UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2006
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-27432
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CLEAN DIESEL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1393453
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(State of Incorporation) (I.R.S. Employer
Identification No.)
Clean Diesel Technologies, Inc.
300 Atlantic Street - Suite 702
Stamford, CT 06901-3522
(Address of principal executive offices) (Zip Code)
(203) 327-7050
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is a large accelerated filer,
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer Accelerated Filer Non-Accelerated Filer X
--- --- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
As of November 10, 2006, there were outstanding 26,162,459 shares of Common
Stock, par value $0.05 per share, of the registrant.
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CLEAN DIESEL TECHNOLOGIES, INC.
Form 10-Q for the Quarter Ended September 30, 2006
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Balance Sheets as of September 30, 2006 (Unaudited), 3
and December 31, 2005
Statements of Operations for the Three and Nine Months 4
Ended September 30, 2006 and 2005 (Unaudited)
Statements of Cash Flows for the Nine Months 5
Ended September 30, 2006 and 2005 (Unaudited)
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of 12
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES & CERTIFICATIONS 17
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
CLEAN DIESEL TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
(in thousands, except share data)
SEPTEMBER 30, December 31,
2006 2005
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,252 $ 4,513
Accounts receivable, net of allowance of $18 and $11 in
2006 and 2005, respectively 183 125
Inventories 440 285
Other current assets 115 94
Subscription receivable, net 0 488
------------------ ------------------
TOTAL CURRENT ASSETS 1,990 5,505
Patents, net 608 567
Fixed assets, net of accumulated depreciation of $307
and $259 in 2006 and 2005, respectively 117 175
Other assets 37 27
------------------ ------------------
TOTAL ASSETS $ 2,752 $ 6,274
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Deferred revenue 0 9
Accounts payable and accrued expenses 590 487
------------------ ------------------
TOTAL CURRENT LIABILITIES 590 496
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $0.05 per share,
100,000 shares authorized, no shares issued
and outstanding -- --
Common Stock, par value $0.05 per share, authorized
45,000,000 shares, issued and outstanding
26,162,459 and 25,369,358 shares respectively 1,308 1,268
Common Stock, par value $0.05 per share, subscribed
and to be issued; 705,113 shares in 2005 0 35
Additional paid-in capital 44,334 44,068
Accumulated deficit (43,480) (39,593)
------------------ ------------------
TOTAL STOCKHOLDERS' EQUITY 2,162 5,778
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,752 $ 6,274
================== ==================
See notes to condensed financial statements.
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CLEAN DIESEL TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
------------ ---------- ------------- ----------
REVENUE:
Additive revenue $ 161 $ 97 $ 457 $ 283
Hardware revenue 74 56 191 314
License, royalty and other revenue 104 13 239 29
------------ ---------- ------------- ----------
Total revenue 339 166 887 626
COSTS AND EXPENSES:
Cost of revenue 206 102 478 373
General and administrative 1,157 1,260 3,872 3,635
Research and development 52 222 447 369
Patent amortization and other patent expense 53 61 146 125
------------ ---------- ------------- ----------
Loss from operations (1,129) (1,479) (4,056) (3,876)
Other income (expense):
Foreign currency exchange gain/(loss) 7 (12) 101 (106)
Interest income 8 2 56 16
Miscellaneous income 0 0 12 0
------------ ---------- ------------- ----------
Net loss $ (1,114) $ (1,489) $ (3,887) $ (3,966)
============ ========== ============= ==========
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.04) $ (0.09) $ (0.15) $ (0.23)
============ ========== ============= ==========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - BASIC AND DILUTED 26,162 17,193 26,120 17,176
============ ========== ============= ==========
See notes to condensed financial statements.
-4-
CLEAN DIESEL TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
2006 2005
----------- ----------
OPERATING ACTIVITIES
Net loss $ (3,887) $ (3,966)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 116 126
Write-off patent and bad debt provision 26 85
Non-cash compensation expense for stock options 155 --
Changes in operating assets and liabilities:
Accounts receivable (76) 35
Inventories (149) 79
Other current assets and security deposits (31) (14)
Accounts payable and accrued expenses 196 (148)
----------- ----------
Net cash used in operating activities (3,650) (3,507)
----------- ----------
INVESTING ACTIVITIES
Patent costs (93) (185)
Purchase of fixed assets (20) (79)
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Net cash used in investing activities (113) (264)
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FINANCING ACTIVITIES
Proceeds from exercise of stock options 14 --
Proceeds from receipt of subscription receivable 488 --
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Net cash provided by financing activities 502 --
----------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,261) (3,771)
Cash and cash equivalents at beginning of period 4,513 4,265
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,252 $ 494
=========== ==========
Non-cash financing activities
Accrued expenses settled in common stock $ 94 $ 71
See notes to condensed financial statements.
