UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2007
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number: 0-27432
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CLEAN DIESEL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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Delaware 06-1393453
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 Atlantic Street - Suite 702,Stamford, CT 06901-3522
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(Address of principal executive offices) (Zip Code)
(203) 327-7050
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(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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
As of May 14, 2007, there were 32,200,008 outstanding shares of common stock,
par value $0.05 per share.
CLEAN DIESEL TECHNOLOGIES, INC.
Quarterly Report on Form 10-Q
for the Quarter Ended March 31, 2007
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements 3
Condensed Consolidated Balance Sheets as of March 31, 2007 (Unaudited)
and December 31, 2006 3
Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 2007 and 2006 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2007 and 2006 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CLEAN DIESEL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
MARCH 31, DECEMBER 31,
2007 2006
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(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,298 $ 5,314
Accounts receivable, net of allowance of $63
and $34, respectively 151 100
Inventories, net 474 365
Other current assets 72 96
Subscription receivable, net - 2,412
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TOTAL CURRENT ASSETS 6,995 8,287
Patents, net 625 603
Fixed assets, net of accumulated depreciation of $369
and $350, respectively 74 91
Other assets 37 37
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TOTAL ASSETS $ 7,731 $ 9,018
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 23 $ 330
Accrued expenses 247 740
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TOTAL CURRENT LIABILITIES 270 1,070
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $0.05 per share;
authorized 100,000; no shares issued and outstanding - -
Common Stock, par value $0.05 per share:
authorized 45,000,000 shares;
issued and outstanding 32,195,008 and 29,822,468
shares, respectively 1,610 1,491
subscribed and to be issued 1,083,053 and 3,339,994
shares, respectively 54 167
Additional paid-in capital, net of subscriptions receivable of
$1,389 and $1,901, respectively 52,585 51,263
Accumulated other comprehensive income 4 4
Accumulated deficit (46,792) (44,977)
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TOTAL STOCKHOLDERS' EQUITY 7,461 7,948
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,731 $ 9,018
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The accompanying notes are an integral part of the financial statements.
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CLEAN DIESEL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except per share amounts)
THREE MONTHS ENDED
MARCH 31,
2007 2006
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Revenue:
Additive revenue $ 122 $ 150
Hardware revenue 83 45
License and royalty revenue 11 1
Consulting and other -- 73
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Total revenue 216 269
Costs and expenses:
Cost of revenue 116 116
Selling, general and administrative 1,803 1,529
Research and development 42 218
Patent amortization and other expense 97 43
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Operating costs and expenses (2,058) (1,906)
Loss from operations (1,842) (1,637)
Other income (expense):
Interest income 27 27
Other income (expense) -- 26
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Net loss $ (1,815) $ (1,584)
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Basic and diluted loss per common share $ (0.06) $ (0.06)
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Basic and diluted weighted-average number of
common shares outstanding 30,573 25,677
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The accompanying notes are an integral part of the financial statements.
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CLEAN DIESEL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
THREE MONTHS ENDED
MARCH 31,
2007 2006
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OPERATING ACTIVITIES
Net loss $ (1,815) $ (1,584)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 35 42
Provision for doubtful accounts, net 30 17
Compensation expense for stock options 551 53
Changes in operating assets and liabilities:
Accounts receivable (81) (49)
Inventories (109) 22
Other current assets and other assets 24 (18)
Accounts payable and accrued expenses (685) 431
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Net cash used for operating activities (2,050) (1,086)
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INVESTING ACTIVITIES
Patent costs (38) (34)
Purchase of fixed assets (2) --
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Net cash used for investing activities (40) (34)
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FINANCING ACTIVITIES
Proceeds from issuance of common stock, net 3,047 488
Proceeds from exercise of stock options 27 14
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Net cash provided by financing activities 3,074 502
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 984 (618)
Cash and cash equivalents at beginning of the period 5,314 4,513
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CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 6,298 $ 3,895
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SUPPLEMENTAL NON-CASH ACTIVITIES:
Payment of accrued directors' fees in common stock $ 115 --
The accompanying notes are an integral part of the financial statements.
