1,662 | 1,324 | 4,395 | 4,837 | ||||||||||||
Reimbursement of expenses under grant program |
(44 | ) | | (159 | ) | | ||||||||||
Severance charge |
| 448 | (163 | ) | 958 | |||||||||||
Research and development |
55 | 128 | 244 | 314 | ||||||||||||
Patent amortization and other expense |
32 | 98 | 109 | 307 | ||||||||||||
Operating costs and expenses |
1,836 | 2,215 | 5,242 | 7,084 | ||||||||||||
Loss from operations |
(1,495 | ) | (1,962 | ) | (3,845 | ) | (6,110 | ) | ||||||||
Other income (expense): |
||||||||||||||||
Interest income |
2 | 46 | 93 | 187 | ||||||||||||
Other income (expense), net |
| (26 | ) | (67 | ) | 295 | ||||||||||
Net loss |
$ | (1,493 | ) | $ | (1,942 | ) | $ | (3,819 | ) | $ | (5,628 | ) | ||||
Basic and diluted loss per common share |
$ | (1.09 | ) | $ | (1.43 | ) | $ | (2.80 | ) | $ | (4.15 | ) | ||||
Basic and diluted weighted-average number of
common shares outstanding (Note 1) |
1,365 | 1,356 | 1,364 | 1,356 | ||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements
5
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
(Restated) | ||||||||
Note 1 | ||||||||
Operating activities |
||||||||
Net loss |
$ | (3,819 | ) | $ | (5,628 | ) | ||
Adjustments to reconcile net loss to cash used in operating activities: |
||||||||
Depreciation and amortization |
140 | 139 | ||||||
Compensation expense for options, warrants and stock awards |
84 | 579 | ||||||
Provision (Recovery) for doubtful accounts, net |
23 | (148 | ) | |||||
Unrealized gain on investments, net |
| (185 | ) | |||||
Loss on abandonment of patents and equipment |
3 | 195 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(73 | ) | 622 | |||||
Inventories, net |
152 | 73 | ||||||
Other current assets and other assets |
122 | 112 | ||||||
Accounts payable, accrued expenses and other liabilities |
252 | 41 | ||||||
Net cash used for operating activities |
(3,116 | ) | (4,200 | ) | ||||
Investing activities |
||||||||
Sale of investments |
11,725 | | ||||||
Patent costs |
(125 | ) | (88 | ) | ||||
Purchase of fixed assets |
(15 | ) | (121 | ) | ||||
Net cash provided by (used for) investing activities |
11,585 | (209 | ) | |||||
Financing activities |
||||||||
Proceeds from short-term debt |
2,161 | 4,735 | ||||||
Repayment of short-term debt |
(9,854 | ) | (51 | ) | ||||
Net cash (used for) provided by financing activities |
(7,693 | ) | 4,684 | |||||
Effect of exchange rate changes on cash |
(23 | ) | (27 | ) | ||||
Net increase in cash and cash equivalents |
$ | 753 | $ | 248 | ||||
Cash and cash equivalents at beginning of the period |
2,772 | 3,976 | ||||||
Cash and cash equivalents at end of the period |
$ | 3,525 | $ | 4,224 | ||||
Supplemental non-cash activities: |
||||||||
Accumulated amortization of abandoned assets |
$ | 35 | $ | 277 | ||||
Supplemental disclosures: |
||||||||
Cash paid for interest |
$ | 47 | $ | 55 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
6
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Significant Accounting Policies
Basis of Presentation:
In this Quarterly Report on Form 10-Q, the terms CDT, Clean Diesel, Company, we, us,
or our mean Clean Diesel Technologies, Inc. and its wholly-owned subsidiary, Clean Diesel
International, LLC.
The accompanying unaudited condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and in
accordance with accounting principles generally accepted in the United States of America (GAAP) for
interim financial information. Certain information and note disclosures normally included in
financial statements prepared in accordance with GAAP have been omitted or condensed. These interim
condensed consolidated financial statements should be read in conjunction with Clean Diesels
consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for
the year ended December 31, 2009.
The unaudited condensed consolidated financial statements reflect all adjustments that, in the
opinion of management, are necessary for a fair statement of the results of operations, financial
position and cash flows for the interim periods presented. All such adjustments are of a normal
recurring nature. The results for interim periods are not necessarily indicative of results that
may be expected for any other interim period or for the full year.
On October 15, 2010, the Company effected a 1-for-6 reverse split of its common stock. All
share information related to periods prior to October 15, 2010 in the accompanying financial
statements have been restated retroactively to reflect the reverse stock split. The common stock
and additional paid-in capital accounts at December 31, 2009 were adjusted retroactively to reflect
the reverse stock split.
Our management believes that our current cash and cash equivalents at September 30, 2010 were
sufficient to fund our operations for at least the next twelve months on a standalone basis
(pre-Merger). However, on October 15, 2010, we completed the Merger with CSI. CSI has suffered
recurring losses and negative cash flows from operations since inception, and prior to the Merger,
CSIs working capital was severely limited. As of September 30, 2010, CSI had an accumulated
deficit of approximately $152 million and a working capital deficit of $6.3 million. As of December
31, 2009, CSI had an accumulated deficit of approximately $149.3 million and a working capital
deficit of $4.4 million. As a result, CSIs auditors report for fiscal year 2009 included an
explanatory paragraph that expresses substantial doubt about CSIs ability to continue as a going
concern. In addition, CSIs principal credit agreement has been in default since March 31, 2009,
although a forbearance agreement is in place that expires on January 13, 2011 (that date that is 90
days after the effective date of the Merger). At September 30, 2010, CSIs outstanding balance on
the line of credit was $2.6 million with $2.8 million available. Although the Merger and the
respective equity capital raises (CSIs $4.0 million aggregate issuance of secured convertible
notes, which converted to equity immediately prior to the Merger, and Clean Diesels $1.0 million
Regulation S offering of common stock and warrants, which closed immediately prior to the Merger)
provided necessary capital to the combined company, we nevertheless will need to replace CSIs
credit facility and may require additional capital in order to conduct our operations for any
reasonable length of time. If we are not able to replace CSIs credit facility or otherwise
recapitalize the combined company, it would have a material adverse effect on our business,
operating results, financial condition and long-term prospects
Reclassifications:
Some amounts in the prior period financial statements have been reclassified to conform to
current period presentation.
Revision of Prior Period Amounts:
In preparing its financial statements for the three months ended March 31, 2010, Clean Diesel
identified certain errors related to accounting for patents. These errors resulted in the
overstatement of Patents, net and the understatement of patent costs for 2009. In accordance with
SEC Staff Accounting Bulletin Nos. 99 and 108 (SAB 99 and SAB 108), Clean Diesel evaluated these
errors and determined that they were immaterial to each reporting period affected and, therefore,
amendment of previously filed reports was not required. However, if the adjustments to correct the
cumulative errors had been recorded in the first quarter 2010, Clean Diesel
believes the impact would have been significant to the quarter ended March 31, 2010 and would
impact comparisons to prior periods. Clean Diesel has subsequently amended its 2009 quarterly
filings for these immaterial amounts.
7
Table of Contents
The Consolidated Balance Sheet at December 31, 2009 was revised to reflect the cumulative
effect of these errors which resulted in an increase in Accumulated deficit of $185,000. Also, in
accordance with SAB 108, the Consolidated Statement of Operations and Consolidated Statement of
Cash Flows have been revised as follows:
Condensed Consolidated Balance Sheet December 31, 2009
As previously | ||||||||||||
reported | Adjustment | Revised | ||||||||||
(In thousands) | ||||||||||||
Patents, net |
$ | 1,083 | $ | (185 | ) | $ | 898 | |||||
Total assets |
17,432 | (185 | ) | 17,247 | ||||||||
Accumulated deficit |
(65,632 | ) | (185 | ) | (65,817 | ) | ||||||
Total stockholders equity |
8,763 | (185 | ) | 8,578 | ||||||||
Total liabilities and stockholders equity |
17,432 | (185 | ) | 17,247 |
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Condensed Consolidated Statement of Operations Three Months Ended September 30, 2009
As previously | ||||||||||||
reported | Adjustment | Revised | ||||||||||
(In thousands) | ||||||||||||
Patent amortization and other expense |
$ | 56 | $ | 42 | $ | 98 | ||||||
Operating costs and expenses |
2,173 | 42 | 2,215 | |||||||||
Loss from operations |
(1,920 | ) | (42 | ) | (1,962 | ) | ||||||
Net loss |
(1,900 | ) | (42 | ) | (1,942 | ) | ||||||
Basic and diluted loss per common share |
(1.40 | ) | (0.03 | ) | (1.43 | ) |
Condensed Consolidated Statement of Operations Nine Months Ended September 30, 2009
As previously | ||||||||||||
reported | Adjustment | Revised | ||||||||||
(In thousands) | ||||||||||||
Patent amortization and other expense |
$ | 128 | $ | 179 | $ | 307 | ||||||
Operating costs and expenses |
6,905 | 179 | 7,084 | |||||||||
Loss from operations |
(5,931 | ) | (179 | ) | (6,110 | ) | ||||||
Net loss |
(5,449 | ) | (179 | ) | (5,628 | ) | ||||||
Basic and diluted loss per common share |
(4.02 | ) | (0.13 | ) | (4.15 | ) |
Condensed Consolidated Statement of Cash Flows Nine Months Ended September 30, 2009
As previously | ||||||||||||
reported | Adjustment | Revised | ||||||||||
(In thousands) | ||||||||||||
Net loss |
$ | (5,449 | ) | $ | (179 | ) | $ | (5,628 | ) | |||
Loss on abandonment of patents |
16 | 179 | 195 | |||||||||
Accumulated amortization of abandoned assets |
270 | 7 | 277 |
Revenue Recognition:
The Company generates revenue from sales of emission reduction products including Purifier
system hardware; ARIS® advanced reagent injection system injectors and dosing systems;
fuel-borne catalysts, including the Platinum Plus® fuel-borne catalyst products and
concentrate; and license and royalty fees from the ARIS system and other technologies.