-5-
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited, condensed, consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. All such adjustments are
of a normal recurring nature. Operating results for the three and nine month
periods ended September 30, 2006, are not necessarily indicative of the results
that may be expected for the year ending December 31, 2006. The balance sheet
at December 31, 2005 has been derived from the audited financial statements at
that date but does not include all the information and notes required by
generally accepted accounting principles for complete financial statement
presentation. For further information, refer to the Financial Statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2005.
Clean Diesel Technologies, Inc. (the "Company", "Clean Diesel" or "CDT") was
incorporated in the State of Delaware on January 19, 1994, as a wholly owned
subsidiary of Fuel-Tech Inc., formerly Fuel Tech N.V. ("Fuel Tech"). Effective
December 12, 1995, Fuel Tech completed a Rights Offering of the Company's Common
Stock that reduced its ownership in the Company to 27.6%. Fuel Tech currently
holds a 7.0% interest in the Company as of September 30, 2006.
The Company is a specialty chemical and energy technology company supplying fuel
additives and proprietary systems that reduce harmful emissions from internal
combustion engines while improving fuel economy. The Company's Platinum Plus
FBC fuel additive is registered with the EPA for on-highway use and is approved
under the VERT-VSET procedure. The Platinum Plus FBC in combination with a
diesel oxidation catalyst or a catalyzed wire mesh filter have both been
verified by the EPA for retrofit emission reduction. The success of the
Company's technologies will depend upon the market acceptance of the
technologies and governmental regulations including corresponding foreign and
state agencies.
Clean Diesel has been unable to generate positive cash flows from its operations
in the past. The Company does not have any credit facilities available with
financial institutions or other third parties. If the Company is unable to
generate cash flow from operations in the future, Clean Diesel will be dependent
upon external sources of best-efforts financing, of which there are no firm
commitments or arrangements. Based on the current operating plan, management
believes that the cash balance as of September 30, 2006 of $1.252 million will
be sufficient to meet the cash needs into the first quarter of 2007. In the
future, unless operating revenues are sufficient to meet operating expenses, the
Company will need to access capital markets to fund operations by incurring
indebtedness or issuing equity securities. The Company can provide no assurance
that it will be successful in any future financing effort to obtain the
necessary working capital to support operations or if such financing is
available, it will be on acceptable terms. If management is unable to obtain
the necessary financing from external sources, the Company will need to manage
any cash shortfalls by taking measures which may include deferring or reducing
the scope of commercialization efforts, reducing costs and overhead expenses, or
otherwise curtailing operations, or obtaining funds by a disposition of assets
or through arrangements with others that may require Clean Diesel to relinquish
rights to certain of its technologies, or to license the rights to such
technologies on terms that are less favorable to Clean Diesel than might
otherwise be available. The condensed financial statements have been prepared on
a going concern basis and do not reflect any adjustments that might result from
the outcome of this uncertainty.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
FOREIGN CURRENCY
The US dollar is considered the functional currency for Clean Diesel
Technologies, Inc. and the British Sterling is the functional currency for its
UK branch office. Assets and Liabilities of the UK branch office are translated
to US dollars
-6-
using the exchange rates in effect at the balance sheet date. Results of
operations are translated using weighted average exchange rates during the
period. Adjustments resulting from the translation process which are not
significant through September 30, 2006 are included in a separate component of
Shareholders' Equity. Clean Diesel recorded a foreign currency gain of $7,000
and $101,000 on its UK bank holdings for the three and nine months ended
September 30, 2006 versus a loss of ($12,000) and ($106,000) for the same three
and nine month period ended September 30, 2005, which is included in other
income (expense) in the accompanying statement of operations.
INVENTORIES
Inventories are stated at the lower of cost or market and consist of the
following:
SEPTEMBER 30, December 31,
(in thousands) 2006 2005
-------------- -------------
Finished Platinum Plus FBC $ 125 $ 59
Platinum concentrate/metal 175 119
Hardware (ARIS and Purifier) 83 55
Other 57 52
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Total inventory $ 440 $ 285
REVENUE RECOGNITION
Clean Diesel Technologies generates revenue from the sale of additives including
the Platinum Plus FBC products and concentrate; hardware including the EPA
verified Purifier System and catalyzed wire mesh filter, ARIS injectors and
dosing systems; and license, royalty fees and other revenue from the ARIS System
and market analysis/consulting. CDT sells to end-user fleets, municipalities and
construction companies, as well as fuel resellers, additive distribution
companies and emission reduction companies.
