form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_______________
FORM
10-Q
_______________
(Mark
One)
|
S
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended September 30,
2008
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: 001-33710
CLEAN
DIESEL TECHNOLOGIES, INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
06-1393453
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification
No.)
|
|
300 Atlantic Street - Suite 702, Stamford,
CT
|
06901-3522
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
|
(203) 327-7050
|
|
|
|
(Registrant’s
telephone number, including area code)
|
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes 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.
|
Large
Accelerated Filer £
|
|
Accelerated
Filer S
|
|
Non-Accelerated
Filer £ (Do not
check if a smaller reporting company.)
|
|
Smaller
reporting company £
|
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
November 7, 2008, there were 8,138,303 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 September 30, 2008
INDEX
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Page
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PART
I.
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FINANCIAL
INFORMATION
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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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18
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Item
3.
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25
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Item
4.
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25
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PART
II.
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OTHER
INFORMATION
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Item
1A.
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26
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Item
5.
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26
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Item
6.
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27
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28
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PART
I.
|
FINANCIAL
INFORMATION
|
CLEAN DIESEL TECHNOLOGIES, INC.
Condensed
Consolidated Balance Sheets
(in
thousands, except share data)
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
6,691 |
|
|
$ |
1,517 |
|
|
Accounts
receivable, net of allowance of $516 and $49, respectively
|
|
|
1,093 |
|
|
|
1,927 |
|
|
Investments
|
|
─
|
|
|
|
7,100 |
|
|
Inventories,
net
|
|
|
831 |
|
|
|
1,093 |
|
|
Other
current assets
|
|
|
170 |
|
|
|
234 |
|
| |
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
8,785 |
|
|
|
11,871 |
|
| |
|
|
|
|
|
|
|
|
|
Investments
|
|
|
10,975 |
|
|
|
11,725 |
|
|
Patents,
net
|
|
|
992 |
|
|
|
817 |
|
|
Fixed
assets, net of accumulated depreciation of $486 and $421,
respectively
|
|
|
220 |
|
|
|
175 |
|
|
Other
assets
|
|
|
71 |
|
|
|
75 |
|
|
Total
assets
|
|
$ |
21,043 |
|
|
$ |
24,663 |
|
|
|
|
|
|
|
|
|
|
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|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
469 |
|
|
$ |
757 |
|
|
Accrued
expenses
|
|
|
476 |
|
|
|
850 |
|
|
Short-term
debt
|
|
|
3,000 |
|
|
─
|
|
|
Customer
deposits
|
|
|
78 |
|
|
|
56 |
|
| |
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
4,023 |
|
|
|
1,663 |
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, par value $0.01 per share: authorized 100,000 shares; no shares
issued and outstanding
|
|
─
|
|
|
─
|
|
|
Common
stock, par value $0.01 per share: authorized 12,000,000 shares; issued and
outstanding 8,138,303 and 8,124,056 shares, respectively
|
|
|
81 |
|
|
|
81 |
|
|
Additional
paid-in capital
|
|
|
73,490 |
|
|
|
72,447 |
|
|
Accumulated
other comprehensive loss
|
|
|
(925 |
) |
|
|
(16 |
) |
|
Accumulated
deficit
|
|
|
(55,626 |
) |
|
|
(49,512 |
) |
|
Total
stockholders’ equity
|
|
|
17,020 |
|
|
|
23,000 |
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
21,043 |
|
|
$ |
24,663 |
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
CLEAN DIESEL TECHNOLOGIES, INC.
Condensed
Consolidated Statements of Operations
(in
thousands, except per share amounts) (Unaudited)
|
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales
|
|
$ |
1,415 |
|
|
$ |
223 |
|
|
$ |
6,432 |
|
|
$ |
567 |
|
|
Technology
licensing fees and royalties
|
|
|
165 |
|
|
|
2,237 |
|
|
|
368 |
|
|
|
3,352 |
|
|
Consulting
and other
|
|
─
|
|
|
─
|
|
|
─
|
|
|
─
|
|
|
Total
revenue
|
|
|
1,580 |
|
|
|
2,460 |
|
|
|
6,800 |
|
|
|
3,919 |
|
|
|
|
|
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|
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|
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Costs
and expenses:
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue ─ product sales
|
|
|
1,174 |
|
|
|
167 |
|
|
|
5,232 |
|
|
|
388 |
|
|
Cost
of revenue ─ licensing fees and royalties
|
|
─
|
|
|
─
|
|
|
─
|
|
|
─
|
|
|
Cost
of revenue ─ consulting and other
|
|
─
|
|
|
─
|
|
|
─
|
|
|
─
|
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|
Selling,
general and administrative
|
|
|
2,403 |
|
|
|
1,659 |
|
|
|
7,447 |
|
|
|
4,957 |
|
|
Research
and development
|
|
|
162 |
|
|
|
100 |
|
|
|
316 |
|
|
|
292 |
|
|
Patent
amortization and other expense
|
|
|
65 |
|
|
|
86 |
|
|
|
143 |
|
|
|
262 |
|
|
Operating
costs and expenses
|
|
|
3,804 |
|
|
|
2,012 |
|
|
|
13,138 |
|
|
|
5,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from operations
|
|
|
(2,224 |
) |
|
|
448 |
|
|
|
(6,338 |
) |
|
|
(1,980 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
125 |
|
|
|
204 |
|
|
|
481 |
|
|
|
298 |
|
|
Interest
expense
|
|
|
(14 |
) |
|
─
|
|
|
|
(14 |
) |
|
─
|
|
|
Other
income (expense), net
|
|
|
(268 |
) |
|
|
(1 |
) |
|
|
(243 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before provision/benefit for income taxes
|
|
|
(2,381 |
) |
|
|
651 |
|
|
|
(6,114 |
) |
|
|
(1,683 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision/benefit
for income taxes
|
|
─
|
|
|
─
|
|
|
─
|
|
|
─
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(2,381 |
) |
|
$ |
651 |
|
|
$ |
(6,114 |
) |
|
$ |
(1,683 |
) |
|
(Loss)
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.29 |
) |
|
$ |
0.09 |
|
|
$ |
(0.75 |
) |
|
$ |
(0.25 |
) |
|
Diluted
|
|
$ |
(0.29 |
) |
|
$ |
0.09 |
|
|
$ |
(0.75 |
) |
|
$ |
(0.25 |
) |
|
Weighted-average
number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,138 |
|
|
|
7,377 |
|
|
|
8,137 |
|
|
|
6,685 |
|
|
Diluted
|
|
|
8,138 |
|
|
|
7,580 |
|
|
|
8,137 |
|
|
|
6,685 |
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
CLEAN DIESEL TECHNOLOGIES, INC.
