UNITED STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Amendment No. 1
CURRENT REPORT
Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest
event reported): October 15, 2010
CLEAN DIESEL TECHNOLOGIES,
INC.
(Exact name of registrant as
specified in its charter)
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DELAWARE |
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001-33710 |
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06-1393453 |
(State or other Jurisdiction of Incorporation) |
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(Commission File Number) |
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(IRS Employer Identification No.) |
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4567 TELEPHONE ROAD, SUITE
206
VENTURA, CALIFORNIA
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93003 |
(Address of Principal Executive Offices) |
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(Zip Code) |
Registrant’s telephone number,
including area code: (805) 639-9458
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(Former name or former address if changed since last report.) |
Check the appropriate box below if the
Form 8-K filing is intended to simultaneously satisfy the filing obligation of
the registrant under any of the following provisions:
o Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
o Soliciting material pursuant
to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule
14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule
13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
1
Explanatory Note
This Current Report on Form 8-K is being amended solely to append, commencing on page F-1 hereof, the financial statements of business acquired and pro forma financial information required by Item 9.01, which previously had been incorporated by reference. No updated information is contained in this Form 8-K/A
Item 1.01 Entry into a Material
Definitive Agreement
On October 15,
2010, Clean Diesel Technologies, Inc. (“Clean Diesel,”
“we,” “our,” or “us”), CDTI Merger Sub,
Inc., a California corporation and our wholly-owned subsidiary, and Catalytic
Solutions, Inc., a California corporation (“CSI”), consummated a
business combination pursuant to the terms of the 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”). Pursuant to the Merger Agreement, CDTI Merger Sub, Inc.
merged with and into CSI, and CSI became our wholly-owned subsidiary. We refer
to this business combination as the “Merger.” Immediately prior to
the Merger, and as contemplated by the Merger Agreement, a one-for-six reverse
stock split took effect.
On October 15,
2010, Clean Diesel issued a press release announcing the completion of the
Merger and the reverse stock split ratio, among other items. A copy of the
press release is attached hereto as Exhibit 99.1.
On October 15,
2010, CSI entered into a Registration Rights Agreement (the “Registration
Rights Agreement”) with the investors in its secured convertible notes,
which notes are described in more detail in our Registration Statement on Form
S-4/A filed with the Securities and Exchange Commission (the “SEC”)
on September 23, 2010 (the “Registration Statement”).
Subsequent to the Merger, on October 15, 2010, we and CSI entered into an
Assignment and Assumption Agreement whereby we agreed to assume CSI’s
obligations under the Registration Rights Agreement. The Registration Rights
Agreement provides for certain registration rights with respect to the shares
of Clean Diesel common stock issued to the holders of such notes in the Merger
(which notes converted into shares of CSI’s Class B common stock of
CSI immediately prior to the Merger). Pursuant to the Registration Rights
Agreement, we agreed to file a registration statement to register the shares of
Clean Diesel common stock issued in the Merger to such holders for resale at
the request of such holders. In addition, we also granted such holders
“piggyback” registration rights. We will pay substantially all of
the costs and expenses related to the filing of the registration statements and
any underwritten public offering required pursuant to the Registration Rights
Agreement.
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 described in our Current Report on Form 8-K filed with the SEC on
May 18, 2010 and in the Registration Statement, 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.
Copies of both the
Assignment and Assumption Agreement and Registration Rights Agreement are filed
as Exhibits to this Current Report on Form 8-K and the foregoing descriptions
are qualified in their entirety by the full text of such agreements, which are
incorporated by reference herein.
Item 2.01 Completion of
Acquisition or Disposition of Assets
On October 15,
2010, Clean Diesel’s 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.
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
- 2 -
2
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, CSI’s 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 2,287,943 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 666,666 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.
Following the closing
of the Merger, CSI became a wholly-owned subsidiary of Clean Diesel and the
shares of CSI common stock, which previously traded under the ticker symbols
“CTS” and “CTSU” on the AIM market of the London Stock
Exchange (the “AIM”), ceased trading on, and were delisted from,
the AIM.
Following the
consummation of the Merger, the holders of CSI securities (including the
holders of its secured convertible notes) and CSI’s 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.
The description of the
Merger contained in this Item 2.01 does not purport to be complete and is
qualified in its entirety by reference to the Merger Agreement as amended by
the two letter agreements, which Merger Agreement (as amended) was included as
Annex A to the joint proxy statement/information statement and prospectus
included in the Registration Statement, and which letter agreements were filed
as Exhibits 2.2 and 2.3 to the Registration Statement, all of which are
incorporated by reference herein.
On October 15,
2010, we issued a press release announcing the completion of the Merger, among
other items. A copy of that press release is included as Exhibit 99.1
hereto.
Item 3.02 Unregistered Sales of
Equity Securities
We did not register on
the Registration Statement all of the shares and warrants issued on
October 15, 2010 in connection with the Merger. Only an aggregate 560,112
shares of common stock on a post-split basis (or 3,360,676 shares on a
pre-split basis) and warrants to acquire 458,295 shares of common stock on a
post-split basis (or 2,749,770 shares on a pre-split basis) were registered on
the Registration Statement. Accordingly, the following securities issued on
October 15, 2010 in connection with the Merger have not been registered
under the Securities Act of 1933, as amended (the “Act”), or state
securities laws, and may not be offered or sold in the United States absent
registration with the SEC or an applicable exemption from the registration
requirements: (a) an aggregate 1,510,189 shares of our common stock on a
post-split basis (9,061,160 on a pre-split basis) to the holders of CSI’s
Class B common stock, (b) 166,666 shares of common stock on a post-split
basis (1,000,000 shares on a pre-split basis) and warrants to purchase 166,666
shares of common stock on a post-split basis (1,000,000 shares on a pre-split
basis) to Allen & Company LLC, CSI’s financial advisor, and
(c) an aggregate 50,969 shares of common stock on a post-split basis
(305,822 shares of common stock on a pre-split basis) and warrants to acquire
41,705 shares of common stock on a post-split basis (or 250,230 shares on a
pre-split basis) to CSI’s former non-employee directors. All of these
shares of Clean Diesel common stock and warrants to purchase Clean Diesel
common stock were issued in reliance upon the exemption from the registration
requirements of the Act pursuant to Section 4(2) of the Act and/or
Rule 506 of Regulation D promulgated thereunder. CSI has agreed to
use commercially reasonable efforts to register for resale under the Act the
shares of Clean Diesel common stock issued or issuable upon exercise of
warrants issued to Allen & Company. In addition to the securities issued as
part of the Merger consideration, Clean Diesel issued 32,414 shares of common
stock on a post-split basis (194,486 shares on a pre-split basis) and warrants to acquire 14,863 shares of common
stock on a post-split basis (89,180 shares on a pre-split basis) to Clean
Diesel’s financial advisor Innovator Capital as payment for fees.
3
As described under
Item 1.01, we assumed CSI’s obligations under the Registration
Rights Agreement. The Registration Rights Agreement provides for certain demand
and “piggyback” registration rights, and requires us to register
all the shares of Clean Diesel common stock issued in the Merger to the former
holders of CSI’s Class B common stock (which was issued upon
conversion of CSI’s secured convertible notes immediately prior to the
Merger).
In addition to the
unregistered shares of Clean Diesel common stock and warrants to purchase Clean
Diesel common stock issued in the Merger, on October 15, 2010, we also
completed our Regulation S private placement described in Item 1.01 above,
and 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 up to 166,666
shares of our common stock on a post-split basis (1,000,000 on a pre-split
basis). All of these shares of Clean Diesel common stock and warrants to
purchase Clean Diesel common stock were issued in reliance upon the exemption
from the registration requirements of the Act pursuant to Regulation S
promulgated thereunder.
Neither this Current
Report on Form 8-K nor the exhibits attached hereto is an offer to sell or the
solicitation of an offer to buy shares of our common stock or any other
security.
The disclosure in
Item 1.01 of this Current Report on Form 8-K is incorporated by reference
into this Item.
Item 3.03 Material Modification
to Rights of Security Holders.
As contemplated by the
Merger Agreement and described in the Registration Statement, at the annual
meeting held on October 12, 2010, Clean Diesel’s stockholders
approved a reverse stock split with the ratio to be determined by the Board of
Directors. Following approval by the Clean Diesel stockholders, the Board of
Directors authorized a one-for-six reverse stock split, which took effect on
October 15, 2010, with respect to all shares of Clean Diesel common stock
outstanding as of October 15, 2010.
The foregoing
description of the amendment to Clean Diesel’s Restated Certificate of
Incorporation contained in this Item 3.03 does not purport to be complete
and is qualified in its entirety by reference to the Certificate of Amendment,
which is filed as Exhibit 3.1 hereto and is incorporated herein by
reference.
On October 15,
2010, Clean Diesel issued a press release announcing the ratio of the reverse
stock split, among other items. A copy of the press release is attached hereto
as Exhibit 99.1.
Item 5.01 Changes in Control of
Registrant
Reference is made to
the disclosure set forth under Item 2.01 of this Current Report on Form
8-K, which disclosure is incorporated herein by reference.
Following the
consummation of the Merger, the holders of CSI securities (including the
holders of its secured convertible notes) prior to the Merger and CSI’s
financial advisor hold approximately 60% of our outstanding common stock, and
the holders of our equity prior to the Merger hold approximately 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.
Item 5.02 |
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Departure of Directors or Certain Officers; Election of Directors;
Appointment of Certain Officers; Compensatory Arrangements of Certain
Officers. |
Board of
Directors
In connection with the
Merger and as contemplated by the Merger Agreement, at the effective time of
the Merger:
4
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• |
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four members of Clean Diesel’s Board (Frank Gallucci, Charles W.
Grinnell, David F. Merrion, and David W. Whitwell) resigned from the Board of
Directors; and |
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• |
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four members of the Board of Directors of CSI (Charles F. Call, Bernard
H. “Bud” Cherry, Alexander “Hap” Ellis, III and Charles
R. Engles, Ph.D.) were appointed to Clean Diesel’s Board of Directors |
Additional information
regarding the directors listed above is contained in the Registration
Statement, which information is incorporated herein by reference.
On October 19,
2010, the Board designated Mr. Ellis as Chairman of the Board, and
confirmed the appointment of Messrs. Ellis and Engles as members of the
Audit Committee (with Mr. Gray continuing to serve as Chairman and as the
Audit Committee’s financial expert), and Messrs. Cherry, Ellis and
Engles as members of the Compensation and Nominating Committee. (with
Mr. Cherry serving as Chairman). The Board also determined that
Messrs. Cherry, Ellis, Engles, and Gray are each “independent”
as that term is defined in the NASDAQ listing rules. Messrs. Call, Park
and Rogers are not independent under NASDAQ listing standards.
Resignation of
Officers
As contemplated by the
Merger Agreement, upon the completion of the Merger, Timothy Rogers resigned as
President and Chief Executive Officer of Clean Diesel, John B. Wynne resigned
as Treasurer and Chief Financial Officer and Charles V. Grinnell relinquished
his positions as Vice President, General Secretary and Secretary of Clean
Diesel. Mr. Rogers will continue with Clean Diesel as Senior Corporate Vice
President – Product Development. John Wynne and Charles V. Grinnell will
continue to serve Clean Diesel in a transitional capacity, but no longer will
be considered a “Section 16 Officer.”
These departures were
as contemplated by the Merger Agreement and not a result of any disagreements
with Clean Diesel on any matter relating to Clean Diesel’s operations,
policies or practices.
Appointment of
Officers
On October 15,
2010, prior to consummation of the Merger, the Board appointed Charles F. Call
as Chief Executive Officer, Nikhil A. Mehta as Chief Financial Officer and
Treasurer, and Stephen J. Golden, Ph.D. as Chief Technical Officer. The
material terms of Messrs. Call, Mehta and Golden’s employment
agreements are described in the Registration Statement (which information is
incorporated herein by reference), copies of which were filed as Exhibits
thereto. Additional information regarding the directors and officer listed
above is contained in the Registration Statement, which information is
incorporated herein by reference.
On October 19,
2010, following consummation of the Merger, the newly constituted Board
designated the persons who serve as the officers of Clean Diesel to hold office
until such officer’s successor is elected and qualified or until such
officer’s earlier resignation or removal. The Board confirmed the
appointments of Charles F. Call, Nikhil Mehta, Stephen J. Golden, Ph.D., and
Timothy Rogers to the offices noted above. In addition, the Board appointed
Christopher J. Harris as Chief Operations Officer, and David E. Shea as
Corporate Controller. Bruce McRoy was designated Secretary of the Corporation.
The Board delegated to Mr. Call authority as to the appointment or removal
of subordinate officers.
Following is
biographical information for Mr. Harris and Mr. Shea:
Christopher J.
Harris, Chief Operations Officer (Age 45)
Mr. Harris joined CSI as President of its Catalyst Business
in August 2008 and will serve as the combined company’s Chief
Operations Officer and President of Engine Control Systems, Limited.
Mr. Harris has over 20 years of technical, commercial and general
management experience in both privately-held and publicly-traded specialty
chemicals and materials companies. Prior to joining CSI,
Mr. Harris’ positions included Chief Operating Officer of Aculon,
Inc., an early-stage nanotechnology company, from May 2007 to
August 2008, and prior thereto Global Vice President/General Manager of
Avery Dennison Corporation’s (NYSE: AVY) Performance Polymers
business. Earlier in his career, Mr. Harris held various management
positions in North America and Europe during eleven years with Rohm and Haas
Company, acquired by The Dow Chemical Company (NYSE: DOW) in 2009.
Mr. Harris earned his Bachelor of Science in Chemical Engineering from
Cornell University and completed graduate business coursework at Temple
University.
5
David E. Shea,
Corporate Controller (Age 48)
Mr. Shea joined CSI in October 2005 as Manager of
Financial Planning and Analysis and was appointed Corporate Controller in
2009. Mr. Shea has over 20 years of financial management
experience in a number of different industries. Prior to joining CSI,
from 2001 to 2005, he was the Director of Finance for ENCO Utility Services, a
privately held utility services outsourcing provider. From 1998 to 2001,
he was the Manager of Business Planning and Development for Edison Enterprises,
an unregulated subsidiary of Edison International (NYSE: EIX). From
1986 to 1998, Mr. Shea held several of financial positions, the last being
Manager of Material Estimating and Cost Management at Northrop Grumman
(NYSE: NOC). Mr. Shea received an MBA Degree from The
University of Southern California Marshall School of Business and a Bachelor of
Arts in Economics/Mathematics from the University of California at Santa
Barbara.
There are no
arrangements or understandings between any of Messrs. Call, Mehta, Golden,
Harris, Shea or McRoy or any other person pursuant to which such person was selected as
an officer. None of Messrs. Call, Mehta, Golden, Harris, Rogers, Shea or
McRoy has any family relationship with any director or other executive officer
of Clean Diesel or any person nominated or chosen by Clean Diesel to become a
director or executive officer. There are no transactions in which any of
Messrs. Call, Mehta, Golden, Harris, Rogers, Shea or McRoy has an interest
requiring disclosure under Item 404(a) of Regulation S-K.
Item 9.01 Financial Statements
and Exhibits.
(a) Financial
statements of business acquired.
Audited financial
statements of Catalytic Solutions, Inc. as of and for the year ended
December 31, 2009 (attached to this Current Report on Form 8-K/A hereto and
incorporated herein by reference).
Unaudited financial
statements of Catalytic Solutions, Inc. as of and for the six months ended June
30, 2010 (attached to this Current Report on Form 8-K/A hereto and incorporated
herein by reference).
(b) Pro forma
financial information.
Unaudited Pro Forma
condensed balance sheet of Catalytic Solutions, Inc. as of June 30, 2010
(attached to this Current Report on Form 8-K/A hereto and incorporated
herein by reference).
Unaudited Pro Forma
condensed statement of operations of Catalytic Solutions, Inc. for the year
ended December 31, 2009 and the six months ended June 30, 2010 (attached
to this Current Report on Form 8-K/A hereto and incorporated herein by
reference).
Unaudited Pro Forma
condensed combined balance sheet of Clean Diesel Technologies, Inc. as of June
30, 2010 (attached to this Current Report on Form 8-K/A hereto and incorporated
herein by reference).
Unaudited Pro Forma
condensed combined statement of operations of Clean Diesel Technologies, Inc.
for the year ended December 31, 2009 and the six months ended
June 30, 2010 (attached to this Current Report on Form 8-K/A hereto and
incorporated herein by reference).
(c) Exhibits.
EXHIBIT INDEX
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Exhibit
Number |
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Description of Exhibits |
2.1
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Agreement and Plan of Merger, dated as of
May 13, 2010, among Clean Diesel Technologies, Inc., CDTI Merger Sub, Inc.
and Catalytic Solutions , Inc. (incorporated by reference to Annex A to the
joint proxy statement/information statement and prospectus included in Clean
Diesel’s Registration Statement on Form S-4/A filed on
September 23, 2010). |
6
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2.2
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Letter Agreement dated September 1, 2010
amending the Agreement and Plan of Merger dated as of May 13, 2010
(incorporated by reference to Exhibit 2.2 to the joint proxy
statement/information statement and prospectus included in Clean Diesel’s
Registration Statement on Form S-4/A filed on September 23,
2010). |
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2.3
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Letter Agreement dated September 14, 2010
amending the Agreement and Plan of Merger dated as of May 13, 2010
(incorporated by reference to Exhibit 2.3 to the joint proxy
statement/information statement and prospectus included in Clean Diesel’s
Registration Statement on Form S-4/A filed on September 23,
2010). |
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3.1
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Certificate of Amendment of Restated
Certificate of Incorporation (incorporated by reference to Annex B to the joint
proxy statement/information statement and prospectus included in Clean
Diesel’s Registration Statement on Form S-4/A filed on September 23,
2010). |
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10.1
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Registration Rights Agreement dated
October 15, 2010* |
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10.2
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Assignment and Assumption Agreement dated
October 15, 2010* |
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23.1
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Consent of KPMG, LLP, independent registered
public accounting firm of Catalytic Solutions, Inc.* |
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99.1
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Press Release of the registrant dated
October 15, 2010* |
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* |
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previously filed with this Form 8-K on October 21, 2010
|
7
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 hereunto duly
authorized.
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CLEAN DIESEL TECHNOLOGIES, INC. |
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December 30, 2010
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By: |
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/s/ Nikhil A. Mehta |
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Name: Nikhil A. Mehta |
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Title: Chief Financial Officer and
Treasurer |
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8
CATALYTIC SOLUTIONS, INC.
INDEX TO FINANCIAL STATEMENTS
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F-2 |
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F-3 |
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F-4 |
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F-5 |
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F-20 |
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F-21 |
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F-22 |
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F-23 |
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F-24 |
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F-26 |
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F-48 |
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F-50 |
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F-51 |
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F-52 |
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F-53 |
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F-57 |
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F-58 |
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F-59 |
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F-60 |
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F-1
CATALYTIC SOLUTIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
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June 30, |
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December 31, |
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2010 |
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2009 |
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US $000 |
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US $000 |
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(Unaudited) |
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ASSETS
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Current assets: |
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Cash and cash equivalents |
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$ |
2,887 |
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$ |
2,336 |
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Trade accounts receivable, net |
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5,926 |
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8,066 |
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Inventories |
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5,026 |
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6,184 |
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Prepaid expenses and other current assets |
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1,635 |
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2,010 |
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Total current assets |
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15,474 |
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18,596 |
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Property and equipment, net |
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2,688 |
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2,897 |
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Intangible assets, net |
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4,160 |
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4,445 |
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Goodwill |
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4,161 |
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4,223 |
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Other assets |
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311 |
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82 |
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Total assets |
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$ |
26,794 |
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$ |
30,243 |
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities: |
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|
|
Line of credit |
|
$ |
3,029 |
|
|
$ |
5,147 |
|
Current portion of long-term debt |
|
|
3,000 |
|
|
|
3,000 |
|
Secured convertible notes |
|
|
1,767 |
|
|
|
|
|
Accounts payable |
|
|
4,449 |
|
|
|
4,967 |
|
Deferred revenue |
|
|
|
|
|
|
195 |
|
Accrued salaries and benefits |
|
|
1,427 |
|
|
|
1,294 |
|
Accrued expenses |
|
|
3,103 |
|
|
|
2,990 |
|
Deferred gain on sale of intellectual property |
|
|
|
|
|
|
1,900 |
|
Accrued professional and consulting fees |
|
|
1,499 |
|
|
|
2,375 |
|
Income taxes payable |
|
|
784 |
|
|
|
1,081 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
19,058 |
|
|
|
22,949 |
|
Long-term debt, excluding current portion |
|
|
61 |
|
|
|
75 |
|
Deferred tax liability |
|
|
1,283 |
|
|
|
1,336 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
20,402 |
|
|
|
24,360 |
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 12) |
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
|
|
|
|
|
|
Common stock, no par value. Authorized
148,500,000 shares; issued and outstanding
69,761,902 shares at June 30, 2010 and
December 31, 2009 |
|
|
156,307 |
|
|
|
156,216 |
|
Treasury stock at cost (60,000 shares) |
|
|
(100 |
) |
|
|
(100 |
) |
Accumulated other comprehensive loss |
|
|
(1,116 |
) |
|
|
(889 |
) |
Accumulated deficit |
|
|
(148,699 |
) |
|
|
(149,344 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
6,392 |
|
|
|
5,883 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
26,794 |
|
|
$ |
30,243 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
F-2
CATALYTIC SOLUTIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30 |
|
|
|
2010 |
|
|
2009 |
|
|
|
US $000 |
|
|
US $000 |
|
|
|
(Unaudited) |
|
Revenues |
|
$ |
25,371 |
|
|
$ |
19,144 |
|
Cost of revenues |
|
|
18,595 |
|
|
|
15,582 |
|
|
|
|
|
|
|
|
Gross margin |
|
|
6,776 |
|
|
|
3,562 |
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
1,561 |
|
|
|
2,113 |
|
Research and development |
|
|
2,145 |
|
|
|
3,724 |
|
General and administrative |
|
|
4,126 |
|
|
|
3,988 |
|
Recapitalization expense |
|
|
727 |
|
|
|
655 |
|
Severance expense |
|
|
15 |
|
|
|
237 |
|
Gain on sale of intellectual property |
|
|
(3,900 |
) |
|
|
(2,500 |
) |
|
|
|
|
|
|
|
Total operating expenses |
|
|
4,674 |
|
|
|
8,217 |
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
2,102 |
|
|
|
(4,655 |
) |
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
Interest income |
|
|
2 |
|
|
|
13 |
|
Interest expense |
|
|
(678 |
) |
|
|
(1,513 |
) |
Other |
|
|
(109 |
) |
|
|
(774 |
) |
|
|
|
|
|
|
|
Total other expense, net |
|
|
(785 |
) |
|
|
(2,274 |
) |
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes |
|
|
1,317 |
|
|
|
(6,929 |
) |
Income tax expense from continuing operations |
|
|
510 |
|
|
|
67 |
|
|
|
|
|
|
|
|
Net income (loss) income from continuing operations |
|
|
807 |
|
|
|
(6,996 |
) |
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
Net loss from operations of discontinued Energy |
|
|
|
|
|
|
|
|
Systems division |
|
|
(162 |
) |
|
|
(1,159 |
) |
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
645 |
|
|
$ |
(8,155 |
) |
|
|
|
|
|
|
|
Basic net income (loss) per share: |
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations |
|
$ |
0.01 |
|
|
$ |
(0.10 |
) |
Loss from discontinued operations |
|
|
|
|
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
Basic net income (loss) per share |
|
$ |
0.01 |
|
|
$ |
(0.12 |
) |
|
|
|
|
|
|
|
Diluted net income (loss) per share: |
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations |
|
$ |
0.01 |
|
|
$ |
(0.10 |
) |
Loss from discontinued operations |
|
|
|
|
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
Diluted net income (loss) per share |
|
$ |
0.01 |
|
|
$ |
(0.12 |
) |
|
|
|
|
|
|
|
Weighted average number of common shares outstanding (000s): |
|
|
|
|
|
|
|
|
Basic |
|
|
69,762 |
|
|
|
69,762 |
|
|
|
|
|
|
|
|
Diluted |
|
|
70,226 |
|
|
|
69,762 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
F-3
CATALYTIC SOLUTIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30 |
|
|
|
2010 |
|
|
2009 |
|
|
|
US $000 |
|
|
US $000 |
|
|
|
(Unaudited) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
645 |
|
|
$ |
(8,155 |
) |
Loss from discontinued operations |
|
|
162 |
|
|
|
1,159 |
|
Adjustments to reconcile net income (loss) to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
619 |
|
|
|
651 |
|
(Recovery of) provision for doubtful accounts, net |
|
|
(11 |
) |
|
|
53 |
|
Stock-based compensation |
|
|
91 |
|
|
|
344 |
|
Change in fair value of liability classified warrants |
|
|
|
|
|
|
(207 |
) |
Change in fair value of financial instruments |
|
|
(178 |
) |
|
|
|
|
Amortization of debt discount on convertible notes |
|
|
281 |
|
|
|
|
|
Loss on foreign currency transactions |
|
|
231 |
|
|
|
19 |
|
Amortization of deferred financing costs |
|
|
56 |
|
|
|
321 |
|
Loss on unconsolidated affiliate |
|
|
33 |
|
|
|
575 |
|
Loss on sale of property and equipment |
|
|
34 |
|
|
|
189 |
|
Gain on sale of intellectual property |
|
|
(3,900 |
) |
|
|
(2,500 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
|
2,137 |
|
|
|
(246 |
) |
Inventories |
|
|
1,125 |
|
|
|
2,495 |
|
Prepaid expenses and other assets |
|
|
1,081 |
|
|
|
2,498 |
|
Accounts payable |
|
|
(506 |
) |
|
|
579 |
|
Income taxes payable |
|
|
(289 |
) |
|
|
(115 |
) |
Accrued expenses and other current liabilities |
|
|
(840 |
) |
|
|
(423 |
) |
|
|
|
|
|
|
|
Cash provided by (used in) operating activities of continuing operations |
|
|
771 |
|
|
|
(2,763 |
) |
Cash (used in) provided by operating activities of discontinued operations |
|
|
(161 |
) |
|
|
215 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
610 |
|
|
|
(2,548 |
) |
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(186 |
) |
|
|
(593 |
) |
Investment in unconsolidated affiliate |
|
|
(413 |
) |
|
|
|
|
Proceeds from sale of property and equipment |
|
|
|
|
|
|
10 |
|
Proceeds from sale of intellectual property |
|
|
2,000 |
|
|
|
2,500 |
|
|
|
|
|
|
|
|
Net cash provided by investing activities of continuing operations |
|
|
1,401 |
|
|
|
1,917 |
|
|
|
|
|
|
|
|
Net cash used in investing activities of discontinued operations |
|
|
|
|
|
|
(51 |
) |
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
1,401 |
|
|
|
1,866 |
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Borrowings under line of credit |
|
|
241 |
|
|
|
891 |
|
Proceeds from issuance of debt |
|
|
1,500 |
|
|
|
44 |
|
Repayments under line of credit |
|
|
(2,501 |
) |
|
|
(2,703 |
) |
Repayment of long-term debt |
|
|
(14 |
) |
|
|
|
|
Payments for debt issuance costs |
|
|
(272 |
) |
|
|
(12 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(1,046 |
) |
|
|
(1,780 |
) |
|
|
|
|
|
|
|
Effect of exchange rates on cash |
|
|
(414 |
) |
|
|
(259 |
) |
Net change in cash and cash equivalents |
|
|
551 |
|
|
|
(2,721 |
) |
Cash and cash equivalents at beginning of period |
|
|
2,336 |
|
|
|
6,726 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
2,887 |
|
|
$ |
4,005 |
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
258 |
|
|
$ |
667 |
|
Cash paid for income taxes |
|
$ |
663 |
|
|
$ |
2 |
|
See accompanying notes to condensed consolidated financial statements.