Revenue is recognized when earned. For technology licensing fees paid by licensees that are
fixed and determinable, accepted by the customer and nonrefundable, revenue is recognized upon
execution of the license agreement, unless it is subject to completion of any performance criteria
specified within the agreement, in which case it is deferred until such performance criteria are
met. Royalties are frequently required pursuant to license agreements or may be the subject of
separately executed royalty agreements. Revenue from royalties is recognized ratably over the
royalty period based upon periodic reports submitted by the royalty obligor or based on minimum
royalty requirements. Revenue from product sales is recognized when title has passed and our
products are shipped to our customer, unless the purchase order or contract specifically requires
us to provide installation for hardware purchases. For hardware projects in which we are
responsible for installation (either directly or indirectly by third-party contractors), revenue is
recognized when the hardware is installed and/or accepted, if the project requires inspection
and/or acceptance.
Generally, our license agreements are non-exclusive and specify the geographic territories and
classes of diesel engines covered, such as on-road vehicles, off-road vehicles, construction,
stationary engines, marine and railroad engines. At the time of the execution of our license
agreement, we assign the right to the licensee to use our patented technologies. The up-front fees
are not subject to refund or adjustment. We recognize the license fee as revenue at the inception
of the license agreement when we have reasonable assurance that the technologies transferred have
been accepted by the licensee and collectability of the license fee is reasonably assured. The
nonrefundable up-front fee is in exchange for the culmination of the earnings process as the
Company has accomplished what it must do to be entitled to the benefits represented by the revenue.
Under our license agreements, there is no significant
obligation for future performance required of the Company. Each licensee must determine if the
rights to our patented technologies are usable for their business purposes and must determine the
means of use without further involvement by the Company. In most cases, licensees must make
additional investments to enable the capabilities of our patents, including significant
engineering, sourcing of and assembly of multiple components. Our obligation to defend valid
patents does not represent an additional deliverable to which a portion of an arrangement fee
should be allocated. Defending the patents is generally consistent with our representation in the
license agreement that such patents are legal and valid.
9
Table of Contents
Valuation of Accounts Receivable:
Management reviews the creditworthiness of a customer prior to accepting an initial order.
Upon review of the customers credit application and confirmation of the customers credit and bank
references, management establishes the customers terms and credit limits. Credit terms for payment
of products are extended to customers in the normal course of business and no collateral is
required. We receive order acknowledgements from customers confirming their orders prior to our
fulfillment of orders. To determine the allowance for doubtful accounts receivable which adjusts
gross trade accounts receivable downward to estimated net realizable value, management considers
the ongoing financial stability of the Companys customers, the aging of accounts receivable
balances, historical losses and recoveries, and general business trends and existing economic
conditions that impact our industry and customers. In cases where the Company is aware of
circumstances that may impair a specific customers ability to meet its financial obligations, we
record a specific allowance against amounts due from that customer, and thereby reduce the net
recognized receivable to the amount the Company reasonably believes will be collected. An account
is written off only after management has determined that all available means of collection,
including legal remedies, are exhausted.
Cost of Revenue:
Our cost of product sales includes the costs we incur to formulate our finished products into
saleable form for our customers, including material costs, labor and processing costs charged to us
by our outsourced blenders, installers and other vendors, packaging costs incurred by our
outsourced suppliers, freight costs to customers and inbound freight charges from our suppliers.
Our inventory is primarily maintained off-site by our outsourced suppliers. To date, our
purchasing, receiving, inspection and internal transfer costs have been insignificant and have been
included in cost of product sales. Cost of licensing fees and royalties is zero as there are no
incremental costs associated with the revenue.
Patent Expense:
Patents, which include all direct incremental costs associated with initial patent filings and
costs to acquire rights to patents under licenses, are stated at cost and amortized using the
straight-line method over the remaining useful lives, ranging from one to twenty years. During the
nine months ended September 30, 2010, we capitalized $125,000 of patent costs and recognized a
$3,000 loss on the abandonment of certain patents and patent applications. Indirect and other
patent-related costs are expensed as incurred. Patent amortization expense for the three and nine
months ended September 30, 2010 was $18,000 and $51,000, respectively. For the three and nine
months ended September 30, 2009, amortization expense was $14,000 and $40,000, respectively. At
September 30, 2010 and December 31, 2009, the Companys patents, net of accumulated amortization,
were $968,000 and $898,000, respectively.
Basic and Diluted Loss per Common 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 in a manner 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. The Companys computation of diluted net loss per share for the
three and nine months ended September 30, 2010 and 2009 does not include common share equivalents
associated with 127,911 and 146,068 options, respectively, and 66,562 and 67,916 warrants,
respectively, as the result would be anti-dilutive. Further, per share effects of the 4,444 and
6,667 unvested restricted shares under a stock award have not been included in the diluted net loss
per share for the three and nine months ended September 30, 2010 and 2009, respectively, as the
result would be anti-dilutive.
10
Table of Contents
Income Taxes:
At September 30, 2010, there were no unrecognized tax benefits. It is the Companys policy to
classify in the financial statements accrued interest and penalties attributable to a tax position
as income taxes.
Utilization of CDTs U.S. federal tax loss carryforwards for the period prior to December 12,
1995 is limited as a result of the ownership change in excess of 50% attributable to the 1995
Fuel-Tech N.V. rights offering to a maximum annual allowance of $734,500. Utilization of CDTs U.S.
federal tax loss carryforwards for the period after December 12, 1995 and before December 30, 2006
is limited as a result of the ownership change in excess of 50% attributable to the private
placement which was effective December 29, 2006 to a maximum annual allowance of $2,518,985.
Utilization of CDTs tax losses subsequent to 2006 may be limited due to cumulative ownership
changes in any future three-year period. Losses through October 15, 2010 will be limited due to a
change in control as a result of our merger with Catalytic Solutions, Inc. (CSI) (see Notes 13
and 14).
We file our tax returns as prescribed by the tax laws of the jurisdictions in which we
operate. Our tax years after 2006 remain open to examination by various taxing jurisdictions as the
statute of limitations has not expired.
Fair Value of Financial Instruments:
The Companys assets carried at fair value on a recurring basis are its investments (see Note
2). At December 31, 2009, the investments have been classified within level 3 in the valuation
hierarchy as their valuation requires substantial judgment and estimation of factors that are not
currently observable in the market due to the lack of trading in the securities.
Certain financial instruments are carried at cost on our condensed consolidated balance
sheets, which approximates fair value due to their short-term, highly liquid nature. These
instruments include cash and cash equivalents, accounts receivable, prepaid expenses, accounts
payable, customer deposits, accrued expenses and short-term debt.
Recently Adopted and Recently Issued Accounting Pronouncements:
In January 2010, the Financial Accounting Standards Board (FASB) published Accounting
Standards Update (ASU) 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving
Disclosures about Fair Value Measurements. ASU No. 2010-06 clarifies improved disclosure
requirements related to fair value measurements and disclosures in Overall Subtopic 820-10 of the
FASB Codification. The new disclosures and clarifications of existing disclosures are effective for
interim and annual reporting periods beginning after December 15, 2009, except for the disclosure
about purchases, sales, issuances, and settlements in the rollforward of activity in Level 3 fair
value measurements. Those disclosures are effective for fiscal years beginning after December 15,
2010, and for interim periods within those fiscal years. The adoption of this standard will not
have a material impact on the Companys financial position and results of operations.
Note 2. Investments
Classification of investments as current or non-current is dependent upon managements
intended holding period, the securitys maturity date and liquidity considerations based on market
conditions. At December 31, 2009, the Company classified all investments as current based on
managements intention and ability to liquidate the investments within twelve months.
