<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 March 31, 1999
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 May 14, 1999, there were outstanding 2,591,124 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 March 31, 1999
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets as of March 31, 1999, 1
and December 31, 1998
Statements of Operations for the Three 2
Months Ended March 31, 1999 and 1998,
and for the Period from January 1, 1992,
through March 31, 1999
Statements of Cash Flows for the Three 3
Months Ended March 31, 1999 and 1998,
and for the Period from January 1, 1992,
through March 31, 1999
Note to Financial Statements 4
Item 2. Management's Discussion and Analysis of 8
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CLEAN DIESEL TECHNOLOGIES, INC.
(A Development-Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
(in thousands except share data)
March 31, December 31,
1999 1998
-------- --------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 923 $ 1,663
Inventories 231 219
Other current assets 54 58
-------- --------
Total current assets 1,208 1,940
Other assets 43 45
-------- --------
Total assets $ 1,251 $ 1,985
======== ========
Liabilities and stockholders' equity
Current Liabilities:
Accounts payable and accrued expenses $ 611 $ 686
-------- --------
Stockholders' equity:
Preferred Stock, par value $.05 per share,
authorized 90,000 shares, no shares issued
and outstanding -- --
Series A Convertible Preferred Stock, par
value $.05 per share, $500 per share
liquidation preference, authorized 10,000
shares, issued and outstanding 7,670 and
7,582 shares, involuntary liquidation value
$3,945,000 and $3,840,000 1 1
Common Stock, par value $0.05 per share,
authorized 15,000,000 shares, issued and
outstanding 2,552,777 and 2,544,443 shares 128 127
Additional paid-in capital 15,052 15,008
Deficit accumulated during development stage (14,541) (13,837)
-------- --------
Total stockholders' equity 640 1,299
-------- --------
Total liabilities and stockholders' equity $ 1,251 $ 1,985
======== ========
</TABLE>
See note to financial statements.
-1-
<PAGE>
CLEAN DIESEL TECHNOLOGIES, INC.
(A Development-Stage Company)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
(in thousands except per share data)
Period from
Three Months Ended January 1, 1992,
March 31, through
1999 1998 March 31, 1999
----------- ----------- ------------------
<S> <C> <C> <C>
Sales $ 9 $ -- $ 254
Costs and expenses:
Cost of sales 5 -- 166
General and administrative 381 451 6,938
Research and development 268 236 6,594
Patent filing and maintenance 24 56 1,118
-------- -------- --------
Loss from operations 669 743 14,562
Interest income (15) (13) (637)
Interest expense 1 11 303
Cost of withdrawn Rights Offering -- -- 264
-------- -------- --------
Net loss during development stage 655 741 14,492
Preferred Stock dividend 49 -- 49
-------- -------- --------
Net loss attributable to Common Stockholders $ 704 $ 741 $ 14,541
======== ======== ========
Basic and diluted loss per common share $ 0.28 $ 0.29 N/A
======== ======== ========
Average number of common shares
outstanding 2,550 2,517 N/A
======== ======== ========
</TABLE>
See note to financial statements.
-2-
<PAGE>
CLEAN DIESEL TECHNOLOGIES, INC.
(A Development-Stage Company)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(in thousands)
Period from
Three Months Ended January 1, 1992,
March 31, through
1999 1998 March 31, 1999
--------- --------- --------------
<S> <C> <C> <C>
Operating activities
Net cash used in operating activities $ (737) $ (581) $(14,076)
-------- -------- --------
Financing activities
Proceeds from 1995 Rights Offering, net
of $630 of brokerage commissions -- -- 11,156
Expenses of 1995 Rights Offering -- -- (425)
Repayment of expenses of 1995 Rights
Offering paid by Fuel-Tech N.V -- -- (200)
Issuance of common stock to parent -- -- 250
Net parent company investment -- -- 469
Proceeds of loan from Fuel-Tech N.V -- -- 2,874
Repayment of loan to Fuel-Tech N.V -- -- (2,313)
Proceeds from exercise of stock options 1 -- 5
Proceeds from bridge loan -- -- 1,400
Proceeds from issuance of preferred stock -- -- 1,876
-------- -------- --------
Net cash provided from financing activities 1 -- 15,092
-------- -------- --------
Investing activities
Purchase of fixed assets (4) (1) (93)
-------- -------- --------
Net cash used in investing activities (4) (1) (93)
-------- -------- --------
Net (decrease) increase in cash
and cash equivalents (740) (582) 923
Cash and cash equivalents at beginning
of period 1,663 1,239 --
-------- -------- --------
Cash and cash equivalents at
end of period $ 923 $ 657 $ 923
======== ======== ========
</TABLE>
See note to financial statements.
