e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
or
|
|
|
o |
|
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: 001-33710
CLEAN DIESEL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
|
|
06-1393453 |
|
|
|
(State or other jurisdiction of
|
|
(I.R.S. Employer |
incorporation or organization)
|
|
Identification No.) |
4567 Telephone Road, Suite 206
Ventura, CA 93003
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (805) 639-9458
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definition of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
|
|
|
|
|
|
|
Large Accelerated filer o | |
Accelerated filer o | |
Non-accelerated filer o | |
Smaller reporting company þ |
|
|
|
|
(Do not check if a smaller reporting company) |
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of August 5, 2011, the outstanding number of shares of the registrants common stock, par value
$0.01 per share, was 7,165,226.
CLEAN DIESEL TECHNOLOGIES, INC.
TABLE OF CONTENTS
EXPLANATORY NOTE
On October 15, 2010, we completed the merger of our wholly-owned subsidiary, CDTI Merger
Sub, Inc., with and into Catalytic Solutions, Inc., a California corporation (CSI), as
contemplated by that certain Agreement and Plan of Merger dated May 13, 2010, as amended by
letter agreements dated September 1, 2010 and September 14, 2010 (the Merger Agreement). We
refer to this transaction as the Merger, see Note 3 to our Notes to Condensed Consolidated
Financial Statements. On October 15, 2010, we also effected a one-for-six reverse stock split
of the shares of our common stock. When we refer to our shares of common stock on a
post-split basis, it means after giving effect to the one-for-six reverse stock split. The
Merger was accounted for as a reverse acquisition and, as a result, our companys (the legal
acquirer) consolidated financial statements are now those of CSI (the accounting acquirer),
with the assets and liabilities, and revenues and expenses, of our company being included
effective from the date of the closing of the Merger.
As used in this Quarterly Report on Form 10-Q and unless otherwise indicated, the terms
the company, we, us, and our refer to Clean Diesel Technologies, Inc. after giving
effect to the Merger, unless the context requires otherwise.
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this report are forward-looking statements. You can sometimes
identify forward-looking statements by our use of forward-looking words like may, should,
expects, intends, plans, anticipates, believes, estimates, predicts,
potential, or continue or the negative of these terms and other similar expressions.
Although we believe that the plans and expectations reflected in or suggested by our
forward-looking statements are reasonable, those statements are based only on the current
beliefs and assumptions of our management and on information currently available to us and,
therefore, they involve uncertainties and risks as to what may happen in the future.
Accordingly, we cannot guarantee that our plans and expectations will be achieved. Our actual
results could differ from those expressed in or implied by any forward-looking statement in
this report as a result of many known and unknown factors, many of which are beyond our
ability to predict or control. These factors include, but are not limited to, those described
under the caption Risk Factors in our Annual Report on Form 10-K for the year ended
December 31, 2010 filed with the Securities and Exchange Commission (the SEC) on March 31,
2011 (the Form 10-K) including without limitation the following:
|
|
|
Future growth of our business depends, in part, on
enforcement of existing emissions-related environmental
regulations, further tightening of emission standards
worldwide and the general availability of funding for
emissions control programs, if such regulations and
standards are not enacted or enforced, demand for our
products could decrease, which would have an adverse effect
on our financial condition and results of operations; |
|
|
|
|
Historically, we have been dependent on a few major
customers for a significant portion of our companys
revenue and our revenue could decline if we are unable to
maintain or develop relationships with current or potential
customers, or if such customers reduce demand for our
products; |
|
|
|
|
Failure of one or more key suppliers to timely deliver
could prevent, delay or limit us from supplying products;
and |
|
|
|
|
Future growth of our business depends, in part, on market
acceptance of our catalyst products, successful
verification of our products and retention of our
verifications and if we do not receive such acceptance or
verification, it would have an adverse effect on demand for
our catalyst products and our business. |
All written and oral forward-looking statements attributable to us are expressly qualified
in their entirety by these cautionary statements.
Our forward-looking statements speak only as of the date they are made and should not be
relied upon as representing our plans and expectations as of any subsequent date. Although we
may elect to update or revise forward-looking statements at some time in the future, we
specifically disclaim any obligation to do so, even if our plans and expectations change.
ii
PART IFINANCIAL INFORMATION
Item 1. Financial Statements
CLEAN DIESEL TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
3,148 |
|
|
$ |
5,007 |
|
Accounts receivable, net |
|
|
6,504 |
|
|
|
5,475 |
|
Inventories |
|
|
8,532 |
|
|
|
5,253 |
|
Prepaid expenses and other current assets |
|
|
2,083 |
|
|
|
1,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
20,267 |
|
|
|
17,553 |
|
Property and equipment, net |
|
|
2,880 |
|
|
|
2,884 |
|
Intangible assets, net |
|
|
6,630 |
|
|
|
7,294 |
|
Goodwill |
|
|
4,828 |
|
|
|
4,671 |
|
Other assets |
|
|
152 |
|
|
|
246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
34,757 |
|
|
$ |
32,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Line of credit |
|
$ |
4,373 |
|
|
$ |
2,431 |
|
Settlement obligation |
|
|
|
|
|
|
1,575 |
|
Accounts payable |
|
|
7,377 |
|
|
|
4,588 |
|
Warrant liability |
|
|
108 |
|
|
|
1,238 |
|
Accrued expenses and other current liabilities |
|
|
5,476 |
|
|
|
4,466 |
|
Income taxes payable |
|
|
436 |
|
|
|
455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
17,770 |
|
|
|
14,753 |
|
Shareholder notes payable |
|
|
4,464 |
|
|
|
1,410 |
|
Capital lease obligation |
|
|
30 |
|
|
|
46 |
|
Deferred tax liability |
|
|
1,127 |
|
|
|
1,096 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
23,391 |
|
|
|
17,305 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 15) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, par value $0.01 per
share: authorized 100,000; no shares issued and
outstanding |
|
|
|
|
|
|
|
|
Common stock, par value $0.01 per
share: authorized 12,000,000; issued
and outstanding
4,111,476 and 3,959,208 shares at June 30,
2011 and December 31, 2010, respectively |
|
|
41 |
|
|
|
40 |
|
Additional paid-in capital |
|
|
174,870 |
|
|
|
173,262 |
|
Accumulated other comprehensive income (loss) |
|
|
222 |
|
|
|
(239 |
) |
Accumulated deficit |
|
|
(163,767 |
) |
|
|
(157,720 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
11,366 |
|
|
|
15,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
34,757 |
|
|
$ |
32,648 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
1
CLEAN DIESEL TECHNOLOGIES, INC.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Revenues |
|
$ |
11,532 |
|
|
$ |
12,926 |
|
|
$ |
25,316 |
|
|
$ |
25,371 |
|
Cost of revenues |
|
|
8,101 |
|
|
|
9,756 |
|
|
|
17,878 |
|
|
|
18,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
3,431 |
|
|
|
3,170 |
|
|
|
7,438 |
|
|
|
6,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative (including
stock-based compensation expense of $663, $45, $983
and $91) |
|
|
4,861 |
|
|
|
2,650 |
|
|
|
9,412 |
|
|
|
5,687 |
|
Research and development (including stock-based
compensation expense of $192, $0, $192 and $0) |
|
|
2,235 |
|
|
|
1,157 |
|
|
|
3,749 |
|
|
|
2,145 |
|
Recapitalization expense |
|
|
|
|
|
|
560 |
|
|
|
|
|
|
|
727 |
|
Severance expense |
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
15 |
|
Gain on sale of intellectual property |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,900 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
7,096 |
|
|
|
4,382 |
|
|
|
13,161 |
|
|
|
4,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations |
|
|
(3,665 |
) |
|
|
(1,212 |
) |
|
|
(5,723 |
) |
|
|
2,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
2 |
|
|
|
|
|
|
|
8 |
|
|
|
2 |
|
Interest expense |
|
|
(322 |
) |
|
|
(532 |
) |
|
|
(535 |
) |
|
|
(678 |
) |
Other income (expense), net |
|
|
553 |
|
|
|
188 |
|
|
|
720 |
|
|
|
(109 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
233 |
|
|
|
(344 |
) |
|
|
193 |
|
|
|
(785 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before
income taxes |
|
|
(3,432 |
) |
|
|
(1,556 |
) |
|
|
(5,530 |
) |
|
|
1,317 |
|
Income tax expense from continuing operations |
|
|
249 |
|
|
|
304 |
|
|
|
471 |
|
|
|
510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations |
|
|
(3,681 |
) |
|
|
(1,860 |
) |
|
|
(6,001 |
) |
|
|
807 |
|
Net loss from operations of discontinued Energy
Systems division |
|
|
(43 |
) |
|
|
(87 |
) |
|
|
(46 |
) |
|
|
(162 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(3,724 |
) |
|
$ |
(1,947 |
) |
|
$ |
(6,047 |
) |
|
$ |
645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations per share |
|
$ |
(0.92 |
) |
|
$ |
(3.38 |
) |
|
$ |
(1.50 |
) |
|
$ |
1.47 |
|
Net loss from discontinued operations per share |
|
|
(0.01 |
) |
|
|
(0.16 |
) |
|
|
(0.01 |
) |
|
|
(0.30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share |
|
$ |
(0.93 |
) |
|
$ |
(3.54 |
) |
|
$ |
(1.51 |
) |
|
$ |
1.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations per share |
|
$ |
(0.92 |
) |
|
$ |
(3.38 |
) |
|
$ |
(1.50 |
) |
|
$ |
1.46 |
|
Net loss from discontinued operations per share |
|
|
(0.01 |
) |
|
|
(0.16 |
) |
|
|
(0.01 |
) |
|
|
(0.30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share |
|
$ |
(0.93 |
) |
|
$ |
(3.54 |
) |
|
$ |
(1.51 |
) |
|
$ |
1.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
4,009 |
|
|
|
550 |
|
|
|
3,997 |
|
|
|
550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
4,009 |
|
|
|
550 |
|
|
|
3,997 |
|
|
|
554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the condensed consolidated financial statements.
2
CLEAN DIESEL TECHNOLOGIES, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(6,047 |
) |
|
$ |
645 |
|
Loss from discontinued operations |
|
|
46 |
|
|
|
162 |
|
Adjustments to reconcile net (loss) income to cash (used in) provided by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,178 |
|
|
|
619 |
|
Provision for (recovery of) doubtful accounts |
|
|
23 |
|
|
|
(11 |
) |
Stock based compensation expense |
|
|
1,175 |
|
|
|
91 |
|
Change in fair value of liability-classified warrants |
|
|
(1,091 |
) |
|
|
|
|
Change in fair value of financial instruments |
|
|
|
|
|
|
(178 |
) |
Amortization of debt discount and accretion of debt payment premium |
|
|
54 |
|
|
|
281 |
|
Amortization of debt issuance costs |
|
|
75 |
|
|
|
56 |
|
(Gain) loss on unconsolidated affiliate |
|
|
(18 |
) |
|
|
33 |
|
Loss on foreign currency transactions |
|
|
221 |
|
|
|
231 |
|
(Gain) loss on disposal of property and equipment |
|
|
(35 |
) |
|
|
34 |
|
Gain on sale of intellectual property |
|
|
|
|
|
|
(3,900 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(968 |
) |
|
|
2,137 |
|
Inventories |
|
|
(3,060 |
) |
|
|
1,125 |
|
Prepaid expenses and other assets |
|
|
126 |
|
|
|
1,081 |
|
Accounts payable |
|
|
2,828 |
|
|
|
(506 |
) |
Income taxes payable |
|
|
(56 |
) |
|
|
(289 |
) |
Accrued expenses and other current liabilities |
|
|
547 |
|
|
|
(840 |
) |
|
|
|
|
|
|
|
Cash (used in) provided by operating activities of continuing operations |
|
|
(5,002 |
) |
|
|
771 |
|
Cash used in operating activities of discontinued operations |
|
|
(46 |
) |
|
|
(161 |
) |
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
(5,048 |
) |
|
|
610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(360 |
) |
|
|
(186 |
) |
Investment in unconsolidated affiliate |
|
|
51 |
|
|
|
(413 |
) |
Proceeds from sale of property and equipment |
|
|
37 |
|
|
|
|
|
Proceeds from sale of intellectual property |
|
|
|
|
|
|
2,000 |
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(272 |
) |
|
|
1,401 |
|
|
|
|
|
|
|
|
See accompanying notes to the condensed consolidated financial statements.
3
CLEAN DIESEL TECHNOLOGIES, INC.
Condensed Consolidated Statements of Cash Flows Continued
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net borrowings under demand line of credit |
|
|
4,373 |
|
|
|
|
|
Borrowings under line of credit |
|
|
|
|
|
|
241 |
|
Repayment of line of credit |
|
|
(2,540 |
) |
|
|
(2,501 |
) |
Proceeds from issuance of debt |
|
|
|
|
|
|
1,500 |
|
Proceeds from issuance of shareholder notes payable |
|
|
3,000 |
|
|
|
|
|
Proceeds from exercise of warrants |
|
|
394 |
|
|
|
|
|
Payment of settlement obligation |
|
|
(1,575 |
) |
|
|
|
|
Repayment of capital lease obligations |
|
|
(16 |
) |
|
|
(14 |
) |
Payments for debt issuance costs |
|
|
(115 |
) |
|
|
(272 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
3,521 |
|
|
|
(1,046 |
) |
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash |
|
|
(60 |
) |
|
|
(414 |
) |
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
(1,859 |
) |
|
|
551 |
|
Cash and cash equivalents at beginning of period |
|
|
5,007 |
|
|
|
2,336 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
3,148 |
|
|
$ |
2,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
438 |
|
|
$ |
258 |
|
Cash paid for income taxes |
|
$ |
626 |
|
|
$ |
663 |
|
See accompanying notes to the condensed consolidated financial statements.
4
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization
a. Description of Business
Clean Diesel Technologies, Inc. is a global manufacturer and distributor of heavy duty diesel
and light duty vehicle emissions control systems and products to major automakers and retrofitters.
Its business is driven by increasingly stringent global emission standards for internal combustion
engines, which are major sources of a variety of harmful pollutants. It has operations in the
United States, Canada, the United Kingdom, France, Japan and Sweden as well as an Asian investment.
b. Merger
On October 15, 2010, Clean Diesel Technologies, Inc. (CDTI) consummated a business
combination with Catalytic Solutions, Inc. (CSI) through the merger of its wholly-owned
subsidiary, CDTI Merger Sub, Inc., with and into CSI pursuant to the terms of the Agreement and
Plan of Merger dated May 13, 2010, as amended by letter agreements dated September 1, 2010 and
September 14, 2010 (the Merger Agreement). The Company refers to this transaction as the
Merger. Pursuant to the terms of the Merger Agreement, all of the outstanding common stock of
CSI (both Class A and Class B) was cancelled and CDTI issued (or reserved for issuance to the
holder of an in-the-money warrant of CSI) an aggregate 2,287,872 shares of CDTI common stock and
warrants to acquire 666,581 shares of CDTI common stock to the former security holders of CSI and
its financial advisor (each after giving effect to a one for six reverse stock split of CDTIs
common stock that took effect on October 15, 2010). In connection with the Merger, CSI became a
wholly-owned subsidiary of the Company, with the former security holders of CSI and its financial
advisor in the Merger collectively owning shares of the Companys common stock representing
approximately 60% of the voting power of the Companys outstanding common stock immediately after
completion of the Merger.
The Merger was accounted for as a reverse acquisition with CSI considered the acquirer for
accounting purposes and the surviving corporation in the merger. As a result, the Companys
consolidated financial statements are those of CSI, the accounting acquirer, with the assets and
liabilities and revenue and expenses of CDTI being included effective from the date of the closing
of the Merger.
References to the Company prior to the Merger refer to the operations of CSI and its
consolidated subsidiaries and subsequent to the Merger to the combined operations of the merged
company and its consolidated subsidiaries. The terms CSI and CDTI refer to such entities stand
alone businesses prior to the Merger.
c. Liquidity
The accompanying consolidated financial statements have been prepared assuming the Company
will continue as a going concern. Therefore, the consolidated financial statements contemplate the
realization of assets and settlement of liabilities in the ordinary course of business. The Company
has suffered recurring losses and negative cash flows from operations since inception, resulting in
an accumulated deficit of $163.8 million at June 30, 2011. The Company has funded its operations
through equity sales, debt and bank borrowings.
