May 13, 2016 - 1:01 AM EDT
Print Email Article Font Down Font Up
CLEAN DIESEL TECHNOLOGIES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our unaudited 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, 2015. This discussion contains forward-looking statements,
the accuracy of which involves risks and uncertainties. Refer to the "Cautionary
Note 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 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, 2015.



References to "Notes" are notes included in the unaudited condensed consolidated financial statements included elsewhere in the Quarterly Report on Form 10-Q.



Overview



We are transitioning our business from being a niche manufacturer of emissions
control solutions for the automotive and heavy duty diesel markets to becoming
an advanced materials technology provider for these markets. We have a proven
ability to develop proprietary materials incorporating various base metals that
replace costly platinum group metals ("PGM") and rare earth metals in coatings
on vehicle catalytic converters. Our business is driven by increasingly
stringent global emission standards for internal combustion engines, which are
major sources of a variety of harmful pollutants.



Over the past decade, we have developed several generations of high performance
catalysts, including our low-PGM MPC® catalysts that are used on certain new
Honda vehicles. Recently, we have expanded our materials platform to include new
synergized-PGM diesel oxidation catalysts, or SPGM™ DOCs, base-metal activated
rhodium support, or BMARS™, and Spinel™ technologies. Initial vehicle tests
using these new technologies have demonstrated PGM savings of up to 97% compared
to current OEM catalysts. We are in the process of introducing these new
catalyst technologies to OEMs and other vehicle catalyst manufacturers. We do so
both by supplying coated catalysts and by providing our technology in a
proprietary powder form, which allows coaters to capture the benefits of our
advanced catalyst technology in their own manufacturing operations.



We also supply heavy duty diesel emissions control systems and products incorporating our proprietary catalyst technologies to major automakers, distributors, integrators and retrofitters.



We have more than 15 years history of supplying catalysts to light duty vehicle
OEMs and 35 years of experience in the heavy duty diesel systems market. During
these periods, we have developed a substantial portfolio of patents and related
proprietary rights and extensive technological know-how.



We organize our operations in two business divisions: Catalyst and Heavy Duty Diesel Systems.



Catalyst:  Utilizing our advanced materials technology platform, we develop and
produce catalysts to reduce emissions from gasoline, diesel and natural gas
combustion engines. Most catalytic systems require significant amounts of costly
PGMs to operate effectively. Using our proprietary mixed-phase catalyst, or
MPC®, technology, we have developed a family of unique high-performance
catalysts, featuring inexpensive base-metals with low or even no PGM content. We
have recently developed a new generation of catalyst technologies, which we
believe will enable further advances in catalyst performance and further
reductions in PGM usage. Since 2001, we have supplied over twelve million
catalyst parts to light duty vehicle OEM customers. Our Catalyst division is
also a supplier of products for our Heavy Duty Diesel Systems division. Revenues
from our Catalyst division accounted for 58% and 60% of the total consolidated
revenues for the three months ended March 31, 2016 and 2015, respectively.



Heavy Duty Diesel Systems:  We specialize in the design and manufacture of
exhaust emissions control solutions for a wide range of heavy duty diesel
applications. We offer a full range of DuraFit™ OEM replacement diesel
particulate filters, or DPFs, and diesel oxidation catalysts, or DOCs, and
products for the verified retrofit and non-retrofit OEM markets through our
distribution/dealer network and direct sales. We believe we offer one of the
industry's most comprehensive portfolios of emissions control systems for use in
engine retrofit programs that have been evaluated and verified as compliant with
applicable state and federal regulations, as well as regulations imposed by
several European countries. We have received certification from the Verification
of Emission Reduction Technologies Association (VERT) for our Purifilter®
exhaust gas recirculation (EGR) diesel particulate filter system, which expands
our retrofit market opportunities into South America and other international
locations. Sales of emissions control systems by our Heavy Duty Diesel Systems
division are driven by the regulation of diesel emissions, particularly in the
State of California. Revenues from our Heavy Duty Diesel Systems division
accounted for 42% and 40% of the total consolidated revenues for the three
months ended March 31, 2016 and 2015, respectively.



                                       15

--------------------------------------------------------------------------------
  Table of Contents



Strategy



We are in the process of transitioning from being a niche manufacturer of
emissions control solutions for the automotive and heavy duty diesel markets to
becoming an advanced materials technology provider of proprietary powders for
these markets. We believe that the transition to a powder-to-coat (P2C™)
business model will allow us to achieve greater scale and higher return on our
technology investment than in the past. In the short term, we expect to focus
our efforts and resources in pursuing opportunities in fast growing markets in
China, India and North America that we believe can be served profitably with our
powder-to-coat business model.



