10-Q 1 body.txt CLEAN DIESEL TECHNOLOGIEST 10-Q 9-30-2005 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 September 30, 2005 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 --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes No X --- --- As of November 10, 2005, there were outstanding 17,193,047 shares of Common Stock, par value $0.05 per share, of the registrant. =========================================================================
CLEAN DIESEL TECHNOLOGIES, INC. Form 10-Q for the Quarter Ended September 30, 2005 INDEX Page ---- PART I. FINANCIAL INFORMATION Item 1. Condensed Financial Statements Balance Sheets as of September 30, 2005 (Unaudited), 3 and December 31, 2004 Statements of Operations for the Three and Nine Months 4 Ended September 30, 2005 and 2004 (Unaudited) Statements of Cash Flows for the Three and Nine Months 5 Ended September 30, 2005 and 2004 (Unaudited) Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis of 12 Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk 14 Item 4. Controls and Procedures 14 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 & CERTIFICATIONS
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PART I. FINANCIAL INFORMATION Item 1. Condensed Financial Statements CLEAN DIESEL TECHNOLOGIES, INC. CONDENSED BALANCE SHEETS (in thousands, except share data) SEPTEMBER 30, December 31, --------------------------------- 2005 2004 (Unaudited) ---------------- --------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 494 $ 4,265 Accounts receivable, net of allowance of $8 and $12 in 2005 and 2004, respectively 101 145 Inventories 265 387 Other current assets 85 71 ---------------- --------------- TOTAL CURRENT ASSETS 945 4,868 Patents, net 530 418 Fixed assets, net of accumulated depreciation of $233 in 2005 and $188 in 2004, respectively 193 200 Other assets 27 27 ---------------- --------------- TOTAL ASSETS $ 1,695 $ 5,513 ================ =============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses 468 391 ---------------- --------------- TOTAL CURRENT LIABILITIES 468 391 STOCKHOLDERS' EQUITY: Preferred Stock, par value $0.05 per share, 100,000 shares authorized, no shares issued and outstanding -- -- Common Stock, par value $0.05 per share, authorized 30,000,000 shares, issued and outstanding 17,193,047 and 17,165,868 shares respectively 860 858 Additional paid-in capital 38,500 38,431 Accumulated deficit (38,133) (34,167) ---------------- --------------- TOTAL STOCKHOLDERS' EQUITY 1,227 5,122 ---------------- --------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,695 $ 5,513 ================ ===============
See notes to condensed financial statements. - 3 -
CLEAN DIESEL TECHNOLOGIES, INC. CONDENSED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Revenue: Additive revenue $ 97 $ 88 $ 283 $ 199 Hardware revenue 56 135 314 280 License and royalty revenue 13 18 29 49 ----------- ----------- ----------- ----------- Total revenue 166 241 626 528 Costs and expenses: Cost of revenue 102 149 373 334 General and administrative 1,260 1,150 3,635 2,761 Research and development 222 174 369 344 Patent amortization and other expense 61 22 125 61 ----------- ----------- ----------- ----------- Loss from operations (1,479) (1,254) (3,876) (2,972) Foreign currency exchange gain/(loss) (12) -- (106) -- Interest income 2 11 16 36 ----------- ----------- ----------- ----------- Net loss attributable to common stockholders $ (1,489) $ (1,243) $ (3,966) $ (2,936) =========== =========== =========== =========== Basic and diluted loss per common share $ (0.09) $ (0.08) $ (0.23) $ (0.19) =========== =========== =========== =========== Weighted average number of common shares outstanding - basic and diluted 17,193 15,757 17,176 15,719 =========== =========== =========== ===========
See notes to condensed financial statements. - 4 -
CLEAN DIESEL TECHNOLOGIES, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) NINE MONTHS ENDED SEPTEMBER 30, 2005 2004 ----------- ----------- OPERATING ACTIVITIES Net loss $ (3,966) $ (2,936) Adjustments to reconcile net loss to cash used in operating activities: Bad debt 9 -- Depreciation and amortization 126 95 Write-off inventory and patents 76 -- Changes in operating assets and liabilities: Accounts receivable 35 (63) Inventories 79 (123) Other current assets (14) 10 Accounts payable and accrued expenses 148 347 ----------- ----------- Net cash used in operating activities (3,507) (2,670) ----------- ----------- INVESTING ACTIVITIES Patent costs (185) (82) Purchase of fixed assets (79) (143) ----------- ----------- Net cash used in investing activities (264) (225) ----------- ----------- FINANCING ACTIVITIES Proceeds from issuance of common stock, net 1,785 Proceeds from broker fee credit (2003 fundraising) -- 3 ----------- ----------- Net cash provided by financing activities -- 1,788 ----------- ----------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,771) (1,107) ----------- ----------- Cash and cash equivalents at beginning of period 4,265 6,515 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 494 $ 5,408 =========== =========== Non-cash activities Accrued expenses settled in common stock $ 71 $ 57