On February 14, 2011, the Company and certain of its subsidiaries entered into separate Sale
and Security Agreements with Faunus Group International, Inc. (FGI) to provide for a $7.5
million secured demand facility backed by the Companys receivables and inventory. On February 16,
2011, approximately $2.1 million of proceeds from advances under this facility were used to pay in
full the balance of the obligations under CSIs credit facility with Fifth Third Bank. Amounts
outstanding under the FGI facility, totaling $4.4 million at June 30, 2011, are due on demand and,
therefore, are classified as current liabilities in the accompanying condensed, consolidated
balance sheet.
On April 11, 2011, the Company entered into a Subordinated Convertible Notes Commitment Letter
with Kanis S.A. (Purchaser) that provides for the sale and issuance by the Company of 8%
subordinated convertible notes (the Notes). As provided in the Commitment Letter, on May 6, 2011
Purchaser acquired from the Company at par, $3.0 million aggregate principal amount of the Notes.
The Notes bear interest at a rate of 8% per annum, which is payable quarterly in arrears. See Note 8 for a detailed description of the Notes.
At June 30, 2011, the Company had $3.1 million in cash. On July 9, 2011, the Company received
net proceeds of approximately $10.1 million through a public offering of common stock. See Notes 9
and 17. Management believes that the Company will have sufficient working capital to sustain
operations through at least the next twelve
5
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
months. However, there is no assurance that, if required, the Company will be able to raise
additional capital or reduce discretionary spending to provide the required liquidity.
2. Summary of Significant Accounting Policies
a. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of
Clean Diesel Technologies, Inc. and its subsidiaries. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary for a fair presentation have
been reflected. The accompanying unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and related notes included in Clean
Diesel Technologies, Inc.s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
Certain financial information that is normally included in annual financial statements
prepared in accordance with U.S. generally accepted accounting principles, but is not required for
interim reporting purposes, has been condensed or omitted.
b. Stockholders Equity
Stockholders equity, including all share and per share amounts, has been retroactively
restated to reflect the number of shares of common stock received by former CSI stockholders in the
Merger and includes the effect of the one-for-six reverse stock split of CDTIs common stock that
became effective immediately prior to the closing of the Merger. See Note 3.
c. Principles of Consolidation
The condensed consolidated financial statements include the financial statements of the
Company and its wholly owned subsidiaries. All significant inter-company balances and transactions
have been eliminated in consolidation.
d. Concentration of Risk
For the periods presented below, certain customers accounted for 10% or more of the Companys
revenues as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
Customer |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
A |
|
|
11 |
% |
|
|
23 |
% |
|
|
18 |
% |
|
|
22 |
% |
B |
|
|
1 |
% |
|
|
14 |
% |
|
|
1 |
% |
|
|
15 |
% |
The customers above are automotive OEMs and relate to sales within the Catalyst segment.
The March 2011 earthquake and resulting tsunami in Japan caused a disruption to automotive
production. Customer A has significant operations in Japan and has been impacted by the disaster
there. Although the Companys shipments are primarily to U.S.-based production sites, due to parts
delays coming out of Japan, Customer A temporarily reduced its U.S.-based production. Customer A
has announced that it plans to ramp production back up to normal production levels during the third
quarter of 2011. The Company does not yet know what the effect of this decision will be on its
third quarter results of operations.
For the periods presented below, certain customers accounted for 10% or more of the Companys
accounts receivable balance as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
Customer |
|
2011 |
|
2010 |
A |
|
|
7 |
% |
|
|
16 |
% |
B |
|
|
8 |
% |
|
|
14 |
% |
Customer A above is an automotive OEM and customer B is a diesel distributor.
6
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
For the periods presented below, certain vendors accounted for 10% or more of the Companys
raw material purchases as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
Vendor |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
A |
|
|
17 |
% |
|
|
21 |
% |
|
|
18 |
% |
|
|
22 |
% |
B |
|
|
11 |
% |
|
|
12 |
% |
|
|
9 |
% |
|
|
14 |
% |
C |
|
|
4 |
% |
|
|
6 |
% |
|
|
7 |
% |
|
|
10 |
% |
Vendor A above is a catalyst supplier, vendor B is a precious metals supplier and vendor C is
a substrate supplier.
e. Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States (U.S. GAAP) requires management of the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Areas where significant
judgments are made include but are not limited to the following: business combination accounting,
impairment of goodwill and long-lived assets, stock-based compensation, the fair value of financial
instruments, allowance for doubtful accounts, inventory valuation, taxes and contingent and accrued
liabilities. Actual results could differ from those estimates. These estimates and assumptions are
based on managements best estimates and judgment. The Company evaluates its estimates and
assumptions on an ongoing basis using historical experience and other factors, including the
current economic environment, which it believes to be reasonable under the circumstances. Estimates
and assumptions are adjusted when facts and circumstances dictate. As future events and their
effects cannot be determined with precision, actual results could differ from these estimates.
Changes in estimates resulting from continuing changes in the economic environment will be
reflected in the financial statements in future periods.
f. Recapitalization Expense
Recapitalization expense consists primarily of the expense for legal, accounting and other
advisory professional services related to the Companys efforts in 2010 to explore strategic
opportunities and include such costs related to the Merger.
g. Net (Loss) Income per Share
Basic net (loss) income per share is computed using the weighted average number of common
shares outstanding during the period. Diluted net (loss) income per share is computed using the
weighted average number of common shares and dilutive potential common shares. Dilutive potential
common shares include employee stock options, other warrants and convertible notes that are
convertible into the Companys common stock. The Company had potential dilutive securities totaling
1,584,000 for the three and six months ended June 30, 2011 and 68,000 for the three and six months
ended June 30, 2010.
Diluted net (loss) income per share excludes certain dilutive potential common shares
outstanding as their effect is anti-dilutive. Because the Company incurred a net loss in the three
and six months ended June 30, 2011 and the three months ended June 30, 2010, the effect of dilutive
securities totaling 1,584,000 and 68,000 equivalent shares, respectively, has been excluded in the
computation of net loss per share and net loss from continuing operations per share as their impact
would be anti-dilutive. The effect of 58,000 equivalent out-of-the-money shares has been excluded
in the computation of net income per share and net income from continuing operations per share for
the six months ended June 30, 2010 as their impact would be anti-dilutive.
In addition to the option and warrant dilutive securities, a total of 1,510,189 shares that
were issuable upon the conversion of the secured convertible notes (see Note 8) have been excluded
from the computation of net (loss) income per share and net (loss) income from continuing
operations per share for the three months and six months ended June 30, 2010 as their impact would
be anti-dilutive for the secured convertible notes issued through June 30, 2010 and the remainder
were issuable upon contingencies that had not been resolved as of June 30, 2010.
7
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
h. Comprehensive (Loss) Income
The Companys other comprehensive income consists of foreign currency translation adjustments
from those subsidiaries not using the U.S. dollar as their functional currency. Total
comprehensive income (loss) is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net (loss) income |
|
$ |
(3,724 |
) |
|
$ |
(1,947 |
) |
|
$ |
(6,047 |
) |
|
$ |
645 |
|
Unrealized (loss) gain on
foreign currency
translation |
|
|
(90 |
) |
|
|
(544 |
) |
|
|
461 |
|
|
|
(227 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income |
|
$ |
(3,814 |
) |
|
$ |
(2,491 |
) |
|
$ |
(5,586 |
) |
|
$ |
418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
i. Fair Value Measurements
Fair value is defined as an exit price, representing the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants. As
such, fair value is a market-based measurement that should be determined based on assumptions that
market participants would use in pricing an asset and liability. As a basis for considering such
assumptions, a fair value hierarchy has been established that prioritizes the inputs used to
measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (level 1 measurement) and the lowest priority to
unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are as
follows:
|
|
|
Level 1: Quoted prices (unadjusted) in active markets for identical assets or
liabilities; |
|
|
|
|
Level 2: Inputs other than quoted prices included within Level 1 that are either
directly or indirectly observable including quoted prices for similar instruments in active
markets and quoted prices for identical or similar instruments in markets that are not
active; and |
|
|
|
|
Level 3: Unobservable inputs in which little or no market activity exists, therefore
requiring an entity to develop its own assumptions about the assumptions that market
participants would use in pricing. |
The fair values of the Companys cash and cash equivalents, trade accounts receivable,
prepaid expenses and other current assets, accounts payable and accrued expenses and other current
liabilities approximate carrying values due to the short maturity of these instruments. The fair
value of borrowings under the line of credit approximates their carrying value due to their
variable interest rates. The fair value of long-term debt is
approximately $3.7 million at June
30, 2011. To a lesser extent, debt also includes capital lease obligations for which the carrying
amount approximates the fair value.
See Note 10 regarding the fair value of the Companys warrants.
j. Accounting Changes
In December 2010, the FASB issued ASU 2010-28, Intangibles Goodwill and Other (Topic 350):
When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative
Carrying Amounts (ASU 2010-28 ) to clarify when testing for goodwill impairment is required. The
modifications clarify that when the carrying amount of a reporting unit is zero or negative, an
entity is required to perform step 2 of the goodwill impairment test if it is more likely than not
a goodwill impairment exists. The modifications are effective for fiscal years beginning after
December 15, 2010 and interim periods within those years. Early adoption is not permitted. The
adoption of this accounting update did not have an impact on the Companys financial statements as
of the adoption date.
k. Reclassifications
In prior periods the Company presented Selling and marketing expenses and General and
administrative expenses separately on its statement of operations. Beginning with the statement of
operations included in the Annual Report on Form 10-K for the year ended December 31, 2010, the
Company now combines these categories of expenses into Selling, general and administrative
expenses because there is considerable overlap between management functions pertaining to sales
and marketing and general administrative duties, and as such, estimating
8
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
allocation of expenses associated with these overlapping functions is not meaningful. Prior periods
have been reclassified to reflect this change in presentation.
3. Merger with CDTI
On October 15, 2010, CDTI consummated a business combination with CSI through the merger of
its wholly-owned subsidiary, CDTI Merger Sub, Inc. with and into CSI pursuant to the terms of the
Merger Agreement. In the Merger, CSI became a wholly-owned subsidiary of CDTI. The Merger provided
the Company with several advantages, including better capitalization, improved access to
development capital as well as better positioning to pursue and implement its business strategy.
Pursuant to the terms of the Merger Agreement, (i) each outstanding share of CSI Class A
Common Stock was converted into and became exchangeable for 0.007888 fully paid and non-assessable
shares of CDTIs common stock on a post-split basis (with any fractional shares paid in cash) and
warrants to acquire 0.006454 fully paid and non-assessable shares of CDTI common stock for $7.92
per share on a post-split basis; and; (ii) each outstanding share of CSI Class B Common Stock was
converted into and became exchangeable for 0.010039 fully paid and non-assessable shares of the
Companys common stock on a post-split basis (with any fractional shares paid in cash); and (iii)
CDTI issued 166,666 shares of common stock on a post-split basis and warrants to purchase an
additional 166,666 shares of common stock for $7.92 per share on a post-split basis to Allen &
Company LLC, CSIs financial advisor in the Merger. Accordingly, at the effective time of the
Merger, CDTI issued or reserved for issuance (i) 611,017 shares of common stock (including 9,859
shares reserved for CSIs outstanding in-the-money warrant) and warrants to purchase 499,915 shares
of common stock (including 8,067 warrants reserved for issuance for CSIs outstanding in-the-money
warrants) in exchange for all outstanding CSI Class A Common Stock (ii) 1,510,189 shares of common
stock in exchange for all outstanding CSI Class B Common Stock; and (iii) 166,666 shares of common
stock and warrants to acquire an additional 166,666 shares of common stock to Allen & Company LLC,
in each case reflecting the elimination of fractional shares that were cashed out in accordance
with the Merger Agreement. All 666,581 warrants issued in connection with the Merger (the Merger
Warrants) expire on the earlier of (x) October 15, 2013 (the third anniversary of the effective
time of the Merger) and (y) the date that is 30 days after the Company gives notice to the warrant
holder that the market value of one share of its common stock has exceeded 130% of the exercise
price of the warrant for 10 consecutive days.
Immediately following the consummation of the Merger, the former holders of CSI securities and
CSIs financial advisor collectively held approximately 60% of the Companys outstanding common
stock. Because CSI stockholders held a majority of the voting stock of the combined company, CSI
assumed key management positions and CSI held a majority of the board of directors seats upon
closing of the Merger, CSI is deemed to be the acquiring company for accounting purposes and the
transaction has been accounted for as a reverse acquisition in accordance with FASB Accounting
Standards Codification (ASC) Topic 805, Business Combinations. Accordingly, the assets and
liabilities of Clean Diesel were recorded as of the Merger closing date at their estimated fair
values.
The following table summarizes the consideration paid for CDTI (in thousands):
|
|
|
|
|
Fair value of CDTI common stock at October 15, 2010 |
|
$ |
7,401 |
|
Fair value of stock options and warrants at October 15, 2010 |
|
|
171 |
|
|
|
|
|
Total purchase consideration |
|
$ |
7,572 |
|
|
|
|
|
Purchase consideration includes 1,511,621 shares of CDTI common stock with a fair value of
$4.90 per share based on the closing price on NASDAQ on October 15, 2010. The fair value of
warrants to purchase a total of 166,666 shares of CDTI common stock with a strike price of $7.92
per share issued to accredited investors is $0.93 per warrant. The fair value of warrants to
purchase 14,863 shares of CDTI common stock with a strike price of $10.09 per share issued to
CDTIs investment advisor is $0.71 per warrant. The warrants include a provision that they expire
30 days after a period where the market value of one share of CDTI common stock has exceeded 130%
of the warrant exercise price for 10 consecutive days. See Notes 12 and 13 to the consolidated
financial statements included in the Companys Annual Report on Form 10-K for the year ended
December 31, 2010 regarding the fair value of warrants and stock options included in purchase
consideration.
The accounting for the business combination is preliminary, principally with respect to
finalization of intangible asset valuations (pending the final valuation report from a third-party
valuation expert assisting the Company in valuing the identified intangible assets), deferred taxes
(pending final assessment of tax positions), and contingent liabilities (pending final legal
analysis). Estimated amounts of assets acquired and liabilities assumed, including
9
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
provisional amounts for identified intangible assets, contingent liabilities, inventory and
deferred taxes, as of acquisition date are as follows (in thousands):
|
|
|
|
|
Cash and cash equivalents |
|
$ |
3,916 |
|
Accounts receivable |
|
|
175 |
|
Inventory |
|
|
761 |
|
Other assets |
|
|
326 |
|
Property and equipment |
|
|
216 |
|
Intangible assets |
|
|
3,306 |
|
Goodwill |
|
|
246 |
|
|
|
|
|
Total assets acquired |
|
|
8,946 |
|
Liabilities assumed |
|
|
(1,374 |
) |
|
|
|
|
Total purchase consideration |
|
$ |
7,572 |
|
|
|
|
|
Any changes during the measurement period resulting from the finalization of the purchase
price allocation will be reflected retrospectively in the period in which the business combination
occurred. During the six months ended June 30, 2011, the Company recorded $92,000 of acquisition
accounting adjustments, which included a $19,000 increase in accounts receivable and $111,000
decrease in inventory. These adjustments were offset to goodwill.
The excess of the purchase price over the fair value of the tangible and identifiable
intangible assets acquired and liabilities assumed in the acquisition was allocated to goodwill.
The value of goodwill represents the value the Company expects to be created by combining the
various operations of CDTI with the Companys operations, including providing manufacturing,
regulatory expertise and North American distribution for CDTI products and technologies and
providing a stronger distribution capability for the Companys products in Europe and Asia. The
CDTI acquisition is included in the Heavy Duty Diesel Systems segment. The goodwill recorded in the
CDTI acquisition is not deductible for tax purposes.
The following table summarizes the intangible assets acquired, all of which are subject to
amortization, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Useful Life in |
|
|
|
|
|
|
Years |
|
|
Fair Value |
|
Trade name |
|
|
15.5 |
|
|
$ |
390 |
|
Patents |
|
|
15.5 |
|
|
|
1,446 |
|
Backlog |
|
|
1.0 |
|
|
|
180 |
|
Customer relationships |
|
|
4.5 |
|
|
|
1,290 |
|
|
|
|
|
|
|
|
|
Total intangible assets acquired |
|
|
|
|
|
$ |
3,306 |
|
|
|
|
|
|
|
|
|
The Company has consolidated the results of CDTI with its own financial results beginning on
the October 15, 2010 Merger date.
