e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
March 31, 2010
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number:
001-33710
CLEAN DIESEL TECHNOLOGIES,
INC.
(Exact name of
registrant as specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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06-1393453
(I.R.S. Employer
Identification No.)
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10 Middle Street, Suite 1100, Bridgeport, CT
(Address of principal
executive offices)
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06604
(Zip Code)
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(203) 416-5290
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past
90 days. Yes þ 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 o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act.
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Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting
company þ
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(Do not check if a smaller
reporting company.)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of May 10, 2010, there were 8,213,988 outstanding shares
of the registrants common stock, par value $0.01 per share.
CLEAN
DIESEL TECHNOLOGIES, INC.
Quarterly Report on
Form 10-Q
for the Quarter Ended March 31, 2010
INDEX
-2-
PART I.
FINANCIAL INFORMATION
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Item 1.
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Condensed
Consolidated Financial Statements
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CLEAN
DIESEL TECHNOLOGIES, INC.
Condensed
Consolidated Balance Sheets
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March 31,
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December 31,
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2010
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2009
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(Unaudited)
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(In thousands, except share data)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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2,257
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$
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2,772
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Investments
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10,475
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11,725
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Accounts receivable, net of allowance of $218 and $232,
respectively
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522
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148
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Inventories, net
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887
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1,059
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Other current assets
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128
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294
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Total current assets
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14,269
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15,998
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Patents, net
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908
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898
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Fixed assets, net of accumulated depreciation of $396 and $505,
respectively
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270
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294
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Other assets
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55
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57
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Total assets
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$
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15,502
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$
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17,247
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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405
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$
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301
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Accrued expenses
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618
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675
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Short-term debt
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6,900
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7,693
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Total current liabilities
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7,923
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8,669
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Commitments and contingencies (Note 7)
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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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Common stock, par value $0.01 per share:
authorized 12,000,000; issued and outstanding 8,213,988 and
8,213,988 shares, respectively
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82
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82
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Additional paid-in capital
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74,724
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74,694
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Accumulated other comprehensive loss
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(435
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(381
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Accumulated deficit
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(66,792
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(65,817
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)
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Total stockholders equity
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7,579
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8,578
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Total liabilities and stockholders equity
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$
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15,502
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$
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17,247
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The accompanying notes are an integral part of the condensed
consolidated financial statements.
-3-
CLEAN
DIESEL TECHNOLOGIES, INC.
Condensed
Consolidated Statements of Operations
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Three Months Ended
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March 31,
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2010
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2009
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(In thousands, except per share amounts)
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(Unaudited)
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Revenue:
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Product sales
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$
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612
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$
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312
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Technology licensing fees and royalties
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33
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34
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Consulting and other
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38
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Total revenue
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683
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346
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Costs and expenses:
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Cost of product sales
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465
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234
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Cost of licensing fees and royalties
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Cost of consulting and other revenues
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Selling, general and administrative
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1,221
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1,952
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Severance charge
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(103
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510
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Research and development
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53
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59
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Patent amortization and other expense
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49
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69
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Operating costs and expenses
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1,685
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2,824
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Loss from operations
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(1,002
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(2,478
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Other income (expense):
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Interest income
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60
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92
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Other income (expense), net
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(33
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(121
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Net loss
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$
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(975
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$
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(2,507
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Basic and diluted loss per common share
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$
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(0.12
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$
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(0.31
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Basic and diluted weighted-average number of common shares
outstanding
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8,181
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8,138
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The accompanying notes are an integral part of the condensed
consolidated financial statements
-4-
CLEAN
DIESEL TECHNOLOGIES, INC.
Condensed
Consolidated Statements of Cash Flows
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Three Months Ended
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March 31,
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2010
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2009
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(In thousands)
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(Unaudited)
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Operating activities
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Net loss
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$
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(975
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$
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(2,507
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)
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Adjustments to reconcile net loss to cash used in operating
activities:
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Depreciation and amortization
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47
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47
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Compensation expense for options, warrants and stock awards
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30
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206
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Unrealized loss on investments, net
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72
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Loss on abandonment of patents
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3
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34
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Changes in operating assets and liabilities:
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Accounts receivable
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(374
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235
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Inventories, net
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172
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11
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Other current assets and other assets
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168
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12
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Accounts payable, accrued expenses and other liabilities
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47
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123
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Net cash used for operating activities
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(882
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(1,767
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)
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Investing activities
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Sale of investments
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1,250
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Patent costs
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(29
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(24
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Purchase of fixed assets
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(9
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(116
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Net cash provided by (used for) investing activities
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1,212
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(140
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)
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Financing activities
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Proceeds from short-term debt
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498
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3,471
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Repayment of short-term debt
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(1,291
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)
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(25
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)
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Net cash (used for) provided by financing activities
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(793
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)
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3,446
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Effect of exchange rate changes on cash
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(52
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)
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(9
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Net (decrease) increase in cash and cash equivalents
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$
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(515
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)
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$
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1,530
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Cash and cash equivalents at beginning of the period
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2,772
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3,976
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Cash and cash equivalents at end of the period
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$
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2,257
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$
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5,506
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Supplemental non-cash activities:
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Accumulated amortization of abandoned assets
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$
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2
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$
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3
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Supplemental disclosures:
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Cash paid for interest
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$
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24
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$
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20
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The accompanying notes are an integral part of the condensed
consolidated financial statements.
-5-
CLEAN
DIESEL TECHNOLOGIES, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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Note 1.
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Significant
Accounting Policies
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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 Diesels consolidated financial statements and
notes thereto included in our Annual Report on
Form 10-K
for the year ended December 31, 2009.