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CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION:
In this Quarterly Report on Form 10-Q, the terms "CDT," "Clean Diesel,"
"Company," "we," "us," or "our" mean Clean Diesel Technologies, Inc. and its
wholly-owned subsidiary, Clean Diesel International, LLC.
The accompanying unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC) and in accordance with accounting principles generally accepted in the
United States of America (GAAP) for interim financial information. Certain
information and note disclosures normally included in financial statements
prepared in accordance with GAAP have been omitted or condensed. These interim
consolidated financial statements should be read in conjunction with Clean
Diesel's consolidated financial statements and notes thereto included in its
Annual Report on Form 10-K for the year ended December 31, 2006.
The unaudited consolidated financial statements reflect all adjustments which,
in the opinion of management, are necessary for a fair statement of the results
of operations, financial position and cash flows for the interim periods
presented. All such adjustments are of a normal recurring nature. The results
for interim periods are not necessarily indicative of results which may be
expected for any other interim period or for the full year.
RECLASSIFICATIONS:
Some amounts in prior years' financial statements have been reclassified to
conform to the current year's presentation.
REVENUE RECOGNITION:
The Company generates revenue from the sale of fuel-borne catalysts (classified
as additives), including the Platinum Plus(R) fuel-borne catalyst products and
concentrate; hardware including our U.S. Environmental Protection Agency
verified Purifier System, our advanced reagent injection system (ARIS(R))
injectors and dosing systems; license and royalty fees from the ARIS System and
other technologies; and consulting fees and other.
Revenue is recognized when earned. For technology licensing fees paid by
licensees that are fixed and determinable, accepted by the customer and
nonrefundable, revenue is recognized upon execution of the license agreement
unless it is subject to completion of any performance criteria specified within
the agreement, in which case it is deferred until such performance criteria are
met. Royalties are frequently required pursuant to license agreements or may be
the subject of separately executed royalty agreements. Revenue from royalties is
recognized over the royalty period based upon periodic reports submitted by the
royalty obligor or based on minimum royalty requirements. Revenue from product
sales is recognized when title has passed and our products are shipped to our
customer, unless the purchase order or contract specifically requires us to
provide installation for hardware purchases. For hardware projects in which we
are responsible for installation (either directly or indirectly by third-party
contractors), revenue is recognized when the hardware is installed and/or
accepted, if the project requires inspection and/or acceptance. Other revenue
primarily consists of engineering and development consulting services. Revenue
from technical consulting services is generally recognized and billed as the
services are performed.
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 recognized the revenue ratably over the
term of the contract. During the three months ended March 31, 2006, the Company
recognized $58,000 of revenue relating to this contract.
PATENT EXPENSE:
Patents, which include all direct incremental costs associated with initial
patent filings and costs to acquire rights to patents under licenses, are stated
at cost and amortized using the straight-line method over the remaining useful
lives,
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ranging from one to seventeen years. During the three months ended March 31,
2007, we capitalized $38,000 of patent costs. Indirect and other patent-related
costs are expensed as incurred. Patent amortization expense was $16,600 and
$17,000 for the three months ended March 31, 2007 and 2006, respectively. At
March 31, 2007 and December 31, 2006, the Company's patents, net of accumulated
amortization, were $625,000 and $603,000, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE:
Selling, general and administrative expense is summarized as the following:
(in thousands)
THREE MONTHS ENDED
MARCH 31,
2007 2006
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Non-cash stock-based compensation $ 551 $ 53
Severance -- 357
Compensation and benefits 601 592
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Total compensation and benefits $ 1,152 $ 1,002
Professional 223 201
Travel 138 124
Occupancy 112 101
Sales and marketing expenses 88 47
Depreciation and all other 90 54
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Total selling, general and administrative expense $ 1,803 $ 1,529
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Compensation expense for the three months ended March 31, 2007 and 2006 includes
stock-based compensation charges of $551,000 and $53,000, respectively (see Note
4). During the three months ended March 31, 2006, the Company recorded severance
compensation expense of $357,475 for the departure of its former president and
chief operating officer, which amount was paid in twelve monthly installments.