4. Goodwill and Intangible Assets
Goodwill
The Companys Heavy Duty Diesel Systems reporting unit, which is also a reporting segment,
has all of the Companys allocated goodwill. The changes in the carrying amount of goodwill for
the six months ended June 30, 2011 is as follows (in thousands):
|
|
|
|
|
Balance at December 31, 2010 (1) |
|
$ |
4,671 |
|
Effect of translation adjustment |
|
|
157 |
|
|
|
|
|
Balance at June 30, 2011 |
|
$ |
4,828 |
|
|
|
|
|
|
|
|
(1) |
|
Reflects the impact of measurement period adjustments (see Note 3). |
10
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Intangible Assets
Intangible assets as of June 30, 2011 and December 31, 2010 are summarized as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life |
|
June 30, |
|
|
December 31, |
|
|
|
in Years |
|
2011 |
|
|
2010 |
|
Trade name |
|
15 20 |
|
$ |
1,184 |
|
|
$ |
1,165 |
|
Patents and know-how |
|
5 16 |
|
|
5,507 |
|
|
|
5,416 |
|
Backlog |
|
1 |
|
|
180 |
|
|
|
180 |
|
Customer relationships |
|
4 8 |
|
|
2,581 |
|
|
|
2,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,452 |
|
|
|
9,305 |
|
Less accumulated
amortization |
|
|
|
|
(2,822 |
) |
|
|
(2,011 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,630 |
|
|
$ |
7,294 |
|
|
|
|
|
|
|
|
|
|
The
Company recorded amortization expense of $0.4 million and $0.1 million related to
amortizable intangible assets during the three months ended June 30, 2011 and 2010,
respectively. The Company recorded amortization expense of $0.8 million and $0.3 million
related to amortizable intangible assets during the six months ended June 30, 2011 and 2010,
respectively.
Estimated amortization expense for existing intangible assets for each of the next five years
is as follows (in thousands):
|
|
|
|
|
Years ending December 31: |
|
|
|
|
Remainder of 2011 |
|
$ |
767 |
|
2012 |
|
|
1,031 |
|
2013 |
|
|
869 |
|
2014 |
|
|
789 |
|
2015 |
|
|
724 |
|
5. Accrued Expenses and Other Current Liabilities
Accrued
expenses and other current liabilities at June 30, 2011 and December 31, 2010
consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Accrued salaries and benefits |
|
$ |
1,892 |
|
|
$ |
1,515 |
|
Accrued professional and consulting fees |
|
|
623 |
|
|
|
750 |
|
Accrued severance |
|
|
121 |
|
|
|
258 |
|
Accrued warranty |
|
|
447 |
|
|
|
466 |
|
Deferred revenue |
|
|
650 |
|
|
|
|
|
Liability for consigned precious metals |
|
|
763 |
|
|
|
469 |
|
Other |
|
|
980 |
|
|
|
1,008 |
|
|
|
|
|
|
|
|
|
|
$ |
5,476 |
|
|
$ |
4,466 |
|
|
|
|
|
|
|
|
In May 2011, the Company entered into an agreement with Tanaka Kikinzoku Kogyo K. K. (TKK),
its investment partner in the Asia Pacific (see Note 12), to provide catalyst engineering and
support services to advance the deployment of the Companys Mixed Phase Catalyst (MPC®) emission
control technology in China. Clean Diesel is expected to receive $1.45 million in exchange for
contributing its engineering expertise and support to assist TKK in the establishment of a catalyst
manufacturing capability in China. The agreement consists of an up-front payment with the balance
to be paid upon completion of certain milestones expected to last approximately 14 months. The
Company had $0.6 million in deferred revenue related to this agreement and has not recognized any
revenue as of June 30, 2011.
11
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6. Severance Charges
The Company has taken actions to reduce its cost base beginning in 2008 and continuing
through 2010. As a result of these actions, the Company has accrued severance costs, which are
included in accrued expenses on the accompanying consolidated balance sheets, as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Balance at beginning of period |
|
$ |
258 |
|
|
$ |
670 |
|
Accrued severance expense |
|
|
|
|
|
|
15 |
|
Paid severance expense |
|
|
(141 |
) |
|
|
(276 |
) |
Translation adjustment |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
121 |
|
|
$ |
409 |
|
|
|
|
|
|
|
|
The Company expects the remaining accrued severance costs to be paid in 2011.
7. Accrued Warranty
The Company accrues warranty upon shipment of its products. Accrued warranties are
included in accrued expenses on the accompanying consolidated balance sheets. The accrued
warranty is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Balance at beginning of period |
|
$ |
466 |
|
|
$ |
371 |
|
Accrued warranty expense |
|
|
110 |
|
|
|
61 |
|
Warranty claims paid |
|
|
(141 |
) |
|
|
(50 |
) |
Translation adjustment |
|
|
12 |
|
|
|
3 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
447 |
|
|
$ |
385 |
|
|
|
|
|
|
|
|
8. Debt
Long-term debt at June 30, 2011 and December 31, 2010 consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Line of credit |
|
$ |
4,373 |
|
|
$ |
2,431 |
|
6% shareholder note payable due 2013 |
|
|
1,464 |
|
|
|
1,410 |
|
8% subordinated convertible shareholder notes due 2016 |
|
|
3,000 |
|
|
|
|
|
Capital lease obligation |
|
|
30 |
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
8,867 |
|
|
|
3,887 |
|
Less current portion |
|
|
(4,373 |
) |
|
|
(2,431 |
) |
|
|
|
|
|
|
|
|
|
$ |
4,494 |
|
|
$ |
1,456 |
|
|
|
|
|
|
|
|
Line of Credit with Fifth Third Bank
The Company had a demand revolving credit line through Fifth Third Bank with a maximum
principal amount at December 31, 2010 of Canadian $6.0 million and availability based upon eligible
accounts receivable and inventory. At December 31, 2010, the outstanding balance in U.S. dollars
was $2.4 million with $3.1 million available for borrowings by its subsidiary, Engine Control
Systems, in Canada. The loan was collateralized by the assets of the Company. On March 31, 2009,
CSI failed to achieve two of the covenants under its Fifth Third Bank credit facility. These
covenants related to the annualized EBITDA and the funded debt to EBITDA ratio for its Engine
Control Systems subsidiary. Beginning in March 31, 2009 and through repayment in full, Fifth Third
Bank extended forbearance of the default, while converting the facility into a demand facility,
reducing the size of the
12
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
facility and increasing the rate for borrowings. The entire debt due to
Fifth Third Bank was repaid with the
completion of the financing facility with Faunus Group International (FGI) on February 16, 2011.
Secured Demand Facility with FGI
On February 14, 2011, the Company entered into Sale and Security Agreements with FGI to
provide for a $7.5 million secured demand facility backed by its receivables and inventory (the
FGI Facility). The FGI Facility has an initial two-year term and may be extended at the Companys
option for additional one-year terms. In addition to the Company, the following subsidiaries
entered into Sale and Security Agreements with FGI: Catalytic Solutions, Inc., Engine Control
Systems Limited, Engine Control Systems Ltd. and Clean Diesel International, LLC (the Credit
Subsidiaries). The Company and the Credit Subsidiaries also entered into guarantees to guarantee
the performance of the others of their obligations under the Sale and Security Agreements. The
Company also granted FGI a first lien collateral interest in substantially all of its assets.
Under the FGI Facility, FGI can elect to purchase eligible accounts receivables from the
Company and the Credit Subsidiaries at up to 80% of the value of such receivables (retaining a 20%
reserve). Purchased receivables are subject to full recourse to the Company in the event of
nonpayment by the customer. FGI becomes responsible for the servicing and administration of the
accounts receivable purchased. The Company is not obligated to offer accounts in any month and FGI
has the right to decline to purchase any accounts. At FGIs election, FGI may advance the Company
up to 80% of the value of any purchased accounts receivable, subject to the $7.5 million limit.
Reserves retained by FGI on any purchased receivable are expected to be refunded to the Company net
of interest and fees on advances once the receivables are collected from customers. The Company may
also borrow up to $1 million against eligible inventory subject to the aggregate $7.5 million limit
under the FGI Facility and certain other conditions.
The interest rate on advances or borrowings under the FGI Facility will be the greater of (i)
7.50% per annum and (ii) 2.50% per annum above the Wall Street Journal prime rate and was 7.50%
at June 30, 2011. Any advances or borrowings under the FGI Facility are due on demand. The Company
also agreed to pay FGI collateral management fees of: 0.44% per month on the face amount of
eligible receivables as to which advances have been made and 0.55% per month on borrowings against
inventory, if any. At any time outstanding advances or borrowings under the FGI Facility are less
than $2.4 million, the Company agreed to pay FGI standby fees of (i) the interest rate on the
difference between $2.4 million and the average outstanding amounts and (ii) 0.44% per month on 80%
of the amount by which advances or borrowings are less than the agreed $2.4 million minimum.
The Company paid FGI a one-time facility fee of $75,000 upon entry into the FGI Facility, and
agreed that it will pay a $150,000 termination fee if it terminates within the first 360 days
($76,000 if it terminates in second 360 days and prior to the expiration of the facility). FGI may
terminate the facility at any time. As such, the facility fee was
expensed in the first quarter of 2011. The termination fee is not payable upon a termination by FGI or upon
non-renewal.
The Company accounts for the sale of accounts receivable under the FGI Facility as a secured
borrowing with a pledge of the subject receivables as collateral, in accordance with ASC 860,
Transfers and Servicing. At June 30, 2011, the Company had $4.2 million of gross accounts
receivable pledged to FGI as collateral for short-term debt in the amount of $3.4 million. At June
30, 2011, the Company also had $1.0 million in borrowings outstanding against eligible inventory.
The Company was in compliance with the terms of the FGI Facility at June 30, 2011.
Secured Convertible Notes
In June 2010, the Company agreed to issue up to $4 million of secured convertible notes (the
Secured Convertible Notes) to a group of accredited investors. As agreed, $2.0 million were
issued in four equal installments ($0.5 million on each of June 2, 2010, June 8, 2010, June 28,
2010 and July 12, 2010), with the remaining $2.0 million issued on October 15, 2010 immediately
prior to the Merger. The Secured Convertible Notes contained two embedded financial instruments
that required separate accounting at fair value, a premium redemption feature related to a 2x
premium and a contingent equity forward related to the future funding commitment. The Secured
Convertible Notes also included a beneficial conversion feature totaling $1.3 million that was
contingent on the approval by the Companys shareholders of certain amendments to its Articles of
Incorporation. The initial value of the embedded financial instruments was recorded as a discount
to the face value of the Secured Convertible Notes and was amortized using the effective interest
method though the original maturity date, which was August 2, 2010. The embedded financial
instruments were re-measured at fair value at the end of each reporting period with changes in fair
value recorded to other income (expense). During the three and six months ended June 30, 2010, the
13
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Company recognized $0.2 million in gain related to the change in fair value of the embedded
financial instruments
and $0.3 million in interest expense related to the amortization of discount. The aggregate $4.0
million of Secured Convertible Notes was converted into newly created CSI Class B common stock
immediately prior to the Merger, and exchanged for shares of CDTI common stock in the Merger.
6% Shareholder Note Payable due 2013 and Payment of Settlement Obligation
On December 30, 2010, the Company executed a Loan Commitment Letter with Kanis S.A., a
shareholder of the Company, pursuant to which Kanis S.A. loaned the Company $1.5 million. The loan
bears interest on the unpaid principal at a rate of six percent (6%), with interest only payable
quarterly on each March 31, June 30, September 30 and December 31, commencing March 31, 2011. The
loan matures on June 30, 2013. In addition to principal and accrued interest, the Company is
obligated to pay Kanis S.A. at maturity a Payment Premium ranging from $100,000 to $200,000 based
proportionally on the number of days that the loan remains outstanding. There is no prepayment
penalty. The loan is unsecured.
In connection with the loan, the Company issued warrants to acquire 25,000 shares of its
common stock at $10.40 per share. The relative estimated fair value of such warrants represents
a discount from the face amount of the loan and has been recorded as a discount from the loan
amount. The discount is being amortized using the effective interest method over the term of
the loan.
On January 4, 2011, using proceeds of the loan and cash on hand, the Company paid $1.6 million
as satisfaction in full of its obligation to the seller of the Applied Utility Systems acquisition
pursuant to the October 20, 2010 long-term settlement agreement. This $1.6 million was a settlement
obligation and was classified in current liabilities at December 31, 2010.
8% Subordinated Convertible Shareholder Notes Due 2016
On April 11, 2011, the Company entered into a Subordinated Convertible Notes Commitment Letter
with Kanis S.A. (Purchaser) that provides for the sale and issuance by the Company of 8%
subordinated convertible notes (the Notes). As provided in the Commitment Letter, on May 6, 2011
Purchaser purchased from the Company at par $3.0 million aggregate principal amount of the Notes,
which bear interest at a rate of 8% per annum, payable quarterly in arrears.
The Notes have a stated maturity of five years from the date of issuance, which maturity may
be accelerated by Purchaser in the event that: (i) the Company is in breach of the Notes or other
agreements between Company and Purchaser, or (ii) Purchaser provides written notice to the Company,
not less than 30 days prior to such date, that it elects to accelerate the maturity to a date not
earlier than November 11, 2012. Upon such acceleration, the Company would owe 100% of the principal
amount plus any accrued by unpaid interest.
The Notes also provide that the Company has the option to redeem the Notes at any time at a
price equal to 100% of the face amount plus accrued and unpaid interest through the date of
redemption. There is no prepayment penalty. Net proceeds from the sale of the Notes will be used
for general working capital purposes. The Notes are unsecured obligations of the Company and
subordinated to existing and future secured indebtedness of the Company.
The outstanding principal balance of, plus accrued and unpaid interest on, the Notes are
convertible subject to limitation at the option of Purchaser at anytime upon written notice given not less than
75 calendar days prior to the date of conversion into shares of the Companys common stock, $0.01
par value at an initial conversion price equal to $7.044 per share, which is equal to 120% of the
consolidated closing bid price per share of the Companys common stock on April 8, 2011. The
Company cannot effect any conversion of the Notes, and Purchaser cannot convert any portion of the
Notes, to the extent that after giving effect to such conversion, the aggregate number of shares of
Company common stock issued upon conversion would exceed 369,853 shares.
9. Stockholders Equity
As of June 30, 2011, the Company had 12.1 million shares authorized, 12 million of which
are $0.01 par value common stock and 100,000 of which are $0.01 par value preferred stock.
In connection with the public offering by the Company and certain stockholders of
2,725,000 shares of the Companys common stock, the Company filed a registration statement on
Form S-1 with the SEC, as supplemented by an additional registration statement on Form S-1,
both of which were declared effective on
14
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 28, 2011. On June 28, 2011, the Company entered
into an underwriting agreement (the Underwriting
Agreement) with Roth Capital Partners, LLC, as representative of the underwriters names
therein (the Underwriters). Pursuant to the terms and conditions of the Underwriting
Agreement, the Company and the selling stockholders named in the Underwriting Agreement (the
Selling Stockholders) agreed to sell, and the Underwriters agreed to purchase, an aggregate
2,725,000 shares of the Companys common stock at a price of $3.5208 per share representing a
discount to the public offering price of $3.75 per share. Of these 2,725,000 shares, 2,645,000
shares were offered by the Company and 80,000 shares were offered by the Selling Stockholders.
The Company will not receive any proceeds from shares sold by the Selling Stockholders. The
Underwriters were also granted an option to purchase up to an additional 408,750 shares of
common stock from the Company within 30 days after the date of the Underwriting Agreement to
cover over-allotments, if any. Such option was exercised in full on June 30, 2011.
The Company also agreed to issue the Underwriters warrants to purchase in the aggregate,
61,076 shares of the Companys common stock (2.0% of the shares issued by the Company in the
offering) with an exercise price equal to $4.50 (120% of the public offering price) upon the
closing of the offering. See Note 17, Subsequent Events for further discussion.