At December 31, 2009, the Companys investments consist of auction rate securities (ARS) and
an auction rate securities right (ARSR). The Company accounts for its ARS investments based upon
accounting standards that provide for determination of the appropriate classification of
investments. Available-for-sale securities are carried at fair value, with unrealized holding gains
and losses, net of tax, reported as a separate component of stockholders equity. Trading
securities are carried at fair value, with unrealized holding gains and losses included in other
income (expense) on our condensed consolidated statements of operations.
The Companys ARSR investment is accounted for based upon a standard that provides a fair
value option election that allows entities to irrevocably elect fair value as the initial and
subsequent measurement attribute for certain assets and liabilities. Changes in fair value are
recognized in earnings as they occur for those assets or liabilities for which the election is
made. The election is made on an instrument by instrument basis at initial recognition of an asset
or liability or upon an event that gives rise to a new basis of accounting for that instrument.
11
Table of Contents
The Companys investments are reported at fair value in accordance with accounting standards
that accomplish the following key objectives:
| Defines fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the
measurement date; |
||
| Establishes a three-level hierarchy (valuation hierarchy) for fair value measurements; |
||
| Requires consideration of the Companys creditworthiness when valuing liabilities; and |
||
| Expands disclosures about instruments measured at fair value. |
The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset
or liability as of the measurement date. A financial instruments categorization within the
valuation hierarchy is based upon the lowest level of input that is significant to the fair value
measurement. The three levels of the valuation hierarchy are as follows:
| Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets. |
||
| Level 2 inputs to the valuation methodology include quoted prices for similar assets
and liabilities in active markets, and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the financial
instrument. |
||
| Level 3 inputs to the valuation methodology are unobservable and significant to the
fair value measurement. |
The Companys investments as of December 31, 2009 have been classified within level 3 as their
valuation requires substantial judgment and estimation of factors that are not currently observable
in the market due to the lack of trading in the securities. Investments are comprised of the
following:
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Auction rate securities |
$ | | $ | 10,577 | ||||
Auction rate securities right |
| 1,148 | ||||||
Total investments |
$ | | $ | 11,725 | ||||
Classified as current assets |
| 11,725 | ||||||
Classified as non-current assets |
$ | | $ | | ||||
Our ARS are variable-rate debt securities, most of which are AAA/Aaa rated, that are
collateralized by student loans substantially guaranteed by the U.S. Department of Education. While
the underlying securities have a long-term nominal maturity, the interest rate is reset through
dutch auctions that are typically held every 28 days. The contractual maturities of our ARS range
from 2027 to 2047. Auctions for our ARS have failed since February 2008 resulting in illiquid
investments for the Company. Our ARS were purchased and held through UBS. In October 2008, the
Company received an offer (the Offer) from UBS AG for a put right permitting us to sell to UBS at
par value all ARS previously purchased from UBS at a future date (any time during a two-year period
beginning June 30, 2010). The Offer also included a commitment to loan us 75% of the UBS-determined
value of the ARS at any time until the put is exercised. We accepted the Offer on November 6, 2008.
Our right under the Offer is in substance a put option (with the strike price equal to the par
value of the ARS) which we recorded as an asset, measured at its fair value, with the resultant
gain recognized in our statement of operations.
For the period through the date the Company accepted the Offer, the Company classified the ARS
as available-for-sale; thereafter, the Company transferred the ARS to the trading category.
The fair value of the ARS was approximately $10.6 million at December 31, 2009. The fair value
of the ARS was determined utilizing a discounted cash flow approach and market evidence with
respect to the ARSs collateral, ratings and insurance to assess default risk, credit spread risk
and downgrade risk. The Company also recorded the ARSR at an initial fair value of $1.3 million.
The fair value of the ARSR was based on an approach in which the present value of all expected
future cash flows were subtracted from the current fair market value of the securities and the
resultant value was calculated as a future value at an interest rate reflective of
counterparty risk. In the nine months ended September 30, 2010, recognized gains on the ARS
were directly offset by losses on the ARSR, resulting in no impact on our results of operations. In
the three and nine months ended September 30, 2009, we recorded a gain of $31,000 and $441,000,
respectively, on the ARS and a loss of $7,000 and $256,000, respectively, on the ARSR, resulting in
a $24,000 and $185,000 net gain, respectively, included in other income (expense) on our unaudited
condensed consolidated statements of operations.
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During the first quarter of 2010, UBS began purchasing certain of our ARS investments at par
value and on June 30, 2010 we exercised our put option under the Offer and sold to UBS our
remaining ARS for approximately $5.2 million, representing par value. Of this amount, approximately
$3.2 million was used in July 2010 to pay down the Companys outstanding borrowings to UBS.
Interest income for the three months ended September 30, 2010 and 2009 was approximately
$2,000 and $46,000, respectively, and for the nine-month periods then ended was approximately
$93,000 and $187,000, respectively. Accrued interest receivable at September 30, 2010 and December
31, 2009 was approximately zero and $7,000, respectively.
The table below includes a roll-forward of the Companys investments in ARS and ARSR for the
nine months ended
September 30, 2010:
2010 | ||||
Significant | ||||
Unobservable | ||||
Inputs | ||||
(Level 3) | ||||
(In thousands) | ||||
Fair value at beginning of period |
$ | 11,725 | ||
Purchases |
| |||
Sales |
(11,725 | ) | ||
Transfers (out) in |
| |||
Unrealized gain (loss) included in statement of operations |
| |||
Fair value at end of period |
$ | | ||
Change in unrealized gain (loss) |
$ | | ||
Note 3. Inventories
Inventories are stated at the lower of cost or market with cost determined using the average
cost method. Inventories consist of the following:
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Finished Platinum Plus fuel-borne catalyst |
$ | 130 | $ | 85 | ||||
Platinum concentrate/metal |
246 | 449 | ||||||
Hardware |
510 | 587 | ||||||
Other |
93 | 11 | ||||||
$ | 979 | $ | 1,132 | |||||
Less: inventory reserves |
(72 | ) | (73 | ) | ||||
Inventories, net |
$ | 907 | $ | 1,059 | ||||
Note 4. Short-term Debt
On July 25, 2008, the Company borrowed $3.0 million from the demand loan facility with UBS
collateralized by our ARS, a facility we had arranged in May 2008. Management determined to draw
down the entire facility as a matter of financial prudence to secure available cash. The loan
facility was available for our working capital purposes and required that we continue to meet
certain collateral maintenance requirements, such that our outstanding borrowings could not exceed
50% of the value of our ARS as determined by the lender. No facility fee was required. Borrowings
bore interest at a floating interest rate per annum equal to the sum of the prevailing daily 30-day
Libor plus 25 basis points.
In November 2008, we accepted the Offer from UBS AG (see Note 2). UBS committed to loan us 75%
of the value of the ARS as determined by UBS at any time until the ARSR is exercised. We applied
for the loan which UBS committed would be on a no net cost
basis to the Company. UBS approved our credit application on January 14, 2009 and approved a
$6.5 million credit facility pursuant to its Offer. On September 4, 2009, we arranged an increase
of the credit line to $7.7 million.
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The outstanding balance of the short-term debt at December 31, 2009 was $7.7 million. In July
2010, pursuant to the terms of our agreement with UBS, we used a portion of the proceeds from our
sale of ARS investments to pay down the remaining UBS borrowings.
Interest expense was approximately zero and $25,000 for the three months ended September 30,
2010 and 2009, respectively and $47,000 and $57,000 for the nine months ended September 30, 2010
and 2009 respectively.
Note 5. Stockholders Equity
In March 2009, we issued 6,666 restricted shares of our common stock under our Incentive Plan
(see Note 6).
In the first nine months of 2010, 1,328 of the Companys outstanding warrants expired. At
September 30, 2010, the Company had 66,562 warrants outstanding, exercisable at a weighted-average
exercise price of $69.10 with a weighted-average remaining life of 1.77 years.
Note 6. Stock-Based Compensation
The Company maintains a stock award plan approved by its stockholders, the 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 awards or cash, or combinations of these as
determined by the board of directors. Awards are granted at fair market value on the date of grant
and typically expire ten years after date of grant. Participants in the Plan may include the
Companys directors, officers, employees, consultants and advisors (except consultants or advisors
in capital-raising transactions) as the board of directors may determine. The maximum number of
awards allowed under the Plan is 17.5% of the Companys outstanding common stock less the then
outstanding awards, subject to sufficient authorized shares.
Share-based compensation cost recognized under ASC 718 was approximately $27,000 and $161,000
for the three months ended September 30, 2010 and 2009, respectively and $84,000 and $579,000 for
the nine months ended September 30, 2010 and 2009, respectively. As of September 30, 2010, there
was approximately $0.1 million of unrecognized compensation cost related to stock options and
restricted shares granted under the Plan. The cost is expected to be recognized over a
weighted-average period of 0.5 years.
