<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number: 0-27432
----------------
CLEAN DIESEL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1393453
- ------------------------ -----------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
Clean Diesel Technologies, Inc.
300 Atlantic Street - Suite 702
Stamford, CT 06901-3522
(Address of principal executive offices) (Zip Code)
(203) 327-7050
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
-------- --------
As of August 13, 1996, there were outstanding 2,500,000 shares of Common Stock,
par value $0.05 per share, of the registrant.
===============================================================================
<PAGE>
CLEAN DIESEL TECHNOLOGIES, INC.
(A Development Stage Company)
Form 10-Q for the Quarter Ended June 30, 1996
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets as of June 30, 1996 3
and December 31, 1995
Statements of Operations for the Three and 4
Six Months Ended June 30, 1996 and 1995
and for the Period from January 1, 1992
through June 30, 1996
Statements of Cash Flows for the Six 5
Months Ended June 30, 1996 and 1995
and for the Period from January 1, 1992
through June 30, 1996
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1 Financial Statements
CLEAN DIESEL TECHNOLOGIES, INC.
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 5,296,000 $ 6,848,000
Short-term investments 2,000,000 --
Stock subscription receivable -- 2,018,000
Other current assets 121,000 16,000
----------- ------------
Total current assets 7,417,000 8,882,000
Other assets 59,000 --
----------- ------------
Total assets $ 7,476,000 $ 8,882,000
=========== ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 415,000 $ 421,000
Due to Fuel-Tech N.V. 96,000 --
Demand loan payable to Fuel-Tech N.V. 745,000 66,000
----------- ------------
Total current liabilities 1,256,000 487,000
Loan payable to Fuel-Tech N.V. -- 745,000
Stockholders' equity:
Preferred stock, par value $.05 per share, authorized
100,000 shares, no shares issued and outstanding -- --
Common stock, par value $.05 per share, authorized
5 million shares, issued and outstanding
2,500,000 shares 125,000 125,000
Additional paid-in capital 11,125,000 11,125,000
Deficit accumulated during the development stage (5,030,000) (3,600,000)
----------- ------------
Total stockholders' equity 6,220,000 7,650,000
----------- ------------
Total liabilities and stockholders' equity $ 7,476,000 $ 8,882,000
=========== ============
</TABLE>
See notes to financial statements.
<PAGE>
CLEAN DIESEL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Period from
Three Months Ended Six Months Ended January 1, 1992
June 30 June 30 through
1996 1995 1996 1995 June 30, 1996
----------- ----------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Costs and expenses:
General and administrative $ 492,000 $ 231,000 $ 950,000 $ 417,000 $ 2,420,000
Research and development 352,000 153,000 576,000 235,000 2,161,000
Patent filing and maintenance 34,000 44,000 90,000 73,000 568,000
----------- ----------- ----------- ----------- -----------
Loss from operations 878,000 428,000 1,616,000 725,000 5,149,000
Interest income, net (85,000) (2,000) (186,000) (5,000) (119,000)
----------- ----------- ----------- ----------- -----------
Net loss during development
stage $ 793,000 $ 426,000 $ 1,430,000 $ 720,000 $ 5,030,000
=========== =========== =========== =========== ===========
Net loss per common share $ 0.32 $ 0.17 $ 0.57 $ 0.28 N/A
=========== =========== =========== =========== ===========
Weighted average number of
common shares outstanding 2,500,000 2,566,346 2,500,000 2,566,346 N/A
=========== =========== =========== =========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
CLEAN DIESEL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Period from
Six Months Ended January 1, 1992
June 30 through
1996 1995 June 30, 1996
------------- ------------- ----------------
<S> <C> <C> <C>
Operating activities
Net loss $ (1,430,000) $ (720,000) $ (5,030,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 4,000 -- 4,000
Changes in operating assets and liabilities:
Other current assets (105,000) -- (121,000)
Accounts payable and accrued expenses (6,000) (149,000) 415,000
Payment of security deposit (18,000) -- (18,000)
Due to Fuel-Tech N.V. 30,000 -- 30,000
------------ ------------ ------------
Net cash used in operating activities (1,525,000) (869,000) (4,720,000)