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.
Revision
of Prior Period Amounts:
In preparing its financial statements for the three months ended
March 31, 2010, Clean Diesel discovered certain errors
related to accounting for patents. These errors resulted in the
overstatement of Patents, net and the understatement of patent
costs for 2009. In accordance with SEC Staff accounting
Bulletin Nos. 99 and 108 (SAB 99 and
SAB 108), Clean Diesel evaluated these errors and
determined that they were immaterial to the each reporting
period affected and, therefore, amendment of previously filed
reports was not required. However, if the adjustments to correct
the cumulative errors had been recorded in the first quarter
2010, Clean Diesel believes the impact would have been
significant to the first quarter and would impact comparisons to
prior periods. As permitted by SAB 108, Clean Diesel
revised in the current filing and plans to revise in the next
filings of its quarterly and annual consolidated financial
statements previously reported annual and quarterly results for
2009 for these immaterial amounts.
The Consolidated Balance Sheet at December 31, 2009 was
revised to reflect the cumulative effect of these errors which
resulted in an increase in Accumulated deficit of $185,000.
Also, in accordance with SAB 108, the Consolidated
Statement of Operations and Consolidated Statement of Cash Flows
have been revised as follows:
Condensed Consolidated Balance Sheet
December 31, 2009
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As previously
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reported
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Adjustment
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Revised
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(In thousands)
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Patents, net
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$
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1,083
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$
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(185
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)
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$
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898
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Total assets
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17,432
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(185
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)
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17,247
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Accumulated deficit
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(65,632
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)
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(185
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)
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(65,817
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)
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Total stockholders equity
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8,763
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(185
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)
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8,578
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Total liabilities and stockholders equity
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17,432
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(185
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)
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17,247
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-6-
Condensed Consolidated Statement of Operations Three
Months Ended March 31, 2009
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As previously
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reported
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Adjustment
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Revised
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(In thousands)
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Patent amortization and other expense
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$
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35
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$
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34
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$
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69
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Operating costs and expenses
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2,790
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|
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34
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|
|
|
2,824
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Loss from operations
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(2,444
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)
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(34
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)
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(2,478
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)
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Net loss
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(2,473
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)
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(34
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)
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(2,507
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)
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Basic and diluted loss per common share
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(0.30
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)
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(0.31
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)
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Condensed Consolidated Statement of Cash Flows Three
Months Ended March 31, 2009
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As previously
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reported
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Adjustment
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Revised
|
|
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(In thousands)
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|
|
Net loss
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$
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(2,473
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)
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$
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(34
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)
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$
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(2,507
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)
|
Loss on abandonment of patents
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|
|
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34
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|
|
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34
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Accumulated amortization of abandoned assets
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|
|
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3
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|
|
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3
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Revenue
Recognition:
The Company generates revenue from sales of emission reduction
products including Purifier system hardware;
ARIS®
advanced reagent injection system injectors and dosing systems;
fuel-borne catalysts, including the Platinum
Plus®
fuel-borne catalyst products and concentrate; and license and
royalty fees from the ARIS system and other technologies.
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 grant income,
engineering and development consulting services. Revenue from
technical consulting services is generally recognized and billed
as the services are performed. Revenue from grant income is
recognized when grant income is earned.
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
-7-
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.
Valuation
of Accounts Receivable:
Management reviews the creditworthiness of a customer prior to
accepting an initial order. Upon review of the customers
credit application and confirmation of the customers
credit and bank references, management establishes the
customers terms and credit limits. Credit terms for
payment of products are extended to customers in the normal
course of business and no collateral is required. We receive
order acknowledgements from customers confirming their orders
prior to our fulfillment of orders. To determine the allowance
for doubtful accounts receivable which adjusts gross trade
accounts receivable downward to estimated net realizable value,
management considers the ongoing financial stability of the
Companys customers, the aging of accounts receivable
balances, historical losses and recoveries, and general business
trends and existing economic conditions that impact our industry
and customers. In cases where the Company is aware of
circumstances that may impair a specific customers ability
to meet its financial obligations, we record a specific
allowance against amounts due from that customer, and thereby
reduce the net recognized receivable to the amount the Company
reasonably believes will be collected. An account is written off
only after management has determined that all available means of
collection, including legal remedies, are exhausted.
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. Cost of
licensing fees and royalties is zero as there are no incremental
costs associated with the revenue. Cost of consulting and other
revenue 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, 2010, we capitalized $29,000 of patent costs and
recognized a $3,000 loss on the abandonment of certain patents
and patent applications. Indirect and other patent-related costs
are expensed as incurred. Patent amortization expense for the
three months ended March 31, 2010 and March 31, 2009
was $16,000 and $11,000, respectively. At March 31, 2010
and December 31, 2009, the Companys patents, net of
accumulated amortization, were $908,000 and $898,000,
respectively.
Basic and
Diluted Loss per Common 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 Companys computation
of diluted net loss per share for the three months ended
March 31, 2010 and 2009 does not include common share
equivalents associated with 818,744 and 972,078 options,
respectively, and 407,493 and 424,992 warrants, respectively, as
the result would be anti-dilutive. Further, per share effects of
the 26,667 and 40,000 unvested restricted shares under a stock
award have not been included in the diluted net loss per share
for the three months ended March 31, 2010 and 2009,
respectively, as the result would be anti-dilutive.
-8-
Income
Taxes:
At March 31, 2010, there were no unrecognized tax benefits.