NEWLY ADOPTED ACCOUNTING STANDARDS:
Effective January 1, 2007, we adopted the provision of the Financial Accounting
Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48
clarifies the accounting for uncertainties in income taxes recognized in a
company's financial statements in accordance with Statement of Financial
Accounting Standard ("SFAS") No. 109 and prescribes a recognition threshold and
measurement attributable for financial disclosure of tax positions taken or
expected to be taken on a tax return. In addition, FIN 48 provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The adoption of FIN 48 did not impact our
financial position, results of operations or cash flows for the three months
ended March 31, 2007.
We file our tax returns as prescribed by the tax laws of the jurisdictions in
which we operate. Our tax years ranging from 2003 through 2006 remain open to
examination by various taxing jurisdictions as the statute of limitations has
not expired. The Company is in the process of determining whether there are any
Section 382 limitations for net operating loss carryforwards. If it is
determined that such limitations apply, the Company's gross deferred asset
related to the net operating loss carryforwards and the valuation allowance
would be reduced by such amount.
NEW ACCOUNTING STANDARDS:
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements."
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands disclosures about
fair value measurements. Specifically, this Statement sets forth a definition
of fair value, and establishes a hierarchy prioritizing the inputs to valuation
techniques, giving the highest priority to quoted prices in active markets for
identical assets and liabilities and the lowest priority to unobservable inputs.
The provisions of SFAS No. 157 are generally required to be applied on a
prospective basis, except to certain financial instruments accounted for under
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, for
which the provisions of SFAS No. 157 should be applied retrospectively. The
Company will adopt SFAS No. 157 in the first quarter of 2008 and is still
evaluating the effect, if any, on its financial position or results of
operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115." SFAS No. 159 permits an entity to elect fair value as the
initial and subsequent measurement attribute for many financial assets and
liabilities. Entities electing the fair value option would be required to
recognize changes in fair value in earnings. Entities electing the fair value
option are required to distinguish, on the face of the statement of financial
position, the fair value of assets and liabilities for which the fair value
option has been elected and similar assets and liabilities measured using
another measurement attribute. SFAS No. 159 is effective for the Company's
fiscal year 2008. The adjustment to reflect the difference between the fair
value and the carrying amount would be accounted for as a cumulative-effect
adjustment to retained earnings as of the date of initial adoption. We are
currently evaluating the impact, if any, of SFAS No. 159 on the Company's
consolidated financial statements.
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NOTE 2. INVENTORIES
Inventories are stated at the lower of cost or market with cost determined using
the average cost method. Inventories consist of the following:
(in thousands)
MARCH 31, DECEMBER 31,
2007 2006
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Finished Platinum Plus $ 107 $ 144
Platinum concentrate/metal 246 103
Hardware 122 119
Other 26 26
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$ 501 $ 392
Less: inventory reserves (27) (27)
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Inventories, net $ 474 $ 365
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NOTE 3. STOCKHOLDERS' EQUITY
During the first three months of 2007, the Company issued 2,256,941 shares of
its common stock in consideration of approximately $3,047,000 cash
received from investors to settle stock subscriptions entered into pursuant to
CDT's December 2006 private placement. In the December 2006 placement, the
Company secured commitments for the purchase of 7,000,000 shares of its common
stock, par value $0.05, and warrants for the purchase of an additional 7,000,000
shares of common stock for aggregate gross cash proceeds of $9.5 million (net
proceeds of approximately $9.0 million). The securities were sold in investment
units consisting of one share of common stock, one Class A Warrant and one Class
B Warrant, each warrant entitling the holder to purchase one additional share of
common stock for every two shares of common stock acquired in the offering at a
purchase price of $1.35 per unit. Of the aggregate cash proceeds, $5.0 million
($4.7 million, net) had been received by December 31, 2006 and comprised
3,660,006 shares of our common stock. Of the remaining balance of $4.5 million,
$2.5 million was paid by subscribers by March 23, 2007 and, net of the related
placement fee of approximately $0.1 million, or $2.4 million, was classified in
current assets as subscriptions receivable on the December 31, 2006 Consolidated
Balance Sheet and represented 1,867,773 shares of our common stock. Net
subscriptions receivable of $1.9 million (net of the related placement fees of
approximately $0.1 million) that had not been collected as of March 23, 2007
were classified as a reduction of stockholders' equity as of December 31, 2006
and represented 1,472,221 shares of our common stock.