------------ ------------ ------------
Financing activities
Proceeds from Rights Offering, net 2,018,000 -- 11,156,000
Expenses of Rights Offering -- -- (425,000)
Repayment of expenses of Rights Offering
paid by Fuel-Tech N.V. -- -- (200,000)
Issuance of common stock to parent -- -- 250,000
Net parent company investment -- -- 469,000
Proceeds of loan from Fuel-Tech N.V. -- 884,000 2,874,000
Repayment of loan to Fuel-Tech N.V. -- -- (2,063,000)
------------ ------------ ------------
Net cash provided from financing activities 2,018,000 884,000 12,061,000
------------ ------------ ------------
Investing activities
Purchase of short-term investments (2,000,000) -- (2,000,000)
Purchase of fixed assets (45,000) -- (45,000)
------------ ------------ ------------
Net cash used in investing activity (2,045,000) -- (2,045,000)
Net increase (decrease) in cash
and cash equivalents (1,552,000) 15,000 5,296,000
Cash and cash equivalents at beginning
of period 6,848,000 513,000 --
------------ ------------ ------------
Cash and cash equivalents at end of period $ 5,296,000 $ 528,000 $ 5,296,000
============ ============ ============
</TABLE>
See notes to financial statements.
<PAGE>
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. All such
adjustments are of a normal recurring nature. Operating results for the three-
and six-month periods ended June 30, 1996, are not necessarily indicative of the
results that may be expected for the year ending December 31, 1996. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year ended
December 31, 1995.
Clean Diesel Technologies, Inc. ("CDTI" or the "Company") was
incorporated in the State of Delaware on January 19, 1994 as a wholly-owned
subsidiary of Fuel-Tech N.V. ("Fuel Tech"). Predecessor financial information
included in the accompanying financial statements for the period January 1, 1992
through January 18, 1994 reflects the Company's operations prior to
incorporation, at which time it was accounted for as part of Fuel Tech. As more
fully discussed in Note 2, effective December 12, 1995, Fuel Tech completed a
Rights Offering of the Company's common shares. Accordingly, at December 12,
1995, Fuel Tech held a 27.6% interest in the Company's common shares.
The Company is a development stage enterprise and its efforts from
January 1, 1992 through June 30, 1996 have been devoted to the research and
development of a platinum fuel catalyst ("PFC") for diesel engines, licensed to
the Company by Fuel Tech. There were no material activities related to the
Company's business prior to 1992.
The Company's PFC process will require additional research and
development testing in order to determine its commercial viability. The
Company's management believes that the Company has adequate capital to fund its
operations through December 31, 1997 and that additional financing will be
required in the future to commercialize its technologies.
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
In 1995 and 1996 net loss per common share is based on the average
number of shares of common stock outstanding during each period. Common
equivalent shares are not included in the per share calculations where the
effect of their inclusion would be antidilutive, except that, in accordance with
Securities and Exchange Commission requirements, common and common equivalent
shares issued during the 12-month period prior to the filing of a proposed
initial public offering and extending through December 12, 1995 (effective date
of the Rights Offering), have been included in the calculation as if they were
outstanding for all periods, using the treasury stock method and the initial
public offering price of $6.50 per share.
<PAGE>
The demand loan payable to Fuel Tech of $745,000 bears interest at 8%
per annum. Fuel Tech has agreed, however, not to demand repayment of this loan
during 1996. Under the Management and Services Agreement with Fuel Tech, which
the Company renegotiated for months beginning with June, 1996, the Company is to
reimburse Fuel Tech for management, services and administrative expenses it
incurs on behalf of the Company, plus a management fee equal to 3% or 10% of
such charges, depending on the nature of the charge incurred. Prior to June,
1996, the management fee was equal to 10% of all such charges. In the first six
months of 1996, approximately $800,000 of such expenses were incurred.