-3-
<PAGE>
CLEAN DIESEL TECHNOLOGIES, INC.
(A Development-Stage Company)
NOTE TO FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
Basis of Presentation
The accompanying unaudited condensed 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 month period ended
March 31, 1999, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. For further information, refer
to the Financial Statements and footnotes thereto included in the Company's Form
10-K for the year ended December 31, 1998.
The balance sheet at December 31, 1998, has been derived from the audited
Financial Statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
Clean Diesel Technologies, Inc. (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"). Effective December 12, 1995, Fuel Tech completed a Rights
Offering of the Company's Common Stock, and reduced its ownership in the Company
to 27.6%.
In the first half of 1998, the Company received $1.4 million, exclusive
of $45,000 of commissions and expenses, from the sale of bridge loan notes (the
"Bridge Loan"), including $500,000 that was received from Fuel Tech. In November
1998, the Company received additional proceeds of approximately $1.85 million,
net of expenses of $28,000, through a private placement of 3,753 shares of the
Company's Series A Convertible Preferred Stock (the "Preferred Stock").
Simultaneously, the Bridge Loan was converted into 2,800 shares of the Preferred
Stock. Furthermore, Fuel Tech elected to exchange its $495,000 promissory note
(the "Term Note") with the Company, along with $20,000 of associated accrued
interest from its Bridge Loan and Term Note, for 1,029 shares of the Preferred
Stock. Following these transactions, the Company had 7,582 shares of Preferred
Stock outstanding at December 31, 1998. As more fully described in "Series A
Convertible Preferred Stock" below, the Preferred Stock carries, by resolution
of the Board of Directors of the Company, either an annual dividend of 9%
payable in cash or 11% payable in kind. The Directors have resolved that until
further notice such dividend will be paid in kind. As a result of the quarterly
in-kind dividend paid on January 1, 1999, the Company had 7,670 shares of
Preferred Stock outstanding at March 31, 1999, with Fuel Tech retaining an
approximate 26.9% interest in the Company.
The Company is a development stage enterprise, and its efforts from
January 1, 1992, through March 31, 1999, have been devoted to the research,
development, and commercialization of Platinum Fuel Catalysts ("PFCs"), some of
which are licensed to the Company by Fuel Tech, and nitrogen oxide ("NOx")
reduction technologies for diesel engines.
-4-
<PAGE>
During 1998, the Company began a shift in emphasis from research and
development toward commercialization of its technologies. Commercialization of
the Company's technologies will depend upon the success of field tests and
governmental regulations, principally by the US Environmental Protection Agency,
and corresponding foreign and state agencies. In December 1997, the Company
decided to seek additional financing of $5 million to aid in its
commercialization efforts. As noted above, the Company received net proceeds of
approximately $3.2 million in 1998 through private placements. The
accomplishment of the Company's objectives to commercialize its products will
require at least the remainder of the additional capital identified in 1997.
Consequently, the Company is currently actively seeking an additional $1.8 -
$2.5 million through a private placement of its equity securities. See "Going
Concern" below for additional information.
Going Concern
The financial statements have been prepared assuming that the Company
will continue as a going concern and do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
and the amount and classification of liabilities that may result from the
possible inability of the Company to continue as a going concern.
As a result of the Company's recurring operating losses, the Company has
been unable to generate a positive cash flow. In addition to the $3.2 million
funding raised in 1998, the Company will require additional capital in the
future in order to fund its operations. The Company's current cash position,
coupled with expected revenues and/or proceeds from joint development
agreements, will not be sufficient to fund the Company's operations until it
generates a positive cash flow. The Company is, however, actively seeking
additional financing of $1.8 - $2.5 million through a private placement of its
equity securities in order to fund its commercialization efforts. Without any
further funding or revenues from sales, demonstration programs, or license fees,
the Company expects to be able to fund operations into September 1999. Although
the Company believes that it will be successful in its capital-raising efforts,
there is no guarantee that it will be able to raise such funds on terms that
will be satisfactory to the Company. The Company has developed contingency plans
in the event its financing efforts are not successful. Such plans include
reducing expenses and selling or licensing the Company's technologies.
