form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
____________________
FORM
10-Q
____________________
(Mark
One)
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended March 31,
2009
or
|
o
|
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
(State
or other jurisdiction of incorporation or organization)
|
06-1393453
(I.R.S.
Employer Identification No.)
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|
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Suite 1100, 10 Middle Street, Bridgeport,
CT
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06604
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(Address
of principal executive offices)
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(Zip
Code)
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(203)
416-5290
(Registrant’s
telephone number, including area code)
Suite 702, 300 Atlantic
Street, Stamford, CT 06901
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes o
No x
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 o
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Accelerated
Filer x
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Non-Accelerated
Filer o
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(Do
not check if a smaller reporting company.)
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Smaller
reporting company o
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o
No x
As of May
8, 2009, there were 8,178,304 outstanding shares of common stock, par value
$0.01 per share.
CLEAN DIESEL TECHNOLOGIES, INC.
Quarterly
Report on Form 10-Q
for the
Quarter Ended March 31, 2009
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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16
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Item
3.
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21
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Item
4.
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21
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PART
II.
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OTHER
INFORMATION
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Item
5.
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22
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Item
6.
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22
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23
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Item
1.
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Condensed
Consolidated Financial Statements
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CLEAN
DIESEL TECHNOLOGIES, INC.
Condensed
Consolidated Balance Sheets
(in
thousands, except share data)
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March
31,
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December
31,
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2009
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2008
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(unaudited)
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Assets
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Current
assets:
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Cash
and cash equivalents
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$ |
5,506 |
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$ |
3,976 |
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Accounts
receivable, net of allowance of $355 and $359,
respectively
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402 |
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637 |
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Investments
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6,413 |
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6,413 |
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Inventories,
net
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963 |
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974 |
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Other
current assets
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207 |
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219 |
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Total
current assets
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13,491 |
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12,219 |
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Investments
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5,055 |
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5,127 |
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Patents,
net
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1,040 |
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1,027 |
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Fixed
assets, net of accumulated depreciation of $541 and $505,
respectively
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376 |
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296 |
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Other
assets
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78 |
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78 |
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Total
assets
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$ |
20,040 |
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$ |
18,747 |
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Liabilities
and Stockholders’ Equity
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Current
liabilities:
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Accounts
payable
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$ |
367 |
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$ |
501 |
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Accrued
expenses
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796 |
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534 |
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Short-term
debt
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6,459 |
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3,013 |
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Customer
deposits
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3 |
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8 |
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Total
current liabilities
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7,625 |
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4,056 |
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Commitments
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Stockholders’
equity:
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Preferred
stock, par value $0.01 per share: authorized 100,000; no shares issued and
outstanding
|
|
─
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|
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─
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Common
stock, par value $0.01 per share: authorized 12,000,000; issued and
outstanding 8,178,304 and 8,138,304 shares, respectively
|
|
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82 |
|
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|
81 |
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Additional
paid-in capital
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74,107 |
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73,901 |
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Accumulated
other comprehensive loss
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(416 |
) |
|
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(406 |
) |
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Accumulated
deficit
|
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|
(61,358 |
) |
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|
(58,885 |
) |
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Total
stockholders’ equity
|
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12,415 |
|
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14,691 |
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Total
liabilities and stockholders’ equity
|
|
$ |
20,040 |
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$ |
18,747 |
|
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)
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Three
Months Ended
March
31,
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2009
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2008
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Revenue:
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Product
sales
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$ |
312 |
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$ |
2,527 |
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Technology
licensing fees and royalties
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34 |
|
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74 |
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Total
revenue
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|
|
346 |
|
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2,601 |
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Costs
and expenses:
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Cost
of product sales
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234 |
|
|
|
2,065 |
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Cost
of licensing fees and royalties
|
|
─
|
|
|
─
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Selling,
general and administrative
|
|
|
1,952 |
|
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|
2,322 |
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Severance
charge
|
|
|
510 |
|
|
─
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Research
and development
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|
59 |
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|
65 |
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Patent
amortization and other expense
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35 |
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36 |
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Operating
costs and expenses
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2,790 |
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4,488 |
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Loss
from operations
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(2,444 |
) |
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(1,887 |
) |
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Other
income (expense):
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Interest
income
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|
92 |
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|
243 |
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Other
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(121 |
) |
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54 |
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Net
loss
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$ |
(2,473 |
) |
|
$ |
(1,590 |
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Basic
and diluted loss per common share
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$ |
(0.30 |
) |
|
$ |
(0.20 |
) |
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Basic
and diluted weighted-average number of common shares
outstanding
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8,138 |
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8,137 |
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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)
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Three
Months Ended
March
31,
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2009
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2008
|
|
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Operating
activities
|
|
|
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|
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Net
loss
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|
$ |
(2,473 |
) |
|
$ |
(1,590 |
) |
|
Adjustments
to reconcile net loss to cash used in operating
activities:
|
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Depreciation
and amortization
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|
47 |
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|
34 |
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Provision
for doubtful accounts, net
|
|
─
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18 |
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Compensation
expense for equity instruments
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|
206 |
|
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|
530 |
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Loss
on investment, net
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|
72 |
|
|
─
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Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
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Accounts
receivable
|
|
|
235 |
|
|
|
(1,341 |
) |
|
Inventories
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|
11 |
|
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|
281 |
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Other
current assets and other assets
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12 |
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|
73 |
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Accounts
payable, accrued expenses and other liabilities
|
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|
123 |
|
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|
64 |
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Net
cash used for operating activities
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(1,767 |
) |
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(1,931 |
) |
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Investing
activities
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Sale
of investments
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─
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7,100 |
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Patent
costs
|
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|
(24 |
) |
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(52 |
) |
|
Purchase
of fixed assets
|
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(116 |
) |
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(20 |
) |
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Net
cash (used for) provided by investing activities
|
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(140 |
) |
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7,028 |
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Financing
activities
|
|
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|
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Proceeds
from short-term debt
|
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|
3,471 |
|
|
─
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Repayment
of short-term debt
|
|
|
(25 |
) |
|
─
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Proceeds
from exercise of stock options
|
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─
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19 |
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Net
cash provided by financing activities
|
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|
3,446 |
|
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|
19 |
|
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Effect
of exchange rate changes on cash
|
|
|
(9 |
) |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
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Net
increase in cash and cash equivalents
|
|
|
1,530 |
|
|
|
5,104 |
|
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Cash
and cash equivalents at beginning of the period
|
|
|
3,976 |
|
|
|
1,517 |
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Cash
and cash equivalents at end of the period
|
|
$ |
5,506 |
|
|
$ |
6,621 |
|
|
|
|
|
|
|
|
|
|
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Supplemental
non-cash activities:
|
|
|
|
|
|
|
|
|
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Unrealized
loss on available-for-sale securities
|
|
$
|
─
|
|
|
$ |
586 |
|
| |
|
|
|
|
|
|
|
|
| Spplemental
disclosures: |
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
20 |
|
|
$ |
─
|
|
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 condensed 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, 2008.
