form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_______________
FORM
10-Q
_______________
(Mark
One)
|
S
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
quarterly period ended March 31,
2008
or
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£
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from ______ to ______
Commission
file number: 001-33710
CLEAN
DIESEL TECHNOLOGIES, INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
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06-1393453
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|
(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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300 Atlantic Street -
Suite 702, Stamford, CT
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06901-3522
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(Address
of principal executive offices)
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(Zip
Code)
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(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 S No £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
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Large
Accelerated Filer £
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Accelerated
Filer S
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Non-Accelerated
Filer £
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(Do
not check if a smaller reporting company.)
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Smaller
reporting company £
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes £ No
S
As of May
9, 2008, there were 8,138,150 outstanding shares of common stock, par value
$0.01 per share.
CLEAN
DIESEL TECHNOLOGIES, INC.
Quarterly
Report on Form 10-Q
for the
Quarter Ended March 31, 2008
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Page
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PART
I.
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Item
1.
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3
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3
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4
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5
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6
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Item
2.
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15
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Item
3.
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19
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Item
4.
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19
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PART
II.
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Item
6.
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20
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21
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Condensed
Consolidated Balance Sheets
(in
thousands, except share data)
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March
31,
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December
31,
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2008
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2007
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(Unaudited)
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Assets
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Current
assets:
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Cash
and cash equivalents
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$ |
6,621 |
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$ |
1,517 |
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Accounts
receivable, net of allowance of $67 and $49, respectively
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3,250 |
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1,927 |
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Investments
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─
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7,100 |
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Inventories,
net
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812 |
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1,093 |
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Other
current assets
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161 |
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234 |
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Total
current assets
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10,844 |
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11,871 |
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Investments
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11,139 |
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11,725 |
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Patents,
net
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855 |
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817 |
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Fixed
assets, net of accumulated depreciation of $441 and $421,
respectively
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175 |
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175 |
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Other
assets
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75 |
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75 |
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Total
assets
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$ |
23,088 |
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$ |
24,663 |
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Liabilities
and Stockholders’ Equity
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Current
liabilities:
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Accounts
payable
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$ |
649 |
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$ |
757 |
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Accrued
expenses
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989 |
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850 |
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Customer
deposits
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89 |
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56 |
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Total
current liabilities
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1,727 |
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1,663 |
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Commitments
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Stockholders’
equity:
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Preferred
stock, par value $0.01 per share: authorized 100,000 shares; no shares
issued and outstanding
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─
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─
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Common
stock, par value $0.01 per share: authorized 12,000,000 shares; issued and
outstanding 8,137,650 and 8,124,056 shares, respectively
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81 |
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81 |
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Additional
paid-in capital
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72,996 |
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72,447 |
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Accumulated
other comprehensive loss
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(614 |
) |
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(16 |
) |
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Accumulated
deficit
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(51,102 |
) |
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(49,512 |
) |
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Total
stockholders’ equity
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21,361 |
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23,000 |
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Total
liabilities and stockholders’ equity
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$ |
23,088 |
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$ |
24,663 |
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The
accompanying notes are an integral part of the consolidated financial
statements.
CLEAN
DIESEL TECHNOLOGIES, INC.
Condensed
Consolidated Statements of Operations
(in
thousands, except per share amounts) (Unaudited)
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Three
Months Ended
March
31,
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2008
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2007
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Revenue:
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Product
sales
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$ |
2,527 |
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$ |
205 |
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Technology
licensing fees and royalties
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74 |
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11 |
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Consulting
and other
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─
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─
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Total
revenue
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2,601 |
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216 |
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Costs
and expenses:
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Cost
of revenue ─ product sales
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2,065 |
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116 |
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Cost
of revenue ─ licensing fees and royalties
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─
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─
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Cost
of revenue ─ consulting and other
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─
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─
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Selling,
general and administrative
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2,322 |
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1,803 |
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Research
and development
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65 |
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42 |
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Patent
amortization and other expense
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36 |
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97 |
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Operating
costs and expenses
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4,488 |
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2,058 |
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Loss
from operations
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(1,887 |
) |
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(1,842 |
) |
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Other
income (expense):
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Interest
income
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243 |
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27 |
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Other
income
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54 |
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─
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Net
loss
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$ |
(1,590 |
) |
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$ |
(1,815 |
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Basic
and diluted loss per common share
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$ |
(0.20 |
) |
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$ |
(0.30 |
) |
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Basic
and diluted weighted-average number of common shares
outstanding
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8,137 |
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6,115 |
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The
accompanying notes are an integral part of the consolidated financial
statements.