The following table summarizes information concerning stock options outstanding including the
related transactions under the Plan for the nine months ended September 30, 2010:
Weighted- | ||||||||||||||||
Weighted- | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Number of | Exercise | Contractual | Intrinsic | |||||||||||||
Shares* | Price | Term in Years | Value | |||||||||||||
Options Outstanding as of December 31, 2009 |
146,068 | $ | 62.41 | |||||||||||||
Granted |
| $ | | |||||||||||||
Exercised |
| $ | | |||||||||||||
Forfeited |
(1,111 | ) | $ | 16.23 | ||||||||||||
Expired |
(17,046 | ) | $ | 71.79 | ||||||||||||
Options outstanding as of September 30, 2010 |
127,911 | $ | 61.57 | 3.4 | $ | | ||||||||||
Options exercisable as of September 30, 2010 |
123,413 | $ | 63.06 | 3.2 | $ | | ||||||||||
* | Table does not include 6,667 shares issued in 2009 as a restricted
stock award under the Plan. |
The aggregate intrinsic value (market value of stock less option exercise price) in the
preceding table represents the total pretax intrinsic value, based on the Companys closing stock
price on September 30, 2010, adjusted for the effect of the Companys 1 for 6 reverse stock split
(see Note 1), which would have been received by the holders had all holders of awards and options
in the money exercised their options as of that date.
14
Table of Contents
No stock options were exercised in the nine months ended September 30, 2010 and 2009.
In 2009, the board of directors awarded 6,667 shares to its newly-elected Chief Executive
Officer at an average market price of $9.75 per share, representing the high and low market price
on the date of award, March 30, 2009. These shares vest as to one-third of the total on each of
February 10, 2010, 2011 and 2012. The total fair value of the award was $65,000 which is being
charged to expense over the vesting period. As a result of the Chief Executive Officers
resignation on October 8, 2010, no further expense for this award will be recognized.
The Company estimates the fair value of stock options using a Black-Scholes option pricing
model. Key input assumptions used to estimate the fair value of stock options include the expected
term, expected volatility of the Companys stock, the risk free interest rate, option forfeiture
rates, and dividends, if any. The expected term of the options is based upon the historical term
until exercise or expiration of all granted options. The expected volatility is derived from the
historical volatility of the Companys stock on the U.S. NASDAQ Capital Market (the
Over-the-Counter market prior to October 3, 2007) for a period that matches the expected term of
the option. The risk-free interest rate is the constant maturity rate published by the U.S. Federal
Reserve Board that corresponds to the expected term of the option. ASC 718 requires forfeitures to
be estimated at the time of grant in order to estimate the amount of share-based awards that will
ultimately vest. The estimate is based on the Companys historical rates of forfeitures. ASC 718
also requires estimated forfeitures to be revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. The dividend yield is assumed as 0% because the Company
has not paid dividends and does not expect to pay dividends in the future.
Note 7. Commitments and Contingencies
Legal Proceedings
From time to time, the Company is involved in legal proceedings in the ordinary course of its
business. The litigation process is inherently uncertain, and the Company cannot guarantee that the
outcome of existing proceedings will be favorable for the Company or that they will not be material
to the Companys business, results of operations or financial position. However, the Company does
not currently believe these matters will have a material adverse effect on its business, results or
financial position.
On April 30, 2010, the Company received a complaint from the Hartford, Connecticut office of
the U.S. Department of Labor under Section 806 of the Corporate and Criminal Fraud Accountability
Act of 2001, Title VIII of the Sarbanes-Oxley Act of 2002, alleging that Ms. Ann B. Ruple, former
Vice President, Treasurer and Chief Financial Officer of Clean Diesel, had been subject to
discriminatory employment practices. The Companys Board of Directors terminated Ms. Ruples
employment on April 19, 2010. The complainant in this proceeding does not demand specific relief.
However, the statute provides that a prevailing employee shall be entitled to all relief necessary
to make the employee whole, including compensatory damages which may be reinstatement, back pay
with interest, front pay, and special damages such as attorneys and expert witness fees. The
Company responded on June 14, 2010, denying the allegations of the complaint. Based upon current
information, management, after consultation with legal counsel defending the Companys interests,
believes the ultimate disposition will have no material effect upon the Companys business, results
or financial position.
Note 8. Related Party Transactions
Mr. Park, our Chairman, is also a principal and chairman of Innovator Capital Limited, a
financial services company based in London, England, which firm has provided services to the
Company. On November 20, 2009, the Company entered into an engagement letter with Innovator to
provide financing and merger and acquisition services (Engagement Letter). The Engagement Letter
had an initial three month term during which Innovator would (i) act for the Company in arranging a
private placement financing of $3.0 million to $4.0 million from the sale of the Companys common
stock and warrants and (ii) assist the Company in merger and acquisition activities. Effective
February 20, 2010, the Company extended the term of the Engagement Letter to June 30, 2010 and
revised the minimum and maximum range of private placement financing to $1.0 million to $1.5
million. On August 6, 2010, the Company further extended the term of the Engagement Letter (see
Note 13).
For its financing services, Innovator will receive (i) a placing commission of five percent
(5%) of all monies received by the Company and (ii) financing warrants to acquire shares of common
stock of the Company equal in value to fifteen percent (15%) of the total gross proceeds received
by the Company in the financing, such financing warrants to be exercisable at a price equal to a
ten percent (10%) premium to the price per share of common stock in the financing. Issuance of the
financing warrants is contingent on the stockholders of the Company authorizing additional common
stock.
15
Table of Contents
For its merger and acquisition services, Innovator will receive monthly retainer fees of
$10,000 and success fees as a percentage of transaction value of five percent (5%) on the first
$10.0 million, four percent (4%) on the next $3.0 million, three percent (3%) on the next $2.0
million, and two percent (2%) on amounts above $15.0 million in connection with possible merger and
acquisition transactions. Success fees are payable in cash or shares or a combination of cash or
shares as determined by the Board of the Company (see Notes 13 and 14).
The Engagement Letter further provides that retainer fees may be deducted from success fees,
that Innovator shall be reimbursed for its ordinary and necessary out of pocket expenses, that the
Engagement Letter is subject to Delaware law, and that disputes between the parties are subject to
arbitration.
Selling, general and administrative expenses for the three and nine months ended September 30,
2010 include $30,000 and $90,000, respectively, related to services rendered by Innovator Capital
under the terms of the Engagement Letter.
Effective January 27, 2010, we engaged David F. Merrion, a director of the Company, to perform
consulting services for us as an expert witness in an administrative proceeding related to a patent
application with respect to diesel engine technology. For these services, which commenced February
1, 2010 and were completed on March 16, 2010, Mr. Merrion was paid approximately $20,000, at the
rate of $300 per hour or a daily maximum of $3,000 per day.
Note 9. Significant Customers
For the three and nine months ended September 30, 2010 and 2009, revenue derived from certain
customers comprised 10% or more of our consolidated revenue (significant customers) as set forth
in the table below:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Customer A |
* | * | 38.7 | % | * | |||||||||||
Customer B |
15.5 | % | * | * | * | |||||||||||
Customer C |
13.8 | % | * | * | * | |||||||||||
Customer D |
10.6 | % | * | * | * | |||||||||||
Customer E |
* | 20.0 | % | * | 11.5 | % | ||||||||||
Customer F |
* | * | * | 10.4 | % | |||||||||||
Customer G |
* | 11.6 | % | * | * | |||||||||||
Customer H |
* | * | * | 13.6 | % |
* | 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 periods indicated. |
At September 30, 2010, Clean Diesel had two customers (not included in the table above) that
represented approximately 48.1 % of its gross accounts receivable balance.
16
Table of Contents
Note 10. Comprehensive Loss
Components of comprehensive loss follow:
(in thousands)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net loss |
$ | (1,493 | ) | $ | (1,942 | ) | $ | (3,819 | ) | $ | (5,628 | ) | ||||
Other comprehensive income
(loss): |
||||||||||||||||
Foreign currency translation
adjustment |
(42 | ) | (64 | ) | 26 | (20 | ) | |||||||||
Comprehensive loss |
$ | (1,535 | ) | $ | (2,006 | ) | $ | (3,793 | ) | $ | (5,648 | ) | ||||
17
Table of Contents
Note 11. Geographic Information
CDT sells its products and licenses its technologies throughout the world. A geographic
distribution of revenue consists of the following:
(in thousands)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenue: |
||||||||||||||||
U.S. |
$ | 88 | $ | 111 | $ | 306 | $ | 489 | ||||||||
U.K./Europe |
239 | 91 | 1,050 | 374 | ||||||||||||
Asia |
14 | 51 | 41 | 111 | ||||||||||||
Total |
$ | 341 | $ | 253 | $ | 1,397 | $ | 974 | ||||||||
The Company has patent coverage in North and South America, Europe, Asia, Africa and
Australia. As of September 30, 2010 and December 31, 2009, the Companys assets comprise the
following:
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
U.S. |
$ | 4,274 | $ | 15,551 | ||||
Foreign |
1,771 | 1,696 | ||||||
Total assets |
$ | 6,045 | $ | 17,247 | ||||
Note 12. Severance Charges
On February 10, 2009, the Companys Board of Directors elected Michael L. Asmussen as
President and Chief Executive Officer replacing Dr. Bernhard Steiner. As a consequence of his
termination of employment, Dr. Steiner was entitled to salary of approximately $315,445 (EUR
241,500) per annum until September 13, 2010, the remainder of his contract term, along with
specified expenses not to exceed an aggregate of approximately $4,300, to be paid in monthly
installments. During the three months ended March 31, 2009, the Company recognized a severance
charge of $510,000 for this obligation. As a result of Dr. Steiners death on June 26, 2010, the
Companys obligation under his severance arrangement ceased and the remaining severance accrual of
$60,000 was reversed into income.