CDT shipping terms are FOB shipping point but revenue is recognized when its
products are received and collections are reasonably assured unless the purchase
order or contract specifically requires CDT to provide installation of hardware.
For hardware projects where CDT is responsible for installation either directly
or indirectly (third-party contractor), revenue is recognized when the hardware
is installed and/or accepted if the project requires inspection/acceptance.
License revenue is recognized when the license agreement is entered into, the
license period commences, the technology rights, information and know-how have
been transferred to the licensee and CDT does not have any ongoing
responsibilities or performance requirements and collection is reasonably
assured. Royalty income is recognized when earned.
In January 2006 Clean Diesel signed a one year contract with a new customer to
provide certain consulting and market analysis services for a fee of 130,000 GBP
(approximately $230,000). The Company was recognizing the revenue ratably over
the 12 month term of the contract. During the three and nine months ended
September 30, 2006, the Company recorded $56,096 and $182,731, respectively, of
revenues relating to this contract. In September 2006 the customer terminated
the contract as allowed in the contract and paid Clean Diesel fully through the
termination date. Clean Diesel does not expect to recognize any additional
revenue from this agreement.
GEOGRAPHIC INFORMATION
CDT sells its Platinum Plus additives and hardware and ARIS systems licenses
throughout the world. A geographic breakdown of revenue consists of the
following:
Third Quarter Year to Date
(in thousands) 2006 2005 2006 2005
-------- ------- ------- -------
REVENUE:
US $ 211 $ 104 $ 537 $ 531
UK/Europe 89 8 300 28
Asia 39 54 50 67
-------- ------- ------- -------
Total Revenue $ 339 $ 166 $ 887 $ 626
-7-
Patents held by Clean Diesel consist of capitalized patent costs net of
accumulated amortization and are as follows:
SEPTEMBER 30, December 31,
(in thousands) 2006 2005
-------------- -------------
US patents, net $ 177 $ 138
Foreign patents, net 431 429
-------------- -------------
Total patents, net $ 608 $ 567
PATENT EXPENSE
CDT capitalizes all direct incremental costs associated with initial patent
filing costs and amortizes the cost over the estimated remaining life of such
patent. Patents are reviewed regularly and the remaining carrying values of any
patents deemed not commercial or cost effective are written off. The expiration
dates of CDT's patents, in numerous countries throughout the world, range from
2006 to 2025.
RESEARCH AND DEVELOPMENT COSTS
Costs relating to the research, development and testing of products are charged
to operations as they are incurred. These costs include test programs, salary
and benefits, consultancy fees, materials and certain testing equipment.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense is summarized as the following:
Third Quarter Year to Date
(in thousands) 2006 2005 2006 2005
------ -------- ------- -------
Compensation and benefits $ 748 $ 809 $ 2,644 $ 2,363
Occupancy 98 128 308 369
Professional 179 241 611 639
Other 132 82 309 264
------ -------- ------- -------
Total general and administrative expense $1,157 $ 1,260 $ 3,872 $ 3,635
Included in the 2006 year to date compensation and benefit expense is $357,475
of severance charges related to the departure of James Valentine, President and
Chief Operating Officer. Clean Diesel announced in January 2006 that Mr.
Valentine had been "released from employment and resigned as director of the
company." The balance sheet at September 30, 2006 includes accrued severance
charges of $105,000 representing salary and benefit costs for the remainder of
the one year employment contract between Clean Diesel and Mr. Valentine which is
to be paid on a monthly basis through January 2007.
STOCK-BASED COMPENSATION
Effective January 1, 2006, Clean Diesel adopted Statement of Financial
Accounting Standards No. 123 (Revised 2004), Share Based Payment (SFAS No.
123R), which requires a public entity to measure the cost of employee, officer
and director services received in exchanged for an award of equity instruments
based on the grant-date fair value of the award. SFAS No. 123R supersedes the
Company's previous accounting under SFAS No. 123, accounting for Stock-Based
Compensation (SFAS No. 123), which permitted the Company to account for such
compensation under Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB No. 25). Pursuant to APB No. 25, and related
interpretations, no compensation cost had been recognized in connection with the
issuance of stock options, as all options granted under the Company's stock
option plan had an exercise price equal to or greater than the market value of
the underlying common stock on the date of the grant.