Note 2. Rights Offering of the Company's Common Shares
On December 12, 1995, Fuel Tech completed a Rights Offering to its
existing shareholders of 72.4% of the Company's common shares, retaining 27.6%
of the common shares outstanding. Approximately 1.8 million Company shares were
purchased in the offering, which raised net proceeds of approximately $10.5
million, all of which was contributed by Fuel Tech to the Company. In December
1995, after the offering was completed, the Company paid Fuel Tech approximately
$2.3 million, which represented the repayment of certain loans made to the
Company ($2.1 million), as well as certain expenses of the Rights Offering paid
by Fuel Tech ($200,000).
On December 26, 1995 the Company's common stock commenced trading on
the National Association of Securities Dealers Quotation System ("NASDAQ") under
the symbol CDTI.
Note 3. Short-Term Investments
In June, 1996, the Company purchased a discount note of the United
States Federal Home Loan Bank. The note matures in June, 1997, and has a yield
to maturity of 5.84%.
Note 4. Warrants to Purchase Common Shares
Pursuant to a financial consulting agreement with an investment banker,
the investment banker has the right to purchase warrants covering 50,000 of the
Company's common shares, with an exercise price of $6.50 per share, which
represented an 18% premium over market price on the date of issue. The warrants
expire on March 1, 2001.
<PAGE>
CLEAN DIESEL TECHNOLOGIES, INC.
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Forward-Looking Statements
Statements in this Form 10-Q which are not historical facts, so-called
"forward-looking statements, "are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Investors are cautioned
that all forward-looking statements involve risks and uncertainties, including
those detailed in the Company's filings with the Securities and Exchange
Commission. See Item 1 "Risk Factors of the Business" and also Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's Form 10-K for the year ended December 31, 1996.
Results of Operations
General and administrative expenses increased to $492,000 in the second
quarter of 1996 from $231,000 in the second quarter of 1995, and to $950,000 in
the first six months of 1996 from $417,000 in the first six months of 1995. The
increase was due to expenses associated with the Company moving into its new
corporate headquarters, additional support staff, and increased management and
administrative costs provided by Fuel Tech pursuant to a management and services
agreement. In the first six months of 1996, a greater portion of Fuel Tech
management's time was spent on the Company's business activities, which included
research programs, establishing relationships with potential marketing partners,
and hiring staff.
Research and development expenses for the second quarter and first six
months of 1996 increased to $352,000 and $576,000, respectively from $153,000
and $235,000 in the second quarter and first six months of 1995, respectively.
The increase was primarily due to significant testing of light- and heavy-duty
engines using the Company's PFC alone and with a catalytic oxidizer. These test
programs were conducted in conjunction with potential marketing partners.
Patent filing and maintenance expenses were $34,000 and $90,000 in the
second quarter and first six months of 1996, respectively, and $44,000 and
$73,000 in the second quarter and first six months of 1995, respectively. The
increase in the first six months of 1996 was primarily due to the preparation
and filing of new patent applications in the first quarter of 1996, both in the
United States and overseas.
Interest income, net, increased to $85,000 and $186,000 in the second
quarter and first six months of 1996, respectively, from $2,000 and $5,000 in
the second quarter and first six months of 1995, respectively. The increase was
due to interest earned on higher cash balances resulting from the proceeds of
the Rights Offering.
Liquidity and Sources of Capital
The Company is a development stage company and has incurred losses
since inception aggregating $5,030,000 at June 30, 1996. The Company expects to
incur losses through the foreseeable future as it further pursues its research
and development efforts. In December, 1995 the Company raised approximately
$10.5
<PAGE>
million, net of offering expenses and broker dealer commissions of approximately
$1.3 million, through a Rights Offering of its shares by Fuel Tech.
Approximately $2 million of this amount was received in January, 1996.
Total cash and cash equivalents were $5.3 million and $6.8 million at
June 30, 1996 and December 31, 1995 respectively. The decrease in cash was
principally due to cash used to fund the Company's first half loss.