On August 4, 2009, the Board of Directors adopted a plan to implement a company-wide reduction
in force effective August 7, 2009. In accordance with ASC 420, Exit or Disposal Cost Obligations,
the Company recognized approximately $448,000 in severance charges in the third quarter of 2009.
During the three months ended March 31, 2010, the Company reversed $103,000 of its severance
accrual to recognize a reduction in the Companys obligations under these severance arrangements.
A summary of the activity in the severance accrual is as follows:
(In thousands) | ||||
Balance at December 31, 2009 |
$ | 389 | ||
Provisions (Reversals) |
(163 | ) | ||
Payments |
(226 | ) | ||
Balance at September 30, 2010 |
$ | | ||
18
Table of Contents
Note 13. Merger
On May 13, 2010, the Company entered into an Agreement and Plan of Merger (the Merger
Agreement) with Catalytic Solutions, Inc. (AIM: CTS and CTSU), a global manufacturer and
distributor of emissions control systems and products based in Ventura, CA. The proposed merger is
a transaction that will result in the combination of the businesses of Clean Diesel and CSI,
whereby CSI will become a wholly-owned subsidiary of Clean Diesel (the Merger). Under the terms
of the Merger Agreement:
| For accounting purposes, CSI is considered to be acquiring the Company. |
||
| In exchange for their shares of CSI common stock, the shareholders of CSI will receive
shares, and warrants to purchase shares, of Clean Diesel common stock. CSI shareholders will
receive such numbers of Clean Diesel common stock so that after the Merger, CSI will own
approximately 60% of the outstanding shares of Clean Diesel common stock. In addition, CSI
shareholders will receive warrants to purchase up to 3 million shares of Clean Diesel common
stock. |
||
| The Merger is conditional among other matters on obtaining Clean Diesel stockholder
approval and CSI shareholder approval and also a number of further closing requirements
including that Clean Diesel and CSI each have $1.0 million in cash or equivalent at the time
of the Merger. |
||
| The Company will amend its certificate of incorporation to effect a reverse stock split
in a ratio ranging from 1-for-3 to 1-for-8 of all issued and outstanding shares of Clean
Diesel common stock, the final ratio to be determined within the discretion of the Clean
Diesel Board of Directors, to occur immediately before the closing of the Merger. |
In connection with the Merger, if successful, Innovator Capital, an investment banking firm
described in Note 8, is expected to receive a fee of approximately $761,000. On July 21, 2010, the
Companys board formed a Special Committee of Independent Directors (Special Committee) to review
and consider various matters in connection with the Companys proposed merger with CSI.
On August 6, 2010, based upon a recommendation from the Special Committee, the Companys board
voted to extend the term of Innovator Capitals engagement to the earlier of September 30, 2010 or
the closing of the Merger and to determine the form of payment of Innovator Capitals fee for
merger and acquisition services. In connection with a successful merger with CSI, Innovator
Capitals fee will be comprised of $500,000 in cash (inclusive of monthly retainers) and 32,414
shares (194,486 shares on a pre-split basis) of Clean Diesel common stock.
The Merger Agreement may be terminated at any time prior to the effective time of the Merger
by mutual written consent. The Merger Agreement obligates each party to pay a termination fee of
$300,000 in cash plus reasonable costs and expenses not to exceed $350,000 in the aggregate, to the
counter party if either the Company or CSI fails to approve the merger under conditions stipulated
in the Merger Agreement.
Both CSI and Clean Diesel intend to issue additional securities prior to the Merger in order
that they can finance current operations. The Company has received commitment letters from existing
stockholders to raise approximately $1.0 million for the issuance of additional shares of common
stock and warrants in a Regulation S offering. Under the terms of the Companys private placement,
the closing of which is conditioned upon the consummation of the Merger, Clean Diesel will sell
units consisting of up to 109,020 shares (654,118 shares on a pre-split basis) of its common stock
and warrants to purchase up to 166,666 shares (1,000,000 on a pre-split basis) of its common stock.
In connection with this offering, Innovator Capital will receive a fee of $50,000, in cash and 15%
of the gross proceeds of the capital raise through the issuance of 14,863 warrants (89,180 warrants
on a pre-split basis) to purchase common stock.
In connection with the Merger, the Company has entered into certain employee agreements,
including a Transition Services Agreement with Charles W. Grinnell, Vice President, General
Counsel, Corporate Secretary and a Director of the Registrant. The agreements provide for aggregate
retention and transition bonuses of $250,000. Each agreement contains a termination clause to the
effect that if the Merger does not occur on or before September 6, 2010, or such later date as
determined by the Company, the agreements will be void and no bonus will be paid.
Note 14. Subsequent Events
On October 15, 2010, Clean Diesels wholly-owned subsidiary, CDTI Merger Sub, Inc., merged
with and into CSI, with CSI continuing as the surviving corporation and as a wholly-owned
subsidiary of Clean Diesel. Immediately prior to the Merger, and as contemplated by the Merger
Agreement, a one-for-six reverse stock split took effect.
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Table of Contents
Pursuant to the terms of the Merger Agreement, each outstanding share of (i) CSI Class A
Common Stock was converted into and became exchangeable for 0.007888 fully paid and non-assessable
shares of Clean Diesel common stock on a post-split basis (0.04732553 on a pre-split basis) with
any fractional shares to be paid in cash and warrants to acquire 0.006454 fully paid and
non-assessable shares of Clean Diesel common stock for $7.92 per share on a post-split basis
(0.03872267 shares for $1.32 per share on a pre-split basis); and (ii) CSI Class B Common Stock was
converted into and became exchangeable for 0.010039 fully paid and non-
assessable shares of Clean Diesel common stock on a post-split basis (0.06023308 on a pre-split
basis) with any fractional shares to be paid in cash. In connection with the Merger and as
contemplated by the Merger Agreement, we also issued 166,666 shares of common stock on a post-split
basis (1,000,000 shares on a pre-split basis) and warrants to purchase an additional 166,666 shares
of common stock on a post-split basis (1,000,000 shares on a pre-split basis) to Allen & Company
LLC, CSIs financial advisor. The warrants issued in the Merger expire on the earlier of (x)
October 15, 2013 (the third anniversary of the effective time of the Merger) and (y) the date that
is 30 days after we give notice to the warrant holder that the market value of one share of our
common stock has exceeded 130% of the exercise price of the warrant for 10 consecutive days.
As provided in the Merger Agreement, Clean Diesel is issuing (or reserving for issuance
pursuant to in-the-money warrants) approximately 2,287,873 shares of Clean Diesel common stock on
a post-split basis (13,727,658 on a pre-split basis) and warrants to purchase an additional 666,583
shares of Clean Diesel common stock (4,000,000 on a pre-split basis) in connection with the Merger.
Based on the closing price of $0.82 per share of Clean Diesel common stock on The NASDAQ Capital
Market (NASDAQ) on October 15, 2010, the last trading day before the effectiveness of the reverse
stock split and the closing of the Merger, the aggregate value of the Clean Diesel common stock
issued in connection with the Merger was approximately $11,256,680.
In addition, on October 15, 2010, prior to the completion of the Merger, pursuant to binding
commitment letters from investors in our Regulation S private placement we sold units consisting of
109,020 shares of our common stock on a post-split basis (654,118 on a pre-split basis) and
warrants to purchase 166,666 shares of our common stock on a post-split basis (1,000,000 on a
pre-split basis) for approximately $1,000,000 in cash before commissions and expenses. The warrants
issued in our Regulation S private placement have an exercise price of $7.92 on a post-split basis
($1.32 on a pre-split basis) and expire on the earlier of (i) October 15, 2013 (the third
anniversary of the effective time of the Merger) and (ii) the date that is 30 days after we give
notice to the warrant holder that the market value of one share of our common stock has exceeded
130% of the exercise price of the warrant for 10 consecutive days.
In connection with the Merger, Innovator Capital, an investment banking firm described in Note
8, received a fee of approximately $761,000 comprised of $500,000 in cash (inclusive of monthly
retainers) and 32,414 shares (194,486 shares on a pre-split basis) of Clean Diesel common stock. In
addition, Innovator Capital received a fee of $50,000, in cash and 15% of the gross proceeds of
the Companys Regulation S private placement through the issuance of 14,863 warrants (89,180
warrants on a pre-split basis) to purchase common stock.