F-4
Notes to Condensed Consolidated Financial Statements (unaudited)
1. Basis of Preparation
a. Description of Business
Catalytic Solutions, Inc. (the Company) is a global manufacturer and distributor of
emissions control systems and products, focused in the heavy duty diesel and light duty vehicle
markets. The Companys emissions control systems and products are designed to deliver high value to
its customers while benefiting the global environment through air quality improvement,
sustainability and energy efficiency. Catalytic Solutions, Inc. is listed on AIM of the London
Stock Exchange (AIM: CTS and CTSU) and currently has operations in the USA, Canada, France, Japan
and Sweden as well as an Asian joint venture.
b. Proposed Merger with Clean Diesel Technologies, Inc.
On May 14, 2010, the Company announced that it had entered into a merger agreement with
Clean Diesel Technologies, Inc., or CDTI, a U.S.-based company that designs, markets and licenses
patented technologies and solutions that reduce harmful emissions from internal combustion engines
while improving fuel economy and engine power (the Merger). The Company entered into an Agreement
and Plan of Merger (the Merger Agreement), dated as of May 13, 2010, with CDTI and CDTI Merger
Sub, Inc., a California corporation and wholly-owned subsidiary of CDTI (Merger Sub). The
proposed Merger, to be effected by way of a reverse merger, is a transaction that will result in
the combination of the Companys business with CDTI, whereby the Company will become a wholly-owned
subsidiary of CDTI.
In exchange for their shares of the Companys common stock and warrants to purchase
shares of the Companys common stock, the Companys security holders will receive shares of CDTI
common stock and (excluding investors in the capital raise discussed below) warrants to purchase
CDTI common stock. The Companys shareholders (including investors in the capital raise and the
Companys financial advisor, Allen & Company LLC) will receive such numbers of CDTI common stock so
that after the Merger they will own 60% of the outstanding shares of CDTI common stock and
(excluding investors in the capital raise and also the Companys financial advisor) warrants to
purchase up to three million shares of CDTI common stock. The Companys financial advisor will hold
warrants to purchase an additional one million shares of CDTI common stock.
The Merger is conditional, among other things, on obtaining the Companys shareholder
approval and CDTI stockholder approval. The Merger Agreement contains provisions regarding an
adjustment to the merger consideration based on a closing cash adjustment depending on whether each
company meets certain cash targets determined at June 30, 2010. Both companies have met such cash
targets at June 30, 2010, and therefore no cash adjustment is necessary.
CDTI will use commercially reasonable efforts to cause all shares of CDTI common stock to
be issued in connection with the Merger and all shares of CDTI common stock to be issued upon
exercise of the warrants to purchase shares of CDTI common stock to be listed on the NASDAQ Stock
Market as of the effective time of the Merger.
Neither company will be required to complete the Merger if the shares of CDTI common
stock to be issued in connection with the Merger are not approved for listing, subject to notice of
issuance, on the NASDAQ Stock Market.
Following completion of the Merger:
|
|
|
Merger Sub will merge with and into the Company and the Company will be the surviving corporation. |
|
|
|
|
As a result of the Merger, the business and assets of the Company will be a wholly-owned
subsidiary of CDTI. |
|
|
|
|
The Company will cease trading on the Alternative Investment Market (AIM). |
F-5
|
|
|
The board of directors of the combined company is expected
to comprise seven directors, four from the Companys
existing board of directors (Charles F. Call, Alexander
Ellis, III, Charles R. Engles Ph.D. and Bernard H. Cherry)
and three from CDTI (Mungo Park, Derek R. Gray and Timothy
Rogers). |
|
|
|
|
The executive management team of the combined company is
expected to be composed of the following members of the
current management team of the Company: Charles F. Call,
Nikhil A. Mehta and Stephen J. Golden Ph.D. |
CDTI has filed a Form S-4 Registration Statement containing a joint proxy
statement/information statement and prospectus, providing the Companys shareholders with
information about the background to and the reasons for the Merger and capital raise (the
Circular), and containing a notice of a special meeting of the Companys shareholders to be
convened on a date to be agreed and will be sent to shareholders when declared effective. The
Circular outlining the terms of the Merger and capital raise will seek shareholder approval to,
among other things, enable the Company to complete the Merger and capital raise discussed below.
The Merger will be completed once both companies have approved the Merger and the
conditions are satisfied. The timing of the shareholders meetings of both companies is dependant
on when the Registration Statement is declared effective, which cannot be determined now. Final
timing relating to the date of the shareholders meetings and the expected completion date for the
Merger will be set out in the Circular that is dispatched to shareholders of both companies.
c. Liquidity
The accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. Therefore, the consolidated financial statements
contemplate the realization of assets and liquidation of liabilities in the ordinary course of
business. The Company has suffered recurring losses and negative cash flows from operations since
its inception, resulting in an accumulated deficit of $148.7 million at June 30, 2010. The Company
has funded its operations through equity sales, debt and bank borrowings. In addition, due to
non-compliance with certain loan covenants (described below) and per the repayment obligations
under the Companys loan agreements, substantially all the debt of the Company has been classified
as current at June 30, 2010. As a result of this classification, the Company has a working capital
deficit of $3.6 million. The covenants are almost exclusively based on the performance of the
Companys Engine Control Systems subsidiary. As of March 31, 2009, the Company had failed to
achieve two of the covenants under the bank loan agreement with Fifth Third Bank (see Note 4 for a
discussion of the Fifth Third Bank loan agreement). The covenants that the Company failed to
achieve are those related to the annualized earnings before interest, tax, depreciation and
amortization (EBITDA) and the funded debt to EBITDA ratio for the Engine Control Systems
subsidiary. The bank agreed to temporarily suspend its rights with respect to the breach of these
two covenants under a Forbearance Agreement that expires on August 31, 2010, with an additional
extension through 30 November 2010, provided certain criteria are met.
At June 30, 2010 the Company had $2.9 million in cash. The Companys access to working
capital is limited and its debt service obligations and projected operating costs for 2010 exceed
its cash balance at June 30, 2010.
These matters raise substantial doubt about the Companys ability to continue as a going
concern. The Company has entered into agreements to merge with Clean Diesel Technologies, Inc., or
CDTI, and to issue $4.0 million of secured convertible notes to a group of qualifying investors.
The Company has issued $1.5 million of theses notes as of June 30, 2010. These agreements are
discussed in greater detail in Note 4. However, there is no certainty that existing cash will be
sufficient to sustain operations of the combined company without additional financing. At this
time, the Company cannot provide any assurance that the announced Merger will be approved and
completed or that the secured convertible notes will be converted to equity. In the event that the
Company is not successful in entering into forbearance arrangements with the noteholders in respect
of the current technical default, and/or in completion of the Merger, the secured convertible
notes, along with a premium collectively totaling $6.0 million plus accrued interest, will be due.
In such case, the Company may not be able to continue operations and may be required to file
bankruptcy. There can be no assurance that the Company will be able to reorganize through
bankruptcy and might be forced to effect a liquidation of its assets. The condensed consolidated
financial statements do not include any adjustments that might result from the outcome of this
uncertainty.
See Note 14 for subsequent events.
F-6
d. Preparation based on U.S. Generally Accepted Accounting Principles (U.S. GAAP)
The consolidated financial statements and accompanying notes are presented in U.S.
dollars and have been prepared in accordance with U.S. GAAP.
2. Summary of Significant Accounting Policies
a. Principles of Consolidation
The consolidated financial statements include the financial statements of Catalytic
Solutions, Inc. and its wholly owned subsidiaries. All significant inter-company balances and
transactions have been eliminated in consolidation.
b. Concentration of Risk
For the periods presented below, certain customers accounted for 10% or more of the
Companys revenues as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30 |
|
Customer |
|
2010 |
|
|
2009 |
|
A |
|
|
22 |
% |
|
|
24 |
% |
B |
|
|
15 |
% |
|
|
26 |
% |
The customers above are automotive original equipment manufacturers (OEMs) and relate to
sales within the Catalyst segment.
For the periods presented below, certain customers accounted for 10% or more of the
Companys accounts receivable balance as follows:
|
|
|
|
|
|
|
|
|
Customer |
|
June 30, 2010 |
|
|
December 31, 2009 |
|
A |
|
|
13 |
% |
|
|
18 |
% |
B |
|
|
13 |
% |
|
|
6 |
% |
C |
|
|
11 |
% |
|
|
22 |
% |
Customer A above is a diesel systems distributor and Customers B and C are automotive
OEMs.
Certain vendors accounted for 10% or more of the Companys raw material purchases as
follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30 |
|
Vendor |
|
2010 |
|
|
2009 |
|
A |
|
|
22 |
% |
|
|
7 |
% |
B |
|
|
14 |
% |
|
|
19 |
% |
C |
|
|
10 |
% |
|
|
11 |
% |
D |
|
|
6 |
% |
|
|
11 |
% |
Vendor A above is a catalyst supplier, vendor B is a precious metals supplier and vendors
C and D are substrate suppliers.
F-7
c. Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management
of the Company to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period.
Areas where significant judgments are made include but are not limited to the following: impairment
of long-lived assets, stock-based compensation, the fair value of financial instruments, allowance
for doubtful accounts, inventory valuation, taxes and contingent and accrued liabilities. Actual
results could differ from those estimates. These estimates and assumptions are based on the
Companys best estimates and judgment. The Company evaluates its estimates and assumptions on an
ongoing basis using historical experience and other factors, including the current economic
environment, which it believes to be reasonable under the circumstances. Estimates and assumptions
are adjusted when facts and circumstances dictate. Illiquid credit markets, volatile equity
markets, foreign currency fluctuations, and declines in customer spending have combined to increase
the uncertainty inherent in such estimates and assumptions. As future events and their effects
cannot be determined with precision, actual results could differ from these estimates. Changes in
estimates resulting from continuing changes in the economic environment will be reflected in the
financial statements in future periods.
d. Accounting Changes
On January 1, 2009, the Company adopted EITF 07-05, Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entitys Own Stock, included in Accounting Standards
Codification (ASC) topic 815. EITF 07-05 provides guidance on determining what types of instruments
or embedded features in an instrument held by a reporting entity can be considered indexed to its
own stock. Upon adoption of the EITF, the Company reclassified certain of its warrants from equity
to liabilities. See further discussion in Note 3.
The Company adopted Statement of Financial Accounting Standards No. 157, Fair Value
Measurements (SFAS 157) included in ASC Topic 820, for all assets and liabilities effective
January 1, 2008 except for nonfinancial assets and liabilities that are recognized or disclosed at
fair value on a non-recurring basis where the adoption was January 1, 2009. The adoption of this
standard did not have a material effect on the Companys consolidated financial statements. ASC 820
prioritizes the inputs used in measuring fair value into the following hierarchy:
|
|
|
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. |
|
|
|
|
Level 2: Inputs other than quoted prices included within Level 1 that are either directly
or indirectly observable. |
|
|
|
|
Level 3: Unobservable inputs in which little or no market activity exists, therefore
requiring an entity to develop its own assumptions about the assumptions that market
participants would use in pricing. |
Goodwill impairment testing requires the Company to estimate the fair value of its
reporting unit. The Companys estimate of fair value of its reporting unit involves level 3 inputs.
The estimated fair value of the HDD Systems reporting unit was derived primarily from a discounted
cash flow model utilizing significant unobservable inputs including expected cash flows and
discount rates. In addition, the Company considered the overall fair values of its reporting units
as compared to the market capitalization of the Company. The Company determined that no goodwill
impairment existed as of December 31, 2009 or June 30, 2010; however, it is reasonably possible
that future impairment tests may result in a different conclusion for the goodwill of the HDD
Systems reporting unit. The estimate of fair value of the reporting units is sensitive to certain
factors including but not limited to the following: movements in the Companys share price, changes
in discount rates and the Companys cost of capital, growth of the reporting units revenue, cost
structure of the reporting unit, successful completion of research and development and customer
acceptance of new products and approval of the reporting units product by regulatory agencies.
During 2009, the Company elected to change its accounting policy for legal costs incurred
during the registration of patents to expense such costs as incurred. Previously, the Company
capitalized such costs when they concluded such costs resulted in probable future benefits. Due to
the administrative difficulties in documenting support for the future benefit of such costs as a
result of uncertainty of ultimate patent approval, the Company concluded the new method of
accounting was preferable.
F-8
The adjustments to the Companys balance sheet and statement of operations as of and for
the six months ended June 30, 2009 were not material and include: (i) reductions to intangible
assets, total assets, and total stockholders equity and an increase to accumulated deficit of $0.6
million and (ii) increases to general and administrative expenses and net loss of $0.1 million.
Loss per share and cash flows from operations are $0.01 greater and unchanged, respectively.
e. Fair Value of Financial Instruments
The fair values of the Companys cash and cash equivalents, trade accounts receivable,
prepaid expenses and other current assets, accounts payable, accrued salaries and benefits and
accrued expenses approximate carrying values due to the short maturity of these instruments. The
fair values of the Companys debt and off-balance sheet commitments are less than their carrying
values as a result of deteriorating credit quality of the Company and, therefore, it is expected
that current market rates would be higher than those currently being experienced by the Company.
It is not practical to estimate the fair value of these instruments as the Companys debt
is not publicly traded and the Companys current financial position and the recent credit crisis
experienced by financial institutions have caused current financing options to be limited.
f. Recapitalization Expense
The Company has been in the process of recapitalizing to improve its financial stability.
The recapitalization has required the Company to hire a financial advisor, Allen & Company LLC, as
well as legal and accounting experts to evaluate its options and to guide it through the process of
the merger with CDTI. The Company reported expense of $727,000 and $655,000 for the six months
ended June 30, 2010 and 2009, respectively.
3. Warrants
The exercisable warrants and their associated exercise prices are shown below at June 30,
2010:
|
|
|
|
|
Warrants exercisable into common stock (issued in USD) |
|
|
37,500 |
|
Exercise price |
|
$ |
1.67 |
|
Warrants exercisable into common stock (issued in GBX) |
|
|
4,367,115 |
|
Weighted average exercise price |
|
$ |
1.02 |
|
The Company has outstanding warrants to purchase its common stock held by Cycad Group,
LLC, Capital Works ECS Investors, LLC and SVB Financial Group, an affiliate of Silicon Valley Bank.
The Company adopted EITF 07-05 on January 1, 2009. With the adoption of EITF 07-05, the warrants to
Cycad Group, LLC and Capital Works ECS Investors, LLC were determined not to be solely linked to
the stock price of the Company and therefore require classification as liabilities. As a result of
the adoption on January 1, 2009, the Company recorded a cumulative effect of change in accounting
principle of $2.3 million directly as a reduction of accumulated deficit representing the decline
in fair value between the issuance and adoption date. For the six months ended June 30, 2009, the
application of EITF 07-05 resulted in an increase to other income of $0.2 million resulting from a
decline in the fair value of the warrants during the period. SVB Financial Group has agreed to
cancel its 37,500 warrants contingent upon, and immediately prior to, completion of the Merger.
F-9
4. Debt
The Company has a demand revolving credit line through Fifth Third Bank with a maximum
principal amount of Canadian $7.0 million and availability based upon eligible accounts receivable
and inventory. At June 30, 2010, the outstanding balance in U.S. dollars was $3.0 million with $3.3
million available for borrowings by Engine Control Systems in Canada. The loan is collateralized by
the assets of the Company. The interest rate on the line of credit is variable based upon Canadian
and U.S. Prime Rates. As of June 30, 2010, the weighted average borrowing rate on the line of
credit was 5.9% compared to 4.48% as of December 31, 2009. The Company is also subject to covenants
on minimum levels of tangible capital funds, fixed charge coverage, EBITDA, funded debt-to-earnings
before income tax and depreciation and amortization. In the event of default, the bank may demand
payment on all amounts outstanding immediately. The Company is also restricted from paying
corporate distributions in excess of $250,000. The loan agreement also includes a material adverse
change clause, exercisable if, in the opinion of the bank, there is a material adverse change in
the financial condition, ownership or operation of Engine Control Systems or the Company. If the
bank deems that a material adverse change has occurred, the bank may terminate the Companys right
to borrow under the agreement and demand payment of all amounts outstanding under the agreement. As
of March 31, 2009, the Company had failed to achieve two of the covenants under the bank loan
agreement with Fifth Third Bank. The covenants that the Company failed to achieve are those related
to the annualized EBITDA and the funded debt to EBITDA ratio for the Engine Control Systems
subsidiary. The bank agreed to temporarily suspend its rights with respect to the breach of these
two covenants under a Forbearance Agreement that expires on August 31, 2010. A further extension
until November 30, 2010 was to be granted if the proposed Merger with CDTI was completed by August
1, 2010, and as of August 31, 2010, the secured convertible notes issued by the Company in
connection with the capital raise had been converted to common equity and the security granted to
the convertible noteholders had been released; the Company had $3.0 million of free cash on its
balance sheet; the Engine Control Systems subsidiary had Canadian $2.0 million available under the
existing loan agreement; and no default, forbearance default or event of default (as defined in the
credit and forbearance agreements) was outstanding. Although the merger was not completed by August
1, 2010 and will not be completed before the August 31, 2010 expiration date for the current
forbearance, Fifth Third Bank has indicated its willingness to extend the forbearance until October
15, 2010 and, if the merger is completed prior to such date, for a further period of 90 days after
consummation of the merger, but the credit limit would be further reduced to $6.0 million, the
interest rate would be increased by 0.25% to U.S./Canadian Prime Rate plus 3.00% and, if the merger
is not consummated by October 15, 2010, the interest rate would be increased by an additional 1.00%
to U.S./Canadian Prime Rate plus 4.00%. Fifth Third Banks willingness to extend the forbearance,
among other things, is subject to the Company having entered into forbearance arrangements with
holders of the Companys secured convertible notes and execution of appropriate documentation.
There can be no assurance that Fifth Third Bank or the holders of the Companys secured convertible
notes will actually enter into any such forbearance arrangements.
The Company has $3.0 million of consideration due to the seller as part of the Applied
Utility Systems acquisition. The consideration was due August 28, 2009 and accrues interest at
5.36%. At June 30, 2010 the Company had accrued $0.6 million of unpaid interest. In addition, the
Company may be obligated to pay in connection with its acquisition of the assets of Applied Utility
Systems in 2006 an earn-out amount with respect to the period during which it operated the acquired
business. The Company is currently in arbitration with seller on these matters. See further
discussion in Note 12.
On June 2, 2010, the Company entered into an agreement with a group of accredited
investors providing for the sale of $4.0 million of secured convertible notes (the Notes). The
Notes, as amended, bear interest at a rate of 8% per annum and matured on August 2, 2010. Under the
agreements, $2.0 million of the Notes have been issued by the Company in four equal installments
($0.5 million each on June 2, June 8, June 28 and July 12, 2010) with the remaining $2.0 million to
be issued after all conditions precedent to the closing of the merger with CDTI have been satisfied
or waived (among other items). Under the terms of the Notes, assuming the necessary shareholder
approvals are received at the special meeting of the Companys shareholders to permit conversion
thereof, the $4.0 million of Notes will be converted into newly created Class B common stock
immediately prior to the merger with CDTI such that at the effective time of the merger, this group
of accredited investors will receive approximately 66.066% of the Companys outstanding common
stock on a fully diluted basis. A total of 75,217,000 Class B shares are issuable upon the
conversion of the $2.0 million Notes issued through July 12, 2010 and an additional 75,217,000
Class B shares are issuable upon the funding and conversion of the final $2.0 million of Notes.
The Companys Class B common stock, if approved by the shareholders, has rights identical
to those of the Companys existing Class A common stock other than its exchange rights into CDTI
stock upon the Merger. Each share of the Companys Class B common stock will be exchanged for
0.0602 shares of CDTI common stock whereas each share of the Companys Class A common stock
will be exchanged for 0.0473 shares of CDTI common stock and warrants to purchase 0.0387 shares of
CDTI common stock.
F-10
The terms of the Notes provide that the Company has a 10-business day grace period to
make payments due under the Notes, either at maturity, a date fixed for prepayment, or by
acceleration or otherwise, before it is considered an Event of Default as defined in the Notes.
The terms also provide that, in the event the merger has not occurred prior to the maturity date of
the Notes, the Company has a 10-business day grace period, during which time it could seek the
agreement of the noteholders to extend the maturity date of the Notes, before the Company would be
required to pay the Notes in full. The Company did not repay the Notes or consummate the merger
prior to the August 2, 2010 maturity date or within the subsequent 10-day grace period.
Accordingly, unless waived, extended or modified with the agreement of the noteholders, the
outstanding principal amount under the secured convertible notes, including any interest and an
additional payment premium of two times (2x) the outstanding principal amount will be due to the
holders of the secured convertible notes and the interest rate applicable thereto increases from
8.0% to 15.0%. The holders of a majority of the Notes have indicated their willingness to forbear
from exercising any rights or remedies thereunder to October 15, 2010, to forgo the increase in the
interest rate from 8.0% to 15.0%, to waive the applicability of the additional payment premium, and
to agree that the payment premium would be extinguished in the event that the Notes are converted
and the merger occurs prior to October 15, 2010. The willingness of the holders of the Notes to
enter into these forbearance and other arrangements, among other things, is subject to the Company
having entered into an extended forbearance arrangement with Fifth Third Bank, the provision of
interim statements as to the cash position of CDTI and the Company and the execution of appropriate
documentation. There can be no assurance that the holders of the Notes or Fifth Third Bank will
actually enter into any such forbearance and other arrangements.
The Notes contain two embedded financial instruments that require separate accounting at
fair value. The instruments requiring separate accounting are the premium redemption feature
related to the 2x premium and the contingent equity forward related to the future funding
commitment. The estimate of fair value of such financial instruments involves unobservable inputs
that are considered Level 3 inputs.
For the $1.5 million in Notes issued through June 30, 2010, the premium redemption
instrument had an initial value upon issuance of $0.5 million and represents the fair value of the
additional penalty premium of two times (2x) the outstanding principal amount plus the default
interest that is due if the Notes are in default. This instrument is considered a put option, as
subsequent to August 2, 2010, the noteholders have the option of demanding payment or providing
additional time extensions. The fair value of the premium redemption instrument is estimated by
calculating the present value of $4.0 million plus accrued interest, based on an assumed payment
date (eleven months after default date) using a high yield discount rate of 17%, multiplied by an
estimated probability of its exercise.
The contingent equity forward has an initial value upon issuance of $0.7 million and
represents the fair value of the additional $2.0 million that the investors have committed to fund
immediately prior to the closing of the Merger with CDTI. It is considered a commitment to purchase
equity since the funding will only occur from the same events that will cause the Notes to
automatically convert to equity. The fair value is estimated based on the intrinsic value of the
forward discounted at a risk free rate multiplied by the estimated probability that the forward
will fund. The intrinsic value is calculated based upon the combined market capitalizations of the
Company and CDTI less the required $2.0 million cash payment.
The Notes include a beneficial conversion feature totaling $1.3 million that is
contingent on the approval by the shareholders of certain amendments to the Companys Articles of
Incorporation. Once the related amendments are approved, the beneficial conversion feature will be
recorded as additional non-cash interest expense.
F-11
The initial value of the embedded financial instruments is recorded as a discount to the
face value of the Notes and is amortized using the effective interest method through the original
maturity date of the Notes, which was August 2, 2010. The embedded financial instruments are
re-measured at fair value at the end of the reporting period with changes in fair value being
recorded to other income (expense). While the financial instruments are bifurcated for
measurement purposes, they are presented on a combined basis with the debt host contract. A summary
of the accounting is presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible |
|
|
|
|
|
|
|
|
|
Notes |
|
|
Financial |
|
|
|
|
|
|
(net of discount) |
|
|
Instruments |
|
|
Total |
|
|
|
US $000 |
|
|
US $000 |
|
|
US $000 |
|
Assigned value on date of issuance |
|
|
482 |
|
|
|
1,018 |
|
|
|
1,500 |
|
Fair value of contingent equity forward
issued in advance of final $0.5 million
notes |
|
|
|
|
|
|
164 |
|
|
|
164 |
|
Amortization of discount on notes |
|
|
281 |
|
|
|
|
|
|
|
281 |
|
Change in fair value of financial instruments |
|
|
|
|
|
|
(178 |
) |
|
|
(178 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010 |
|
|
763 |
|
|
|
1,004 |
|
|
|
1,767 |
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, long-term debt classified as current and financial instruments at fair
value at June 30, 2010 and December 31, 2009 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
December 31, 2009 |
|
|
|
US $000 |
|
|
US $000 |
|
Line of credit |
|
|
3,029 |
|
|
|
5,147 |
|
Consideration payable |
|
|
3,000 |
|
|
|
3,000 |
|
Secured convertible
notes payable with a
face value of $1.5
million, net of
discount of $0.7
million |
|
|
1,767 |
|
|
|
|
|
Capital lease obligation |
|
|
61 |
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
7,857 |
|
|
|
8,222 |
|
Less current portion |
|
|
(7,796 |
) |
|
|
(8,147 |
) |
|
|
|
|
|
|
|
|
|
|
61 |
|
|
|
75 |
|
|
|
|
|
|
|
|
See Note 14 for subsequent events.