See notes to condensed financial statements. - 5 - CLEAN DIESEL TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2005 (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 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 nine-month period ended September 30, 2005, are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. The balance sheet at December 31, 2004 has been derived from the audited financial statements at that date but does not include all the information and notes required by generally accepted accounting principles for complete financial statement presentation. For further information, refer to the Financial Statements and footnotes thereto included in CDT's Annual Report on Form 10-K for the year ended December 31, 2004. Clean Diesel Technologies, Inc. ("CDT") 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 CDT's Common Stock that reduced its ownership in CDT to 27.6%. Fuel Tech currently holds a 10.6% interest in CDT as of September 30, 2005. CDT is a specialty chemical and energy technology company supplying fuel additives and proprietary systems that reduce harmful emissions from internal combustion engines while improving fuel economy. CDT's Platinum Plus FBC fuel additive, in the US, is registered with the EPA for on-highway use and in Europe, is approved under the VERT-VSET procedure. The Platinum Plus FBC in combination with a diesel oxidation catalyst or a catalyzed wire mesh filter have both been verified by the EPA for retrofit emission reduction. The success of CDT's technologies will depend upon the market acceptance of the technologies and governmental regulations including corresponding foreign and state agencies. At the present time, CDT cannot estimate when, or if, its operations will generate positive cash flows from operations. CDT does not have any credit facilities available with financial institutions or other third parties. If CDT cannot generate cash flow from operations, CDT will be dependent upon external sources of best-efforts financing, of which there are no firm commitments or arrangements. Based on the current operating plan, the $6.0 million net fundraising from a private common stock placing completed on November 7, 2005 (see Note 7) and the cash balance of $494,000 as of September 30, 2005 management believes it has sufficient resources to meet the cash needs of Clean Diesel into the first quarter of 2007. In the future, unless operating revenues are sufficient to meet operating expenses, CDT will need to access capital markets to fund operations by incurring indebtedness or issuing equity securities. CDT can provide no assurance that it will be successful in any future financing effort to obtain the necessary working capital to support operations or if such financing is available, it will be on acceptable terms. If management is unable to obtain the necessary financing from external sources, CDT may need to manage any cash shortfalls by taking measures which may include deferring or reducing the scope of commercialization efforts, reducing costs and overhead expenses, or otherwise curtailing operations, or obtaining funds by a disposal of assets or through arrangements with others that may require CDT to relinquish rights to certain of its technologies, or to license the rights to such technologies on terms that are less favorable to CDT than might otherwise be available. If CDT is unable to generate cash from operations or find alternative sources of funding, it would have an adverse impact on liquidity and operations and CDT may be unable to continue as a going concern. The consolidated financial statements have been prepared on a going concern basis and do not reflect any adjustments that might result from the outcome of this uncertainty. - 6 - NOTE 2: SIGNIFICANT ACCOUNTING POLICIES FOREIGN CURRENCY The US dollar is considered the functional currency for CDT. CDT maintains a sterling bank account for its UK representative office. Foreign currency translation gains or losses are recognized in the period incurred. CDT recorded a foreign currency loss on its UK bank holdings of $12,000 and $106,000 in the third quarter 2005 and year to date, respectively. INVENTORIES Inventories are stated at the lower of cost or market and consist of the following:
SEPTEMBER 30, December 31, (in thousands) 2005 2004 -------------- ------------- Finished Platinum Plus FBC $ 71 $ 142 Platinum concentrate/metal 74 150 Hardware (ARIS and Purifier) 65 77 Other 55 18 -------------- ------------- Total inventory $ 265 $ 387
REVENUE RECOGNITION Clean Diesel Technologies generates revenue from the sale of additives including the Platinum Plus FBC products and concentrate; hardware including the EPA verified Purifier System, ARIS injectors and dosing systems; and license and royalty fees from the ARIS 2000 System. CDT sells to end-user fleets, municipalities and construction companies, as well as fuel resellers, additive distribution companies and emission reduction companies. CDT shipping terms are FOB shipping point and revenue is recognized when its products are shipped and collections are reasonably assured unless the purchase order or contract specifically requires CDT to provide installation of hardware. For hardware projects where CDT is responsible for installation either directly or indirectly (third-party contractor), revenue is recognized when the hardware is installed and/or accepted if the project requires inspection/acceptance. License revenue is recognized when the license agreement is entered into, the license period commences, the technology rights, information and know-how have been transferred to the licensee and CDT does not have any ongoing responsibilities or performance requirements and collection is reasonably assured. Royalty income is recognized when earned. During the third quarter of 2004, the RJM Corporation ceased operations and consequently their ARIS stationary license for the North American market reverted back to CDT and thus CDT will not receive any future royalties from RJM. CDT had previously received and recognized $1.1 million in license revenue from RJM in 2000 and 2001 for the exclusive ARIS stationary license in the North American market. In April 2003, Clean Diesel Technologies completed a non-exclusive license agreement with Combustion Component Associates Inc. (CCA) of Monroe, Connecticut, for the mobile ARIS technology in the US for the remaining life of the patents, through 2018. Under terms of the agreement, CCA agreed to pay CDT a $150,000 non-refundable license fee and the licensee committed to spend an additional $100,000 in developing, testing and demonstrating ARIS mobile prototypes. CDT also receives ongoing royalty payments on a per unit basis. CDT recognized the $150,000 license revenue in the second quarter of 2003, as there are no significant ongoing services required to be performed by CDT. In September 2004, CCA was granted a limited two-year non-exclusive ARIS stationary license for the US market. The license fee of $150,000 is due by the end of a two-year trial period. Similar to the other ARIS license agreements for stationary applications, a per unit royalty of approximately $1,500 (based on percentage of sales price) is due for each ARIS system sold. In August 2001, Clean Diesel Technologies completed an exclusive license agreement with Mitsui Ltd for CDT's ARIS 2000 NOx control system for all stationary diesel power generators in Japan for the remaining life of the patents, through 2018. Under the agreement, CDT received a nonrefundable up-front license payment of $495,000, and will receive ongoing standard royalties of between $1,500 and $2,500 on each system sold by Mitsui. CDT recognized the license payment as revenue in 2001, as there are no significant ongoing services to be performed by CDT. - 7 - In December 2002, Clean Diesel Technologies completed an additional exclusive license agreement with Mitsui for the mobile ARIS technology for Japan for the remaining life of the patents, through 2018. Under terms of the agreement Mitsui agreed to pay CDT a $250,000 license fee and Mitsui committed to spend an additional $200,000 in developing, testing and demonstrating ARIS mobile prototypes. CDT recognized the $250,000 license revenue in the fourth quarter of 2002, as there are no significant ongoing services to be performed by CDT. In May 2005, CDT and Mitsui Ltd mutually agreed to transfer both Mitsui's exclusive ARIS mobile and stationary licenses to DENOX Inc of Japan. DENOX is a former joint venture of Mitsui. No additional license fees or payments were involved and DENOX agreed to same per unit royalties and terms of the original license agreement. GEOGRAPHIC INFORMATION CDT sells its Platinum Plus additives and licenses its ARIS systems throughout the world. A geographic breakdown of revenue consists of the following:
Third Quarter Year to Date (in thousands) 2005 2004 2005 2004 ------ ------ ------ ------ REVENUE: US $ 104 $ 180 $ 531 $ 302 UK/Europe 8 0 28 0 Asia 54 61 67 226 ------ ------ ------ ------ Total Revenue $ 166 $ 241 $ 626 $ 528
Foreign assets held by Clean Diesel Technologies consist of capitalized foreign patents net of accumulated amortization and are as follows:
SEPTEMBER 30, December 31, (in thousands) 2005 2004 -------------- -------------- US patents, net $ 127 $ 79 Foreign patents, net 403 339 -------------- -------------- Total patents, net $ 530 $ 418
PATENT EXPENSE CDT capitalizes all direct incremental costs associated with initial patent filing costs and amortizes the cost over the estimated remaining life of such patent. Patents are reviewed regularly and the remaining carrying value of any patents deemed not commercial or cost effective are written off. The expiration dates of CDT's patents, in numerous countries throughout the world, range from 2005 to 2022. RESEARCH AND DEVELOPMENT COSTS Costs relating to the research, development and testing of products are charged to operations as they are incurred. These costs include test programs, salary and benefits, consultancy fees, materials and certain testing equipment. GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expense is summarized as the following:
Third Quarter Year to Date (in thousands) 2005 2004 2005 2004 ------- ------- ------- ------- Compensation and benefits $ 809 $ 580 $ 2,363 $ 1,658 Occupancy 128 125 369 311 Professional 241 381 639 603 Other 82 64 264 189 ------- ------- ------- ------- Total general and administrative expense $ 1,260 $ 1,150 $ 3,635 $ 2,761
- 8 - STOCK-BASED COMPENSATION Clean Diesel Technologies accounts for employee/director stock option grants in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" and its related interpretations. Under CDT's current plan, options may be granted at not less than the fair market value on the date of grant and therefore no compensation expense is recognized for the stock options granted to employees. If compensation expense for CDT's plan had been determined based on the fair value at the grant dates for awards under its plan, consistent with the method described in SFAS No. 123, CDT's net loss and basic and diluted loss per common share would have been as follows on a pro forma basis:
Third Quarter Nine months YTD 2005 2004 2005 2004 -------- -------- -------- -------- Net loss attributable to common stockholders as reported $(1,489) $(1,243) $(3,966) $(2,936) Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects ( 61 ) (140) ( 678 ) (463) -------- -------- -------- -------- Pro forma net loss attributable to common stockholders $(1,550) $(1,383) $(4,644) $(3,399) Net loss per share attributable to common stockholders: Basic and diluted net loss per common share-as reported $ (0.09) $ (0.08) $ (0.23) $ (0.19) Basic and diluted per common share-pro forma $ (0.09) $ (0.09) $ (0.27) $ (0.22)
In August 2005 the Clean Diesel Board awarded Walter Copan, newly hired Chief Technology Officer, 100,000 options at the then current market price of $1.39. Clean Diesel's standard vesting policy for employees is one-third at grant and the remaining two-thirds on the first and second anniversary dates. Using the Black-Scholes option valuation model a non-cash compensation value of $104,500 was calculated of which $40,700 is included in the above pro forma table for the three and nine months ended September 30, 2005. In June 2005 upon his election to CDT's Board of Directors at its annual general meeting, John McCloy II was awarded 50,000 options at the current market price of $1.58. As with CDT's policy, non-executive director's options fully vest upon grant and using the Black-Scholes option valuation model a non-cash compensation value of $59,000 was calculated and included in the above pro forma table for the nine months ended September 30, 2005. In March 2005, the Board of Directors elected to accelerate the vesting on 363,000 unvested employee option grants representing all unvested 2003 employee option grants and certain unvested 2004 option grants. Since the market price at the time of the vesting modification was below the option grant price no additional expense was recognized on CDT's statement of operations. The remaining fair value for the 363,000 option grants was $498,000 and is included in the pro forma table above for the nine months ended