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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, 2000
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
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CLEAN DIESEL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1393453
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(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 5, 2000, there were outstanding 2,594,256 shares of Common Stock, par
value $0.05 per share, of the registrant.
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CLEAN DIESEL TECHNOLOGIES, INC.
Form 10-Q for the Quarter Ended March 31, 2000
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets as of March 31, 2000, 2
and December 31, 1999
Statements of Operations for the Three 3
Months Ended March 31, 2000 and 1999
Statements of Cash Flows for the Three 4
Months Ended March 31, 2000 and 1999
Note to Financial Statements 6
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CLEAN DIESEL TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
(in thousands except share data)
March 31, December 31,
2000 1999
-------- --------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 563 $ 892
Accounts Receivable 25 46
Inventories 262 321
Other current assets 52 52
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Total current assets 902 1,311
Other assets 35 35
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Total assets $ 937 $ 1,346
======== ========
Liabilities and stockholders' equity
Current Liabilities:
Accounts payable and accrued expenses $ 570 $ 690
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Stockholders' equity:
Preferred Stock, par value $.05 per share,
authorized 85,000 shares, no shares issued
and outstanding -- --
Series A Convertible Preferred Stock, par
value $.05 per share, $500 per share
liquidation preference, authorized 15,000
shares, issued and outstanding 11,082,
involuntary liquidation value (incl. dividends payable)
$5,934,000 and $6,087,000 1 1
Common Stock, par value $0.05 per share,
authorized 15,000,000 shares, issued and
outstanding 2,594,456 shares 130 130
Additional paid-in capital 19,119 18,946
Accumalated Deficit (18,883) (18,421)
-------- --------
Total stockholders' equity 367 656
-------- --------
Total liabilities and stockholders' equity $ 937 $ 1,346
======== ========
</TABLE>
See note to financial statements.
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CLEAN DIESEL TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
(in thousands except per share data)
Three Months Ended
March 31
2000 1999
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<S> <C> <C>
Revenue:
Sales $ 46 $ 9
License Revenue 260 --
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Total Revenue 306 9
Costs and expenses:
Cost of sales 22 5
General and administrative 429 381
Research and development 139 268
Patent filing and maintenance 24 24
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Loss from operations 308 669
Interest income (10) (15)
Interest expense 1 1
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Net Loss before preferred stock dividend 299 655
Preferred Stock dividend 163 49
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Net loss attributed to Common Stockholders $ 462 $ 704
======= =======
Basic and diluted loss per common share $ 0.18 $ 0.28
======= =======
Average number of common shares
outstanding 2,594 2,550
======= =======
</TABLE>
See note to financial statements.
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CLEAN DIESEL TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(in thousands)
Three Months Ended
March 31
2000 1999
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<S> <C> <C>
Operating activities
Net Loss before preferred stock dividend $ (299) $ (655)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation 3 4
Changes in operating assets and liabilities:
Accounts Receivable 21 --
Inventories 59 (12)
Other current assets -- 4
Accounts payable and accrued expenses (110) (78)
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Net cash used in operating activities $ (326) $ (737)
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Financing activities
Proceeds from exercise of stock options -- 1
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Net cash provided from (used in) financing activities -- 1
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Investing activities
Purchase of fixed assets (3) (4)
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Net cash (used in) provided by investing activities (3) (4)
------- -------
Net (decrease) increase in cash and
cash equivalents (329) (740)
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Cash and cash equivalents at beginning of period 892 1,663
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Cash and cash equivalents at end of period $ 563 $ 923
======= =======
Non-Cash activities
Preferred Dividend 163 49
Accrued Director's Fee in stock 10 --
</TABLE>
See note to financial statements.
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CLEAN DIESEL TECHNOLOGIES, INC.
NOTE TO FINANCIAL STATEMENTS
MARCH 31, 2000
(Unaudited)
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-month period ended March 31, 2000, are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000. 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, 1999.
The balance sheet at December 31, 1999, 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 then reduced its ownership in the
Company to 27.6%.
The Company is a specialty chemical company supplying fuel additives and
proprietary systems that reduce harmful emissions from internal combustion
engines while improving fuel economy. Prior to December 1999 the Company was a
development stage enterprise devoted to research, development, and
commercialization of Platinum Fuel Catalysts (PFC's) and Nitrogen Oxide (NOx)
reduction technologies for diesel engines. During December 1999, the Company
received its EPA registration for its platinum - cerium diesel fuel combustion
catalyst and recorded its first commercial sales for this Platinum Plus(R)
diesel fuel catalyst product. Accordingly, in the opinion of management the
Company is no longer a development stage enterprise.