In support of this strategy, we have filed approximately 215 patents that
underpin next-generation technology for our advanced zero-PGM and low-PGM
catalysts, and during 2015 and early 2016, we completed an initial series of
vehicle tests to validate our next-generation technologies. Based on the success
of these tests, we are beginning to make our new catalyst technologies available
to OEMs and other catalytic coaters for use in proprietary powder form, and we
foresee multiple paths to market our new technologies.



In 2014, we were awarded two significant patents for our new Spinel™ technology,
a proprietary clean emissions exhaust platform aimed at improved catalytic
performance, which we believe will dramatically reduce the cost of compliance
with more stringent clean-air requirements. This is becoming increasingly
relevant as new standards, such as the EPA's Tier 3, become effective and are
expected to require increased loadings of PGMs to achieve compliance with
conventional catalyst formulation technology.



Recent Developments



Promissory Note and Amendments to Loan Agreements



On April 1, 2016, we executed a Promissory Note (the "Kanis Note") and entered
into an amendment of existing loan agreements (the "Kanis Agreement") with Kanis
S.A. Pursuant to the terms of the Kanis Note, Kanis S.A. agreed to lend us $2.0
million at 8% per annum and a maturity date of September 30, 2017. Pursuant to
the terms of the Kanis Agreement, we agreed to amend prior loans with an
aggregate outstanding principal balance of $7.5 million (collectively, the "Loan
Agreements"), such that: (i) Kanis S.A. shall have the right to convert the
principal balance of the Loan Agreements and any accrued interest thereon into
CDTI common stock at any time prior to maturity at a conversion price equal to
the lower of the closing price of CDTI's common stock on the date before the
date of the Kanis Agreement or as of the date when Kanis S.A. exercises its
conversion right; and (ii) we shall have the right to mandatorily convert the
$7.5 million principal balance and any accrued interest thereon into the common
stock of CDTI upon maturity of the Loan Agreements or earlier upon the
occurrence of a Liquidity Event at a conversion price equal to the lower of the
closing price of CDTI as of the date immediately before the date of the Kanis
Agreement or at a 25% discount to the Liquidity Event price. A Liquidity Event
is defined as a strategic investment in CDTI or a public stock offering by CDTI.
We may prepay the principal and any interest due on the Loan Agreements at any
time before their maturity date without penalty.



Director Convertible Promissory Note



On April 11, 2016, we executed a Convertible Promissory Note (the "Director
Note") with Lon E. Bell, Ph.D., one of our Directors. Pursuant to the terms of
the Director Note, Mr. Bell agreed to lend us $0.5 million at 8% per annum and a
maturity date of September 30, 2017. Mr. Bell has the right to convert the
principal balance of the Director Note and any accrued interest thereon into
common stock of CDTI at any time prior to maturity at a conversion price equal
to the lower of the closing price of CDTI on the date before the date of the
Director Note or as of the date when Mr. Bell exercises his conversion right. We
shall have the right to mandatorily convert the principal balance of the
Director Note and any accrued interest thereon into the common stock of CDTI
upon maturity at a conversion price equal to the lower of the closing price of
CDTI on the date before the date of the Director Note or on the maturity date.
We shall also have the right to mandatorily convert the principal amount of the
Director Note plus accrued interest thereon into the common stock of CDTI
concurrently with the closing of a Liquidity Event at a conversion price equal
to the lower of the closing price of CDTI as of the date immediately before the
date of this Director Note or at a 25% discount to the Liquidity Event price. A
Liquidity Event is defined as a strategic investment in CDTI or a public stock
offering by CDTI.


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.



                                       16

--------------------------------------------------------------------------------

Table of Contents



We believe that the assumptions, judgments and estimates involved in the
accounting for revenue recognition, allowance for doubtful accounts, inventory
valuation, product warranty reserves, accounting for income taxes, goodwill,
impairment of long-lived assets other than goodwill, stock-based compensation
and liability-classified warrants have the greatest potential impact on our
unaudited condensed consolidated financial statements. Please refer to
Management's 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
the year ended December 31, 2015 for a more complete discussion of our critical
accounting policies and estimates.