September 30, 2005. The 363,000 of accelerated option grants represent less than 14 percent of the 2.7 million option grants outstanding and 81% of the accelerated option grants would have vested in 2005. The CDT Board's decision to accelerate the vesting of these option grants was in response to the issuance by the FASB of SFAS No. 123R, "share based payment." As a result of this measure, CDT will not be required to recognize any compensation expense with respect to these option grants in the statements of operations in future periods. In accordance with the provisions of SFAS No. 123, for purposes of the pro forma disclosure the estimated fair value of the options are amortized over the option vesting period. The application of the pro forma disclosures presented above is not representative of the effects SFAS No. 123 may have on operating results and earnings (loss) per share in future years due to the timing of stock option grants and considering that options vest over a period of two years for employees (one third at grant, and one-third on the first and second anniversary respectively) and immediately for directors. BASIC AND DILUTED LOSS PER COMMON SHARE Basic and diluted loss per share is calculated in accordance with SFAS No. 128, "Earnings Per Share." Basic loss per share is computed by dividing net loss by the weighted-average shares outstanding during the reporting period. Diluted loss per share is computed similar to basic earnings per share, except that the weighted-average shares outstanding are increased to include additional shares from the assumed exercise of stock options and warrants, if dilutive using the treasury stock method. CDT's computation of diluted net loss per share does not include common share equivalents associated with 2,823,387 and 2,235,000 options, respectively, and 507,000 and 532,000 warrants, respectively for the 2005 and 2004 periods, as the result would be anti-dilutive. - 9 - STOCKHOLDERS' EQUITY Pursuant to a Regulation S exemption with respect to an offshore placement, Clean Diesel Technologies sold, effective September 28, 2004, 1,000,000 shares of its common stock. The price of the common stock was 1.025 sterling (GBP) per share (approximately $1.82 per share). The proceeds of the common stock issuance, was $1.785 million (net of $65,000 in expenses). NOTE 3: RELATED PARTY TRANSACTIONS CDT has a Management and Services Agreement with Fuel Tech. The agreement requires CDT to reimburse Fuel Tech for management, services and administrative expenses incurred on our behalf. CDT has agreed to pay Fuel Tech a fee equal to an additional 3% of the costs paid on behalf of administration (approximately $500 for the quarter). Currently, and for the last three years CDT has reimbursed Fuel Tech for the expenses associated with one Fuel Tech officer/director who also serves as an officer/director of CDT. CDT believes the charges under the Management and Services Agreement are reasonable and fair. The Management and Services Agreement may be cancelled by either party by notifying the other in writing of the cancellation on or before May 15 in any year. For the three months ended September 30, 2005 and 2004, CDT incurred $500 in management fees and for the nine months ended 2005 and 2004 CDT incurred $1,500 of management fees. NOTE 4: COMMITMENTS Clean Diesel Technologies leases 3,925 square feet of administrative office space at 300 Atlantic Street, Stamford, Connecticut. The five year lease through March 2009 has an annual cost of approximately $123,000, including rent, utilities and parking. CDT leases 400 square feet of administrative space at 23 Bourne House, 475 Godstone Road in Surrey England. The two and half year lease through September 2007 has an annual cost of approximately $33,000 including utilities and communication services. CDT has signed a four year lease (through July 2008) for 2,750 square feet of warehouse space in Milford, Connecticut. Annual rent including utilities will be approximately $21,000. Effective October 28, 1994, Fuel Tech granted two licenses to CDT for all patents and rights associated with its platinum fuel catalyst technology. Effective November 24, 1997, the licenses were canceled and Fuel Tech assigned to CDT all such patents and rights on terms substantially similar to the licenses. In exchange for the assignment, CDT pays Fuel Tech a royalty of 2.5% of its annual gross revenue from sales of the platinum fuel catalysts commencing in 1998. The royalty obligation expires in 2008. CDT may terminate the royalty obligation to Fuel Tech by payment of $4.4 million in 2005 and declining annually