5. Severance Expense
The Company has taken actions to reduce its cost base beginning in 2008 and continuing
into the six months ended June 30, 2010. As a result of these actions, the Company has accrued
severance costs, which are included in accrued expenses on the accompanying consolidated balance
sheets, as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30 |
|
|
|
2010 |
|
|
2009 |
|
|
|
US $000 |
|
|
US $000 |
|
Balance at beginning of period |
|
|
670 |
|
|
|
187 |
|
Accrued severance expense |
|
|
15 |
|
|
|
237 |
|
Paid severance expense |
|
|
(276 |
) |
|
|
(317 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
|
409 |
|
|
|
107 |
|
|
|
|
|
|
|
|
F-12
6. Accrued Warranty
The Company accrues warranty upon shipment of its products. Accrued warranties are
included in accrued expenses on the accompanying consolidated balance sheets. The accrued warranty
for the six months ended June 30, 2010 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30 |
|
|
|
2010 |
|
|
2009 |
|
|
|
US $000 |
|
|
US $000 |
|
Balance at beginning of period |
|
|
371 |
|
|
|
178 |
|
Accrued warranty expense |
|
|
61 |
|
|
|
119 |
|
Warranty claims paid |
|
|
(50 |
) |
|
|
(97 |
) |
Translation adjustment |
|
|
3 |
|
|
|
7 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
385 |
|
|
|
207 |
|
|
|
|
|
|
|
|
7. Net Income (loss) per Share
Basic net income (loss) per share is computed using the weighted average number of common
shares outstanding during the period. Diluted net income (loss) per share is computed using the
weighted average number of common shares and dilutive potential common shares. Diluted net income
(loss) per share excludes certain dilutive potential common shares outstanding as their effect is
anti-dilutive on loss from continuing operations. Dilutive potential common shares include employee
stock options and other warrants that are convertible into the Companys common stock. The Company
had potential option and warrant dilutive securities totaling 8,594,000 and 9,722,000 for the six
months ended June 30, 2010 and 2009.
For the six months ended June 30, 2010 and 2009 the effect of the option and warrant
dilutive securities totaling 7,343,000 and 9,722,000 equivalent shares, respectively, have been
excluded in the computation of net income (loss) per share and net income (loss) from continuing
operations per share as their impact would be anti-dilutive.
In addition to the option and warrant dilutive securities, a total of 150,434,000 Class B
shares are issuable upon the conversion of the Notes. These shares have been excluded from the
computation of net income (loss) per share and net income (loss) from continuing operations per
share as their impact would be anti-dilutive for the Notes issued through June 30, 2010 and the
remainder is issuable upon contingencies that have not been resolved as of June 30, 2010.
8. TCC Joint Venture
In February 2008, the Company entered into an agreement with Tanaka Kikinzoku Kogyo K.K.
(TKK) to form a new joint venture company, TC Catalyst Incorporated (TCC), a Japanese corporation.
The joint venture is part of the Catalyst division. The Company entered the joint venture in order
to improve its presence in Japan and Asia and strengthen its business flow into the Asian market.
In December 2008, the Company agreed to sell and transfer specific heavy duty diesel
catalyst technology and intellectual property to TKK for use in the defined territory for a total
selling price of $7.5 million. TKK will provide that intellectual property to TCC on a royalty-free
basis. The Company also sold shares in TCC to TKK reducing its ownership to 30%. $5.0 million of
the sale was completed and recognized in 2008 with $2.5 million recognized in the three months
ended March 31, 2009.
In December 2009, the Company agreed to sell and transfer specific three-way catalyst and
zero PGM patents to TKK for use in specific geographic regions. The patents were sold for $3.9
million. TKK paid the Company $1.9 million in 2009 and $2.0 million in the first quarter of 2010.
The Company recognized the gain on sale of the patents of $3.9 million in the three months ended
March 31, 2010. As part of the transaction, the Company also sold shares in TCC, which reduced its
ownership in the joint venture to 5%.
F-13
The Companys investment in TCC is accounted for using the equity method as the Company
still has significant influence over TCC as a result of having a seat on TCCs board. In February
2010, the Company entered into an agreement to loan 37.5 million JPY (approximately $0.4 million)
to TCC to fund continuing operations. The loan is funded in four monthly tranches starting in
February 2010 and ending in May 2010. As of June 30, 2010, the Company had loaned TCC 37.5 million
JPY. If the loan is not repaid by TCC, it will offset the Companys obligation to fund its portion
of TCCs losses. Given TCCs historical losses, the loan has been recorded as a reduction of such
obligations. At June 30, 2010, the Companys loan to TCC less its share of accumulated losses in
the amount of $0.4 million is included in other current assets. TCC operates with a March 31 fiscal
year-end. Financial information for TCC as of and for the six months ended June 30, 2010 and 2009
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30 |
|
|
|
2010 |
|
|
2009 |
|
|
|
US $000 |
|
|
US $000 |
|
Assets |
|
|
5,074 |
|
|
|
11,675 |
|
Liabilities |
|
|
9,951 |
|
|
|
13,399 |
|
Deficit |
|
|
(4,877 |
) |
|
|
(1,724 |
) |
Net sales |
|
|
936 |
|
|
|
544 |
|
Gross Margin |
|
|
670 |
|
|
|
(274 |
) |
Net loss |
|
|
(641 |
) |
|
|
(2,041 |
) |
9. Sale of Energy Systems Division
On October 1, 2009 the Company sold all significant assets of Applied Utility Systems,
Inc., which comprised the Companys Energy Systems division, for up to $10.0 million, including
$8.6 million in cash and contingent consideration of $1.4 million. Of the contingent consideration,
$0.5 million was contingent upon Applied Utility Systems being awarded certain projects and $0.9
million is retention against certain project and contract warranties and other obligations. The
Company has not recognized any of the contingent consideration as of June 30, 2010 and will only do
so if the contingencies are resolved favorably. The $0.5 million of contingent consideration that
was contingent on the award of certain projects was not earned and is not likely to be paid. The
income statement of the Energy Systems division is presented as discontinued operations. There was
no revenue included within discontinued operations for the six month period ended June 30, 2010.
Revenue included within discontinued operations was $8.5 million for the six months ended June 30,
2009.
10. Related-party Transactions
One of the Companys Directors, Mr. Alexander (Hap) Ellis, III, is a partner of
RockPort Capital Partners (RockPort), a shareholder in the Company which subscribed for the
secured convertible notes in connection with the capital raise discussed in Note 4.
In October 2008, the Companys Board of Directors unanimously adopted a resolution to
waive the Non-Executive Directors right to receive, and the Companys obligation to pay, any
director fees with respect to participation in Board and Committee meetings and other matters with
effect from July 1, 2008 and continuing thereafter until the Directors elect to adopt resolutions
reinstating such fees. On May 1, 2009, the Directors adopted a resolution to reinstate the accrual
of director fees effective January 1, 2009, with a payment schedule to be determined at a later
date. As of June 30, 2010 an amount of $0.5 million was accrued for Directors fees and was due and
payable to the Directors. As part of the $4.0 million issuance of secured convertible notes
discussed in Note 4, the accrued director fees as of December 31, 2009, which amounted to $0.4
million, will be paid in a combination of common stock and cash, with the cash portion being $0.1
million. The stock portion is contemplated to be issued just prior to the Merger and converted to
CDTI common stock post merger. The 2010 director fees will be paid in cash.
F-14
11. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the six months ended June 30, 2010 are
as follows:
|
|
|
|
|
|
|
US $000 |
|
Balance at December 31, 2009 |
|
|
4,223 |
|
Effect of translation adjustment |
|
|
(62 |
) |
|
|
|
|
Balance at June 30, 2010 |
|
|
4,161 |
|
|
|
|
|
Intangible assets as of June 30, 2010 and December 31, 2009 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful life |
|
June 30, 2010 |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
US $000 |
|
|
US $000 |
|
Trade name |
|
15-20 years |
|
|
739 |
|
|
|
738 |
|
Patents and know-how |
|
5-10 years |
|
|
3,796 |
|
|
|
3,792 |
|
Customer relationships |
|
8 years |
|
|
1,184 |
|
|
|
1,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,719 |
|
|
|
5,736 |
|
Less accumulated amortization |
|
|
|
|
|
|
(1,559 |
) |
|
|
(1,291 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,160 |
|
|
|
4,445 |
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate amortization for amortizable intangible assets, using the straight-line
amortization method for the six months ended June 30, 2010 and 2009 was $0.3 million. Estimated
amortization expense for existing intangible assets for the next five years is $0.5 million in each
year.
12. Legal Proceedings
In connection with the Companys acquisition of the assets of Applied Utility Systems,
Inc., Applied Utility Systems entered into a Consulting Agreement with M.N. Mansour, Inc.
(Mansour, Inc.), pursuant to which Mansour, Inc. and Dr. M.N. Mansour (Dr. Mansour) agreed to
perform consulting services for Applied Utility Systems. As further discussed in Note 9, the income
statement of Applied Utility Systems is presented as discontinued operations. During February 2008,
Applied Utility Systems terminated the Consulting Agreement for cause and alleged that Mansour,
Inc. and Dr. Mansour had breached their obligations under the Consulting Agreement. The matter was
submitted to binding arbitration in Los Angeles, California. On April 13, 2010, the Arbitrator
rendered a Final Award (a) finding that the Consulting Agreement was properly terminated by the
Company on February 27, 2008, (b) excusing the Company from any obligation to make any further
payments under the Consulting Agreement, (c) obligating Mansour, Inc. to pay the Company an amount
equal to 75% of all amounts paid to Mansour Inc. by the Company under the Consulting Agreement, and
(d) awarding the Company attorneys fees in the amount of $450,000, resulting in a total award of
approximately $1.2 million. A hearing was held on August 2, 2010, during which the court confirmed
the arbitrators award in its entirety. Included in accrued liabilities at June 30, 2010, is an
accrual for the consulting fees under this arrangement totaling $1.2 million. The Company will
reverse such liability and has recorded an associated gain from discontinued operations during the
quarter ending September 30, 2010, which represents the period in which the court confirmed the
award and the Company was legally released from its liability.
The Company has $3.0 million of consideration due to the seller under the Applied Utility
Systems Asset Purchase Agreement dated August 28, 2006. The consideration was due August 28, 2009
and accrues interest at 5.36%. At June 30, 2010 the Company had accrued $0.6 million of unpaid
interest. The Company has not paid the foregoing amounts. In addition, the Asset Purchase Agreement
provides that the Company would pay the seller an earn-out amount based on the revenues and net
profits from the conduct of the acquired business of Applied Utility Systems. The earn-out
potentially was payable over a period of ten years beginning January 1, 2009. The Company has not
paid any earn-out amount for the fiscal year ended December 31, 2009 or the six months ended June
30, 2010. The assets of the business were sold on October 1, 2009 and the Company believes that it
has no obligation to pay any earn-out for any period post the sale of the business.
F-15
The seller commenced an action in California Superior Court to compel arbitration regarding the
consideration which was due in August 2009. Such action was stayed by the court and the seller was
directed to pursue any collection action through arbitration. The seller has commenced arbitration
proceedings to collect the consideration which was due in August 2009 and any earn-out amounts
payable under the Asset Purchase Agreement. The earn-out requested under the proceedings is $21.0
million, which is the maximum earnable over the ten year period of the earn-out defined in the
Asset Purchase Agreement. The Company has certain claims against the seller under the terms of the
Asset Purchase Agreement. While the arbitration is in the preliminary stages and it is not possible
to predict the outcome of the arbitration, the Company intends to vigorously assert its claims
against the seller under the Asset Purchase Agreement and to defend against any action or
arbitration by the seller to collect on the consideration and earn-out. The Company believes the
outcome of these matters will not exceed the liabilities recorded as of June 30, 2010. In
connection with the arbitration proceedings, the seller sought a writ of attachment with respect to
the foregoing amounts. On June 24, 2010, the arbitrator issued an interim award granting the seller
a right to a writ in the amount of approximately $2.4 million (which amount was the net amount of
the approximately $3.6 million that the seller claimed was payable by the Company during August
2009 and the amount of $1.2 million that the Company was awarded against the seller in a separate
arbitration action by the Company relating to the sellers breach of his Consulting Agreement with
the Company). The seller has initiated action to California Superior Court for Orange County,
California, and has filed a motion for the issuance of the writ of attachment. The Company intends
to continue to vigorously defend its interests to limit any adverse effects of the writ of
attachment and the imposition of the writ against any of the Companys assets, pending any final
decision on the merits of the underlying claims in the arbitration. A hearing on this matter was
held on August 18, 2010. The court has taken it under submission but has not ruled. Under the terms
of the Fifth Third forbearance agreement described in Note 4, the Company is restricted from making
any payment to unsecured creditors, including seller, until the conditions of the forbearance
agreement have been met.
In connection with the Companys acquisition of the assets of Applied Utility Systems,
Inc., the seller entered into an agreement not to compete pursuant to which he agreed to refrain
from taking certain actions that would be competitive with the business of Applied Utility Systems,
Inc. The Company believes that the seller has breached his obligations under the agreement not to
compete and on November 19, 2009, commenced suit in California Superior Court for Orange County,
California, to enjoin any continuing breaches and to recover damages for the alleged breaches. The
seller demurred to the complaint. A hearing on the demurrer was held on July 26, 2010, at which
hearing the court granted the demur to the Companys claim for breach of the agreement not to
compete but allowed the Companys claim for breach of fiduciary duty to proceed, and granted the
Company leave to file an amended complaint seeking return of consideration paid for the agreement
not to compete in light of the ruling that such agreement was not enforceable. The Company filed a
further amended complaint asserting a cause of action for rescission of the agreement not to
compete and the seller filed a demurrer to the amended complaint and a hearing on the demurrer is
scheduled for September 14, 2010. The suit is in the preliminary stages and it is not possible to
predict the outcome of the suit.
On September 30, 2008, Applied Utility Systems, Inc. (AUS), a former subsidiary of the
Company, filed a complaint against Benz Air Engineering, Inc. (Benz Air). The complaint was
amended on January 16, 2009, and asserts claims against Benz Air for breach of contract, common
counts and slander. AUS seeks $0.2 million in damages, plus interest, costs and applicable
penalties. In response to the complaint, Benz Air filed a cross-complaint on November 17, 2008,
which named both AUS and the Company as defendants. The cross-complaint asserts claims against AUS
and the Company for breach of oral contract, breach of express warranty, breach of implied
warranty, negligent misrepresentation and intentional misrepresentation and seeks not less than
$0.3 million in damages, plus interest, costs and punitive damages. The Company is unable to
estimate any potential payment for punitive damages as they have not been quantified by Benz Air.
The Company believes it is more likely than not to prevail in this matter. The trial began on June
14, 2010 and was postponed to October 4, 2010.
See Note 14 for subsequent events.
F-16
13. Segment Reporting
The Company has two division segments based on the products it delivers:
Heavy Duty Diesel (HDD) Systems division The HDD Systems division includes
retrofit of legacy diesel fleets with emissions control systems and the emerging opportunity for
new engine emissions controls for on- and off-road vehicles. In 2007, the Company acquired Engine
Control Systems (ECS), an Ontario, Canada-based company focused on a variety of heavy duty vehicle
applications. This environmental business segment specializes in the design and manufacture of
verified exhaust emissions control solutions. Globally, the HDD Systems division offers a range of
products for the OEM, aftermarket and retrofit markets in order to reduce exhaust emissions created
by on-road, off-road and stationary diesel, gasoline and alternative fuel engines including propane
and natural gas. The retrofit market in the U.S. is driven in particular by state and municipal
environmental regulations and incentive funding for voluntary early compliance. The HDD Systems
division derives significant revenues from retrofit with a portfolio of solutions verified by the
California Air Resources Board and the United States Environmental Protection Agency.
Catalyst division The Catalyst division is the original part of the Catalytic
Solutions (CSI) business behind the Companys proprietary Mixed Phase Catalyst
(MPC®) technology enabling the Company to produce catalyst formulations for
gasoline, diesel and natural gas induced emissions that offer performance, proven durability and
cost effectiveness for multiple markets and a wide range of applications. A family of unique
catalysts has been developed with base-metals or low platinum group metal (PGM) and zero PGM
content to provide increased catalytic function and value for technology-driven automotive
industry customers.
Corporate Corporate includes cost for personnel, insurance and public company
expenses such as legal, audit and taxes that are not allocated down to the operating divisions.
During 2009, the Company changed its internal reporting to the Companys chief operational decision
makers to report corporate expenses separately from the Catalyst division. All data reported
reflect this change.
Discontinued operations In 2006, the Company purchased Applied Utility
Systems, Inc., a provider of cost-effective, engineered solutions for the clean and efficient
utilization of fossil fuels. Applied Utility Systems, referred to as the Companys Energy Systems
division, provided emissions control and energy systems solutions for industrial and utility
boilers, process heaters, gas turbines and generation sets used largely by major utilities,
industrial process plants, OEMs, refineries, food processors, product manufacturers and
universities. The Energy Systems division delivered integrated systems built for customers
specific combustion processes. As discussed in Note 9, this division was sold on October 1, 2009.
F-17
Summarized financial information for our reportable segments as of and for the six months
ended June 30, 2010 and 2009 are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30 |
|
|
|
2010 |
|
|
2009 |
|
|
|
US $000 |
|
|
US $000 |
|
Net sales |
|
|
|
|
|
|
|
|
HDD Systems |
|
|
15,776 |
|
|
|
8,796 |
|
Catalyst |
|
|
9,936 |
|
|
|
10,457 |
|
Corporate |
|
|
|
|
|
|
|
|
Eliminations (1) |
|
|
(341 |
) |
|
|
(109 |
) |
|
|
|
|
|
|
|
Total |
|
|
25,371 |
|
|
|
19,144 |
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
|
|
|
|
|
|
HDD Systems |
|
|
1,913 |
|
|
|
(61 |
) |
Catalyst |
|
|
3,104 |
|
|
|
(1,768 |
) |
Corporate |
|
|
(2,915 |
) |
|
|
(2,826 |
) |
|
|
|
|
|
|
|
Total |
|
|
2,102 |
|
|
|
(4,655 |
) |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Elimination of Catalyst revenue related to sales to HDD Systems. |
The six months Catalyst division income from operations includes a $3.9 million gain on
sale of intellectual property to TKK in 2010 and $2.5 million in 2009.
Net sales by geographic region based on location of sales organization for the six months
ended June 30, 2010 and 2009 are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30 |
|
|
|
2010 |
|
|
2009 |
|
|
|
US $000 |
|
|
US $000 |
|
United States |
|
|
11,346 |
|
|
|
11,880 |
|
Canada |
|
|
11,177 |
|
|
|
5,298 |
|
Europe |
|
|
2,848 |
|
|
|
1,966 |
|
|
|
|
|
|
|
|
Total |
|
|
25,371 |
|
|
|
19,144 |
|
|
|
|
|
|
|
|
14. Subsequent Events
The Company has evaluated subsequent events from the balance sheet date through August
27, 2010, the date at which the unaudited condensed consolidated financial statements were issued,
and determined there are no other items to disclose.
Upon the inclusion of the financial statements in an amended Form S-4 filing of Clean
Diesel Technologies, Inc., the Company has considered disclosures of the following additional
matters through the date of filing on September 23, 2010.
On August 31, 2010, Fifth Third Bank agreed to further extend the forbearance period
relating to the Companys demand revolving credit line through October 15, 2010. Under the terms of
the extended forbearance agreement, the credit limit was further reduced to $6.0 million and the
interest rate was increased by 0.25% to U.S./Canadian Prime Rate plus 3.00% and, if the Merger is
not consummated by October 15, 2010, the interest rate will increase by an additional 1.00% to
U.S./Canadian Prime Rate plus 4.00%. A further extension until 90 days after consummation of the
Merger will be granted if the proposed Merger with CDTI is completed by October 15, 2010, and as of
the effective time of the Merger, the secured convertible notes issued by the Company in connection
with the capital raise have been converted to common equity and
the security granted to the convertible noteholders has been released; the Company and CDTI
collectively have $3.0 million of free cash on their balance sheet; the Engine Control Systems
subsidiary has Canadian $2.0 million available under the existing loan agreement; and no
default, forbearance default or event of default (as defined in the credit and forbearance
agreements) is outstanding.
F-18
As of August 31, 2010, following the Companys failure to pay amounts due with respect to
the $2.0 million principal amount of the Companys secured convertible notes or consummate the
merger prior to the August 2, 2010 maturity date or within the subsequent grace period, the holders
of the Notes agreed to forbear from exercising any rights or remedies there under to October 15,
2010. The agreement regarding rights and remedies includes: forgoing the increase in the interest
rate on the Notes from 8.0% to 15.0%, waiving the applicability of the additional payment premium
of two times (2x) the outstanding principal amount due, and agreeing that no payment premium will
be payable in the event that the Notes are converted and the Merger occurs prior to October 15,
2010. The holders of the notes further conditioned their obligation to purchase the remaining $2.0
million of the notes immediately prior to the closing of the Merger on the requirement that the
Company and CDTI timely furnish the requested statements regarding their estimated cash positions,
that each of the Company and CDTI have a certain minimum cash position, that the shares of CDTI to
be issued in the Merger be approved for listing on the Nasdaq, in addition to the other closing
conditions in the secured convertible note purchase agreements (which include that the Company must
not have suffered any material adverse change). Accordingly, if the Merger has not occurred by
October 15, 2010, and the Company is not able to obtain the agreement of the holders of these Notes
to further waive, extend or further modify the terms of the Notes, the $2.0 million principal
amount of the Notes, together with accrued interest at the increased rate of 15.0% and an
additional payment premium of two times (2x) the outstanding principal amount will be due to the
holders of the Notes.
In connection with the arbitration with Dr. Mansour and Mansour Inc. regarding his
Consulting Agreement with Applied Utility Systems, the court awarded the Company an additional
$64,475 in attorney fees, expenses and interest on the amount of the judgment following a hearing
held on September 2, 2010.
In connection with the arbitration relating to amounts due to the seller under the
Applied Utility Systems Asset Purchase Agreement, the court granted the sellers application for
writs of attachment against the Company and Applied Utility Systems by order dated August 31, 2010.
The seller has delivered to the Company the forms of writ of attachment that he will be filing for
issuance by the clerk of the court. Upon issuance, approximately $2.4 million of the Companys
assets would be subject to limitations on their use and disposition pending resolution of the
underlying arbitration. The writ of attachment may be levied against only those assets of the
Company located in California. Intellectual property is not subject to levy, and the Company will
not be required to set aside $2.4 million in cash. The Company does not anticipate any significant
impact on its ability to conduct its operations.
In connection with the Companys acquisition of the assets of Applied Utility Systems,
Inc., the seller entered into an agreement not to compete pursuant to which he agreed to refrain
from taking certain actions that would be competitive with the business of Applied Utility Systems,
Inc. The Company believes that the seller has breached his obligations under the agreement not to
compete and on November 19, 2009, commenced suit in California Superior Court for Orange County,
California, to enjoin any continuing breaches and to recover damages for the alleged breaches. The
seller demurred to the complaint. A hearing on the demurrer was held on July 26, 2010, at which
hearing the court granted the demur to the Companys claim for breach of the agreement not to
compete but allowed the Companys claim for breach of fiduciary duty to proceed, and granted the
Company leave to file an amended complaint seeking return of consideration paid for the agreement
not to compete in light of the ruling that such agreement was not enforceable. The Company filed a
further amended complaint asserting a cause of action for rescission of the agreement not to
compete and the seller filed a demurrer to the amended complaint. Following a hearing, the demurrer
was denied on September 21, 2010. The suit is in the preliminary stages and it is not possible to
predict the outcome of the suit.