It is the Companys policy to classify in the financial
statements accrued interest and penalties attributable to a tax
position as income taxes.
Utilization of CDTs 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 CDTs
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 CDTs tax losses subsequent to
2006 may be limited due to cumulative ownership changes in
any future three-year period.
We file our tax returns as prescribed by the tax laws of the
jurisdictions in which we operate. Our tax years after 2006
remain open to examination by various taxing jurisdictions as
the statute of limitations has not expired.
Selling,
General and Administrative Expense:
Selling, general and administrative expense is summarized as the
following:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Compensation and benefits
|
|
$
|
620
|
|
|
$
|
1,016
|
|
Non-cash stock-based compensation
|
|
|
30
|
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
Total compensation and benefits
|
|
|
650
|
|
|
|
1,218
|
|
Professional services
|
|
|
326
|
|
|
|
247
|
|
Travel
|
|
|
51
|
|
|
|
111
|
|
Occupancy
|
|
|
122
|
|
|
|
235
|
|
Sales and marketing expenses
|
|
|
7
|
|
|
|
52
|
|
Depreciation and all other
|
|
|
65
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative expenses
|
|
$
|
1,221
|
|
|
$
|
1,952
|
|
|
|
|
|
|
|
|
|
|
Aggregate non-cash stock-based compensation charges incurred by
the Company in the three months ended March 31, 2010 and
2009 were $30,000 and $206,000, respectively, (including zero
and $4,000, respectively, in research and development expenses).
Fair
Value of Financial Instruments:
The Companys 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 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:
In January 2010, the Financial Accounting Standards Board
(FASB) published Accounting Standards Update
(ASU)
2010-06,
Fair Value Measurements and Disclosures (Topic 820):
Improving Disclosures about Fair Value Measurements. ASU
No. 2010-06
clarifies improved disclosure requirements related to fair
-9-
value measurements and disclosures in Overall Subtopic
820-10 of
the FASB Codification. The new disclosures and clarifications of
existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except
for the disclosure about purchases, sales, issuances, and
settlements in the rollforward of activity in Level 3 fair
value measurements. Those disclosures are effective for fiscal
years beginning after December 15, 2010, and for interim
periods within those fiscal years. The adoption of this standard
will not have a material impact on the Companys financial
position and results of operations.
The Companys investments consist of auction rate
securities (ARS) and an auction rate securities
right (ARSR). The Company accounts for its ARS
investments based upon accounting standards that provide 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 condensed consolidated statements
of operations.
The Companys ARSR investment is accounted for based upon a
standard that 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 Companys investments are reported at fair value in
accordance with accounting standards that accomplish 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 Companys 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 instruments 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.
|
-10-
The Companys investments as of March 31, 2010 and
December 31, 2009 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:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Auction rate securities
|
|
$
|
9,461
|
|
|
$
|
10,577
|
|
Auction rate securities right
|
|
|
1,014
|
|
|
|
1,148
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
10,475
|
|
|
$
|
11,725
|
|
Classified as current assets
|
|
|
10,475
|
|
|
|
11,725
|
|
|
|
|
|
|
|
|
|
|
Classified as non-current assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
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, 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;
thereafter, the Company transferred the ARS to the trading
category.
In March 2010, UBS purchased one of our ARS instruments at par
value. UBS applied the sale proceeds of $1,250,000 to reduce the
outstanding borrowing under our UBS credit facility (see
Note 4.). This action is pursuant to the terms of the UBS
Offer that grants UBS the right to purchase ARS from our account
at par value plus accrued interest and apply all proceeds to the
outstanding debt. As such, UBS has modified the amount we are
eligible to borrow based upon 75% of the UBS-determined value of
the ARS.
The fair value of the ARS was approximately $9.5 million
(par value of $10.5 million) at March 31, 2010 and
$10.6 million at December 31, 2009. The fair value of
the ARS was determined utilizing a discounted cash flow approach
and market evidence with respect to the ARSs 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,
2010, we recorded a gain of $134,000 on the ARS and a loss of
$134,000 on the ARSR, resulting in no impact on our results of
operation. 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 net loss included in other
income (expense) on our condensed consolidated statements of
operations.
Classification of investments as current or non-current is
dependent upon managements intended holding period, the
securitys maturity date and liquidity considerations based
on market conditions. At March 31, 2010 and
December 31, 2009, the Company classified all investments
as current based on managements intention and ability to
liquidate the investments by June 30, 2010.
-11-
The Company will be exposed to credit risk should UBS be unable
to fulfill its commitment under the Offer. In the event that UBS
is unable to perform upon our exercise of the ARS put right on
or after June 30, 2010, we would have to sell the
underlying securities at a discount which would negatively
impact our future cash flows.
Interest income for the three months ended March 31, 2010
and March 31, 2009 was approximately $60,000 and $92,000,
respectively. Accrued interest receivable at March 31, 2010
and December 31, 2009 was approximately $12,000 and $7,000,
respectively.