Following the consummation of the Merger, the holders of CSI securities (including the holders
of its secured convertible notes) and CSIs financial advisor collectively hold approximately 60%
of our outstanding common stock and Clean Diesel stockholders (including investors in its
Regulation S offering discussed herein) hold the remaining 40% of our outstanding common stock. For
legal purposes, Clean Diesel acquired CSI, although the combination will be accounted for as a
reverse merger with CSI deemed to be the acquiror for accounting and financial reporting
purposes.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our business and analysis of our financial condition and results of
operations reflects our business as of September 30, 2010, prior to giving effect to the Merger,
and should be read in conjunction with our unaudited condensed consolidated interim financial
statements and the related notes thereto appearing elsewhere in this Form 10-Q and our audited
consolidated financial statements and related notes thereto and the description of our business
appearing in the Form 10-K. For additional financial information on CSI, please see the historical
financial data of CSI, the unaudited pro forma condensed financial information of the combined
company, and other information materials filed with the Form S-4.
This discussion contains forward-looking statements that involve risks and uncertainties. See
Cautionary Note Regarding Forward-Looking Statements. Known and unknown risks, uncertainties and
other factors could cause our actual results to differ materially from those projected in any
forward-looking statements. In evaluating these statements, you should specifically consider
various factors, including, but not limited to, those set forth under the caption Risk Factors in
the Form 10-K and the Form S-4.
Results of Operations
Three Months ended September 30, 2010 Compared to Three Months ended September 30, 2009
Total revenue in the three months ended September 30, 2010 was $341,000 compared to $253,000
in the three months ended September 30, 2009, an increase of $88,000, or 34.8%, reflecting
increased traction in our attempt to establish the company in the retrofit space. Revenue for the
three months ended September 30, 2010 consisted of approximately 83.0% in product sales and 17.0%
in technology licensing fees and royalties. Of our operating revenue for the three months ended
September 30, 2009, approximately 88.9% was from product sales and 11.1% was from technology
licensing fees and royalties. The mix of our revenue sources during any reporting period may have a
material impact on our operating results. In particular, our execution of technology licensing
agreements, and the timing of the revenue recognized from these agreements, has not been
predictable.
Product sales were $283,000 in the third quarter of 2010 compared to $225,000 in the same
quarter of 2009, an increase of $58,000. This increase in product sales was attributable primarily
to higher demand for our Platinum Plus Purifier Systems, a product comprised of a diesel
particulate filter along with our Platinum Plus fuel-borne catalyst. The sales of our Purifier
Systems provide us with recurring revenue from use of our Platinum Plus fuel-borne catalyst that
enables the regeneration of the diesel particulate filter. We believe we will have the opportunity
to expand this business opportunity as we build the certified product portfolio and infrastructure
required to address additional low emission zones throughout the globe.
Our technology licensing fees and royalties were also higher in 2010 with $58,000 in the three
months ended September 30, 2010 compared to $28,000 in the same quarter of 2009. These revenues are
primarily attributable to royalties related to our ARIS technologies. While we have not executed
new technology license agreements in 2010, we continue our efforts to consummate technology license
agreements with manufacturers and component suppliers for the use of our ARIS technologies for
control of oxides of nitrogen (NOx) using our selective catalytic reduction (SCR) emission control,
the combination of exhaust gas recirculation (EGR) with SCR technologies, and hydrocarbon injection
for lean NOx traps, NOx catalysts and diesel particulate filter regeneration.
Our total cost of revenue was $131,000 in the three month period ended September 30, 2010
compared to $217,000 in the three month period ended September 30, 2009. Our gross profit as a
percentage of revenue was 61.6% and 14.2% for the three month periods ended September 30, 2010 and
2009, respectively. The increase in gross margin was principally due to changes in sales mix during
the periods, combined with a charge in the prior year period to adjust the carrying value of
inventories to reflect realizable value.
Our cost of revenue product sales includes the costs we incur to formulate our finished
products into saleable form for our customers, including material costs, labor and processing costs
charged to us by our outsourced blenders, installers and other vendors, packaging costs incurred by
our outsourced suppliers, freight costs to customers and inbound freight charges from our
suppliers. Our inventory is primarily maintained off-site by our outsourced suppliers. To date, our
purchasing, receiving, inspection and internal transfer costs have been insignificant and have been
included in cost of revenue product sales. In addition, in 2009 the costs of our warehouse of
approximately $21,000 per year were included in selling, general and administrative expenses. Our
gross margins may not be comparable to those of other entities, because some entities include all
of the costs related to their distribution network in cost of revenue and others like us exclude a
portion of such costs from gross margin, including such costs instead within operating
expenses. Cost of revenue licensing fees and royalties is zero as there are no incremental
costs associated with the revenue. Cost of consulting and other revenue includes incremental out of
pocket costs to provide consulting services.
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Selling, general and administrative expenses were $1,662,000 in the three months ended
September 30, 2010 compared to $1,324,000 in the comparable 2009 period, an increase of $338,000,
or 25.5%. The increase in selling, general and administrative costs is primarily attributable to
increased professional fees incurred in connection with our merger with CSI, which was completed on
October 15, 2010. The increased professional fees were partially offset by lower compensation and
benefits, travel, rent and related occupancy expenses in 2010. Selling, general and administrative
expenses are summarized as follows:
Three Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Compensation and benefits |
$ | 634 | $ | 784 | ||||
Non-cash stock-based compensation |
27 | 159 | ||||||
Total compensation and benefits |
661 | 943 | ||||||
Professional services |
753 | 127 | ||||||
Travel |
68 | 78 | ||||||
Occupancy |
93 | 115 | ||||||
Bad debt (recovery) provision |
23 | (14 | ) | |||||
Depreciation and all other |
64 | 75 | ||||||
Total selling, general and administrative expenses |
$ | 1,662 | $ | 1,324 | ||||
Excluding the non-cash stock-based charges, compensation and benefit expenses were $634,000
for the three months ended September 30, 2010 compared to $784,000 in the comparable prior year
period. This decrease of $150,000, or 19.1%, is due primarily to the reduction in force implemented
effective August 7, 2009. The reduction in non-cash stock-based compensation reflects a reduction
in our workforce and related issuance of stock-based awards.
Expenses related to professional services increased by $626,000 to $753,000 in the three
months ended September 30, 2010 compared to $127,000 in the comparable prior year period. The
increase principally reflects legal, accounting, investment banking fees and other expenses
incurred in connection with our merger with CSI, which was completed on October 15, 2010.
Reimbursement of expenses under grant program represents amounts reimbursed under a $961,000
diesel emissions reduction technology development grant from the Houston Advanced Research Center
(HARC). The project goal is to develop and verify a Nitrogen Oxide-Particulate Matter (NOx-PM)
reduction retrofit system for on- and off-road engines, including those used in Class 8 type diesel
fleets. The program is administered by HARC on behalf of the Texas Environmental Research
Consortium utilizing funding provided by the State of Texas. We anticipate completing the HARC
program by the first quarter of 2011.
Research and development expenses were $55,000 in the three months ended September 30, 2010
compared to $128,000 in the three months ended September 30, 2009, a decrease of $73,000.
Presently, we are working to overcome gaps in our technology and product portfolios brought about
by volatile markets and past development setbacks. In addition to development of new products, our
2010 projects include field testing of fuel economy and emission control technologies in connection
with our HARC project. Total research and development expenses for the three months ended September
30, 2009 included $2,000 of non-cash charges for stock-based compensation.
Patent amortization and other patent related expense was $32,000 in the three months ended
September 30, 2010 compared to $98,000 in the same prior year period, a decrease of $66,000. The
2009 expense includes the write-off of $42,000 in capitalized costs related to the abandonment of
certain patents and patent applications not material to our business, the continued maintenance of
which was judged by management to be uneconomic.
At each reporting period, we evaluate the events or changes in circumstances that may indicate
that patents are not recoverable. The types of events and changes in circumstances that would
indicate the carrying value of our patents is not recoverable and therefore, impairment testing
would be triggered include the following: permanent elimination of mandated compliance with
emission reduction standards; reduction in overall market prevalence of diesel engines;
obsolescence of our technologies due to new discoveries and inventions; and an adverse action or
assessment against our technologies.
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Our technology is comprised of patents, patent applications, trade or service marks, data and
know-how. We consider the life of our technologies to be commensurate with the remaining term of
our U.S. and corresponding foreign patents. Our patents have expiration dates ranging from 2010
through 2026, with the majority of the material patents upon which we rely expiring in 2018 and
beyond. We believe that we have sufficient patent coverage surrounding our core patents that
effectively serves to provide us longer proprietary protection. Our patents comprise technologies
that have been asserted as the technologies of choice by various automotive original equipment
manufacturers (OEMs) to meet mandates to comply with regulatory requirements that went into effect
starting in 2010 (EPA 2010). We monitor evolving technologies in the automotive and other
applicable industries to evaluate obsolescence of any of our patents.