The
unaudited condensed 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.
Revenue
Recognition:
The
Company generates revenue from product sales comprised of fuel-borne catalysts,
including the Platinum Plus®
fuel-borne catalyst products and concentrate; hardware including the Purifier
System, ARIS® advanced
reagent injection system injectors and dosing systems; license and royalty fees
from the ARIS system and other technologies; and consulting fees and
other.
Revenue
is recognized when earned. For technology licensing fees paid by
licensees that are fixed and determinable, accepted by the customer and
nonrefundable, revenue is recognized upon execution of the license agreement,
unless it is subject to completion of any performance criteria specified within
the agreement, in which case it is deferred until such performance criteria are
met. Royalties are frequently required pursuant to license agreements
or may be the subject of separately executed royalty
agreements. Revenue from royalties is recognized ratably over the
royalty period based upon periodic reports submitted by the royalty obligor or
based on minimum royalty requirements. Revenue from product sales is
recognized when title has passed and our products are shipped to our customer,
unless the purchase order or contract specifically requires us to provide
installation for hardware purchases. For hardware projects in which
we are responsible for installation (either directly or indirectly by
third-party contractors), revenue is recognized when the hardware is installed
and/or accepted, if the project requires inspection and/or
acceptance. Other revenue primarily consists of engineering and
development consulting services. Revenue from technical consulting
services is generally recognized and billed as the services are
performed.
Generally,
our license agreements are non-exclusive and specify the geographic territories
and classes of diesel engines covered, such as on-road vehicles, off-road
vehicles, construction, stationary engines, marine and railroad
engines. At the time of the execution of our license agreement, we
assign 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 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 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 licensing fees and royalties is zero
as there are no incremental costs associated with the revenue. Cost
of consulting and other includes incremental out of pocket costs to provide
consulting services.
Patent
Expense:
Patents,
which include all direct incremental costs associated with initial patent
filings and costs to acquire rights to patents under licenses, are stated at
cost and amortized using the straight-line method over the remaining useful
lives, ranging from one to twenty years. During the three months
ended March 31, 2009, we capitalized $24,000 of patent
costs. Indirect and other patent-related costs are expensed as
incurred. Patent amortization expense was $11,000 and $14,000 for the
three months ended March 31, 2009 and 2008, respectively. At March
31, 2009 and December 31, 2008, the Company’s patents, net of accumulated
amortization, were $1,040,000 and $1,027,000, respectively.
Selling,
General and Administrative Expense:
Selling,
general and administrative expense is summarized as the following:
|
(in
thousands)
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
March
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Non-cash
stock-based compensation
|
|
$ |
202 |
|
|
$ |
300 |
|
|
Compensation
and benefits
|
|
|
1,016 |
|
|
|
887 |
|
|
Total
compensation and benefits
|
|
|
1,218 |
|
|
|
1,187 |
|
|
Professional
services
|
|
|
247 |
|
|
|
647
|
* |
|
Travel
|
|
|
111 |
|
|
|
114 |
|
|
Occupancy
|
|
|
235 |
|
|
|
245 |
|
|
Sales
and marketing expenses
|
|
|
52 |
|
|
|
85 |
|
|
Depreciation
and all other
|
|
|
89 |
|
|
|
44 |
|
|
Total
selling, general and administrative expenses
|
|
$ |
1,952 |
|
|
$ |
2,322 |
|
|
|
*
|
Professional
services in 2008 included $227,000 of non-cash stock-based compensation
charges for fair value of warrants.
|
Aggregate
non-cash stock-based compensation charges incurred by the Company in the three
months ended March 31, 2009 and 2008 were $206,000 and $530,000, respectively
(see Note 6).
Basic
and Diluted Loss per Common Share:
Basic and
diluted loss per share is calculated in accordance with the provisions of Financial Accounting Standards Board
(“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 128,
“Earnings Per Share.” Basic loss per share is computed by dividing
net loss by the weighted-average shares outstanding during the reporting
period. Diluted loss per share is computed in a manner similar to
basic earnings per share except that the weighted-average shares outstanding are
increased to include additional shares from the assumed exercise of stock
options and warrants, if dilutive, using the treasury stock
method. The Company’s computation of diluted net loss per share for
the three months ended March 31, 2009 and 2008 does not include common share
equivalents associated with 972,078 and 809,178 outstanding options,
respectively, and 424,992 warrants in each period and 40,000 unvested restricted
shares under a stock award in 2009 as the result would be
anti-dilutive.
Income
Taxes:
We
adopted FASB Interpretation No.
48 (“FIN 48”)
effective January 1, 2007. There were no unrecognized tax benefits at
the date of adoption of FIN 48, and there were no unrecognized tax benefits at
March 31, 2009. It is the Company’s policy to classify in the
financial statements accrued interest and penalties attributable to a tax
position as income taxes.