At March 31, 2007, the remaining net subscriptions receivable from the 2006
private placement of approximately $1,389,000 have been classified as a
reduction of stockholders' equity and represent 1,083,053 shares of our common
stock.
On January 12, 2007, the Company issued 85,714 shares of its common stock to
three non-executive members of the CDT board of directors as payment (or partial
payment in the case of one director) of $115,000 in lieu of cash for directors'
fees earned in 2006. The number of shares of our common stock issued to the
directors was determined based upon the average of our high and low prices
during each quarter of 2006 on the OTCBB and AIM markets.
In the first three months of 2007, CDT issued 29,885 shares of its common stock
upon exercise of stock options for aggregate proceeds to the Company of
approximately $27,000.
During the first three months of 2006, Clean Diesel received $487,500 cash (net
of $12,500 in expenses) for subscriptions for 705,000 shares of its common stock
pursuant to an offshore private placement completed in November 2005.
NOTE 4. STOCK-BASED COMPENSATION
Effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standard No. 123 (Revised 2004), "Share Based Payment," using the modified
prospective transition method. SFAS No. 123(R) requires the
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measurement and recognition of compensation cost for all share-based payment
awards made to employees and directors, including grants of employee stock
options, based on estimated fair values on the date of grant.
Share-based compensation cost recognized under SFAS 123(R) was approximately
$551,000 and $53,000 for the three months ended March 31, 2007 and 2006,
respectively. Compensation costs for stock options which vest over time are
recognized over the vesting period. As of March 31, 2007, there was
approximately $570,500 of unrecognized compensation cost related to stock
options granted under the Plan. The cost is expected to be recognized over a
weighted-average period of 1.8 years.
The Company maintains a stock award plan approved by its stockholders, the 1994
Incentive Plan (the "Plan"). Under the Plan, awards may be granted to
participants in the form of incentive stock options, non-qualified stock
options, stock appreciation rights, restricted stock, performance awards,
bonuses or other forms of share-based awards or cash, or combinations of these
as determined by the board of directors. Awards are granted at fair market value
on the date of grant and typically expire ten years after date of grant.
Participants in the Plan may include the Company's directors, officers,
employees, consultants and advisors (except consultants or advisors in
capital-raising transactions) as the board of directors may determine. The
maximum number of awards allowed under the Plan is 17.5% of the Company's
outstanding common stock less the then outstanding awards, subject to sufficient
authorized shares.
The following table summarizes information concerning options outstanding
including the related transactions under the options plans for the three months
ended March 31, 2007:
Weighted-
Average
Weighted- Remaining
Average Contractual Aggregate
Number of Exercise Term in Intrinsic
Shares Price Years Value
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Options Outstanding as of
December 31, 2006 3,240,437 $ 2.060
Granted 625,000 $ 1.820
Exercised (29,885) $ 0.900
Forfeited (49,667) $ 1.181
Expired (96,667) $ 4.625
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Options outstanding as of
March 31, 2007 3,689,218 $ 1.935 6.61 $1,430,529
Options exercisable as of
March 31, 2007 3,154,218 $ 1.992 6.15 $1,141,487
The aggregate intrinsic value (market value of stock less option exercise price)
in the preceding table represents the total pretax intrinsic value, based on the
Company's closing stock price on March 30, 2007, which would have been received
by the option holders had all option holders exercised their options as of that
date.
Proceeds received from the exercise of stock options were approximately $27,000
for the three months ended March 31, 2007, and were included in financing
activities on the Company's Consolidated Statements of Cash Flows. The total
intrinsic value of stock options exercised for the three months ended March 31,
2007 and 2006 was $30,553 and $3,000, respectively.
On January 4, 2007, the board of directors granted 625,000 option shares to
employees, directors and consultants at an exercise price of $1.82 per share.