The table below includes a rollforward of the Companys
investments in ARS and ARSR for the three months ended
March 31, 2010:
|
|
|
|
|
|
|
2010
|
|
|
|
Significant
|
|
|
|
Unobservable
|
|
|
|
Inputs
|
|
|
|
(Level 3)
|
|
|
|
(In thousands)
|
|
|
Fair value at beginning of period
|
|
$
|
11,725
|
|
Purchases
|
|
|
|
|
Sales
|
|
|
(1,250
|
)
|
Transfers (out) in
|
|
|
|
|
Unrealized gain (loss) included in statement of operations
|
|
|
|
|
|
|
|
|
|
Fair value at end of period
|
|
$
|
10,475
|
|
|
|
|
|
|
Change in unrealized gain (loss)
|
|
$
|
|
|
|
|
|
|
|
Inventories are stated at the lower of cost or market with cost
determined using the average cost method. Inventories consist of
the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Finished Platinum Plus fuel-borne catalyst
|
|
$
|
185
|
|
|
$
|
85
|
|
Platinum concentrate/metal
|
|
|
262
|
|
|
|
449
|
|
Hardware
|
|
|
443
|
|
|
|
587
|
|
Other
|
|
|
67
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
957
|
|
|
$
|
1,132
|
|
Less: inventory reserves
|
|
|
(70
|
)
|
|
|
(73
|
)
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
887
|
|
|
$
|
1,059
|
|
|
|
|
|
|
|
|
|
|
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 could 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
-12-
for the loan which UBS committed would be on a no net cost basis
to the Company. UBS approved our credit application on
January 14, 2009 and approved a $6.5 million credit
facility pursuant to its Offer. On September 4, 2009, we
arranged an increase of the credit line to $7.7 million.
In March 2010, UBS purchased one of our ARS instruments at par
value. UBS applied the sale proceeds of $1,250,000 to reduce the
outstanding debt. This action was pursuant to the terms of the
UBS Offer that grants UBS the right to purchase ARS from our
account at par value plus accrued interest and apply all
proceeds to the outstanding debt. As such, UBS modified the
amount we are eligible to borrow based upon 75% of the
UBS-determined value of the ARS to approximately
$6.9 million.
The outstanding balance of the short-term debt at March 31,
2010 and December 31, 2009 was $6.9 million and
$7.7 million, respectively.
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, 2010 and 2009
was approximately $27,000 and $20,000, respectively. Accrued
interest payable at March 31, 2010 was approximately $3,000.
|
|
Note 5.
|
Stockholders
Equity
|
In March 2009, we issued 40,000 restricted shares of our common
stock under our Incentive Plan (see Note 6).
In the first three months of 2010, there was no activity in the
Companys warrants. At March 31, 2010, the Company had
407,493 warrants outstanding, exercisable at a weighted-average
exercise price of $11.51 with a weighted-average remaining life
of 2.2 years.
|
|
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 Companys 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 Companys outstanding common
stock less the then outstanding awards, subject to sufficient
authorized shares.
Share-based compensation cost recognized under ASC 718 was
approximately $30,000 and $206,000 for the three months ended
March 31, 2010 and 2009, respectively. As of March 31,
2010, there was approximately $0.1 million of unrecognized
compensation cost related to stock options and restricted shares
granted under the Plan. The cost is expected to be recognized
over a weighted-average period of 0.7 years.
-13-
The following table summarizes information concerning stock
options outstanding including the related transactions under the
Plan for the three months ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares*
|
|
|
Price
|
|
|
Term in Years
|
|
|
Value
|
|
|
Options Outstanding as of December 31, 2009
|
|
|
876,410
|
|
|
$
|
10.40
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(57,666
|
)
|
|
$
|
12.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of March 31, 2010
|
|
|
818,744
|
|
|
$
|
10.27
|
|
|
|
4.2
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable as of March 31, 2010
|
|
|
781,744
|
|
|
$
|
10.58
|
|
|
|
3.9
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Table does not include 40,000 shares issued in 2009 as a
restricted stock award under the Plan. |
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 Companys closing
stock price on March 31, 2010, 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, 2010 and 2009.
In 2009, the board of directors awarded 40,000 shares to
the newly-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 is being charged to expense over the vesting
period.
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 Companys 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 Companys 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. ASC 718 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 Companys historical rates of forfeitures.
ASC 718 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
and Contingencies
|
Legal
Proceedings
From time to time, the Company is involved in legal proceedings
in the ordinary course of its business. The litigation process
is inherently uncertain, and the Company cannot guarantee that
the outcome of existing proceedings will be favorable for the
Company or that they will not be material to the Companys
business, results of operations or financial position. However,
the Company does not currently believe these matters will have a
material adverse effect on its business, results or financial
position.
-14-
|
|
Note 8.
|
Related
Party Transactions
|
Mr. Park, our Chairman, is also a principal and chairman of
Innovator Capital Limited, a financial services company based in
London, England, which firm has provided services to the
Company. On November 20, 2009, the Company entered into an
engagement letter with Innovator to provide financing and merger
and acquisition services (Engagement Letter). The
Engagement Letter had an initial three month term during which
Innovator would (i) act for the Company in arranging a
private placement financing of $3.0 million to
$4.0 million from the sale of the Companys common
stock and warrants and (ii) assist the Company in merger
and acquisition activities. Effective February 20, 2010,
the Company extended the term of the Engagement Letter to
June 30, 2010 and revised the minimum and maximum range of
private placement financing to $1.0 million to
$1.5 million.
For its financing services, Innovator will receive (i) a
placing commission of five percent (5%) of all monies received
by the Company and (ii) financing warrants to acquire
shares of common stock of the Company equal in value to fifteen
percent (15%) of the total gross proceeds received by the
Company in the financing, such financing warrants to be
exercisable at a price equal to a ten percent (10%) premium to
the price per share of common stock in the financing. Issuance
of the financing warrants is contingent on the stockholders of
the Company authorizing additional common stock.