Condensed
Consolidated Statements of Cash Flows
(in
thousands) (Unaudited)
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Three
Months Ended
March
31,
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2008
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2007
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Operating
activities
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Net
loss
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$ |
(1,590 |
) |
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$ |
(1,815 |
) |
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Adjustments
to reconcile net loss to cash used in operating
activities:
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Depreciation
and amortization
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34 |
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35 |
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Provision
for doubtful accounts, net
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18 |
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30 |
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Compensation
expense for stock options and warrants
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530 |
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551 |
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Changes
in operating assets and liabilities:
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Accounts
receivable
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(1,341 |
) |
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(81 |
) |
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Inventories
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281 |
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(109 |
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Other
current assets and other assets
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73 |
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24 |
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Accounts
payable and accrued expenses
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64 |
|
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(685 |
) |
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Net
cash used for operating activities
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(1,931 |
) |
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(2,050 |
) |
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Investing
activities
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Sales
of investments
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7,100 |
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─
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Patent
costs
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(52 |
) |
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(38 |
) |
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Purchases
of fixed assets
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(20 |
) |
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(2 |
) |
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Net
cash provided by (used for) investing activities
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7,028 |
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(40 |
) |
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Financing
activities
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Proceeds
from issuance of common stock, net
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─
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3,047 |
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Proceeds
from exercise of stock options
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19 |
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27 |
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Net
cash provided by financing activities
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19 |
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3,074 |
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Effect
of exchange rate changes on cash
|
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(12 |
) |
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─
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Net
increase in cash and cash equivalents
|
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5,104 |
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|
984 |
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Cash
and cash equivalents at beginning of the period
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1,517 |
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|
5,314 |
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Cash
and cash equivalents at end of the period
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$ |
6,621 |
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$ |
6,298 |
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Supplemental
non-cash activities:
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Payment
of accrued directors’ fees in common stock
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$
|
─
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$ |
115 |
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Unrealized
loss on available-for-sale securities
|
|
$ |
586 |
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|
$
|
─
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The
accompanying notes are an integral part of the consolidated financial
statements.
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 condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC) and in accordance with accounting principles generally accepted
in the United States of America (GAAP) for interim financial
information. Certain information and note disclosures normally
included in financial statements prepared in accordance with GAAP have been
omitted or condensed. These interim 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, 2007.
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.
Reverse
Split of Common Stock:
On June
15, 2007, the Company effected a five-for-one reverse split of its common
stock. All historical share numbers and per share amounts in these
financial statements have been adjusted to give effect to this reverse
split.
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 product sales comprised of fuel-borne catalysts,
including the Platinum Plus® fuel-borne
catalyst products and concentrate, and hardware including the U.S. Environmental
Protection Agency (EPA) verified Purifier System, ARIS®
advanced reagent injection system 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 ratably over the
royalty period based upon periodic reports submitted by the royalty obligor or
based on minimum royalty requirements. Revenue from product sales is
recognized when title has passed and our products are shipped to our customer,
unless the purchase order or contract specifically requires us to provide
installation for hardware purchases. For hardware projects in which
we are responsible for installation (either directly or indirectly by
third-party contractors), revenue is recognized when the hardware is installed
and/or accepted, if the project requires inspection and/or
acceptance. 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.
Generally,
our license agreements are non-exclusive and specify the geographic territories
and classes of diesel engines covered, such as on-road vehicles, off-road
vehicles, construction, stationary engines, marine and railroad
engines. At the time of the execution of our license agreement, we
convey the right to the licensee to use our patented
technologies. The up-front fees are not subject to refund or
adjustment. We recognize the license fee as revenue at the inception
of the license agreement when we have reasonable assurance that the technologies
transferred have been accepted by the licensee and collectability of the license
fee is reasonably assured. The nonrefundable up-front fee is in
exchange for the culmination of the earnings process as the Company has
accomplished what it must do to be entitled to the benefits represented by the
revenue. Under our license agreements, there is no significant
obligation for future performance required of the Company. Each
licensee must determine if the rights to our patented technologies are usable
for their business purposes and must determine the means of use without further
involvement by the Company. In most cases, licensees must make
additional investments to enable the capabilities of our patents, including
significant engineering, sourcing of and assembly of multiple
components. Our obligation to defend valid patents does not represent
an additional deliverable to which a portion of an arrangement fee should be
allocated. Defending the patents is generally consistent with our
representation in the license agreement that such patents are legal and
valid.
Cost
of Revenue:
Our cost
of revenue – product sales includes the costs we incur to formulate our finished
products into saleable form for our customers, including material costs, labor
and processing costs charged to us by our outsourced blenders, installers and
other vendors, packaging costs incurred by our outsourced suppliers, freight
costs to customers and inbound freight charges from our
suppliers. Our inventory is primarily maintained off-site by our
outsourced suppliers. To date, our purchasing, receiving, inspection
and internal transfer costs have been insignificant and have been included in
cost of revenue – product sales. In addition, the costs of our
warehouse of approximately $21,000 per year are included in selling, general and
administrative expenses. Cost of revenue – licensing fees and
royalties is zero as there are no incremental costs associated with the
revenue. Cost of revenue – consulting and other includes incremental
out of pocket costs to provide consulting services.
Patent
Expense:
Patents,
which include all direct incremental costs associated with initial patent
filings and costs to acquire rights to patents under licenses, are stated at
cost and amortized using the straight-line method over the remaining useful
lives, ranging from one to twenty years. During the three months
ended March 31, 2008, we capitalized $52,000 of patent
costs. Indirect and other patent-related costs are expensed as
incurred. Patent amortization expense was $14,000 and $17,000 for the
three months ended March 31, 2008 and 2007, respectively. At March
31, 2008 and December 31, 2007, the Company’s patents, net of accumulated
amortization, were $855,000 and $817,000, respectively.