Condensed
Consolidated Statements of Cash Flows
(in
thousands) (Unaudited)
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Operating
activities
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(6,114 |
) |
|
$ |
(1,683 |
) |
|
Adjustments
to reconcile net loss to cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
110 |
|
|
|
100 |
|
|
Provision
for doubtful accounts, net
|
|
|
499 |
|
|
|
28 |
|
|
Compensation
expense for stock options and warrants
|
|
|
1,033 |
|
|
|
733 |
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
335 |
|
|
|
(1,827 |
) |
|
Inventories
|
|
|
262 |
|
|
|
(361 |
) |
|
Other
current assets and other assets
|
|
|
68 |
|
|
|
(28 |
) |
|
Accounts
payable, accrued expenses and other liabilities
|
|
|
(640 |
) |
|
|
(47 |
) |
|
Net
cash used for operating activities
|
|
|
(4,447 |
) |
|
|
(3,085 |
) |
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
Sales
(purchases) of investments
|
|
|
7,100 |
|
|
|
(11,825 |
) |
|
Patent
costs
|
|
|
(220 |
) |
|
|
(212 |
) |
|
Purchases
of fixed assets
|
|
|
(110 |
) |
|
|
(71 |
) |
|
Net
cash provided by (used for) investing activities
|
|
|
6,770 |
|
|
|
(12,108 |
) |
|
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
Proceeds
from short-term debt
|
|
|
3,000 |
|
|
─
|
|
|
Proceeds
from issuance of common stock, net
|
|
─
|
|
|
|
4,313 |
|
|
Proceeds
from issuance of warrants, net
|
|
─
|
|
|
|
6,867 |
|
|
Stockholder-related
charges
|
|
|
(14 |
) |
|
|
(143 |
) |
|
Proceeds
from exercise of stock options
|
|
|
24 |
|
|
|
83 |
|
|
Net
cash provided by financing activities
|
|
|
3,010 |
|
|
|
11,120 |
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
(159 |
) |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
$ |
5,174 |
|
|
$ |
(4,063 |
) |
|
Cash
and cash equivalents at beginning of the period
|
|
|
1,517 |
|
|
|
5,314 |
|
|
Cash
and cash equivalents at end of the period
|
|
$ |
6,691 |
|
|
$ |
1,251 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
non-cash activities:
|
|
|
|
|
|
|
|
|
|
Payment
of accrued directors’ fees in common stock
|
|
$
|
─
|
|
|
$ |
140 |
|
|
Unrealized
loss on available-for-sale securities
|
|
$ |
750 |
|
|
$
|
─
|
|
The
accompanying notes are an integral part of the condensed 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.
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. 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. 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. 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 nine months ended
September 30, 2008, we capitalized $220,000 of patent costs. Indirect
and other patent-related costs are expensed as incurred. Patent
amortization expense for the three and nine months ended September 30, 2008 was
$17,000 and $45,000, respectively, and for the three and nine months ended
September 30, 2007 was $17,000 and $50,000, respectively. At
September 30, 2008 and December 31, 2007, the Company’s patents, net of
accumulated amortization, were $992,000 and $817,000, respectively.
Selling,
General and Administrative Expense:
Selling,
general and administrative expense is summarized as the following:
|
(in
thousands)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Non-cash
stock-based compensation
|
|
$ |
259 |
|
|
$ |
91 |
|
|
$ |
797 |
|
|
$ |
733 |
|
|
Compensation
and benefits
|
|
|
1,176 |
|
|
|
843 |
|
|
|
3,256 |
|
|
|
2,097 |
|
|
Total
compensation and benefits
|
|
|
1,435 |
|
|
|
934 |
|
|
|
4,053 |
|
|
|
2,830 |
|
|
Professional
|
|
|
215 |
|
|
|
228 |
|
|
|
1,247 |
* |
|
|
816 |
|
|
Travel
|
|
|
183 |
|
|
|
145 |
|
|
|
548 |
|
|
|
441 |
|
|
Occupancy
|
|
|
167 |
|
|
|
120 |
|
|
|
677 |
|
|
|
355 |
|
|
Sales
and marketing expenses
|
|
|
108 |
|
|
|
182 |
|
|
|
337 |
|
|
|
342 |
|
|
Bad
debt provision
|
|
|
258 |
|
|
|
28 |
|
|
|
499 |
|
|
|
58 |
|
|
Depreciation
and all other
|
|
|
37 |
|
|
|
22 |
|
|
|
86 |
|
|
|
115 |
|
|
Total
selling, general and administrative expenses
|
|
$ |
2,403 |
|
|
$ |
1,659 |
|
|
$ |
7,447 |
|
|
$ |
4,957 |
|
* Includes
$227,000 of non-cash stock-based compensation charges for fair value of
warrants.
We
account for stock-based compensation in accordance with the provisions of the
Financial Accounting Standards Board (“FASB”) Statement of Financial
Accounting Standard (“SFAS”) No. 123 (Revised 2004), “Accounting for Stock-Based
Compensation” (“SFAS No. 123R”). Aggregate non-cash stock-based
compensation charges incurred by the Company in the three and nine months ended
September 30, 2008 were $262,000 and $1,033,000, respectively, (including $3,000
and $9,000, respectively, in research and development expenses) and in the three
and nine months ended September 30, 2007 were $91,000 and $733,000, 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 SFAS
No. 128, “Earnings Per Share.” Basic loss per share is computed by
dividing net loss by the weighted-average number of 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 number of
shares outstanding is 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) income per
share for the three and nine months ended September 30, 2008 and for nine months
ended September 30, 2007, respectively, does not include common share
equivalents associated with 812,178 and 699,419 options, respectively, and
424,992 and 922,049 warrants, respectively, as the result would be
anti-dilutive. Dilutive common share equivalents included in the
diluted weighted-average shares outstanding for the three months ended September
30, 2007 consist of 128,896 related to stock options and 73,526 related to
warrants.
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 September 30,
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.
As of
September 30, 2008, the Company has tax losses available for offset against
future years’ taxable income of approximately $40.6 million, expiring between
2009 and 2027. The Company also had research and development tax credit
carryforwards of approximately $1.7 million, expiring between 2011 and 2027. The
Company has provided a full valuation allowance to reduce the related deferred
tax asset to zero because of the uncertainty relating to realizing such tax
benefits in the future. 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 N.V. 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.
No income
taxes were provided on the income before income taxes for the three months ended
September 30, 2007 because at September 30, 2007, the Company had tax losses
available for offset against future years’ taxable income.
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 (“ARS”) which are variable-rate debt
securities, the majority 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 ARS 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 has been
recorded as interest income. The contractual maturities
of the ARS held by us range from 2027 to 2047. Accrued
interest receivable at September 30, 2008 and December 31, 2007 was
approximately $17,000 and $49,000, respectively.