For its merger and acquisition services, Innovator will receive
monthly retainer fees of $10,000 and success fees as a
percentage of transaction value of five percent (5%) on the
first $10.0 million, four percent (4%) on the next
$3.0 million, three percent (3%) on the next
$2.0 million, and two percent (2%) on amounts above
$15.0 million in connection with possible merger and
acquisition transactions. Success fees are payable in cash or
shares or a combination of cash or shares as determined by the
Board of the Company.
The Engagement Letter further provides that retainer fees may be
deducted from success fees, that Innovator shall be reimbursed
for its ordinary and necessary out of pocket expenses, that the
Engagement Letter is subject to Delaware law, and that disputes
between the parties are subject to arbitration.
Selling, general and administrative expenses for the three
months ended March 31, 2010 include $30,000 related to
services rendered by Innovator Capital under the terms of the
Engagement Letter.
Effective January 27, 2010, we engaged David F. Merrion, a
director of the Company, to perform consulting services for us
as an expert witness in an administrative proceeding related to
a patent application with respect to diesel engine technology.
Mr. Merrion will be paid for his services, as requested
from time to time by the Company, at the rate of $300 per hour
or a daily maximum of $3,000 per day. In the three months ended
March 31, 2010, the Company incurred costs of approximately
$20,000 under this agreement.
|
|
Note 9.
|
Significant
Customers
|
For the three months ended March 31, 2010 and 2009, revenue
derived from certain customers comprised 10% or more of our
consolidated revenue as set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2010
|
|
2009
|
|
Customer A
|
|
|
53.9
|
%
|
|
|
*
|
|
Customer B
|
|
|
*
|
|
|
|
38.3
|
%
|
|
|
|
* |
|
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, 2010, Clean Diesel had two customers (one
customer is not included in the table above) that represented
approximately 59.3% of its gross accounts receivable balance.
-15-
|
|
Note 10.
|
Comprehensive
Loss
|
Components of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Net loss
|
|
$
|
(975
|
)
|
|
$
|
(2,507
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(54
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(1,029
|
)
|
|
$
|
(2,516
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Note 11.
|
Geographic
Information
|
CDT sells its products and licenses its technologies throughout
the world. A geographic distribution of revenue consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
U.S.
|
|
$
|
138
|
|
|
$
|
221
|
|
U.K./Europe
|
|
|
518
|
|
|
|
97
|
|
Asia
|
|
|
27
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
683
|
|
|
$
|
346
|
|
|
|
|
|
|
|
|
|
|
The Company has patent coverage in North and South America,
Europe, Asia, Africa and Australia. As of March 31, 2010
and December 31, 2009, the Companys assets comprise
the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
U.S.
|
|
$
|
13,771
|
|
|
$
|
15,551
|
|
Foreign
|
|
|
1,731
|
|
|
|
1,696
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
15,502
|
|
|
$
|
17,247
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 12.
|
Severance
Charges
|
On February 10, 2009, the Companys Board of Directors
elected Michael L. Asmussen as President and Chief Executive
Officer replacing Dr. Bernhard Steiner. 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. During
the three months ended March 31, 2009, the Company
recognized a severance charge of $510,000 for this obligation.
On August 4, 2009, the Board of Directors adopted a plan to
implement a company-wide reduction in force effective
August 7, 2009. In accordance with ASC 420, Exit or
Disposal Cost Obligations, the Company recognized approximately
$448,000 in severance charges in the third quarter of 2009.
During the three months ended March 31, 2010, the Company
reversed $103,000 of its severance accrual to recognize a
reduction in the Companys obligations under these
severance arrangements.
-16-
A summary of the activity in the severance accrual is as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
Balance at December 31, 2009
|
|
$
|
389
|
|
Provisions (Reversals)
|
|
|
(103
|
)
|
Payments
|
|
|
(146
|
)
|
|
|
|
|
|
Balance at March 31, 2010
|
|
$
|
140
|
|
|
|
|
|
|
|
|
Note 13.
|
Subsequent
Events
|
Effective April 19, 2010, our Board of Directors terminated
the employment of Ann B. Ruple and her appointment as Vice
President, Treasurer and Chief Financial Officer. Also on the
same date, our Board of Directors appointed John B. Wynne, 48,
as Vice President, Treasurer and Interim Chief Financial Officer
to be effective on April 23, 2010. Mr. Wynne has been
a partner of Tatum, LLC since 2005. Tatum is an executive
services firm and is furnishing to Clean Diesel the services of
Mr. Wynne as Interim Chief Financial Officer.
In May 2010, UBS purchased one of our ARS instruments at par
value in the amount of $3.5 million and applied the
proceeds to reduce the outstanding borrowing under our UBS
credit facility (See Note 4). This action is pursuant to
the terms of the UBS Offer that grants UBS the right to purchase
ARS from our account at par value plus accrued interest and
apply all proceeds to the outstanding debt. As such, UBS has
modified the amount we are eligible to borrow based upon 75% of
the UBS-determined value of the ARS. On May 6, 2010, UBS
advised us that we have approximately $1.2 million available
under our UBS credit facility.
Effective May 10, 2010, Mr. John A. de Havilland
resigned as a director of the Company.