Selling,
General and Administrative Expense:
Selling,
general and administrative expense is summarized as the following:
|
(in
thousands)
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
March
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Non-cash
stock-based compensation
|
|
$ |
300 |
|
|
$ |
551 |
|
|
Compensation
and benefits
|
|
|
887 |
|
|
|
601 |
|
|
Total
compensation and benefits
|
|
|
1,187 |
|
|
|
1,152 |
|
|
Non-cash
stock-based compensation
|
|
|
227 |
|
|
─
|
|
|
Professional
|
|
|
420 |
|
|
|
223 |
|
|
Total
professional services
|
|
|
647 |
|
|
|
223 |
|
|
Travel
|
|
|
114 |
|
|
|
138 |
|
|
Occupancy
|
|
|
245 |
|
|
|
112 |
|
|
Sales
and marketing expenses
|
|
|
85 |
|
|
|
88 |
|
|
Depreciation
and all other
|
|
|
44 |
|
|
|
90 |
|
|
Total
selling, general and administrative expenses
|
|
$ |
2,322 |
|
|
$ |
1,803 |
|
Aggregate
non-cash stock-based compensation charges incurred by the Company in the three
months ended March 31, 2008 and 2007 were $530,000 and $551,000, respectively
(see Note 4).
Basic
and Diluted Loss per Common Share:
Basic and
diluted loss per share is calculated in accordance with the provisions of
Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting
Standard (“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 in a
manner similar to basic earnings per share except that the weighted-average
shares outstanding are increased to include additional shares from the assumed
exercise of stock options and warrants, if dilutive, using the treasury stock
method. The Company’s computation of diluted net loss per share for
the three months ended March 31, 2008 and 2007 does not include common share
equivalents associated with 809,178 and 737,844 options, respectively, and
424,992 and 1,557,424 warrants, respectively, as the result would be
anti-dilutive.
Income
Taxes:
We
adopted FASB Interpretation No. 48 (“FIN 48”) effective January 1,
2007. There were no unrecognized tax benefits at the date of adoption
of FIN 48, and there were no unrecognized tax benefits at March 31, 2008. It is
the Company’s policy to classify in the financial statements accrued interest
and penalties attributable to a tax position as income taxes.
Utilization
of CDT's U.S. federal tax loss carryforwards for the period prior to December
12, 1995 is limited as a result of the ownership change in excess of 50%
attributable to the 1995 Fuel Tech rights offering to a maximum annual allowance
of $734,500. Utilization of CDT's U.S. federal tax loss carryforwards
for the period after December 12, 1995 and before December 30, 2006
is limited as a result of the ownership change in excess of 50%
attributable to the private placement which was effective December 29, 2006 to a
maximum annual allowance of $2,518,985. Utilization of CDT's tax
losses subsequent to 2006 may be limited due to cumulative ownership changes in
any future three-year period. It is not anticipated that CDT's U.S.
taxable income for the full calendar year 2008 will be in excess of the limited
allowable loss carryforwards.
We file
our tax returns as prescribed by the tax laws of the jurisdictions in which we
operate. Our tax years ranging from 2004 through 2007 remain open to
examination by various taxing jurisdictions as the statute of limitations has
not expired.
Investments:
Investments
represent auction rate securities which are variable-rate debt securities, most
of which are AAA/Aaa rated, that are collateralized by student loans
substantially guaranteed by the U.S. Department of Education. These
investments are classified as "available for sale" under SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities." Liquidity for these auction-rate securities is typically
provided by an auction process that resets the applicable interest rate at
pre-determined intervals. While the underlying securities have a
long-term nominal maturity, the interest rate is reset through dutch auctions
that are held at pre-determined intervals, typically every 28
days. The securities can be resold in the auction at par and are
callable at par any time at the option of the issuer. Interest is
paid at the end of each auction period. The investments are reported
at fair value (see further discussion below under caption “Newly Adopted
Accounting Standards”). Classification of marketable securities as
current or non-current is dependent upon management’s intended holding period,
the security’s maturity date and liquidity considerations based on market
conditions. If management intends to hold the securities for longer
than one year as of the balance sheet date, or, if the state of the auction
market effectively prevents their liquidation on resale, they are classified as
non-current. All income generated from these investments was recorded
as interest income. The contractual maturities
of the auction rate securities held by us range from 2027 to
2047. Accrued interest receivable at March 31, 2008 and
December 31, 2007 was approximately $32,000 and $49,000,
respectively.
During
the three months ended March 31, 2008, the Company sold $7.1 million in auction
rate securities. However, starting on February 15, 2008, the Company
experienced difficulty in selling additional securities because of the failure
of the auction mechanism as a result of sell orders exceeding buy
orders. These failed auctions represent liquidity risk exposure and
are not defaults or credit events. Holders of the securities continue
to receive interest on the investment, currently at a pre-determined rate, and
the securities will be auctioned at the pre-determined intervals until the
auction succeeds, the issuer calls the securities, or they
mature. Accordingly, because there may be no effective mechanism for
selling these securities, the securities may be viewed as non-current
assets. The investments associated with failed auctions will not be
accessible until a successful auction occurs or a buyer is found outside of the
auction process. We classified $11.1 million and $11.7 million of
these auction rate securities as non-current investments as of March 31, 2008
and December 31, 2007, respectively. At March 31, 2008, the
estimated fair market value of the investments held by the Company declined by
$586,000 based upon management’s internal assessment and information provided by
the investment bank through which the Company holds such
securities. Although these securities have continued to pay interest
according to their stated terms and most of these securities continue to be
AAA/Aaa rated, the Company recorded an unrealized loss of $586,000 in other
comprehensive loss during the three months ended March 31, 2008 resulting in a
reduction in stockholders’ equity. At this time, because the Company
has the ability and intent to hold these securities until recovery of their
value, the Company does not believe such securities are other-than-temporarily
impaired or that the failure of the auction mechanism will have a material
impact on the Company’s liquidity or financial position.