The financial statements as of June 30, 2011 do not include any adjustments related to
this offering except for $0.3 million in offering costs incurred prior to June 30, 2011 and
included in prepaid and other current assets at June 30, 2011 in the accompanying balance
sheet.
10. Warrants
Warrant activity for the six months ended June 30, 2011 and warrant information as of June
30, 2011 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Exercise |
|
|
Range of |
|
|
|
Shares |
|
|
Price |
|
|
Exercise Prices |
|
Outstanding at December 31, 2010 |
|
|
942,870 |
|
|
$ |
16.36 |
|
|
|
$2.80 - $169.47 |
|
Warrants exercised |
|
|
(49,779 |
) |
|
$ |
7.92 |
|
|
|
$7.92 |
|
Warrants expired / forfeited |
|
|
(830 |
) |
|
$ |
60.00 |
|
|
|
$60.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2011 |
|
|
892,261 |
|
|
$ |
16.79 |
|
|
|
$2.80 - $169.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercisable at June 30, 2011 |
|
|
867,261 |
|
|
$ |
16.98 |
|
|
|
$2.80 - $169.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value |
|
$ |
19,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the six months ended June 30, 2011, the Company issued an aggregate 49,779 shares of common
stock related to the exercise of warrants originally issued to CSIs Class A shareholders in the
Merger. The Company received cash proceeds of $0.4 million related to these exercises. There were
no warrant exercises in the six months ended June 30, 2010.
Warrant Liability
Certain warrants are not afforded equity treatment because the Company is required to
physically settle the contract by delivering registered shares. In addition, while the relevant
warrant agreement does not require cash settlement if the Company fails to maintain
registration of the warrant shares, it does not specifically preclude cash settlement.
Accordingly, the Companys agreement to deliver registered shares without express terms for
settlement in the absence of continuous effective registration is presumed to create a
liability to settle these warrants in cash, requiring liability classification. The liability
is remeasured at the end of each reporting period with changes in fair value recognized in
other income (expense) until such time as the warrants are exercised or expire. The Company had
379,678 and 429,457 warrants at June 30, 2011 and December 31, 2010, respectively, with an
original grant date of October 15, 2010, exercise price of $7.92 and original contractual life
of three years, classified as liabilities in the accompanying condensed consolidated balance
sheets.
The contracts for the remaining warrants allow for settlement in unregistered shares and do
not contain any other characteristics that would result in liability classification. Accordingly,
these instruments have been classified
15
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
in stockholders equity in the accompanying consolidated
balance sheet at June 30, 2011 and December 31, 2010.
The warrants that are accounted for as equity are only valued on the issuance date and not
subsequently revalued.
The Company evaluated the balance sheet classification of all warrants at June 30, 2011
noting no changes.
The warrants classified as liabilities are considered Level 3 in the fair value hierarchy
because they are valued based on unobservable inputs. The Company determined the fair value of its
liability-classified warrants using a Monte Carlo simulation model, which utilizes multiple input
variables to estimate the probability that market conditions will be achieved. The assumptions used
in the Monte Carlo simulation model as of June 30, 2011 and December 31, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2011 |
|
2010 |
Expected volatility |
|
|
36.8 |
% |
|
|
47.9 |
% |
Risk-free interest rate |
|
|
0.8 |
% |
|
|
1.2 |
% |
Forfeiture rate |
|
|
0.0 |
% |
|
|
0.0 |
% |
Closing price of Clean Diesel Technologies, Inc. common stock |
|
$ |
4.75 |
|
|
$ |
9.49 |
|
Due to the significant change in the Company following the Merger, CDTIs historical price
volatility was not considered representative of expected volatility going forward. Therefore, the
Company utilized an estimate based upon the implied volatility of a portfolio of peer companies.
The following is a reconciliation of the warrant liability measured at fair value using Level
3 inputs for the six months ended June 30, 2011 (in thousands):
|
|
|
|
|
Balance at December 31, 2010 |
|
$ |
1,238 |
|
Exercise of common stock warrants |
|
|
(39 |
) |
Remeasurement of common stock warrants |
|
|
(1,091 |
) |
|
|
|
|
Balance at June 30, 2011 |
|
$ |
108 |
|
|
|
|
|
11. Shared Based Payment
Stock Compensation
Under the Clean Diesel Technologies, Inc. 1994 Incentive plan, as amended (the Plan), awards
may be granted to participants in the form of incentive stock options, non-qualified stock options,
stock appreciation rights, restricted stock, performance awards, bonuses or other forms of
share-based awards or cash, or combinations of these as determined by the board of directors. The
Company measures compensation cost for all stock-based awards at fair value on the date of grant
and recognizes it over the service period for awards expected to vest. The maximum number of awards
allowed under the Plan is 17.5% of the Companys outstanding common stock less the then outstanding
awards, subject to sufficient authorized shares. There were 397,160 shares available under the plan
at June 30, 2011.
Stock-based compensation expense for both employee and non-employee awards for the three and
six months ended June 30, 2011 and 2010 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Selling, general and administrative |
|
$ |
663 |
|
|
$ |
45 |
|
|
$ |
983 |
|
|
$ |
91 |
|
Research and development |
|
|
192 |
|
|
|
|
|
|
|
192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
|
$ |
855 |
|
|
$ |
45 |
|
|
$ |
1,175 |
|
|
$ |
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Stock Options
Stock option activity for the six months ended June 30, 2011 and stock option information as
of June 30, 2011 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
Weighted |
|
Remaining |
|
|
|
|
|
|
|
|
Average |
|
Contractual |
|
Aggregate |
|
|
|
|
|
|
Exercise |
|
Term |
|
Intrinsic |
|
|
Shares |
|
Price |
|
(in years) |
|
Value |
Outstanding at January 1, 2011 |
|
|
151,801 |
|
|
$ |
53.55 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
182,459 |
|
|
$ |
5.68 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
(31,550 |
) |
|
$ |
63.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2011 |
|
|
302,710 |
|
|
$ |
23.66 |
|
|
|
7.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2011 |
|
|
204,814 |
|
|
$ |
32.06 |
|
|
|
6.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value represents the difference between the exercise price and the
Companys closing stock price on the last trading day of the quarter ended June 30, 2011.
On March 17, 2011, the Company granted stock options covering a total 182,459 common shares,
50 percent of which vested on the date of grant and 50 percent on the first anniversary of the date
of grant. The option price of $5.68 per share was equal to the closing market price of the
underlying common shares on the grant date. The fair value of these stock options, based on the
Black-Scholes option-pricing model, was $3.66 per share. The following assumptions were used to
value these options:
|
|
|
|
|
Expected volatility |
|
|
77.4 |
% |
Risk-free interest rate |
|
|
2.0 |
% |
Dividend yield |
|
|
0.0 |
% |
Expected life in years |
|
|
5.25 |
|
The expected term of the options has historically been based upon the historical term until
exercise or expiration of all granted options. Due to the significant change in the Company
following the Merger and significant change in the terms of the options granted, CDTIs historical
exercise data was not considered to provide a reasonable basis for estimating the expected term for
current option grants. As such, the expected term of stock options granted on March 17, 2011 was
determined using the simplified method as allowed under ASC 718-10-S99. The simplified method
calculates the expected term as the average of the vesting term and original contractual term of
the options. Also, due to the significant change in the Company following the Merger, CDTIs
historical price volatility was not considered representative of expected volatility going forward.
Therefore, the Company utilized an estimate based upon the historical volatility of a portfolio of
peer companies. The risk-free interest rate is the constant maturity rate published by the U.S.
Federal Reserve Board that corresponds to the expected term of the option. The dividend yield is
assumed as 0% because the Company has not paid dividends and does not expect to pay dividends in
the future.
As of June 30, 2011, total compensation cost related to options granted under the Plan but not
yet recognized was approximately $0.3 million, net of estimated forfeitures. This cost will be
amortized on a straight-line basis over a weighted average period of approximately 0.7 years.
Restricted Stock Units
On June 8, 2011, the Companys Board of Directors approved a form of Restricted Share Unit
Agreement under the Plan. Restricted share units (RSU) are awards under the Plan that have an
exercise price equal to zero and, upon vesting are settled in shares of the Companys common stock
on a one-for-one basis. The fair value of the RSU awards is based on the closing market price of
the Companys common stock on the date of grant, and the Company recognizes compensation expense on
a straight-line basis over the requisite vesting period. On June 8, 2011, the Company granted RSU
awards to executive officers as well as other key employees covering a total 122,127 common shares
with a grant date fair value of $6.17. Of the RSUs, 92,677 vested in full seven business days from
17
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
the grant date. The remaining 29,450 RSUs are time-based and vest on the following schedule: 33.3%
of the total number of RSUs vest seven days from the grant date and each of the first and second
anniversaries of the grant date.
RSU activity for the six months ended June 30, 2011 and stock option information as of June
30, 2011 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Average |
|
Aggregate |
|
|
|
|
|
|
Grant Date |
|
Intrinsic |
|
|
Shares |
|
Fair Value |
|
Value |
Non-vested share units at January 1, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
122,127 |
|
|
$ |
6.17 |
|
|
|
|
|
Vested |
|
|
(102,489 |
) |
|
$ |
6.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested share units at June 30, 2011 |
|
|
19,638 |
|
|
$ |
6.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011, the Company had approximately $0.1 million of unrecognized compensation
expense, net of estimated forfeitures, related to RSUs, which will be recognized over a weighted
average estimated remaining life of 1.4 years.
12. TCC Investment
In February 2008, the Company entered into an agreement with TKK to form a new joint
venture company, TC Catalyst Incorporated (TCC), a Japanese corporation. The joint venture is
part of the Catalyst division. The Company entered the joint venture in order to improve its
presence in Japan and Asia and strengthen its business flow into the Asian market.
In December 2008, the Company agreed to sell and transfer specific heavy duty diesel
catalyst technology and intellectual property to TKK for use in the defined territory for a
total selling price of $7.5 million. TKK will provide that intellectual property to TCC on a
royalty-free basis. The Company also sold shares in TCC to TKK reducing its ownership to 30%.
Of this sale, $5.0 million was completed and recognized in 2008 with $2.5 million recognized in
2009.
In December 2009, the Company agreed to sell and transfer specific three-way catalyst and
zero platinum group metal patents to TKK for use in specific geographic regions. The patents
were sold for $3.9 million. TKK paid the Company $1.9 million in 2009 and $2.0 million in the
first quarter of 2010 and recognized the gain on the sale of the patents of $3.9 million in the
first quarter of 2010. As part of the transaction, the Company also sold shares in TCC, which
reduced its ownership in the joint venture to 5%. As the Company is contractually obligated to
fund its portion of the losses of the joint venture based on its ownership percentage, the
Company recognized a gain of $1.1 million during the year ended December 31, 2009 as a result
of the decrease in ownership and the related decrease to its obligation to fund losses.
The Companys investment in TCC is accounted for using the equity method as the Company
still has significant influence over TCC as a result of having a seat on TCCs board. In
February 2010, the Company entered into an agreement to loan 37.5 million JPY (approximately
$0.4 million) to TCC to fund continuing operations. The loan was funded in four monthly
tranches starting in February 2010 and ending in May 2010. As of December 31, 2010, the Company
had loaned TCC 37.5 million JPY. If the loan is not repaid by TCC, it will offset the Companys
obligation to fund its portion of TCCs losses. Given TCCs historical losses, the loan has
been recorded as a reduction of such obligations. At June 30, 2011, the balance of the
Companys loan to TCC less its share of accumulated losses in the amount of $0.1 million is
included in other current assets. TCC operates with a March 31 fiscal year-end.
13. Sale of Energy Systems Division
On October 1, 2009, the Company sold all significant assets of Applied Utility Systems,
Inc. (AUS), which comprised the Companys Energy Systems division, for up to $10.0 million, including
$8.6 million in cash and contingent consideration of $1.4 million. Of the contingent
consideration, $0.5 million was contingent upon AUS being awarded certain
projects and $0.9 million is retention against certain project and contract warranties and
other obligations. The Company has not recognized any of the contingent consideration as of
June 30, 2011 and will only do so if the contingencies are resolved favorably. The $0.5 million
of
18
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
contingent consideration that was contingent on the award of certain projects was not earned
and will not be paid.
The loss, net of tax, of the Energy Systems division is presented as discontinued
operations. There was no revenue included within discontinued operations for the six months
ended June 30, 2011 or 2010.
14. Related-Party Transactions
One of the Companys Directors, Mr. Alexander (Hap) Ellis, III, is a partner of RockPort
Capital Partners (RockPort), a shareholder in the Company which subscribed for $0.9 million
of Secured Convertible Notes discussed in Note 8.
In October 2008, the Companys Board of Directors unanimously adopted a resolution to
waive the Non-Executive Directors right to receive, and the Companys obligation to pay, any
director fees with respect to participation in Board and Committee meetings and other matters
with effect from July 1, 2008 and continuing thereafter until the Directors elect to adopt
resolutions reinstating such fees. On May 1, 2009, the Directors adopted a resolution to
reinstate the accrual of director fees effective January 1, 2009, with a payment schedule to be
determined at a later date. As of December 31, 2009 an amount of $0.4 million was accrued for
Directors fees and was due and payable to the Directors. As part of the $4.0 million issuance
of Secured Convertible Notes discussed in Note 8, the Company agreed to pay director fees
accrued as of December 31, 2009, which amounted to $0.4 million. These fees were paid on
October 15, 2010 immediately prior to the merger in a combination of stock and cash, with the
cash portion being $0.1 million.
15. Contingencies
Legal Proceedings
On
September 30, 2008, AUS, a former subsidiary of the
Company, filed a complaint against Benz Air Engineering, Inc. (Benz Air). The Company sold the
majority of the assets of AUS to Johnson Matthey on October 1,
2009 (see Note 13), however, this lawsuit was
excluded from the sale. The complaint was amended on January 16, 2009, and asserted claims against
Benz Air for breach of contract, common counts and slander. AUS was seeking $0.2 million in
damages, plus interest, costs and applicable penalties. In response to the complaint, Benz Air
filed a cross-complaint on November 17, 2008, which named both AUS and the Company as defendants.
The cross-complaint asserted claims against AUS and the Company for breach of oral contract, breach
of express warranty, breach of implied warranty, negligent misrepresentation and intentional
misrepresentation and was seeking not less than $0.3 million in damages, plus interest, costs and
punitive damages. The trial was concluded on July 29, 2011 with the jury awarding AUS $0.2 million
plus interest as well as an additional $0.3 million for false statements. The Company is evaluating
collectability of the jury award. As such, the financial statements as of June 30, 2011 do not
include any adjustments related to this jury award.
On April 30, 2010, CDTI received a complaint from the Hartford, Connecticut office of the U.S.
Department of Labor under Section 806 of the Corporate and Criminal Fraud Accountability Act of
2001, Title VIII of the Sarbanes-Oxley Act of 2002, alleging that a former employee had been
subject to discriminatory employment practices. CDTIs Board of Directors terminated the employees
employment on April 19, 2010. The complainant in this proceeding does not demand specific relief.
However, the statute provides that a prevailing employee shall be entitled to all relief necessary
to make the employee whole, including compensatory damages, which may be reinstatement, back pay
with interest, front pay, and special damages such as attorneys and expert witness fees. CDTI
responded on June 14, 2010, denying the allegations of the complaint. Based upon current
information, management, after consultation with legal counsel defending the Companys interests,
believes the ultimate disposition will have no material effect upon its business, results or
financial position. As no specific quantification of damages has been provided by the Claimant, the
Company cannot provide a reasonable range of possible outcomes.
In addition to the above, the Company is from time to time involved in collection matters
routine to its business.
Sales and use tax audit
The Company is undergoing a sales and use tax audit by the State of California on AUS for the
period of 2007 through 2009. The audit has identified a project performed by the Company during
that time period for which sales tax was not collected and remitted and for which the State of
California asserts that proper documentation of resale
19
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
may not have been obtained. The Company contends and believes that it received sufficient and
proper documentation from its customer to support not collecting and remitting sales tax from that
customer and is actively disputing the audit report with the State of California. Accordingly, no
accrual has been recorded for this matter. The potential outcomes of this matter range from zero to
$1.2 million. Should the Company not prevail in this matter, it has certain indemnifications from
its customer related to sales tax and would pursue reimbursement from the customer for all
assessments from the State.