Utilization
of CDT's U.S. federal tax loss carryforwards for the period prior to December
12, 1995 is limited as a result of the ownership change in excess of 50%
attributable to the 1995 Fuel Tech rights offering to a maximum annual allowance
of $734,500. Utilization of CDT's U.S. federal tax loss carryforwards
for the period after December 12, 1995 and before December 30, 2006
is limited as a result of the ownership change in excess of 50%
attributable to the private placement which was effective December 29, 2006 to a
maximum annual allowance of $2,518,985. Utilization of CDT's tax
losses subsequent to 2006 may be limited due to cumulative ownership changes in
any future three-year period. It is not anticipated that CDT's U.S.
taxable income for the full calendar year 2009 will be in excess of the limited
allowable loss carryforwards.
We file our tax returns as prescribed by
the tax laws of the jurisdictions in which we operate. Our tax years
ranging from 2004 through 2008 remain open to examination by various
taxing jurisdictions as the statute of limitations has not
expired.
Fair
Value of Financial Instruments:
The
Company’s assets carried at fair value on a recurring basis are its investments
(see Note 2). The investments have been classified within level 3 in
the valuation hierarchy established by SFAS No. 157, “Fair Value Measurements,”
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.
Recently
Adopted and Recently Issued Accounting Pronouncements:
On
January 1, 2009, the Company adopted 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 will be applied
prospectively for acquisitions beginning in 2009 or thereafter.
On
January 1, 2009, the Company adopted 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. Upon adoption, this standard had no material effect on the
Company’s financial position, results of operations or cash flows.
On
January 1, 2009, the Company adopted Staff Position 157-2 (“FSP 157-2”),
“Effective Date of FASB Statement No. 157.” 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 elected to delay the adoption of SFAS No. 157 for
qualifying non-financial assets and liabilities, such as fixed assets and
patents. This standard had no material impact on the Company’s
financial position, results of operations or cash flows.
In
October 2008, the FASB issued FASB Staff Position (“FSP”) FSP FAS
No. 157-3, “Determining the Fair Value of a Financial Asset When the Market
for That Asset Is Not Active” (“FSP FAS No. 157-3”), to provide guidance on
determining the fair value of financial instruments in inactive
markets. FSP FAS No. 157-3 became effective for the Company upon
issuance. This standard had no impact on the Company’s financial
position, results of operations or cash flows.
On
January 1, 2009, the Company adopted SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities" ("SFAS No. 161"). SFAS No. 161
requires enhanced disclosures about an entity's derivative and hedging
activities. These enhanced disclosures will discuss: (a) how and
why a company uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under FASB Statement No. 133 and
its related interpretations and (c) how derivative instruments and related
hedged items affect a company’s financial position, results of operations and
cash flows. This standard had no material impact on the Company’s
financial position, results of operations or cash flows.
On
January 1, 2009, the Company adopted FSP FAS No. 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP FAS No. 142-3”). FSP FAS No. 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible
Assets. The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset and the
period of expected cash flows used to measure the fair value of the asset under
SFAS No. 141 (revised 2007), Business Combinations, and other US generally accepted accounting
principles. This standard had no material impact on the Company’s
financial position, results of operations or cash
flows.
On
January 1, 2009, the Company adopted EITF 07-05, “Determining Whether an
Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF
07-05”). EITF 07-05 provides guidance on determining what types of
instruments or embedded features in an instrument held by a reporting entity can
be considered indexed to its own stock for the purpose of evaluating the first
criteria of the scope exception in paragraph 11(a) of SFAS No.
133. EITF 07-05 had no material impact on the Company’s financial
position, results of operations or cash flows.
In April
2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB
28-1”). FSP FAS 107-1 and APB 28-1 extends the disclosure
requirements of SFAS No. 107 to interim period financial statements, in addition
to the existing requirements for annual periods and reiterates SFAS No. 107’s
requirement to disclose the methods and significant assumptions used to estimate
fair value. FSP FAS 107-1 and APB 28-1 is effective for the Company’s
interim periods ending after June 15, 2009 consolidated financial statements and
will be applied on a prospective basis. FSP FAS 107-1 and APB 28-1 is
not expected to have a material impact on the Company’s consolidated financial
statements.
In April
2009, the FASB issued FASB Staff Position No. FAS 157-4, “Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP
FAS 157-4”). FSP FAS 157-4 is effective for the Company’s interim and
annual periods ending after June 15, 2009 consolidated financial statements and
will be applied on a prospective basis. FSP FAS 157-4 is not expected
to have a material impact on the Company’s consolidated financial
statements.
In April
2009, the FASB issued FASB Staff Position SFAS No. 141(R)-1, “Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination that Arise
from Contingencies” (“FSP SFAS No. 141(R) -1”). FSP SFAS No.
141(R)-1 applies to all assets acquired and all liabilities assumed in a
business combination that arise from contingencies. FSP SFAS No.
141(R)-1 states that the acquirer will recognize such an asset or liability if
the acquisition-date fair value of that asset or liability can be determined
during the measurement period. If the acquisition date fair value
cannot be determined, the acquirer applies the recognition criteria, consistent
with SFAS No. 5, “Accounting for Contingencies,” to determine whether the
contingency should be recognized as of the acquisition date or after
it. FSP SFAS No. 141(R)-1 will be applied prospectively for
acquisitions beginning in 2009 or thereafter.
Note
2. Investments
The
Company’s investments consist of auction rate securities (“ARS”) and an auction
rate securities right (“ARSR”). The Company accounts for its ARS
investments using the provisions of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities,” and its ARSR investment using the
provisions of SFAS No. 159, “The Fair Value Option for Financial Assets and
Liabilities.” SFAS No. 115 provides for determination of the
appropriate classification of investments. Available-for-sale
securities are carried at fair value, with unrealized holding gains and losses,
net of tax, reported as a separate component of stockholders’
equity. Trading securities are carried at fair value, with unrealized
holding gains and losses included in other income (expense) on our consolidated
statements of operations.
SFAS No.