Newly
Adopted Accounting Standards:
Effective
January 1, 2008, the Company adopted Statement of Financial Accounting
Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”), for
assets and liabilities measured at fair value on a recurring
basis. SFAS 157 accomplishes the following key
objectives:
|
|
·
|
Defines
fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants
at the measurement date;
|
|
|
·
|
Establishes
a three-level hierarchy (“valuation hierarchy”) for fair value
measurements;
|
|
|
·
|
Requires
consideration of the Company’s creditworthiness when valuing liabilities;
and
|
|
|
·
|
Expands
disclosures about instruments measured at fair
value.
|
The
valuation hierarchy is based upon the transparency of inputs to the valuation of
an asset or liability as of the measurement date. A financial
instrument’s categorization within the valuation hierarchy is based upon the
lowest level of input that is significant to the fair value
measurement. The three levels of the valuation hierarchy and the
distribution of the Company’s financial assets within it are as
follows:
|
|
·
|
Level
1 – inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active
markets.
|
|
|
·
|
Level
2 – inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial
instrument.
|
|
|
·
|
Level
3 – inputs to the valuation methodology are unobservable and significant
to the fair value measurement.
|
The
Company’s assets carried at fair value on a recurring basis are its investments
in auction rate securities as described above under the caption
“investments.” The securities have been classified within level 3 as
their valuation requires substantial judgment and estimation of factors that are
not currently observable in the market due to the lack of trading in the
securities. The valuation may be revised in future periods as market
conditions evolve.
Certain
financial instruments are carried at cost on our condensed consolidated balance
sheets, which approximates fair value due to their short-term, highly liquid
nature. These instruments include cash and cash equivalents, accounts
receivable, prepaid expenses, accounts payable, customer deposits and accrued
expenses.
The table
below includes a roll forward of the Company’s investments in auction rate
securities from January 1, 2008 to March 31, 2008, and a
reclassification of these investments from level 2 to level 3 in the valuation
hierarchy. When a determination is made to classify a financial
instrument within level 3, the determination is based upon the significance of
the unobservable parameters to the overall fair value
measurement. However, the fair value determination for level 3
financial instruments may include observable components.
The
estimated fair value at March 31, 2008 is based upon management’s internal
assessment and information provided by the investment bank through which the
Company holds such securities.
|
(in
thousands)
|
|
|
|
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Fair
value January 1, 2008
|
|
$ |
18,825 |
|
|
$ |
— |
|
|
Purchases
|
|
|
— |
|
|
|
— |
|
|
Sales
|
|
|
(7,100 |
) |
|
|
— |
|
|
Transfers
(out) in
|
|
|
(11,725 |
) |
|
|
11,725 |
|
|
Unrealized
loss included as reduction in stockholders’ equity and not in
operations
|
|
|
— |
|
|
|
(586 |
) |
|
Fair
value March 31, 2008
|
|
$ |
— |
|
|
$ |
11,139 |
|
In
February 2008, the FASB issued Staff Position 157-2 (“FSP
157-2”). FSP 157-2 permits delayed adoption of SFAS 157 for certain
non-financial assets and liabilities, which are not recognized at fair value on
a recurring basis, until fiscal years and interim periods beginning after
November 15, 2008. As permitted by FSP 157-2, the Company has
elected to delay the adoption of SFAS 157 for qualifying non-financial assets
and liabilities, such as fixed assets and patents. The Company is in
the process of evaluating the impact, if any, that the application of SFAS 157
to its non-financial assets will have on the Company’s consolidated results of
operations or financial position.
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 became
effective beginning January 1, 2008. The Company elected not to
measure any eligible items using the fair value option in accordance with SFAS
No. 159 and therefore, SFAS No. 159 did not have an impact on the Company’s
consolidated financial position, results of operations or cash
flows.
Recent
Accounting Pronouncements:
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141R”). SFAS No. 141R provides revised
guidance on how acquirers recognize and measure the consideration transferred,
identifiable assets acquired, liabilities assumed, noncontrolling interests, and
goodwill acquired in a business combination. SFAS No. 141R also
expands required disclosures surrounding the nature and financial effects of
business combinations. SFAS No. 141R is effective, on a prospective
basis, for us in the fiscal year beginning January 1, 2009. The
Company is currently assessing the impact of SFAS No. 141R on its consolidated
financial position and results of operations.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements.” SFAS No. 160 establishes
requirements for ownership interests in subsidiaries held by parties other than
the Company (sometimes called “minority interests”) be clearly identified,
presented, and disclosed in the consolidated statement of financial position
within equity, but separate from the parent’s equity. All changes in
the parent’s ownership interests are required to be accounted for consistently
as equity transactions and any noncontrolling equity investments in
deconsolidated subsidiaries must be measured initially at fair
value. SFAS No. 160 is effective, on a prospective basis, for us in
the fiscal year beginning January 1, 2009. However, presentation and
disclosure requirements must be retrospectively applied to comparative financial
statements. The Company is currently assessing the impact of SFAS No.
160 on its consolidated financial position and results of
operations.
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,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Finished
Platinum Plus fuel-borne catalyst
|
|
$ |
138 |
|
|
$ |
165 |
|
|
Platinum
concentrate/metal
|
|
|
537 |
|
|
|
656 |
|
|
Hardware
|
|
|
158 |
|
|
|
260 |
|
|
Other
|
|
|
1 |
|
|
|
34 |
|
|
|
|
$ |
834 |
|
|
$ |
1,115 |
|
|
Less:
inventory reserves
|
|
|
(22 |
) |
|
|
(22 |
) |
|
Inventories,
net
|
|
$ |
812 |
|
|
$ |
1,093 |
|
Note
3. Stockholders’ Equity
At the
Company’s annual meeting of stockholders held on June 7, 2007, the stockholders
approved a five-for-one reverse split of the Company’s common stock, a reduction
of the par value of the Company’s preferred and common stock from $0.05 per
share to $0.01 per share and an increase in the number of shares of common stock
the Company is authorized to issue from 9 million to 12 million. Such
actions became effective at the close of business on June 15, 2007 when the
Company filed a Certificate of Amendment to its Restated Certificate of
Incorporation with the Secretary of State of Delaware. The historical
share numbers and per share amounts in these financial statements have been
adjusted to give effect to the reverse split.