On May 13, 2010, the Company entered into an Agreement and
Plan of Merger (the Merger Agreement) with Catalytic
Solutions, Inc. (CSI) (AIM: CTS and CTSU), a global
manufacturer and distributor of emissions control systems and
products based in Ventura, CA. The proposed merger is a
transaction that will result in the combination of the
businesses of Clean Diesel and CSI, whereby CSI will become a
wholly-owned subsidiary of Clean Diesel (the
Merger). Under the terms of the Merger Agreement:
|
|
|
|
|
In exchange for their shares of CSI common stock, the
shareholders of CSI will receive shares, and warrants to
purchase shares, of Clean Diesel common stock. CSI shareholders
will receive such numbers of Clean Diesel common stock so that
after the Merger, CSI will own approximately 60% of the
outstanding shares of Clean Diesel common stock, subject to
adjustment for the cash position, as defined in the Merger
Agreement, of CSI and Clean Diesel, at the earlier of closing or
June 30, 2010. In addition, CSI shareholders will receive
warrants to purchase up to 3 million shares of Clean Diesel
common stock.
|
|
|
|
The Merger is conditional among other matters on obtaining Clean
Diesel stockholder approval and CSI shareholder approval and
also a number of further closing requirements including that
Clean Diesel has $4.5 million and CSI has $2.0 million
in cash or equivalent at the time of the Merger.
|
In connection with the proposed merger, the Company in a
Regulation S offering, has received commitment letters from
existing stockholders to raise approximately $1.0 million
for the issuance of additional shares of common stock and
warrants.
-17-
|
|
Item 2.
|
Managements
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 Companys filings with the Securities and
Exchange Commission. See Item 1A, Risk Factors,
and Item 7, Managements Discussion and Analysis
of Financial Condition and Results of Operations in the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2009.
Results
of Operations
Three
Months ended March 31, 2010 Compared to Three Months ended
March 31, 2009
Total revenue in the three months ended March 31, 2010 was
$683,000 compared to $346,000 in the three months ended
March 31, 2009, an increase of $337,000, or 97.4%,
reflecting increased traction in the Companys attempt to
establish itself in the retrofit space. Operating revenue for
the three months ended March 31, 2010 consisted of
approximately 89.6% in product sales, 4.8% in technology
licensing fees and royalties, and 5.6% in grant revenue. 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. 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 $612,000 in the first quarter of 2010
compared to $312,000 in the same quarter of 2009, an increase of
$300,000. This increase in product sales was 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. 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, although the Mayor of London has
proposed suspension of the 2010 deadline. 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
we build the infrastructure required to address additional low
emission zones throughout Europe and elsewhere.
Our technology licensing fees and royalties were essentially
flat year over year with $33,000 in the three months ended
March 31, 2010 compared to $34,000 in the same quarter of
2009. These revenues are primarily attributable to royalties
related to our
ARIS®
technologies. While we have not executed new technology license
agreements in 2010, we continue 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 $465,000 in the three month period
ended March 31, 2010 compared to $234,000 in the three
month period ended March 31, 2009. The increase in our cost
of sales is due to higher product sales volume. Our gross profit
as a percentage of revenue was 31.9% and 32.4% for the three
month periods ended March 31, 2010 and 2009, respectively.
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
-18-
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, in 2009 the costs of our warehouse of
approximately $21,000 per year were 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 consulting and other
revenue includes incremental out of pocket costs to provide
consulting services.
Selling, general and administrative expenses were $1,221,000 in
the three months ended March 31, 2010 compared to
$1,952,000 in the comparable 2009 period, a decrease of
$731,000, or 37.4%. The decrease in selling, general and
administrative costs is primarily attributable to lower
compensation and benefits, travel, rent and related occupancy
expenses. Our cost control initiatives to strictly control
spending are ongoing and improvements are apparent in our
current operating costs. Selling, general and administrative
expenses are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Compensation and benefits
|
|
$
|
620
|
|
|
$
|
1,016
|
|
Non-cash stock-based compensation
|
|
|
30
|
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
Total compensation and benefits
|
|
|
650
|
|
|
|
1,218
|
|
Professional services
|
|
|
326
|
|
|
|
247
|
|
Travel
|
|
|
51
|
|
|
|
111
|
|
Occupancy
|
|
|
122
|
|
|
|
235
|
|
Sales and marketing expenses
|
|
|
7
|
|
|
|
52
|
|
Depreciation and all other
|
|
|
65
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative expenses
|
|
$
|
1,221
|
|
|
$
|
1,952
|
|
|
|
|
|
|
|
|
|
|
Excluding the non-cash stock-based charges, compensation and
benefit expenses were $620,000 for the three months ended
March 31, 2010 compared to $1,016,000 in the comparable
prior year period. This decrease of $396,000, or 39.0%, is due
primarily to the reduction in force implemented effective
August 7, 2009. The reduction in non-cash stock-based
compensation reflects a reduction in the Companys
workforce and related issuance of stock-based awards.
Research and development expenses were $53,000 in the three
months ended March 31, 2010 compared to $59,000 in the
three months ended March 31, 2009, a decrease of $6,000, or
10.2%. Presently, we are working to overcome gaps in our
technology and product portfolios brought about by volatile
markets and past development setbacks. In addition to
development of new products, our 2010 projects include field
testing of fuel economy and emission control technologies. Total
research and development expenses for the three months ended
March 31, 2009 included $4,000 of non-cash charges for
stock-based compensation.
The U.S. Environmental Protection Agency (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. Presently,
we do not intend to seek verification of these products. We have
no assurance of the extent of additional testing that may be
required by EPA or whether it will be adequate to remove any
remaining concern the EPA may have regarding use of our
fuel-borne catalyst.
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. EPA
and/or the
California Air Resources Board (CARB) protocols in order to
qualify for funding from 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.
-19-
Verification is also useful for commercial acceptability. We
believe that the lack of CARB verification will result in a
shift of U.S. retrofit revenue into future periods. We
expect to have CARB verification in the fourth quarter of 2010.
We may have the opportunity to obtain a conditional CARB
verification before all of our testing has been concluded.