159, which the Company adopted on January 1, 2008, provides a fair value option
election that allows entities to irrevocably elect fair value as the initial and
subsequent measurement attribute for certain assets and
liabilities. Changes in fair value are recognized in earnings as they
occur for those assets or liabilities for which the election is
made. The election is made on an instrument by instrument basis at
initial recognition of an asset or liability or upon an event that gives rise to
a new basis of accounting for that instrument.
The
Company’s investments are reported at fair value in accordance with SFAS No.
157, “Fair Value Measurements,” which was adopted on January 1,
2008. 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 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
accordance with SFAS No. 157, the Company’s investments as of March 31, 2009 and
December 31, 2008 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 fair value of the investments may be revised in
future periods as market conditions evolve. Investments are comprised
of the following:
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Auction
rate securities
|
|
$ |
10,269 |
|
|
$ |
10,235 |
|
|
Auction
rate securities right
|
|
|
1,199 |
|
|
|
1,305 |
|
|
Total
investments
|
|
$ |
11,468 |
|
|
$ |
11,540 |
|
|
Classified
as current assets
|
|
|
6,413 |
|
|
|
6,413 |
|
|
Classified
as non-current assets
|
|
$ |
5,055 |
|
|
$ |
5,127 |
|
Our ARS
are variable-rate debt securities, most of which are AAA/Aaa rated, that are
collateralized by student loans substantially guaranteed by the U.S. Department
of Education. While the underlying securities have a long-term
nominal maturity, the interest rate is reset through dutch auctions that are
typically held every 28 days. The contractual maturities of our ARS range from
2027 to 2047. Auctions for our ARS have failed since February 2008 resulting in
illiquid investments for the Company. Our ARS 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 included a
commitment to loan us 75% of the UBS-determined value of the ARS at any time
until the put is exercised. We accepted the Offer on November 6,
2008. Our right under the Offer is in substance a put option (with
the strike price equal to the par value of the ARS) which we recorded as an
asset, measured at its fair value (elected pursuant to SFAS No. 159), with the
resultant gain recognized in our statement of operations.
For the
period through the date the Company accepted the Offer, the Company classified
the ARS as available-for-sale under SFAS No. 115. Thereafter, the
Company transferred the ARS to the trading category.
The fair
value of the ARS was approximately $10.3 million (par value of $11.7 million) at
March 31, 2009 and $10.2 million at December 31, 2008. We sold $7.1
million of these investments in 2008. The fair value of the ARS was
determined utilizing a discounted cash flow approach and market evidence with
respect to the ARS’s collateral, ratings and insurance to assess default risk,
credit spread risk and downgrade risk. The Company also recorded the
ARSR at an initial fair value of $1.3 million. The fair value of the
ARSR was based on an approach in which the present value of all expected future
cash flows were subtracted from the current fair market value of the securities
and the resultant value was calculated as a future value at an interest rate
reflective of counterparty risk. In the three months ended March 31,
2009, we recorded a gain of $34,000 on the ARS and a loss of $106,000 on the
ARSR, resulting in a $72,000 loss included in other income (expense) on our
condensed consolidated statement of operations.
Classification
of investments 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. At each of March 31, 2009 and December 31,
2008, the Company classified $6.4 million of the ARS as current based on
management’s intention to use such securities as consideration if UBS demands
payment on its loan prior to the date the Company exercises the
ARSR.
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 the ability to
acquire the par value of its ARS upon exercise of the ARSR.
Accrued
interest receivable at March 31, 2009 and December 31, 2008 was approximately
$9,000 and $11,000, respectively.
Note
3. Inventories
Inventories
are stated at the lower of cost or market with cost determined using the average
cost method. Inventories consist of the following:
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Finished
Platinum Plus fuel-borne catalyst
|
|
$ |
158 |
|
|
$ |
144 |
|
|
Platinum
concentrate/metal
|
|
|
495 |
|
|
|
578 |
|
|
Hardware
|
|
|
331 |
|
|
|
268 |
|
|
Other
|
|
|
1 |
|
|
|
6 |
|
|
|
|
$ |
985 |
|
|
$ |
996 |
|
|
Less:
inventory reserves
|
|
|
(22 |
) |
|
|
(22 |
) |
|
Inventories,
net
|
|
$ |
963 |
|
|
$ |
974 |
|
Note
4. Short-term Debt
On July
25, 2008, the Company borrowed $3.0 million from the demand loan facility with
UBS collateralized by our ARS, a facility we had arranged in May
2008. Management determined to draw down the entire facility as a
matter of financial prudence to secure available cash. The loan
facility was available for our working capital purposes and required that we
continue to meet certain collateral maintenance requirements, such that our
outstanding borrowings may not exceed 50% of the value of our ARS as determined
by the lender. No facility fee was required. Borrowings
bore interest at a floating interest rate per annum equal to the sum of the
prevailing daily 30-day Libor plus 25 basis points.
In
November 2008, the Company accepted the Offer from UBS AG (see Note
2). UBS committed to loan us 75% of the value of the ARS as
determined by UBS at any time until the ARSR is exercised. We applied
for the loan which UBS committed would be on a no net cost basis to the
Company. UBS approved our application on January 14,
2009.
In
January 2009, we received $3.5 million proceeds from UBS under the approved no
net cost loan. UBS approved a $6.5 million credit facility based upon
acceptance of our credit application pursuant to its Offer. Our ARS
serve as collateral for the loan which is payable upon demand. If UBS
should demand repayment prior to the commencement of the exercise period for our
ARSR (June 30, 2010), UBS will arrange alternative financing with substantially
the same terms and conditions. If alternative financing cannot be
established, UBS will purchase our pledged ARS at par value. Interest
is calculated at the weighted average rate of interest we earn on the
ARS. Interest is payable monthly. Interest expense for the
three months ended March 31, 2009 was approximately $20,000.
Note
5. Stockholders’ Equity
In the
first three months of 2009, we issued 40,000 restricted shares of our common
stock under our Incentive Plan (see Note 6).
In the
first three months of 2008, we issued 13,594 shares of our common stock upon the
exercise of stock options (see Note 6).
There was
no activity in the Company's 424,992 outstanding warrants during the periods
ended March 31, 2009 and 2008.