F-19
CSI AUDITED FINANCIAL STATEMENTS
Independent Auditors Report
The Board of Directors
Catalytic Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of Catalytic Solutions, Inc. and subsidiaries (the Company) as of December 31, 2009
and 2008, and the related consolidated statements of operations, stockholders equity and comprehensive loss, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the
United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Catalytic Solutions, Inc. and subsidiaries as
of December 31, 2009 and 2008, and the results of their operations and their cash flows for the
years then ended in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1b to the consolidated financial
statements, the Company has suffered recurring losses from operations and has an accumulated
deficit that raise substantial doubt about its ability to continue as a going concern. Managements
plans in regard to these matters are also described in Note 1b. The consolidated financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
Los Angeles, California
May 4, 2010, except for Note 21, as to
which the date is May 14, 2010
F-20
CATALYTIC SOLUTIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2009 |
|
|
2008 |
|
|
|
US $000 |
|
|
US $000 |
|
|
|
|
|
|
As Adjusted |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
2,336 |
|
|
|
6,726 |
|
Trade accounts receivable, less allowance for
doubtful accounts of $313 and $123 at December 31,
2009 and 2008, respectively |
|
|
8,066 |
|
|
|
10,667 |
|
Inventories |
|
|
6,184 |
|
|
|
8,919 |
|
Prepaid expenses and other current assets |
|
|
2,010 |
|
|
|
4,494 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
18,596 |
|
|
|
30,806 |
|
Property and equipment, net |
|
|
2,897 |
|
|
|
2,882 |
|
Intangible assets, net |
|
|
4,445 |
|
|
|
6,486 |
|
Goodwill |
|
|
4,223 |
|
|
|
6,319 |
|
Promissory note from unconsolidated affiliate |
|
|
|
|
|
|
2,767 |
|
Other assets |
|
|
82 |
|
|
|
454 |
|
|
|
|
|
|
|
|
Total assets |
|
|
30,243 |
|
|
|
49,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Line of credit |
|
|
5,147 |
|
|
|
8,068 |
|
Current portion of long-term debt |
|
|
3,000 |
|
|
|
9,812 |
|
Accounts payable |
|
|
4,967 |
|
|
|
7,325 |
|
Deferred revenue |
|
|
195 |
|
|
|
2,942 |
|
Accrued salaries and benefits |
|
|
1,294 |
|
|
|
1,451 |
|
Accrued expenses |
|
|
2,990 |
|
|
|
4,816 |
|
Deferred gain on sale of intellectual property |
|
|
1,900 |
|
|
|
|
|
Accrued professional and consulting fees |
|
|
2,375 |
|
|
|
1,085 |
|
Income taxes payable |
|
|
1,081 |
|
|
|
354 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
22,949 |
|
|
|
35,853 |
|
Long-term debt, excluding current portion |
|
|
75 |
|
|
|
33 |
|
Deferred tax liability |
|
|
1,336 |
|
|
|
2,415 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
24,360 |
|
|
|
38,301 |
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 9, 19 and 21) |
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Common stock, no par value. Authorized 148,500,000
shares; issued and outstanding 69,761,902 shares at
December 31, 2009 and 2008 |
|
|
156,216 |
|
|
|
158,019 |
|
Treasury stock at cost (60,000 shares) |
|
|
(100 |
) |
|
|
(100 |
) |
Accumulated other comprehensive loss |
|
|
(889 |
) |
|
|
(2,867 |
) |
Accumulated deficit |
|
|
(149,344 |
) |
|
|
(143,639 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
5,883 |
|
|
|
11,413 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
|
30,243 |
|
|
|
49,714 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-21
CATALYTIC SOLUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
December 31 |
|
|
|
2009 |
|
|
2008 |
|
|
|
US $000 |
|
|
US $000 |
|
|
|
|
|
|
|
As Adjusted |
|
Revenues |
|
|
50,514 |
|
|
|
52,563 |
|
Cost of revenues |
|
|
38,547 |
|
|
|
44,346 |
|
|
|
|
|
|
|
|
Gross margin |
|
|
11,967 |
|
|
|
8,217 |
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
3,577 |
|
|
|
5,165 |
|
Research and development |
|
|
7,257 |
|
|
|
8,942 |
|
General and administrative |
|
|
8,903 |
|
|
|
10,611 |
|
Impairment of long-lived assets |
|
|
|
|
|
|
4,928 |
|
Severance expense |
|
|
1,429 |
|
|
|
234 |
|
Recapitalization expense |
|
|
1,258 |
|
|
|
|
|
Gain on sale of intellectual property |
|
|
(2,500 |
) |
|
|
(5,000 |
) |
|
|
|
|
|
|
|
Total operating expenses |
|
|
19,924 |
|
|
|
24,880 |
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(7,957 |
) |
|
|
(16,663 |
) |
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
Interest income |
|
|
18 |
|
|
|
266 |
|
Interest expense |
|
|
(2,304 |
) |
|
|
(2,224 |
) |
Other |
|
|
(291 |
) |
|
|
(643 |
) |
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(2,577 |
) |
|
|
(2,601 |
) |
|
|
|
|
|
|
|
Loss from continuing operations before income taxes |
|
|
(10,534 |
) |
|
|
(19,264 |
) |
Income tax (benefit) expense from continuing operations |
|
|
(1,036 |
) |
|
|
624 |
|
|
|
|
|
|
|
|
Net loss from continuing operations |
|
|
(9,498 |
) |
|
|
(19,888 |
) |
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
Income (loss) from operations of discontinued Energy Systems
division (including gain on disposal of $3.7 million in 2009) |
|
|
2,554 |
|
|
|
(915 |
) |
Income tax expense from discontinued operations |
|
|
1,032 |
|
|
|
1 |
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations |
|
|
1,522 |
|
|
|
(916 |
) |
|
|
|
|
|
|
|
Net loss |
|
|
(7,976 |
) |
|
|
(20,804 |
) |
|
|
|
|
|
|
|
Basic and diluted loss per share: |
|
|
|
|
|
|
|
|
Net loss from continuing operations per share |
|
$ |
(0.14 |
) |
|
$ |
(0.29 |
) |
|
|
|
|
|
|
|
Net loss per share |
|
$ |
(0.11 |
) |
|
$ |
(0.30 |
) |
|
|
|
|
|
|
|
Weighted average number of common shares outstanding (000s): |
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
69,762 |
|
|
|
69,701 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-22
CATALYTIC SOLUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders Equity and Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, 2009 and 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Net |
|
|
|
Common Stock |
|
|
Treasury Stock |
|
|
Comprehensive |
|
|
Accumulated |
|
|
Stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Gain/(Loss) |
|
|
Deficit |
|
|
Equity |
|
|
|
|
|
|
|
US $000 |
|
|
|
|
|
|
US $000 |
|
|
US $000 |
|
|
US $000 |
|
|
US $000 |
|
Balance at December 31, 2007 |
|
|
69,756,461 |
|
|
|
156,562 |
|
|
|
(60,000 |
) |
|
|
(100 |
) |
|
|
427 |
|
|
|
(122,612 |
) |
|
|
34,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change
in accounting for patent costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(223 |
) |
|
|
(223 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,804 |
) |
|
|
(20,804 |
) |
Unrealized loss on foreign
currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,294 |
) |
|
|
|
|
|
|
(3,294 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,098 |
) |
Stock based compensation |
|
|
|
|
|
|
821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
821 |
|
Issuance of warrants |
|
|
|
|
|
|
614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
614 |
|
Issuance of restricted stock |
|
|
60,000 |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22 |
|
Cashless exercise of stock
options |
|
|
5,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
69,821,902 |
|
|
|
158,019 |
|
|
|
(60,000 |
) |
|
|
(100 |
) |
|
|
(2,867 |
) |
|
|
(143,639 |
) |
|
|
11,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change
in accounting for warrants |
|
|
|
|
|
|
(2,494 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,271 |
|
|
|
(223 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,976 |
) |
|
|
(7,976 |
) |
Unrealized gain on foreign
currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,978 |
|
|
|
|
|
|
|
1,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,998 |
) |
Stock based compensation |
|
|
|
|
|
|
691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
69,821,902 |
|
|
|
156,216 |
|
|
|
(60,000 |
) |
|
|
(100 |
) |
|
|
(889 |
) |
|
|
(149,344 |
) |
|
|
5,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-23
CATALYTIC SOLUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
December 31 |
|
|
|
2009 |
|
|
2008 |
|
|
|
US $000 |
|
|
US $000 |
|
|
|
|
|
|
|
As Adjusted |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
|
(7,976 |
) |
|
|
(20,804 |
) |
(Income) loss from discontinued operations (including gain on sale of
discontinued operations of $3.7 million) |
|
|
(1,522 |
) |
|
|
916 |
|
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,394 |
|
|
|
3,012 |
|
Provision for (recovery of) doubtful accounts, net |
|
|
11 |
|
|
|
(35 |
) |
Amortization of deferred financing |
|
|
686 |
|
|
|
923 |
|
Stock-based compensation |
|
|
691 |
|
|
|
821 |
|
Change in fair value of liability-classified warrants |
|
|
(221 |
) |
|
|
|
|
Loss on unconsolidated affiliate |
|
|
1,271 |
|
|
|
988 |
|
Gain on sale of interest in unconsolidated affiliate |
|
|
(1,165 |
) |
|
|
(428 |
) |
Impairment of long-lived assets |
|
|
|
|
|
|
4,928 |
|
Deferred income taxes |
|
|
(1,347 |
) |
|
|
93 |
|
Loss on disposal of property and equipment |
|
|
60 |
|
|
|
476 |
|
Loss (gain) on foreign currency transaction |
|
|
655 |
|
|
|
(8 |
) |
Gain on sale of intellectual property |
|
|
(2,500 |
) |
|
|
(5,000 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
|
(3,041 |
) |
|
|
641 |
|
Inventories |
|
|
3,184 |
|
|
|
763 |
|
Prepaid expenses and other assets |
|
|
1,036 |
|
|
|
(959 |
) |
Accounts payable |
|
|
1,662 |
|
|
|
(1,523 |
) |
Deferred revenue |
|
|
|
|
|
|
2,937 |
|
Accrued expenses |
|
|
(820 |
) |
|
|
(2,015 |
) |
Income taxes payable |
|
|
377 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
Cash used in operating activities of continuing operations |
|
|
(7,565 |
) |
|
|
(14,275 |
) |
Cash provided by (used in) operating activities of discontinued operations |
|
|
195 |
|
|
|
(866 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(7,370 |
) |
|
|
(15,141 |
) |
|
|
|
|
|
|
|
F-24
CATALYTIC SOLUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
December 31 |
|
|
|
2009 |
|
|
2008 |
|
|
|
US $000 |
|
|
US $000 |
|
|
|
|
|
|
|
As Adjusted |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Investment in unconsolidated affiliate |
|
|
|
|
|
|
(986 |
) |
Purchases of property and equipment |
|
|
(629 |
) |
|
|
(1,896 |
) |
Purchase of ECS, net of cash |
|
|
|
|
|
|
475 |
|
Proceeds from sale of interest in unconsolidated affiliate |
|
|
108 |
|
|
|
441 |
|
Proceeds from sale of intellectual property |
|
|
5,400 |
|
|
|
4,000 |
|
Proceeds from sale of property and equipment |
|
|
|
|
|
|
1,702 |
|
Proceeds from sale of discontinued Energy Systems division |
|
|
8,550 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by investing activities of continuing operations |
|
|
13,429 |
|
|
|
3,736 |
|
Cash provided by (used in) investing activities of discontinued operations |
|
|
|
|
|
|
(109 |
) |
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
13,429 |
|
|
|
3,627 |
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Borrowings under line of credit |
|
|
1,721 |
|
|
|
4,790 |
|
Proceeds from issuance of debt |
|
|
30 |
|
|
|
3,345 |
|
Repayment of line of credit |
|
|
(5,424 |
) |
|
|
(3,506 |
) |
Repayment of long-term debt |
|
|
(6,800 |
) |
|
|
(1,889 |
) |
Payments for debt issuance costs |
|
|
(14 |
) |
|
|
(713 |
) |
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(10,487 |
) |
|
|
2,027 |
|
|
|
|
|
|
|
|
Effect of exchange rates on cash |
|
|
38 |
|
|
|
(1,231 |
) |
Net change in cash and cash equivalents |
|
|
(4,390 |
) |
|
|
(10,718 |
) |
Cash and cash equivalents at beginning of year |
|
|
6,726 |
|
|
|
17,444 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
|
2,336 |
|
|
|
6,726 |
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
Interest |
|
|
1,390 |
|
|
|
1,222 |
|
Income taxes |
|
|
528 |
|
|
|
809 |
|
Noncash investing and financing activities: |
|
|
|
|
|
|
|
|
Warrants issued for long-term debt |
|
|
|
|
|
|
614 |
|
See accompanying notes to consolidated financial statements.
F-25
Notes to Consolidated Financial Statements
1. Basis of Preparation
a. Description of Business
Catalytic Solutions, Inc. (the Company) is a global manufacturer and distributor of
emissions control systems and products, focused in the heavy duty diesel and light duty vehicle
markets. The Companys emissions control systems and products are designed to deliver high value to
our customers while benefiting the global environment through air quality improvement,
sustainability and energy efficiency. Catalytic Solutions, Inc. is listed on AIM of the London
Stock Exchange (AIM: CTS and CTSU) and currently has operations in the USA, Canada, France, Japan
and Sweden as well as an Asian joint venture.
b. Liquidity
The accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. Therefore, the consolidated financial statements
contemplate the realization of assets and liquidation of liabilities in the ordinary course of
business. The Company has suffered recurring losses and negative cash flows from operations since
its inception, resulting in an accumulated deficit of $149.3 million at December 31, 2009. The
Company has funded its operations through equity sales, convertible debt and bank borrowings. In
addition, due to non-compliance with certain loan covenants (described below) and per the repayment
obligations under the Companys loan agreements, substantially all the debt of the Company has been
classified as current at December 31, 2009. As a result of this classification, the Company has a
working capital deficit of $4.4 million. The covenants are almost exclusively based on the
performance of the Companys Engine Control Systems subsidiary. As of March 31, 2009, the Company
had failed to achieve two of the covenants under the bank loan agreement with Fifth Third Bank (see
Note 8 for a discussion of the Fifth Third Bank loan agreement). The covenants that the Company
failed to achieve are those related to the annualized EBITDA and the funded debt to EBITDA ratio
for the Engine Control Systems subsidiary. The bank agreed to temporarily suspend its rights with
respect to the breach of these two covenants under a Forbearance Agreement that expired on April
30, 2010. The Company is currently in discussion with the bank regarding an extension to the
forbearance; however, the Company cannot provide assurance that it will be successful in these
efforts.
At December 31, 2009 the Company had $2.3 million in cash. The Companys access to
working capital is limited and its debt service obligations and projected operating costs for 2010
exceed its cash balance at December 31, 2009. Failure to renegotiate payment terms for debt due
will result in the Company not having sufficient cash to operate.
These matters raise substantial doubt about the Companys ability to continue as a going
concern. In order to address this uncertainty, in the first quarter of 2009, the Company retained a
U.S.-based investment banking firm to act as a financial advisor to the Company in exploring
alternatives to recapitalize the Company. Alternatives under consideration include the sale of
Company stock and/or a sale of the Companys assets, while negotiating with the Companys lenders
to modify loan terms in order to delay repayments while alternative capital is secured. At this
time the Company cannot provide any assurances that it will be successful in its continuing efforts
to recapitalize the balance sheet or work with its lenders on loan modifications. In the event that
the Company is not successful in the immediate future, the Company will be unable to continue
operations and may be required to file bankruptcy. There can be no assurances that the Company will
be able to reorganize through bankruptcy and might be forced to effect a liquidation of its assets.
The consolidated financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
c. Preparation based on U.S. Generally Accepted Accounting Principles (U.S. GAAP)
The consolidated financial statements and accompanying notes are presented in U.S.
dollars and have been prepared in accordance with U.S. GAAP.
F-26
Notes to Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies
a. Principles of Consolidation
The consolidated financial statements include the financial statements of Catalytic
Solutions, Inc. and its wholly owned subsidiaries. All significant inter-company balances and
transactions have been eliminated in consolidation.
b. Concentration of Risk
For the periods presented below, certain customers accounted for 10% or more of the
Companys revenues as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
December 31 |
|
Customer |
|
2009 |
|
|
2008 |
|
A |
|
|
24 |
% |
|
|
30 |
% |
B |
|
|
22 |
% |
|
|
7 |
% |
The customers above are automotive OEMs and relate to sales within the Catalyst segment.
For the periods presented below, certain customers accounted for 10% or more of the
Companys accounts receivable balance as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
December 31 |
|
Customer |
|
2009 |
|
|
2008 |
|
A |
|
|
18 |
% |
|
|
7 |
% |
B |
|
|
15 |
% |
|
|
|
|
C |
|
|
14 |
% |
|
|
|
|
Customer A above is an automotive OEM, and customers B and C are diesel distributors.
For the periods presented below, certain vendors accounted for 10% or more of the
Companys raw material purchases as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
December 31 |
|
Vendor |
|
2009 |
|
|
2008 |
|
A |
|
|
16 |
% |
|
|
12 |
% |
B |
|
|
14 |
% |
|
|
11 |
% |
C |
|
|
11 |
% |
|
|
19 |
% |
Vendor A above is a catalyst supplier, vendor B is a precious metals supplier and vendor
C is a substrate supplier.
c. Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management of the Company to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Areas where significant
judgments are made include, but are not limited to the following: impairment of long-lived assets,
stock-based compensation and instruments, allowance for doubtful accounts, inventory valuation,
taxes and contingent and accrued liabilities. Actual results could differ from those estimates.
These estimates and assumptions are based on the Companys best estimates and judgment. The Company
evaluates its estimates and assumptions on an ongoing basis using historical experience and other
factors, including the
current economic environment, which it believes to be reasonable under the circumstances.
Estimates and assumptions are adjusted when facts and circumstances dictate. Illiquid credit
markets, volatile equity, foreign currency, and declines in customer spending have combined to
increase the uncertainty inherent in such estimates and assumptions. As future events and their
effects cannot be determined with precision, actual results could differ from these estimates.
Changes in estimates resulting from continuing changes in the economic environment will be
reflected in the financial statements in future periods.
F-27
Notes to Consolidated Financial Statements (Continued)
d. Cash and Cash Equivalents
Cash and cash equivalents of $2.3 million and $6.7 million at December 31, 2009 and 2008,
respectively, consist of cash balances and money market mutual funds. For purposes of the
consolidated statements of cash flows, the Company considers the money market funds and all highly
liquid debt instruments with original maturities of three months or less to be cash equivalents.
e. Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest.
The allowance for doubtful accounts is the Companys best estimate of the amount of probable credit
losses in the Companys existing accounts receivable. The Company determines the allowance based on
historical write off experience and past due balances over 60 days that are reviewed individually
for collectability. Account balances are charged off against the allowance after all means of
collection have been exhausted and the potential for recovery is considered remote. The Company
does not have any off balance sheet credit exposure related to its customers.
f. Inventories
Inventories are stated at the lower of cost (FIFO method) or market (net realizable
value). Finished goods inventory includes materials, labor and manufacturing overhead. The
Companys inventory includes precious metals (platinum, palladium and rhodium) for use in the
manufacturing of catalysts. The precious metals are valued lower of cost or market, consistent with
the Companys other inventory. Included in raw material at December 31, 2009 and December 31, 2008
are precious metals of $206,000 and $262,000, respectively.
g. Property and Equipment
Property and equipment are stated at cost. Property and equipment under capital leases
are stated at the present value of the minimum lease payments. Depreciation and amortization have
been provided using the straight line method over the following estimated useful lives:
|
|
|
Machinery and equipment |
|
2 10 years |
Furniture and fixtures |
|
2 5 years |
Computer hardware and software |
|
2 5 years |
Vehicles |
|
2 5 years |
When an asset is sold or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is recognized. Repairs
and maintenance are charged to expense as incurred and major replacements or betterments are
capitalized. The Company records depreciation expense in the expense category that primarily
utilizes the associated fixed asset. The depreciation of manufacturing and distribution assets is
included within cost of revenues, research and development assets are included in research and
development expense and assets related to general and administrative activities are included
in general and administrative expense. Property and equipment held under capital leases and
leasehold improvements are amortized straight-line over the shorter of the lease term or estimated
useful life of the asset. Total depreciation for continuing operations for the years ended December
31, 2009 and 2008 was $0.6 million and $2.3 million, respectively.
F-28
Notes to Consolidated Financial Statements (Continued)
h. Goodwill
Goodwill is recorded when the purchase price of an acquisition exceeds the estimated fair
value of the net identified tangible and intangible assets acquired and is recorded in the
reporting unit that will benefit from acquired intangible and tangible assets. Goodwill is tested
for impairment on an annual basis and written down to its implied fair value when impaired. The
Company performed the annual goodwill impairment testing as of October 31, 2009. The Companys
Heavy Duty Diesel (HDD) Systems reporting unit, which is also a reporting segment, has all of the
Companys allocated goodwill. The Company performed Step I of the annual impairment test and it was
determined that the fair value of the Companys reporting unit (as determined using the expected
present value of future cash flows) was greater than the carrying amount of the respective
reporting unit, including goodwill, and Step II of the annual impairment test was not necessary;
therefore, there was no impairment to the carrying amount of the reporting unit.
i. Purchased Intangible Assets
Purchased intangible assets are carried at cost, less accumulated amortization.
Amortization is computed on a straight-line basis over the estimated useful lives of the respective
assets, ranging from 1 to 20 years. Intangible assets consist of trade names, acquired patents and
technology, and customer relationships.
j. Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective
tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance against deferred tax assets is required if, based on the
weight of available evidence, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The valuation allowance should be sufficient to reduce the
deferred tax asset to the amount that is more likely than not to be realized. The Company
recognizes the effect of income tax positions only if those positions are more likely than not of
being sustained. Recognized income tax positions are measured at the largest amount that is greater
than 50% likely of being realized. Changes in recognition or measurement are reflected in the
period in which the change in judgment occurs. The Company records interest and penalties related
to unrecognized tax benefits in income tax expense.
k. Revenue Recognition
The Company generally recognizes revenue when products are shipped and the customer takes
ownership and assumes risk of loss, collection of the relevant receivable is reasonably assured,
persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. There
are certain customers where risk of loss transfers at destination point and revenue is recognized
when product is delivered to the destination. For these customers, revenue is recognized upon
receipt at the customers warehouse. This generally occurs within five days from shipment date.
The HDD Systems division has certain sales with associated installation. For such sales,
revenue is recognized upon completion of installation.
l. Cost of revenue
The Company includes the direct material costs and factory labor as well as factory
overhead expense in the cost of revenue. Indirect factory expense includes the costs of freight
(inbound and outbound for direct material and finished good), purchasing and receiving, inspection,
testing, warehousing, utilities and deprecation of facilities and equipment utilized in the
production and distribution of products.
F-29
Notes to Consolidated Financial Statements (Continued)
m. Sales and Marketing
Costs related to sales and marketing are expensed as they are incurred. These expenses
include the salary and benefits for the sales and marketing staff as well as travel, samples
provided at no-cost to customers and marketing materials.
n. Research and Development
Research and development costs are generally expensed as incurred. These expenses include
the salary and benefits for the research and development staff as well as travel, research
materials, testing and legal expense related to patenting intellectual property. Also included is
any depreciation related to assets utilized in the development of new products.
o. General and Administrative
These expenses include the salary and benefits for the administrative staff as well as
travel, legal, accounting and tax consulting. Also included is any depreciation related to assets
utilized in the general and administrative functions.
p. Recapitalization Expense
Recapitalization expense includes fees paid to outside advisors hired to assist the
Company it its strategic review and its efforts to recapitalize the balance sheet.
q. Long Lived Assets
Assets such as property, plant, and equipment and amortizable intangible assets are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset or asset group to estimated undiscounted future
cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset
or asset group exceeds its estimated future cash flows, an impairment charge is recognized for the
amount by which the carrying amount of the asset or asset group exceeds the fair value of the asset
or asset group. Assets to be disposed of would be separately presented in the balance sheet and
reported at the lower of the carrying amount or fair value less costs to sell and are no longer
depreciated. The assets and liabilities of a disposed group classified as held for sale would be
presented separately in the appropriate asset and liability sections of the balance sheet.
r. Stock Compensation
The Company recognizes compensation expense ratably over the vesting period based on the
estimated grant date fair value method using the Black-Scholes option-valuation model. The
Companys Plan allows for the grant of awards with market conditions. These awards are valued using
a Monte Carlo univariate options pricing model.
s. Foreign Currency
The functional currency of the HDD Systems division is the Canadian Dollar, while that of
its subsidiary Engine Control Systems Europe AB in Sweden is the Swedish Krona. The functional
currency of the Companys Japanese branch office and TCC joint venture is the Japanese Yen. Assets
and liabilities of the foreign locations are translated into U.S. dollars at period-end exchange
rates. Revenue and expense accounts are translated at the average exchange rates for the period.
The resulting adjustments are charged or credited directly to accumulated comprehensive income
(loss) within Stockholders Equity. All realized and unrealized transaction adjustments are
included in other income (loss).
F-30
Notes to Consolidated Financial Statements (Continued)
t. Accounting Changes
On January 1, 2009, the Company adopted EITF 07-05, Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entitys Own Stock, included in Accounting Standards
Codification (ASC) topic 815. EITF 07-05 provides guidance on determining what types of instruments
or embedded features in an instrument held by a reporting entity can be considered indexed to its
own stock. Upon adoption of the EITF, the Company reclassified certain of its warrants from equity
to liabilities. See further discussion in Note 7.
The Company adopted Statement of Financial Accounting Standards No. 157, Fair Value
Measurements (SFAS 157) included in ASC Topic 820, for all assets and liabilities effective
January 1, 2008 except for nonfinancial assets and liabilities that are recognized or disclosed at
fair value on a non-recurring basis where the adoption was January 1, 2009. The adoption of this
standard did not have a material effect on the Companys consolidated financial statements. ASC 820
prioritizes the inputs used in measuring fair value into the following hierarchy:
|
|
|
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. |
|
|
|
|
Level 2: Inputs other than quoted prices included within Level 1 that are either directly
or indirectly observable. |
|
|
|
|
Level 3: Unobservable inputs in which little or no market activity exists, therefore
requiring an entity to develop its own assumptions about the assumptions that market
participants would use in pricing. |
Goodwill impairment testing requires the Company to estimate the fair value of its
reporting unit. The Companys estimate of fair value of its reporting unit involves level 3 inputs.
The estimated fair value of the HDD Systems reporting unit was derived primarily from a discounted
cash flow model utilizing significant unobservable inputs including expected cash flows and
discount rates. In addition, the Company considered the overall fair values of its reporting units
as compared to the market capitalization of the Company. The Company determined that no goodwill
impairment existed as of December 31, 2009; however, it is reasonably possible that future
impairment tests may result in a different conclusion for the goodwill of the HDD Systems reporting
unit. The estimate of fair value of the reporting units is sensitive to certain factors including
but not limited to the following: movements in the Companys share price, changes in discount rates
and the Companys cost of capital, growth of the reporting units revenue, cost structure of the
reporting unit, successful completion of research and development and customer acceptance of new
products and approval of the reporting units product by regulatory agencies.
During 2009, the Company elected to change its accounting policy for legal costs incurred
during the registration of patents to expense such costs as incurred. Previously, the Company
capitalized such costs when they concluded such costs resulted in probable future benefits. Due to
the administrative difficulties in documenting support for the future benefit of such costs as a
result of uncertainty of ultimate patent approval, the Company concluded the new method of
accounting was preferable. The 2008 financial statements have been adjusted to reflect these
changes.
The Company recorded a cumulative effect of the change as an increase to accumulated
deficit on January 1, 2008 totaling $0.2 million. The adjustments to the Companys balance sheet
and statement of operations as of and for the year ended December 31, 2008, respectively, were not
material and include: (i) reductions to intangible assets, total assets, and total stockholders
equity and an increase to accumulated deficit at December 31, 2008 of $0.4 million, and (ii)
increases to general and administrative expense, net loss from continuing operations and net loss
for the year ended December 31, 2008 of $0.2 million.
Loss per share, loss from continuing operations per share and cash flow from operations
for the year ended December 31, 2008 remained unchanged.
F-31
Notes to Consolidated Financial Statements (Continued)
The adjustments to the Companys balance sheet and statement of operations as of and for
the six months ended June 30, 2009 and 2008, respectively, were not material and include: (i)
reductions to intangible assets,
total assets, and total stockholders equity and an increase to accumulated deficit at June
30, 2009 and 2008 of $0.6 million and $0.5 million, respectively, and (ii) increases to general and
administrative expenses and net loss for the six months ended June 30, 2009 and 2008 of $0.1
million and $0.1 million, respectively. Loss per share and cash flows from operations for the six
months ended June 30, 2009 would have been $0.01 greater and unchanged, respectively. Loss per
share and cash flows from operations for the six months ended June 30, 2008 would have been
unchanged.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement
No. 162, included in ASC Topic 105, Generally Accepted Accounting Principles (ASC 105). ASC 105
establishes the FASB Accounting Standards Codification as the source of authoritative accounting
principles recognized by the FASB to be applied by non-governmental entities in the preparation of
financial statements in conformity with U.S. GAAP. ASC 105 was effective for financial statements
issued for interim and annual periods ending after September 15, 2009. The Company adopted this
standard and included the new references in its consolidated financial statements effective with
the year ending December 31, 2009.
u. Fair Value of Financial Instruments
The fair values of the Companys cash and cash equivalents, trade accounts receivable,
prepaid expenses and other current assets, accounts payable, accrued salaries and benefits and
accrued expenses approximate carrying values due to the short maturity of these instruments. The
fair values of the Companys debt and off-balance sheet commitments are less than their carrying
values as a result of deteriorating credit quality of the Company and, therefore, expected higher
interest rates that would be available currently to the Company.
It is not practical to estimate the fair value of these instruments as the Companys debt
is not publicly traded and the Companys current financial position and the recent credit crisis
experienced by financial institutions have caused current financing options to be limited.