Accordingly, at March 31, 1999, there is substantial doubt as to the Company's
ability to continue as a going concern. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Sources of Capital" elsewhere herein for additional information.
Inventories
Inventories are stated at the lower of cost or market and consist of
finished products. Cost is determined using the first-in, first-out (FIFO)
method.
Series A Convertible Preferred Stock
During 1998, the Company received $1.4 million, exclusive of $45,000 of
commissions and expenses, through the Bridge Loan. In November 1998, the Company
received an additional $1.85 million in net proceeds through a private placement
of 3,753 shares of its Preferred Stock. As the net proceeds exceeded the $1.75
million minimum stipulated in the terms of the Bridge Loan, the loan
automatically converted into 2,800 shares of the Preferred Stock. Concurrently,
in November 1998, Fuel Tech elected to convert its $495,000 Term Note due from
the Company, as well as $20,000 of associated accrued interest from the Bridge
Loan and Term Note (described below), into 1,029 shares of the Preferred Stock.
The Preferred Stock has a stated value and liquidation preference of $500
per share plus accrued and unpaid dividends. Holders of the Preferred Stock are
entitled to receive, when and if
-5-
<PAGE>
declared by the Board of Directors of the Company out of funds of the Company
legally available therefor, cash dividends at the annual rate of 9% or dividends
in kind at the annual rate of 11%. Cash dividends and dividends in kind are each
deemed "Preferred Dividends". Preferred Dividends are payable quarterly in
arrears.
In order to conserve cash, on February 4, 1999, the Company's Board of
Directors adopted a resolution that all dividends declared on the Preferred
Stock be payable in kind at the annual rate of 11%. The dividends will be paid
in the form of additional shares of Preferred Stock in accordance with the terms
and conditions of the Certificate of Designation on the first business day of
January, April, July, and October to stockholders of record on the first
business day of the prior December, March, June, and September. Dividends in
kind are evidenced by a stock certificate for full share amounts of such
dividends, with fractional amounts accruing and paid in full shares on a
subsequent dividend. The directors further resolved to issue certificates for
stock dividends annually rather than quarterly, unless a stockholder requests
certificates to be issued more frequently. These resolutions will remain in
effect until revoked by the Company's Board of Directors.
The fourth quarter 1998 stock dividend payable on January 1, 1999, was
paid at the annual rate of 11% and pro-rated as 88 additional shares of the
Preferred Stock. The dividend period was calculated as the latter of November
11, 1998 (the date of execution of the original certificates of Preferred
Stock), or the receipt by the Company of payment for the preferred shares
through December 31, 1998. At March 31, 1999, the Company had 7,670 shares of
Preferred Stock issued and outstanding, and earned but unissued dividends of
approximately $106,000.
Each share of the Preferred Stock is convertible into 333.33 shares of
the Company's Common Stock, which is equivalent to $1.50 per Common Share.
Assuming full conversion of the Preferred Stock, at March 31, 1999, the Company
would have approximately 5.1 million shares of Common Stock outstanding, of
which Fuel Tech would own approximately 1.4 million shares, or a 26.9% interest
in the Company.
The Company can force the holder of Preferred Stock to convert its
shares, in whole or in part, into Common Stock at any time on, or after, the
date that the average Closing Price (as defined in the Certificate of
Designation) of the Common Stock equals or exceeds $4.50 for 20 consecutive
trading days. Such conversion may, at the election of the holders of 60% of the
issued and outstanding shares of the Preferred Stock, be scheduled to occur on a
pro-rata basis quarterly over 18 months. The Preferred Stock shall be
automatically converted into Common Stock should the Company consummate a public
offering of its Common Stock in excess of certain prescribed amounts. In the
event of such mandatory conversion, accrued and unpaid dividends will also
convert into Common Stock, on the same terms as the underlying shares of
Preferred Stock.
Effective February 10, 1999, Section 3(a) of the Certificate of
Designation (the "Certificate") of the Preferred Stock was revoked by the filing
of a Certificate of Amendment with the Secretary of the State of Delaware. The
effect of this resolution was to eliminate the requirement in Section 3(a) of
the Certificate that the Preferred Stock be subject to redemption at the option
of a stockholder on or after May 8, 2002. The revocation had previously been
approved by the holders of the Preferred Stock.