16. Segment Reporting
The Company has two division segments based on the products it delivers:
Heavy Duty Diesel Systems division The Heavy Duty Diesel Systems division includes
retrofit of legacy diesel fleets with emissions control systems and the emerging opportunity for
new engine emissions controls for on- and off-road vehicles. In 2007, the Company acquired Engine
Control Systems (ECS), an Ontario, Canada-based company focused on a variety of heavy duty vehicle
applications. This environmental business segment specializes in the design and manufacture of
verified exhaust emissions control solutions. The operations of CDTI are included in the Heavy Duty
Diesel Systems division from the October 15, 2010 Merger date. Globally, the Heavy Duty Diesel
Systems division offers a range of products for the verified retrofit and OEM markets through its
distributor/dealer network and direct sales. The ECS and Clean Diesel Technologies-branded products
are used to reduce exhaust emissions created by on-road, off-road and stationary diesel and
alternative fuel engines including propane and natural gas. The retrofit market in the U.S. is
driven in particular by state and municipal environmental regulations and incentive funding for
voluntary early compliance. The Heavy Duty Diesel Systems division derives significant revenues
from retrofit with a portfolio of solutions verified by the California Air Resources Board and the
United States Environmental Protection Agency.
Catalyst division The Catalyst division is the original part of the Catalytic
Solutions (CSI) business behind the Companys proprietary Mixed Phase Catalyst
(MPC®) technology enabling the Company to produce catalyst formulations for
gasoline, diesel and natural gas induced emissions that offer performance, proven durability and
cost effectiveness for multiple markets and a wide range of applications. A family of unique
high-performance catalysts has been developed with base-metals or low platinum group metal (PGM)
and zero PGM content to provide increased catalytic function and value for technology-driven
automotive industry customers. The Catalyst divisions technical and manufacturing competence in
the light duty vehicle market is aimed at meeting auto makers most stringent requirements, and it
has supplied over ten million parts to light duty vehicle customers since 1996. The Catalyst
division also provides catalyst formulations for the Companys Heavy Duty Diesel Systems division.
Corporate Corporate includes cost for personnel, insurance, recapitalization
expense and public company expenses such as legal, audit and taxes that are not allocated down to
the operating divisions.
Discontinued
operations In 2006, the Company purchased AUS, a provider of cost-effective, engineered solutions for the clean and efficient utilization of
fossil fuels. AUS, referred to as the Companys Energy Systems division,
provided emissions control and energy systems solutions for industrial and utility boilers, process
heaters, gas turbines and generation sets used largely by major utilities, industrial process
plants, OEMs, refineries, food processors, product manufacturers and universities. The Energy
Systems division delivered integrated systems built for customers specific combustion processes.
As discussed in Note 13, this division was sold on October 1, 2009.
20
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Summarized financial information for the Companys reportable segments for the three and
six months ended June 30, 2011 and 2010 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heavy Duty Diesel Systems |
|
$ |
9,571 |
|
|
$ |
8,277 |
|
|
$ |
19,029 |
|
|
$ |
15,776 |
|
Catalyst |
|
|
3,421 |
|
|
|
4,852 |
|
|
|
8,088 |
|
|
|
9,936 |
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminations (1) |
|
|
(1,460 |
) |
|
|
(203 |
) |
|
|
(1,801 |
) |
|
|
(341 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
11,532 |
|
|
$ |
12,926 |
|
|
$ |
25,316 |
|
|
$ |
25,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heavy Duty Diesel Systems |
|
$ |
(393 |
) |
|
$ |
811 |
|
|
$ |
(126 |
) |
|
$ |
1,913 |
|
Catalyst (2) |
|
|
(887 |
) |
|
|
(554 |
) |
|
|
(1,361 |
) |
|
|
3,104 |
|
Corporate |
|
|
(2,294 |
) |
|
|
(1,469 |
) |
|
|
(4,128 |
) |
|
|
(2,915 |
) |
Eliminations |
|
|
(91 |
) |
|
|
|
|
|
|
(108 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(3,665 |
) |
|
$ |
(1,212 |
) |
|
$ |
(5,723 |
) |
|
$ |
2,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Elimination of Catalyst revenue related to sales to Heavy Duty Diesel Systems. |
|
(2) |
|
Catalyst division income from operations includes a $3.9 million gain on sale of
intellectual property to TKK in the six months ended June 30, 2010. |
Net sales by geographic region for the three and six months ended June 30, 2011 and 2010
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
United States |
|
$ |
3,892 |
|
|
$ |
5,579 |
|
|
$ |
9,735 |
|
|
$ |
11,346 |
|
Canada |
|
|
5,550 |
|
|
|
6,027 |
|
|
|
11,314 |
|
|
|
11,177 |
|
Europe |
|
|
2,090 |
|
|
|
1,320 |
|
|
|
4,267 |
|
|
|
2,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
11,532 |
|
|
$ |
12,926 |
|
|
$ |
25,316 |
|
|
$ |
25,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic information is based on country of origin. The majority of Canadian sales are
to U.S. customers.
17. Subsequent Events
Public Offering of Common Stock
On July 5, 2011, the Company closed a public offering in which it sold 3,053,750 shares,
including 408,750 shares pursuant to the Underwriters over-allotment option, and the Selling
Stockholders sold 80,000 shares. The shares were sold at a price of $3.5208 per share, representing
a discount to the public offering price of $3.75 per share. The net proceeds of the offering to the
Company were $10.1 million after deducting underwriting discounts and commissions and offering
expenses. The Company did not receive any proceeds from shares sold by the Selling Stockholders.
In accordance with the Underwriting Agreement, the Company issued 61,076 common stock warrants
(2.0% of the share issued by the Company in the offering) with an exercise price equal to $4.50
(120% of the public offering price), and which have a term of not greater than five years from June
28, 2011 (the date of the final prospectus for the public offering).
21
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Litigation Judgment
On July 29, 2011, a jury awarded AUS $0.2 million plus interest as well as an additional $0.3
million for false statements in connection with litigation between AUS and BenzAir (see Note 15
above). The Company is evaluating collectability of the jury award. The financial statements as of
June 30, 2011 do not include any amounts related to this award.
22
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The Merger was accounted for as a reverse acquisition and, as a result, our companys (the
legal acquirer) consolidated financial statements are now those of CSI (the accounting acquirer),
with the assets and liabilities, and revenues and expenses, of CDTI included effective from October
15, 2010, the date of the closing of the Merger. For information regarding CDTIs financial
condition and results of operations as well as CDTIs financial statements and related notes
thereto reflecting CDTIs business as a stand-alone company for periods prior to the Merger, please
see our Annual Report on Form 10-K for the year ended December 31, 2009 and our Quarterly Reports
on Form 10-Q for periods prior to the closing of the Merger.
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our condensed consolidated financial statements and related
notes included elsewhere in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q
should also be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended
December 31, 2010. This discussion contains forward-looking statements, the accuracy of which
involves risks and uncertainties, see Cautionary Statement Concerning Forward-Looking Statements
at the beginning of this Quarterly Report on Form 10-Q. Our actual results could differ materially
from those anticipated in these forward-looking statements for many reasons, as a result of many
important factors, including the consolidation of CDTI for periods after October 15, 2010, as well
as those set forth in Part I Item 1A Risk Factors of our Annual Report on Form 10-K for the
fiscal year ended December 31, 2010.
All percentage amounts and ratios included in this Managements Discussion and Analysis of
Financial Condition and Results of Operations were calculated using the underlying data in
thousands.
Overview
We are a leading global manufacturer and distributor of heavy diesel and light duty vehicle
emissions control systems and products to major automakers and retrofitters. Our emissions control
systems and products are designed to deliver high value to our customers while benefiting the
global environment through air quality improvement, sustainability and energy efficiency. Our
business is driven by increasingly stringent global emission standards for internal combustion
engines, which are major sources of a variety of harmful pollutants.
In light of the Merger, we now organize our operations in two business divisions: the Heavy
Duty Diesel Systems division and the Catalyst division. We have included all of the operations of
CDTI in our Heavy Duty Diesel Systems division effective from the date of the closing of the
Merger.
Heavy Duty Diesel Systems: Through our Heavy Duty Diesel Systems division we design and
manufacture verified exhaust emissions control solutions. Our Heavy Duty Diesel Systems division
offers a full range of products for the verified retrofit and original equipment manufacturer, or
OEM, markets through its distribution/dealer network and direct sales. These ECS and Clean Diesel
Technologies-branded products, such as Purifilter ® , Purifier, ARIS
® and exhaust gas recirculation with selective catalytic reduction are used to reduce
exhaust emissions created by on-road, off-road and stationary diesel and alternative fuel engines
including propane and natural gas. Revenues from our Heavy Duty Diesel Systems division accounted
for approximately 65% of the total consolidated revenues for the year ended December 31, 2010 and
75% of total consolidated revenues for the six months ended June 30, 2011.
Catalyst: Through our Catalyst division, we produce catalyst formulations to reduce emissions
from gasoline, diesel and natural gas combustion engines that are offered for multiple markets and
a wide range of applications. A family of unique high-performance catalysts has been developed
with base-metals or low platinum group metal and zero- platinum group metal content to provide
increased catalytic function and value for technology-driven automotive industry customers. Our
technical and manufacturing competence in the light duty vehicle market is aimed at meeting auto
makers most stringent requirements, and we have supplied over ten million parts to light duty
vehicle customers since 1996. Our Catalyst division also provides catalyst formulations for our
Heavy Duty Diesel Systems division. Revenues from our Catalyst division accounted for approximately
35% of the total consolidated revenues for the year ended December 31, 2010 and 25% of total
consolidated revenues for the six months ended June 30, 2011.
23
Sources of Revenues and Expenses
Revenues
We generate revenues primarily from the sale of our emission control systems and products. We
generally recognize revenues from the sale of our emission control systems and products upon
shipment of these products to our customers. However, for certain customers, where risk of loss
transfers at the destination (typically the customers warehouse), revenue is recognized when the
products are delivered to the destination (which is generally within five days of the shipment).
Cost of revenues
Cost of revenues consists primarily of direct costs for the manufacture of emission control
systems and products, including cost of raw materials, costs of leasing and operating manufacturing
facilities and wages paid to personnel involved in production, manufacturing quality control,
testing and supply chain management. In addition, cost of revenues include normal scrap and
shrinkage associated with the manufacturing process and an expense
from the write down of obsolete and
slow moving inventory. We include the direct material costs and factory labor as well as factory
overhead expense in the cost of revenue. Indirect factory expense includes the costs of freight
(inbound and outbound for direct material and finished goods), purchasing and receiving,
inspection, testing, warehousing, utilities and depreciation of facilities and equipment utilized in
the production and distribution of products.
Selling, general and administrative expenses
In prior periods we presented Selling and marketing expenses and General and
administrative expenses separately on our statement of operations. Beginning in the year ended
December 31, 2010, we now combine these categories of expenses into Selling, general and
administrative expenses because there is considerable overlap between management functions
pertaining to sales and marketing and general administrative duties, and as such, estimating
allocation of expenses associated with these overlapping functions is not meaningful. Prior periods
have been reclassified to reflect this change in presentation.
Selling, general and administrative expenses consist of our selling and marketing expenses, as
well as our general and administrative expenses. Selling and marketing expenses consist primarily
of compensation paid to sales and marketing personnel, and marketing expenses. Costs related to
sales and marketing are expensed as they are incurred. These expenses include the salary and
benefits for the sales and marketing staff as well as travel, samples provided at no-cost to
customers and marketing materials. General and administrative expenses consist primarily of
compensation paid to administrative personnel, legal and professional fees, corporate expenses and
regulatory fees, bad debt and other administrative expenses. These expenses include the salary and
benefits for management and administrative staff as well as travel. Also included is any
depreciation related to assets utilized in the selling, marketing and general and administrative
functions as well as amortization of acquired intangible assets.
Research and development expenses
Research and development expenses consist of costs associated with research related to new
product development and product enhancement expenditures. Research and development costs also
include costs associated with getting our heavy duty diesel systems verified and approved for sale
by the EPA, the CARB and other regulatory authorities. These expenses include the salary and
benefits for the research and development staff as well as travel, research materials, testing and
legal expense related to patenting intellectual property. Also included is any depreciation related
to assets utilized in the development of new products.
Recapitalization expenses
Recapitalization
expenses consists primarily of the expense for legal, accounting and other
advisory professional services as a result of our efforts in the 2010 to explore strategic
opportunities resulting in the Merger.
Total other income (expense)
Total other income (expense) primarily reflects interest expense, loss on foreign exchange and
changes in fair value of our liability classified warrants and
certain of our financial instrument liabilities. It also includes interest income as
well as our share of income and losses from our Asian investment.
24
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires the use of estimates and assumptions that affect the reported amounts of assets
and liabilities, revenues and expenses, and related disclosures in the financial statements.
Critical accounting policies are those accounting policies that may be material due to the levels
of subjectivity and judgment necessary to account for highly uncertain matters or the
susceptibility of such matters to change, and that have a material impact on financial condition or
operating performance. While we base our estimates and judgments on our experience and on various
other factors that we believe to be reasonable under the circumstances, actual results may differ
from these estimates under different assumptions or conditions.
We believe that the assumptions, judgments and estimates involved in the accounting for
revenue recognition, allowance for doubtful accounts, inventory valuation, accounting for income
taxes, business combinations, goodwill, impairment of long-lived assets other than goodwill, fair
value of embedded financial instruments, stock-based compensation and warrant derivative liability
have the greatest potential impact on our Condensed Consolidated Financial Statements. Please refer
to Managements Discussion and Analysis of Financial Condition and Results of Operations contained
in Part II, Item 7 of our Annual Report on Form 10-K for our year ended December 31, 2010 for a
more complete discussion of our critical accounting policies and estimates.
Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). This
pronouncement was issued to provide a consistent definition of fair value and ensure that the fair
value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. ASU 2011-04
changes certain fair value measurement principles and enhances the disclosure requirements
particularly for Level 3 fair value measurements. This pronouncement is effective for reporting
periods beginning on or after December 15, 2011, with early adoption prohibited. The new guidance
will require prospective application. We are currently evaluating the effect this pronouncement
will have on our financial statements.
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income which
was issued to enhance comparability between entities that report under U.S. GAAP and IFRS, and to
provide a more consistent method of presenting non-owner transactions that affect an entitys
equity. ASU 2011-05 eliminates the option to report other comprehensive income and its components
in the statement of changes in stockholders equity and requires an entity to present the total of
comprehensive income, the components of net income and the components of other comprehensive income
either in a single continuous statement or in two separate but consecutive statements. This
pronouncement is effective for fiscal years, and interim periods within those years, beginning
after December 15, 2011. Early adoption of the new guidance is permitted and full retrospective
application is required. We expect the adoption of this updated authoritative guidance to have an
impact on our consolidated financial statement disclosures.
Recent Developments
Public Offering of Common Stock
On June 28, 2011, we entered into an underwriting agreement with Roth Capital Partners,
LLC, as representative of the underwriters named therein. As provided in the underwriting
agreement, on July 5, 2011 we and the selling stockholders named in the underwriting agreement
sold the underwriters an aggregate 3,133,750 shares of our common stock at a price of $3.5208
per share, which represents a discount from the public offering price of $3.75 per share. Of
these shares, 3,053,750 shares were sold by us (including 408,750 shares issued pursuant to the
underwriters overallotment option, which was exercised in full on June 30, 2011) and 80,000
shares were sold by the selling stockholders. We received net proceeds of $10.1 million after
deducting underwriting discounts and commissions and offering expenses.
In accordance with the underwriting agreement, on July 5, 2011, we issued the underwriters
warrants to purchase an aggregate 61,076 shares of our common stock (2.0% of the shares issued by
us in the offering) with an exercise price equal to $4.50 (120% of the public offering price),
which have a term of not greater than five years from June 28, 2011 (the date of the final
prospectus for the public offering).
25
We intend to use the net proceeds from this offering for working capital and general corporate
purposes.
Sale of $3.0 Million 8% Subordinated Convertible Notes Due 2016
On April 11, 2011, we entered into a Subordinated Convertible Notes Commitment Letter with
Kanis S.A. that provides for the sale and issuance by us of 8% subordinated convertible notes. As
provided in the Commitment Letter, on May 6, 2011, Kanis S.A. purchased from us, at par, $3.0
million aggregate principal amount of our subordinated convertible notes due 2016. The notes bear
interest at a rate of 8% per annum, which is payable quarterly in arrears. For more information
relating to the terms of the subordinated convertible notes, see Description of Indebtedness
below and Note 8 to our condensed consolidated financial statements included elsewhere in this
Quarterly Report on Form 10-Q.