The Company adopted SFAS No. 123R using the modified prospective transition
method, which requires that compensation cost be recorded as earned for all
unvested stock options outstanding at the beginning of the first fiscal year of
adoption of SFAS No. 123R based upon the grant date fair value estimated in
accordance with the original provisions of SFAS No. 123 and for compensation
cost for all share-based payments granted or modified subsequent to the
adoption, based on fair value estimated in accordance with the provisions of
SFAS No. 123R. The Company's Financial Statements as of and for the three and
nine months ended September 30, 2006 reflect the impact of SFAS No. 123R. In
accordance with the modified prospective transition method, the Company's
Financial Statements for prior periods have not been restated to reflect, and do
not include, the impact of SFAS No. 123R. In the three and
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nine months ended September 30, 2006, Clean Diesel recorded share-based
compensation for options attributable to employees and officers of $49,000 and
$155,000, or $0.00 and $0.01 per share which is included in the Company's net
loss for the respective periods.
Clean Diesel has a 1994 stock option plan approved by shareholders for officers,
directors, key employees of the Company, and consultants to the Company.
Participants are eligible to receive incentive and/or nonqualified stock
options. The stock option plan allows for total options granted to be up to
17.5% of outstanding common shares. The stock option plan is administered by
the Compensation Committee of the Board of Directors. The selection of
participants, grant of options, determination of price and other conditions
relating to the exercise of options are determined by the Board of Directors and
on the recommendation of its Compensation Committee, and administered in
accordance with the 1994 stock option plan.
Both incentive stock options and non-qualified options granted to employees,
officers and directors under this plan are exercisable for a period of up to 10
years from the date of grant at an exercise price which is not less than the
fair market value of the common stock on the date of the grant. The options
typically vest one-third on grant date and one-third on the first and second
grant anniversary dates except for Non-Executive Directors for which options
fully vest upon granting.
A summary of the Company's stock option plans activity as of September 30, 2006,
and changes during the nine months then ended is as follows:
Weighted
Weighted average
average remaining Aggregate
exercise contractual intrinsic
Shares price term (years) value
---------- ------------ ------------- ----------
Outstanding, January 1, 2006 3,245,936 $ 2.06
Granted -- N/A
Exercised 15,000 0.90
Forfeited 47,167 2.00
Expired 5,000 5.63
---------- ------------
Outstanding and expected to vest,
September 30, 2006 3,178,769 $ 2.06 7.0 $ 602,000
========== ============ ============= ==========
Exercisable, September 30, 2006 2,867,770 $ 2.16 6.1 $ 409,000
========== ============ ============= ==========
The Company estimates the fair value of stock options using a Black-Scholes
valuation model, consistent with the provisions of SFAS No. 123R, Securities and
Exchange Commission (SEC) Staff Accounting Bulletin No. 107 and the Company's
prior period pro forma disclosures of net earnings, including the fair value of
stock-based compensation. Key input assumptions used to estimate the fair value
of stock options include the expected term until exercise of the option,
expected volatility of the Company's stock, the risk free interest rate, option
forfeiture rates, and dividends, if any. The expected term of the options is
based on a historical weighted average of exercised options. The expected
volatility is derived from the historical volatility of the Company's stock on
the UK London Stock Exchange AIM listing and the US Over the Counter market for
a period that matches the expected term of the option. The risk-free interest
rate is the yield from a treasury bond or note corresponding to the expected
term of the option. Option forfeiture rates are based on the Company's
historical forfeiture rates. The Company has not paid dividends and does not
expect to pay dividends in the future.
Compensation costs for stock options with graded vesting are recognized over the
vesting period. As of September 30, 2006, there was $151,000 unrecognized
compensation costs related to granted stock options. These costs are expected
to be recognized over a weighted average period of 1.0 years.
No options have been granted in 2006. The weighted-average grant-date fair
value of options granted for the three and nine months ended September 30, 2005
was $1.05 and $1.08, respectively. The total intrinsic value of stock options
exercised for the three and nine months ended September 30, 2006 was $0 and
$3,000, respectively. For the three and nine month period of 2005, the total
intrinsic value of stock options exercised was $0 and $0, respectively. In
March 2005, the Company accelerated vesting of 363,000 options with fair market
value of $498,000 in response to the issuance by FASB of SFAS No. 123R.