In the
first three months of 2008, we issued 13,594 shares of our common stock upon the
exercise of 21,666 stock options. In connection therewith, we
received approximately $19,000 in cash and the surrender of 8,072
shares.
There was
no activity in the Company's 424,992 outstanding warrants during the period
ended March 31, 2008.
On
January 12, 2007, we issued 17,142 shares of our common stock to three
non-executive members of our 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 the high and low share
prices during each quarter. The grant date for such shares of common
stock for purposes of measuring compensation is the last day of the quarter in
which the shares are earned, which is the date that the director begins to
benefit from, or be adversely affected by, subsequent changes in the price of
the stock. Directors’ compensation charged to operations did not
materially differ from such measurement.
In the
first three months of 2007, we issued 5,977 shares of our common stock upon
exercise of stock options for aggregate proceeds to the Company of approximately
$27,000.
Note
4. Stock-Based Compensation
Share-based
compensation cost recognized under SFAS 123(R) was approximately $530,000 and
$551,000 for the three months ended March 31, 2008 and 2007,
respectively. Of such 2008 total, $527,000 is classified in selling,
general and administrative expenses ($300,000 as employee compensation and
$227,000 as investor relations compensation for advisory services) and $3,000 is
included in research and development expenses. Compensation costs for
stock options which vest over time are recognized over the vesting
period. As of March 31, 2008, there was approximately $1.4 million 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 0.9 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, 2008:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number
of
|
|
|
Exercise
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
Term in Years
|
|
|
Value
|
|
Options
Outstanding as of December 31, 2007
|
|
|
812,844 |
|
|
$ |
11.716 |
|
|
|
|
|
|
|
Granted
|
|
|
18,000 |
|
|
$ |
16.114 |
|
|
|
|
|
|
|
Exercised
|
|
|
(21,666 |
) |
|
$ |
10.463 |
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
Options
outstanding as of March 31, 2008
|
|
|
809,178 |
|
|
$ |
11.847 |
|
6.6
|
|
|
$ |
2,232,091
|
|
Options
exercisable as of March 31, 2008
|
|
|
666,844 |
|
|
$ |
11.093 |
|
6.1
|
|
|
$ |
2,027,822
|
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 31, 2008, which would have been received
by the option holders had all holders of options in the money exercised their
options as of that date.
Proceeds
received from the exercise of stock options were approximately $19,000 and
$27,000, respectively, for the three months ended March 31, 2008 and 2007, and
were included in financing activities on the Company’s consolidated statements
of cash flows. In addition for the three months ended March 31, 2008,
8,072 shares were surrendered upon the exercise of options to fund the
purchase. The total intrinsic value of stock options exercised for
the three months ended March 31, 2008 and 2007 was $271,676 and $30,553,
respectively.
During
the three months ended March 31, 2008, the board of directors granted 18,000
option shares to employees at a weighted average exercise price of $16.11 per
share. During the three months ended March 31, 2007, the board of
directors granted 125,000 option shares to employees, directors and consultants
at an exercise price of $9.10 per share. The non-executive directors’
options are exercisable immediately. All 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 March 31,
2008 was $12.44 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
|
3.64%
|
|
Expected
volatility
|
92.6%
|
|
Dividend
yield
|
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. NASDAQ Capital Market (the Over-the-Counter market prior to
October 3, 2007) for a period that matches the expected term of the
option. The risk-free interest rate is the constant maturity rate
published by the U.S. Federal Reserve Board that corresponds to the expected
term of the option. 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
$128,000, 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 64-month
lease through March 2013 for 1,942 square feet of administrative space in the
U.K. at an annual cost of approximately $65,000, including utilities and
parking.
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
December 2008. CDT may terminate the royalty obligation to Fuel Tech
by payment of $1.1 million. CDT, as assignee and owner, maintains the
technology at its expense. Royalty expense incurred under this
obligation for the three months ended March 31, 2008 and 2007 was approximately
$4,600 and $2,800, respectively. Royalties payable to Fuel Tech at
March 31, 2008 and December 31, 2007 were $4,600 and $14,300,
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 the Company’s 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, the Company reimburses Fuel Tech for the
expenses associated with one Fuel Tech officer/director who also serves as an
officer/director of CDT. The Company’s condensed consolidated
statements of operations 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, 2008 and 2007. 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.
Note
7. Significant Customers
For the
three months ended March 31, 2008 and 2007, 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,
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
Customer
A
|
12.5%
|
|
*
|
|
Customer
B
|
10.8%
|
|
*
|
|
Customer
C
|
*
|
|
18.5%
|
|
Customer
D
|
*
|
|
13.0%
|
|
|
*
|
Represents less than 10% revenue
for that customer in the applicable period. There were no other
customers that represented 10% or more of revenue for the periods
indicated.
|
At March
31, 2008, Clean Diesel had one customer (such customer is not included in the
table above) that represented approximately 23% of its gross accounts receivable
balance.