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 of $16,577,000
since inception (excluding non-cash preferred dividends and the one-time imputed
preferred dividend of 1,750,000 recognized in the third quarter of 1999), the
Company has been unable to generate a positive cash flow. The Company may
require additional capital in the future in order to fund its operations. The
Company's current cash position, including proceeds from the RJM license
agreement will not be sufficient to fund the Company's cash requirements. The
Company completed a preferred stock offering of $1,021,500 in April of 2000 (see
"Subsequent Events" for details). Without any further funding, the Company
expects to be able to fund operations through the first quarter 2001. 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
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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, 2000, there is substantial
doubt as to the Company's ability to continue as a going concern.
Inventories
Inventories are stated at the lower of cost or market and consist of
finished product. Cost is determined using the first-in, first-out (FIFO)
method.
Revenue Recognition
During February 2000, the Company completed a license agreement with the
RJM Corporation for CDT's ARIS 2000(TM) NOx Control System for all stationary,
marine and locomotive applications in North, Central and South America. The
Company received a $260,000 license payment and $100,000 inventory payment in
return for transferring the ARIS 2000 technology to the RJM Corporation. The
license payment is non-refundable and requires no ongoing services to be
performed by CDT. Clean Diesel has the opportunity to earn an additional
cumulative $1,000,000 in license revenue on the first, second, and third
anniversaries of the license agreement based on the prior years' ARIS 2000 sales
performance.
Series A Preferred Stock
During the year ended December 31, 1999 and 1998, the Company received
proceeds of $1.75 million and $1.85 million through private placements of 3,500
and 3,753 shares of its Series A Preferred Stock, respectively. In addition, in
1998 $1.4 million of bridge loans and $.5 million of term loans due to Fuel Tech
were converted into 2,800 and 1,029 shares of Series A Preferred Stock. During
the month ended March 31, 2000, 163,000 of dividends were declared (January 1,
2000) but unissued on the Series A Preferred Stock. At March 31, 2000, the
Company had 11,082 shares of Series A Preferred Stock issued and outstanding.
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 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 shares 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 1999 stock dividend payable on January 1, 2000, was
declared in kind as 318 additional shares of the Preferred Stock. As of March
31, 2000, the Company had 11,082 shares of Preferred Stock issued and
outstanding, and an additional 774 preferred stock shares to be issued for 1998
and 1999 dividends declared but not issued. As of March 31, 2000 the Company had
earned but undeclared dividends of approximately $169,000 (338 shares).
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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, 2000, the Company
would have approximately 6.66 million shares of Common Stock outstanding, of
which Fuel Tech would own approximately 1.45 million shares, or a 21.8% 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.
Related Party Transactions
The Company has a Management and Services Agreement with Fuel Tech. Under
the new 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 from Fuel Tech. Charges to the Company, inclusive of the
administrative fee, were approximately $25,500 and $30,000 in the first quarter
of 2000 and 1999, respectively.
Commitments
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 $9,818,180 million in 2000 and
declining annually to approximately $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, 2000.
Subsequent Event
In April 28, 2000, the Company completed a private placement preferred
stock offering of 1,362 Series A Preferred shares for $1,021,500 ($750 per
Series A Preferred Stock). The Series A Preferred shares have the same rights
and dividend terms as the previous Series A Preferred shares. The Series A
Preferred Stock was issued at a premium to the underlying common stock to which
it is convertible into.
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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, 1999.
Results of Operations
In prior years the Company was a development stage enterprise and its
efforts were devoted to the research, development and commercialization of
platinum fuel catalysts and nitrogen oxide reduction technologies to reduce
emissions from diesel engines. During 1999, the Company received its US EPA
registration for its platinum -cerium fuel catalyst product and completed its
first commercial sales.
Sales and Cost of sales were $46,000 and $22,500 respectively for the
first quarter of 2000 versus $9,000 and $5,000 for 1999. $32,000 of Platinum
Plus fuel catalyst sales were recorded in the first quarter of 2000. Commercial
sales of Platinum Plus fuel catalyst began in December 1999 and the Company is
in the process of rolling out regional demonstration programs with selected
fleets.
Included in the 2000 revenue is a $260,000 license payment from the RJM
Corporation for transfer of the ARIS 2000 NOx reduction technology. In addition
to the $260,000 license fee, the Company sold $14,000 of ARIS 2000 systems prior
to the February 2000 RJM license agreement. CDT will earn a royalty on all
future RJM sales of the ARIS 2000 as well as additional license revenue in 2001,
2002, and 2003 depending on the ARIS 2000 sales in those years.
General and administrative expenses increased $48,000 to $429,000 in the
first quarter 2000 versus $381,000 in the same period of 1999. The increase is
related to higher salary and fringes associated with a full time Chief Financial
Officer and higher marketing costs associated with the increased commercial
activity of Platinum Plus fuel catalyst.