During
the first two months of 2008, the Company sold $7.1 million of the
ARS. However, starting on February 15, 2008 and continuing through
the third quarter of 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, the issuer
redeems the issue, a buyer is found outside of the auction process or the
underlying securities mature. We classified the fair value of
approximately $11.0 million (par value of $11.7 million) and $11.7 million of
these auction rate securities as non-current investments as of September 30,
2008 and December 31, 2007, respectively, reflecting a $750,000 decline
from par value 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, for the nine months ended September 30, 2008, the Company
recorded an unrealized temporary loss of $750,000 which is reflected in our
consolidated balance sheet in accumulated other comprehensive loss, resulting in
a reduction in stockholders’ equity. Factors we considered in
determining whether this loss was temporary included the length of time and
extent to which fair value has been less than the cost basis, the financial
condition and near-term prospects of the issuers, and our intent and ability to
retain the investment for a period of time sufficient to allow for any
anticipated recovery in fair value. At September 30, 2008, 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.
The
Company does not expect to need to access these funds in the short-term;
however, in May 2008, we arranged a $3 million demand loan facility using our
ARS as collateral and in July 2008, borrowed those funds (see Note
5). On August 8, 2008, the Securities and Exchange Commission’s
Division of Enforcement announced it had entered into an agreement in principle
with UBS Securities LLC and UBS Financial Services, Inc. (collectively “UBS”),
whereby UBS will use its best efforts to liquidate at par value by the end of
2009 but not later than June 30, 2010. Our investment holdings of
$11.7 million par value of auction rate securities were purchased and held
through UBS.
In
October 2008, the Company received an offer (the “Offer”) from UBS AG for a put
right permitting us to sell to UBS at par value all ARS previously purchased
from UBS at a future date (any time during a two-year period beginning June 30,
2010). The Offer also includes a commitment to loan us 75% of the UBS
value of the ARS at any time until the put is exercised. The Offer is
non-transferable and expires on November 14, 2008 (see Note 11 “Subsequent
Events”).
Newly
Adopted Accounting Standards:
Effective
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value
Measurements” 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.
|
In
October 2008, the FASB issued FASB Staff Position FAS 157-3, “Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active” (“FSP 157-3”). FSP 157-3 clarified the application of
FAS 157. FSP 157-3 demonstrated how the fair value of a
financial asset is determined when the market for that financial asset is
inactive. FSP 157-3 was effective upon issuance, including prior periods
for which financial statements had not been issued. The guidance provided
by FSP 157-3 is consistent with our approach to valuing our ARS for which there
is no active market.
The
Company’s assets carried at fair value on a recurring basis are its investments
in ARS 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, accrued
expenses and short-term debt.
The table
below includes a roll forward of the Company’s investments in ARS from
January 1, 2008 to September 30, 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.
As noted
above, typically, the fair value of ARS investments approximates par value due
to the frequent resets through the auction process. While the Company
continues to earn interest on its ARS investments at the contractual rate, these
investments are not currently trading and therefore do not have a readily
determinable market value. Accordingly, the estimated fair value of
the ARS no longer approximates par value. At September 30, 2008,
management’s internal assessment included an income approach analysis of
expected future cash flows and included assumptions for interest rates, timing
and amount of cash flows, credit and liquidity premiums, and expected holding
periods of the ARS. These assumptions are volatile and subject to
change as the underlying sources of these assumptions and market conditions
change. Based on this Level 3 valuation, the Company valued the ARS
investments at $11.0 million, which represents a decline in value of $750,000
from par.
The
estimated fair value at September 30, 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
|
|
|
— |
|
|
|
(750 |
) |
|
Fair
value September 30, 2008
|
|
$ |
— |
|
|
$ |
10,975 |
|
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, the adoption of SFAS No. 159 did not have a material
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 does not expect a significant impact on its consolidated financial
position and results of operations from the adoption of SFAS No.
141R.
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 does not expect a significant impact on its
consolidated financial position and results of operations from the adoption of
SFAS No. 160.
In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities" ("SFAS 161"). SFAS 161 requires enhanced
disclosures about an entity's derivative and hedging activities and is effective
for us as of January 1, 2009. We do not expect the adoption of SFAS
161 to have a material effect on our consolidated financial
statements.
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)
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Finished
goods (Platinum Plus fuel-borne catalyst)
|
|
$ |
145 |
|
|
$ |
165 |
|
|
Raw
materials (primarily, platinum concentrate)
|
|
|
364 |
|
|
|
656 |
|
|
Hardware
|
|
|
343 |
|
|
|
260 |
|
|
Other
|
|
|
1 |
|
|
|
34 |
|
|
|
|
$ |
853 |
|
|
$ |
1,115 |
|
|
Less:
inventory reserves
|
|
|
(22 |
) |
|
|
(22 |
) |
|
Inventories,
net
|
|
$ |
831 |
|
|
$ |
1,093 |
|
Note
3. Stockholders’ Equity
In the
first nine months of 2008, we issued 14,247 shares of our common stock upon the
exercise of 27,166 stock options. In connection therewith, we
received approximately $24,000 in cash and the surrender of 12,920 stock
options.
There was
no activity in the Company's 424,992 outstanding warrants during the nine months
ended September 30, 2008.
In the
first nine months of 2008, the Company charged approximately $14,000 to
additional paid-in capital for costs incurred in connection with our filing of a
Post-effective Amendment to a Registration Statement on Form S-1 and a
Registration Statement on Form S-8 with the SEC on June 19, 2008.
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 conjunction with the
reverse split, we incurred costs aggregating approximately $25,000, primarily
from our transfer agents and outside legal counsel which were charged to
additional paid-in capital in the nine months ended September 30,
2007. We also charged an aggregate of $118,000 to additional paid-in
capital for costs incurred in connection with our filing of a Registration
Statement on Form S-1 with the SEC on June 29, 2007 and our submission of an
application for listing on the NASDAQ Capital Market on June 29,
2007.
In the
first nine months of 2007, the Company issued 667,998 shares of its common stock
in consideration of approximately $4.5 million ($4.3 million, net of expenses)
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 1,400,000 shares
of its common stock, par value $0.01, and warrants for the purchase of an
additional 1,400,000 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 $6.75 per
unit. The Class A Warrants entitled the holder until July 2, 2007 to
purchase, at a price of $10.00 per share, one share of common stock for every
two shares of common stock acquired in the December 2006 private placement and
the Class B Warrants entitled the holder until December 29, 2007 to purchase, at
a price of $12.50 per share, one share of common stock for every two shares of
common stock acquired in the December 2006 private placement.