Note
8. Comprehensive Loss
Components
of comprehensive loss follow:
|
(in
thousands)
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
March
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Net
loss
|
|
$ |
(1,590 |
) |
|
$ |
(1,815 |
) |
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(12 |
) |
|
|
|
|
Unrealized
loss on available-for-sale securities
|
|
|
(586 |
) |
|
|
|
|
Comprehensive
loss
|
|
$ |
(2,188 |
) |
|
$ |
(1,815 |
) |
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,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Revenue:
|
|
|
|
|
|
|
|
U.S.
|
|
$ |
135 |
|
|
$ |
159 |
|
|
U.K./Europe
|
|
|
2,446 |
|
|
|
36 |
|
|
Asia
|
|
|
20 |
|
|
|
21 |
|
|
Total
|
|
$ |
2,601 |
|
|
$ |
216 |
|
The
Company has patent coverage in North and South America, Europe, Asia, Africa and
Australia. As of March 31, 2008 and December 31, 2007, the Company’s
assets comprise the following:
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
U.S.
|
|
$ |
19,332 |
|
|
$ |
22,680 |
|
|
Foreign
|
|
|
3,756 |
|
|
|
1,983 |
|
|
Total
assets
|
|
$ |
23,088 |
|
|
$ |
24,663 |
|
Note
10. Subsequent Events
On May 8,
2008, we entered into a $3 million demand loan facility with a lender
collateralized by our auction rate securities. The loan facility may
be used for our working capital purposes, if needed. We must continue
to meet certain collateral maintenance requirements, such that our outstanding
borrowings may not exceed 50% of the value of our auction rate
securities. No facility fee is required and borrowings, if needed,
will be at a floating interest rate per annum equal to the sum of the prevailing
daily 30-day Libor plus 25 basis points.
|
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, 2007.
Results
of Operations
Three
Months ended March 31, 2008 Compared to Three Months ended March 31,
2007
Total
revenue in the three months ended March 31, 2008 was $2,601,000 compared to
$216,000 in the three months ended March 31, 2007, an increase of $2,385,000, or
1,104.2%, primarily attributable to sales of our Purifier Systems as an emission
reduction solution that meets the standards established for the London Low
Emission Zone. Of our operating revenue for the three months ended
March 31, 2008, approximately 97.2% was from product sales and 2.8% was from
technology licensing fees and royalties. Of our operating revenue for
the three months ended March 31, 2007, approximately 94.9% was from product
sales and 5.1% was from technology licensing fees and royalties. The
mix of our revenue sources during any reporting period may have a material
impact on our operating results. In particular, our execution of
technology licensing agreements, and the timing of the revenue recognized from
these agreements, has not been predictable.
Product
sales increased 1,132.7% to $2,527,000 in the first quarter of 2008 from
$205,000 in the same 2007 quarter. The increase in product sales is
attributable primarily to higher demand for our Platinum Plus Purifier Systems,
a product comprised of a diesel particulate filter along with our Platinum Plus
fuel-borne catalyst to enable regeneration. We received approval in
October 2007 from Transport for London to supply our Purifier Systems as an
emission reduction solution that meets the standards established for the London
Low Emission Zone. The deadlines for compliance with the London Low
Emission Zone will be phased in over time for different classifications of
vehicles. February 2008 was the compliance deadline for vehicles
greater than 12 metric tons. The next compliance deadline is July
2008 for motor coaches and vehicles greater than 3.5 metric
tons. During the three months ended March 31, 2008, our Purifier
Systems were approved for emissions reduction in Scotland under a
grant-supported retrofit program for Scottish council fleets. We
believe these sales of our Purifier Systems for compliance with the requirements
of the London Low Emission Zone may provide us with recurring revenue from use
of our Platinum Plus fuel-borne catalyst that enables the regeneration of the
diesel particulate filter. We believe we will have the opportunity to
expand this business opportunity as additional Low Emission Zones are
established throughout Europe.
Our
technology licensing fees and royalties were $74,000 in the first quarter of
2008 compared to $11,000 in the same quarter of 2007 and were primarily
attributable to royalties related to our ARIS® technologies. In March
2008, we entered into a license agreement with the largest commercial diesel
engine exhaust company in China to supply Chinese original equipment
manufacturers. Pursuant to this license, we will supply our wire mesh
filters along with Platinum Plus fuel-borne catalyst to the supplier after the
supplier completes initial testing, which testing is anticipated to be concluded
in the second half of 2008. We are continuing our efforts to
consummate technology license agreements with manufacturers and component
suppliers for the use of our ARIS technologies for control of oxides of nitrogen
(NOx) using our selective catalytic reduction (SCR) emission control, the
combination of exhaust gas recirculation (EGR) with SCR technologies, and
hydrocarbon injection for lean NOx traps, NOx catalysts and diesel particulate
filter regeneration.
Our total
cost of revenue was $2,065,000 in the three-month period ended March 31, 2008
compared to $116,000 in the three-month period ended March 31,
2007. The increase in our cost of sales is due to higher product
sales volume. Our gross profit as a percentage of revenue was 20.6%
and 46.3% for three-month periods ended March 31, 2008 and 2007, respectively,
with the decrease attributable to the mix of lower margin product
sales.