Related Party Transactions
The Company entered into a Management and Services Agreement with Fuel
Tech. Under the agreement, the Company agreed to pay Fuel Tech a fee equal to an
additional 3 - 10% of the costs paid on the Company's behalf, dependent upon the
nature of the costs incurred. Currently, a fee of 3% is assessed on all costs
billed to the Company. Charges to the Company,
-6-
<PAGE>
inclusive of the administrative fee, were approximately $30,000 and $58,000 in
the first quarter of 1999 and 1998, respectively.
Commitments
In January 1999, the Company agreed to an extension of its sublease. The
annual fixed rent amount under the sublease extension, which runs from March 1,
1999, through February 28, 2002 (unless terminated sooner pursuant to the terms
of the agreement), is $81,200.
Effective October 28, 1994, Fuel Tech granted two licenses to the Company
for all patents and rights associated with its PFC technology. Effective
November 24, 1997, the licenses were canceled and Fuel Tech assigned to the
Company all such patents and rights on terms substantially similar to the
licenses. In exchange for the assignment, the Company will pay Fuel Tech a
royalty of 2.5% of its annual gross revenue from sales of the PFCs commencing in
1998. The royalty obligation expires in 2008. The Company may terminate the
royalty obligation to Fuel Tech by payment of $10,909,091 in 1999 and declining
annually to $1,090,910 in 2008. The Company as assignee and owner will maintain
the technology at its own expense. To date, no royalties have been paid to Fuel
Tech, although the Company has recorded an insignificant accrual for royalties
payable to Fuel Tech at March 31, 1999.
Subsequent Event
In February 1999, the non-employee members of the Company's Board of
Directors agreed to accept the Company's Common Stock in consideration of their
accrued director's fees at December 31, 1998 (totaling approximately $45,000),
as well as for all future fees. A director may choose to receive either all
stock or 20% cash and 80% stock. Currently, with the exception of one
non-employee director, each director has elected to receive all stock. On April
12, 1999, the Company issued 38,347 shares of Common Stock and subsequently paid
$1,750 to the directors in consideration for their 1998 accrued directors fees.
Director's fees for the first quarter of 1999, totaling $10,000, have been
accrued at March 31, 1999.
-7-
<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 that are not historical facts, so-called
"forward-looking statements," are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Investors are cautioned
that all forward-looking statements involve risks and uncertainties, including
those detailed in the Company's filings with the Securities and Exchange
Commission. See "Risk Factors of the Business" in Item 1, "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, 1998.
Results of Operations
Sales and Cost of sales were $9,000 and $5,000, respectively, in the
first quarter of 1999 versus zero in the comparable period in 1998. The 1999
sales related primarily to some of the Company's first commercial sales of its
Platinum Plus(R) additives for use with particulate filters both domestically
and in Taiwan.
The Company had minimal sales of its platinum-cerium bimetallic additive
in 1998. These sales were for field trials and the Company expects retrofit
markets to develop in Taiwan and Korea during 1999. The Company believes its
platinum-cerium additive has demonstrated better regeneration performance than
other additive systems and has the great benefit of being effective at much
lower dose rates than the other competitive additives of cerium or iron alone.
Dose rates are important because they result in lower ash buildup and longer
filter life.
The Company's platinum-cerium bimetallic additive with diesel flow
through oxidizers has also proven in testing to be effective in reducing the
"carbon fraction" of diesel particulate emissions, whereas oxidizers alone are
effective only on the soluble organic fraction from oil and fuel residues. Many
engine manufacturers plan to meet the new nitrogen oxide ("NOx") limits by means
of Exhaust Gas Recirculation ("EGR"), which has the disadvantage of increasing
particulates and especially the "carbon fraction" content.
The Company is completing its Tier 1 registration of the platinum-cerium
additive and already has effective registration of its platinum-only additives.
Field trials of the platinum-cerium additive started in the first quarter of
1999. The Company expects to complete sufficient trials in the first half of
1999, and depending on results of these trials, expects commercial sales to
start in 1999.