In the
nine months ended September 30, 2007, the Company received approximately $6.9
million, net of expenses, upon the exercise of warrants to acquire 709,383
shares of our common stock.
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. On June 19, 2007, the Company issued 2,457 shares of
common stock, valued at $25,000, to two non-executive members of the Board of
Directors in lieu of fees for services rendered during the first quarter of
2007. 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 nine months of 2007, CDT issued 29,441 shares of its common stock upon
exercise of 42,201 stock options for aggregate proceeds to the Company of
approximately $83,000.
Note
4. Stock-Based Compensation
Share-based
compensation cost recognized under SFAS 123(R) was approximately $262,000 and
$91,000 for the three months ended September 30, 2008 and 2007, respectively,
and $1,033,000 and $733,000 for the nine months ended September 30, 2008 and
2007, respectively. Of such 2008 nine-month total, $1,024,000 is
classified in selling, general and administrative expenses ($797,000 as employee
compensation and $227,000 as investor relations compensation for advisory
services) and $9,000 is included in research and development
expenses. Compensation costs for stock options which vest over time
are recognized over the vesting period. As of September 30, 2008,
there was approximately $1.0 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 0.74 years.
The
Company maintains an equity compensation 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 Plan for the nine months ended September 30,
2008:
|
|
|
Number
of Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted-Average
Remaining Contractual Term in Years
|
|
|
Aggregate
Intrinsic Value
|
|
Options
outstanding as of December 31, 2007
|
|
|
812,844 |
|
|
$ |
11.716 |
|
|
|
|
|
|
|
|
Granted
|
|
|
28,000 |
|
|
$ |
13.359 |
|
|
|
|
|
|
|
|
Exercised
|
|
|
(27,166 |
) |
|
$ |
10.37 |
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(1,500 |
) |
|
$ |
10.00 |
|
|
|
|
|
|
|
Options
outstanding as of September 30, 2008
|
|
|
812,178 |
|
|
$ |
11.821 |
|
|
|
6.3 |
|
|
$ |
– |
|
Options
exercisable as of September 30, 2008
|
|
|
663,177 |
|
|
$ |
11.091 |
|
|
|
5.7 |
|
|
$ |
– |
|
Options
outstanding as of September 30, 2008 and expected to
vest
|
|
|
765,478 |
|
|
$ |
11.821 |
|
|
|
6.3 |
|
|
$ |
– |
|
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 September 30, 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 $24,000 and
$83,000, respectively, in the nine months ended September 30, 2008 and 2007, and
were included in financing activities on the Company’s consolidated statements
of cash flows. In addition, for the nine months ended September 30,
2008, 12,920 options were surrendered upon the exercise of options to fund the
purchase. The total intrinsic value of stock options exercised for
the three months ended September 30, 2008 and 2007 was zero and $151,000,
respectively, and for the nine months ended September 30, 2008 and 2007 was
$288,000 and $261,000, respectively.
During
the nine months ended September 30, 2008, the board of directors granted 28,000
option shares to employees at a weighted average exercise price of $13.359 per
share. During the nine months ended September 30, 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 nine months ended September 30,
2008 was $10.311 per share and was estimated using the Black-Scholes option
pricing model with the following weighted-average assumptions:
|
Expected
term in years
|
|
|
8.63 |
|
|
Risk-free
interest rate
|
|
|
3.69 |
% |
|
Expected
volatility
|
|
|
92.4 |
% |
|
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. Short-term Debt
On July
25, 2008, we borrowed $3 million from the demand loan facility with UBS
collateralized by our auction rate securities, a facility we had arranged on May
8, 2008. Management determined to draw down the entire facility as a
matter of financial prudence to secure available cash. The loan
facility may be used for our working capital purposes. 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 as determined by the lender. No facility fee is required
and borrowings will be at a floating interest rate per annum equal to the sum of
the prevailing daily 30-day Libor plus 25 basis points. Interest
expense for the three and nine months ended September 30, 2008 was
$14,000.
In
October 2008, the Company received an Offer from UBS AG for a put right
permitting us to sell to UBS at par value all ARS previously purchased from UBS
at a future date (commencing not later than June 30, 2010) and committing to
loan us 75% of the value of the ARS as determined by the lender at any time
until the put is exercised. Further, the loan would be on a no-cost
basis to the Company, and UBS would reimburse us for any interest expense
incurred under previous loan arrangements (see Note 11 “Subsequent
Events”).
Note
6. 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. We entered into
another lease for our principal office (5,515 square feet) that commences
January 1, 2009, has a seven-year term and an annual base rent of approximately
$128,000. The Company was obligated under a four-year lease which
expired in July 2008 for 2,750 square feet of warehouse space at an annual cost
of approximately $21,000, including utilities. We have renewed our
lease for the warehouse space at the same annual cost until July
2009. 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 September 30, 2008 and 2007 was
approximately $5,000 and $4,000, respectively, and for the nine months ended
September 30, 2008 and 2007 was approximately $14,000 and $10,000,
respectively. Royalties payable to Fuel Tech at September 30, 2008
and December 31, 2007 were $14,000 and $14,300, respectively.
Note
7. 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 September 30, 2008 and 2007 and $53,000 in each of the nine-month
periods ended September 30, 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. We intend to cancel the
Management and Services Agreement in 2009.
Note
8. Significant Customers
For the
three and nine months ended September 30, 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
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
A
|
|
|
16.4 |
% |
|
|
* |
|
|
|
15.6 |
% |
|
|
* |
|
|
Customer
B
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
29.1 |
% |
|
Customer
C
|
|
|
* |
|
|
|
61.0 |
% |
|
|
* |
|
|
|
38.3 |
% |
|
Customer
D
|
|
|
* |
|
|
|
24.3 |
% |
|
|
* |
|
|
|
18.2 |
% |
|
|
*
|
Represents
less than 10% revenue for that customer in the applicable
period. There were no other customers that represented 10% or
more of revenue for the periods
indicated.
|
At
September 30, 2008, Clean Diesel had one customer (not included in the table
above) that represented approximately 15.2% of its gross accounts receivable
balance.