New Financing Agreement with FGI; repayment of Fifth Third Bank
On February 14, 2011, we and certain of our subsidiaries entered into separate Sale and
Security Agreements with Faunus Group International, Inc., or FGI, to provide for a $7.5 million
secured demand financing facility backed by our receivables and inventory. On February 16, 2011, we
used approximately $2.1 million of proceeds from advances under this facility to pay in full the
balance of our obligations under our credit facility with Fifth Third Bank. For more information
relating to the FGI and Fifth Third facilities, see Description of Indebtedness below and Note
8 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on
Form 10-Q.
Repayment of Settlement Obligation
On January 4, 2011, using proceeds of the December 30, 2010 unsecured loan from Kanis S.A. and
cash on hand, we paid $1.6 million in full settlement of our obligation to make subsequent payments
under our October 20, 2010 settlement agreement with respect to the litigation and other disputes
in connection with our purchase of Applied Utility Systems assets in August 2006. For more
information relating to the settlement agreement, see Note 19 to our consolidated
financial statements included in our Annual Report on Form 10-K
for the year ended December 31, 2010.
Factors Affecting Future Results
Consolidation of CDTI
The recently completed Merger will have an impact on our future results as we will consolidate
CDTIs results of operations for periods after the effective time of the Merger.
Factors Affecting our Heavy Duty Diesel Systems Division
The nature of our business and, in particular, our Heavy Duty Diesel Systems division, is
heavily influenced by government funding of emissions control projects and increased diesel
emission control regulations. Compliance with these regulatory initiatives drives demand for our
products and the timing of implementation of emission reduction projects. Notably, the retrofit
applications sold in the United States by the division are generally for funded one-off projects,
and typical end-user customers include school districts, municipalities and other fleet operators.
For example, a major project to retrofit trucks in the San Francisco area ports, was implemented in
late 2009 and the first half of 2010, resulting in growth in the retrofit systems business during
the first half of 2010. In addition, following the passage of the American Recovery and
Reinvestment Act of 2009 (commonly referred to as the Stimulus Bill), government spending (both
federal and state) increased. As such, our Heavy Duty Diesel Systems divisions had increased
revenues due to this additional funding in 2010. Notably, the draft U.S. fiscal year 2012 budget
proposes elimination of EPA funding under the Diesel Emissions Reduction Act (DERA). If passed in
current form, it would potentially have an adverse effect on retrofit system sales in 2012 and
beyond. However, funding for diesel retrofit programs in 2011 is expected to continue to accrue
from funds allocated under the Stimulus Bill and other sources such as the funding under
Californias Proposition 1B and from funding provided by the U.S. Department of Transportation
under its Congestion Mitigation and Air Quality Improvement Program. In addition, government
mandates around the world are being used increasingly to combat diesel emissions. For example,
London, U.K. has mandated that several heavy duty diesel vehicles entering the London Low Emissions
Zone (or LEZ) will be required to meet certain emission standards by January 2012. We believe that
approximately 20,000 such vehicles will require a retrofit emission control device installed on the
vehicle by year end 2011. In anticipation and preparation for sales in the London LEZ in 2011, we
will continue to incur supplier accreditation, product verification and other expenditures relating
to sales and marketing activities before we record orders and start shipping products to generate
sufficient revenue and gross profit to offset these expenditures. In addition, the California Air
Resources Board has mandated that all Class 7 and Class 8 heavy diesel trucks meet certain emission
26
targets by 2016, with interim targets established for 2011, 2012 and 2013 such that 90% will be
required to meet these targets by 2014. We estimate that this rule will require well over 100,000
heavy duty diesel trucks to be replaced or retrofitted. We will incur product verification and
other expenditures relating to sales and marketing activities before we record orders and start
shipping products under this rule in California. While we cannot guarantee that we will be
successful in gaining any particular level of sales from the various funding sources, emission
programs and mandates, we expect to pursue these opportunities. The timing of these sales is
uncertain and could result in fluctuations in revenue from quarter to quarter during this year and
beyond.
Factors Affecting our Catalyst Division
Because the customers of our Catalyst division are auto makers, our business is also affected
by macroeconomic factors that impact the automotive industry generally, which can result in
increased or decreased purchases of vehicles, and consequently demand for our products. The global
economic crisis in the latter half of 2008 that continued through 2009 and 2010 had a negative
effect on our customers in the automotive industry. As such demand for our products, which our auto
maker customers incorporate into the vehicles they sell, decreased. In the future, if similar
macroeconomic factors or other factors affect our customer base, our revenues will be similarly
affected. In addition, two auto maker customers account for a significant portion of our Catalyst
division revenues (see Note 2 to our consolidated financial statements included in our Annual
Report on Form 10-K and Note 2 to our condensed consolidated financial statements included
elsewhere in this Quarterly Report on Form 10-Q). In the second half of 2010, one of these auto
makers accelerated manufacture of a vehicle that requires a catalyst product meeting a higher
regulatory standard than the product currently supplied to such auto maker by our Catalyst
division. Although we had already commenced the necessary testing and approval processes for our
products under the higher regulatory standard, such processes are not yet complete. In February
2011, we were informed that there will be a further delay in the completion of tests. Accordingly,
we now expect lower revenues in our Catalyst division through most of 2011. Although we expect that
sales of our Catalyst products to this auto maker will resume towards the end of 2011 or early 2012
once we have received the necessary regulatory approvals and customer qualifications, there is no
guarantee that this will occur. In January 2011, we began shipment of catalyst to a new automobile
manufacturer. We expect to continue shipping catalyst to this new customer during 2011. Demand from
this customer has not yet been fully stabilized, as it represents catalyst for a new model of
automobile. We currently anticipate that sales to this customer will partially offset the loss of
sales resulting from the delayed testing described above. In addition, one of our auto maker
customers reduced production in light of the recent earthquake and tsunami in Japan and as a
result, our catalyst sales in the second quarter of 2011 were unfavorably impacted. Based on public
announcements by this customer and based on our internal review of the order book, it is
anticipated that this customers operations will return to normalcy in August 2011 and our sales
are expected to recover accordingly.
Supply of Catalyst Division Products to Heavy Duty Diesel Systems Division
Our strategy is to progressively utilize the products of our Catalyst division in the products
of our Heavy Duty Diesel Systems division. We anticipate that following approval by the regulatory
agencies our intercompany sales of catalysts will increase compared to historical levels. While
this will not impact our reported sales, we believe that the manufacturing gross margin associated
with these sales will improve the margins of our Catalyst division and hence our total gross
margin.
Regulatory approvals were expected to be obtained for a majority of our products sometime in
the second quarter of 2011. However due to a backlog at the third party external testing site the
approval process has been delayed and we have received approval for only some of the products
applied for. We now expect approval for the rest of the products sometime in the third and fourth
quarters of 2011.
Results of Operations
Comparison of Three Months Ended June 30, 2011 to Three Months Ended June 30, 2010
Revenues
The table below and the tables in the discussion that follow are based upon the way we analyze
our business. See Note 16 to our condensed consolidated financial statements included elsewhere in
this Quarterly Report on Form 10-Q for additional information about our divisions.
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
2011 |
|
|
Revenue |
|
|
2010 |
|
|
Revenue |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in millions) |
|
Heavy Duty Diesel Systems |
|
$ |
9.6 |
|
|
|
83.0 |
% |
|
$ |
8.3 |
|
|
|
64.0 |
% |
|
$ |
1.3 |
|
|
|
15.6 |
% |
Catalyst |
|
|
3.4 |
|
|
|
29.7 |
% |
|
|
4.8 |
|
|
|
37.5 |
% |
|
|
(1.4 |
) |
|
|
(29.5 |
)% |
Intercompany revenue |
|
|
(1.5 |
) |
|
|
(12.7 |
)% |
|
|
(0.2 |
) |
|
|
(1.5 |
)% |
|
|
(1.3 |
) |
|
|
619.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
11.5 |
|
|
|
100.0 |
% |
|
$ |
12.9 |
|
|
|
100.0 |
% |
|
$ |
(1.4 |
) |
|
|
(10.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue for the three months ended June 30, 2011 decreased by $1.4 million, or
10.8%, to $11.5 million from $12.9 million for the three months ended June 30, 2010.
Revenues for our Heavy Duty Diesel Systems division for the three months ended June 30, 2011
increased $1.3 million, or 15.6%, to $9.6 million from $8.3 million for the three months ended June
30, 2010. Revenues for the three months ended June 30, 2011 include $0.8 million from CDTIs legacy
business as a result of the Merger. The remaining increase was due to early incentive sales in the
California Truck and Bus program of $1.3 million, favorable effect of fluctuations in foreign
currency exchange rates of $0.6 million, growth in sales to European mining customers of $0.2
million and initial sales in the London Low Emission Zone (or LEZ) of $0.2 million, all of which
was partially offset by decreases in other markets of $1.8 million. We expect sales in our Heavy
Duty Diesel Systems division to increase for the remainder of 2011 as compared to the second
quarter as shipments in the London LEZ are expected to increase
towards its December 2011 compliance deadline.
The majority of the sales increase is expected to occur toward the end of the third quarter and in
the fourth quarter of 2011.
Revenues for our Catalyst division for the three months ended June 30, 2011 decreased $1.4
million, or 29.5%, to $3.4 million from $4.8 million for the three months ended June 30, 2010.
Revenues for this division decreased year-over-year as a result of an automaker accelerating the
manufacture of a vehicle that requires a catalyst product meeting a higher regulatory standard than
the product currently supplied to the automaker by our Catalyst division, resulting in a decrease
in sales of $1.8 million. We also experienced $1.3 million in lower sales due to a customer
impacted by the earthquake and tsunami in Japan. These reductions in sales were partially offset by
$1.3 million in higher intercompany catalysts sales and $0.4 million in sales to a new automaker
customer. We expect revenues in the Catalyst division for the third quarter of 2011 to be higher
than the second quarter of 2011 as sales to a customer that temporarily reduced automotive
production due to the Japanese earthquake and tsunami return to normal levels in August and beyond.
We eliminate intercompany sales by the Catalyst division to our Heavy Duty Diesel Systems
division in consolidation.
Cost of revenues
Cost of revenues decreased by $1.6 million, or 17.0%, to $8.1 million for the three months
ended June 30, 2011 compared to $9.7 million for the three months ended June 30, 2010. The primary
reason for the decrease in costs was lower product sales volume in our Catalyst division.
Gross Profit
The following table shows our gross profit and gross margin (gross profit as a percentage of
revenues) by division for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
|
|
2011 |
|
|
Revenue (1) |
|
|
2010 |
|
|
Revenue (1) |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in millions) |
|
Heavy Duty Diesel Systems |
|
$ |
2.8 |
|
|
|
29.7 |
% |
|
$ |
2.3 |
|
|
|
27.9 |
% |
|
$ |
0.5 |
|
|
|
23.1 |
% |
Catalyst |
|
|
0.7 |
|
|
|
19.8 |
% |
|
|
0.9 |
|
|
|
17.7 |
% |
|
|
(0.2 |
) |
|
|
(21.1 |
)% |
Intercompany eliminations |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit |
|
$ |
3.4 |
|
|
|
29.8 |
% |
|
$ |
3.2 |
|
|
|
24.5 |
% |
|
$ |
0.2 |
|
|
|
8.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Division calculation based on division revenue. Total based on total revenue. |
28
Gross profit increased to $3.4 million for the three months ended June 30, 2011 from
$3.2 million for the three months ended June 30, 2010. Gross margin was 29.8% during the three
months ended June 30, 2011 compared to 24.5% during the three months ended June 30, 2010. The gross
profit in our Heavy Duty Diesel Systems division increased $0.5 million as a result of increased
sales and gross margin for the three months ended June 30, 2011 improved as compared to the three
months ended June 30, 2010. The gross profit in our Catalyst division decreased $0.2 million to
$0.7 million due to the lower sales volume, whereas gross margin for the three months ended June
30, 2011 improved as compared to the three months ended June 30, 2010.
The increase in gross margin for our Heavy Duty Diesel Systems division is primarily a result
of favorable product sales mix, price increases implemented during
the quarter and $0.1 million of
royalty sales by CDTIs legacy business, all of which were partially offset by an increase in costs
associated with the manufacturing scale-up in London prior to realizing sales in the LEZ. We
anticipate that gross margins in this business will gradually improve as we realize the full
benefits of price increases instituted in the second quarter and the product mix shifts to reflect
higher margin products such as those we expect to sell in the London LEZ (see Factors Affecting
Future Results above).
The increase in gross margin for our Catalyst division is a result of sales to a new customer
at favorable margins, improved operating efficiency and increased intercompany sales. These
favorable changes were partially offset by a lower overall factory throughput. We expect margins in
this business to increase gradually as sales recover in the third quarter and as the volume of
intercompany catalyst sales grows (see Factors Affecting Future Results above).
Operating Expenses
The following table shows our operating expenses and operating expenses as a percentage of
revenues for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
2011 |
|
|
Revenue |
|
|
2010 |
|
|
Revenue |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in millions) |
|
Selling, general and administrative |
|
$ |
4.8 |
|
|
|
42.2 |
% |
|
$ |
2.7 |
|
|
|
20.6 |
% |
|
$ |
2.1 |
|
|
|
83.4 |
% |
Research and development |
|
|
2.2 |
|
|
|
19.4 |
% |
|
|
1.2 |
|
|
|
9.0 |
% |
|
|
1.0 |
|
|
|
93.2 |
% |
Recapitalization expenses |
|
|
|
|
|
|
|
|
|
|
0.5 |
|
|
|
4.3 |
% |
|
|
(0.5 |
) |
|
|
(100.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
7.0 |
|
|
|
61.6 |
% |
|
$ |
4.4 |
|
|
|
33.9 |
% |
|
$ |
2.6 |
|
|
|
61.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2011, operating expenses increased by $2.6 million
to $7.0 million from $4.4 million for the three months ended June 30, 2010. The three months ended
June 30, 2010 included $0.5 million of recapitalization expenses incurred for legal and
professional fees paid directly related to the Merger. Included in operating expenses for the three
months ended June 30, 2011 were $0.2 million related to CDTIs legacy business as a result of the
Merger.
Selling, general and administrative expenses
For the three months ended June 30, 2011, selling, general and administrative expenses
increased by $2.1 million, or 83.4%, to $4.8 million from $2.7 million for the three months ended
June 30, 2010. The expense for the three months ended June 30, 2011 includes $0.1 million related
to CDTIs legacy business subsequent to the Merger. The remaining increase is due to $0.7 million
of increased legal and professional costs associated with being a U.S. public company as compared
to the same period in 2010, when we were listed on the AIM market of the London Stock Exchange,
$0.6 million in increased stock compensation expense related to stock option grants in the fourth
quarter of 2010 and the first quarter of 2011 and RSUs granted in the second quarter of 2011, $0.6
million in increased expenditures incurred in preparation for sales in the London LEZ, $0.2 million
in amortization of intangible assets acquired in the Merger and the unfavorable effect of
fluctuations in foreign currency exchange rates related to the operations in Sweden and Canada of
$0.1 million, all of which were partially offset by other decreases of $0.2 million. Selling,
general and administrative expenses as a percentage of revenues increased to 42.2% in the three
months ended June 30, 2011 compared to 20.6% in the three months ended June 30, 2010. We expect to
continue to invest in sales and marketing related expenses both in London and to support the
anticipated opportunity resulting from the California mandate (see Factors Affecting Future
Results above).
29
Research and development expenses
For the three months ended June 30, 2011, research and development expenses increased by $1.0
million, or 93.2%, to $2.2 million from $1.2 million for the three months ended June 30, 2010. The
increase in research and development expenses was primarily attributable to preparations for
qualification of catalysts for use in our Heavy Duty Diesel Systems division and pre-production
testing for a model year change-over expected in 2012 of $0.3 million, product verifications and
engineering for the London LEZ of $0.3 million, $0.2 million in increased stock compensation
expense related to stock options and RSUs granted in 2011, $0.1 million related to CDTIs legacy
business as a result of the Merger and $0.1 million of other increases. As a percentage of
revenues, research and development expenses were 19.4% in the three months ended June 30, 2011,
compared to 9.0% in the three months ended June 30, 2010. We expect to continue to incur research
and development expense relating to product verifications for the planned sales of products of our
Catalyst division to our Heavy Duty Diesel Systems division and certain new product development and
verification expenses to support the anticipated opportunity resulting from the California mandate
(see Factors Affecting Future Results above).