3. Trade Accounts Receivable
Trade accounts receivable at December 31, 2009 and 2008 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
US $000 |
|
|
US $000 |
|
Non-contract trade accounts receivable |
|
|
8,379 |
|
|
|
4,521 |
|
Completed contracts |
|
|
|
|
|
|
178 |
|
Contracts in progress |
|
|
|
|
|
|
6,091 |
|
Less allowance for doubtful accounts |
|
|
(313 |
) |
|
|
(123 |
) |
|
|
|
|
|
|
|
|
|
|
8,066 |
|
|
|
10,667 |
|
|
|
|
|
|
|
|
At December 31, 2009, there were no amounts included in receivables under retainage
provisions in contracts.
The Companys revolving credit facility is collateralized by inventory and receivables.
At December 31, 2009 and 2008, the collateralized receivables were $6.0 million and $2.8 million,
respectively.
In December 2005, the Company fully reserved an accounts receivable balance from Delphi
in the amount of $0.4 million. The $0.4 million represents the amount owed to the Company at the
time of Delphis filing for bankruptcy protection in October 2005. The entire balance was reserved
when the Company determined it was unlikely that Delphi would improve the priority of the debt
beyond those of general creditors and a probable loss
would be incurred by the Company. In 2007, the Company sold its interest in the receivable at
102.5% of value; however, the Company did not reverse its reserve as the buyer had the ability to
demand a refund if Delphi refused the Companys claim. In 2009, the Company released the reserve
and recorded a $0.4 million gain in other income as a result of Delphi exiting bankruptcy.
F-32
Notes to Consolidated Financial Statements (Continued)
4. Inventories
Inventories at December 31, 2009 and 2008 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
US $000 |
|
|
US $000 |
|
Finished goods |
|
|
2,221 |
|
|
|
4,735 |
|
Work in progress |
|
|
1,255 |
|
|
|
1,127 |
|
Raw materials |
|
|
2,708 |
|
|
|
3,057 |
|
|
|
|
|
|
|
|
|
|
|
6,184 |
|
|
|
8,919 |
|
|
|
|
|
|
|
|
5. Property and Equipment
Property and equipment at December 31, 2009 and 2008 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
US $000 |
|
|
US $000 |
|
Buildings and land |
|
|
679 |
|
|
|
511 |
|
Furniture and fixtures |
|
|
2,354 |
|
|
|
2,175 |
|
Computer hardware and software |
|
|
1,351 |
|
|
|
1,335 |
|
Machinery and equipment |
|
|
11,544 |
|
|
|
11,376 |
|
Vehicles |
|
|
59 |
|
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
15,987 |
|
|
|
15,470 |
|
Less accumulated depreciation |
|
|
(13,090 |
) |
|
|
(12,588 |
) |
|
|
|
|
|
|
|
|
|
|
2,897 |
|
|
|
2,882 |
|
|
|
|
|
|
|
|
During the year ending December 31, 2008, the Company conducted an assessment for the
impairment of certain property, plant and equipment within the catalyst segment as a result of the
significant slow-down in the automotive sector during 2008 and the anticipated pace of recovery of
the Companys business in the light duty vehicle catalyst segment. During this assessment, certain
long-lived assets of the light duty vehicle catalyst segment were deemed to be impaired and a
write-down to fair value was considered necessary. An impairment charge of $4.9 million was
recorded during the year ending December 31, 2008, due to projected cash flows not being able to
support the asset base. The Company uses a probability-weighted discounted cash flow model to
determine fair market value. The allocation of the impairment to asset groups is shown below:
|
|
|
|
|
|
|
2008 |
|
|
|
US $000 |
|
Furniture and fixtures |
|
|
278 |
|
Computer hardware and software |
|
|
1,127 |
|
Machinery and equipment |
|
|
3,515 |
|
Vehicles |
|
|
8 |
|
|
|
|
|
|
|
|
4,928 |
|
|
|
|
|
F-33
Notes to Consolidated Financial Statements (Continued)
6. Share-Based Payment
The Company has two stock option plans (the 1997 Plan and the 2006 Plan) for the benefit
of employees, officers, directors and consultants of the Company. The 1997 Plan expired on December
31, 2006 and as of December 31, 2009, there were 2,283,150 shares outstanding. Under the 2006 Plan,
a total of 4,200,000 shares of the Companys common stock are reserved for issuance. Options
granted under the plans are generally exercisable for a period between seven and ten years from the
date of grant at an exercise price that is not less than the fair market value of the common stock
on the date of grant. Options granted under the 1997 Plan
generally vest over a period of four years and those granted under the 2006 Plan generally
vest over a period of three years. Vested stock options may be exercised and paid for by cash,
check, net-exercise or by other means as approved by the Remuneration Committee of the Companys
Board of Directors. The fair market value is determined by using the last reported sale price as
listed on the AIM of the London Stock Exchange as of the date of exercise or (if there were no
trades on that date) the latest preceding date upon which a sale was reported. All common stock
issued from exercises are newly issued shares that have been reserved for under the respective
Plans.
Under the 2006 Plan, the Company granted stock options that include a market condition.
Such options become exercisable if the Companys common stock trading price is equal to or exceeds
an amount equal to 120% of the exercise price of the option for a period of ninety days on which
the stock is actually traded on the AIM of the London Stock Exchange. The fair value of these
awards is determined using the Monte Carlo univariate pricing model.
There were no options granted during the year ended December 31, 2009.
The per share weighted average fair value of each option granted during the year ended
December 31, 2008 was $0.44. The 2006 market-based Plan was valued using a Monte Carlo univariate
option pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
2008 |
|
Expected volatility |
|
|
59.9 |
% |
Risk-free interest rate |
|
|
2.8 |
% |
Dividend yield |
|
|
0.0 |
% |
Expected life in years |
|
|
5.0 |
|
Forfeiture rate |
|
|
6.0 |
% |
As the stock of the Company became publicly traded in November 2006 and has traded for a
relatively short period time, it is not practicable for management to estimate the expected
volatility of share price because there is not sufficient historical information about volatility.
Therefore, the Company utilized an estimate based upon a portfolio of peer companies. The expected
life was derived via the Monte Carlo model.
The following summarizes the stock option transactions under the Companys stock option
plans during the years presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Shares |
|
|
Exercise Price |
|
|
|
|
|
|
$ |
|
Options outstanding at December 31, 2007 |
|
|
5,305,151 |
|
|
|
1.95 |
|
Granted |
|
|
728,000 |
|
|
|
0.81 |
|
Exercised |
|
|
(30,000 |
) |
|
|
1.07 |
|
Forfeited |
|
|
(129,000 |
) |
|
|
2.44 |
|
Expired |
|
|
(556,740 |
) |
|
|
1.96 |
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2008 |
|
|
5,317,411 |
|
|
|
1.78 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(220,620 |
) |
|
|
1.98 |
|
Expired |
|
|
(455,848 |
) |
|
|
2.16 |
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2009 |
|
|
4,640,943 |
|
|
|
1.73 |
|
At December 31, 2009, the range of exercise prices and weighted average remaining
contractual life of outstanding options was $0.42 $2.74 and 4.87 years, respectively.
F-34
Notes to Consolidated Financial Statements (Continued)
The following table details the options outstanding at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
|
|
|
|
|
Options |
|
|
Currently |
|
|
Options Vested or |
|
|
|
Outstanding |
|
|
Exercisable |
|
|
Expected to Vest |
|
Number of shares |
|
|
4,640,943 |
|
|
|
3,682,861 |
|
|
|
4,456,739 |
|
Weighted average exercise price |
|
$ |
1.73 |
|
|
$ |
1.91 |
|
|
$ |
1.75 |
|
Aggregate intrinsic value |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining contractual term |
|
|
4.87 |
|
|
|
4.74 |
|
|
|
4.90 |
|
The total compensation cost of non-vested options expected to vest is $281,035, with a
weighted average period to recognize of 0.7 years.
There was no cash received from option exercises under any share-based payment
arrangements for the years ended December 31, 2009 or 2008.
The Companys 2006 Plan allows for the issuance of stock awards to Non-Executive
Directors. As of December 31, 2009, the Company had issued two restricted stock awards in
accordance with the Plan, totaling 120,000 shares.
7. Warrants
In June 2008, the Company issued warrants to purchase 1,250,000 shares of common stock as
part of the consideration for a debt facility with Cycad Group, LLC.
In December 2007, The Company issued warrants to purchase 3,117,115 shares of common
stock to Capital Works, LLC as part of the consideration to acquire Engine Control Systems.
The exercisable warrants and their associated exercise prices are shown below at December
31, 2009 and 2008:
|
|
|
|
|
Warrants exercisable into common stock (issued in USD) |
|
|
37,500 |
|
Exercise price |
|
$ |
1.67 |
|
Warrants exercisable into common stock (issued in GBX) |
|
|
4,367,115 |
|
Weighted average exercise price |
|
$ |
1.02 |
|
The Company has outstanding warrants to purchase its common stock held by Cycad Group,
LLC, Capital Works ECS Investors, LLC and SVB Financial Group, an affiliate of Silicon Valley Bank.
The Company adopted EITF 07-05 on January 1, 2009. With the adoption of EITF 07-05, the warrants to
Cycad Group, LLC and Capital Works ECS Investors, LLC were determined not to be solely linked to
the stock price of the Company and, therefore, require classification as liabilities. As a result
of the adoption on January 1, 2009, the Company recorded a cumulative effect of change in
accounting principle of $2.3 million directly as a reduction of accumulated deficit representing
the decline in fair value between the issuance and adoption date. The fair value of the warrants
was calculated using the Black-Scholes option-valuation model. The model utilized a volatility of
60% and a risk free rate of 1.4%. The years to maturity are 4.4 and 2.8 for the Cycad Group, LLC
and Capital Works, LLC warrants, respectively, which corresponds to the remaining term of the
warrants. For the year ended December 31, 2009, the application of EITF 07-05 resulted in an
increase to other income of $0.2 million resulting from a decline in fair value of the warrants
during the period.
F-35
Notes to Consolidated Financial Statements (Continued)
8. Debt
In June 2008, the Company put in place a debt facility with Cycad Group, LLC that would
allow a one-time draw down of up to $3.3 million. In September 2008, the Company borrowed $3.3
million under the debt facility. The debt was collateralized by the accounts receivable at the
Energy Systems division and the machinery and equipment of the Catalyst division. As of May 31,
2009, the Company was out of compliance with a covenant in the loan agreement with Cycad Group,
LLC. The non-compliance resulted from the
Companys failure to achieve covenants under the bank loan agreement with Fifth Third Bank, as
described below. The Company paid off the debt and all accrued interest and fees on October 1,
2009.
In December 2007, the Company and its subsidiaries including Engine Control Systems
entered into borrowing agreements with Fifth Third Bank as part of the cash consideration paid for
the purchase of Engine Control Systems on December 20, 2007. The borrowing agreements provided for
three facilities including a revolving line of credit and two term loans. The line of credit is a
demand facility loan up to a maximum principal amount of Canadian $8.5 million, with availability
based upon eligible accounts receivable and inventory. At December 31, 2009, the outstanding
balance in U.S. dollar was $5.1 million with $3.0 million available for borrowings by Engine
Control Systems in Canada. The other facilities included a five-year non-revolving term loan of up
to $2.5 million, which was paid off during 2008, and a non-revolving term loan of $3.5 million that
was paid off in October 2009. The loans are collateralized by the assets of the Company. The
interest rate on the line of credit is variable based upon Canadian and U.S. Prime Rates. As of
December 31, 2009, the weighted average borrowing rate on the line of credit was 4.48% compared to
6.36% as of December 31, 2008. The Company is also subject to covenants on minimum levels of
tangible capital funds, fixed charge coverage, earnings before income tax, depreciation and
amortization, funded debt-to-earnings before income tax and depreciation and amortization. In the
event of default, the bank may demand payment on all amounts outstanding immediately. The Company
is also restricted from paying corporate distributions in excess of $250,000. The loan agreement
also includes a material adverse change clause, exercisable if, in the opinion of the bank, there
is a material adverse change in the financial condition, ownership or operation of Engine Control
Systems or the Company. If the bank deems that a material adverse change has occurred, the bank may
terminate the Companys right to borrow under the agreement and demand payment of all amounts
outstanding under the agreement. As of March 31, 2009, the Company had failed to achieve two of the
covenants under the bank loan agreement with Fifth Third Bank. The covenants that the Company
failed to achieve are those related to the annualized EBITDA and the funded debt to EBITDA ratio
for the Engine Control Systems subsidiary. The bank agreed to temporarily suspend its rights with
respect to the breach of these two covenants under a Forbearance Agreement that expired on April
30, 2010.
The Company has $3.0 million of consideration due to the seller as part of the Applied
Utility Systems acquisition. The consideration was due August 28, 2009 and accrues interest at
5.36%. At December 31, 2009 the Company had accrued $538,000 of unpaid interest. The Company is
currently in arbitration with seller on payment of the consideration.
Long term debt at December 31, 2009 and 2008 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
US $000 |
|
|
US $000 |
|
Line of credit |
|
|
5,147 |
|
|
|
8,068 |
|
Consideration payable |
|
|
3,000 |
|
|
|
3,000 |
|
Term loans |
|
|
|
|
|
|
3,500 |
|
Cycad debt facility |
|
|
|
|
|
|
3,300 |
|
Capital lease obligation |
|
|
75 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
8,222 |
|
|
|
17,913 |
|
Less current portion |
|
|
(8,147 |
) |
|
|
(17,880 |
) |
|
|
|
|
|
|
|
|
|
|
75 |
|
|
|
33 |
|
|
|
|
|
|
|
|
Annual scheduled principal payments of long-term debt are $8.1 million and $0.1 million
for the years ended December 31, 2009 and 2012, respectively.
F-36
Notes to Consolidated Financial Statements (Continued)
9. Commitments and Contingencies
The Company leases certain equipment and facilities under operating leases that expire
through December 2018. The Company recognizes its minimum lease payments, including escalation
clauses, on a straight line basis over the minimum lease term of the lease. The gross amount of
assets recorded under capital leases is $0.1 million. Future minimum lease payments under
non-cancellable operating leases (with initial or remaining lease terms in excess of one year) and
future minimum capital lease payments as of December 31, 2009 are:
|
|
|
|
|
|
|
|
|
|
|
Capital leases |
|
|
Operating leases |
|
|
|
US $000 |
|
|
US $000 |
|
Years ending December 31: |
|
|
|
|
|
|
|
|
2010 |
|
|
35 |
|
|
|
1,261 |
|
2011 |
|
|
32 |
|
|
|
1,107 |
|
2012 |
|
|
12 |
|
|
|
1,049 |
|
2013 |
|
|
6 |
|
|
|
646 |
|
2014 |
|
|
|
|
|
|
641 |
|
Later years, through 2031 |
|
|
|
|
|
|
1,150 |
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
|
85 |
|
|
|
5,854 |
|
|
|
|
|
|
|
|
|
Less amount representing interest |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum capital lease payments |
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense during 2009 and 2008 totaled $1.5 million and $1.3 million, respectively.
10. Severance Expense
The Company has taken actions to reduce its cost base beginning in 2008 and continuing
into 2009. As a result of these actions, the Company has accrued severance costs, included in
accrued expenses on the accompanying consolidated balance sheets, as follows:
|
|
|
|
|
|
|
US $000 |
|
Accrued severance at December 31, 2007 |
|
|
|
|
Accrued severance expense |
|
|
234 |
|
Paid severance expense |
|
|
(47 |
) |
|
|
|
|
Accrued severance at December 31, 2008 |
|
|
187 |
|
Accrued severance expense |
|
|
1,429 |
|
Paid severance expense |
|
|
(946 |
) |
|
|
|
|
Accrued severance at December 31, 2009 |
|
|
670 |
|
|
|
|
|
F-37
Notes to Consolidated Financial Statements (Continued)
11. Accrued Warranty
The Company accrues warranty upon shipment of its products. Accrued warranties are
included in accrued expenses on the accompanying consolidated balance sheets. The accrued warranty
is as follows:
|
|
|
|
|
|
|
US $000 |
|
Accrued warranty at December 31, 2007 |
|
|
237 |
|
Accrued warranty expense |
|
|
130 |
|
Claims paid |
|
|
(143 |
) |
Accrued warranty at December 31, 2008 |
|
|
224 |
|
Accrued warranty expense |
|
|
372 |
|
Claims paid |
|
|
(205 |
) |
Accrued warranty at December 31, 2009 |
|
|
391 |
|
12. Income Taxes
(Loss) income from continuing operations before income taxes include the following
components:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
US $000 |
|
|
US $000 |
|
U.S.-based operations |
|
|
(11,678 |
) |
|
|
(21,396 |
) |
Non U.S.-based operations |
|
|
1,144 |
|
|
|
2,132 |
|
|
|
|
|
|
|
|
|
|
|
(10,534 |
) |
|
|
(19,264 |
) |
|
|
|
|
|
|
|
Income tax expense (benefit) attributable to loss from continuing operations is
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
Deferred |
|
|
Total |
|
|
|
US $000 |
|
|
US $000 |
|
|
US $000 |
|
Year ended December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal |
|
|
(47 |
) |
|
|
|
|
|
|
(47 |
) |
State and local |
|
|
56 |
|
|
|
|
|
|
|
56 |
|
Foreign |
|
|
522 |
|
|
|
93 |
|
|
|
615 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
531 |
|
|
|
93 |
|
|
|
624 |
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal |
|
|
(560 |
) |
|
|
(258 |
) |
|
|
(818 |
) |
State and local |
|
|
(150 |
) |
|
|
(70 |
) |
|
|
(220 |
) |
Foreign |
|
|
1,021 |
|
|
|
(1,019 |
) |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
311 |
|
|
|
(1,347 |
) |
|
|
(1,036 |
) |
|
|
|
|
|
|
|
|
|
|
F-38
Notes to Consolidated Financial Statements (Continued)
Income taxes attributable to loss from continuing operations differ from the amounts
computed by applying the U.S. federal statutory rate of 34% to loss from continuing operations
before income taxes as shown below:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
US $000 |
|
|
US $000 |
|
Expected tax benefit |
|
|
(3,582 |
) |
|
|
(6,550 |
) |
Net tax effects of: |
|
|
|
|
|
|
|
|
State taxes, net of federal benefit |
|
|
(643 |
) |
|
|
(1,374 |
) |
Research credits |
|
|
(153 |
) |
|
|
(103 |
) |
Other |
|
|
(245 |
) |
|
|
209 |
|
Change in deferred tax asset valuation allowance |
|
|
3,587 |
|
|
|
8,442 |
|
|
|
|
|
|
|
|
|
|
|
(1,036 |
) |
|
|
624 |
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
US $000 |
|
|
US $000 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Research and development credits |
|
|
3,895 |
|
|
|
3,758 |
|
Other credits |
|
|
366 |
|
|
|
354 |
|
Operating loss carry forwards |
|
|
34,509 |
|
|
|
27,727 |
|
Warrant expense |
|
|
84 |
|
|
|
84 |
|
Inventories |
|
|
601 |
|
|
|
960 |
|
Allowance for doubtful accounts |
|
|
105 |
|
|
|
36 |
|
Depreciation |
|
|
566 |
|
|
|
1,112 |
|
Deferred research and development expenses for income tax |
|
|
6,882 |
|
|
|
8,557 |
|
Non-cash compensation |
|
|
681 |
|
|
|
482 |
|
Other |
|
|
3,800 |
|
|
|
3,264 |
|
|
|
|
|
|
|
|
Total gross deferred tax assets |
|
|
51,489 |
|
|
|
46,334 |
|
Valuation allowance |
|
|
(48,536 |
) |
|
|
(44,949 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
|
2,953 |
|
|
|
1,385 |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Amortization |
|
|
(2,749 |
) |
|
|
(2,030 |
) |
Other identifiable intangibles |
|
|
(1,540 |
) |
|
|
(1,770 |
) |
|
|
|
|
|
|
|
Total gross deferred tax liabilities |
|
|
(4,289 |
) |
|
|
(3,800 |
) |
|
|
|
|
|
|
|
Net deferred tax liabilities |
|
|
(1,336 |
) |
|
|
(2,415 |
) |
|
|
|
|
|
|
|
The Company had approximately $89.8 million and $70.5 million of federal and state income
tax net operating loss carry forwards at December 31, 2009, respectively. The federal and state
income tax net operating loss carry forwards expire starting in 2017 and 2012, respectively.
In assessing the potential realization of deferred tax assets, consideration is given to
whether it is more likely than not that some portion or all of the deferred tax assets will be
realized. The ultimate realization of deferred tax assets is dependent upon the Company attaining
future taxable income during the periods in which those temporary differences become deductible. In
addition, the utilization of net operating loss carry forwards may be limited due to restrictions
imposed under applicable federal and state tax laws due to a change in ownership. Based upon the
level of historical operating losses and future projections, management
believes it is more likely than not that the Company will not realize a significant portion of
the deferred tax assets.
F-39
Notes to Consolidated Financial Statements (Continued)
Future utilization of the net operating losses and credit carry forwards may be subject
to a substantial annual limitation due to ownership change limitations as required by Sections 382
and 383 of the Internal Revenue Code of 1986, as amended (the Code), as well as similar state
limitations. The Company is in the process of performing a study to assess whether an ownership
change has occurred that would materially impact the future utilization of the Companys net
operating losses and credits. The preliminary results do not indicate a material limitation has
occurred with respect to any of the Companys net operating losses and credits. A future change at
the Companys current market capitalization would severely limit the annual use of the net
operating losses and credits and could result in the expiration of all or a portion of the net
operating losses and credits prior to utilization.
The following changes occurred in the amount of Unrecognized Tax Benefits (including
related interest and penalties) during the year:
|
|
|
|
|
|
|
US $000 |
|
Balance as of January 1, 2009 |
|
|
268 |
|
Additions for current year tax positions |
|
|
127 |
|
Reductions for prior year tax positions |
|
|
(34 |
) |
|
|
|
|
Balance as of December 31, 2009 |
|
|
361 |
|
|
|
|
|
As of December 31, 2009, the Company had $76,000 accrued for payment of interest and
penalties related to unrecognized tax benefits.
The Company operates in multiple tax jurisdictions, both within and outside of the United
States. The following tax years remain open to examination by the major domestic taxing
jurisdictions to which we are subject:
|
|
|
|
|
Open Tax Years |
United States Federal |
|
2006 - 2009 |
United States State |
|
2005 - 2009 |
Canada |
|
2004 - 2009 |
Sweden |
|
2008 - 2009 |
13. Foreign Exchange
The Company has exposure to multiple currencies. The primary exposure is between the U.S.
dollar, the Canadian dollar, the Euro and Swedish Krona. The Company recorded foreign exchange loss
of $1.1 million and gain of $0.2 million in the years ended December 31, 2009 and 2008,
respectively, included in other expense on the accompanying Consolidated Statements of Operations.
14. Net Earnings per Share (EPS)
Basic net loss per share is computed using the weighted average number of common shares
outstanding during the period. Diluted net loss per share is computed using the weighted average
number of common shares and dilutive potential common shares. Diluted net loss per share excludes
certain dilutive potential common shares outstanding, as their effect is anti-dilutive on loss from
continuing operations. Dilutive potential common shares consist of employee stock options and other
warrants that are convertible into the Companys common stock.
Because the Company incurred losses in the years ended December 31, 2009 and 2008, the
effect of dilutive securities totaling 9,045,558 and 9,782,000 equivalent shares, respectively, has
been excluded in the
computation of net loss per share and net loss from continuing operations per share as their
impact would be anti-dilutive.
F-40
Notes to Consolidated Financial Statements (Continued)
15. TCC Joint Venture
In February 2008, the Company entered into an agreement with Tanaka Kikinzoku Kogyo K.K.
(TKK) to form a new joint venture company, TC Catalyst Incorporated (TCC), a Japanese corporation.
The joint venture is part of the Catalyst division. The Company entered the joint venture in order
to improve its presence in Japan and Asia and strengthen its business flow into the Asian market.
In December 2008, the Company agreed to sell and transfer specific heavy duty diesel catalyst
technology and intellectual property to TKK for use in the defined territory for a total selling
price of $7.5 million. TKK will provide that intellectual property to TCC on a royalty-free basis.
The Company also sold shares in TCC to TKK reducing its ownership to 30%. $5.0 million of the sale
was completed and recognized in 2008 with $2.5 million recognized in 2009.
In December 2009, the Company agreed to sell and transfer specific three-way catalyst and zero
PGM patents to TKK for use in specific geographic regions. The patents were sold for $3.9 million.
TKK paid the Company $1.9 million in 2009 and $2.0 million in the first quarter of 2010. As the
Company had not delivered the technology as of December 31, 2009, the Company will recognize the
sale of the patents in 2010. As part of the transaction, the Company also sold shares in TCC,
bringing its ownership in the joint venture down to 5%. As the Company is contractually obligated
to fund its portion of the losses of the joint venture based on its ownership percentage, the
Company recognized a gain of $1.1 million during the year ended December 31, 2009 as a result of
the decrease in ownership and the related decrease it its obligation to fund losses. The gain is
included in other income.
The Companys investment in TCC is accounted for using the equity method as the Company still
has significant influence over TCC as a result of having a seat on TCCs board. The Companys share
of the TCC net loss for the year ended December 31, 2009 was $1.3 million and TKKs share is the
balance. At December 31, 2009, the Companys interest in the accumulated deficit of TCC is
reflected as an accrued liability of $0.2 million as the Company is contractually obligated to fund
its portion of the deficit. TCC operates with a March 31 fiscal year-end. Financial information for
TCC as of and for the twelve months ended December 31, 2009 is as follows:
|
|
|
|
|
|
|
2009 |
|
|
|
US $000 |
|
Assets |
|
|
6,928 |
|
Liabilities |
|
|
10,980 |
|
Deficit |
|
|
(4,052 |
) |
Net sales |
|
|
745 |
|
Gross Margin |
|
|
(213 |
) |
Net earnings |
|
|
(4,379 |
) |
16. Sale of Energy Systems Division
On October 1, 2009 the Company sold all significant assets of Applied Utility Systems,
Inc., which comprised the Companys Energy Systems division, for up to $10.0 million, including
$8.6 million in cash and contingent consideration of $1.4 million. Of the contingent consideration,
$0.5 million was contingent upon Applied Utility Systems being awarded certain projects and $0.9
million is retention against certain project and contract warranties and other obligations. The
Company has not recognized any of the contingent consideration as of December 31, 2009 and will
only do so if the contingencies are resolved favorably. The $0.5 million of contingent
consideration
that was contingent on the award of certain projects was not earned and is not likely to be
paid. The income statement of the Energy Systems division is presented as discontinued
operations. Basic and diluted income from discontinued operations per share was $0.02 and loss
from discontinued operations per share was $0.01 for the years ended December 31, 2009 and 2008,
respectively. Revenue included within discontinued operations was $14.0 million and $10.4 million
for the years ended December 31, 2009 and 2008, respectively.