-9-
The fair value of each option grant in 2005 was estimated on the date of grant
using the Black-Scholes options-pricing model with the following weighted
average assumptions:
Third Quarter Year To Date
-------------- -------------
Expected volatility 106.5% 105.0%
Weighted average expected volatility 106.5% 105.0%
Expected dividends N/A N/A
Expected term (in years) 4.3 4.3
Risk-free interest rates 4.56% 4.3%
SFAS No. 123 required disclosure of net income, on a pro forma basis, as if
expense treatment had been applied. Had the Company elected to recognize
compensation expense for the stock option plan, consistent with the method
prescribed by SFAS No. 123R, the Company's net loss for the previous periods
presented would have changed to the pro forma amounts as follows:
Three Months Ended Year-To-Date
September 30, 2005 September 30, 2005
-------------------- --------------------
(Amounts in thousands,
except per share data)
Net loss $ (1,489) $ (3,966)
Deduct: Total stock based employee compensation expense
Under fair value method for all awards, determined
Net of related tax effects (61) (678)
-------------------- --------------------
Pro forma net loss $ (1,550) $ (4,644)
==================== ====================
Basic and diluted net loss per common share - as reported $ (0.09) $ (0.23)
Basic and diluted net loss per common share - pro forma $ (0.09) $ (0.27)
BASIC AND DILUTED LOSS PER COMMON SHARE
Basic and diluted loss per share is calculated in accordance with SFAS No. 128,
"Earnings Per Share." Basic loss per share is computed by dividing net loss by
the weighted-average shares outstanding during the reporting period. Diluted
loss per share is computed similar to basic earnings per share, except that the
weighted-average shares outstanding are increased to include additional shares
from the assumed exercise of stock options and warrants, if dilutive, using the
treasury stock method. CDT's computation of diluted net loss per share does not
include common share equivalents associated with 3,179,000 and 2,823,387
options, respectively, and 507,000 and 507,000 warrants, respectively for the
2006 and 2005 periods, as the result would be anti-dilutive.
STOCKHOLDERS' EQUITY
Pursuant to a Regulation S exemption with respect to an offshore placement,
Clean Diesel Technologies sold, effective November 11, 2005, 8.174 million
shares of its common stock. The price of the common stock was 40 pence (GBP) per
share (approximately $0.704 per share). The proceeds of the common stock
issuance, was $5.5 million (net of $232,000 in expenses).
In addition, Clean Diesel Technologies received subscriptions for an additional
$487,500 (net of $12,500 in expenses) related to the November 11th issuance of
common stock for 0.7 million shares of common stock. The $487,500 was received
in the first quarter 2006.
NOTE 3: RELATED PARTY TRANSACTIONS
The Company has a Management and Services Agreement with Fuel Tech. The
agreement requires CDT to reimburse Fuel Tech for management, services and
administrative expenses incurred on our behalf. The Company has agreed to pay
Fuel Tech a fee equal to an additional 3% of the costs paid on behalf of
administration (approximately $500 for the
-10-
quarter and $1,500 year to date). Currently, and for the last three years CDT
has reimbursed Fuel Tech for the expenses associated with one Fuel Tech
officer/director who also serves as an officer/director of CDT. The Company
believes the charges under the Management and Services Agreement are reasonable
and fair. The Management and Services Agreement may be cancelled by either
party by notifying the other in writing of the cancellation on or before May 15
in any year.
NOTE 4: COMMITMENTS
Clean Diesel Technologies leases 3,925 square feet of administrative office
space at 300 Atlantic Street, Stamford, Connecticut. The five year lease through
March 2009 has an annual cost of approximately $125,000, including rent,
utilities and parking.
CDT leases 400 square feet of administrative space at 23 Bourne House, 475
Godstone Road in Surrey, England. The two and half year lease through September
2007 has an annual cost of approximately $33,000 including utilities and
communication services.
CDT has signed a four year lease (through July 2008) for 2,750 square feet of
warehouse space in Milford, Connecticut. Annual rent including utilities will
be approximately $21,000.
Effective October 28, 1994, Fuel Tech granted two licenses to the Company for
all patents and rights associated with its platinum fuel catalyst technology.
Effective November 24, 1997, the licenses were canceled and Fuel Tech assigned
to the Company all such patents and rights on terms substantially similar to the
licenses. In exchange for the assignment, the Company pays Fuel Tech a royalty
of 2.5% of its annual gross revenue from sales of the platinum fuel catalysts
commencing in 1998. The royalty obligation expires in 2008. The Company may
terminate the royalty obligation to Fuel Tech by payment of $3.3 million in
2006, and declining annually to $2.2 million in 2007 and $1.1 million in 2008.