Note
9. Comprehensive (Loss) Income
Components
of comprehensive (loss) income follow:
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Net
(loss) income
|
|
$ |
(2,381 |
) |
|
$ |
651 |
|
|
$ |
(6,114 |
) |
|
$ |
(1,683 |
) |
|
Other
comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(180 |
) |
|
|
10 |
|
|
|
(159 |
) |
|
|
10 |
|
|
Unrealized
loss on available- for-sale securities
|
|
─
|
|
|
─
|
|
|
|
(750 |
) |
|
─
|
|
|
Comprehensive
(loss) income
|
|
$ |
(2,561 |
) |
|
$ |
661 |
|
|
$ |
(7,023 |
) |
|
$ |
(1,673 |
) |
Note
10. 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
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$ |
271 |
|
|
$ |
1,370 |
|
|
$ |
673 |
|
|
$ |
2,239 |
|
|
U.K./Europe
|
|
|
1,282 |
|
|
|
1,034 |
|
|
|
6,032 |
|
|
|
1,603 |
|
|
Asia
|
|
|
27 |
|
|
|
56 |
|
|
|
95 |
|
|
|
77 |
|
|
Total
|
|
$ |
1,580 |
|
|
$ |
2,460 |
|
|
$ |
6,800 |
|
|
$ |
3,919 |
|
The
Company has patent coverage in North and South America, Europe, Asia, Africa and
Australia. As of September 30, 2008 and December 31, 2007, the
Company’s assets comprise the following:
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
U.S.
|
|
$ |
17,791 |
|
|
$ |
22,680 |
|
|
Foreign
|
|
|
3,252 |
|
|
|
1,983 |
|
|
Total
assets
|
|
$ |
21,043 |
|
|
$ |
24,663 |
|
Note
11. Subsequent Events
In
October 2008, the Company received an Offer from UBS to sell at par value
auction-rate securities originally purchased from UBS (approximately $11.7
million) at any time during a two-year period beginning June 30,
2010. The Offer also provides for a no-cost loan for the Company of
75% of the value of the ARS as determined by UBS and reimbursement of interest
expense incurred under previous loan arrangements. Based upon the UBS
value of our ARS at September 30, 2008, the additional borrowings available to
us (over the $3.0 million we have borrowed to date) would be approximately $4.5
million. UBS significantly reduced its value of our ARS as of October
31, 2008 which would decrease our additional available loan to approximately
$3.9 million. The Offer is non-transferable and expires on November
14, 2008.
On
November 6, 2008, the Company accepted the Offer. The Company’s right
under the Offer is in substance a put option (with the strike price equal to the
par value of the ARS) which it expects to record as an asset, measured at its
fair value (pursuant to SFAS No. 159), with the resultant gain recognized in
earnings. Concurrently, the Company will also recognize an
other-than-temporary impairment on the ARS, measured as the amount of unrealized
loss in the stockholders’ equity component accumulated other comprehensive loss
related to the ARS, which would be offset, to a great extent, by the gain
recognized upon recording the put option.
|
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 September 30, 2008 Compared to Three Months ended September 30,
2007
Total
revenue in the three months ended September 30, 2008 was $1,580,000 compared to
$2,460,000 in the three months ended September 30, 2007, a decrease of $880,000,
or 35.8%, primarily attributable to significant up-front license fees recognized
in the prior year third quarter. Of our operating revenue for the
three months ended September 30, 2008, approximately 89.6% was from product
sales and 10.4% was from technology licensing fees and royalties. Of
our operating revenue for the three months ended September 30, 2007,
approximately 9.1% was from product sales and 90.9% was from technology
licensing fees and royalties. The mix of our revenue sources during
any reporting period may have a material impact on our operating
results. In particular, our execution of technology licensing
agreements, and the timing of the revenue recognized from these agreements, has
not been predictable.
Product
sales were $1,415,000 in the third quarter of 2008 compared to $223,000 in the
same 2007 quarter, an increase of $1,192,000, or 534.5%. The increase
in product sales is attributable primarily to 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 are being phased in over time for different
classifications of vehicles. February 2008 was the compliance
deadline for vehicles greater than 12 metric tons and July 2008 was the deadline
for motor coaches and vehicles greater than 3.5 metric tons. The next
compliance deadline is October 2010 for larger vans and minibuses, followed by
further compliance deadlines in 2012. 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 and that we will have the opportunity to expand this business model as
additional Low Emission Zones are established throughout
Europe.
Our
technology licensing fees and royalties were $165,000 in the three months ended
September 30, 2008 compared to $2,237,000 in the same quarter of 2007, a
decrease of $2,072,000, or 92.6%, due to recognition of significant license fees
in the prior year. In each of the three-month periods ended September
30, 2008 and 2007, we executed new technology licensing agreements and
recognized revenue from license fees 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. We are continuing our
efforts to consummate technology license agreements with manufacturers and
component suppliers for the use of our ARIS technologies.
Our total
cost of revenue was $1,174,000 in the three-month period ended September 30,
2008 compared to $167,000 in the three-month period ended September 30, 2007
with the increase due to higher product sales volume. Our gross
profit as a percentage of total revenue was 25.7% and 93.2% for the three-month
periods ended September 30, 2008 and 2007, respectively, with the decrease
attributable to the mix of lower margin product sales. Gross profit
as a percentage of product sales was 17.0% and 25.1% for the three-month periods
ended September 30, 2008 and 2007, respectively. We experienced
higher costs in the third quarter of 2008 due to reduced volume discounts from
our supplier of Purifier Systems because of lower demand for such products as
key 2008 LEZ compliance deadlines had passed. Our planned gross
margins for products compliant with the LEZ requirements was initially set at a
low level, based upon low pricing, to attract interest in our offering to
establish greater visibility of the Company in the marketplace. Our
international operation implemented price increases late in the third quarter of
2008.
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 $2,403,000 in the three months ended
September 30, 2008 compared to $1,659,000 in the comparable 2007 period, an
increase of $744,000, or 44.8%. The increase in selling, general and
administrative costs is primarily attributable to higher compensation and
benefits, as well as higher bad debt provision, occupancy and travel costs as
further discussed below. Selling, general and administrative expenses
are summarized as follows:
|
(in
thousands)
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Non-cash
stock-based compensation
|
|
$ |
259 |
|
|
$ |
91 |
|
|
Compensation
and benefits
|
|
|
1,176 |
|
|
|
843 |
|
|
Total
compensation and benefits
|
|
|
1,435 |
|
|
|
934 |
|
|
Professional
|
|
|
215 |
|
|
|
228 |
|
|
Travel
|
|
|
183 |
|
|
|
145 |
|
|
Occupancy
|
|
|
167 |
|
|
|
120 |
|
|
Sales
and marketing expenses
|
|
|
108 |
|
|
|
182 |
|
|
Bad
debt provision
|
|
|
258 |
|
|
|
28 |
|
|
Depreciation
and all other
|
|
|
37 |
|
|
|
22 |
|
|
Total
selling, general and administrative expenses
|
|
$ |
2,403 |
|
|
$ |
1,659 |
|
Aggregate
non-cash charges for the fair value of stock options and warrants in the three
months ended September 30, 2008 were $262,000, of which $259,000 has been
included in selling, general and administrative expenses and $3,000 in research
and development expenses. This compares to $91,000 in non-cash stock
option compensation expense in the three months ended September 30,
2007.