Our cost
of revenue – product sales includes the costs we incur to formulate our finished
products into saleable form for our customers, including material costs, labor
and processing costs charged to us by our outsourced blenders, installers and
other vendors, packaging costs incurred by our outsourced suppliers, freight
costs to customers and inbound freight charges from our
suppliers. Our inventory is primarily maintained off-site by our
outsourced suppliers. To date, our purchasing, receiving, inspection
and internal transfer costs have been insignificant and have been included in
cost of revenue – product sales. In addition, the costs of our
warehouse of approximately $21,000 per year are included in selling, general and
administrative expenses. Our gross margins may not be comparable to
those of other entities, because some entities include all of the costs related
to their distribution network in cost of revenue and others like us exclude a
portion of such costs from gross margin, including such costs instead within
operating expenses. Cost of revenue – licensing fees and royalties is
zero as there are no incremental costs associated with the
revenue. Cost of revenue – consulting and other includes incremental
out of pocket costs to provide consulting services.
Selling,
general and administrative expenses were $2,322,000 in the three months ended
March 31, 2008 compared to $1,803,000 in the comparable 2007 period, an increase
of $519,000, or 28.8%. The increase in selling, general and
administrative costs is primarily attributable to higher professional fees and
occupancy costs as further discussed below. Selling, general and
administrative expenses are summarized as follows:
|
(in
thousands)
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
March
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Non-cash
stock-based compensation
|
|
$ |
300 |
|
|
$ |
551 |
|
|
Compensation
and benefits
|
|
|
887 |
|
|
|
601 |
|
|
Total
compensation and benefits
|
|
|
1,187 |
|
|
|
1,152 |
|
|
Non-cash
stock-based compensation
|
|
|
227 |
|
|
─
|
|
|
Professional
|
|
|
420 |
|
|
|
223 |
|
|
Total
professional services
|
|
|
647 |
|
|
|
223 |
|
|
Travel
|
|
|
114 |
|
|
|
138 |
|
|
Occupancy
|
|
|
245 |
|
|
|
112 |
|
|
Sales
and marketing expenses
|
|
|
85 |
|
|
|
88 |
|
|
Depreciation
and all other
|
|
|
44 |
|
|
|
90 |
|
|
Total
selling, general and administrative expenses
|
|
$ |
2,322 |
|
|
$ |
1,803 |
|
Aggregate
non-cash charges for the fair value of stock options and warrants in the three
months ended March 31, 2008 were $530,000, of which $527,000 has been included
in selling, general and administrative expenses ($300,000 in compensation and
$227,000 in professional) and $3,000 in research and development
expenses. This compares to $551,000 in non-cash stock option
compensation expense in the three months ended March 31, 2007 primarily
attributable to stock grants during the period.
Total
compensation and benefit expense in the three months ended March 31, 2008
included $300,000 of non-cash charges for the fair value of stock options
compared to $551,000 in non-cash stock option compensation expense in the three
months ended March 31, 2007. Excluding the non-cash stock-based
charges, compensation and benefit expenses were $887,000 for the three months
ended March 31, 2008 compared to $601,000 in the comparable prior year period,
an increase of $286,000, or 47.6%, due to new personnel and salary increases in
2008.
Professional
fees include public relations, investor relations and financial advisory fees
along with audit-related costs. Included in 2008 is a $227,000
non-cash compensation expense for stock warrants issued for financial advisory
services. Such charge represents the remaining stock-based amount
that was amortized over the period that services were rendered. The
significant component of the increase in professional fees is attributable to
the high costs of complying with the requirements of the Sarbanes-Oxley Act of
2002 associated with the Company’s transition to accelerated filer
status. Occupancy costs include office rents, insurance and related
costs. We moved our U.K. administrative offices in November 2007 and
expect higher occupancy costs in the future.
Research
and development expenses were $65,000 in the three months ended March 31, 2008
compared to $42,000 in the three months ended March 31, 2007, an increase of
$23,000, or 54.8%. The 2008 projects include laboratory testing on
additive formulations, including a new bio-fuel. The 2008 research
and development expenses include $3,000 of non-cash charges for the fair value
of stock options granted in accordance with SFAS No. 123R.
Patent
amortization and other patent costs decreased to $36,000 in the three months
ended March 31, 2008 from $97,000 in the comparable 2007 period, due to
additional costs in 2007 associated with the protection of the CDT
patents. Patent amortization expense for the three months ended March
31, 2008 and 2007 was $14,000 and $17,000, respectively.
Interest
income was $243,000 in the three months ended March 31, 2008 compared to $27,000
in the three months ended March 31, 2007, an increase of $216,000, or 800.0%,
due to higher invested balances in 2008.
Other
income was $54,000 in the three months ended March 31, 2008 and is comprised of
foreign currency transaction gains, net of losses.
Liquidity
and Sources of Capital
We
require capital resources and liquidity to fund our global development and for
working capital. Our working capital requirements vary from period to
period depending upon manufacturing volumes, the timing of deliveries and
payment cycles of our customers. At March 31, 2008 and December 31,
2007, we had cash, cash equivalents and investments classified as current assets
of $6,621,000 and $8,617,000, respectively, to use for our
operations.
Net cash
used for operating activities was $1,931,000 in the three months ended March 31,
2008 and was used primarily to fund the net loss of $1,590,000, adjusted for
non-cash items. Included in the non-cash items was stock-based
compensation expense of $530,000 accounted for in accordance with SFAS No.
123R.
Our
working capital was $9,117,000 at March 31, 2008 compared to $10,208,000 at
December 31, 2007, a decrease of $1,091,000. Accounts receivable, net
increased to $3,250,000 at March 31, 2008 from $1,927,000 at December 31, 2007
due to sales of our Purifier Systems to meet the requirements of the London Low
Emission Zone. Inventories, net decreased to $812,000 at March 31,
2008 from $1,093,000 at December 31, 2007. Our accounts payable and
accrued expenses were at about the same level at March 31, 2008 as at December
31, 2007.