Note
6. Stock-Based Compensation
The
Company maintains a stock award plan approved by its stockholders, the 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.
Share-based
compensation cost recognized under SFAS 123R was approximately $206,000 and
$530,000 for the three months ended March 31, 2009 and 2008,
respectively. Of such 2009 total, $202,000 is classified in selling,
general and administrative expenses and $4,000 in research and development
expenses, and of such 2008 total, $527,000 is classified in selling, general and
administrative expenses ($300,000 as employee compensation and $227,000 as
investor relations compensation for advisory services) and $3,000 is included in
research and development expenses. Compensation costs for stock
options which vest over time are recognized over the vesting
period. As of March 31, 2009, there was approximately $0.8 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 0.7 years.
The
following table summarizes information concerning stock options outstanding
including the related transactions under the Plan for the three months ended
March 31, 2009:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
Aggregate
|
|
|
|
|
Number
of
|
|
Exercise
|
|
|
Contractual
|
|
Intrinsic
|
|
|
|
|
Shares
|
|
Price
|
|
|
Term
in Years
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding as of December 31, 2008
|
|
|
972,578 |
|
|
$ |
11.716 |
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(500 |
) |
|
$ |
4.6875 |
|
|
|
|
|
|
|
|
|
|
Options
outstanding as of March 31, 2009
|
|
|
972,078 |
|
|
$ |
9.858 |
|
|
|
6.4 |
|
|
$
|
|
|
|
Options
exercisable as of March 31, 2009
|
|
|
832,411 |
|
|
$ |
10.464 |
|
|
|
5.9 |
|
|
$
|
|
|
The
aggregate intrinsic value (market value of stock less option exercise price) in
the preceding table represents the total pretax intrinsic value, based on the
Company’s closing stock price on March 31, 2009, which would have been received
by the holders had all holders of awards and options in the money exercised
their options as of that date.
No stock
options were exercised in the three months ended March 31, 2009. For
the three months ended March 31, 2008, proceeds received from the exercise of
stock options were approximately $19,000 and were included in financing
activities on the Company’s condensed consolidated statements of cash
flows. In addition, for the three months ended March 31, 2008, 8,072
shares were surrendered upon the exercise of options to fund the
purchase. The total intrinsic value of stock options exercised for
the three months ended March 31, 2008 was $271,676.
During
the three months ended March 31, 2009, the board of directors awarded 40,000
shares to the recently elected Chief Executive Officer at an average market
price of $1.625 per share, representing the high and low market price on the
date of award, March 30, 2009. These shares vest as to one-third of
the total on each of February 10, 2010, 2011 and 2012. The total fair
value of the award was $65,000 which will be charged to expense over the vesting
period.
During
the three months ended March 31, 2008, the board of directors granted 18,000
option shares to employees at a weighted average exercise price of $16.11 per
share. These options vest as to one-third, immediately upon grant and
as to one-third, upon each of the first and second anniversaries of
grant. The weighted-average fair value at the date of grant for
options granted during the three months ended March 31, 2008 was $12.44 per
share and was estimated using the Black-Scholes option pricing model with the
following weighted-average assumptions:
|
Expected
term in years
|
|
|
8.64 |
|
|
Risk-free
interest rate
|
|
|
3.64 |
% |
|
Expected
volatility
|
|
|
92.6 |
% |
|
Dividend
yield
|
|
|
0 |
% |
The
Company estimates the fair value of stock options using a Black-Scholes option
pricing model. Key input assumptions used to estimate the fair value
of stock options include the expected term, expected volatility of the Company’s
stock, the risk free interest rate, option forfeiture rates, and dividends, if
any. The expected term of the options is based upon the historical
term until exercise or expiration of all granted options. The
expected volatility is derived from the historical volatility of the Company’s
stock on the U.S. NASDAQ Capital Market (the Over-the-Counter market prior to
October 3, 2007) for a period that matches the expected term of the
option. The risk-free interest rate is the constant maturity rate
published by the U.S. Federal Reserve Board that corresponds to the expected
term of the option. SFAS No. 123R requires forfeitures to be
estimated at the time of grant in order to estimate the amount of share-based
awards that will ultimately vest. The estimate is based on the
Company’s historical rates of forfeitures. SFAS No. 123R also
requires estimated forfeitures to be revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. The
dividend yield is assumed as 0% because the Company has not paid dividends and
does not expect to pay dividends in the future.
Note
7. Commitments
The
Company was obligated under a five-year sublease agreement through March 31,
2009 for its principal office (3,925 square feet) at an annual cost of
approximately $128,000, including utilities and parking. The Company
is obligated under a seven-year lease expiring December 2015 for its relocated
U.S. headquarters at 10 Middle Street, Bridgeport, Connecticut (5,515 square
feet) at an annual cost of approximately $141,000, including
utilities. We have a lease for 1,942 square feet of office space
outside London, U.K. through March 2013 at an annual cost of approximately
$65,000, including utilities and parking. We also lease 2,750 square
feet of warehouse space in Milford, Connecticut at an annual cost of
approximately $21,000 (including utilities) through July 2009.
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 was 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 expired in
December 2008. CDT, as assignee and owner, maintains the technology
at its expense. Royalty expense incurred under this obligation for
the three months ended March 31, 2008 was approximately
$4,600. Royalties payable to Fuel Tech at December 31, 2008 were
$20,700.
Note
8. Related Party Transactions
The
Company terminated its Management and Services Agreement with Fuel Tech
effective February 1, 2009. That agreement required 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. In 2008 and until the termination in 2009, the Company
reimbursed Fuel Tech for the expenses associated with one Fuel Tech
officer/director who also serves as an officer/director of CDT. This
CDT officer/director became a part-time employee of the Company on February 1,
2009. The Company’s condensed consolidated statements of operations
include charges from Fuel Tech of certain management and administrative costs of
approximately $6,000 and $18,000, respectively, in the three-month periods ended
March 31, 2009 and 2008.