The directors' options are exercisable immediately. The other options vest as to
one-third, immediately upon grant and as to one-third, upon each of the first
and second anniversaries of grant. The weighted-average fair value at the date
of grant for options granted during the three months ended
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March 31, 2007 was $1.493 per share and was estimated using the Black-Scholes
option pricing model with the following weighted-average assumptions:
Expected term in years 8.64
Risk-free interest rate 4.67%
Expected volatility 104.7%
Dividend yield 0%
Forfeiture rate 5.0%
The Company estimates the fair value of stock options using a Black-Scholes
option pricing model. Key input assumptions used to estimate the fair value of
stock options include the expected term, expected volatility of the Company's
stock, the risk free interest rate, option forfeiture rates, and dividends, if
any. The expected term of the options is based upon the historical term until
exercise or expiration of all granted options. The expected volatility is
derived from the historical volatility of the Company's stock on the U.S. Over
the Counter market and the U.K. AIM of the London Stock Exchange for a period
that matches the expected term of the option. The risk-free interest rate is the
constant maturity rate published by the U.S. Federal Reserve Board that
corresponds to the expected term of the option. SFAS No. 123R requires
forfeitures to be estimated at the time of grant in order to estimate the amount
of share-based awards that will ultimately vest. The estimate is based on the
Company's historical rates of forfeitures. SFAS No. 123R also requires estimated
forfeitures to be revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. The dividend yield is assumed as 0%
because the Company has not paid dividends and does not expect to pay dividends
in the future.
NOTE 5. COMMITMENTS
The Company is obligated under a five-year sublease agreement through March 2009
for its principal office (3,925 square feet) at an annual cost of approximately
$125,000, including rent, utilities and parking. The Company is obligated under
a four-year lease through July 2008 for 2,750 square feet of warehouse space at
an annual cost of approximately $21,000, including utilities. In addition, the
Company is obligated under a lease through September 2007 for 400 square feet of
administrative space in the U.K. at an annual cost of approximately $33,000,
including utilities and communication services.
Effective October 28, 1994, Fuel Tech, Inc., successor to Fuel-Tech N.V. ("Fuel
Tech"), the company that spun CDT off in a rights offering in December 1995,
granted two licenses to the Company for all patents and rights associated with
its platinum fuel-based catalyst technology. Effective November 24, 1997, the
licenses were canceled and Fuel Tech assigned to CDT all such patents and rights
on terms substantially similar to the licenses. In exchange for the assignment
commencing in 1998, the Company is obligated to pay Fuel Tech a royalty of 2.5%
of its annual gross revenue attributable to sales of the platinum fuel-borne
catalysts. The royalty obligation expires in 2008. CDT may terminate the royalty
obligation to Fuel Tech by payment of $2.2 million in 2007 or $1.1 million in
2008. CDT, as assignee and owner, maintains the technology at its expense.
Royalty expense incurred under this obligation for the three months ended March
31, 2007 and 2006 was $2,776 and $3,756, respectively. Royalties payable to Fuel
Tech at March 31, 2007 and December 31, 2006 were $2,776 and $14,500,
respectively.
NOTE 6. RELATED PARTY TRANSACTIONS
The Company has a Management and Services Agreement with Fuel Tech that requires
the Company to reimburse Fuel Tech for management, services and administrative
expenses incurred on its behalf at a rate equal to an additional 3 to 10% of the
costs paid on the Company's behalf, dependent upon the nature of the costs
incurred. Currently, and for the last three years, the Company 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's Consolidated Statements
of Operation include charges from Fuel Tech of certain management and
administrative costs of approximately $18,000 in each of the three-month periods
ended March 31, 2007 and 2006. The Company believes the charges under this
Management and Services Agreement are reasonable and fair. The Management and
Services Agreement is for an indefinite term but may be cancelled by either
party by notifying the other in writing of the cancellation on or before May 15
in any year.
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NOTE 7. SIGNIFICANT CUSTOMERS
For the three months ended March 31, 2007 and 2006, revenue derived from certain
customers comprised 10% or more of our consolidated revenue ("significant
customers") as set forth in the table below:
THREE MONTHS ENDED
MARCH 31,
2007 2006
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Customer A 18.5% *
Customer B * 21.6%
Customer C 13.0% 12.6%
Customer D * 11.9%
* Represents less than 10% revenue for that customer in the applicable
period. There were no other customers that represented 10% or more of
revenue for the periods indicated.