Research and development expenses decreased $129,000 to $139,000 in 2000
versus $268,000 in the comparable period in 1999. The decrease is attributable
to the shift from research and development to commercialization that occurred in
the latter half of 1999. In addition two engineers transferred from CDT to RJM
as part of the ARIS 2000 license agreement.
Patent filing expense remained flat at $24,000 in 2000 and in 1999.
Interest income decreased slightly in 2000 to $10,000 from $15,000 in
1999 as a result of the decrease in cash and cash equivalents in 2000.
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Liquidity and Sources of Capital
In December 1999, the Company received its U.S. EPA registration for its
platinum - cerium fuel catalyst product and began commercial sales of the
product. Prior to this time the Company was a development stage enterprise. The
Company has been primarily a research and development company that has incurred
losses since inception aggregating $16,577,000 (excluding the effect of the
preferred dividends and the one-time non-cash imputed preferred dividend of
$1,750,000 recognized in the third quarter of 1999). The Company expects to
incur losses through the foreseeable future as it further pursues its
commercialization efforts. 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 through the 1995 Rights Offering
of its shares by Fuel Tech. The Company then repaid Fuel Tech approximately $2.3
million in inter-company 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 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, in November 1998, the Bridge
Loan automatically converted into 2,800 shares of 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. 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 approximately $1.85 million in net
proceeds against the issuance of 3,753 shares of Preferred Stock through a
private placement. 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
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 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
1999 quarterly dividends, if converted, along with its Common Stock ownership
would give Fuel Tech an approximate 21.8% interest in the Company on a fully
converted basis at December 31, 1999.
In August/September 1999, the Company received gross proceeds of $1.75
million, excluding expenses of $29,000, from private investors against the
issuance of an additional 3,500 shares of Preferred Stock. Therefore, the
Company had 11,082 shares of Preferred Stock issued and outstanding at December
31, 1999. As a result of the 1999 quarterly preferred dividends, and the January
1, 2000 preferred dividend, the Company had an additional 1,112 shares of
Preferred Stock issuable upon demand. At March 31, 1999, the Company had a total
of 12,194 issuable shares of Preferred Stock, which are convertible into
approximately 4.1 million shares of the Company's Common Stock, ($0.05 par
convertible at a rate of 1:333.33).
On April 1, 2000 the Company declared a preferred stock dividend in kind
of 338 shares. As discussed in the "Subsequent Events" section, on April 28,
2000, the Company completed a private placement of 1,362 Series A Preferred
shares for $1, 021,500. Therefore as of April 30, 2000 the Company had 13,874
shares of Series A Preferred Stock issued or issuable on demand.
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The Company signed an agreement with the RJM Corporation on February 2,
2000 that licensed RJM to sell CDT's ARIS 2000 NOx control system for all
stationary, marine, and locomotive applications in North, Central, and South
America. Under terms of the agreement CDT received an initial $360,000 license
and inventory payment and the opportunity to earn an additional $1,000,000 in
license revenue over the next 3 years based on the performance of the ARIS 2000.
In addition to license revenue, CDT will earn a royalty on all future ARIS 2000
sales.
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 PFC's, commencing in 1998. The royalty obligation expires in 2008.
The Company may terminate the royalty obligation to Fuel Tech by payment of
$9,818,180 in 2000 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, 2000 and 1999, the Company used cash
of $326,000 and $737,000 respectively, in operating activities.
At March 31, 2000, and December 31, 1999, the Company had cash and cash
equivalents of $563,000 and $892,000, respectively. The decrease in cash and
cash equivalents in 2000 was the result of the Company's use of its resources to
fund operations in 2000, partially offset by the funds received from the RJM
license agreement. The Company anticipates incurring additional losses through
at least 2000 as it further pursues its commercialization efforts.
As a result of the Company's recurring operating losses, the Company has
been unable to generate a positive cash flow. In management's opinion, the
Company's cash balance at March 31, 2000, together with the $1,021,500 received
from private investors against the issuance of 1,362 shares of preferred stock
(see "Subsequent Events") will be sufficient to fund the Company's operations
through the first quarter of 2001. The Company may require additional capital to
fund its working capital needs in 2001. 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 will develop contingency plans in the event future
financing efforts are not successful. Such plans may include reducing expenses
and selling or licensing some of the Company's technologies. Accordingly, at
March 31, 2000, there is substantial doubt as to the Company's ability to
continue as a going concern. See "Liquidity Going Concern" elsewhere herein for
additional information.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
None
b. Reports on Form 8-K
None
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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 5, 2000 By: /s/Jeremy D. Peter-Hoblyn
-------------------------
Jeremy D. Peter-Hoblyn
President and Chief Executive Officer
Date: May 5, 2000 By: /s/David W. Whitwell
--------------------
David W. Whitwell
Vice President and Chief Financial Officer
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