Note
9. Significant Customers
For the
three months ended March 31, 2009 and 2008, revenue derived from certain
customers comprised 10% or more of our consolidated revenue (“significant
customers”) as set forth in the table below:
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Customer
A
|
|
|
38.3%
|
|
|
|
*
|
|
|
Customer
B
|
|
|
*
|
|
|
|
12.5%
|
|
|
Customer
C
|
|
|
*
|
|
|
|
10.8%
|
|
|
|
*
|
Represents less than 10% revenue
for that customer in the applicable period. There were no other
customers that represented 10% or more of revenue for the periods
indicated.
|
At March
31, 2009, Clean Diesel had three customers (two of such customers are not
included in the table above) that represented approximately 43.3% of its gross
accounts receivable balance.
Note
10. Comprehensive Loss
Components
of comprehensive loss follow:
|
(in
thousands)
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
March
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Net
loss
|
|
$ |
(2,473 |
) |
|
$ |
(1,590 |
) |
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(9 |
) |
|
|
(12 |
) |
|
Unrealized
loss on available-for-sale securities
|
|
|
|
|
|
(586 |
) |
|
Comprehensive
loss
|
|
$ |
(2,482 |
) |
|
$ |
(2,188 |
) |
Note
11. Geographic Information
CDT sells
its products and licenses its technologies throughout the world. A
geographic distribution of revenue consists of the following:
|
(in
thousands)
|
|
|
|
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
U.S.
|
|
$ |
221 |
|
|
$ |
135 |
|
|
U.K./Europe
|
|
|
97 |
|
|
|
2,446 |
|
|
Asia
|
|
|
28 |
|
|
|
20 |
|
|
Total
revenue
|
|
$ |
346 |
|
|
$ |
2,601 |
|
The
Company has patent coverage in North and South America, Europe, Asia, Africa and
Australia. As of March 31, 2009 and December 31, 2008, the Company’s
assets comprise the following:
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
U.S.
|
|
$ |
18,592 |
|
|
$ |
17,214 |
|
|
Foreign
|
|
|
1,448 |
|
|
|
1,533 |
|
|
Total
assets
|
|
$ |
20,040 |
|
|
$ |
18,747 |
|
|
|
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, 2008.
Results
of Operations
Three
Months ended March 31, 2009 Compared to Three Months ended March 31,
2008
Total
revenue in the three months ended March 31, 2009 was $346,000 compared to
$2,601,000 in the three months ended March 31, 2008, a decrease of $2,255,000,
or 86.7%, reflecting declines in product sales as well as licensing fees and
royalties. Of our operating revenue for the three months ended March
31, 2009, approximately 90.2% was from product sales and 9.8% was from
technology licensing fees and royalties. Of our operating revenue for
the three months ended March 31, 2008, approximately 97.2% was from product
sales and 2.8% was from technology licensing fees and royalties. 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 decreased $2,215,000 to $312,000 in the first quarter of 2009 from
$2,527,000 in the same 2008 quarter. The decrease in product sales
was attributable primarily to lower demand for our Platinum Plus Purifier
Systems, a product comprised of a diesel particulate filter along with our
Platinum Plus fuel-borne catalyst, for compliance with the requirements of the
London Low Emission Zone. 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 deadlines for the London Low Emission Zone are in 2010 and
2012. The sales of our Purifier Systems for compliance with the
requirements of the London Low Emission Zone provide us with recurring revenue
from use of our Platinum Plus fuel-borne catalyst that enables the regeneration
of the diesel particulate filter. We believe we will have the
opportunity to expand this business opportunity as additional Low Emission Zones
are established throughout Europe and elsewhere.
Our
technology licensing fees and royalties were $34,000 in the first quarter of
2009 compared to $74,000 in the same quarter of 2008 and were primarily
attributable to royalties related to our ARIS® technologies. In March
2008, we entered into a license agreement with the largest commercial diesel
engine exhaust company in China to supply Chinese original equipment
manufacturers of diesel-powered transportation in support of China’s anticipated
regulations for emissions. Pursuant to this license, we intend to
supply our wire mesh filters along with Platinum Plus fuel-borne catalyst to the
supplier after the supplier completes initial testing, which testing had been
anticipated to be concluded late in 2008 but has not yet been
completed. We are continuing our efforts to consummate technology
license agreements with manufacturers and component suppliers for the use of our
ARIS technologies for control of oxides of nitrogen (NOx) using our selective
catalytic reduction (SCR) emission control, the combination of exhaust gas
recirculation (EGR) with SCR technologies, and hydrocarbon injection for lean
NOx traps, NOx catalysts and diesel particulate filter
regeneration.
Our total
cost of revenue was $234,000 in the three-month period ended March 31, 2009
compared to $2,065,000 in the three-month period ended March 31,
2008. The decrease in our cost of sales is due to lower product sales
volume. Our gross profit as a percentage of revenue was 32.4% and
20.6% for three-month periods ended March 31, 2009 and 2008, respectively, with
the increase attributable to higher margin product sales.
Our cost
of 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 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 licensing fees and royalties is zero as
there are no incremental costs associated with the revenue. Cost of
consulting and other includes incremental out of pocket costs to provide
consulting services.