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
2011 |
|
|
Revenue |
|
|
2010 |
|
|
Revenue |
|
|
|
(Dollars in millions) |
|
Interest expense |
|
$ |
(0.3 |
) |
|
|
(2.8 |
)% |
|
$ |
(0.5 |
) |
|
|
(4.1 |
)% |
Gain on change in fair value of derivative
financial instruments |
|
|
0.7 |
|
|
|
5.7 |
% |
|
|
0.2 |
|
|
|
1.4 |
% |
All other, net |
|
|
(0.2 |
) |
|
|
(0.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net |
|
$ |
0.2 |
|
|
|
2.0 |
% |
|
$ |
(0.3 |
) |
|
|
(2.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2011, we incurred interest expense of $0.3 million
compared to $0.5 million in the three months ended June 30, 2010. The three months ended June 30,
2010 includes $0.3 million related to the amortization of debt discount on the secured convertible
notes issued in June 2010. For additional information relating to the secured convertible notes,
see Note 8 to the condensed consolidated financial statements included elsewhere within this
Quarterly Report on Form 10-Q.
For the three months ended June 30, 2011, there was $0.7 million in gains related to the
change in fair value of liability classified common stock warrants issued in connection with the
Merger. For more information relating to these warrants, see Note 10 to the condensed consolidated
financial statements included elsewhere within this Quarterly Report on Form 10-Q. The three months
ended June 30, 2010 includes approximately $0.2 million in income resulting from changes in the
fair value of the derivative financial instruments issued in connection with the secured
convertible notes issued in June 2010.
Net loss
For the foregoing reasons, we had a net loss of $3.7 million for the three months ended June
30, 2011 compared to a net loss of $1.9 million for the three months ended June 30, 2010. Excluding
net loss from discontinued operations, we had a net loss from continuing operations of $3.7 million
for the three months ended June 30, 2011 compared to a net loss from continuing operations of $1.8
million for the three months ended June 30, 2010. We continue to have legal and other expenses
related to the 2009 divestiture of the assets of Applied Utility Systems. We record these
activities as discontinued operations. For additional information relating to Applied Utility
Systems, see Note 13 to the consolidated financial statements included elsewhere within this
Quarterly Report on Form 10-Q.
30
Comparison of Six Months Ended June 30, 2011 to Six Months Ended June 30, 2010
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
2011 |
|
|
Revenue |
|
|
2010 |
|
|
Revenue |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in millions) |
|
Heavy Duty Diesel Systems |
|
$ |
19.0 |
|
|
|
75.2 |
% |
|
$ |
15.8 |
|
|
|
62.2 |
% |
|
$ |
3.2 |
|
|
|
20.6 |
% |
Catalyst |
|
|
8.1 |
|
|
|
31.9 |
% |
|
|
9.9 |
|
|
|
39.2 |
% |
|
|
(1.8 |
) |
|
|
(18.6 |
)% |
Intercompany revenue |
|
|
(1.8 |
) |
|
|
(7.1 |
)% |
|
|
(0.3 |
) |
|
|
(1.4 |
)% |
|
|
(1.5 |
) |
|
|
(428.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
25.3 |
|
|
|
100.0 |
% |
|
$ |
25.4 |
|
|
|
100.0 |
% |
|
$ |
(0.1 |
) |
|
|
(0.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue for the six months ended June 30, 2011 decreased by $0.1 million, or 0.2%,
to $25.3 million from $25.4 million for the six months ended June 30, 2010.
Revenues for our Heavy Duty Diesel Systems division for the six months ended June 30, 2011
increased $3.2 million, or 20.6%, to $19.0 million from $15.8 million for the six months ended June
30, 2010. Revenues for the six months ended June 30, 2011 include $1.5 million from CDTIs legacy
business as a result of the Merger. The remaining increase was due largely to early incentive sales
in the California Truck and Bus program of $1.3 million, favorable effect of fluctuation in foreign
currency exchange rates of $1.0 million and initial London LEZ sales of $0.2 million, partially
offset by decreases in other areas of $0.8 million.
Revenues for our Catalyst division for the six months ended June 30, 2011 decreased $1.8
million, or 18.6%, to $8.1 million from $9.9 million for
the six months ended June 30, 2010. Revenues for this division decreased year-over-year as a result of an automaker accelerating the manufacture
of a vehicle that requires a catalyst product meeting a higher regulatory standard than the product
currently supplied to the automaker by our Catalyst division, resulting in a decrease in sales of
$3.8 million. We also experienced a reduction in sales of $0.7 million to an automaker that was
impacted by the earthquake and tsunami in Japan. These reductions in sales were partially offset by
higher intercompany catalyst sales of $1.4 million, sales to a new automaker customer of $0.8
million and increased sales of service parts of $0.5 million.
We eliminate intercompany sales by the Catalyst division to our Heavy Duty Diesel Systems
division in consolidation.
Cost of revenues
Cost of revenues decreased by $0.7 million, or 3.9%, to $17.9 million for the six months ended
June 30, 2011 compared to $18.6 million for the six months ended June 30, 2010. The primary
reason for the decrease in costs was lower product sales volume in our Catalyst division.
Gross Profit
The following table shows our gross profit and gross margin (gross profit as a percentage of
revenues) by division for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
|
|
2011 |
|
|
Revenue (1) |
|
|
2010 |
|
|
Revenue (1) |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in millions) |
|
Heavy Duty Diesel Systems |
|
$ |
5.8 |
|
|
|
30.4 |
% |
|
$ |
4.8 |
|
|
|
30.3 |
% |
|
$ |
1.0 |
|
|
|
20.6 |
% |
Catalyst |
|
|
1.8 |
|
|
|
21.9 |
% |
|
|
2.0 |
|
|
|
20.0 |
% |
|
|
(0.2 |
) |
|
|
(11.0 |
)% |
Intercompany elimination |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit |
|
$ |
7.4 |
|
|
|
29.4 |
% |
|
$ |
6.8 |
|
|
|
26.7 |
% |
|
$ |
0.6 |
|
|
|
9.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Division calculation based on division revenue. Total based on total revenue. |
Gross profit increased by $0.6 million, or 9.8%, to $7.4 million for the six months
ended June 30, 2011, from $6.8 million for the six months ended June 30, 2010. Gross margin was
29.4% during the six months ended June 30, 2011 compared to 26.7% during the six months ended June
30, 2010. The increase in gross profit was due to an
31
increase in our Heavy Duty Diesel Systems division resulting from increased sales. The gross profit
in our Catalyst division decreased $0.2 million to $1.8 million for the six months ended June 30,
2011 from $2.0 million for the six months ended June 30, 2010.
The increase in gross margin for our Heavy Duty Diesel Systems division is a result of
favorable product sales mix, price increases implemented during the quarter and $0.2 million in
royalty sales by CDTIs legacy business, all of which were partially offset by increases in
platinum group metal prices in the first quarter of 2011 and an increase in costs associated with
the manufacturing scale-up in London prior to realizing sales in the LEZ. We anticipate that the
gross margin in this business will improve when we are able to pass along the price increases
through price increases to our customers, which we began implementing in the second quarter of
2011, as well as when our product mix changes to higher margin products expected to be sold in the
London LEZ in the second half of 2011 (see Factors Affecting Future Results above).
The increase in gross margin for our Catalyst division is a result of sales to a new customer
at favorable margins and improved operating efficiency. However, we expect to have downward
pressure on margins until the full restart of the production for one auto manufacturer and until we
increase the shipment of products of our Catalyst division to our Heavy Duty Diesel Systems
division (see Factors Affecting Future Results above).
Operating Expenses
The following table shows our operating expenses and operating expenses as a percentage of
revenues for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
2011 |
|
|
Revenue |
|
|
2010 |
|
|
Revenue |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in millions) |
|
Selling, general and administrative |
|
$ |
9.4 |
|
|
|
37.2 |
% |
|
$ |
5.7 |
|
|
|
22.4 |
% |
|
$ |
3.7 |
|
|
|
65.5 |
% |
Research and development |
|
|
3.7 |
|
|
|
14.8 |
% |
|
|
2.2 |
|
|
|
8.5 |
% |
|
|
1.5 |
|
|
|
74.8 |
% |
Recapitalization expenses |
|
|
|
|
|
|
|
|
|
|
0.7 |
|
|
|
2.9 |
% |
|
|
(0.7 |
) |
|
|
(100.0 |
)% |
Gain on sale of intellectual
property |
|
|
|
|
|
|
|
|
|
|
(3.9 |
) |
|
|
(15.4 |
)% |
|
|
3.9 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
13.1 |
|
|
|
52.0 |
% |
|
$ |
4.7 |
|
|
|
18.4 |
% |
|
$ |
8.4 |
|
|
|
181.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2011, operating expenses increased by $8.4 million
to $13.1 million from $4.7 million for the six months ended June 30, 2010. The six months ended
June 30, 2010 include a $3.9 million gain, which arose from the sale of specific three-way catalyst
technology and intellectual property to TKK, our partner in our Asian investment. Partially
offsetting this gain in the first half of 2010 were $0.7 million of recapitalization expenses
incurred for legal and professional fees paid directly related to the Merger and costs related to
the Catalyst division restructuring. Included in operating expenses for the six months ended June
30, 2011 were $0.5 million related to CDTIs legacy business as a result of the Merger.
Selling, general and administrative expenses
For the six months ended June 30, 2011, selling, general and administrative expenses increased
by $3.7 million, or 65.5%, to $9.4 million from $5.7 million for the six months ended June 30,
2010. The expense for the six months ended June 30, 2011 includes $0.3 million related to CDTIs
legacy business subsequent to the Merger. The remaining increase is due to $1.2 million of expenses
incurred in preparation for the London LEZ, $0.9 million of increased stock compensation expense
related to stock options granted in the fourth quarter of 2010 and the first quarter of 2011 and
RSUs granted in the second quarter of 2011, $0.9 million in increased legal and professional costs
associated with being a U.S. public company compared to the same period in 2010, $0.5 million in
amortization of intangibles resulting from the Merger, and unfavorable effect of fluctuations in
foreign currency exchange rates related to the operation in Sweden and Canada of $0.2 million, all
of which were partially offset by other decreases of $0.3 million. Selling, general and
administrative expenses as a percentage of revenues increased to 37.2% in the six months ended June
30, 2011 compared to 22.4% in the six months ended June 30, 2010.
Research and development expenses
For the six months ended June 30, 2011, research and development expenses increased by $1.5
million, or 74.8%, to $3.7 million from $2.2 million for the six months ended June 30, 2010. The
increase in research and development expenses was primarily attributable to preparations for
qualification of catalysts for use in our Heavy
32
Duty Diesel Systems division and pre-production testing for a model year change over expected in
2012 of $0.7 million, product verifications and engineering for the London LEZ of $0.3 million,
increased stock compensation expense of $0.2 million related to stock options and restricted share
units granted in 2011, $0.2 million related to CDTIs legacy business as a result of the merger and
$0.1 million of other increases. As a percentage of revenues, research and development expenses
were 14.8% in the six months ended June 30, 2011, compared to 8.5% in the six months ended June 30,
2010.
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
2011 |
|
|
Revenue |
|
|
2010 |
|
|
Revenue |
|
|
|
(Dollars in millions) |
|
Interest expense |
|
$ |
(0.5 |
) |
|
|
(2.1 |
)% |
|
$ |
(0.7 |
) |
|
|
(2.7 |
)% |
Gain on change in fair value of
derivative financial instruments |
|
|
1.1 |
|
|
|
4.3 |
% |
|
|
0.2 |
|
|
|
0.7 |
% |
All other, net |
|
|
(0.4 |
) |
|
|
(1.4 |
)% |
|
|
(0.3 |
) |
|
|
(1.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net |
|
$ |
0.2 |
|
|
|
0.8 |
% |
|
$ |
(0.8 |
) |
|
|
(3.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2011, we incurred interest expense of $0.5 million
compared to $0.7 million in the six months ended June 30, 2010. The six months ended June 30, 2011
includes $75,000 in debt issuance costs related to the new FGI demand facility which was recognized
as interest expense on inception of the agreement which can be terminated at any time by FGI. For
additional information relating to the secured demand credit facility, see Note 8 to the condensed
consolidated financial statements included elsewhere within this Quarterly Report on Form 10-Q and
Description of Indebtedness below. The six months ended June 30, 2010 includes $0.3 million
related to the amortization of debt discount on the secured convertible notes issued in June 2010.
For the six months ended June 30, 2011, there was $1.1 million in gains related to the change
in fair value of liability classified common stock warrants issued in connection with the Merger.
For more information relating to these warrants, see Note 10 to the condensed consolidated
financial statements included elsewhere within this Quarterly Report on Form 10-Q. The six months
ended June 30, 2010 includes approximately $0.2 million in income resulting from changes in the
fair value of the derivative financial instruments issued in connection with the secured
convertible notes issued in June 2010.
Net loss
For the foregoing reasons, we had a net loss of $6.0 million for the six months ended June 30,
2011 compared to net income of $0.6 million for the six months ended June 30, 2010. Excluding net
loss from discontinued operations, we had a net loss from continuing operations of $6.0 million for
the six months ended June 30, 2011 compared to net income from continuing operations of $0.8
million for the six months ended June 30, 2010. We continue to have legal and other expenses
related to the 2009 divestiture of the assets of Applied Utility Systems. We record these
activities as discontinued operations. For additional information relating to Applied Utility
Systems, see Note 13 to the consolidated financial statements included elsewhere within this
Quarterly Report on Form 10-Q.
Liquidity and Capital Resources
The revenue that we generate is not sufficient to fund our operating requirements and debt
servicing needs. Notably, we have suffered recurring losses and negative cash flows from operations
since inception. Our primary sources of liquidity in recent years have been asset sales, credit
facilities and other borrowings and equity sales.
Although the Merger (which was completed on October 15, 2010) was initially anticipated to
provide sufficient cash to the combined company, unforeseen delays in completing the Merger led to
significantly higher transactional costs for both CDTI and CSI. In addition, the reduction in
Catalyst sales discussed above under Factors Affecting Future Results resulted in lower cash
inflows than previously anticipated. Thus, our post-Merger company had less cash than we needed to
incur the sales, marketing and product verification expenditures required to be made in advance of
realizing the anticipated sales in the London LEZ as well as the expenditures needed to complete
verification of certain products of our Catalyst division for use in the products of our Heavy Duty
Diesel Systems division. We continued to work on improving our liquidity situation and in February
2011 we entered into the FGI financing facility and repaid Fifth Third Bank, and in May 2011 we
issued $3.0 million of our 8% subordinated convertible notes to a shareholder. However, our access
to working capital continued to be limited and
33
our debt service obligations and projected operating costs for 2011 exceeded our cash balance at
June 30, 2011. As of June 30, 2011, we had an accumulated deficit of approximately $163.8 million.
As of December 31, 2010, we had an accumulated deficit of approximately $157.7 million. We had $3.1
million in cash and cash equivalents at June 30, 2011 compared to $5.0 million in cash and cash
equivalents at December 31, 2010, and total current liabilities of $17.8 million at June 30, 2011
compared to $14.8 million at December 31, 2010.
In order to address our need for capital, on June 28, 2011, we entered into an underwriting
agreement with Roth Capital Partners, LLC, and on July 5, 2011 (subsequent to the end of the second
quarter), we closed a public offering in which we sold 3,053,750 shares and the selling
stockholders sold 80,000 shares of our common stock (see Recent Development Public Offering
of Common Stock above). We received $10.1 million in net proceeds from the offering after
deducting underwriting discounts and commissions and offering expenses. Management now believes
that we will have sufficient working capital to sustain operations through at least the next twelve
months. However, no assurances can be provided that we will have sufficient cash and credit to
sustain operations or that we will be successful in obtaining additional funding, if needed.