F-41
Notes to Consolidated Financial Statements (Continued)
17. Related-party Transactions
In June 2008, the Company put in place a debt facility with Cycad Group, LLC (a
significant shareholder of the Company) that would allow a one-time draw down of up to $3.3
million. To avoid any conflict of interest, Mr. K. Leonard Judson, officer of Cycad Group, LLC and
Non-Executive Director of the Company, recused himself from all Board of Directors discussions and
voting pertaining to the debt facility. Further details regarding the debt facility are disclosed
in the long-term debt discussion in Note 8. Mr. Judson resigned from the Board of Directors of the
Company in January 2009. The debt facility was repaid in full on October 1, 2009.
In October 2008, the Companys Board of Directors unanimously adopted a resolution to waive
the Non-Executive Directors right to receive, and the Companys obligation to pay, any director
fees with respect to participation in Board and Committee meetings and other matters with effect
from July 1, 2008 and continuing thereafter until the Directors elect to adopt resolutions
reinstating such fees. On May 1, 2009, the Directors adopted a resolution to reinstate the accrual
of director fees effective January 1, 2009, with a payment schedule to be determined at a later
date. As of December 31, 2009 an amount of $406,000 was accrued for Directors fees and was due and
payable to the Directors.
18. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the years ended December 31, 2008 and
2009 are as follows:
|
|
|
|
|
|
|
US $000 |
|
Balance at December 31, 2007 |
|
|
7,753 |
|
Goodwill adjustments related to acquisition of Engine Control Systems |
|
|
54 |
|
Tax valuation adjustment |
|
|
(489 |
) |
Effect of translation adjustment |
|
|
(999 |
) |
|
|
|
|
Balance at December 31, 2008 |
|
|
6,319 |
|
Sale of Energy Systems division |
|
|
(2,600 |
) |
Effect of translation adjustment |
|
|
504 |
|
|
|
|
|
Balance at December 31, 2009 |
|
|
4,223 |
|
|
|
|
|
Intangible assets as of December 31, 2009 and 2008 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
US $000 |
|
|
US $000 |
|
Trade name |
|
15-20 years |
|
|
738 |
|
|
|
2,151 |
|
Non-compete agreement |
|
3 years |
|
|
|
|
|
|
111 |
|
Patents and know-how |
|
5-10 years |
|
|
3,792 |
|
|
|
4,919 |
|
Acquired contract work-in-progress |
|
1.4 years |
|
|
|
|
|
|
353 |
|
Customer relationships |
|
8 years |
|
|
1,206 |
|
|
|
1,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,736 |
|
|
|
8,628 |
|
Less accumulated amortization |
|
|
|
|
|
|
(1,291 |
) |
|
|
(2,142 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,445 |
|
|
|
6,486 |
|
|
|
|
|
|
|
|
|
|
|
|
F-42
Notes to Consolidated Financial Statements (Continued)
Aggregate amortization for amortizable intangible assets, using the straight-line
amortization method, for the years ended December 31, 2009 and 2008 was $0.8 million and $0.6
million, respectively. Estimated amortization expense for existing intangible assets for the next
five years is $546,000 in each year.
19. Legal Proceedings
In connection with the Companys acquisition of the assets of Applied Utility Systems,
Inc., Applied Utility Systems entered into a Consulting Agreement with M.N. Mansour, Inc.
(Mansour, Inc.), pursuant to which Mansour, Inc. and Dr. M.N. Mansour (Dr. Mansour) agreed to
perform consulting services for Applied Utility Systems. As further discussed in Note 16, the
income statement of Applied Utility Systems is presented as discontinued operations. During
February 2008, Applied Utility Systems terminated the Consulting Agreement for cause and alleged
that Mansour, Inc. and Dr. Mansour had breached their obligations under the Consulting Agreement.
The matter was submitted to binding arbitration in Los Angeles, California. The arbitration was
held during February 2009. During May 2009 the Arbitrator rendered an Interim Award (a) finding
that the Consulting Agreement was properly terminated by the Company on February 27, 2008, (b)
excusing the Company from any obligation to make any further payments under the Consulting
Agreement and (c) excusing Mansour, Inc. from any obligation to repay to the Company any of the
amounts previously paid to it under the Consulting Agreement. In the Interim Award, the Arbitrator
requested that the parties schedule a date for a hearing on the award of attorneys fees and the
correction of any aspects of the award, without rearguing the merits of the case. The Consulting
Agreement provides that, on termination of the Consulting Agreement by the Company, Mansour, Inc.
shall repay to the Company 75% of the amounts previously paid to it under the Consulting Agreement.
The hearing was held on February 17, 2010. At the hearing, the Company sought the award of its
attorneys fees and the correction of the award to require such payment by Mansour, Inc. The
Arbitrator took the matter under submission and did not render a decision at the hearing. A final
hearing on the award of attorneys fees is scheduled for May 10, 2010. Included in accrued
liabilities at December 31, 2009, is an accrual for the consulting fees under this arrangement
through the date of the interim award totaling $1.5 million. Should a final binding award be
rendered on terms that are consistent with the interim award, the Company would reverse the accrued
liability and record income from discontinued operations.
The Company has $3.0 million of consideration due to the seller under the Applied Utility
Systems Asset Purchase Agreement dated August 28, 2006. The consideration was due August 28, 2009
and accrues interest at 5.36%. At December 31, 2009 the Company had accrued $538,000 of unpaid
interest. The Company has not paid the foregoing amount. The Company has certain claims against the
seller under the terms of the Asset Purchase Agreement. At this time, the Company intends to
vigorously assert its claims against seller under the Asset Purchase Agreement and to defend
against any action or arbitration by seller to collect on the consideration. The seller commenced
an action in California Superior Court for collection of the consideration. Such action was
dismissed by the court and the seller was directed to pursue any collection action through
arbitration. Seller has commenced arbitration proceedings to collect the amounts payable under the
consideration. Arbitration dates for this action have not been determined. This arbitration is in
the preliminary stages and it is impossible to predict the outcome of the arbitration. Under the
terms of the Fifth Third forbearance agreement described in Note 8, the Company is prohibited from
making any payment to unsecured creditors, including seller, until the conditions of the
forbearance agreement have been met.
In connection with the Companys acquisition of the assets of Applied Utility Systems, Inc.,
Mansour, Inc. and Dr. Mansour entered into an Agreement Not to Compete pursuant to which they
agreed to refrain from taking certain actions that would be competitive with the business of
Applied Utility Systems, Inc. acquired by the Company. The Company believes that Mansour, Inc. and
Dr. Mansour have breached their obligations under such Agreement and has commenced suit in
California Superior Court for Orange County, California, to enjoin any continuing breaches and to
recover damages for the alleged breaches. Mansour, Inc. and Dr. Mansour have
demurred to the Complaint. A hearing on the demurrer is scheduled for May 10, 2010. The suit
is in the preliminary stages and it is not possible to predict the outcome of the suit.
F-43
Notes to Consolidated Financial Statements (Continued)
On September 30, 2008, Applied Utility Systems, Inc. (AUS), a former subsidiary of the
Company, filed a complaint against Benz Air Engineering, Inc. (Benz Air). The complaint was
amended on January 16, 2009, and asserts claims against Benz Air for breach of contract, common
counts and slander. AUS seeks $183,000 in damages, plus interest, costs and applicable penalties.
In response to the complaint, Benz Air filed a cross-complaint on November 17, 2008, which named
both AUS and the Company as defendants. The cross-complaint asserts claims against AUS and the
Company for breach of oral contract, breach of express warranty, breach of implied warranty,
negligent misrepresentation and intentional misrepresentation and seeks not less than $300,000 in
damages, plus interest, costs and punitive damages. The Company is unable to estimate any potential
payment for punitive damages as they have not been quantified by Benz Air. The case is set for
trial on June 14, 2010. The Company assumed the benefits and obligations of this claim when it sold
AUS.
See Note 21 for subsequent events.
20. Segment Reporting
The Company has two division segments based on the products it delivers:
Heavy Duty Diesel (HDD) Systems division The HDD Systems division includes
retrofit of legacy diesel fleets with emissions control systems and the emerging opportunity for
new engine emissions controls for on- and off-road vehicles. In 2007, the Company acquired Engine
Control Systems (ECS), an Ontario, Canada-based company focused on a variety of heavy duty vehicle
applications. This environmental business segment specializes in the design and manufacture of
verified exhaust emissions control solutions. Globally, the HDD Systems division offers a range of
products for the OEM, aftermarket and retrofit markets in order to reduce exhaust emissions created
by on-road, off-road and stationary diesel, gasoline and alternative fuel engines including propane
and natural gas. The retrofit market in the U.S. is driven in particular by state and municipal
environmental regulations and incentive funding for voluntary early compliance. The HDD Systems
division derives significant revenues from retrofit with a portfolio of solutions verified by the
California Air Resources Board and the United States Environmental Protection Agency.
Catalyst division The Catalyst division is the original part of the Catalytic
Solutions (CSI) business behind the Companys proprietary Mixed Phase Catalyst
(MPC®) technology enabling the Company to produce catalyst formulations for
gasoline, diesel and natural gas induced emissions that offer performance, proven durability and
cost effectiveness for multiple markets and a wide range of applications. A family of unique
catalysts has been developed with base-metals or low platinum group metal (PGM) and zero-PGM
content to provide increased catalytic function and value for technology-driven automotive
industry customers.
Corporate The Corporate office includes cost for personnel, insurance and
public company expenses such as legal, audit and taxes that are not allocated down to the operating
divisions. During 2009, the Company changed its internal reporting to the Companys chief
operational decision makers to report corporate expenses separately from the Catalyst division. The
2008 data has been restated to reflect this change.
Discontinued operations In 2006, the Company purchased Applied Utility
Systems, Inc., a provider of cost-effective, engineered solutions for the clean and efficient
utilization of fossil fuels. Applied Utility Systems, referred to as the Companys Energy Systems
division, provided emissions control and energy systems solutions for industrial and utility
boilers, process heaters, gas turbines and generation sets used largely by major utilities,
industrial process plants, OEMs, refineries, food processors, product manufacturers and
universities. The Energy Systems division delivered integrated systems built for customers
specific combustion processes. As discussed in Note 16, this division was sold on October 1, 2009.
F-44
Notes to Consolidated Financial Statements (Continued)
Summarized financial information for our reportable segments as of, and for the years
ended December 31, 2009 and 2008 is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
US $000 |
|
|
US $000 |
|
Net sales |
|
|
|
|
|
|
|
|
HDD Systems |
|
|
25,916 |
|
|
|
27,126 |
|
Catalyst |
|
|
25,074 |
|
|
|
26,311 |
|
Corporate |
|
|
|
|
|
|
|
|
Eliminations(1) |
|
|
(476 |
) |
|
|
(874 |
) |
|
|
|
|
|
|
|
Total |
|
|
50,514 |
|
|
|
52,563 |
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
|
|
|
|
|
|
HDD Systems |
|
|
1,942 |
|
|
|
1,923 |
|
Catalyst(2) |
|
|
(5,730 |
) |
|
|
(14,146 |
) |
Corporate |
|
|
(4,169 |
) |
|
|
(4,440 |
) |
|
|
|
|
|
|
|
Total |
|
|
(7,957 |
) |
|
|
(16,663 |
) |
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
HDD Systems |
|
|
1,143 |
|
|
|
1,061 |
|
Catalyst |
|
|
251 |
|
|
|
1,951 |
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,394 |
|
|
|
3,012 |
|
|
|
|
|
|
|
|
Total assets |
|
|
|
|
|
|
|
|
HDD Systems |
|
|
28,181 |
|
|
|
26,357 |
|
Catalyst |
|
|
29,231 |
|
|
|
43,635 |
|
Discontinued operations |
|
|
532 |
|
|
|
11,537 |
|
Eliminations |
|
|
(27,701 |
) |
|
|
(31,815 |
) |
|
|
|
|
|
|
|
Total |
|
|
30,243 |
|
|
|
49,714 |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
|
|
|
|
|
|
HDD Systems |
|
|
294 |
|
|
|
526 |
|
Catalyst |
|
|
335 |
|
|
|
1,370 |
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
629 |
|
|
|
1,896 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Elimination of Catalyst revenue related to sales to HDD Systems. |
|
(2) |
|
Included in Catalyst operating income (loss) in 2008 are impairment losses of $4.9 million (see Note 5). |
Interest expense for HDD Systems was $0.3 million and $0.6 million for 2009 and 2008,
respectively, and interest expense for Catalyst was $2.0 million and $1.7 million for 2009 and
2008, respectively.
F-45
Notes to Consolidated Financial Statements (Continued)
Net sales by geographic region based on location of sales organization for the years
ended December 31, 2009 and 2008 is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
US $000 |
|
|
US $000 |
|
United States |
|
|
27,671 |
|
|
|
29,721 |
|
Canada |
|
|
18,247 |
|
|
|
13,250 |
|
Europe |
|
|
4,596 |
|
|
|
9,592 |
|
|
|
|
|
|
|
|
Total |
|
|
50,514 |
|
|
|
52,563 |
|
|
|
|
|
|
|
|
Net fixed assets and net assets by geographic region as of December 31, 2009 and 2008 are
shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Fixed Assets |
|
|
Net Assets |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
US $000 |
|
|
US $000 |
|
|
US $000 |
|
|
US $000 |
|
United States |
|
|
1,316 |
|
|
|
1,533 |
|
|
|
10,333 |
|
|
|
31,299 |
|
Canada |
|
|
1,313 |
|
|
|
1,043 |
|
|
|
16,016 |
|
|
|
14,507 |
|
Europe |
|
|
268 |
|
|
|
306 |
|
|
|
3,894 |
|
|
|
3,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,897 |
|
|
|
2,882 |
|
|
|
30,243 |
|
|
|
49,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21. Subsequent Events
The Company has evaluated subsequent events from the balance sheet date through May 5,
2010, the date at which the financial statements were originally issued. Upon the inclusion of the
financial statements in an S-4 filing of Clean Diesel Technologies, Inc., the Company considered
disclosures of additional matters through the date of filing on May 14, 2010.
In the arbitration with Dr. Mansour on the consulting services contract, the Arbitrator has
rendered a Final Award (a) finding that the Consulting Agreement was properly terminated by the
Company on February 27, 2008, (b) excusing the Company from any obligation to make any further
payments under the Consulting Agreement, (c) obligating Mansour, Inc. to pay the Company an amount
equal to 75% of all amounts paid to Mansour Inc. by the Company under the Consulting Agreement, and
(d) awarding the Company attorneys fees in the amount of $450,000, resulting in a total award of
approximately $1.2 million. The Company has initiated action to enter a judgment pursuant to the
award and Mansour, Inc. has petitioned the court to set aside the award, which matters are
scheduled for hearing on August 2, 2010. Included in accrued liabilities at December 31, 2009, is
an accrual for the consulting fees under this arrangement through the date of the interim award
totaling $1.5 million. The Company will reverse such liability and record an associated gain from
discontinued operations when the court affirms the award and the Company is legally released from
its liability.
F-46
Notes to Consolidated Financial Statements (Continued)
The Company continues the initial stages of the arbitration on the $3.0 million of
consideration due to the seller of Applied Utility Systems. Seller has commenced arbitration
proceedings to collect the foregoing amount and the amount of any earn-out payable under the Asset
Purchase Agreement. The Asset Purchase Agreement provides that the Company would pay the seller an
earn-out amount based on the revenues and net profits from the operation of the acquired business
of Applied Utility Systems. The earn-out was potentially payable over a period of ten years
beginning January 1, 2009. The Company has not paid any earn-out amount for the fiscal year ended
December 31, 2009. The assets of the business were sold on October 1, 2009 and the Company believes
that it has no obligation to pay any earn-out for any period post the sale of the business. The
seller commenced an action in California Superior
Court to compel arbitration regarding the consideration which was due in August 2009. Such
action was stayed by the court and the seller was directed to pursue any collection action through
arbitration. The seller has commenced arbitration proceedings to collect the
consideration which was due in August 2009 and any earn-out amounts payable under the Asset
Purchase Agreement. The earn-out requested under the proceedings is $21 million, which is the
maximum earnable over the ten year period of the earn-out defined in the Asset Purchase Agreement.
The Company has certain claims against the seller under the terms of the Asset Purchase Agreement.
While the arbitration is in the preliminary stages and it is not possible to predict the outcome of
the arbitration, the Company intends to vigorously assert its claims against the seller under the
Asset Purchase Agreement and to defend against any action or arbitration by the seller to collect
on the consideration and earn-out. The Company believes the outcome of these matters will not
exceed the liabilities recorded as of December 31, 2009. In connection with the arbitration
proceedings, the seller sought a writ of attachment with respect to the foregoing amounts. The
Company intends to vigorously oppose the granting of any writ of attachment. Arbitration dates for
this action have not been determined. This arbitration is in the preliminary stages and it is
impossible to predict the outcome of the arbitration. Under the terms of the Fifth Third
forbearance agreement described in Note 8, the Company is prohibited from making any payment to
unsecured creditors, including seller, until the conditions of the forbearance agreement have been
met.
In connection with the Companys acquisition of the assets of Applied Utility Systems,
the seller entered into an agreement not to compete pursuant to which he agreed to refrain from
taking certain actions that would be competitive with the business of Applied Utility Systems. The
Company believes that the seller has breached his obligations under the agreement not to compete
and on November 19, 2009 commenced suit in California Superior Court for Orange County, California,
to enjoin any continuing breaches and to recover damages for the alleged breaches. The seller has
demurred to the complaint. A hearing on the demurrer was held on May 10, 2010, at which hearing the
court granted the demur but permitted the Company to file an amended complaint. The Company has
filed an amended complaint and a further demurrer hearing is scheduled for July 26, 2010. The suit
is in the preliminary stages and it is not possible to predict the outcome of the suit.
On May 13, 2010, the Company agreed to a Merger Agreement with Clean Diesel Technologies,
Inc. (CDTI) whereby all outstanding shares of the Company would be exchanged for shares of CDTI and
the Company will become a wholly-owned subsidiary of CDTI. The Merger Agreement is subject to
approval by the shareholders of both the Company and CDTI and other conditions precedent prior to
closing. The Company expects that the transaction will be accounted for as a reverse merger whereby
the Company would be considered the acquirer for accounting purposes.
F-47
UNAUDITED
PRO FORMA CONDENSED FINANCIAL DATA
The following unaudited pro forma condensed financial data gives
effect to the proposed business combination of Clean Diesel and
CSI including related capital raise transactions that close at
or prior to the time of the Merger. For accounting purposes, CSI
is considered to be acquiring Clean Diesel. Accordingly, the
assets and liabilities of Clean Diesel are recorded at fair
value, while the assets and liabilities of CSI are recorded at
historical carrying values for the combined company. The
transaction will be accounted for under the acquisition method
of accounting in accordance with FASB Accounting Standards
Codification (ASC) Topic 805, Business Combinations. Under the
acquisition method of accounting, the estimated purchase
consideration is recorded at fair value as described in
Note 2 to this unaudited pro forma condensed combined
financial data and the tangible and intangible assets acquired
and liabilities of Clean Diesel assumed in connection with the
transaction are recorded at their estimated fair values at the
time the Merger is consummated.
For purposes of this unaudited pro forma condensed combined
financial data, Clean Diesel has made preliminary estimates of
the purchase consideration and the values of the assets to be
acquired and liabilities to be assumed based on preliminary
estimates of their fair values. A final determination of the
estimated fair values, will be made subsequent to the completion
of the Merger based on the actual purchase consideration and the
actual assets and liabilities of Clean Diesel that exist as of
the date of completion of the Merger. The actual amounts
recorded at the completion of the Merger may differ materially
from the information presented in this unaudited pro forma
condensed combined financial data as a result of:
|
|
|
|
|
net cash used in Clean Diesels and CSIs operations
between the dates of the pro forma financial statements and the
closing of the Merger;
|
|
|
|
the effect of Clean Diesels and CSIs capital raise
transactions;
|
|
|
|
other changes in Clean Diesels and CSIs assets and
liabilities that occur prior to completion of the Merger;
|
|
|
|
the timing of completion of the Merger; and
|
|
|
|
other changes in estimated costs and fair values, which could
cause material differences in the information presented.
|
Further, Clean Diesel has made preliminary estimates of the fair
values of financial instruments issued in connection with the
capital raise transactions. A final determination of the
estimated fair values will be made in connection with the
issuance of the financial statements containing such instruments.
The unaudited pro forma condensed combined financial data is
based on the pro forma financial statements of Clean Diesel and
CSI, adjusted to give effect to the acquisition of Clean Diesel
by CSI for accounting purposes. The unaudited Clean Diesel and
CSI pro forma statements reflect their historical data adjusted
to give effect to the accounting impact of their respective
capital raise transactions. The pro forma adjustments are
described in the accompanying notes.
The unaudited pro forma condensed combined balance sheet as of
June 30, 2010 gives effect to the proposed Merger as if it
occurred on June 30, 2010, and combines the unaudited pro
forma balance sheets of Clean Diesel and CSI as of June 30,
2010. The unaudited Clean Diesel and CSI pro forma balance sheet
as of June 30, 2010 adjusts the historical balance sheet of
each company, as included elsewhere in this joint proxy
statement/information statement and prospectus, to give effect
to their respective capital raise transactions as if they
occurred on June 30, 2010.
The unaudited pro forma condensed combined statement of
operations for the six months ended June 30, 2010, and the
year ended December 31, 2009 are presented as if the Merger
was consummated on January 1, 2009, and combines the
historical results of Clean Diesel and CSI for the six months
ended June 30, 2010, and the historical results of Clean
Diesel and the pro forma results of CSI for the twelve months
ended December 31, 2009. The unaudited CSI pro forma
condensed statement of operations for the six months ended
June 30, 2010 and the year ended December 31, 2009,
adjusts the historical statement of operations of CSI, included
elsewhere in this joint proxy statement/information statement
and prospectus, to give effect to its capital raise transaction
as if such transaction was consummated on January 1, 2009.
For purposes of the CSI
F-48
pro forma condensed statement of operations, it is assumed that
the Merger is consummated four months after the closing of the
capital raise and the secured convertible notes are converted to
equity at the end of the four-month period; therefore, there are
no resulting pro forma adjustments that impact CSIs pro
forma net income for the six months ended June 30, 2010.
Likewise, the Clean Diesel capital raise involved the issuance
of equity and there are no resulting pro forma adjustments that
impact Clean Diesel pro forma net income for the twelve months
ended December 31, 2009 nor the six months ended
June 30, 2010.
This unaudited pro forma condensed financial data has been
prepared for illustrative purposes only and is not indicative of
the consolidated financial position or results of operations in
future periods or the results that actually would have been
realized had Clean Diesel and CSI been a combined company during
the periods presented or had Clean Diesel and CSI completed
their capital raise transactions on the dates noted above. The
pro forma adjustments are based on the preliminary information
available at the time of the preparation of this joint proxy
statement/information statement and prospectus and are subject
to change. This unaudited pro forma condensed financial data,
including the notes thereto should be read in conjunction with,
the historical financial statements of Clean Diesel and CSI
included elsewhere in this joint proxy statement/information
statement and prospectus.
As required, the unaudited pro forma condensed financial data
includes adjustments that give effect to the events that are
(i) directly attributable to the Merger; (ii) expected
to have a continuing impact and (iii) factually
supportable. The unaudited pro forma condensed combined
statements of operations do not reflect any adjustments for
non-recurring items or anticipated synergies resulting from the
Merger. Merger expenses will be expensed as incurred in
accordance with applicable accounting rules regarding business
combinations. Further, the pro forma condensed combined
financial data does not include the impact of the contemplated
reverse stock split.