Excluding
the non-cash stock-based charges, compensation and benefit expenses were
$1,176,000 for the three months ended September 30, 2008 compared to $843,000 in
the comparable prior year period, an increase of $333,000, or 39.5%, due to new
personnel, recruitment and relocation costs, and higher salaries for existing
personnel in 2008 compared to 2007. The three months ended September
30, 2008 included approximately $15,000 for bonuses, whereas, the comparable
2007 period included $309,000 in bonuses based on achievement of certain 2007
milestones.
Professional
fees include public relations, investor relations and financial advisory fees,
along with audit-related costs and costs of complying with the requirements of
the Sarbanes-Oxley Act of 2002. Occupancy costs include office rents,
insurance and related costs. The higher occupancy costs in 2008 are
attributable to higher costs for our U.K. office under a new lease that we
entered into in November 2007. We executed a lease for a new
U.S. office, effective January 1, 2009, and expect the rent expense will be
approximately the same level as our current rent expense but with a lower cash
outlay in the early years of the lease. Bad debt provision as a
percentage of product sales in the three months ended September 30, 2008 and
2007 was 18.2% and 12.6%, respectively, with the increased rate in 2008
attributable to specific aged accounts.
Research
and development expenses were $162,000 in the three months ended September 30,
2008 compared to $100,000 in the three months ended September 30, 2007, an
increase of $62,000, or 62.0%. The 2008 projects include laboratory
testing on additive formulations, fuel economy and carbon reduction along with
field testing of emission control technologies. The 2008 research and
development expenses include $3,000 of non-cash charges for the fair value of
stock options.
Patent
amortization and other patent expenses were $65,000 in the three months ended
September 30, 2008 compared to $86,000 in the same period in 2007, a decline of
$21,000, or 24.4%.
Interest
income was $125,000 in the three months ended September 30, 2008 compared to
$204,000 in the three months ended September 30, 2007, a decrease of $79,000, or
38.7%, due to lower interest rates in the 2008 period.
Interest
expense was $14,000 in the three months ended September 30, 2008. In
July 2008, we borrowed all of the $3.0 million line of credit from UBS that is
secured by our investments in ARS (see Note 5). We expect the
interest expense incurred will be reimbursed by UBS in conjunction with our
acceptance of their Offer as outlined in Note 11 “Subsequent
Events.”
Other
expense was $268,000 in the three months ended September 30, 2008 and is
comprised of foreign currency transaction losses, net of gains, primarily
attributable to cash balances on the U.S. records denominated in U.K. pounds
sterling.
Nine
Months ended September 30, 2008 Compared to Nine Months ended September 30,
2007
Total
revenue for the nine months ended September 30, 2008 increased $2,881,000, or
73.5%, to $6,800,000 from $3,919,000 in the nine months ended September 30, 2007
due primarily to sales of our Purifier Systems as an emission reduction solution
that meets the standards established for the London Low Emission
Zone. Operating revenue in the nine months ended September 30, 2008
consisted of approximately 94.6% in product sales and 5.4% in technology
licensing fees and royalties. Operating revenue in the nine months
ended September 30, 2007 consisted of approximately 14.5% in product sales and
85.5% in technology licensing fees and royalties.
The mix
of our revenue sources during any reporting period may have a material impact on
our operating results. In particular, our execution of technology
licensing agreements, and the timing of the revenue recognized from these
agreements, has not been predictable.
Product
sales in the nine months ended September 30, 2008 were $6,432,000 compared to
$567,000 in the same prior year period, an increase of $5,865,000, or
1,034.4%. 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 and July 2008 was the compliance deadline for motor
coaches and vehicles greater than 3.5 metric tons. The next
compliance deadline is October 2010 for large vans and minibuses, followed by
further compliance deadlines in 2012. During our first quarter of
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 model as additional Low Emission
Zones are established throughout Europe.
Technology
licensing fees and royalties included fees upon execution of new agreements and
royalties from existing licensees, primarily for use of our ARIS
technologies. Our technology licensing fees and royalties were
$368,000 and $3,352,000 for the nine months ended September 30, 2008 and 2007,
respectively, a decline of $2,984,000, or 89.0%, attributable to recognition of
significant up-front license fees in 2007. In the nine months ended
September 30, 2008 and 2007, we executed new technology licensing agreements and
recognized revenue from license fees 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 license agreements
executed in 2008 include Headway Machinery Co., Ltd. (Zhucheng City, China) and
Hilite International, Inc. (Cleveland, Ohio), among others. The new
license agreements executed in the first nine months of 2007 included Robert
Bosch GmbH, Tenneco Automotive Operating Company Inc. and Combustion Components
Associates, Inc. We are continuing our efforts to consummate
technology license agreements with manufacturers and component suppliers for the
use of our ARIS technologies.
Our total
cost of revenue was $5,232,000 in the nine-month period ended September 30, 2008
compared to $388,000 in the nine-month period ended September 30, 2007 due to
higher product sales volume. Our gross profit as a percentage of
total revenue was 23.1% and 90.1% for nine-month periods ended September 30,
2008 and 2007, respectively, with the decrease attributable to the mix of lower
margin product sales. Gross profit as a percentage of product sales
was 18.7% and 31.6% for nine-month periods ended September 30, 2008 and 2007,
respectively. The gross margin for products compliant with the LEZ
requirements was initially set at a low level, based on low prices for our
products, to attract interest in our offering to establish greater visibility of
the Company in the marketplace. Our international operation
implemented price increases late in the third quarter of 2008.
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 $7,447,000 in the nine months ended
September 30, 2008 compared to $4,957,000 in the comparable 2007 period, an
increase of $2,490,000, or 50.2%. The increase was primarily due to
higher compensation and benefit costs, as well as higher professional fees,
occupancy costs and bad debt provision. Selling, general and
administrative expenses are summarized as follows:
|
(in
thousands)
|
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Non-cash
stock-based compensation
|
|
$ |
797 |
|
|
$ |
733 |
|
|
Compensation
and benefits
|
|
|
3,256 |
|
|
|
2,097 |
|
|
Total
compensation and benefits
|
|
|
4,053 |
|
|
|
2,830 |
|
|
Professional
|
|
|
1,247 |
* |
|
|
816 |
|
|
Travel
|
|
|
548 |
|
|
|
441 |
|
|
Occupancy
|
|
|
677 |
|
|
|
355 |
|
|
Sales
and marketing expenses
|
|
|
337 |
|
|
|
342 |
|
|
Bad
debt provision
|
|
|
499 |
|
|
|
58 |
|
|
Depreciation
and all other
|
|
|
86 |
|
|
|
115 |
|
|
Total
selling, general and administrative expenses
|
|
$ |
7,447 |
|
|
$ |
4,957 |
|
* Includes
$227,000 of non-cash stock-based compensation charges for fair value of
warrants.