The US EPA and Engine Manufacturers Settlement of October 1998 mandates
the expenditure by engine companies of $109.5 million in projects to reduce NOx
emissions, including research and development to design low-emitting engines and
new emission control technologies. The Company has prepared a demonstration
program of its Advanced Reagent Injection System, the ARIS(TM) 2000 system. The
Company has submitted proposals to the US EPA and engine companies for four
projects totaling approximately $6 million, two of which pertain to the ARIS
system and two to the Company's bimetallic fuel additive.
-8-
<PAGE>
The Company identified a market opportunity for urea selective catalytic
reduction (SCR) systems for use with stationary diesel engines primarily for
power generation. The ARIS 2000 is a single fluid injection and metering system
complete with an electronic control unit that can be integrated with engine
electronic and diagnostic systems. The Company has completed development of the
ARIS 2000 system for stationary diesel engines and sold initial units to major
engine manufacturers for evaluation purposes in late 1998.
Thus, the Company believes that it is extremely well placed to sell both
its platinum-cerium additive technology and its ARIS 2000 urea injection system
technology as part of the overall emission control strategy for a very wide
range of diesel engines.
The Company expects revenues from sales of its Platinum Plus additives to
start in 1999, initially from sales to fleets and aftermarket products and later
to engine manufacturers for inclusion with an "onboard dosing" system on new
vehicles. The Company expects revenues from sales of commercial ARIS 2000
systems for stationary diesel installations in the second half of 1999. The
Company also expects revenues from demonstration programs and joint development
agreements (both for its ARIS 2000 system and its Platinum Plus additives for
particulate filters and oxidizers), but will not know whether its programs are
accepted until sometime in 1999.
General and administrative expenses decreased to $381,000 in the first
quarter of 1999 from $451,000 in the comparable period in 1998. The decrease is
due primarily to the costs associated with the Company's efforts to raise
additional capital in the first quarter of 1998 and measures implemented by the
Company to reduce expenditures in order to conserve cash, pending securing
additional working capital and the success of its commercialization efforts.
These measures, which initially began in the latter part of 1997, include a
reduction in the allocation of some of Fuel Tech's management time to the
Company in January 1999, as well as reduced travel, investor relations, and
financial advisory costs. Additionally, the costs in the first quarter of 1998
include a charge for severance pay that resulted from the closing of the
Company's UK office. As part of the shift towards commercialization, however,
marketing costs were higher in the first quarter of 1999 than in the comparable
year-earlier period.
Research and development expenses increased to $268,000 in the first
quarter of 1999 from $236,000 in the comparable period in 1998. The slight
increase in 1999 is due in part to the costs associated with completing the US
EPA Tier 1 registration testing of the Company's platinum-cerium bimetallic
product. This project began in mid-year 1998 and testing was completed in March
1999.
Patent filing and maintenance expenses decreased to $24,000 in the first
quarter of 1999 from $56,000 in the comparable period in 1998. The decrease is
due in part to the shift in emphasis toward commercialization as noted above.
Interest expense decreased to $1,000 in the first quarter of 1999 from
$11,000 in the comparable period in 1998 due to the conversion of the Company's
outstanding debt into shares of the Company's Series A Convertible Preferred
Stock (the "Preferred Stock") in November 1998. See "Note to Financial
Statements" above and "Liquidity and Sources of Capital" below for further
information.
Liquidity and Sources of Capital
The Company is a development stage enterprise and has incurred losses
since inception (January 1, 1992) aggregating $14,492,000 (excluding the effect
of the dividend paid on the Preferred Stock) and $13,837,000 at March 31, 1999,
and December 31, 1998, respectively. The Company expects to incur losses through
the foreseeable future as it further pursues its research, development, and
commercialization efforts. Although the Company started selling product in 1997,
-9-
<PAGE>
sales to date have been minimal and the Company continues to be dependent upon
sources other than operations to finance its working capital requirements.
In December 1995, the Company raised approximately $10.5 million, net of
offering expenses and broker-dealer commissions of approximately $1.3 million,
through the 1995 Rights Offering of its shares by Fuel Tech. The Company then
repaid Fuel Tech approximately $2.3 million in intercompany loans.
On February 17, 1998, Fuel Tech agreed to provide the Company with up to
$500,000 in order to fund its cash requirements until such time as the Company
obtained the long-term financing it was seeking. On May 20, 1998, the $500,000
commitment was converted into a bridge loan (the "Bridge Loan"). The Bridge Loan
stipulated an automatic conversion into shares of the Preferred Stock upon the
conclusion of a public or private financing that contributed a minimum of $1.75
million of additional net proceeds to the Company. In mid-1998, the Company also
received an additional $900,000 of financing under the same Bridge Loan (having
the same terms and conditions) from outside investors. As more fully described
below and in the "Note to Financial Statements" above, in November 1998, the
Bridge Loan automatically converted into 2,800 shares of the Preferred Stock.