to $3.3 million in 2006, $2.2 million in 2007 and $1.1 million in 2008. CDT as assignee and owner is responsible for maintaining the technology at its own expense. A royalty of $7,450 was paid to Fuel Tech for 2004 and the royalty payable to Fuel Tech at September 30, 2005 and 2004 is $ 6,970 and $4,950, respectively. NOTE 5: CONCENTRATION For the quarter ended September 30, 2005, one customer (customer "A") accounted for 33% of Clean Diesel's revenue. For the comparable three month period in 2004 customer A also accounted for 25% of Clean Diesel's revenue. For the nine month period in 2005 a different customer (customer "B") accounted for 30% of revenue while customer A accounted for 11% of revenue. For the nine-month year-to-date period in 2004, customer A also accounted for 43% of Clean Diesel's revenue. NOTE 6: ISSUANCE OF STOCK TO DIRECTOR FOR DIRECTOR'S FEES In June 2005 CDT issued 27,000 shares of common stock for payment of the $70,000 of accrued 2004 non-executive director's fees due to the director. The shares are determined based on the average of the high and low price of the stock each quarter. - 10 - NOTE 7: SUBSEQUENT EVENTS On November 7, 2005 Clean Diesel Technologies, Inc. completed a private placement of its common stock in which it raised approximately $6.0 million (net of $250,000 of expenses) and issued approximately 8.89 million shares of its common stock at approximately $0.70 per share. Of these proceeds, $620,000 is subject to delayed delivery and will be received within 90 days. In addition, approximately $268,000 (380,000 shares) of the placement was raised from directors and management. - 11 - 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 CDT'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 CDT's Annual Report on Form 10-K for the year ended December 31, 2004. RESULTS OF OPERATIONS 2005 VERSUS 2004 Revenues and cost of revenue in the second quarter of 2005 were $166,000 and $102,000, respectively, versus 2004 revenues and cost of revenues of $241,000 and $149,000, respectively. For the nine months to date, 2005 revenue and cost of revenue were $626,000 and $373,000, respectively, versus $528,000 and $334,000, respectively for the same nine month period in 2004. Revenues consist of the following:
Third Quarter Year to Date (in thousands) 2005 2004 2005 2004 ------ ------ ------ ------ REVENUE: Additive revenue $ 97 $ 88 $ 283 $ 199 Hardware revenue 56 135 314 280 License and royalty revenue 13 18 29 49 ------ ------ ------ ------ Total Revenue $ 166 $ 241 $ 626 $ 528
In the foregoing table "Additive" includes the Platinum Plus FBC products and concentrate; "Hardware" includes the EPA verified Purifier System, ARIS injectors and dosing systems. Clean Diesel received EPA verification of its Purifier System (FBC and DOC) in October 2003, and a second verification for its catalyzed wire mesh filter system (FBC and CWMF) in June 2004. Clean Diesel Technologies has applied for verification for emission reduction by CARB for the CWMF/FBC system as well. The Platinum Plus FBC is registered with the EPA. Additive revenue has increased in the third quarter 2005 and year to date as a result of successful demonstration programs and sales of the verified Purifier System which requires the use of the Platinum Plus FBC. Clean Diesel also saw significant increases in additive sales in the mining sector. Hardware sales of the Purifier system increased year to date as a result of the completion of the State of Pennsylvania grant project, partially offset by a decrease in ARIS injector sales. Clean Diesel Technologies identified a market opportunity for its urea selective catalytic reduction (SCR) system, The ARIS 2000, to reduce NOx in stationary power generation diesel engines. The ARIS 2000 NOx reduction system is a single-fluid injection and metering system complete with an electronic control unit that can be integrated with engine electronic and diagnostic systems. CDT's business strategy is to license the ARIS 2000 NOx reduction system to other companies for an up-front fee for the technology and information transfer and a separate on-going royalty per unit payment. CDT currently has an exclusive license agreement for both stationary and mobile ARIS applications for Japan with DENOX Inc (transferred from Mitsui Ltd in May 2005). CDT has a non-exclusive license for both stationary and mobile ARIS applications in the United States with Combustion Components Associates of Monroe, Connecticut. CDT previously had an ARIS stationary license agreement for North America with the RJM Corporation of Norwalk Connecticut, but as of August 2004 RJM was out of business and the ARIS license reverted back to CDT. CDT believes that the ARIS 2000 system can most effectively be commercialized through licensing several companies with a related business in these markets. Clean Diesel Technologies is actively seeking additional ARIS licensees for both mobile and stationary applications in the US, Europe and Asia. - 12 - General and administrative expenses increased $110,000 to $1,260,000 in the third quarter 2005 from $1,150,000 in 2004 and year to date the increase was 874,000 to $3,635,000 versus $2,761,000 in the same 2004 period as summarized in the following table:
Third Quarter Year to Date (in thousands) 2005 2004 2005 2004 ------ ------ ------ ------ Compensation and benefits $ 809 $ 580 $2,363 $1,658 Occupancy 128 125 369 311 Professional 241 381 639 603 Other 82 64 264 189 ------ ------ ------ ------ Total general and administrative expense $1,260 $1,150 $3,635 $2,761
Compensation and benefit expense increased as a result of several staff additions in the US and in Europe in 2005 related to increased sales and marketing efforts and a new Chief Technology Officer. Occupancy increased in 2005 as a result of the establishment of a UK representative office. Professional fees also increased primarily due to the creation of a technical advisory board, additional UK advisors and Sarbanes Oxley section 404 compliance work. Research and development expenses increased $48,000 to $222,000 in the third quarter 2005 from $174,000 in 2004. For the nine months year to date in 2005 research and development increased $25,000 to $399,000 from $344,000 in 2004. The increase in research and development in third quarter 2005 is due to the additional requested EPA testing on the Platinum Plus FBC. Patent amortization and other costs increased to $61,000 in the third quarter 2005 versus $22,000 in 2004. For the nine months to date in 2005 patent amortization and other costs increased to $125,000 from $61,000 in 2004. The 2005 increase is related to higher amortization related to prior period capitalization and non-capitalizable patent expenses incurred in 2005. In addition in the third quarter 2005 the Company wrote-off several international patents determined to be commercially unviable which amounted to $32,500. Interest income decreased to $2,000 in the third quarter 2005 from $11,000 in 2004. For the nine months to date in 2005 interest income decreased to $16,000 from $36,000 in 2004. The decrease is due to the higher amount of invested funds in the first half of 2004 related to the November 2003 fund-raising. LIQUIDITY AND SOURCES OF CAPITAL Prior to 2000, CDT was primarily engaged in research and development and has incurred losses since inception aggregating $33,381,000 (excluding the effect of the non-cash preferred stock dividends on preferred shares prior to conversion to common). CDT expects to incur losses through the foreseeable future as it further pursues its commercialization efforts. Although CDT started selling limited quantities of Platinum Plus additive and the verified Purifier system and generating some ARIS licensing fees and royalties, operating revenue to date has been insufficient to cover operating expenses and CDT continues to be dependent upon proceeds from fund raising to finance its working capital requirements. For the nine months ended September 30, 2005 and 2004, CDT used cash of $3,507,000 and $2,670,000 respectively, in operating activities. At September 30, 2005 and December 31, 2004, CDT had cash and cash equivalents of $494,000 and $4,265,000, respectively. The decrease in cash and cash equivalents in 2005 was the result of limited revenues and on-going operating costs. CDT anticipates incurring additional losses through at least 2006 as it further pursues its commercialization efforts. In November 2005 Clean Diesel Technologies received $6 million (net of $250,000) expenses through a private placement of its common. The price of the common stock was 0.40 GBP per share (approximately $0.70 per share). The proceeds of the common stock issuance are being used for the general corporate purposes of Clean Diesel Technologies. In October 2004, Clean Diesel Technologies received $754,000 (net of $25,000 in expenses) through a private placement of 426,500 shares of its common stock. The price of the common stock was 1.025 GBP per share (approximately $1.82 per share). The proceeds of the common stock issuance are being used for the general corporate purposes of Clean Diesel Technologies. - 13 - In September 2004, Clean Diesel Technologies received $1.785 million (net of $65,000 in