Although we have seen certain suspensions and delays in mandated emissions requirements, we
expect sufficient revenue over the remaining life of the underlying patents to recover the carrying
value of our patents. We believe the emission reduction mandates will be phased in over time so
that despite volatility in our revenue streams, we should realize the expected revenue from our
patents. Our intellectual property strategy has been to build upon our base of core technology with
newer advanced technology patents developed or purchased by us. In many instances, we have
incorporated the technology embodied in our core patents into patents covering specific product
applications, including product design and packaging. We believe this building-block approach
provides greater protection to us and our licensees than relying solely on our core patents.
Interest income was $2,000 in the three months ended September 30, 2010 compared to $46,000 in
the three months ended September 30, 2009, a decrease of $44,000, principally due to lower invested
balances and rates of return during the 2010 period.
Other income (expense) was zero in the three months ended September 30, 2010 compared to
($26,000) in the comparable 2009 period. The 2009 other income (expense) is comprised of foreign
currency transaction losses, net of gains of ($24,000), interest expense of ($25,000) and gain, net
on the fair value of investments of $23,000.
Nine Months ended September 30, 2010 Compared to Nine Months ended September 30, 2009
Total revenue for the first nine months of 2010 was $1,397,000 compared to $974,000 in the
first nine months of 2009, an increase of $423,000, or 43.4%, reflecting an increase in product
sales as well as licensing fees and royalties. Operating revenue in the nine months ended September
30, 2010 consisted of approximately 90.6% in product sales and 9.4% in technology licensing fees
and royalties. Total revenues in the nine months ended September 30, 2009 consisted of
approximately 90.2% in product sales and 9.8% in technology licensing fees and royalties. The mix
of our revenue sources during any reporting period may have a material impact on our operating
results. In particular, our execution of technology licensing agreements, and the timing of the
revenue recognized from these agreements, has not been predictable.
Product sales in the nine months ended September 30, 2010 were $1,265,000 compared to $879,000
in the same prior year period, an increase of $386,000 or 43.9%. The increase in product sales was
attributable primarily to higher demand for our Platinum Plus Purifier Systems, a product comprised
of a diesel particulate filter along with our Platinum Plus fuel-borne catalyst.
Our technology licensing fees and royalties were also higher in 2010 with $132,000 in the nine
months ended September 30, 2010 compared to $95,000 in the same period of 2009. These revenues are
primarily attributable to royalties related to our ARIS technologies. We have not executed new
technology license agreements in 2010.
Our total cost of revenue was $816,000 in the nine-month period ended September 30, 2010
compared to $668,000 in the nine-month period ended September 30, 2009. The increase in our cost of
sales is due to an increase in sales volume. Our gross profit as a percentage of revenue was 41.6%
and 31.4% for nine-month periods ended September 30, 2010 and 2009, respectively, with the increase
largely attributable to the mix of revenues during the periods.
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Selling, general and administrative expenses were $4,395,000 in the nine months ended
September 30, 2010 compared to $4,837,000 in the comparable 2009 period, a decrease of $442,000, or
9.1%. The decrease in selling, general and administrative costs is primarily
attributable to lower compensation and occupancy expenses partially offset with an increase in
professional services related to our merger with CSI which was completed on October 15, 2010.
Selling, general and administrative expenses are summarized as follows:
Nine Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Compensation and benefits |
$ | 1,901 | $ | 2,833 | ||||
Non-cash stock-based compensation |
84 | 569 | ||||||
Total compensation and benefits |
1,985 | 3,402 | ||||||
Professional services |
1,695 | 545 | ||||||
Travel |
188 | 266 | ||||||
Occupancy |
316 | 495 | ||||||
Bad debt (recovery) provision |
23 | (148 | ) | |||||
Depreciation and all other |
188 | 277 | ||||||
Total selling, general and administrative expenses |
$ | 4,395 | $ | 4,837 | ||||
Our aggregate non-cash charges for the fair value of stock options and warrants in the nine
months ended September 30, 2010 were $84,000. This compares to $579,000 in total non-cash
stock-based compensation expense in the nine months ended September 30, 2009, of which $569,000 was
included in selling, general and administrative expenses and $10,000 in research and development
expenses.
Excluding the non-cash stock-based charges, compensation and benefit expenses were $1,901,000
for the nine months ended September 30, 2010 compared to $2,833,000 in the comparable prior year
period, a decrease of $932,000, or 32.9%.
Professional services include audit-related costs, legal fees, as well as investor relations
and financial advisory fees. The increase principally reflects legal, accounting and investment
banking fees incurred in connection with our merger with CSI, which was completed on October 15,
2010.
We relocated our U.S. corporate offices in January 2009 and incurred rent expense on both our
old and new U.S. headquarters due to the timing of our relocation and expiration of the old lease.
Reimbursement of expenses under grant program represents amounts reimbursed under a $961,000
diesel emissions reduction technology development grant from the Houston Advanced Research Center
(HARC). The project goal is to develop and verify a Nitrogen Oxide-Particulate Matter (NOx-PM)
reduction retrofit system for on- and off-road engines, including those used in Class 8 type diesel
fleets. The program is administered by HARC on behalf of the Texas Environmental Research
Consortium utilizing funding provided by the State of Texas. We anticipate completing the HARC
program by the first quarter of 2011.
On February 10, 2009, our Board of Directors elected Michael L. Asmussen, as President and
Chief Executive Officer replacing Dr. Bernhard Steiner. Mr. Asmussen was also appointed to serve as
a Director of the Company. Effective February 11, 2009, Dr. Steiner resigned as a Director of the
Company. As a consequence of his termination of employment, Dr. Steiner was entitled to salary of
approximately $315,445 (EUR 241,500) per annum until September 13, 2010, the remainder of his
contract term, along with specified expenses not to exceed an aggregate of approximately $4,300, to
be paid in monthly installments. We recognized a severance charge of $510,000 in the nine months
ended September 30, 2009 for this obligation.
Following Dr. Steiners death on June 26, 2010, our obligation to provide severance payments
to him ceased. As a result, during the nine months ended September 30, 2010, we reversed $163,000
of our severance accrual to recognize a reduction in our obligations due Dr. Steiner as well as
certain severance arrangements related to our August 2009 workforce reduction.
Research and development expenses were $244,000 in the nine months ended September 30, 2010
compared to $314,000 in the nine months ended September 30, 2009. Presently, we are working to
overcome gaps in our technology and product portfolios brought about by volatile markets and past
development setbacks. Research and development expenses in the nine months ended September 30, 2009
include $10,000 of non-cash charges for the fair value of stock options granted in accordance with
ASC 718.
The U.S. Environmental Protection Agency (EPA) verifications were withdrawn on two of our
products in January 2009 because available test results were not accepted by EPA as meeting new
emissions testing requirements for NO2 measurement. Presently, we
do not intend to seek verification of these products. We have no assurance of the extent of
additional testing that may be required by EPA or whether it will be adequate to remove any
remaining concern the EPA may have regarding use of our fuel-borne catalyst.
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We believe that it is an essential requirement of the U.S. retrofit market that emissions
control products and systems are verified under the U.S. EPA and/or the California Air Resources
Board (CARB) protocols in order to qualify for funding from EPA and/or CARB programs. Funding for
these emissions control products and systems is generally limited to those products and
technologies that have already been verified. Verification is also useful for commercial
acceptability. We believe that the lack of CARB verification will result in a shift of U.S.
retrofit revenue into future periods. We are currently working to achieve CARB verification and may
have the opportunity to obtain a conditional CARB verification before all of our testing has been
concluded.
Without full CARB verification, our U.S. retrofit opportunities are limited although certain
jurisdictions have been satisfied with other of our certifications. We received the EPA
registration in December 1999 for the Platinum Plus fuel-borne catalyst for use in bulk fuel by
refiners, distributors and truck fleets. In 2000, we 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 environmental agency BUWAL approved the Platinum Plus fuel-borne
catalyst for use with particulate filters. In 2002, the U.S. Mining, Safety and Health
Administration accepted Platinum Plus fuel-borne catalyst for use in all underground mines. In
2007, we received accreditation for our Purifier System, our Platinum Plus fuel-borne catalyst used
with a diesel particulate filter, to be sold for compliance with the emission reduction
requirements established for the London LEZ. In 2009, the German Federal Environment Agency, the
Umweltbundesamt (UBA), issued a non disapproval for sale of Platinum Plus fuel-borne catalyst for
use in conjunction with up to 2,000 diesel particulate filters in Germany; further work will be
required to remove the 2,000 unit restriction.