In 1997, the Company repaid $250,000 of a $745,000 promissory demand note
with Fuel Tech and restructured the remaining amount into a $495,000 promissory
note (the "Term Note") with Platinum Plus, Inc. ("Platinum Plus"), a wholly
owned subsidiary of Fuel Tech. The principal amount of the Term Note was payable
in three annual installments of $100,000 each on July 1 of each of the years
1998 through 2000, with a final installment of $195,000 due on July 1, 2001. On
July 1, 1998, Platinum Plus elected to defer the repayment of the $100,000 of
principal, which was payable on that date. Interest at a rate of 8% per annum
was payable on the unpaid balance on each principal payment date. The interest
accrued on the note as of July 1, 1998, was paid by the Company. See below for
further information concerning the exchange of the Term Note for shares of the
Company's Preferred Stock.
In November 1998, the Company obtained through a private placement
approximately $1.85 million in net proceeds against the issuance of 3,753 shares
of the Preferred Stock. As the Company received net proceeds in excess of the
$1.75 million minimum, and in accordance with the terms of the Bridge Loan
agreement, the $1.4 million Bridge Loan, mentioned above, converted into 2,800
shares of the Preferred Stock. Additionally, in an effort to retain its
approximate 27% interest in the Company (assuming conversion of the Preferred
Stock into the Company's Common Shares), Fuel Tech elected to exchange its
$495,000 Term Note, and $20,000 of associated accrued interest from its Bridge
Loan and Term Note, for 1,029 shares of the Preferred Stock. As a result, Fuel
Tech owned 2,029 shares of the Company's Preferred Stock at December 31, 1998.
These shares plus the January 1999 dividend, if converted, along with its Common
Stock ownership would give Fuel Tech an approximate 26.9% interest in the
Company on a fully converted basis at March 31, 1999.
As a result of the foregoing transactions, the Company had 7,582 shares
of Preferred Stock outstanding at December 31, 1998. As of a result of the
January 1, 1999 dividend, the Company had 7,670 shares of Preferred Stock
outstanding at March 31, 1999, which are convertible into approximately 2.6
million shares of the Company's Common Stock, $0.05 par (convertible at a rate
of 1:333.33). Pursuant to a Registration Rights Agreement and Consent, these
Common Shares will be entitled to registrations under the Securities Act of
1933, as amended, (a) three on demand, if not less than $500,000 in value and
not more often than once in every twelve months, and (b) an unlimited number, if
incidental or "piggy-back." See "Note to Financial Statements -- Series A
Convertible Preferred Stock" above for further information on the dividend,
conversion, and redemption features of the Preferred Stock.
-10-
<PAGE>
Effective as of October 28, 1994, Fuel Tech granted two licenses to the
Company for all patents and rights associated with its Platinum Fuel Catalyst
("PFC") technology. Effective November 24, 1997, the licenses were canceled and
Fuel Tech assigned to the Company all such patents and rights on terms
substantially similar to the licenses. In exchange for the assignment, the
Company will pay Fuel Tech a royalty of 2.5% of its annual gross revenue from
sales of the PFCs, commencing in 1998. The royalty obligation expires in 2008.
The Company may terminate the royalty obligation to Fuel Tech by payment of
$10,909,091 in 1999 and declining annually to $1,090,910 in 2008. The Company as
assignee and owner will maintain the technology at its own expense. To date, no
royalties have been paid to Fuel Tech.
For the three months ended March 31, 1999 and 1998, and for the period
from January 1, 1992, through March 31, 1999, the Company used cash of $737,000,
$581,000, and $14,076,000, respectively, in operating activities.
At March 31, 1999, and December 31, 1998, the Company had cash and cash
equivalents of $923,000 and $1,663,000, respectively. Working capital decreased
to $597,000 at March 31, 1999, from $1,254,000, at December 31, 1998. The
decrease in cash and cash equivalents and working capital in the first quarter
of 1999 was the result of the Company's use of the resources to fund its
operations in 1999. The Company anticipates incurring additional losses through
at least 1999 as it further pursues its commercialization efforts. In light of
this, the Company is taking steps to minimize expenditures until such time as it
obtains the additional capital it is seeking (see below) and is able to generate
a positive cash flow.