The Company as assignee and owner is responsible for maintaining the technology
at its own expense. Royalty expense was $4,031 and $2,307 for the three months
ended September 30, 2006 and 2005, respectively, and $11,419 and $6,970 for the
nine month period ended September 30, 2006 and 2005, respectively. The royalty
expense payable to Fuel Tech at September 30, 2006 and 2005 is $11,419 and
$6,970, respectively.
NOTE 5: CONCENTRATION
For the quarters ended September 30, 2006 and 2005 and year to date 2006 and
2005, Clean Diesel's largest customers as a percentage of sales were as follows:
Third Quarter Year To Date
REVENUE: 2006 2005 2006 2005
-------- ------- ------- -------
Customer A 10% 19% 13% 13%
Customer B 12% 33% * 11%
Customer C 17% * 20% *
Customer D 13% * * *
* Represents less than 10% revenue for that customer in the applicable period.
There were no other customers that represented 10% or more of revenue for the
shown periods.
In addition to the revenue concentration, at September 30, 2006 Clean Diesel has
2 customers that represent 29% of its gross accounts receivable balance. One of
the customers is the same as listed in the revenue concentration chart above.
NOTE 6: ISSUANCE OF STOCK TO DIRECTOR FOR DIRECTOR'S FEES
On June 15, 2006 Clean Diesel issued 62,194 shares of common stock for payment
of $94,250 of accrued 2005 non-executive directors' fees due to three
non-executive directors. Under an agreement with directors the number of shares
issuable were determined quarterly as earned, based on the average of the high
and low price of the stock each quarter.
-11-
NOTE 7: NEW ACCOUNTING PRONOUNCEMENT
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No 109" (FIN 48), which prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosures and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. We do not expect the adoption of FIN 48 to have a material impact on our
financial reporting and we are currently evaluating the impact, if any, the
adoption of FIN 48 will have on our disclosure requirements.
CLEAN DIESEL TECHNOLOGIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Statements in this Form 10-Q that are not historical facts, so-called
"forward-looking statements," are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Investors are cautioned
that all forward-looking statements involve risks and uncertainties, including
those detailed in the Company's filings with the Securities and Exchange
Commission. See "Risk Factors of the Business" in Item 1, "Business," and also
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in the Company's Annual Report on Form 10-K for the year ended
December 31, 2005.
RECENT DEVELOPMENTS
Clean Diesel's markets include alternative energy and emission reduction. With
rising oil prices and diminishing supplies as well as pending global emission
reduction requirements, the demand for Clean Diesel's technologies continues to
increase. Recently, Clean Diesel has gained substantial interest and acceptance
with original equipment manufacturers and Tier one suppliers. Many of the
leading manufacturers or suppliers are now testing or negotiating with Clean
Diesel for access to its technologies. Clean Diesel has also added several
international distributors for its Platinum Plus FBC and made arrangements for a
UK based toll blending operation to be utilized for production of the Platinum
Plus FBC into the UK and continental Europe.
RESULTS OF OPERATIONS
2006 VERSUS 2005
Revenues and cost of revenue in the third quarter of 2006 were $339,000 and
$206,000, respectively, versus $166,000 and $102,000, respectively for the 2005
third quarter. For the nine months to date, 2006 revenue and cost of revenue
were $887,000 and $478,000, respectively versus $626,000 and $373,000,
respectively for the same nine month period in 2005. Revenues consist of the
following:
Third Quarter Year To Date
(in thousands) 2006 2005 2006 2005
-------- ------- ------- -------
REVENUE:
Additive $ 161 $ 97 $ 457 $ 283
Hardware 74 56 191 314
License, royalty and other 104 13 239 29
-------- ------- ------- -------
Total revenue $ 339 $ 166 $ 887 $ 626
In the foregoing table "Additive" includes the Platinum Plus FBC products and
concentrate; "Hardware" includes the EPA verified Purifier System, EPA verified
wire mesh filter, ARIS injectors and dosing systems.
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Additive revenue has increased as a result of the addition of new customers and
expanding sales in several niche markets including mining and off road vehicles.
The decrease in hardware sales on a 9 month year-to-date basis is primarily the
result of the timing of ARIS injector sales and the 2005 State of Pennsylvania
grant project.
License, royalty and other revenue increased as a result of the royalty income
recognized for the ARIS injector, and a consulting and market analysis project
performed by Clean Diesel for a new International customer.