Without full CARB verification, our U.S. retrofit
opportunities are limited although certain jurisdictions have
been satisfied with other of our certifications. We received the
EPA registration in December 1999 for the Platinum Plus
fuel-borne catalyst for use in bulk fuel by refiners,
distributors and truck fleets. In 2000, we completed the
certification protocol for particulate filters and additives for
use with particulate filters with VERT, the main recognized
authority in Europe that tests and verifies diesel particulate
filters for emissions and health effects. In 2001, the Swiss
environmental agency BUWAL approved the Platinum Plus fuel-borne
catalyst for use with particulate filters. In 2002, the
U.S. Mining, Safety and Health Administration accepted
Platinum Plus fuel-borne catalyst for use in all underground
mines. In 2007, we received accreditation for our Purifier
System, our Platinum Plus fuel-borne catalyst used with a diesel
particulate filter, to be sold for compliance with the emission
reduction requirements established for the London LEZ. In 2009,
the German Federal Environment Agency, the Umweltbundesamt
(UBA), issued a non disapproval for sale of Platinum
Plus fuel-borne catalyst for use in conjunction with up to 2,000
diesel particulate filters in Germany; further work will be
required to lift fully the 2,000 unit restriction.
In addition to emphasis on the global retrofit market, we
continued to focus on fuel economy opportunities in the
U.S. in non-road sectors, including rail, marine, mining
and construction, and expect continued focus on these sectors by
our distributors rather than through our direct selling efforts.
Our Platinum Plus fuel-borne catalyst is effective with regular
sulfur diesel, ultra-low sulfur diesel, arctic diesel (kerosene)
and biodiesel. When used with blends of biodiesel and ultra-low
sulfur diesel, our Platinum Plus fuel-borne catalyst prevents
the normal increase in nitrogen oxides associated with
biodiesel, as well as offering emission reduction in
particulates and reduced fuel consumption. Platinum Plus is used
to improve combustion which acts to reduce emissions and improve
the performance and reliability of emission control equipment.
Platinum Plus fuel-borne catalyst takes catalytic action into
engine cylinders where it improves combustion, thereby reducing
particulates, unburned hydrocarbons and carbon monoxide
emissions, which also results in improved fuel economy. Platinum
Plus fuel-borne catalyst lends itself to a wide range of
enabling solutions including fuel economy, diesel particulate
filtration, low emission biodiesel, carbon reduction and exhaust
emission reduction. The improvement attributable to Platinum
Plus fuel-borne catalyst may vary as a result of engine age,
application in which the engine is used, load, duty cycle,
speed, fuel quality, tire pressure and ambient air temperature.
Generally, after use of Platinum Plus fuel-borne catalyst during
a conditioning period, our customers derive economic benefits
from the use of our Platinum Plus fuel-borne catalyst whenever
the price of diesel fuel is in excess of $1.75 per
U.S. gallon.
Patent amortization and other patent related expense was $49,000
in the three months ended March 31, 2010 compared to
$69,000 in the same prior year period, a decrease of $20,000.
The 2009 expense includes the write-off of $34,000 in
capitalized costs related to the abandonment of certain patents
and patent applications not material to our business, the
continued maintenance of which was judged by management to be
uneconomic.
At each reporting period, the Company evaluates the events or
changes in circumstances that may indicate that patents are not
recoverable. The types of events and changes in circumstances
that would indicate the carrying value of our patents is not
recoverable and therefore, impairment testing would be triggered
include the following: permanent elimination of mandated
compliance with emission reduction standards; reduction in
overall market prevalence of diesel engines; obsolescence of our
technologies due to new discoveries and inventions; and an
adverse action or assessment against our technologies.
Our technology is comprised of patents, patent applications,
trade or service marks, data and know-how. We consider the life
of our technologies to be commensurate with the remaining term
of our U.S. and corresponding foreign patents. Our patents
have expiration dates ranging from 2010 through 2026, with the
majority of the material patents upon which we rely expiring in
2018 and beyond. We believe that we have sufficient patent
coverage surrounding our core patents that effectively serves to
provide us longer proprietary
-20-
protection. Our patents comprise technologies that have been
asserted as the technologies of choice by various automotive
original equipment manufacturers (OEMs) to meet mandates to
comply with upcoming regulatory requirements that go into effect
starting in 2010 (EPA 2010). We monitor evolving technologies in
the automotive and other applicable industries to evaluate
obsolescence of any of our patents.
Although we have seen certain suspensions and delays in mandated
emissions requirements, we expect sufficient revenue over the
remaining life of the underlying patents to recover the carrying
value of our patents. We believe the emission reduction mandates
will be phased in over time so that despite volatility in our
revenue streams, we should realize the expected revenue from our
patents. Our intellectual property strategy has been to build
upon our base of core technology with newer advanced technology
patents developed or purchased by us. In many instances, we have
incorporated the technology embodied in our core patents into
patents covering specific product applications, including
product design and packaging. We believe this building-block
approach provides greater protection to us and our licensees
than relying solely on our core patents.
Interest income was $60,000 in the three months ended
March 31, 2010 compared to $92,000 in the three months
ended March 31, 2009, a decrease of $32,000, or 34.8%,
principally due to lower invested balances.
Other (expense) was ($33,000) in the three months ended
March 31, 2010 compared to ($121,000) in the comparable
2009 period, a decrease of $88,000, which was primarily
attributable to unrealized losses recognized on the fair value
of our investments in the first quarter of 2009. The 2010 other
income (expense) includes foreign currency transaction losses,
net of gains of ($6,000), and interest expense of ($27,000).