In addition, at March 31, 2007 Clean Diesel had three customers, including
Customers A and C in the table above, that represented approximately 49% of its
gross accounts receivable balance.
NOTE 8. COMPREHENSIVE LOSS
Components of comprehensive loss follow:
(in thousands)
THREE MONTHS ENDED
MARCH 31,
2007 2006
------------ ------------
Net loss $ 1,815 $ 1,584
Other comprehensive income:
Foreign currency translation adjustment - -
------------ ------------
Comprehensive loss $ 1,815 $ 1,584
============ ============
NOTE 9. GEOGRAPHIC INFORMATION
CDT sells its products and licenses its technologies throughout the world. A
geographic distribution of revenue consists of the following:
(in thousands)
THREE MONTHS ENDED
MARCH 31,
2007 2006
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REVENUE:
US $ 159 $ 178
UK/Europe 36 18
Asia 21 73
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Total $ 216 $ 269
============= =============
The Company has patent coverage in North America, Europe, Asia and South
America. As of March 31, 2007 and December 31, 2006, approximately 24% and 76%
of our patents, net of accumulated amortization, are attributable to the U.S.
patents and corresponding foreign patents, respectively.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Statements in this Quarterly Report on 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 Item 1A, "Risk Factors," and 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, 2006.
RESULTS OF OPERATIONS
Three Months ended March 31, 2007 Compared to Three Months ended March 31, 2006
Total revenue in the three months ended March 31, 2007 was $216,000 compared to
$269,000 in the three months ended March 31, 2006, a decrease of $53,000, or
19.7%, reflecting decreases in additive, consulting and other revenue, partially
offset by increases in hardware, licensing fees and royalties. Operating revenue
in the three months ended March 31, 2007 consisted of approximately 56.5% in
additive sales, 38.4% in hardware sales, 5.1% in technology licensing fees and
royalties and zero in consulting and other revenue. Operating revenue in the
three months ended March 31, 2006 consisted of approximately 55.8% in additive
sales, 16.7% in hardware sales, 0.4% in technology licensing fees and royalties
and 27.1% in consulting and other revenue. The mix of our revenue sources during
any reporting period may have a material impact on our operating results. In
particular, our execution of technology licensing agreements, and the timing of
the revenue recognized from these agreements, has not been predictable.
Additive revenue in the three months ended March 31, 2007 was $122,000 compared
to $150,000 in the three months ended March 31, 2006, a decrease of $28,000, or
18.7%, due to a shift in order placement resulting from a transition of supply
chain to distribution partners. Hardware revenue was $83,000 in the three months
ended March 31, 2007 compared to $45,000 in the same 2006 period, an increase of
$38,000, or 84.4%, due to increased sales of our ARIS advanced reagent injector
and dosing systems for selective catalytic reduction. License fees and royalty
revenue was $11,000 in the three months ended March 31, 2007 compared to $1,000
in the three months ended March 31, 2006, an increase of $10,000 primarily due
to royalty payments related to our ARIS technology. Consulting and other revenue
was zero in the three months ended March 31, 2007 compared to $73,000 in the
three months ended March 31, 2006 due to consulting projects we performed in
2006.
During the three months ended March 31, 2007, we made substantial progress in
our ongoing initiative to achieve technology license agreements with significant
manufacturers and component suppliers. We will announce our achievements as
agreements are signed and our licensees have consented to the contents of the
announcements.
Cost of revenue was $116,000 in each of the three-month periods ended March 31,
2007 and 2006. Gross profit as a percentage of revenue was 46.3% and 56.9% for
three-month periods ended March 31, 2007 and 2006, respectively, with the
variation attributable to the mix of revenue in the respective periods.