expenses) through a private placement of 1,000,000 shares of its common stock. The price of the common stock was 1.025 GBP per share (approximately $1.82 per share). The proceeds of the common stock issuance are being used for the general corporate purposes of Clean Diesel Technologies. In December 2003, Clean Diesel Technologies received $3.583 million (net of $170,000 in expenses) through a private placement of 1,282,600 shares of its common stock. The price of the common stock was 1.70 GBP per share (approximately $2.92 per share). In September 2003, Clean Diesel Technologies received $3.866 million (net of $39,000 in expenses) through a private placement of 2,395,597 shares of its common stock. In conjunction with the private placement, 230,240 ten year warrants with an exercise price of $1.63 per share were issued. At the present time, CDT cannot estimate when, or if, its operations will generate positive cash flows from operations. CDT does not have any credit facilities available with financial institutions or other third parties. If CDT cannot generate cash flow from operations, CDT will be dependent upon external sources of best-efforts financing, of which there are no firm commitments or arrangements. Based on the current operating plan, the $6.0 million net fundraising from a private common stock placing completed on November 7, 2005 (see Note 7) and the cash balance of $494,000 as of September 30, 2005 management believes it has sufficient resources to meet the cash needs of Clean Diesel into the first quarter of 2007. In the future, unless operating revenues are sufficient to meet operating expenses, CDT will need to access capital markets to fund operations by incurring indebtedness or issuing equity securities. CDT can provide no assurance that it will be successful in any future financing effort to obtain the necessary working capital to support operations or if such financing is available, it will be on acceptable terms. If management is unable to obtain the necessary financing from external sources, CDT may need to manage any cash shortfalls by taking measures which may include deferring or reducing the scope of commercialization efforts, reducing costs and overhead expenses, or otherwise curtailing operations, or obtaining funds by a disposition of assets or through arrangements with others that may require CDT to relinquish rights to certain of its technologies, or to license the rights to such technologies on terms that are less favorable to CDT than might otherwise be available. If CDT is unable to generate cash from operations or find alternative sources of funding, it would have an adverse impact on liquidity and operations and CDT may be unable to continue as a going concern. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the opinion of management, with the exception of exposure to fluctuations in the cost of platinum, CDT is not subject to any significant market risk exposure. CDT generally receives most income in United States dollars. CDT typically makes several payments monthly in various foreign currencies for patent expenses, product tests and registration, local marketing and promotion, consultants and employees. ITEM 4. CONTROLS AND PROCEDURES CDT maintains disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in it's filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. CDT's management, with the participation of its principal executive and financial officers, has evaluated the effectiveness of its disclosure controls and procedures as of the end of the period covered by this Quarterly Report on form 10Q. CDT's principal executive and financial officers have concluded, based on such evaluation, that such disclosure controls and procedures were effective for the purpose for which they were designed as of the end of such period. There was no change in CDT's internal control over financial reporting that was identified in connection with such evaluation that occurred during the period covered by this Quarterly Report on form 10Q that has materially affected, or is reasonably likely to materially affect, CDT's internal control over financial reporting. - 14 - 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 - 15 - CLEAN DIESEL TECHNOLOGIES, INC. SIGNATURES & CERTIFICATIONS 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. Date: November 14, 2005 By: /s/Bernhard Steiner ---------------------------------- Bernhard Steiner Director and Chief Executive Officer Date: November 14, 2005 By: /s/David W. Whitwell ---------------------------------- David W. Whitwell Chief Financial Officer, Vice President and Treasurer - 16 -