In addition to emphasis on the global retrofit market, we continued to focus on fuel economy
opportunities in the U.S. in non-road sectors, including rail, marine, mining and construction, and
expect continued focus on these sectors by our distributors rather than through our direct selling
efforts. Our Platinum Plus fuel-borne catalyst is effective with regular sulfur diesel, ultra-low
sulfur diesel, arctic diesel (kerosene) and biodiesel. When used with blends of biodiesel and
ultra-low sulfur diesel, our Platinum Plus fuel-borne catalyst prevents the normal increase in
nitrogen oxides associated with biodiesel, as well as offering emission reduction in particulates
and reduced fuel consumption. Platinum Plus is used to improve combustion which acts to reduce
emissions and improve the performance and reliability of emission control equipment. Platinum Plus
fuel-borne catalyst takes catalytic action into engine cylinders where it improves combustion,
thereby reducing particulates, unburned hydrocarbons and carbon monoxide emissions, which also
results in improved fuel economy. Platinum Plus fuel-borne catalyst lends itself to a wide range of
enabling solutions including fuel economy, diesel particulate filtration, low emission biodiesel,
carbon reduction and exhaust emission reduction. The improvement attributable to Platinum Plus
fuel-borne catalyst may vary as a result of engine age, application in which the engine is used,
load, duty cycle, speed, fuel quality, tire pressure and ambient air temperature.
Patent amortization and other patent related expense was $109,000 in the nine months ended
September 30, 2010 compared to $307,000 in the same prior year period, a decrease of $198,000. The
2009 expense includes the write-off of $192,000 in capitalized costs related to the abandonment of
certain patents and patent applications not material to our business, the continued maintenance of
which was judged by management to be uneconomic.
Interest income was $93,000 in the nine months ended September 30, 2010 compared to $187,000
in the nine months ended September 30, 2009, a decrease of $94,000, due to lower invested balances
and rates of return during the 2010 period.
Other income (expense) was ($67,000) in the nine months ended September 30, 2010 and is
comprised of foreign currency transaction losses, net of gains of ($20,000) and interest expense of
($47,000). The 2009 other income (expense) of $295,000 consists of foreign currency transaction
gains, net of losses of $168,000, interest expense of ($57,000), a net gain on investments of
$185,000 and ($1,000) all other. In the nine months ended September 30, 2009, the Company had an
unrealized gain on the fair value of its investment in ARS of $441,000 and an unrealized loss of
($256,000) on our ARSR, resulting in an $185,000 net gain.
Liquidity and Capital Resources
We require capital resources and liquidity to fund our global development and for working
capital. Our working capital requirements vary from period to period depending upon manufacturing
volumes, the timing of deliveries and payment cycles of our customers. At September 30, 2010, we
had cash and cash equivalents of approximately $3.5 million to use for our operations. Our working
capital was approximately $3.6 million at September 30, 2010 compared to $7.3 million at December
31, 2009 reflecting a decrease of $3.7 million primarily attributable to our operating losses
during the period.
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Net cash used for operating activities was $3.1 million in the nine months ended September 30,
2010 and was used primarily to fund the net loss of $3.8 million, adjusted for non-cash items and
changes in working capital items. Included in the non-cash items was stock-based compensation
expense of $84,000, a provision for doubtful accounts of $23,000 and depreciation and amortization
of $140,000.
After adjusting for the provision for doubtful accounts, trade accounts receivable, net
increased $73,000 to $198,000 at September 30, 2010 from $148,000 at December 31, 2009 due
primarily to increased sales activity. Inventories, net decreased $152,000, reflecting increased
product sales in the retrofit-market. Other current assets and other assets decreased $122,000 at
September 30, 2010 from the December 31, 2009 levels, principally reflecting collections of other
receivables. Our accounts payable, accrued expenses and other liabilities increased at September
30, 2010 compared to December 31, 2009 reflecting increases in accounts payable that were partially
offset by decreases in accrued expenses and other liabilities. The decrease in accrued expenses is
principally due to the payment and adjustment of severance liabilities.
Net cash provided by investing activities was $11.6 million in the nine months ended September
30, 2010, principally reflecting the sale of our ARS investments. We also used cash for investments
in our patents, including patent applications in foreign jurisdictions. We expect to continue to
invest in our intellectual property portfolio.
Cash used in financing activities was approximately $7.7 million in the nine months ended
September 30, 2010 and was attributable to net repayment of borrowings under our demand loan
facility with UBS.
In October 2008, we received an offer (the Offer) from UBS for a put right permitting us to
sell to UBS at par value all ARS previously purchased from UBS at a future date (any time during a
two-year period beginning June 30, 2010). The Offer also included a commitment to loan us 75% of
the UBS- determined value of the ARS at any time until the put is exercised. The Offer was
non-transferable and expired on November 14, 2008. On November 6, 2008, we accepted the Offer. Our
right under the Offer is in substance a put option (with the strike price equal to the par value of
the ARS) which it recorded as an asset, measured at its fair value.
Classification of investments as current or non-current is dependent upon managements
intended holding period, the securitys maturity date and liquidity considerations based on market
conditions. At December 31, 2009, the Company classified all investments as current based on
managements intention and ability to liquidate the investments within the next twelve months
through exercise of its put right with UBS. On June 30, 2010 we exercised our put option under the
Offer and sold to UBS all our remaining ARS investments for approximately $5.2 million,
representing par value. Of this amount, approximately $3.2 million was used in July 2010, to pay
down our outstanding borrowings to UBS.
Our management believes that our current cash and cash equivalents at September 30, 2010 were
sufficient to fund our operations for at least the next twelve months on a standalone basis
(pre-Merger). However, on October 15, 2010, we completed the Merger with CSI. CSI has suffered
recurring losses and negative cash flows from operations since inception, and prior to the Merger,
CSIs working capital was severely limited. As of September 30, 2010, CSI had an accumulated
deficit of approximately $152 million and a working capital deficit of $6.3 million. As of December
31, 2009, CSI had an accumulated deficit of approximately $149.3 million and a working capital
deficit of $4.4 million. As a result, CSIs auditors report for fiscal year 2009 included an
explanatory paragraph that expresses substantial doubt about CSIs ability to continue as a going
concern. In addition, CSIs principal credit agreement has been in default since March 31, 2009,
although a forbearance agreement is in place that expires on January 13, 2011 (that date that is 90
days after the effective date of the Merger). At September 30, 2010, CSIs outstanding balance on
the line of credit was $2.6 million with $2.8 million available. Although the Merger and the
respective equity capital raises (CSIs $4.0 million aggregate issuance of secured convertible
notes, which converted to equity immediately prior to the Merger, and Clean Diesels $1.0 million
Regulation S offering of common stock and warrants, which closed immediately prior to the Merger)
provided necessary capital to the combined company, we nevertheless will need to replace CSIs
credit facility and may require additional capital in order to conduct our operations for any
reasonable length of time. If we are not able to replace CSIs credit facility or otherwise
recapitalize the combined company, it would have a material adverse effect on our business,
operating results, financial condition and long-term prospects
No dividends have been paid on our common stock and we do not anticipate paying cash dividends
in the foreseeable future.
Capital Expenditures
As of September 30, 2010, we had no commitments for capital expenditures and no material
commitments are anticipated in the near future.
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Subsequent Event
On October 15, 2010, we completed the Merger with CSI. Accordingly, our annual report for the
year ended December 31, 2010 will reflect the description of our business and operations as a
combined entity, and the audited financial statements included in that annual report of the
combined entity will, in substance, be those of CSI (the accounting acquirer), with the assets and
liabilities, and revenues and expenses, of our company being included effective from the date of
the closing of the Merger. For additional information relating to the business and operations of
CSI, please see the Form S-4.
Selected Financial Data
Year Ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
Reflecting post one-for-six split capitalization | (In thousands) | |||||||
Revenue |
$ | 1,221 | $ | 7,475 | ||||
Net loss |
$ | (6,932 | ) | $ | (9,373 | ) | ||
Net loss per share, basic and diluted |
$ | (5.10 | ) | $ | (6.91 | ) | ||
Dividends per share |
$ | | $ | | ||||
Weighted average number of common shares, basic and diluted |
1,358 | 1,356 |
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of the Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule
15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period
covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that we had effective disclosure controls and
procedures (as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as
of the end of the period covered by this Quarterly Report on Form 10-Q.
Changes in Internal Controls
In connection with the evaluation by our Chief Executive Officer and Chief Financial Officer
of internal control over financial reporting that occurred during our last fiscal quarter, no
change in our internal control over financial reporting was identified that has materially
affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
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Table of Contents
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. [Removed and Reserved]
Item 5. Other Information.
None.
Item 6. Exhibits.
Exhibit | |||
Number | Description | ||
31.1 | Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) |
||
31.2 | Certification of Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) |
||
32.1 | Certifications of Chief Executive Officer and Chief Financial Officer required by Rule
13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States
Code |
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Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CLEAN DIESEL TECHNOLOGIES, INC. (Registrant) |
||||
By: | /s/ Charles F. Call | |||
Charles F. Call | ||||
Director and Chief Executive Officer | ||||
Date: November 15, 2010 | ||||
By: | /s/ Nikhil A. Mehta | |||
Nikhil A. Mehta | ||||
Chief Financial Officer and Treasurer |
Date: November 15, 2010
29