Recently Issued Accounting Guidance

Refer to Note 3(g), "Summary of Significant Accounting Policies-Recent Accounting Pronouncements".

Factors Affecting Future Results


Advanced Materials Strategy



Our strategy is to transition from being a niche manufacturer of emissions
control solutions for the automotive and heavy duty diesel OEM, retrofit and
replacement markets to becoming an advanced materials technology provider of
proprietary powders for these markets. We believe that the transition to a
powder-to-coat business model will allow us to achieve greater scale and higher
return on our technology investment than in the past. In support of this
strategy, we have filed a significant number of patents that underpin
next-generation technology for our advanced low-PGM catalysts, and we have
recently completed an initial series of vehicle tests to validate our
next-generation technologies. It is our intention to invest in developing and
commercializing these catalyst technologies. As a consequence, we anticipate
that we will continue to expand our intellectual property portfolio with
additional patents in 2016 and beyond. In addition, we will invest in other
development and marketing activities, including hiring of personnel and
incurring costs for outside testing and consulting.



DuraFit™





In the third quarter of 2014, we introduced CDTi's DuraFit™ OEM replacement DPFs
to provide an alternative to OEM manufactured parts. According to market
analysis firm Power System Research, manufacturers in North America have
produced an average of 250,000 heavy duty on-road diesel vehicles equipped with
DPFs each year since 2007 to comply with EPA requirements. The typical OEM
warranty on DPFs is 5 years and has now expired for many vehicles that entered
service between 2007 and 2011. The total population of vehicles with out of
warranty DPFs is growing rapidly creating a significant market opportunity as
those DPFs fails and require replacement.  According to a 2012 industry report,
the market for medium and heavy duty vehicle after-treatment maintenance and
repair is projected to grow from $0.5 billion in 2010 to $3.0 billion by 2017.



Announcements regarding our progress with the launch of DuraFit™ include:

The New York Department of Sanitation, or DSNY, became the first
major fleet customer for our DuraFit™ OEM replacement DPFs. The DSNY operates
the largest municipal-owned sanitation fleet in the world consisting of
approximately 3,000 vehicles including refuse collection trucks and mechanical
street sweepers.

† We signed a National Distribution Agreement, pursuant to which DuraFit™ will be sold under a private label to hundreds of retailers in the North American aftermarket.

†          We signed a multi-year contract with PACCAR Parts to distribute
DuraFit™ to its North American network of more than 670 Peterbilt and Kenworth
dealerships. Shipments to PACCAR Parts are expected to commence this year.

† We opened four new distribution centers in the U.S., further strengthening our best-in-class service model and enabling us to more efficiently meet order fulfillment and the technical support and service needs of our end customers.


†          We announced DuraFit™ diesel oxidation catalyst for the heavy duty
aftermarket. Leveraging our SPGM™ technology, this OEM quality DOC transforms
exhaust stream pollutants into less harmful compounds, enhances DPF performance
and reduces the need for costly PGMs.

†          We partnered with Hino Motors, Ltd. to distribute DuraFit™ DPFs and
DOCs to its North American network of more than 300 dealerships. Shipments to
Hino commenced during the first quarter of 2016.




Sales of CDTi's DuraFitTM OEM replacement parts increased significantly during 2015 and are expected to grow substantially in 2016 and beyond.

                                       17

--------------------------------------------------------------------------------

Table of Contents

Customer Dependency and Relationship with Honda




Historically, we have derived a significant portion of our revenue from a
limited number of customers. Sales to Honda represented 57% of our revenues for
both the three months ended March 31, 2016 and for the year ended December 31,
2015. However, based on discussions with Honda, and acceleration of our
powder-to-coat strategy, we anticipate that our supply of coated catalysts to
Honda will begin to significantly decline in the second half of 2017, as certain
current vehicle models are phased out. Accordingly, it will be critical that our
advanced materials business strategy produces revenue with new customers, which
may include Honda, directly or indirectly, to replace those from our current
core catalyst business.