Selling,
general and administrative expenses were $1,952,000 in the three months ended
March 31, 2009 compared to $2,322,000 in the comparable 2008 period, a decrease
of $370,000, or 15.9%. The decrease in selling, general and
administrative costs is primarily attributable to lower professional fees,
particularly investor relations and financial advisory services, and lower
non-cash stock-based compensation charges as further discussed
below. We are making a concerted effort in 2009 to contain our costs
and eliminate those costs that are redundant or deemed
unnecessary. Selling, general and administrative expenses are
summarized as follows:
|
(in
thousands)
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
March
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Non-cash
stock-based compensation
|
|
$ |
202 |
|
|
$ |
300 |
|
|
Compensation
and benefits
|
|
|
1,016 |
|
|
|
887 |
|
|
Total
compensation and benefits
|
|
|
1,218 |
|
|
|
1,187 |
|
|
Professional
services
|
|
|
247 |
|
|
|
647
|
* |
|
Travel
|
|
|
111 |
|
|
|
114 |
|
|
Occupancy
|
|
|
235 |
|
|
|
245 |
|
|
Sales
and marketing expenses
|
|
|
52 |
|
|
|
85 |
|
|
Depreciation
and all other
|
|
|
89 |
|
|
|
44 |
|
|
Total
selling, general and administrative expenses
|
|
$ |
1,952 |
|
|
$ |
2,322 |
|
|
|
*
|
Professional
services in 2008 included $227,000 of non-cash stock-based compensation
charges for fair value of warrants.
|
Aggregate
non-cash charges for the fair value of stock options and warrants in the three
months ended March 31, 2009 were $206,000, of which $202,000 has been included
in selling, general and administrative expenses and $4,000 in research and
development expenses. This compares to $530,000 in non-cash stock
option compensation expense in the three months ended March 31, 2008, of which
$527,000 was included in selling, general and administrative expenses ($300,000
in compensation and $227,000 in professional) and $3,000 in research and
development expenses.
Excluding
the non-cash stock-based charges, compensation and benefit expenses were
$1,016,000 for the three months ended March 31, 2009 compared to $887,000 in the
comparable prior year period, an increase of $129,000, or 14.5%, due primarily
to new personnel hired in 2008.
Professional
fees include public relations, investor relations and financial advisory fees
along with audit-related costs. Included in 2008 professional costs
is a $227,000 non-cash compensation expense for stock warrants issued for
financial advisory services. Such charge represents the remaining
stock-based amount that was amortized over the period that services were
rendered. Occupancy costs include office rents, insurance and related
costs. We relocated our U.S. corporate offices in January 2009 and
incurred rent expense on both our old and new U.S. headquarters due to the
timing of our relocation and expiration of the old lease.
We
incurred severance charges totaling $510,000 in the three months ended March 31,
2009 to be paid in monthly installments until September 2010. On
February 10, 2009, the Company’s Board of Directors elected Michael L. Asmussen,
38, as President and Chief Executive Officer replacing Dr. Bernhard
Steiner. Mr. Asmussen was also appointed to serve as a Director of
the Company. Effective February 11, 2009, Dr. Steiner resigned as a
Director of the Company. As a consequence of his termination of
employment, Dr. Steiner is entitled to salary of approximately $315,445 (EUR
241,500) per annum until September 13, 2010, the remainder of his contract term,
along with specified expenses not to exceed an aggregate of approximately
$4,300, to be paid in monthly installments.
We have
rationalized the Company so that each of the services group and the intellectual
property group will manage resources based upon data-driven revenue
expectations. As such, new processes are being established to ensure
organizational and individual discipline and accountability.
Research
and development expenses were $59,000 in the three months ended March 31, 2009
compared to $65,000 in the three months ended March 31, 2008, a decrease of
$6,000, or 9.2%. Our work for the California Showcase is ongoing
along with certain supplemental environmental programs sponsored by California
Air Resources Board (CARB). The 2008 projects included laboratory
testing on additive formulations. Research and development expenses
in the three months ended March 31, 2009 and 2008 include $4,000 and $3,000,
respectively, of non-cash charges for the fair value of stock options granted in
accordance with SFAS No. 123R.
We
believe that it is an essential requirement of the U.S. retrofit market that
emissions control products and systems are verified under the U.S. Environmental
Protection Agency (EPA) and/or CARB protocols in order to qualify for credits
within the EPA and/or CARB programs. Funding for these emissions
control products and systems is generally limited to those products and
technologies that have already been verified. In 2009, we intend to
verify our Platinum Plus fuel-borne catalyst in combination with a high
performance diesel particulate filter under the CARB protocol. We
have no assurance that our product will be verified by CARB or that such a
verification will be acceptable to the EPA. Verification is also
useful for commercial acceptability.
EPA
verifications were withdrawn on two of our products in January 2009 because
available test results were not accepted by EPA as meeting new emissions testing
requirements for NO2
measurement. Although prior testing indicates satisfactory
performance can be achieved, we have no assurance that the EPA will determine
that the results of the proposed evaluations will meet the new standards, nor
whether additional testing which may be required by EPA will be adequate to
remove any remaining concern the EPA may have regarding use of our fuel-borne
catalyst.
Patent
amortization and other patent costs were $35,000 and $36,000 in the three months
ended March 31, 2009 and 2008, respectively. Patent amortization
expense for the three months ended March 31, 2009 and 2008 was $11,000 and
$14,000, respectively.
Interest
income was $92,000 in the three months ended March 31, 2009 compared to $243,000
in the three months ended March 31, 2008, a decrease of $151,000, or 62.1%, due
to lower interest rates in 2009.
Other
expense of $121,000 in the three months ended March 31, 2009 is comprised of
$20,000 interest expense on short-term borrowing, $72,000 of net loss on
investments and $29,000 of foreign currency transaction losses, net of
gains. In the three months ended March 31, 2009, the Company had an
unrealized gain on the fair value of its investment in ARS of $34,000 and an
unrealized loss of $106,000 on its ARSR, resulting in a $72,000 net
loss. In the three months ended March 31, 2008, the Company had other
income of $54,000 which consisted of foreign currency transaction gains, net of
losses.
Liquidity and Capital
Resources
We
require capital resources and liquidity to fund our global development and for
working capital. Our working capital requirements vary from period to
period depending upon manufacturing volumes, the timing of deliveries and
payment cycles of our customers. At March 31, 2009 and December 31,
2008, we had cash and cash equivalents of $5.5 million and $4.0 million,
respectively, to use for our operations. Our working capital was $5.9
million at March 31, 2009 compared to $8.2 million at December 31, 2008
reflecting a decrease of $2.3 million primarily attributable to the $3.4 million
increase in short-term loan, partially offset by the net cash used for
operations.