Selling, general and administrative expenses were $1,803,000 in the three month
ended March 31, 2007 compared to $1,529,000 in the comparable 2006 period, an
increase of $274,000, or 17.9%. Selling, general and administrative expenses
are summarized as follows:
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(in thousands)
THREE MONTHS ENDED
MARCH 31,
2007 2006
------------- -------------
Non-cash stock-based compensation $ 551 $ 53
Severance - 357
Compensation and benefits 601 592
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Total compensation and benefits $ 1,152 $ 1,002
Professional 223 201
Travel 138 124
Occupancy 112 101
Sales and marketing expenses 88 47
Depreciation and all other 90 54
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Total selling, general and administrative expense $ 1,803 $ 1,529
============= =============
Compensation and benefit expense in the three months ended March 31, 2007
included $551,000 of non-cash charges for the fair value of stock options
compared to $53,000 in non-cash stock option compensation expense in the three
months ended March 31, 2006 in accordance with SFAS No. 123R, which we adopted
in January 2006. The three months ended March 31, 2006 also included $357,475 of
severance charges for the former president and chief operating officer who had
been released from employment in January 2006.
Professional fees include public relations, investor relations and financial
advisory fees. Occupancy costs include office rents, insurance and related
costs.
Research and development expenses were $42,000 in the three months ended March
31, 2007 compared to $218,000 in the three months ended March 31, 2006, a
decrease of $176,000, or 80.7%, due to significant special costs incurred on a
project that was substantially competed during the 2006 period. The 2006
projects included additional laboratory testing on the CWMF technology acquired
from Mitsui and a new bio-fuel additive formulation.
Patent amortization and other patent costs increased to $97,000 in the three
months ended March 31, 2007 from $43,000 in the comparable 2006 period, due to
additional costs associated with the protection of the CDT patents.
Interest income was $27,000 in each of the three months ended March 31, 2007 and
2006.
LIQUIDITY AND SOURCES OF CAPITAL
At March 31, 2007 and December 31, 2006, we had cash and cash equivalents of
$6,298,000 and $5,314,000, respectively, an increase of $984,000. Our working
capital was $6,725,000 at March 31, 2007 compared to $7,217,000 at December 31,
2006, a decrease of $492,000 primarily due to a reduction of accounts payable
and accrued expenses.
In the three months ended March 31, 2007, operating activities used $2,050,000
of cash primarily to fund the 2007 net loss of $1,815,000, adjusted for non-cash
items. Included in the 2007 non-cash items was $551,000 stock option
compensation expense accounted for in accordance with SFAS No. 123R, which we
adopted in January 1, 2006. Our accounts payable and accrued expenses used
$685,000 of our operating cash flow. Our March 31, 2007 accrued expenses include
$180,000, the remaining portion of the placement fee due to the placement agent
for the 2006 private placement.
We used $40,000 for investing activities in the three months ended March 31,
2007, primarily for investments in our patents. We expect to continue to invest
in our patents.
Cash provided by financing activities was $3,074,000 in the three months ended
March 31, 2007 due to proceeds from collection of subscriptions receivable from
the 2006 private placement and proceeds from the exercise of stock options.
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During the three months ended March 31, 2007, we collected approximately
$3,047,000 of our subscriptions receivable from the December 2006 private
placement. In December 2006, we entered into definitive agreements with
investors for the purchase by these investors of 7.0 million shares of our
common stock and warrants for the right to acquire an additional 7.0 million
shares of our common stock, for the total gross sales price of $9.5 million
(proceeds, net of $410,000 in expenses, amount to approximately $9.0 million) of
which $2.4 million, net of expenses, was classified in current assets as
subscriptions receivable and $1.9 million, net of expenses, representing unpaid
subscriptions receivable that remained unpaid as of March 23, 2007 were included
as a reduction of stockholders' equity on the Consolidated Balance Sheet at
December 31, 2006. At March 31, 2007, $1,389,000, net of expenses, representing
unpaid subscriptions receivable that remained unpaid as of March 31, 2007 were
included as a reduction of stockholders' equity on the Consolidated Balance
Sheet at March 31, 2007.