In conjunction with our longstanding relationship with Honda, we entered into a
joint research agreement with the motorcycle division of Honda regarding the
development of ZPGM™ catalysts for motorcycles. The agreement was signed in
2010, extended in 2012 and expired in March 2014, although confidentiality
provisions continue to survive. The agreement provides that technology within
the scope of the agreement developed solely by one party is owned by that party,
and that technology within the scope of the agreement that is jointly developed
by both parties is jointly owned. While we believe that core technology within
the scope of the agreement was developed solely by us, there can be no assurance
that our belief will not be challenged or invalidated. To the extent that Honda
is a joint owner of critical technology developed under the agreement, Honda
(including its automotive division) might not be required to pay us a license or
royalty fee for use of the jointly owned technology; Honda may be able to
manufacture its own catalysts based on the jointly owned technology; and Honda
may be able to license the jointly owned technology to others without our
consent. In addition, under the terms of the agreement, we may not be able to
license jointly owned technology to others without Honda's consent. Our
inability to license jointly owned technology to others could adversely affect
the ability to license certain technology.




Government Funding and Standards




The nature of our business is heavily influenced by government funding of
emissions control projects and increased emission control regulations and
mandates. Compliance with these regulatory initiatives drives demand for our
products and the timing of the implementation of emission reduction projects. We
believe that, due to the constant focus on the environment and clean air
standards throughout the world, it can be expected that new and more stringent
regulations, both domestically and abroad, will continually be adopted,
requiring the ongoing development of new products that meet these standards.
However, the availability of funding to incentivize the adoption of emission
reduction programs is often one-off, which means that such funding does not
generally result in a regular source of recurring revenues for us.




Macroeconomic Factors Impacting the Automotive Industry




Since the customers of our Catalyst division are primarily OEM auto makers, this
division is generally affected by macroeconomic factors impacting the automotive
industry. Demand for our products is tied directly to the demand for vehicles.
Accordingly, factors that affect the truck and automobile markets have a direct
effect on our business, including factors outside of our control, such as
vehicle sales slowdowns due to economic concerns, or as a result of natural
disasters, including earthquakes and/or tsunamis.



In addition, our business, operations, results of operation and financial
condition may be affected by other factors, including those discussed in
Part I, Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the year
ended December 31, 2015, and our other filings with the Securities and Exchange
Commission, or SEC.



Results of Operations



The tables in the discussion that follow are based upon the way we analyze our
business. For additional information regarding our business divisions, refer to
Note 13, "Segment Reporting and Geographic Information".



                                       18

--------------------------------------------------------------------------------

Table of Contents




Comparison of Three Months Ended March 31, 2016 to Three Months Ended March 31,
2015



Revenues



                                            Three Months Ended March 31,
                                         % of                   % of
                                        Total                  Total         Change
                              2016     Revenues     2015      Revenues      $        %
                                                  ($ in thousands)
Catalyst                    $ 6,543         67%   $  6,811         66%   $ (268)    (4)%
Heavy Duty Diesel Systems     4,088         42%      4,152         40%      (64)    (2)%
Intercompany revenues          (885)       (9)%       (622)       (6)%     (263)   (42)%
Total revenues              $ 9,746        100%   $ 10,341        100%   $ (595)    (6)%




Excluding intercompany revenues, Catalyst division revenue decreased due to
reduced production of certain niche models for our Japanese OEM customer,
partially offset by an increase in volume for our main production model. The
first quarter of 2015 also included a ramp in volume for the new model that we
started production in January of 2015, that we announced in March of 2015.



Revenues for the Heavy Duty Diesel Systems division remained fairly consistent
for the periods with DuraFit sales increasing $0.2 million with the balance of
sales in the division, including retrofit decreasing by $0.3 million.




We eliminate intercompany revenues from the Catalyst division to our Heavy Duty Diesel Systems division in consolidation.



Gross profit



                                                     Three Months Ended March 31,
                                             % of                       %

of Percentage point change

                              2016       Revenues (1)     2015      Revenues (1)    in gross profit margin
                                                           ($ in thousands)
Catalyst                    $  1,783              27%   $  1,746              26%             1%
Heavy Duty Diesel Systems        999              24%      1,138              27%            (3)%
Intercompany eliminations       (45)                -        (66)               -              -
Total gross profit          $  2,737              28%   $  2,818              27%             1%

--------------------------------------------------------------------------

(1) Division calculations based on division revenues. Total based on total revenues.

The gross margin for our Catalyst division remained fairly consistent.




The gross margin for our Heavy Duty Diesel Systems division decreased primarily
due to certain costs associated with shutting down our Canadian facility and
transitioning the manufacturing from that facility to an outside party.