Net cash
used for operating activities was $1.8 million in the three months ended March
31, 2009 and was used primarily to fund the net loss of $2.5 million, adjusted
for non-cash items. Included in the non-cash items was stock-based
compensation expense of $206,000 accounted for in accordance with SFAS No.
123R.
Accounts
receivable, net decreased by $0.2 million to $0.4 million at March 31, 2009 from
$0.6 million at December 31, 2008 due primarily to collection of
receivables. Inventories, net and other current assets were only
slightly down at March 31, 2009 from the December 31, 2008
levels. Our accounts payable, accrued expenses and other liabilities
increased $0.1 million at March 31, 2009 compared to December 31, 2008
reflecting decreases in accounts payable and other liabilities that were more
than offset by an increase in accrued expenses. The increase in
accrued expenses is primarily due to accrued severance to be paid in monthly
installments through September 2010 as outlined above.
Net cash
used for investing activities was $0.1 million in the three months ended March
31, 2009. We capitalized fixed assets and improvements associated
with our U.S. headquarters to which we relocated in January 2009. We
also used cash for investments in our patents, including patent applications in
foreign jurisdictions. We expect to continue to invest in our
intellectual property portfolio.
Cash
provided by financing activities was $3.4 million in the three months ended
March 31, 2009 and was attributable to proceeds from borrowing from a demand
loan facility. We are using the proceeds from short-term debt for
general working capital purposes.
In May
2008, we arranged a $3 million demand loan facility using our ARS as collateral
and in July 2008, borrowed those funds as a matter of financial prudence to
secure available cash. In January 2009, UBS approved a $6.5 million
credit facility. In January 2009, we drew down the additional
available cash as a matter of financial prudence. The auction rate
securities (“ARS”) serve as collateral for the loan which is due upon demand
(see Note 4 of Notes to the Condensed Consolidated Financial
Statements).
At March
31, 2009, our investments are recorded at fair value in accordance with SFAS No.
157 and comprise ARS and an ARS put right (“ARSR”). At March 31, 2009
and December 31, 2008, we held approximately $10.3 million and $10.2 million
($11.7 million par value), respectively, in investments in ARS collateralized by
student loans, primarily AAA/Aaa-rated, which are substantially guaranteed by
the U.S. Department of Education. We sold $7.1 million of these
investments in the three months ended March 31, 2008. However,
starting on February 15, 2008 and continuing to date in 2009, 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 ARS 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, and the securities continue to
be auctioned at the pre-determined intervals (typically every 28 days) until the
auction succeeds, the issuer calls the securities, or they mature.
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 included a commitment to loan us 75% of the
UBS-determined value of the ARS at any time until the put is
exercised. The Offer was non-transferable and expired 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
recorded as an asset, measured at its fair value (pursuant to SFAS No. 159),
with the resultant gain recognized in earnings.
The fair
value of the Company’s ARS increased $34,000 in the three months ended March 31,
2009, which gain was recognized in our condensed consolidated statement of
operations. The fair value of the ARS was determined utilizing a
discounted cash flow approach and market evidence with respect to the ARS’s
collateral, ratings and insurance to assess default risk, credit spread risk and
downgrade risk. The Company also recorded a loss on the ARSR of
$106,000 and recognized the loss in operations, which, together with the $34,000
increase in fair value of the ARS, resulted in a $72,000 net charge to
operations in 2009. The fair value of the ARSR was based on an
approach in which the present value of all expected future cash flows was
subtracted from the current fair market value of the securities and the
resultant value was calculated as a future value at an interest rate reflective
of counterparty risk. The Company used an independent third party
valuation firm to assist it with its determination of fair value of the ARS and
ARSR.
Classification
of investments 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. At each of March 31, 2009 and December 31,
2008, the Company classified $6.4 million of the ARS as current based on
management’s intention to use such securities as consideration if UBS demands
payment on its loan prior to the date the Company exercises the
ARSR.
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 the ability to
acquire the par value of its ARS upon exercise of the put right.
Our
management believes that based upon the Company’s cash and cash equivalents and
investments at March 31, 2009, 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 $61.4 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.
As of
March 31, 2009, we had no commitments for capital expenditures and no material
commitments are anticipated in the near future.
|
|
Quantitative
and Qualitative Disclosures about Market
Risk
|
In the
opinion of management, with the exception of exposure to fluctuations in the
cost of platinum, exchange rates for pounds sterling and Euros, and current
turmoil in the capital markets, we are not subject to any significant market
risk exposure. We monitor the price of platinum and exchange rates
and adjust our procurement strategies as needed. There have been no
material changes in our market risk exposures at March 31, 2009 as compared to
December 31, 2008.
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
|
Item 5.
|
Other
Information
|
The
Company’s annual meeting of stockholders will be held at 10:00 a.m. Eastern time
on May 13, 2009 in Bridgeport, Connecticut. The Company filed its
definitive proxy statement on Schedule 14A with the Securities and Exchange
Commission on April 20, 2009, which filing is available at the SEC’s web site,
www.sec.gov.
|
(a)
|
Exhibits
|
|
|
|
|
|
|
|
|
|
Exhibit
Number
|
|
Description
|
|
|
|
|
|
| |
|
|
Employment
Agreement effective March 30, 2009 between Michael L. Asmussen and the
Company.
|
| |
|
|
|
|
|
|
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Exchange
Act.
|
|
|
|
|
|
|
|
|
|
Certification
of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Exchange
Act.
|
|
|
|
|
|
|
|
|
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section
1350.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
CLEAN DIESEL TECHNOLOGIES,
INC.
|
|
|
|
(Registrant)
|
|
|
|
|
|
|
|
|
|
|
|
|
Date: May
11, 2009
|
By:
|
/s/ Michael L.
Asmussen
|
|
|
|
|
Michael
L. Asmussen
|
|
|
|
|
Director,
President and
|
|
|
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
|
Date: May
11, 2009
|
By:
|
/s/ Ann B. Ruple
|
|
|
|
|
Ann
B. Ruple
|
|
|
|
|
Chief
Financial Officer,
|
|
|
|
|
Vice
President and Treasurer
|
|