Clean Diesel's strategy is to license the ARIS 2000 NOx reduction system to
other companies for an up-front fee for the technology and information transfer
and a separate on-going royalty per unit payment. CDT currently has an
exclusive license agreement for both stationary and mobile ARIS applications
with DENOX, Inc. (transferred from Mitsui Ltd) for Japan. CDT has a
non-exclusive license for both stationary and mobile ARIS applications in the
United States with Combustion Components Associates of Monroe, Connecticut. CDT
previously had an ARIS stationary license agreement for North America with the
RJM Corporation of Norwalk, Connecticut, but as of August 2004 RJM was out of
business and the ARIS license reverted back to CDT. CDT believes that the ARIS
2000 system can most effectively be commercialized through licensing several
companies with a related business in these markets. Clean Diesel Technologies
is actively seeking additional ARIS licensees for both mobile and stationary
applications in the US, Europe and Asia.
General and administrative expenses decreased in the third quarter 2006 to
$1,157,000 from $1,260,000 in 2005 and year to date 2006 increased to $3,872,000
from $3,635,000 in 2005 as summarized in the following table:
Third Quarter Year To Date
(in thousands) 2006 2005 2006 2005
-------- ------- ------- -------
Compensation and benefits $ 748 $ 809 $ 2,644 $ 2,363
Occupancy 98 128 308 369
Professional 179 241 611 639
Other 132 82 309 264
-------- ------- ------- -------
Total general and administrative expenses $ 1,157 $ 1,260 $ 3,872 $ 3,635
Included in the 2006 year to date compensation and benefit expense is $357,475
of severance charges related to the departure of James Valentine, President and
Chief Operating Officer. Clean Diesel announced in January 2006 that Mr.
Valentine had been "released from employment and resigned as director of the
company." The balance sheet at September 30, 2006 includes accrued severance
charges of $105,000 representing salary and benefit costs for the remainder of
the one year employment contract between Clean Diesel and Mr. Valentine which is
to be paid on a monthly basis through January 2007.
Compensation and benefit expense decreased slightly in the third quarter 2006 as
the savings from the departure of the President and Chief Operating Officer was
mostly offset by the salary and benefit expense of the new Chief Technology
Officer and the recognition of $49,000 in non-cash compensation expense relating
to stock options granted prior to January 1, 2006 as required under Financial
Accounting Standards 123R. Other expense increased as a result of Clean
Diesel's sales and marketing activities including commissions.
For the first nine months year to date compensation and benefit expense
increased as a result of recognition of severance expense, the addition of a
chief technology officer in July 2005 and the recognition of $155,000 in
non-cash compensation expense relating to stock options granted prior to January
1, 2006 as required under Financial Accounting Standards 123R. Other expense
increased as a result of Clean Diesel's sales and marketing activities including
commissions.
Research and development expense decreased in the third quarter 2006 to $52,000
from $222,000 in 2005. For the nine months year to date, research and
development expenses increased to $447,000 in 2006 from $399,000 in 2005. The
increase in research and development in 2006 is due to additional laboratory
testing on the CWMF technology acquired from Mitsui and a new bio-fuel additive
formulation.
Patent amortization and other costs decreased to $53,000 in the third quarter
2006 versus $61,000 in 2005. For the nine months to date in 2006 patent
amortization and other costs increased to $146,000 from $125,000 in 2005. The
2006
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increase is related to higher amortization related to prior period
capitalization and patent legal fees related to recently granted European
patents.
Interest income increased to $8,000 in the third quarter 2006 from $2,000 in
2005 and for the nine months year to date to $56,000 from $16,000 in 2005 due to
higher rates of return and the higher amount of invested funds in the third
quarter and first nine months of 2006 related to the November 2005 fundraising.
Inventory increased to $440,000 at September 30, 2006 from $285,000 at December
31, 2005 as Clean Diesel increased finished Platinum Plus FBC and wire mesh for
its European operations. Platinum and platinum concentrate has increased to
support this growing demand. Clean Diesel also increased the inventory of
onboard dosing systems to support Platinum Plus FBC sales in both the US and
Europe.
Capitalized patents excluding accumulated depreciation increased to $749,000 at
September 30, 2006 from $665,000 at December 31, 2005. As a technology company
Clean Diesel is continuously filing patents. Clean Diesel also had several key
European patents grant recently and added several pending patents related to the
wire mesh filter technology which was acquired from Mitsui in 2005.