F-49
CATALYTIC
SOLUTIONS, INC. AND SUBSIDIARIES
Unaudited
Pro Forma Condensed Balance Sheet
June 30,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalytic
|
|
|
|
|
|
Pro Forma
|
|
|
|
Solutions, Inc.
|
|
|
Pro Forma
|
|
|
Catalytic
|
|
|
|
Historical
|
|
|
Adjustments
|
|
|
Solutions, Inc.
|
|
|
|
(Amounts in thousands)
|
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,887
|
|
|
$
|
500
|
(A)
|
|
$
|
3,387
|
|
Trade accounts receivable, less allowance for doubtful accounts
|
|
|
5,926
|
|
|
|
|
|
|
|
5,926
|
|
Inventories
|
|
|
5,026
|
|
|
|
|
|
|
|
5,026
|
|
Prepaid expenses and other current assets
|
|
|
1,635
|
|
|
|
|
|
|
|
1,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
15,474
|
|
|
|
500
|
|
|
|
15,974
|
|
Property and equipment, net
|
|
|
2,688
|
|
|
|
|
|
|
|
2,688
|
|
Intangible assets, net
|
|
|
4,160
|
|
|
|
|
|
|
|
4,160
|
|
Goodwill
|
|
|
4,161
|
|
|
|
|
|
|
|
4,161
|
|
Other assets
|
|
|
311
|
|
|
|
|
|
|
|
311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
26,794
|
|
|
$
|
500
|
|
|
$
|
27,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
3,029
|
|
|
$
|
|
|
|
$
|
3,029
|
|
Current portion of long-term debt
|
|
|
3,000
|
|
|
|
|
|
|
|
3,000
|
|
Secured convertible notes payable
|
|
|
1,767
|
|
|
|
500
|
(A)
|
|
|
2,267
|
|
Accounts payable
|
|
|
4,449
|
|
|
|
|
|
|
|
4,449
|
|
Accrued expenses
|
|
|
6,029
|
|
|
|
|
|
|
|
6,029
|
|
Income taxes payable
|
|
|
784
|
|
|
|
|
|
|
|
784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
19,058
|
|
|
|
500
|
|
|
|
19,558
|
|
Long-term debt
|
|
|
61
|
|
|
|
|
|
|
|
61
|
|
Deferred tax liability
|
|
|
1,283
|
|
|
|
|
|
|
|
1,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
20,402
|
|
|
|
500
|
|
|
|
20,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A common stock, no par value
|
|
|
156,307
|
|
|
|
|
|
|
|
156,307
|
|
Historical and pro forma: Authorized 148,500,000; issued
69,761,902; and outstanding 69,761,902
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B common stock, no par value
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical and pro forma: Authorized, issued and outstanding:
none
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock at cost (Historical: 60,000 shares)
|
|
|
(100
|
)
|
|
|
|
|
|
|
(100
|
)
|
Accumulated other comprehensive loss
|
|
|
(1,116
|
)
|
|
|
|
|
|
|
(1,116
|
)
|
Accumulated deficit
|
|
|
(148,699
|
)
|
|
|
|
|
|
|
(148,699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
6,392
|
|
|
|
|
|
|
|
6,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
26,794
|
|
|
$
|
500
|
|
|
$
|
27,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per share
|
|
$
|
0.09
|
|
|
|
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-50
CATALYTIC
SOLUTIONS, INC. AND SUBSIDIARIES
Unaudited
Pro Forma Condensed Statement of Operations
Six
Months Ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalytic
|
|
|
|
|
|
Pro Forma
|
|
|
|
Solutions, Inc.
|
|
|
Pro Forma
|
|
|
Catalytic
|
|
|
|
Historical
|
|
|
Adjustments
|
|
|
Solutions, Inc.
|
|
|
|
(Amounts in thousands, except per share amounts)
|
|
|
Revenues
|
|
$
|
25,371
|
|
|
$
|
|
|
|
$
|
25,371
|
|
Cost of revenues
|
|
|
18,595
|
|
|
|
|
|
|
|
18,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
6,776
|
|
|
|
|
|
|
|
6,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
1,561
|
|
|
|
|
|
|
|
1,561
|
|
Research and development
|
|
|
2,145
|
|
|
|
|
|
|
|
2,145
|
|
General and administrative
|
|
|
4,126
|
|
|
|
|
|
|
|
4,126
|
|
Severance expense
|
|
|
15
|
|
|
|
|
|
|
|
15
|
|
Recapitalization expense
|
|
|
727
|
|
|
|
|
|
|
|
727
|
|
Gain on sale of intellectual property
|
|
|
(3,900
|
)
|
|
|
|
|
|
|
(3,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,674
|
|
|
|
|
|
|
|
4,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
2,102
|
|
|
|
|
|
|
|
2,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
Interest expense
|
|
|
(678
|
)
|
|
|
|
|
|
|
(678
|
)
|
Other expense
|
|
|
(109
|
)
|
|
|
|
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(785
|
)
|
|
|
|
|
|
|
(785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
1,317
|
|
|
|
|
|
|
|
1,317
|
|
Provision for income taxes
|
|
|
510
|
|
|
|
|
|
|
|
510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
807
|
|
|
$
|
|
|
|
$
|
807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income from continuing operations
|
|
$
|
0.01
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income from continuing operations
|
|
$
|
0.01
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding (000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
69,762
|
|
|
|
|
|
|
|
220,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
70,226
|
|
|
|
|
|
|
|
220,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per share
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-51
CATALYTIC
SOLUTIONS, INC. AND SUBSIDIARIES
Unaudited
Pro Forma Condensed Statement of Operations
Twelve
Months Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalytic
|
|
|
|
|
|
Pro Forma
|
|
|
|
Solutions, Inc.
|
|
|
Pro Forma
|
|
|
Catalytic
|
|
|
|
Historical
|
|
|
Adjustments
|
|
|
Solutions, Inc.
|
|
|
|
(Amounts in thousands, except per share amounts)
|
|
|
Revenues
|
|
$
|
50,514
|
|
|
$
|
|
|
|
$
|
50,514
|
|
Cost of revenues
|
|
|
38,547
|
|
|
|
|
|
|
|
38,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
11,967
|
|
|
|
|
|
|
|
11,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
3,577
|
|
|
|
|
|
|
|
3,577
|
|
Research and development
|
|
|
7,257
|
|
|
|
|
|
|
|
7,257
|
|
General and administrative
|
|
|
8,903
|
|
|
|
|
|
|
|
8,903
|
|
Severance expense
|
|
|
1,429
|
|
|
|
|
|
|
|
1,429
|
|
Recapitalization expense
|
|
|
1,258
|
|
|
|
|
|
|
|
1,258
|
|
Gain on sale of intellectual property
|
|
|
(2,500
|
)
|
|
|
|
|
|
|
(2,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
19,924
|
|
|
|
|
|
|
|
19,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(7,957
|
)
|
|
|
|
|
|
|
(7,957
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
18
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
(1,707
|
)(B)
|
|
|
|
|
Interest expense
|
|
|
(2,304
|
)
|
|
|
(1,342
|
)(C)
|
|
|
(5,353
|
)
|
|
|
|
|
|
|
|
(1,527
|
)(D)
|
|
|
|
|
Other expense
|
|
|
(291
|
)
|
|
|
701
|
(E)
|
|
|
(1,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(2,577
|
)
|
|
|
(3,875
|
)
|
|
|
(6,452
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(10,534
|
)
|
|
|
(3,875
|
)
|
|
|
(14,409
|
)
|
Income tax benefit
|
|
|
(1,036
|
)
|
|
|
|
|
|
|
(1,036
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(9,498
|
)
|
|
$
|
(3,875
|
)
|
|
$
|
(13,373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss from continuing operations
|
|
$
|
(0.14
|
)
|
|
|
|
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding (000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
69,762
|
|
|
|
|
|
|
|
220,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per share
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-52
CATALYTIC
SOLUTIONS, INC. AND SUBSIDIARIES
Notes to
Unaudited Pro Forma Condensed Financial Data
|
|
1.
|
The
Capital Raise Transaction and Basis of Presentation
|
On June 2, 2010, CSI entered into agreements with a group
of accredited investors providing for the sale of $4,000,000 of
secured convertible notes (the Notes). The Notes bear interest
at a rate of 8% per annum and provide for a maturity date of
August 2, 2010. Under the agreements, $2,000,000 of the
Notes are issued by CSI in four equal installments ($500,000 on
each of June 2, 2010, June 8, 2010, June 28, 2010
and July 12, 2010), with the remaining $2,000,000 to be
issued after all conditions precedent to the closing of the
Merger have been satisfied or waived (among other items). Under
the terms of the Notes, assuming the necessary shareholder
approvals are received at the special meeting of CSIs
shareholders to permit conversion thereof, the $4,000,000 of
Notes will be converted into newly created
Class B common stock immediately prior to the
Merger such that at the effective time of the Merger, this group
of accredited investors will receive approximately
150,434,943 shares of CSI Class B common stock, which
will convert into approximately 66.0066% of the aggregate shares
of Clean Diesel to be issued in the Merger. Because the Merger
was not completed by August 2, 2010, a default under the
Notes has occurred triggering an increase in the interest rate
from 8.0% to 15.0% and a penalty payment of two times (2x) the
outstanding principal amount plus interest due to the investors.
However, the holders of the Notes have entered into a
forbearance agreement, as discussed in Note 14 to
CSIs Interim Condensed Consolidated Financial Statements,
appearing elsewhere in this joint proxy statement/information
statement and prospectus.
Each share of CSI Class B common stock will be exchanged
for 0.0602 shares of Clean Diesel common stock whereas each
share of CSI Class A common stock will be exchanged for
0.0473 shares of Clean Diesel common stock and warrants to
purchase 0.0387 shares of Clean Diesel common stock.
Neither the CSI Class B common stock nor the CSI
Class A common stock has a right to convert into any
security of CSI.
These unaudited pro forma condensed statements reflect
CSIs historical data adjusted to give effect to the
accounting impact of the capital raise transaction described
above.
The unaudited pro forma balance sheet as of June 30, 2010
adjusts the historical balance sheet of CSI to give effect to
the July 12, 2010 fourth installment of $500,000 of the
capital raise transaction as if it occurred on June 30,
2010.
The unaudited pro forma condensed statement of operations for
the six months ended June 30, 2010, and the year ended
December 31, 2009, adjusts CSIs historical statement
of operations to give effect to the capital raise transaction as
if such transaction occurred on January 1, 2009 and assumes
that the Merger is consummated four months after the closing of
the capital raise. The historical condensed statement of
operations for the six months ended June 30, 2010 includes
the impact of the Notes from their issuance date through
June 30, 2010, which resulted in additional expense
totaling approximately $170,000. Such amount was not adjusted in
the pro forma statement of operations as it will remain an
expense of the combined entity post Merger.
These pro forma condensed financial statements include estimates
of fair value and will change, perhaps materially, based on
revisions to current estimates, facts and circumstances.
Balance Sheet Adjustments
(A) This adjustment reflects the issuance of the fourth
$500,000 installment of the Notes. The amount reflected as
secured convertible notes payable of $500,000 represents the
Note proceeds allocated to the Note payable and to the embedded
financial instruments that require separate accounting as
described below. The remaining $2,000,000 in Notes are only
issued at the time of the Merger, and therefore are not included
in CSIs pro forma condensed balance sheet; such issuance
is reflected in the Clean Diesel Technologies, Inc. unaudited
pro forma condensed combined balance sheet. The embedded
financial instruments are separately
F-53
CATALYTIC
SOLUTIONS, INC. AND SUBSIDIARIES
Notes to
Unaudited Pro Forma Condensed Financial
Data (Continued)
valued and included in the balance of secured convertible notes
payable. The agreements for the Notes include the following
embedded financial instruments that require separate accounting
at fair value:
a. Premium redemption feature with an initial estimated
fair value of $177,000 for the final Note issuance of $500,000
or $701,000 for the entire $2,000,000 in Notes issued. This
derivative instrument represents the additional penalty premium
of two times (2x) the outstanding principal amount plus default
interest that is due if the Notes are in default. This
instrument is considered a put option, as subsequent to
August 2, 2010, the noteholders have the option of
demanding payment or providing additional time extensions. The
fair value of the premium redemption instrument is estimated by
calculating the present value of the penalty amount ($1,000,000
plus accrued interest) based on an assumed payment date (eleven
months after default date) using a high-yield discount rate of
17%. The result is weighted for the estimated probability of its
exercise.
The Merger was not completed by August 2, 2010 and,
therefore, the Notes were in default. However, as of
August 31, 2010, the holders of the Notes agreed to forbear
from exercising any rights or remedies thereunder to
October 15, 2010. This pro forma balance sheet assumes that
CSI will complete the Merger prior to October 15, 2010. If
the Merger has not occurred by October 15, 2010, and CSI is
not able to obtain the agreement of the holders of the Notes to
waive, extend or further modify the terms of the Notes, the
interest rate will increase from 8.0% to 15.0% and an additional
payment premium of two times (2x) the outstanding principal
amount will be due to the holders of the Notes. The holders of
the Notes further conditioned their obligation to purchase the
remaining $2.0 million of the Notes immediately prior to
the closing of the Merger on the requirement that CSI and Clean
Diesel timely furnish the requested statements regarding their
estimated cash positions, that each of CSI and Clean Diesel have
a certain minimum cash position, that the shares of Clean Diesel
to be issued in the Merger be approved for listing on the
Nasdaq, in addition to the other closing conditions in the Note
purchase agreements (which include that CSI must not have
suffered any material adverse change). Accordingly, if the
Merger has not occurred by October 15, 2010, the fair value
of the premium redemption instrument would immediately increase
to a liability of $4,000,000 less any applicable discounting and
result in a charge to other expense of approximately $3,299,000.
b. Contingent equity forward with an initial fair value of
$164,000 for the final Note issuance of $500,000 or $658,000 for
the entire $2,000,000 in Notes issued. This instrument
represents the additional $2,000,000 the investors have
committed to fund immediately prior to the closing of the
Merger. It is considered a commitment to purchase equity because
the funding will only occur from the same events that will cause
the Notes to automatically convert to equity. The fair value is
estimated based on the intrinsic value of the forward discounted
at a risk free rate multiplied by the estimated probability that
such forward will fund. The intrinsic value was estimated based
on the combined market capitalizations of CSI and Clean Diesel
less the required $2,000,000 cash payment.
F-54
CATALYTIC
SOLUTIONS, INC. AND SUBSIDIARIES
Notes to
Unaudited Pro Forma Condensed Financial
Data (Continued)
Statement of Operations Adjustments
(B) This adjustment reflects $1,707,000 of interest expense
related to the Notes recorded over the four month period they
are assumed to be outstanding. Interest expense includes the
following items:
|
|
|
|
|
|
|
Item
|
|
Amount
|
|
|
Notes
|
|
Amortization of debt discount
|
|
$
|
1,359,000
|
|
|
As described above in adjustment (A) the Notes are initially
recorded at a value of $641,000. This adjustment reflects the
amortization of the debt discount to the face value of the debt
of $2,000,000.
|
Deferred financing costs
|
|
|
272,000
|
|
|
In order to complete the sale of the Notes, $272,000 of costs
were incurred. This adjustment reflects the full amortization
of such costs.
|
Coupon interest
|
|
|
28,000
|
|
|
The Notes include a coupon interest rate of 8%, which is
estimated to be recorded for a period of two months.
|
Default interest
|
|
|
48,000
|
|
|
The interest rate on the Notes increases to 15% in the event of
a default by CSI. The adjustment assumes that the CSI will be
required to pay the default interest rate for two months,
representing the estimated additional time after original
maturity of the Notes that is needed to complete the Merger.
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,707,000
|
|
|
|
|
|
|
|
|
|
|
(C) This adjustment reflects additional non-cash interest
expense of $1,342,000 for an embedded beneficial conversion
feature included in the Notes. The beneficial conversion is
calculated as the intrinsic value of the conversion feature at
the loan commitment date, but is limited to the amount of
proceeds allocated to the Notes of $1,342,000. The proceeds
allocated to the Notes represent the $2,000,000 cash proceeds
less the proceeds allocated to the contingent equity forward
valued of $658,000. The beneficial conversion feature is
contingent on CSIs shareholders approval of amendments to
the Articles of Incorporation and is recorded at the time of
such approval. For the purpose of this adjustment it assumed
such approval is obtained at the same time as the Merger being
approved.
(D) As described in adjustment (A), the financial
instruments embedded in the Notes are separately recorded at
fair value. Subsequent changes in fair value of these
instruments will be recorded to other income (expense) in the
statement of operations. At the time of the Merger and the
Notes conversion to equity, the embedded financial
instruments fair value will reflect their intrinsic value.
This adjustment assumes the closing of the Merger four months
after the issuance of the Notes. For the purposes of this
adjustment, the intrinsic value of the equity forward was
estimated at $2,185,000 representing the 4.5 million Clean
Diesel shares issuable to settle the forward contract multiplied
by Clean Diesels stock price on September 14, 2010 of
$0.93 less the cash purchase price of $2,000,000. The resulting
loss of $1,527,000 reflects the difference between the
$2,185,000 intrinsic value on settlement date and the initial
proceeds allocated to the instrument of $658,000.
(E) As described in adjustment (A), the financial
instruments embedded in the Notes are separately recorded at
fair value. Subsequent changes in fair value of these
instruments will be recorded to other income (expense) in the
statement of operations. At the time of the Merger and the
Notes conversion to equity, the embedded financial
instruments fair value will reflect their intrinsic value.
This adjustment assumes the closing of the Merger four months
after the issuance of the Notes. As a result, the premium
redemption
F-55
CATALYTIC
SOLUTIONS, INC. AND SUBSIDIARIES
Notes to
Unaudited Pro Forma Condensed Financial
Data (Continued)
instrument is assumed to expire unexercised resulting in a gain
of $701,000, representing the difference between the initial
proceeds allocated to the instrument and its ultimate fair value
of zero.
The Merger was not completed by August 2, 2010 and,
therefore, the Notes were in default. However, as of
August 31, 2010, the holders of the Notes agreed to forbear
from exercising any rights or remedies thereunder to
October 15, 2010. This pro forma statement of operations
assumes that CSI will complete the Merger prior to
October 15, 2010. If the Merger has not occurred by
October 15, 2010, and CSI is not able to obtain the
agreement of the holders of the Notes to waive, extend or
further modify the terms of the Notes, the interest rate will
increase from 8.0% to 15.0% and an additional payment premium of
two times (2x) the outstanding principal amount will be due to
the holders of the Notes. The holders of the Notes further
conditioned their obligation to purchase the remaining
$2.0 million of the Notes immediately prior to the closing
of the Merger on the requirement that CSI and Clean Diesel
timely furnish the requested statements regarding their
estimated cash positions, that each of CSI and Clean Diesel have
a certain minimum cash position, that the shares of Clean Diesel
to be issued in the Merger be approved for listing on the
Nasdaq, in addition to the other closing conditions in the Note
purchase agreements (which include that CSI must not have
suffered any material adverse change). Accordingly, if the
Merger has not occurred by October 15, 2010, the fair value
of the premium redemption instrument would immediately increase
to a liability of $4,000,000 less any applicable discounting and
result in a charge to other expense of approximately $3,299,000
partially offset by decline in fair value of the forward
contract of $658,000 which would expire unsettled.
|
|
3.
|
Pro Forma
Income (Loss) Per Share
|
Weighted average shares outstanding for the twelve months ended
December 31, 2009 includes CSIs historical weighted
average shares outstanding of 69,761,902 plus an additional
150,434,943 shares from the assumed conversion of the
secured convertible notes payable including the funding of the
final $2,000,000 assuming each is outstanding for the entire
period.
Weighted average shares outstanding for the six months ended
June 30, 2010 includes CSIs historical weighted
average shares outstanding of 69,761,902 plus an additional
150,434,943 shares from the assumed conversion of the
secured convertible notes payable including the funding of the
final $2,000,000 assuming each is outstanding for the entire
period.
Diluted weighted average shares outstanding used for the six
months ended June 30, 2010 include the dilutive impact
totaling 464,000 shares from warrants expected to be
outstanding at the time of the closing of the Merger.
Diluted weighted average shares outstanding used for the six
months ended June 30, 2010 and December 31, 2009
exclude the anti-dilutive impact of approximately 3,154,615 and
4,200,227 warrants and options expected to be outstanding at the
time of the closing of the Merger.
Book value per share is calculated by dividing
shareholders equity by common shares outstanding at the
end of the period. The calculation of book value per share
excludes the impact of 150,434,943 shares of CSI
Class B common stock from the assumed conversion of the
Notes including the funding of the final $2,000,000. If these
amounts were included in the calculation, book value per share
would equal $0.03.
F-56
CLEAN
DIESEL TECHNOLOGIES, INC.
Unaudited
Pro Forma Condensed Combined Balance Sheet
June 30,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
Clean Diesel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clean Diesel
|
|
|
|
Clean Diesel
|
|
|
Technologies,
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
Business
|
|
|
Technologies,
|
|
|
|
Technologies,
|
|
|
Inc.
|
|
|
Clean Diesel
|
|
|
Pro Forma
|
|
|
|
|
|
Combination
|
|
|
Inc. For
|
|
|
|
Inc.
|
|
|
Pro Forma
|
|
|
Technologies,
|
|
|
Catalytic
|
|
|
|
|
|
Pro Forma
|
|
|
Business
|
|
|
|
Historical
|
|
|
Adjustments
|
|
|
Inc.
|
|
|
Solutions, Inc.
|
|
|
Subtotal
|
|
|
Adjustments
|
|
|
Combination
|
|
|
|
(In thousands except per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
8,106
|
|
|
$
|
1,000
|
(a)
|
|
$
|
9,106
|
|
|
$
|
3,387
|
|
|
$
|
12,493
|
|
|
$
|
2,000
|
(c)
|
|
$
|
14,493
|
|
Trade accounts receivable, less allowance for doubtful accounts
|
|
|
218
|
|
|
|
|
|
|
|
218
|
|
|
|
5,926
|
|
|
|
6,144
|
|
|
|
|
|
|
|
6,144
|
|
Inventories
|
|
|
822
|
|
|
|
|
|
|
|
822
|
|
|
|
5,026
|
|
|
|
5,848
|
|
|
|
|
|
|
|
5,848
|
|
Prepaid expenses and other current assets
|
|
|
108
|
|
|
|
|
|
|
|
108
|
|
|
|
1,635
|
|
|
|
1,743
|
|
|
|
|
|
|
|
1,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
9,254
|
|
|
|
1,000
|
|
|
|
10,254
|
|
|
|
15,974
|
|
|
|
26,228
|
|
|
|
2,000
|
|
|
|
28,228
|
|
Property and equipment, net
|
|
|
239
|
|
|
|
|
|
|
|
239
|
|
|
|
2,688
|
|
|
|
2,927
|
|
|
|
|
|
|
|
2,927
|
|
Intangible assets, net
|
|
|
957
|
|
|
|
|
|
|
|
957
|
|
|
|
4,160
|
|
|
|
5,117
|
|
|
|
2,793
|
(d)
|
|
|
7,910
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,161
|
|
|
|
4,161
|
|
|
|
|
|
|
|
4,161
|
|
Other assets
|
|
|
55
|
|
|
|
|
|
|
|
55
|
|
|
|
311
|
|
|
|
366
|
|
|
|
|
|
|
|
366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
10,505
|
|
|
$
|
1,000
|
|
|
$
|
11,505
|
|
|
$
|
27,294
|
|
|
$
|
38,799
|
|
|
$
|
4,793
|
|
|
$
|
43,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
3,243
|
|
|
$
|
|
|
|
$
|
3,243
|
|
|
$
|
3,029
|
|
|
$
|
6,272
|
|
|
$
|
|
|
|
$
|
6,272
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
|
|
|
|
3,000
|
|
Secured convertible notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,267
|
|
|
|
2,267
|
|
|
|
(2,267
|
)(b)
|
|
|
|
|
Accounts payable
|
|
|
454
|
|
|
|
|
|
|
|
454
|
|
|
|
4,449
|
|
|
|
4,903
|
|
|
|
(599
|
)(e)
|
|
|
4,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
293
|
(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,556
|
(f)
|
|
|
|
|
Accrued expenses
|
|
|
567
|
|
|
|
|
|
|
|
567
|
|
|
|
6,029
|
|
|
|
6,596
|
|
|
|
880
|
(i)
|
|
|
9,325
|
|
Income taxes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
784
|
|
|
|
784
|
|
|
|
|
|
|
|
784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,264
|
|
|
|
|
|
|
|
4,264
|
|
|
|
19,558
|
|
|
|
23,822
|
|
|
|
(137
|
)
|
|
|
23,685
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
|
|
|
|
61
|
|
|
|
|
|
|
|
61
|
|
Deferred tax liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,283
|
|
|
|
1,283
|
|
|
|
|
|
|
|
1,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
4,264
|
|
|
$
|
|
|
|
$
|
4,264
|
|
|
$
|
20,902
|
|
|
$
|
25,166
|
|
|
$
|
(137
|
)
|
|
$
|
25,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(82
|
)(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137
|
(h)
|
|
|
|
|
Clean Diesel common stock par value $0.01 per share
|
|
$
|
82
|
|
|
$
|
|
|
|
$
|
82
|
|
|
$
|
|
|
|
$
|
82
|
|
|
$
|
91
|
(j)
|
|
$
|
228
|
|
Historical: Authorized 12,000,000; issued and outstanding
8,213,988 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma: Authorized 31,100,000; issued and outstanding
22,790,250 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalytic Solutions Class A common stock, no par value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
156,307
|
|
|
|
156,307
|
|
|
|
(156,307
|
)(j)
|
|
|
|
|
Pro forma: Authorized 85,000,000; issued 76,223,996; and
outstanding none
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,267
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000
|
(c)
|
|
|
|
|
Catalytic Solutions Class B common stock, no par value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,267
|
)(j)
|
|
|
|
|
Pro forma: Authorized 185,000,000, issued 150,434,943 and
outstanding none
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalytic Solutions treasury stock at cost (Historical:
60,000 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100
|
)
|
|
|
(100
|
)
|
|
|
100
|
(j)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
930
|
(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75,751
|
)(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,635
|
(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(880
|
)(i)
|
|
|
|
|
Additional paid in capital
|
|
|
74,751
|
|
|
|
1,000
|
(a)
|
|
|
75,751
|
|
|
|
|
|
|
|
75,751
|
|
|
|
160,383
|
(j)
|
|
|
169,068
|
|
Accumulated other comprehensive income (loss)
|
|
|
(449
|
)
|
|
|
|
|
|
|
(449
|
)
|
|
|
(1,116
|
)
|
|
|
(1,565
|
)
|
|
|
449
|
(g)
|
|
|
(1,116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
561
|
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(624
|
)(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(855
|
)(f)
|
|
|
|
|
Accumulated deficit
|
|
|
(68,143
|
)
|
|
|
|
|
|
|
(68,143
|
)
|
|
|
(148,699
|
)
|
|
|
(216,842
|
)
|
|
|
68,143
|
(g)
|
|
|
(149,617
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
6,241
|
|
|
|
1,000
|
|
|
|
7,241
|
|
|
|
6,392
|
|
|
|
13,633
|
|
|
|
4,930
|
|
|
|
18,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
10,505
|
|
|
$
|
1,000
|
|
|
$
|
11,505
|
|
|
$
|
27,294
|
|
|
$
|
38,799
|
|
|
$
|
4,793
|
|
|
$
|
43,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per share
|
|
$
|
0.76
|
|
|
|
|
|
|
$
|
0.82
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
$
|
0.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent book value per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-57
CLEAN
DIESEL TECHNOLOGIES, INC.