In the December 2006 private placement, each investment unit was sold for $1.35
and was comprised of one share of our common stock, one Class A Warrant and one
Class B Warrant, each warrant entitling the holder to acquire one additional
share of common stock for every two shares purchased in the offering. In the
aggregate, the warrants comprise 3.5 million Class A Warrants and 3.5 million
Class B Warrants. The Class A Warrants are exercisable at a per share price of
$2.00 and expire on July 2, 2007. The Class B Warrants are exercisable at a per
share price of $2.50 and expire on December 29, 2007. We are using the proceeds
from this private placement for general working capital purposes, including the
protection of our intellectual property. Of the total shares sold, 6,690,689
were sold to non-U.S. investors, primarily in the U.K., and the Company claims
the exemption from registration provided by Regulation S under the 1933
Securities Act. Of the total shares sold, 309,312 were sold to investors in the
U.S., and the Company claims the exemption from registration provided by
Regulation D under the Act.
In connection with this private placement, we undertook to apply for the listing
of our outstanding shares on the American Stock Exchange or another recognized
U.S. stock exchange at such time as we should satisfy the applicable listing
requirements. We also undertook to file a registration statement under the
Securities Act of 1933 covering the shares of common stock and the shares of
common stock underlying the warrants following completion of the audit of our
financial statements for the year 2006. The costs to apply for listing on a
national stock exchange and to prepare a registration statement for filing with
the SEC could be significant.
Our management believes that our available funds at March 31, 2007 and the funds
to be collected from subscriptions receivable will be sufficient to sustain our
operations at current levels into 2008. These funds consist of available cash
and the funding derived from our revenue sources. At March 31, 2007, we expect a
cash infusion of approximately $1.4 million, net of expenses, upon settlement of
remaining stock subscriptions receivable that were committed in conjunction with
our December 2006 private placement. There is also the possibility that some or
all of the 7.0 million warrants issued in connection with the December 2006
private placement may be exercised which could generate additional cash.
We have incurred losses since inception aggregating $46,792,000 which amount
includes $4,752,000 of non-cash preferred stock dividends. We expect to incur
losses through the foreseeable future until our products and technological
solutions achieve greater awareness. Although we have generated revenue from
sales of our Platinum Plus fuel-borne catalyst, Purifier Systems, ARIS advanced
reagent injector and dosing systems for selective catalytic reduction, catalyzed
wire mesh filters and from ARIS license fees and royalties, revenue to date has
been insufficient to cover our operating expenses, and we continue to be
dependent upon sources other than operations to finance our working capital
requirements. 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.
In the event that our business does not generate sufficient cash and external
financing is not available or timely, we would be required to substantially
reduce our level of operations and capital expenditures in order to conserve
cash and possibly seek joint ventures or other transactions, including the sale
of assets. These reductions could have an adverse effect on our relationships
with our customers and suppliers. Our long-term continuation is dependent upon
the achievement of profitable operations and the ability to generate sufficient
cash from operations, equity financings and other funding sources to meet our
obligations.
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No dividends have been paid on our common stock and we do not anticipate paying
cash dividends in the foreseeable future.
We have no indebtedness, nor any standby credit arrangements.
CAPITAL EXPENDITURES
As of December 31, 2006, we had no commitments for capital expenditures and no
material commitments are anticipated in the near future.
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 U.K. exchange rate, we are not subject to any
significant market risk exposure. We monitor the price of platinum and exchange
rates and adjust our procurement strategies as needed.
Our transactions are primarily denominated in U.S. dollars. We typically make
certain payments in various foreign currencies for salary expense, patent
annuities and maintenance, product tests and registration, local marketing and
promotion, and consultants.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE 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 10-Q. The Company's
principal executive and principal 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.
CHANGES IN INTERNAL CONTROLS
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 10-Q 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 6. EXHIBITS
(a) Exhibits
Exhibit
Number Description
------- -----------
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) under the Exchange Act
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) under the Exchange Act
32 Certification Pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8-K
We filed a Current Report on Form 8-K on January 10, 2007 regarding the
private placement of shares of our common stock completed in December 2006.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLEAN DIESEL TECHNOLOGIES, INC.
-------------------------------
(Registrant)
Date: May 15, 2007 By: /s/ Bernhard Steiner
------------------------------
Bernhard Steiner
Director, President and
Chief Executive Officer
Date: May 15, 2007 By: /s/ Ann B. Ruple
------------------------------
Ann B. Ruple
Chief Financial Officer,
Vice President and Treasurer
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