As a result of the Company's recurring operating losses, the Company has
been unable to generate a positive cash flow. The Company's current cash coupled
with expected revenues and/or proceeds from joint development agreements, will
not be sufficient to fund the Company's operations until it generates a positive
cash flow. The Company is, however, currently actively seeking additional
financing in the amount of $1.8 - $2.5 million through a private placement of
its equity securities. Without any further funding or revenues from sales,
demonstration programs, or license fees, the Company expects to be able to fund
its operations into September 1999. Although the Company believes that it will
be successful in its capital-raising efforts, there is no guarantee that it will
be able to raise such funds on terms that will be satisfactory to the Company.
The Company has developed contingency plans in the event its financing efforts
are not successful. Such plans include reducing expenses and selling or
licensing the Company's technologies. Accordingly, at March 31, 1999, there is
substantial doubt as to the Company's ability to continue as a going concern.
Impact of Year 2000
The costs of the planned Year 2000 ("Y2K") modifications and the dates by
which the Company expects to complete its plans are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including continued availability of certain resources, third-party modification
plans, and other factors. Specific factors that might cause differences between
the estimates and actual results include, but are not limited to, the
availability and cost of personnel trained in these areas, the ability to locate
and correct all relevant computer codes, changes in consulting fees and costs to
remediate and replace hardware and software, as well as non-incremental costs
resulting from redeployment of internal resources, timely responses to and
corrections by third parties, such as significant customers and suppliers, and
similar uncertainties.
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. The issue
arises if date-sensitive software recognizes a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
-11-
<PAGE>
The Company has identified three information technology ("IT") and non-IT
areas for which Y2K compliance is critical to the normal and routine operations
of the Company. These areas are:
1) commercial off-the-shelf software
2) computer hardware and embedded processors
3) facilities-related applications and processes, such as communications
and equipment with embedded chips
The Company uses commercial off-the-shelf software and hardware, which,
based on the representations of the vendors and consultants, are or will be Y2K
compliant. The Company is also evaluating the possible effects of the Y2K issue
on its key suppliers, contractors, and vendors. Although the possible effects of
the Y2K issue on these parties are beyond the control of the Company, the
Company has initiated a process to communicate with these parties to inform them
of the Company's Y2K strategy and to determine their own Y2K strategies and
readiness. The Company estimates that the total cost of its Year 2000 compliance
program will be insignificant, and will primarily require the purchase of new
hardware and/or software (although a portion of the hardware and software would
have been purchased by the Company through the regular and routine upgrading of
systems). Such hardware and software will be capitalized and depreciated over
the estimated useful life of the related asset. All other expenditures will be
charged to expense. At March 31, 1999, the Company has not expended any funds
specifically for the Y2K problem.
Year 2000 Program
At March 31, 1999, the Company is actively engaged in one or more
compliance phases with respect to each of the three areas described above.
Although there can be no guarantee of complete readiness by the year 2000, the
Company believes each of the areas described above will be Y2K compliant by
November 30, 1999, or will be substantially compliant by that time, such that
further remediation and testing, if any, will not be significant to its
operations. However, as discussed above, the Company has not completed its Year
2000 compliance program. In the event the Company does not complete its program,
or fails to identify and modify critical business applications, there may be an
interruption to the Company's business that may have a materially adverse impact
on its future financial condition and results of operations. In addition,
Y2K-related disruptions in the economy in general may also have a materially
adverse impact on the Company's future financial condition and results of
operations.
Risks
The failure to identify and correct a Year 2000 problem could result in
an interruption in, or failure of, certain normal business activities or
operations. The Company does not expect such failures to have a materially
adverse impact on its results of operations or financial condition. However,
because of the general uncertainty about Year 2000 readiness throughout the
world economy, which results in uncertainties regarding the readiness of the
Company's vendors, contractors, and potential customers, the Company is
currently unable to determine whether Year 2000 problems may have a materially
adverse impact on its results of operations or financial condition. As the
Company's Year 2000 compliance program progresses, the level of uncertainty
about this matter will reduce, especially as to uncertainties concerning the
Company's own degree of Y2K compliance and the compliance of its suppliers and
contractors.