Unaudited
Pro Forma Condensed Combined Statements of Operations
Six
Months Ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
|
Clean Diesel
|
|
|
|
Clean Diesel
|
|
|
Pro Forma
|
|
|
|
|
|
Combination
|
|
|
Technologies, Inc.
|
|
|
|
Technologies, Inc.
|
|
|
Catalytic
|
|
|
|
|
|
Pro Forma
|
|
|
For Business
|
|
|
|
Historical
|
|
|
Solutions, Inc.
|
|
|
Subtotal
|
|
|
Adjustments
|
|
|
Combination
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues
|
|
$
|
1,056
|
|
|
$
|
25,371
|
|
|
$
|
26,427
|
|
|
$
|
|
|
|
$
|
26,427
|
|
Cost of revenues
|
|
|
685
|
|
|
|
18,595
|
|
|
|
19,280
|
|
|
|
|
|
|
|
19,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
371
|
|
|
|
6,776
|
|
|
|
7,147
|
|
|
|
|
|
|
|
7,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
|
|
|
|
1,561
|
|
|
|
1,561
|
|
|
|
|
|
|
|
1,561
|
|
Research and development
|
|
|
189
|
|
|
|
2,145
|
|
|
|
2,334
|
|
|
|
|
|
|
|
2,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59
|
)(k)
|
|
|
|
|
General and administrative
|
|
|
2,695
|
|
|
|
4,126
|
|
|
|
6,821
|
|
|
|
209
|
(l)
|
|
|
6,971
|
|
Severance expense
|
|
|
(163
|
)
|
|
|
15
|
|
|
|
(148
|
)
|
|
|
|
|
|
|
(148
|
)
|
Recapitalization expense
|
|
|
|
|
|
|
727
|
|
|
|
727
|
|
|
|
|
|
|
|
727
|
|
Gain on sale of intellectual property
|
|
|
|
|
|
|
(3,900
|
)
|
|
|
(3,900
|
)
|
|
|
|
|
|
|
(3,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,721
|
|
|
|
4,674
|
|
|
|
7,395
|
|
|
|
150
|
|
|
|
7,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(2,350
|
)
|
|
|
2,102
|
|
|
|
(248
|
)
|
|
|
(150
|
)
|
|
|
(398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
91
|
|
|
|
2
|
|
|
|
93
|
|
|
|
|
|
|
|
93
|
|
Interest expense
|
|
|
|
|
|
|
(678
|
)
|
|
|
(678
|
)
|
|
|
|
|
|
|
(678
|
)
|
Other
|
|
|
(67
|
)
|
|
|
(109
|
)
|
|
|
(176
|
)
|
|
|
|
|
|
|
(176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
24
|
|
|
|
(785
|
)
|
|
|
(761
|
)
|
|
|
|
|
|
|
(761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
(2,326
|
)
|
|
|
1,317
|
|
|
|
(1,009
|
)
|
|
|
(150
|
)
|
|
|
(1,159
|
)
|
Provision for income taxes
|
|
|
|
|
|
|
510
|
|
|
|
510
|
|
|
|
|
|
|
|
510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
(2,326
|
)
|
|
$
|
807
|
|
|
$
|
(1,519
|
)
|
|
$
|
(150
|
)
|
|
$
|
(1,669
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) from continuing operations
|
|
$
|
(0.28
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) from continuing operations
|
|
$
|
(0.28
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding (000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,184
|
|
|
|
220,197
|
|
|
|
|
|
|
|
|
|
|
|
22,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
8,184
|
|
|
|
220,661
|
|
|
|
|
|
|
|
|
|
|
|
22,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent basic and diluted loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per share
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-58
CLEAN
DIESEL TECHNOLOGIES, INC.
Unaudited
Pro Forma Condensed Combined Statements of Operations
Year
Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
|
Clean Diesel
|
|
|
|
Clean Diesel
|
|
|
Pro Forma
|
|
|
|
|
|
Combination
|
|
|
Technologies, Inc.
|
|
|
|
Technologies, Inc.
|
|
|
Catalytic
|
|
|
|
|
|
Pro Forma
|
|
|
For Business
|
|
|
|
Historical
|
|
|
Solutions, Inc.
|
|
|
Subtotal
|
|
|
Adjustments
|
|
|
Combination
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues
|
|
$
|
1,221
|
|
|
$
|
50,514
|
|
|
$
|
51,735
|
|
|
$
|
|
|
|
$
|
51,735
|
|
Cost of revenues
|
|
|
801
|
|
|
|
38,547
|
|
|
|
39,348
|
|
|
|
|
|
|
|
39,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
420
|
|
|
|
11,967
|
|
|
|
12,387
|
|
|
|
|
|
|
|
12,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
|
|
|
|
3,577
|
|
|
|
3,577
|
|
|
|
|
|
|
|
3,577
|
|
Research and development
|
|
|
386
|
|
|
|
7,257
|
|
|
|
7,643
|
|
|
|
|
|
|
|
7,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(107
|
)(k)
|
|
|
|
|
General and administrative
|
|
|
6,280
|
|
|
|
8,903
|
|
|
|
15,183
|
|
|
|
417
|
(l)
|
|
|
15,493
|
|
Severance expense
|
|
|
958
|
|
|
|
1,429
|
|
|
|
2,387
|
|
|
|
|
|
|
|
2,387
|
|
Recapitalization expense
|
|
|
|
|
|
|
1,258
|
|
|
|
1,258
|
|
|
|
|
|
|
|
1,258
|
|
Gain on sale of intellectual property
|
|
|
|
|
|
|
(2,500
|
)
|
|
|
(2,500
|
)
|
|
|
|
|
|
|
(2,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
7,624
|
|
|
|
19,924
|
|
|
|
27,548
|
|
|
|
310
|
|
|
|
27,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(7,204
|
)
|
|
|
(7,957
|
)
|
|
|
(15,161
|
)
|
|
|
(310
|
)
|
|
|
(15,471
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
245
|
|
|
|
18
|
|
|
|
263
|
|
|
|
|
|
|
|
263
|
|
Interest expense
|
|
|
|
|
|
|
(5,353
|
)
|
|
|
(5,353
|
)
|
|
|
|
|
|
|
(5,353
|
)
|
Change in fair value of investments and interest expense
|
|
|
100
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
100
|
|
Other
|
|
|
112
|
|
|
|
(1,117
|
)
|
|
|
(1,005
|
)
|
|
|
|
|
|
|
(1,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
457
|
|
|
|
(6,452
|
)
|
|
|
(5,995
|
)
|
|
|
|
|
|
|
(5,995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(6,747
|
)
|
|
|
(14,409
|
)
|
|
|
(21,156
|
)
|
|
|
(310
|
)
|
|
|
(21,466
|
)
|
Income tax benefit
|
|
|
|
|
|
|
(1,036
|
)
|
|
|
(1,036
|
)
|
|
|
|
|
|
|
(1,036
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(6,747
|
)
|
|
$
|
(13,373
|
)
|
|
$
|
(20,120
|
)
|
|
$
|
(310
|
)
|
|
$
|
(20,430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations per share
|
|
$
|
(0.83
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(0.90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
8,147
|
|
|
|
220,197
|
|
|
|
|
|
|
|
|
|
|
|
22,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent basic and diluted loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per share
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-59
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Unaudited Pro Forma Condensed Combined Financial Data
|
|
1.
|
The
Merger and Basis of Presentation
|
On May 13, 2010, Clean Diesel and CSI entered into the
Merger Agreement, under which a wholly-owned subsidiary of Clean
Diesel, will merge with and into CSI, with CSI becoming a
wholly-owned subsidiary of Clean Diesel. Pursuant to the Merger
Agreement, Clean Diesel will issue an estimated
13,727,658 shares of common stock of Clean Diesel, par
value $0.01 per share, in exchange for all outstanding shares of
common stock of CSI.
Because CSI stockholders will own a majority of the voting stock
of the combined company, CSI will assume key management
positions and CSI will hold a majority of the board of directors
seats upon closing of the Merger, CSI is deemed to be the
acquiring company for accounting purposes and the transaction
will be accounted for as a reverse acquisition in accordance
with FASB Accounting Standards Codification (ASC) Topic 805,
Business Combinations. Accordingly, the assets and liabilities
of Clean Diesel will be recorded as of the Merger closing date
at their estimated fair values.
The accompanying pro forma condensed combined financial
statements do not give effect to any cost savings or revenue
synergies that are expected to result from the Merger. Further,
these pro forma condensed combined financial statements will
change, perhaps materially, based on revisions to current
estimates, facts and circumstances as of the closing of the
Merger.
|
|
2.
|
Estimate
of Consideration Expected to Be Transferred
|
The acquisition method of accounting requires that the
consideration transferred in a business combination be measured
at fair value as of the closing date of the acquisition. As
Clean Diesels stock is traded on the NASDAQ with more
daily average volume than CSIs stock on the AIM exchange,
the closing market price of Clean Diesels common stock as
of September 14, 2010, the most recent date practical to
allow for the preparation of this filing, was used to estimate
the consideration transferred. Clean Diesel believes this method
provides the most reliable determination of fair value for the
purposes of the unaudited pro forma condensed combined financial
statements.
The following is a preliminary estimate of consideration
expected to be transferred to effect the Merger:
|
|
|
|
|
Fair value of Clean Diesel outstanding common stock at
June 30, 2010
|
|
$
|
7,639,000
|
|
Estimated fair value of Clean Diesel shares issued to accredited
investors
|
|
|
608,000
|
|
Estimated fair value of Clean Diesel shares issued to Innovator
Capital
|
|
|
181,000
|
|
Estimated fair value of Clean Diesel stock options and warrants
outstanding at June 30, 2010
|
|
|
25,000
|
|
Estimated fair value of Clean Diesel warrants issued to
Innovator Capital and accredited investors
|
|
|
319,000
|
|
|
|
|
|
|
Total estimated purchase consideration
|
|
$
|
8,772,000
|
|
|
|
|
|
|
On June 30, 2010, Clean Diesel had 8,213,988 shares of
common stock outstanding. In addition, the purchase
consideration includes 654,118 shares to be issued
immediately prior to closing to accredited investors (as
discussed in note 4(b) below) and 194,486 shares to be
issued to Innovator Capital, Clean Diesels financial
advisor, as a transaction fee for their services in connection
with the Merger. The fair value of Clean Diesel common stock
used in determining the purchase price was $0.93 per share based
on the closing price on NASDAQ on September 14, 2010.
The fair value of Clean Diesels stock options and warrants
is a preliminary estimate ($0.29). The final estimated fair
value will be determined using the Black-Scholes Model based on
the number of Clean Diesel stock options and warrants
outstanding on the merger closing date pro-rated for the portion
vested prior to merger. The warrants are expected to have a
strike price of $1.32 per share. The warrants also include
a provision that they expire 30 days after a period where
the Clean Diesel stock price exceeds the warrant exercise price
for 10 consecutive days. To value these warrants, the
Black-Scholes Model was used with Clean
F-60
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Unaudited Pro Forma Condensed Combined Financial
Data (Continued)
Diesels stock price of $0.93 on September 14, 2010, a
volatility of 59.9%, a risk free rate of 1.25% and a term of
3 years. In addition, warrants to purchase a total of
1,089,000 shares of Clean Diesel common stock will be
issued to accredited investors and Innovator Capital in
connection with the transactions described above.
Clean Diesel estimates that professional fees and employee
expenses related to the Merger will approximate $1,556,000.
These costs include fees for legal, accounting, and other direct
costs necessary to complete this transaction. The $1,556,000 of
transaction costs consist of $701,000 of costs expected to be
incurred by Clean Diesel and $855,000 of costs expected to be
incurred by CSI. Clean Diesels $701,000 of professional
and employee expenses will be incurred by Clean Diesel are in
addition to the estimated shares and warrants to be issued to
Innovator Capital, and these costs are included in liabilities
to be assumed by CSI in the Merger. In addition, these costs
include other direct costs of approximately $477,000 expected to
be incurred related to employee retention and success bonuses as
a result of successful completion of the transaction.
Transaction fees of CSI will be expensed as incurred in
accordance with applicable accounting rules regarding business
combinations. In addition to the $855,000 of professional and
employee expenses, CSIs financial advisor,
Allen & Company LLC, will receive
1,000,000 shares of Clean Diesel and warrants to purchase
an additional 1,000,000 shares of Clean Diesel. The
estimated fair value of such shares and warrants totaling
$1,223,000, of which $599,000 has been accrued at June 30,
2010, related to the closing of the Merger will be expensed upon
closing of the Merger.
|
|
3.
|
Preliminary
Allocation of Consideration Transferred to Net Assets
Acquired
|
Under the acquisition method of accounting, the total purchase
consideration is allocated to the acquired tangible and
intangible assets and assumed liabilities of Clean Diesel based
on their estimated fair values as of the Merger closing date.
The excess of the purchase price over the fair value of assets
acquired and liabilities assumed is recorded to goodwill, and
any shortfall is recorded as a gain on transaction. A
preliminary allocation of the preliminary estimated purchase
consideration, as shown above, to the acquired tangible and
intangible assets and assumed liabilities of Clean Diesel based
on the estimated fair values as if the transaction closed on
June 30, 2010, is as follows:
|
|
|
|
|
Cash and cash equivalents(1)
|
|
$
|
9,106,000
|
|
Accounts receivable and other assets
|
|
|
381,000
|
|
Inventory(2)
|
|
|
822,000
|
|
Fixed assets
|
|
|
239,000
|
|
Intangible Assets
|
|
|
|
|
Customer relationships
|
|
|
180,000
|
|
Trade name
|
|
|
948,000
|
|
Patents
|
|
|
2,352,000
|
|
In-process research and development
|
|
|
270,000
|
|
|
|
|
|
|
Total Assets Acquired
|
|
|
14,298,000
|
|
Liabilities assumed
|
|
|
(4,264,000
|
)
|
Merger related liabilities
|
|
|
(701,000
|
)
|
|
|
|
|
|
Net assets acquired
|
|
|
9,333,000
|
|
|
|
|
|
|
Gain on transaction
|
|
|
(561,000
|
)
|
|
|
|
|
|
Total preliminary purchase price allocation
|
|
$
|
8,772,000
|
|
|
|
|
|
|
F-61
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Unaudited Pro Forma Condensed Combined Financial
Data (Continued)
|
|
|
(1) |
|
Includes $1,000,000 of cash to be received by Clean Diesel upon
closing of sale of stock and warrants to accredited investors
described in note 4(a) below. |
|
(2) |
|
Assumed carrying value equals fair value. |
A preliminary valuation of the intangible assets of Clean Diesel
was made. Each of the intangible assets and the methodology for
the preliminary valuation is presented below.
Valuation
of Customer Relationships
The ability to use Clean Diesels relationships with its
clients provides the acquirer with a business advantage that is
distinct and separable from the goodwill acquired. The presence
of a loyal customer base provides management with the
opportunity to sell additional products into the base, and
further leverage cost efficiencies. Customer relationships are
valued using the income approach excess earnings method, based
on the operating profit of the expected revenue, less applicable
capital charges for the use of assets. Key assumptions used in
this valuation were a revenue growth rate of approximately 3%
and an annual customer attrition of 50%.
Valuation
of Trademarks and Tradenames
The fair value of the acquired trademarks or tradenames is the
relief from the royalty method. Under this method, the subject
trademark is valued by reference to the amount of royalty income
it could generate if it were licensed, in an arms-length
transaction, to a third party. Typically, a sample of a
comparable arms-length royalty or license agreement is
selected that reflects similar risk and return investment
characteristics with the subject trademark or tradename. The
royalty rate selected is then multiplied by the net revenue
expected to be generated by the trademark or tradename over the
course of the assumed life of the trademark or tradename. The
product of the royalty rate times the revenue is an estimate of
the royalty income that could be generated, hypothetically, by
licensing the subject trademark or tradename. Therefore, in
selecting a royalty rate for trademarks and tradenames,
consideration was given to the products and Clean Diesels
reputation in the marketplace, the historical and projected
operating profitability of the business and relative importance
of the name(s) compared to other factors driving profitability.
It was determined that the primary driver of operating margins
is resident in the products technological features and
capabilities. Therefore, the value of the trademarks and
tradenames would be relatively small in comparison to these
factors. As such, a royalty rate of 1.5% was used.
Valuation
of Patented Technology
To value the patent portfolio/patented technology assets, the
income approach relief from royalty method was used, similar to
that of the trademarks and tradenames. As noted earlier, market
transactions involving licensing rates for similar technology as
well as the profit split method were considered.
An examination of licensing royalty rates for similar technology
was made using information provided by Royalty
Source®
Intellectual Property Database, a third party reporting service.
The search of their database resulted in 5 guideline license
transactions for patents in similar technologies. The royalty
rates paid ranged between 3.0% and 7.0%. The median transaction
had a royalty rate of 4.0%, while the average transaction had a
royalty rate of 4.5%. Based on this information, a royalty rate
of 4% was used.
Valuation
of In-Process Technology
The fair value of in-process technology was calculated using the
income approach multi-period excess earnings method, which is
the same method used to value customer relationships. In
addition, taken into account were the costs to complete of
$250,000 for Clean Diesels IPR&D project expected to
be launched by the end of 2010.
F-62
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Unaudited Pro Forma Condensed Combined Financial
Data (Continued)
The final determination of the allocation of purchase
consideration will be based on the estimated fair values of the
tangible and intangible assets acquired and liabilities assumed
at the date of the closing of the Merger and will be made as
soon as practicable after the closing. The allocation of
purchase consideration will remain preliminary until CSI
completes its valuation of the tangible and intangible assets
acquired and liabilities assumed. The final fair value of assets
acquired and liabilities assumed could differ significantly from
the amounts presented in these pro forma financial statements.
Clean Diesel Balance Sheet Adjustments
(a) On July 5, 2010, Clean Diesel entered into
agreements with a group of accredited investors providing for
the sale of 654,118 shares of Clean Diesels common
stock and warrants to purchase 1,000,000 shares of Clean
Diesels common stock, for a total purchase price of
$1,000,000, contingent upon the closing of the Merger. This
adjustment assumes the issuance of Clean Diesel stock and
warrants and the receipt of $1,000,000 cash from the investors
immediately prior to the closing of the Merger. This amount is
reflected as part of the outstanding Clean Diesel equity in the
calculation of the estimated purchase consideration described in
note 2.
Business Combination Pro forma Balance Sheet
Adjustments
(b) To record the automatic conversion of the CSI secured
convertible notes of $2,000,000 into CSI Class B common
stock immediately prior to the Merger. This adjustment reflects
reversal of the carrying amount of the notes of $2,267,000
including the fair value of embedded financial instruments.
Refer to further discussion of the secured convertible notes in
adjustment (A) of the notes of CSIs unaudited pro forma
condensed financial data.
(c) To reflect funding of the final $2,000,000 of secured
convertible notes that will automatically convert into CSI
Class B common stock immediately prior to the Merger. Refer
to further discussion of the secured convertible notes in
adjustment (A) of the notes of CSIs unaudited pro forma
condensed financial data.
(d) To record the estimated fair value of the acquired
intangible assets totaling $3,750,000 as more fully described in
note 3. This adjustment also reverses the net book value of
Clean Diesels pre-Merger intangible assets totaling
$957,000, resulting in a net adjustment of $2,793,000. In
addition, this adjustment records a gain on transaction as an
adjustment to accumulated deficit of $561,000 calculated using
the acquisition method of accounting more fully described in
note 3. This gain has not been reflected on the pro forma
condensed statement of operations as it is non-recurring in
nature.
(e) To record CSIs Merger costs related to the
issuance of shares and warrants to Allen & Company LLC
upon closing of the Merger as more fully described in
note 2. These costs have not been reflected on the pro
forma condensed statements of operations as they are
non-recurring in nature. These shares, reflected as common stock
and paid in capital, and warrants, reflected as accrued expense,
have an estimated fair value of $930,000 and $293,000,
respectively for a total of $1,223,000. Additionally, this
adjustment reflects a reduction to accounts payable of $599,000
for settlement costs incurred and accrued prior to June 30,
2010 which results in a net reduction to accumulated deficit of
$624,000. The warrants are classified as liabilities as their
expected terms could compel cash settlement.
(f) To record an increase to Merger-related liabilities for
CSIs and Clean Diesels estimated professional and
employee related Merger costs totaling $1,556,000. These costs,
as more fully described in note 2, have not been reflected
on the pro forma condensed statements of operations as they are
non-recurring in nature. Merger related costs include fees
payable to investment bankers, legal and accounting services,
NASDAQ and other regulatory fees, printing, proxy solicitation
and other costs, including an estimated $477,000, expected to be
incurred related to employee retention and success bonuses as a
result of successful completion of the transaction. Clean
Diesels transaction costs of $701,000 will be incurred
prior to the Merger and are reflected
F-63
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Unaudited Pro Forma Condensed Combined Financial
Data (Continued)
as an accrued expense in the allocation consideration
transferred in note 3. CSIs transaction cost of
$855,000 are reflected as an increase to accumulated deficit as
they will be an expense of the combined entity.
(g) To eliminate the pro forma Clean Diesel equity account
balances upon closing the Merger at June 30, 2010.
(h) To reflect issuance of purchase consideration of
$8,772,000 as more fully described in note 2 representing
13,727,658 shares at par value of $0.01 or $137,000 with
the remaining $8,635,000 reflected as additional paid-in capital.
(i) To record an accrued liability for $880,000
representing the estimated fair value of the 3,000,000 warrants
to be issued to CSI Class A shareholders upon closing of
the Merger. This transaction has been reflected as a
distribution to the shareholders of the accounting acquirer and,
accordingly, a reduction of shareholders equity. The
warrants are classified as liabilities as they are expected to
have ongoing registration requirements, which could compel cash
settlement.
(j) To recast the historical Class A common stock and
Class B common stock capital accounts of CSI to reflect the
appropriate post-Merger paid in capital of Clean Diesel.
Summary of Pro Forma Adjustments to Additional Paid in
Capital
The Summary of pro forma adjustments to additional paid in
capital reflect the impact of the business combination and
associated transactions more fully described above:
|
|
|
|
|
Historical value of CSIs outstanding shares including
conversion of Notes
|
|
$
|
160,474
|
|
Fair value of shares held by Clean Diesel shareholders
|
|
|
8,772
|
|
Fair value of 1,000,000 shares issued to Allen and Company
LLC as a merger cost
|
|
|
930
|
|
Estimated fair value of 3,000,000 warrants issued to CSI
Class A Shareholders recorded
as a distribution
|
|
|
(880
|
)
|
Less: amount attributable to par value of shares
|
|
|
(228
|
)
|
|
|
|
|
|
|
|
$
|
169,068
|
|
|
|
|
|
|
Statements of Operations Adjustments
(k) To eliminate historical Clean Diesel amortization
expense of $59,000 for the six months ended June 30, 2010
and $107,000 for the year ended December 31, 2009.
(l) To record amortization expense based on the preliminary
estimated fair values of the underlying intangible assets to be
acquired amortized over their estimated useful lives as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization Expense
|
|
|
|
|
|
|
Estimated
|
|
|
Six months
|
|
|
Twelve months
|
|
|
|
|
|
|
useful
|
|
|
ended
|
|
|
ended
|
|
|
|
Fair value
|
|
|
life
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
Customer relationships
|
|
$
|
180,000
|
|
|
|
3
|
|
|
$
|
30,000
|
|
|
$
|
60,000
|
|
Trade name
|
|
|
948,000
|
|
|
|
10
|
|
|
|
47,000
|
|
|
|
95,000
|
|
Patents
|
|
|
2,352,000
|
|
|
|
10
|
|
|
|
118,000
|
|
|
|
235,000
|
|
In-process research and development
|
|
|
270,000
|
|
|
|
10
|
|
|
|
14,000
|
|
|
|
27,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,750,000
|
|
|
|
|
|
|
$
|
209,000
|
|
|
$
|
417,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Pro Forma
Income (Loss) Per Share
|
Pro Forma Catalytic Solutions, Inc.
Weighted average shares outstanding for the twelve months ended
December 31, 2009 includes CSIs historical weighted
average shares outstanding of 69,761,902 plus an additional
150,434,943 shares from the
F-64
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Unaudited Pro Forma Condensed Combined Financial
Data (Continued)
assumed conversion of the secured convertible notes payable
including the funding of the final $2,000,000 assuming each is
outstanding for the entire period.
Weighted average shares outstanding for the six months ended
June 30, 2010 includes CSIs historical weighted
average shares outstanding of 69,761,902 plus an additional
150,434,943 shares from the assumed conversion of the
secured convertible notes payable including the funding of the
final $2,000,000 assuming each is outstanding for the entire
period.
Diluted weighted average shares outstanding used for the six
months ended June 30, 2010 include the dilutive impact
totaling 464,000 shares from warrants expected to be
outstanding at the time of the closing of the Merger.
Diluted weighted average shares outstanding used for the six
months ended June 30, 2010 and for the twelve months ended
December 31, 2009 exclude the anti-dilutive impact of
approximately 3,154,615 and 4,200,227 warrants and options
expected to be outstanding at the time of the closing of the
Merger.
Pro Forma Clean Diesel Technologies, Inc. for Business
Combination
Basic weighted average shares outstanding for the six months
ended June 30, 2010 and the year ended December 31,
2009 include:
|
|
|
|
|
|
|
Pre-Reverse
|
|
|
Split
|
Clean Diesel shares outstanding
|
|
|
8,213,988
|
|
New shares to be issued in the Merger to CSI shareholders and
Allen & Company LLC
|
|
|
13,727,658
|
|
New shares to be issued to accredited investors
|
|
|
654,118
|
|
New shares to be issued to Innovator Capital
|
|
|
194,486
|
|
|
|
|
|
|
Total
|
|
|
22,790,250
|
|
|
|
|
|
|
Diluted weighted average shares outstanding used for
June 30, 2010 and December 31, 2009 exclude the
anti-dilutive impact of approximately 6,317,000 warrants
and options expected to be outstanding at the time of the
closing of the Merger.
Pro forma income (loss) per share does not reflect the impact of
the proposed reverse stock split in a ratio ranging from
one-for-three
to
one-for-eight.
Pro forma income (loss) per share assuming the reverse stock
split at each end of the range and a point within the range are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One for
|
|
|
One for
|
|
|
One for
|
|
|
|
three
|
|
|
five
|
|
|
eight
|
|
|
Six months ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma income from continuing operations per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.22
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(0.59
|
)
|
Pro forma weighted average shares outstanding (000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
7,597
|
|
|
|
4,558
|
|
|
|
2,849
|
|
Year ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma loss from continuing operations per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(2.69
|
)
|
|
$
|
(4.48
|
)
|
|
$
|
(7.17
|
)
|
Pro forma weighted average shares outstanding (000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
7,597
|
|
|
|
4,558
|
|
|
|
2,849
|
|
Equivalent Pro Forma Clean Diesel Technologies, Inc. for
Business Combination
The equivalent pro forma income (loss) per share amounts are
calculated by multiplying the pro forma Clean Diesel
Technologies, Inc. for Business Combination per share amounts by
the assumed CSI Class A
F-65
CLEAN
DIESEL TECHNOLOGIES, INC.
Notes to
Unaudited Pro Forma Condensed Combined Financial
Data (Continued)
common stock exchange ratio of 0.0473. For the six months ended
June 30, 2010, equivalent pro forma loss per share is
($0.00) calculated by multiplying the pro forma basic and
diluted loss per share of ($0.07) by the assumed Class A
conversion ratio of 0.0473. For the twelve months ended
December 31, 2009, equivalent pro forma loss per share is
($0.04) calculated by multiplying the pro forma basic and
diluted loss per share of ($0.90) by the assumed Class A
conversion ratio of 0.0473.
Book value per share is calculated by dividing company
shareholders equity by common shares outstanding at the
end of the period. The equivalent pro forma book value per share
is calculated by multiplying the pro forma Clean Diesel
Technologies, Inc. for Business Combination per share amount by
the assumed CSI Class A common stock exchange ratio of
0.0473.
Pro forma Clean Diesel Technologies, Inc. book value per share
is calculated based on Clean Diesels historical common
shares outstanding of 8,213,988 plus the additional
654,118 shares of common stock to be issued upon closing
its capital raise.
The calculation of book value per share for Pro Forma CSI
excludes the impact of 150,434,943 shares of CSI
Class B common stock from the assumed conversion of the
Notes including the funding of the final $2,000,000. If these
amounts were included in the calculation, book value per share
would equal $0.03.
F-66