The following table summarizes our cash flows for the six months ended June 30, 2011 and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30 |
|
|
2011 |
|
2010 |
|
$ Change |
|
% Change |
|
|
(Dollars in millions) |
Cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
(5.0 |
) |
|
$ |
0.6 |
|
|
$ |
(5.6 |
) |
|
|
(927.7 |
)% |
Investing activities |
|
$ |
(0.3 |
) |
|
$ |
1.4 |
|
|
$ |
(1.7 |
) |
|
|
(119.41 |
)% |
Financing activities |
|
$ |
3.5 |
|
|
$ |
(1.0 |
) |
|
$ |
4.5 |
|
|
|
436.62 |
% |
Cash (used in) provided by operating activities
Our largest source of operating cash flows is cash collections from our customers following
the sale of our products and services. Our primary uses of cash for operating activities are for
purchasing inventory in support of the products that we sell, personnel related expenditures,
facilities costs and payments for general operating matters.
Cash used in operating activities in the six months ended June 30, 2011 was $5.0 million, an
increase of $5.6 million from the six months ended June 30, 2010, when our operating activities
provided $0.6 million of cash. The increase in cash used in operations was partially due to a $2.5
million increase in net loss from continuing operations in the six months ended June 30, 2011 as
compared to the six months ended June 30, 2010, after giving consideration to non-cash operating
items, including depreciation and amortization, stock-based compensation, foreign exchange loss and
non-cash interest expense, among others for both periods, change in valuation of liability
classified warrants in the six months ended June 30, 2011 and the gain on sale of intellectual
property in the six months ended June 30, 2010. The increase in net loss from continuing operations
was due to increased expenditures incurred in preparation for sales in the London LEZ, decreased
catalyst sales as a result of the Japanese earthquake and tsunami and increased U.S. public company
expenses. Cash used related to the change in net operating assets and liabilities was $0.6 million
in the six months ended June 30, 2011 as compared to $2.7 million in cash provided from changes in
net operating assets and liabilities in the six months ended June 30, 2010. The increase in cash
use in the first half of 2011 is due to a $3.1 million increase in cash used related to the change
in accounts receivable due to increased sales in our Heavy Duty Diesel Systems business and a $4.2
million increase in cash used related to the change in inventories due to a build up of inventory
to support the London LEZ sales planned in the second half of 2011. These increases were partially
offset by a $4.1 million increase in cash provided related to the change in accounts payable and
accrued expenses and other current liabilities resulting from the increase in inventories as well
as improved working capital management.
Cash (used in) provided by investing activities
Our cash flows from investing activities primarily relate to asset sales and acquisitions, our
Asian investment as well as capital expenditures and other assets to support
our growth plans.
Net cash used in investing activities was $0.3 million in the six months ended June 30, 2011
compared to $1.4 million generated by investing activities in the six months ended June 30, 2010.
Cash used in investing activities in the six months ended June 30, 2011 relates primarily to
purchases of property and equipment. The six months ended June 30, 2010 includes net cash acquired
of $2.0 million received from the sale of intellectual property to TKK, our partner in our Asian
investment.
34
Cash provided by (used in) financing activities
Since inception, we have financed our net operating cash usage through a combination of
financing activities such as issuance of equity or debt and investing activities such as sale of
intellectual property or other assets. Changes in our cash flows from financing activities
primarily relate to borrowings and payments under debt obligations.
Net cash provided by financing activities was $3.5 million in the six months ended June 30,
2011, a $4.5 million increase in cash provided as compared to cash used of $1.0 million in the six
months ended June 30, 2010. Cash provided by financing in the six months ended June 30, 2011
includes proceeds of $3.0 million on the issuance of secured convertible notes, $1.8 million in
increased borrowings under credit facilities and $0.4 million in proceeds from the exercise of
common stock warrants, all of which were partially offset by $1.6 million payment of a settlement
obligation pursuant to the October 20, 2010 settlement agreement and the payment of $0.1 million in
debt issuance costs. Cash used in the six months ended June 30, 2010 relates to the net repayments
of borrowings under our former line of credit with Fifth Third Bank, which was partially offset by
proceeds of $1.5 million from the sale of secured convertible notes in June 2010.
Description of Indebtedness
Our outstanding borrowing at June 30, 2010 and December 31, 2010 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(Dollars in millions) |
|
Line of credit |
|
$ |
4.4 |
|
|
$ |
2.4 |
|
Loan from shareholder |
|
|
1.5 |
|
|
|
1.4 |
|
8% subordinated convertible shareholder notes due 2016 |
|
|
3.0 |
|
|
|
|
|
Capital lease obligations |
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
Total borrowings |
|
$ |
8.9 |
|
|
$ |
3.9 |
|
|
|
|
|
|
|
|
FGI Financing Facility
On February 14, 2011, we and certain of our subsidiaries entered into separate Sale and
Security Agreements with FGI to provide for a $7.5 million secured demand facility backed by our
receivables and inventory. We refer to this receivables/inventory borrowing as the FGI facility.
The FGI facility has an initial two-year term and may be extended at our option for additional
one-year terms. In addition to our company, the following subsidiaries entered into Sale and
Security Agreements with FGI: CSI, Engine Control Systems Limited, Engine Control Systems Ltd. and
Clean Diesel International, LLC (the Credit Subsidiaries). We and the Credit Subsidiaries also
entered into guarantees to guarantee the performance of the others of their obligations under the
Sale and Security Agreements. We also granted FGI a first lien collateral interest in substantially
all of our assets. On February 16, 2011, approximately $2.1 million of proceeds from advances under
this facility were used to pay in full the balance of our obligations under the Second Amended and
Restated Loan Agreement dated as of June 27, 2008 with Fifth Third Bank.
Under the FGI facility, FGI can elect to purchase eligible accounts receivables from us and
the Credit Subsidiaries at up to 80% of the value of such receivables (retaining a 20% reserve). At
FGIs election, FGI may advance us up to 80% of the value of any purchased accounts receivable,
subject to the $7.5 million limit. Reserves retained by FGI on any purchased receivable are
expected to be refunded to us net of interest and fees on advances once the receivables are
collected from customers. We may also borrow up to $1 million against eligible inventory subject to
the aggregate $7.5 million limit under the FGI facility and certain other conditions. The interest
rate on advances or borrowings under the FGI facility will be the greater of (i) 7.50% per annum
and (ii) 2.50% per annum above the Wall Street Journal prime rate and was 7.50% at June 30, 2011.
Any advances or borrowings under the FGI facility are due on demand. We also agreed to pay FGI
collateral management fees of: 0.44% per month on the face amount of eligible receivables as to
which advances have been made and 0.55% per month on borrowings against inventory, if any. At any
time outstanding advances or borrowings under the FGI facility are less than $2.4 million, we
agreed to pay FGI standby fees of (i) the interest rate on the difference between $2.4 million and
the average outstanding amounts and (ii) 0.44% per month on 80% of the amount by which our advances
or borrowings are less than the agreed $2.4 million minimum.
We account for the sale of accounts receivable under the FGI facility as a secured borrowing
with a pledge of the subject receivables as collateral. At June 30, 2011, we had $4.2 million of
gross accounts receivable pledged to
35
FGI as collateral for short-term debt in the amount of $3.4 million. At June 30, 2011, we also had
$1.0 million in borrowings outstanding against eligible inventory. We were in compliance with the
terms of the FGI Facility at June 30, 2011.
We paid FGI a one time facility fee of $75,000 upon entry into the FGI facility, and agreed
that we will pay a $150,000 termination fee if we terminate within the first 360 days ($76,000 if
we terminate in the second 360 days). FGI may terminate the facility at any time.
For further information regarding our secured demand facility with FGI see Note 8 to our
condensed consolidated financial statements included elsewhere in the Quarterly Report on Form
10-Q.
Loan from Kanis S.A.
On December 30, 2010, we executed a Loan Commitment Letter with Kanis S.A., a shareholder of
our company, pursuant to which Kanis S.A. loaned us $1.5 million. The unsecured loan bears interest
on the unpaid principal at a rate of six percent (6%) per annum, with interest only payable
quarterly on each March 31, June 30, September 30 and December 31, commencing March 31, 2011 and
matures on June 30, 2013. In addition to principal and accrued interest, we are obligated to pay
Kanis S.A. at maturity a Payment Premium ranging from $100,000 to $200,000 based proportionally
on the number of days that the loan remains outstanding. There is no prepayment penalty.
In connection with the loan, we issued Kanis S.A. warrants to acquire 25,000 shares of our
common stock at $10.40 per share. These warrants are exercisable on or after June 30, 2013 and
expire on the earlier of (x) June 30, 2016 and (y) the date that is 30 days after we give notice to
the warrant holder that the market value of one share of our common stock has exceeded 130% of the
exercise price of the warrant for 10 consecutive days, which 10 consecutive days commence on or
after June 30, 2013. We have recorded the relative estimated fair value of these warrants as a
discount from the loan amount and are amortizing the discount using the effective interest method
over the term of the loan.
For further information regarding this shareholder loan see Note 8 to our condensed
consolidated financial statements included elsewhere in the Quarterly Report on Form 10-Q.
On January 4, 2011, using proceeds of the loan and cash on hand, we paid $1.6 million as
satisfaction in full of our obligation to the seller of the Applied Utility Systems acquisition
pursuant to the October 20, 2010 settlement agreement. This $1.6 million was a settlement
obligation and was therefore classified in current liabilities at December 31, 2010.
8% Subordinated Convertible Notes Due 2016
On May 6, 2011, in a private placement pursuant to Regulation S, we issued to Kanis S.A $3.0
million aggregate principal amount of our subordinated convertible notes. The notes bear interest
at a rate of 8% per annum, which is payable quarterly in arrears. The notes have a stated maturity
of five years from the date of issuance, which maturity may be accelerated if: (i) we are in breach
of the notes or other agreements with Kanis S.A., or (ii) Kanis S.A. provides written notice, not
less than 30 days prior to such date, that it elects to accelerate the maturity to a date not
earlier than November 11, 2012.
We may be required to redeem all or a portion of the notes at any time on or after November
11, 2012 on not less than 30 days prior written notice at a purchase price in cash equal to 100% of
the principal amount of the notes to be purchased plus any accrued but unpaid interest through the
date of redemption. We also have the option to redeem the notes at any time at a price equal to
100% of the face amount plus accrued and unpaid interest through the date of redemption. There is
no prepayment penalty. We plan to use the net proceeds from the sale of the notes for general
working capital purposes. The subordinated convertible notes are unsecured obligations and are
subordinated to our existing and future secured indebtedness.
The outstanding principal balance of, plus accrued and unpaid interest on, the notes are
convertible subject to limitation at the option of the holder at any time upon written notice given not less than 75
calendar days prior to the date of conversion into shares of our common stock at an initial
conversion price equal to $7.044 per share, which is equal to 120% of the consolidated closing bid
price per share of our common stock on April 8, 2011 (the last trading day before we entered into
the commitment letter with Kanis S.A). We may not convert the notes and Kanis S.A. may not convert
any portion of the notes, to the extent that after giving effect to such conversion, the aggregate
number of shares of our common stock issued upon conversion would exceed 369,853 shares.
36
For further information regarding our 8% subordinated convertible notes due 2016, see Note 8
to our condensed consolidated financial statements included elsewhere in the Quarterly Report on
Form 10-Q.
Fifth Third Bank
In December 2007, CSI and its subsidiaries, including Engine Control Systems, entered into
borrowing agreements with Fifth Third Bank as part of the cash consideration paid for CSIs
December 2007 purchase of Engine Control Systems. The borrowing agreements initially provided for
three facilities including a revolving line of credit and two term loans. The line of credit was a
two-year revolving term operating loan up to a maximum principal amount of $8.2 million (Canadian
$10 million), with availability based upon eligible accounts receivable and inventory. The other
facilities included a five-year non-revolving term loan of up to $2.5 million, which was paid off
during 2008, and a non-revolving term loan of $3.5 million which was paid off in October 2009.
On March 31, 2009, CSI failed to achieve two of the covenants under its Fifth Third Bank
credit facility. These covenants related to the annualized EBITDA and the funded debt to EBITDA
ratio for its Engine Control Systems subsidiary. Beginning in March 31, 2009 and through repayment
in full, Fifth Third Bank extended forbearance of the default, while converting the facility into a
demand facility, reducing the size of the facility and increase the rate for borrowings. At
December 31, 2010, the credit limit under the facility was Canadian $6.0 million and the interest
rate was U.S./Canadian Prime Rate plus 3.00%. The entire debt due to Fifth Third Bank was repaid on
February 16, 2011 with the completion of the financing facility with FGI.
For more information relating to the Fifth Third credit facility, see Note 8 to our condensed
consolidated financial statements included elsewhere in the Quarterly Report on Form 10-Q.
Capital Expenditures
As of June 30, 2011, we had no commitments for capital expenditures and no material
commitments are anticipated in the near future.
Off-Balance Sheet Arrangements
As of June 30, 2011 and December 31, 2010, we had no off-balance sheet arrangements.
Commitments and Contingencies
As of June 30, 2011 and December 31, 2010, other than office leases, employment agreements
with key executive officers and the obligation to fund our portion (5%) of the losses of our
investment in TCC (see Note 12 to the condensed consolidated financial statements elsewhere in this
Quarterly Report on Form 10-Q), we had no material commitments other than the liabilities reflected
in our condensed consolidated financial statements included elsewhere in the Quarterly Report on
Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
In evaluating the disclosure controls and procedures, management recognizes that any controls
and procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures. Our management, with
the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures as of the end of the period covered by this
Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and our Chief
Financial Officer concluded that our disclosure controls and procedures were effective, at the
reasonable assurance level, as of the end of the period covered by this report to ensure that
information we are required to disclose in reports that we file or submit under the Securities
Exchange Act of 1934 (1) is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms, and (2) is accumulated and
communicated to management, including our Chief Executive Officer and our Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure.
37
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting during the period covered by this Quarterly Report on Form 10-Q.
38
PART IIOTHER INFORMATION
Item 1. Legal Proceedings
There have been no material developments in our legal proceedings since the legal proceedings
reported in Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2010.
Item 1A. Risk Factors
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Default Upon Senior Securities
None.
Item 4. (Removed and Reserved)
Item 5. Other Information
None.
Item 6. Exhibits
|
|
|
No. |
|
Description |
|
|
|
10.1
|
|
Subordinated Convertible Notes Commitment Letter, dated April 11, 2011, between Kanis S.A. and
Clean Diesel (incorporated by reference to Exhibit 10.1 of Form 8-K filed April 13, 2011) |
|
|
|
10.2
|
|
Form of $3,000,000 promissory note, dated April 11, 2011 (incorporated by reference to Schedule B
to Subordinated Convertible Notes Commitment Letter filed as Exhibit 10.1 of Form 8-K filed April
13, 2011) |
|
|
|
10.3
|
|
Form of Warrant issued to the underwriters named in the Underwriting Agreement, dated June 28,
2011, by and among Clean Diesel, the selling stockholders named therein, and Roth Capital
Partners, LLC, as the representative of the underwriters named therein (incorporated by reference
to Exhibit 10.1 of Form 8-K filed July 1, 2011) |
|
|
|
10.4
|
|
Form of Restricted Share Unit Agreement (incorporated by reference to Exhibit 10.1 of Form 8-K
filed June 13, 2011) |
|
|
|
10.5
|
|
Management Short Term Incentive Plan (incorporated by reference to Exhibit 10.3 of Form 8-K
filed June 13, 2011) |
|
|
|
31.1*
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2*
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32*
|
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
|
|
|
101.INS
|
|
XBRL Instance Document |
|
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document |
39
|
|
|
No. |
|
Description |
|
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
* |
|
Filed herewith |
|
|
|
Indicates a management contract or compensatory plan or arrangement |
40
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 hereunto duly authorized.
|
|
|
|
|
|
CLEAN DIESEL TECHNOLOGIES, INC.
(Registrant)
|
|
Date: August 11, 2011 |
By: |
/s/ Charles F. Call
|
|
|
|
Charles F. Call |
|
|
|
Director and Chief Executive Officer |
|
|
|
|
|
Date: August 11, 2011 |
By: |
/s/ Nikhil A. Mehta
|
|
|
|
Nikhil A. Mehta |
|
|
|
Chief Financial Officer and Treasurer |
|
|
41