The
Company’s aggregate non-cash charges for the fair value of stock options and
warrants in the nine months ended September 30, 2008 were $1,033,000, of which
$1,024,000 has been included in selling, general and administrative expenses
($797,000 in compensation and $227,000 in professional) and $9,000 in research
and development expenses. This compares to $733,000 in total non-cash
stock-based compensation expense in the nine months ended September 30,
2007.
Excluding
the non-cash stock-based charges, compensation and benefit expenses were
$3,256,000 for the nine months ended September 30, 2008 compared to $2,097,000
in the comparable prior year period, an increase of $1,159,000, or 55.3%, due to
new personnel, recruitment and relocation costs, and higher salary rates in 2008
compared to 2007. The 2008 compensation includes approximately
$41,000 in bonuses, whereas, the 2007 compensation includes approximately
$382,000 bonus expense based upon achievement of milestones.
Professional
fees include public relations, investor relations and financial advisory fees,
along with audit-related costs and costs of complying with the requirements of
the Sarbanes-Oxley Act of 2002. The significant component of the
increase in professional fees is attributable to stock-based compensation
charges for the fair value of warrants issued for investor relations
services. Occupancy costs include office rents, insurance, telephone
and communications, office supplies and related costs. We moved our
U.K. administrative offices in November 2007 and will relocate the U.S. office
in January 2009. The lease for the new U.S. office will result in
rent expense at approximately the current level but the cash outlay in the early
years of the new lease is expected to be lower than our current
requirement. Bad debt provision as a percentage of product sales in
the nine months ended September 30, 2008 and 2007 was 7.8% and 10.2%,
respectively. The 2008 provision is attributable to specific aged
accounts.
Research
and development expenses were $316,000 in the nine months ended September 30,
2008 compared to $292,000 in the nine months ended September 30, 2007, a
decrease of $24,000, or 8.2%. The 2008 projects include laboratory
testing on additive formulations, fuel economy and carbon reduction along with
and field testing of emission control technologies. The 2008 research
and development expenses include $9,000 of non-cash charges for the fair value
of stock options.
Patent
amortization and other patent related expense was $143,000 in the nine months
ended September 30, 2008 compared to $262,000 in the same prior year period, a
decline of $119,000, or 45.4%, due to additional costs in 2007 associated with
the protection of our patents.
Interest
income was $481,000 in the nine months ended September 30, 2008 compared to
$298,000 in the nine months ended September 30, 2007, an increase of $183,000,
or 61.4%, due to higher invested balances during the 2008 period, although at
lower rates in 2008.
Interest
expense was $14,000 in the nine months ended September 30, 2008 compared to zero
in the nine months ended September 30, 2007. In July 2008, we
borrowed all of the $3.0 million line of credit from UBS (see Note
5). We expect the interest expense incurred will be reimbursed by UBS
in conjunction with our acceptance of their Offer as outlined in Note 11
“Subsequent Events.”
Other
expense was $243,000 in the nine months ended September 30, 2008 and is
comprised of foreign currency transaction losses, net of gains.
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 September 30, 2008 and December
31, 2007, we had cash, cash equivalents and investments classified as current
assets of $6,691,000 and $8,617,000, respectively, to use for our
operations.
Net cash
used for operating activities was $4,447,000 in the nine months ended September
30, 2008 and was used primarily to fund the net loss of $6,114,000, adjusted for
non-cash items. Included in the non-cash items was stock-based
compensation expense of $1,033,000 accounted for in accordance with SFAS No.
123R.
Our
working capital was $4,762,000 at September 30, 2008 compared to $10,208,000 at
December 31, 2007, a decrease of $5,446,000. Accounts receivable, net
decreased to $1,093,000 at September 30, 2008 from $1,927,000 at December 31,
2007 due to collection of receivables, an increase in the allowance for doubtful
accounts and lower third quarter sales of our Purifier Systems to meet the
requirements of the London Low Emission Zone. Inventories, net
decreased to $831,000 at September 30, 2008 from $1,093,000 at December 31,
2007. Our accounts payable and accrued expenses decreased by $662,000
compared to December 31, 2007 reflecting lower business activity.
Net cash
provided by investing activities was $6,770,000 in the nine months ended
September 30, 2008, primarily due to sales of investments (see further
discussion below). We invested $220,000 in patents in 2008 and expect
to continue to invest in our patents.
Cash
provided by financing activities was $3,010,000 in the nine months ended
September 30, 2008 and was primarily due to proceeds from short-term debt
borrowing. At September 30, 2008, our outstanding short-term debt was
$3,000,000. Management determined to draw down the entire $3 million
loan facility from UBS as a matter of financial prudence to secure available
cash. The demand 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
(see Note 5). Effective upon the Company’s acceptance of the UBS
Offer, the Company would have a commitment from UBS of additional availability
of cash under the terms of the UBS no-cost loan program (see Note 11 “Subsequent
Events”).
At
September 30, 2008, our investments are recorded at fair value in accordance
with SFAS No. 157. At September 30, 2008 and December 31, 2007, we
held approximately $11.0 million ($11.7 million par value) 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 and continuing to date
in 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, the issuer redeems the issue, a
buyer is found outside of the auction process or the underlying securities
mature. We classified the fair value of approximately $11.0 million
(par value of $11.7 million) and $11.7 million of these auction rate securities
as non-current investments as of September 30, 2008 and December 31, 2007,
respectively, reflecting a $750,000 decline from par value based upon
management’s internal assessment, including review of discounted cash flows, 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, for the nine months ended September 30, 2008, the Company
recorded an unrealized temporary loss of $750,000 which is reflected in our
consolidated balance sheet in accumulated other comprehensive loss, resulting in
a reduction in stockholders’ equity. Factors we considered in
determining whether this loss was temporary included the length of time and
extent to which fair value has been less than the cost basis, the financial
condition and near-term prospects of the issuers, and our intent and ability to
retain the investment for a period of time sufficient to allow for any
anticipated recovery in fair value. At September 30, 2008, 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.
The
Company does not expect to need to access these funds in the short-term;
however, in May 2008, we arranged a $3 million demand loan facility using our
ARS as collateral and in July 2008, borrowed those funds as noted
above. On August 8, 2008, the Securities and Exchange Commission’s
Division of Enforcement announced it had entered into an agreement in principle
with UBS Securities LLC and UBS Financial Services, Inc. (collectively “UBS”),
whereby UBS will use its best efforts to liquidate at par value by the end of
2009 but not later than June 30, 2010. Our investment holdings of
$11.7 million par value of auction rate securities were purchased and held
through UBS.