LIQUIDITY AND SOURCES OF CAPITAL
Prior to 2000, the Company was primarily engaged in research and development and
has incurred losses since inception aggregating $38,679,000 (excluding the
effect of the non-cash preferred stock dividends on preferred shares prior to
conversion to common). Clean Diesel is likely to incur losses through at least
the next twelve months as it further pursues its commercialization efforts.
Although the Company started selling limited quantities of Platinum Plus
additive and the verified Purifier system and generating some ARIS licensing
fees and royalties, operating revenue to date has been insufficient to cover
operating expenses and the Company continues to be dependent upon proceeds from
fundraising to finance its working capital requirements.
For the nine months ended September 30, 2006 and 2005, the Company used cash of
$3,650,000 and $3,507,000, respectively, in operating activities.
At September 30, 2006 and December 31, 2005, the Company had cash and cash
equivalents of $1,252,000 and $4,513,000, respectively. The decrease in cash
and cash equivalents in 2006 was the result of limited revenues and on-going
operating costs. The Company anticipates incurring additional losses into 2007
as it further pursues its commercialization efforts.
Pursuant to a Regulation S exemption with respect to an offshore placement,
Clean Diesel Technologies sold, effective November 11, 2005, 8.174 million
shares of its common stock. The price of the common stock was 40 pence (GBP) per
share (approximately $0.704 per share). The proceeds of the common stock
issuance, was $5.5 million (net of $232,000 in expenses).
In addition, Clean Diesel Technologies received subscriptions for an additional
$487,500 (net of $12,500 in expense) related to the November 11th fundraising
above for 0.7 million shares of common stock. The $487,500 had been received as
of March 3, 2006.
Clean Diesel has been unable to generate positive cash flows from its operations
in the past. The Company does not have any credit facilities available with
financial institutions or other third parties. If the Company is unable to
generate cash flow from operations in the future, Clean Diesel will be dependent
upon external sources of best-efforts financing, of which there are presently no
firm commitments or arrangements although management is actively seeking such
financing . Based on the current operating plan, management believes that the
cash balance as of September 30, 2006 of $1,252,000 will be sufficient to meet
the cash needs into the first quarter of 2007. In the future, unless operating
revenues are sufficient to meet operating expenses, the Company will need to
access capital markets to fund operations by incurring indebtedness or issuing
equity securities. The Company can provide no assurance that it will be
successful in any future financing effort to obtain the necessary working
capital to support operations or if such financing is available, it will be on
acceptable terms. If management is unable to obtain the necessary financing
from external sources, the Company will need to manage any cash shortfalls by
taking measures which may include deferring or reducing the scope of
commercialization efforts, reducing costs and overhead expenses, or otherwise
curtailing operations, or obtaining funds by a disposition of assets or through
arrangements with others that may require Clean Diesel to relinquish rights to
certain of its technologies, or to license the rights to such technologies on
terms that are less favorable to Clean Diesel than might otherwise be available.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the opinion of management, with the exception of exposure to fluctuations in
the cost of platinum and the British Sterling exchange rate, the Company is not
subject to any significant market risk exposure.
The Company generally receives most income in United States dollars. Clean
Diesel Technologies maintains a UK bank account and typically makes several
payments monthly in various foreign currencies for patent expenses, product
tests and registration, local marketing and promotion, consultants and
employees. In addition, Clean Diesel's UK branch office receives payments in
British Sterling.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures and internal controls
designed to ensure that information required to be disclosed in the Company's
filings under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. The Company's management, with the
participation of its principal executive and financial officers, has evaluated
the effectiveness of the Company's disclosure controls and procedures as of the
end of the period covered by this Quarterly Report on form 10Q. The Company's
principal executive and financial officers have concluded, based on such
evaluation, that such disclosure controls and procedures were effective for the
purpose for which they were designed as of the end of such period.
There was no change in the Company's internal control over financial reporting
that was identified in connection with such evaluation that occurred during the
period covered by this Quarterly Report on form 10Q that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 1A Risk Factors
None
Item 2. Unregistered Sales of Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
Exhibits 31.1 and 31.2 are filed herewith
Exhibit 32 is furnished herewith
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CLEAN DIESEL TECHNOLOGIES, INC.
SIGNATURES & CERTIFICATIONS
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 2006 By: /s/Bernhard Steiner
------------------------------------
Bernhard Steiner
Director, President and
Chief Executive Officer
Date: November 13, 2006 By: /s/David W. Whitwell
------------------------------------
David W. Whitwell
Chief Financial Officer,
Senior Vice President and Treasurer
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