Additionally, approximately $2 million of proceeds from the Rights Offering was
received in January, 1996, and in June, 1996, the Company purchased a $2 million
note of a United States Federal Government agency, maturing in June, 1997. The
note is classified as a short-term investment in the accompanying balance sheet
at June 30, 1996. Working capital at June 30, 1996 was approximately $6.2
million, a decrease of approximately $2.2 million from December 31, 1995. The
decrease was the result of working capital used to fund the Company's operations
in the first half of 1996 and the current classification of a $0.7 million loan
payable to Fuel-Tech N.V. previously classified as long-term.
During the remainder of 1996, the Company expects to hire technical,
marketing and administrative employees, and as of February 1, 1996, leased space
for its corporate offices. Additionally, the Company has budgeted increased
spending in the second half of 1996 and 1997 on research and development
programs over 1995 and the first half of 1996. Some of these programs are
expected to be jointly funded by other companies. The Company believes that it
has sufficient cash balances to fund its requirements through 1997. The Company
will require additional financing in the future, and expects to meet its future
cash needs through private placements, a public offering, technology licenses,
and/or the establishment of a credit facility with a financing institution.
However, there is no guarantee that the Company will be able to raise such
capital on terms satisfactory to the Company.
<PAGE>
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults on Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of the Company was held on June 12, 1996 at
which were present in person or by proxy 1,523,413 shares of common
stock of the Company.
The proposal to elect five directors was approved by a vote of
a majority of those present and voting, and, specifically with respect
to each individual nominee, as follows:
<TABLE>
<CAPTION>
Name Votes Cast Votes For Votes Withheld
---- ------------ --------- --------------
<S> <C> <C> <C>
Kent D. S. Durr 1,523,413 1,523,013 400
John A. de Havilland 1,523,413 1,522,013 1,400
Charles W. Grinnell 1,523,413 1,522,752 661
Jeremy D. Peter-Hoblyn 1,523,413 1,523,013 400
James M. Valentine 1,523,413 1,523,013 400
</TABLE>
The appointment of Ernst & Young LLP as independent auditors
of the Company for the year 1996 was approved by a vote of 1,521,791
shares in favor, 1,100 shares against, and 522 shares abstaining.
The amendment of the Company's 1994 Incentive Plan (the
"Plan") to provide that a number of shares equal to 12.5% rather than
10% of the outstanding shares of the Company's common stock would be
available for the grant of awards under the Plan was approved by a
vote of 1,319,637 shares in favor, 7,843 shares against, 1,476 shares
abstaining and 194,457 shares representing broker no-votes.
Item 5. Other Information
Effective July 1, 1996 the Board of Directors of the Company
increased the number of directors of the Company from five to six and
elected Ralph E. Bailey a director and Chairman of the Board. Mr.
Bailey is the former Chairman and Chief Executive Officer of Conoco,
Inc. and a former Vice Chairman of E. I. du Pont de Nemours & Co. Also
effective July 1, 1996, Mr. Kent D. S. Durr, who continues with the
Company as a director, resigned as Chairman of the Board.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 27, Financial Data Schedule to this Form 10-Q
b. Reports on Form 8-K
None
<PAGE>
CLEAN DIESEL TECHNOLOGIES, INC.
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.
Date: August 13, 1996 By: /s/ James M. Valentine
-------------------------------------
James M. Valentine
Executive Vice President and
Chief Operating Officer
Date: August 13, 1996 By: /s/ Scott M. Schecter
---------------------------------------
Scott M. Schecter
Vice President, and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 5,296,000
<SECURITIES> 2,000,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,417,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,476,000
<CURRENT-LIABILITIES> 1,256,000
<BONDS> 0
0
0
<COMMON> 125,000
<OTHER-SE> 6,095,000
<TOTAL-LIABILITY-AND-EQUITY> 7,476,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 878,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (793,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (793,000)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
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</TABLE>