In
October 2008, the Company received an offer (the “Offer”) from UBS for a put
right permitting us to sell to UBS at par value all ARS previously purchased
from UBS at a future date (any time during a two-year period beginning June 30,
2010). The Offer also includes a commitment to loan us 75% of the
UBS-determined value of the ARS at any time until the put is
exercised. The Offer is non-transferable and expires on November 14,
2008. On November 6, 2008, the Company accepted the
Offer. The Company’s right under the Offer is in substance a put
option (with the strike price equal to the par value of the ARS) which it
expects to record as an asset, measured at its fair value (pursuant to SFAS No.
159), with the resultant gain recognized in earnings. Concurrently,
the Company will also recognize an other-than-temporary impairment on the ARS,
measured as the amount of unrealized loss in accumulated other comprehensive
loss related to the ARS (a component of stockholders’ equity), which would be
offset, to a great extent, by the gain recognized upon recording the put
option.
The
Company has requested that it be recharacterized by UBS as in the class of ARS
holders that may exercise the put right commencing January 2, 2009 rather than
the period starting June 30, 2010. There can be no assurance
that UBS will take any action on our request.
The
Company will be exposed to credit risk should UBS be unable to fulfill its
commitment under the Offer. There can be no assurance that the
financial position of UBS will be such as to afford the Company (a) the ability
to acquire the par value of its ARS upon exercise of the put right, or (b) that
the Company may receive significant loan proceeds from the UBS loan
facility.
Our
management believes that based upon the Company’s cash and cash equivalents at
September 30, 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 $55.6 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.
Capital
Expenditures
As of
September 30, 2008, we had no commitments for capital expenditures and no
material commitments are anticipated in the near future.
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 and auction rate securities, 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 September 30, 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.
|
PART
II.
|
OTHER
INFORMATION
|
An
Inability to realize Proceeds from Our Auction Rate Securities
Right issued by UBS May Significantly Impact
Our Liquidity.
On
November 6, 2008 the Company accepted from UBS an Offer to acquire a “put” right
to sell to UBS commencing June 30, 2010 the Company's holdings of $11.7 million
in ARS securities. Also, UBS has established a loan facility whereby
the Company may under certain conditions borrow up to 75% of the UBS-determined
value of these ARS securities collateralized by the securities. Finally,
the Company has requested that it be recharacterized by UBS as in the class of
ARS holders that may exercise its put right commencing January 2, 2009 rather
than the period starting June 30, 2010. There can be no assurance
that the financial position of UBS will be such as to afford the Company (a) the
ability to acquire the par value of ARS securities on exercise of the put right,
or (b) that the Company may receive significant loan proceeds from the
UBS loan facility. Further, there can be no assurance that UBS
will use its discretion to reclassify the Company to enable the Company to
exercise its put right commencing on a date before June 30, 2010.
On
November 6, 2008, the Board of Directors of the Company amended the By-Laws of
the Company in several respects. A copy of such amended By-Laws is
attached to this Quarterly Report on Form 10-Q as Exhibit 3.1.
The
effect of Sections 2.2 and 2.12 of the By-Laws, as amended, is to require, with
respect to stockholder proposals for action at annual or special meetings of
stockholders, including the nomination for election of persons as Directors of
the Company, that there be, with respect to annual meetings, timely and adequate
notice, and, with respect to special meetings that there be adequate
notice.
Timely
notice with respect to annual meetings requires that the notice of the
stockholder proposal be received by the Secretary of the Company not earlier
than one hundred fifty (150) days and not later than sixty-five (65) days before
the first anniversary of the annual meeting of the Company in the preceding
year.
Adequate
notice with respect to business sought to be brought before either annual or
special meetings requires that the notice must set forth as to each matter
sought to be brought before a meeting (i) a brief description of the business
desired to be brought before the meeting which business shall be a proper matter
for stockholder action under the Delaware General Corporation Law, (ii) the
reasons for conducting such business at the meeting, (iii) any material interest
in such business of the stockholder of record and the beneficial owners , if
any, on whose behalf the proposal is made, (iv) the name and address of the
stockholder of record and such beneficial stockholders, if any, (v) the class
and number of shares owned of record and beneficially by the stockholder of
record and such beneficial owners, (vi) a representation by the stockholder of
record that such stockholder intends to appear at the meeting in person or by
proxy to bring the business before the meeting, and (vii) if such business
includes a proposal to amend the Certificate of Incorporation or the By-Laws of
the Corporation, the language of the proposed amendment.
Further,
where the proposed business is the nomination for election of a Director or
Directors, the notice in order to be adequate shall set forth as to each person
whom the stockholder or stockholders propose to nominate for election or
reelection as a director, (i) the name, age, business address and residence
address of the person, (ii) the principal occupations or employments of the
person currently and for the prior five years, (iii) a description of all
arrangements or understandings between or among the person or persons proposed
as a nominee and the proposing stockholder or stockholders and any other person
including their names, and (iv) a statement signed by the person that such
person consents to being named as a nominee, and, if elected, the person intends
to serve as a Director.
Information
concerning the proposed nominee need not be included in the proxy statement
furnished to stockholders by the Corporation in connection with an annual
meeting and nothing in the By-Law as amended is intended to govern or shall be
deemed in any way to affect any rights of stockholders of the Corporation or the
Corporation to request or deny inclusion of proposals in a proxy statement
issued by the Corporation pursuant to Rule 14a-8 under the Securities Exchange
Act of 1934.
Also,
under Section 2.2 of the By-Laws as amended, the Board of Directors with respect
to a special meeting properly called by stockholders, including a meeting called
to nominate persons for election as Directors of the Company, shall fix the time
and place of such meeting which shall be not less than thirty-five (35) and not
more than one hundred twenty (120) days after the date of receipt of the request
for the special meeting.
|
|
Exhibit
Number
|
|
Description
|
|
|
|
|
|
|
|
|
|
By-Laws
of the Company as amended through November 6, 2008.
|
| |
|
|
|
|
|
|
|
Company
Acceptance dated November 6, 2008 of UBS Offer relating to Auction Rate
Securities.
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
Certifications
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: November
10, 2008
|
By:
|
/s/ Bernhard
Steiner
|
|
|
|
|
Bernhard
Steiner
|
|
|
|
|
Director,
President and
|
|
|
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
|
Date: November
10, 2008
|
By:
|
/s/ Ann B. Ruple
|
|
|
|
|
Ann
B. Ruple
|
|
|
|
|
Chief
Financial Officer,
|
|
|
|
|
Vice
President and Treasurer
|
|
- 28 -