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, 2010 and
December 31, 2009, we had cash and cash equivalents of
$2.3 million and $2.8 million, respectively, to use
for our operations. In addition, we have short-term investments
net of outstanding borrowings with UBS of $3.6 million,
which we expect to exercise our put right with UBS on
June 30, 2010. Our working capital was $6.3 million at
March 31, 2010 compared to $7.3 million at
December 31, 2009 reflecting a decrease of
$1.0 million primarily attributable to our operating losses
during the period.
Net cash used for operating activities was $0.9 million in
the three months ended March 31, 2010 and was used
primarily to fund the net loss of $1.0 million, adjusted
for non-cash items. Included in the non-cash items was
stock-based compensation expense of $30,000 and depreciation and
amortization of $47,000.
Accounts receivable, net increased to $0.5 million at
March 31, 2010 from $0.1 million at December 31,
2009 due primarily to increased sales activity. Inventories, net
decreased $172,000, reflecting increased product sales in the
retrofit-market. Other current assets and other assets decreased
$168,000 at March 31, 2010 from the December 31, 2009
levels, principally reflecting collections of other receivables.
Our accounts payable, accrued expenses and other liabilities
decreased at March 31, 2010 compared to December 31,
2009 reflecting increases in accounts payable that were more
than offset by decreases in accrued expenses and other
liabilities. The decrease in accrued expenses is principally due
to the payment and adjustment of severance liabilities.
Net cash provided by investing activities was $1.2 million
in the three months ended March 31, 2010, principally
reflecting the sale of $1.25 million of our ARS
investments. 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 used in financing activities was approximately
$0.8 million in the three months ended March 31, 2010
and was attributable to net repayment of borrowings under our
demand loan facility with 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 included a commitment to
loan us 75% of the UBS-
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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 Companys 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. The Company uses an independent third party
valuation firm to assist it with its determination of fair
values of the ARS and ARSR.
At March 31, 2010 our investments are recorded at fair
value and comprise ARS and an ARSR and together totaled
$10.5 million. At March 31, 2010 and December 31,
2009, we held approximately $9.5 million and
$10.6 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 and approximately
$1.0 million and $1.1 million, respectively, in
investment in ARSR. Starting on February 15, 2008 and
continuing to date, the Company has experienced difficulty in
effecting sales of its ARS 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.
Classification of investments as current or non-current is
dependent upon managements intended holding period, the
securitys maturity date and liquidity considerations based
on market conditions. At March 31, 2010 and
December 31, 2009, the Company classified all investments
as current based on managements intention and ability to
liquidate the investments within the next twelve months through
exercise of its put right with UBS.
The Company will be exposed to credit risk should UBS be unable
to fulfill its commitment under the Offer. In the event that UBS
is unable to perform upon our exercise of the ARS put right on
or after June 30, 2010, we would have to sell the
underlying securities at a discount which would negatively
impact our future cash flows.
Our management believes that based upon the Companys cash
and cash equivalents and investments at March 31, 2010, 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 twelve months.
We have evaluated our cash burn and determined that we have
sufficient resources to fund operations for the next twelve
months. We continue to pay our obligations in the ordinary
course as obligations become due. We continue the efforts begun
in 2009 to contain our costs and eliminate those costs that are
redundant or considered unnecessary with strict controls over
all discretionary spending and travel costs. We have
significantly reduced our ongoing cash requirements by
curtailment of expenses and a 44% reduction in our work force,
effective August 7, 2009. We have also restructured the
Company so that each employee will manage resources based upon
data-driven revenue expectations, and we have established
processes to ensure organizational and individual discipline and
accountability.
We have incurred losses since inception aggregating
$66.8 million, which amount includes $4.8 million of
non-cash preferred stock dividends. We expect to incur losses
through 2010. 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
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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 March 31, 2010, we had no commitments for capital
expenditures and no material commitments are anticipated in the
near future.
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Item 3.
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Quantitative
and Qualitative Disclosures about Market Risk
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Not required for smaller reporting companies.
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Item 4.
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Controls
and Procedures
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Evaluation
of Disclosure Controls and Procedures
The Companys management, with the participation of the
Chief Executive Officer and Chief Financial Officer, evaluated
the effectiveness of the Companys 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 Companys Chief Executive
Officer and Chief Financial Officer concluded that Clean Diesel
had effective 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.
Changes
in Internal Controls
In connection with the evaluation by the Companys Chief
Executive Officer and Chief Financial Officer of internal
control over financial reporting that occurred during the
Companys last fiscal quarter, no change in the
Companys internal control over financial reporting was
identified that has materially affected, or is reasonably likely
to materially affect, the Companys internal control over
financial reporting.
PART II.
OTHER INFORMATION
(a) Exhibits
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|
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Exhibit
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Number
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Description
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10(a)
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Amendment of Engagement Letter between Clean Diesel
Technologies, Inc. and Innovator Capital Limited as of
April 21, 2010.
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10(b)
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Interim Services Agreement between Clean Diesel Technologies,
Inc. and SFN Professional Services LLC d/b/a Tatum as of
April 23, 2010.
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31(a)
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Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a)
under the Exchange Act.
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31(b)
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Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a)
under the Exchange Act.
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32
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Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CLEAN DIESEL TECHNOLOGIES, INC.
(Registrant)
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By:
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/s/ Michael
L. Asmussen
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Michael L. Asmussen
Director, President and
Chief Executive Officer
Date: May 13, 2010
John B. Wynne
Interim Chief Financial Officer,
Vice President and Treasurer
Date: May 13, 2010
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