Operating expenses



                                         Three Months Ended March 31,
                                     % of                   % of
                                    Total                  Total            Change
                         2016      Revenues     2015      Revenues        $         %
                                               ($ in thousands)
Selling, general and
administrative         $   3,400        35%   $   3,407        33%    $    (7)        0%
Research and
development                1,762        18%       2,119        20%        (357)    (17)%
Severance and other
charges                      792         8%           6         0%         786    13100%
Total operating
expenses               $   5,954        61%   $   5,532        53%    $    422        8%




Selling, general and administrative expenses




Expense was relatively unchanged compared to the prior period last year.
Payroll for the sales organization was increased with key hires that were made
in the second half of 2015 to grow DuraFit™ and our advanced materials strategy,
offset by decreases in payroll in the general and administrative area as result
of the closure of our Markham facility and changes made at our Corporate office.
There was also in increase in stock compensation as a result of awards made in
2015.



Research and development expenses




The decrease is primarily a result of reduced outside testing of our advanced
materials, as the fundatmental research of our new key materials, such as
SPGM-DOC™, BMARS™ and Spinel™, have largely transitoned out of the fundamental
research into applications development for specific market opportunities.



                                       19

--------------------------------------------------------------------------------
  Table of Contents



Severance and other charges



The increase was due to the recent closure of our Canadian facility.



Other income (expense)



                                   Three Months Ended March 31,
                                                         Change
                                 2016      2015        $        %
                                         ($ in thousands)
Interest expense               $  (392)   $ (276)   $ (116)    (42)%
Other income, net                  416       118       298    (253)%
Total other income (expense)   $    24    $ (158)   $  182      115%




The increase in total other income (expense) was primarily due warrant liability
re-measurements, partially offset by foreign currency exchange losses. Further,
interest expense increased due primarily to an increase in our line of credit
balance.



Income Tax Expense (Benefit)



We incurred income tax benefit of $0.4 million in the three months ended
March 31, 2016. The effective income tax rates were 13.2% and (5.5)% for the
three months ended March 31, 2016 and 2015, respectively. For interim income tax
reporting, we estimate our annual effective tax rate and apply it to our
year-to-date pre-tax loss. Tax jurisdictions with a projected or year-to-date
loss for which a tax benefit cannot be realized are excluded from the annualized
effective tax rate. The difference between our effective tax rate and the U.S.
statutory tax rate is primarily related to the valuation allowance offsetting
the deferred tax assets in both the U.S. and United Kingdom jurisdictions as
well as to a foreign tax rate differential related to Sweden and Canada.




Liquidity and Capital Resources




Historically, the revenue that we have generated has not been sufficient to fund
our operating requirements and debt servicing needs. Notably, we have suffered
recurring losses since inception. As of March 31, 2016, we had an accumulated
deficit of $202.4 million compared to $199.6 million at December 31, 2015. We
have also had negative cash flows from operations from inception. Our primary
sources of liquidity in recent years have been asset sales, credit facilities
and other borrowings and equity sales.



We had $1.6 million in cash at March 31, 2016 compared to $3.0 million at
December 31, 2015. At March 31, 2016, $0.9 million of our cash was held by
foreign subsidiaries in Canada, Sweden and the United Kingdom. We do not intend
to repatriate any amount of this cash to the United States as it will be used to
fund our subsidiaries' operations. If we decide to repatriate unremitted foreign
earnings in the future, it could have negative tax implications.



We have a $7.5 million secured demand financing facility backed by our
receivables and inventory with Faunus Group International, Inc., or FGI, that
terminates on August 15, 2016 and may be extended at our option for additional
one-year terms. However, FGI can cancel the facility at any time. For details
regarding the FGI facility, refer to the "-Description of Indebtedness"
discussion below. At March 31, 2016, we had $4.1 million in borrowings
outstanding under this facility with $3.4 million available, subject to the
availability of eligible accounts receivable and inventory balances for
collateral. However, there is no guarantee that we will be able to borrow to the
full limit of $7.5 million if FGI chooses not to finance a portion of our
receivables or inventory.



On May 15, 2012, we filed a shelf registration statement on Form S-3 with the
SEC, or the Shelf Registration, which permits us to sell, from time to time, up
to an aggregate of $50.0 million of various securities. However, we may not sell
our securities in a primary offering pursuant to the Shelf Registration or any
other registration statement on Form S-3 with a value exceeding one-third of our
public float in any 12-month period (unless our public float rises to
$75.0 million or more). On May 19, 2015, we filed a shelf registration statement
on Form S-3 with the SEC to replace the existing Shelf Registration, or the
Replacement Shelf, which was declared effective on November 17, 2015. Shelf
registration statements are intended to provide us with additional flexibility
to access capital markets for general corporate purposes, subject to market
conditions and our capital needs.