Net cash
provided by investing activities was $7,028,000 in the three months ended March
31, 2008, primarily due to sales of investments (see further discussion
below).
Cash
provided by financing activities was $19,000 in the three months ended March 31,
2008 and was attributable to exercise of stock options.
At March
31, 2008 and December 31, 2007, we held $11.1 million and $18.8 million,
respectively, in investments in auction rate securities collateralized by
student loans which are substantially guaranteed by the U.S. Department of
Education. We sold $7.1 million of these investments in
2008. However, starting on February 15, 2008, the Company experienced
difficulty in effecting additional sales of such securities because of the
failure of the auction mechanism as a result of sell orders exceeding buy
orders. Liquidity for these auction rate securities is typically
provided by an auction process that resets the applicable interest rate at
pre-determined intervals. These failed auctions represent liquidity
risk exposure and are not defaults or credit events. Holders of the
securities continue to receive interest on the investments (currently at
pre-determined rates), and the securities will be auctioned at the
pre-determined intervals (typically every 28 days) until the auction succeeds,
the issuer calls the securities, or they mature. Accordingly, because
there may be no effective mechanism for selling these securities, the securities
may be viewed as long-term assets. The funds associated with failed
auctions will not be accessible until a successful auction occurs or a buyer is
found outside of the auction process. As of March 31, 2008, the
estimated fair market value of the investments held by the Company declined by
$586,000 based upon management’s internal assessment and information provided by
the investment bank through which the Company holds such
securities. Although these securities have continued to pay interest
according to their stated terms and most of these securities continue to be
AAA/Aaa rated, the Company recorded an unrealized loss of $586,000 in other
comprehensive loss during the three months ended March 31, 2008 resulting in a
reduction in stockholders’ equity. We classified $11.1 million and
$11.7 million of these auction rate securities as non-current investments as of
March 31, 2008 and December 31, 2007, respectively. At this
time, because the Company has the ability and intent to hold these securities
until recovery of their value, the Company does not believe such securities
are other-than-temporarily
impaired or that the failure of the auction mechanism will have a material
impact on the Company’s liquidity or financial position. We continue
to monitor the market for auction rate securities and consider its impact, if
any, on the fair value of our investments. If current market
conditions deteriorate further, we may be required to record additional
unrealized losses as reductions in stockholders’ equity. If the
anticipated recovery in market values does not occur, we may be required to
adjust the carrying value of these investments through impairment
charges.
Our
management believes that based upon the Company’s cash and cash equivalents at
March 31, 2008, the current lack of liquidity in the credit and capital markets
will not have a material impact on our liquidity, cash flow, financial
flexibility or our ability to fund our operations for at least the next 12
months.
We have
incurred losses since inception aggregating $51.1 million, which amount includes
$4.8 million 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 technology licensing
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. Historically, we have been
primarily dependent upon funding from new and existing
stockholders. 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, that 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.
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. However, we have the ability to borrow funds for
working capital purposes pursuant to a margin arrangement we entered into in May
2008 (see Note 10). The loan facility allows us to borrow up to $3
million, subject to collateral maintenance requirements, at a floating interest
rate per annum equal to the sum of the prevailing daily 30-day Libor plus 25
basis points.
As of
March 31, 2008, 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, exchange rates for pounds sterling and Euros, and current
turmoil in the capital markets, 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. There have been no
material changes in our market risk exposures at March 31, 2008 as compared
to December 31, 2007.
Evaluation
of Disclosure Controls and Procedures
The
Company’s management, including the President and Chief Executive Officer and
Chief Financial Officer, carried out an evaluation of the Company’s disclosure
controls and procedures (as defined in Rule 15d-15(e) under the Securities
Exchange Act of 1934, as amended) as of the end of the period covered by this
Quarterly Report on Form 10-Q. Based upon that evaluation, the
Company’s President and Chief Executive Officer and Chief Financial Officer
concluded that Clean Diesel had effective disclosure controls and procedures for
(i) recording, processing, summarizing and reporting information that is
required to be disclosed in its reports under the Securities Exchange Act of
1934, as amended, within the time periods specified in the Securities and
Exchange Commission’s rules and forms and (ii) ensuring that information
required to be disclosed in such reports is accumulated and communicated to the
Company’s management, including its President and Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding
disclosure.
Changes
in Internal Controls
In
connection with the evaluation by the Company’s President and Chief Executive
Officer and Chief Financial Officer of changes in internal control over
financial reporting that occurred during the Company’s last fiscal quarter, no
change in the Company’s internal control over financial reporting was identified
that has materially affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting.
|
Exhibit
Number
|
|
Description
|
|
|
|
|
|
|
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Exchange
Act
|
|
|
|
|
|
|
|
Certification
of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Exchange
Act
|
|
|
|
|
|
|
|
Certification
of CEO and CFO Pursuant to 18 U.S.C. Section
1350
|
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
12, 2008
|
By:
|
/s/ Bernhard
Steiner
|
|
|
|
Bernhard
Steiner
|
|
|
|
Director,
President and
|
|
|
|
Chief
Executive Officer
|
|
|
|
|
|
Date: May
12, 2008
|
By:
|
/s/ Ann B.
Ruple
|
|
|
|
Ann
B. Ruple
|
|
|
|
Chief
Financial Officer,
|
|
|
|
Vice
President and Treasurer
|
-21-