Worst Case Scenario
It is not possible to describe a reasonably likely "worst case Year
2000 scenario" without making numerous assumptions. The Company presently
believes that a most likely worst case scenario would make it necessary for the
Company to replace some suppliers and contractors, rearrange work plans, or,
perhaps, interrupt some office and field activities. Assuming this
-12-
<PAGE>
assessment is correct, the Company does not believe that such circumstances
would have a materially adverse impact on its financial condition or results of
operations, even if it is necessary to incur additional costs to correct
unanticipated compliance failures.
Contingency Plans
The Company currently has no contingency plans in place in the event it
does not complete all phases of its Y2K compliance program by December 31, 1999.
However, it expects to have completed enough of its compliance program by July
1999 that it will be able to identify those areas for which contingency plans
will be necessary, and it will develop the required contingency plans at that
time. The Company continues to monitor carefully the progress of its Year 2000
program and its state of readiness. Any future contingency plan will be based on
its best estimate of numerous factors, which, in turn will be derived by relying
on numerous assumptions of future events. However, there can be no assurance
that these assumptions or estimates will have been made correctly, or that the
Company will have anticipated all relevant factors, or that there will not be a
delay in or increased costs associated with the Company's Y2K program. Any delay
in implementation of the Year 2000 program could affect the Company's Year 2000
readiness. Specific factors that might cause the actual outcome to differ from
the projected outcome include, without limitation, the continued availability of
personnel and consultants trained in the computer programming skills necessary
for remediation of Year 2000 problems, the ability to locate and correct all
relevant computer codes and embedded software, timely responses by third
parties, including suppliers, contractors, and potential customers, and the
ability to implement interfaces between new systems and systems not being
replaced.
This discussion regarding the Year 2000 Issue is a "Year 2000 Readiness
Disclosure" as the term is described in the Year 2000 Information and Readiness
Disclosure Act of 1998.
-13-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
a. Series A Convertible Preferred Stock Amendment
Effective February 10, 1999, Section 3(a) of the Certificate of
Designation (the "Certificate") of the Series A Convertible
Preferred Stock of the Company (the "Preferred Stock") was
revoked by the filing of a Certificate of Amendment with the
Secretary of the State of Delaware. The effect of this
revocation was to eliminate the requirement in Section 3(a) of
the Certificate that the Preferred Stock be subject to
redemption at the option of a stockholder on or after May 8,
2002. The revocation had previously been approved by the
holders of the Preferred Stock (see the text under Item 4,
below).
b. Unregistered Equity Securities Sold during the Period
27,777 shares of the Company's Common Stock were issued on
February 4, 1999, to the Chief Executive Officer and President
of the Company at the equivalent price of $1.125 per share in
lieu of amounts of 1998 compensation. These shares were issued
and sold pursuant to the exemption available under Section 4
(2) of the Securities Act of 1933.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
By forms of written consent executed on January 23, 1999, the
holders of the Company's Series A Convertible Preferred Stock (the
"Preferred Stock") unanimously approved the revocation of Section
3(a) of the Certificate of Designation of the Preferred Stock,
thereby eliminating the provision for optional redemption of the
Preferred Stock by a stockholder on or after May 8, 2002 (see the
text above under Item 2).
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
None
b. Reports on Form 8-K
None
-14-
<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: May 14, 1999 By: /s/Jeremy D. Peter-Hoblyn
---------------------------------------
Jeremy D. Peter-Hoblyn
Chief Executive Officer, President
and Director
Date: May 14, 1999 By: /s/Scott M. Schecter
---------------------------------------
Scott M. Schecter
Chief Financial Officer, Vice President and
Treasurer
-15-
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<PERIOD-TYPE> 3-MOS
<EXCHANGE-RATE> 1
<CASH> 923,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 231,000
<CURRENT-ASSETS> 1,208,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,251,000
<CURRENT-LIABILITIES> 611,000
<BONDS> 0
<COMMON> 128,000
0
1,000
<OTHER-SE> 511,000
<TOTAL-LIABILITY-AND-EQUITY> 640,000
<SALES> 9,000
<TOTAL-REVENUES> 9,000
<CGS> 5,000
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 673,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (14,000)
<INCOME-PRETAX> (704,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (704,000)
<EPS-PRIMARY> (0.28)
<EPS-DILUTED> 0
</TABLE>