On February 12, 2016, a special meeting of our stockholders was held, and at the
meeting, our stockholders voted to approve an amendment to our Restated
Certificate of Incorporation to increase the number of authorized shares from
24.1 million shares to 100.0 million shares. Further, on February 12, 2016, we
filed with the Secretary of State of Delaware a Certificate of Amendment to the
Restated Certificate of Incorporation which increased the number of authorized
shares from 24.1 million shares to 100.0 million shares, ninety nine million
nine hundred thousand (99.9 million) of which are designated as common stock and
one hundred thousand (0.1 million) of which are designated as preferred stock.
The additional authorized shares and Replacement Shelf registration statements
are intended to provide us with additional flexibility to access capital markets
for general corporate purposes, subject to market conditions and our capital
needs.



                                       20

--------------------------------------------------------------------------------

Table of Contents



On April 1, 2016, we executed a Promissory Note and entered into an amendment of
existing loan agreements with Kanis S.A. Pursuant to the terms of the Kanis
Note, Kanis S.A. agreed to lend us $2.0 million at 8% per annum and a maturity
date of September 30, 2017. Pursuant to the terms of the Kanis Agreement, we
agreed to amend prior loans with an aggregate outstanding principal balance of
$7.5 million, such that: (i) Kanis S.A. shall have the right to convert the
principal balance of the Loan Agreements and any accrued interest thereon into
CDTI common stock at any time prior to maturity at a conversion price equal to
the lower of the closing price of CDTI's common stock on the date before the
date of the Kanis Agreement or as of the date when Kanis S.A. exercises its
conversion right; and (ii) we shall have the right to mandatorily convert the
$7.5 million principal balance and any accrued interest thereon into the common
stock of CDTI upon maturity of the Loan Agreements or earlier upon the
occurrence of a Liquidity Event at a conversion price equal to the lower of the
closing price of CDTI as of the date immediately before the date of the Kanis
Agreement or at a 25% discount to the Liquidity Event price. A Liquidity Event
is defined as a strategic investment in CDTI or a public stock offering by CDTI.
We may prepay the principal and any interest due on the Loan Agreements at any
time before their maturity date without penalty.



On April 11, 2016, we executed a Convertible Promissory Note with Lon E. Bell,
Ph.D., one of our Directors. Pursuant to the terms of the Director Note,
Mr. Bell agreed to lend us $0.5 million at 8% per annum and a maturity date of
September 30, 2017. Mr. Bell has the right to convert the principal balance of
the Director Note and any accrued interest thereon into common stock of CDTI at
any time prior to maturity at a conversion price equal to the lower of the
closing price of CDTI on the date before the date of the Director Note or as of
the date when Mr. Bell exercises his conversion right. We shall have the right
to mandatorily convert the principal balance of the Director Note and any
accrued interest thereon into the common stock of CDTI upon maturity at a
conversion price equal to the lower of the closing price of CDTI on the date
before the date of the Director Note or on the maturity date. We shall also have
the right to mandatorily convert the principal amount of the Director Note plus
accrued interest thereon into the common stock of CDTI concurrently with the
closing of a Liquidity Event at a conversion price equal to the lower of the
closing price of CDTI as of the date immediately before the date of this
Director Note or at a 25% discount to the Liquidity Event price. A Liquidity
Event is defined as a strategic investment in CDTI or a public stock offering by
CDTI.



We continue to pursue development of our DuraFitTM product line and its
distribution channels, as well as developing sales opportunities in developing
countries like India and China for our catalyst technology. Opportunities such
as these require cash investment in operating expenses and working capital such
as inventory and receivables prior to realizing profits and cash from sales.
Additionally, as previously discussed, we intend to pursue aggressive
development of our materials science platform which will require cash
investment.



Based on our current cash levels and our current and anticipated usage of cash
resources, we will require additional financing in the form of funding from
outside sources during the second or third quarter of 2016. We will evaluate the
amount of cash needed, and the manner in which such cash will be raised, on an
ongoing basis. Our continuation as a going concern is dependent upon our ability
to obtain adequate additional financing, including financing from equity sales
and asset divestitures. Presently, we are not in compliance with continued
listing requirements of The NASDAQ Stock Market LLC (NASDAQ), as discussed in
Part II - Item 1A. Risk Factors of this quarterly report, and our common stock
is at risk of being delisted from The NASDAQ Capital Market. If our common stock
is delisted, and during the period in which our common stock is at risk of being
delisted, it will be more difficult for us to raise equity financing. There is
no assurance that we will be able to obtain such financing or achieve projected
levels of revenue and maintain access to sufficient working capital, and
accordingly, there is substantial doubt as to whether our existing cash
resources and working capital are sufficient to enable us to continue our
operations for the next twelve months. If we are unable to obtain the necessary
capital, we will be forced to license or liquidate our assets, significantly
curtail or cease our operations and/or seek reorganization under the U.S.
Bankruptcy Code.




The following table summarizes our cash flows for the periods indicated.



                                      Three Months Ended March 31,
                                                              Change
                                2016         2015          $         %
                                            ($ in thousands)
Cash provided by (used in):
Operating activities          $ (1,877 )   $ (2,987 )   $ 1,110      37 %
Investing activities          $   (109 )   $   (131 )   $    22     (17 )%
Financing activities          $    606     $    264     $   342     130 %




Cash used in 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 flows were largely impacted by the
loss from operations, adjusted for non-cash items, including depreciation and
amortization, stock-based compensation, change in fair value of the
liability-classified warrants, and foreign currency gains. The cash flows of the
current year period were also impacted by the timing of vendor payments, sales
and collections, and other working capital changes.




Cash provided by financing activities

The increase in cash provided by financing activities was due to additional borrowings under our line of credit.

                                       21

--------------------------------------------------------------------------------
  Table of Contents



Description of Indebtedness



                                                        March 31,       December 31,
                                                           2016             2015
                                                              ($ in thousands)
Line of credit with FGI                                 $     4,109     $     3,513
$1.5 million, 8% shareholder note due 2018                    1,625         

1,623

$3.0 million, 8% subordinated convertible
shareholder notes due 2018                                    2,975         

2,972

$3.0 million, 8% shareholder note due 2018                    2,968           2,964
                                                        $    11,677     $    11,072




We have a $7.5 million secured demand facility with FGI backed by our
receivables and inventory. The FGI facility expires on August 15, 2016 and may
be extended at our option for additional one-year terms. However, FGI can cancel
the facility at any time.



Under the FGI facility, FGI can elect to purchase eligible accounts receivables
from us and certain of our subsidiaries at up to 80% of the value of such
receivables (retaining a 20% reserve). At FGI's 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 against eligible
inventory up to the inventory sublimit as determined by FGI subject to the
aggregate $7.5 million limit under the FGI facility and certain other
conditions. At March 31, 2016, the inventory sublimit was the lesser of $1.5
million or 50% of the aggregate purchase price paid for accounts receivable
purchased under the FGI facility. While the overall credit limit and inventory
sublimit were not changed, borrowing against Honda inventory has been limited to
$0.2 million by FGI due to their concerns about customer concentration.



The interest rate on advances or borrowings under the FGI facility is the
greater of (i) 6.50% per annum and (ii) 2.50% per annum above the prime rate, as
defined in the FGI facility, and was 6.50% at March 31, 2016 and December 31,
2015.



We were in compliance with the terms of the FGI facility at March 31, 2016. However, there is no guarantee that we will be able to borrow the full limit of $7.5 million if FGI chooses not to finance a portion of our receivables or inventory.

For additional information on our indebtedness, refer to Note 9, "Debt".



Capital Expenditures



As of March 31, 2016, we had no material commitments for capital expenditures and no material commitments are anticipated in the near future.

Off-Balance Sheet Arrangements

As of March 31, 2016 and December 31, 2015, we had no off-balance sheet arrangements.




Commitments and Contingencies



As of March 31, 2016, other than office leases, employment agreements with key
executive officers and the obligation to fund our portion (5%) of the losses of
our Asian investment, we had no material commitments other than the liabilities
reflected in our unaudited condensed consolidated financial statement included
elsewhere in this Quarterly Report on Form 10-Q. For additional information,
refer to Note 12, "Commitments and Contingencies".



                                       22

--------------------------------------------------------------------------------

Table of Contents

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer


Source: Equities.com News (May 13, 2016 - 1:01 AM EDT)

News by QuoteMedia
www.quotemedia.com

Legal Notice