RNS Number : 0934D
Catalytic Solutions, Inc.
10 September 2008
For immediate release 10 September 2008
Catalytic Solutions, Inc.
(The "Company")
interim results for the six months ended 30 june 2008
Catalytic Solutions, Inc. (AIM:CTS and CTSU), the company behind Mixed Phase Catalyst (MPC�) technology, is pleased to announce its
interim results for the six months ended 30 June 2008.
Financial Highlights
* Revenues up 4% to $26.8 million (H1 2007: $25.7 million)
* Gross profit up 26% to $5.8 million (H1 2007: $4.6 million)
* Net Loss of $(10.2) million (H1 2007: $(4.9) million)
Operational Highlights
* Order announced today from Jacobs Engineering Group Inc. valued at approximately $16.5 million for five selective catalytic
reduction (SCR) systems to be installed at a BP Products North America, Inc. refinery
* Began supplying catalysts for the 2009 model year Acura TSX
* First order of catalytic convertors shipped under the commercial partnership agreement with Mintec (a member of the Asara Group
DMCC); received orders for an additional 120,000 catalysts expected to ship during the remainder of 2008
* Shipments to Renault for three-way catalytic convertors commenced in the second quarter of 2008; expected annual delivery value in
excess of $14 million
* Construction of the Company's new European catalyst manufacturing facility in the Czech Republic commenced
* Formed a new joint venture company, TC Catalyst Incorporated (TCC), with Tanaka Kikinzoku Kogyo KK (TKK) to supply emission
reduction catalysts throughout Asia
* Nikhil A. Mehta appointed as Chief Financial Officer and Director
* Bernard H. "Bud" Cherry appointed as non-executive Director
* Additional trading facility established on AIM for unrestricted securities
* Entry into a Loan and Security Agreement with Cycad Group, LLC for a one-time draw down of up to $3.3 million
Outlook
Commenting on the highlights and outlook, Charles F. Call, CEO of Catalytic Solutions, Inc. said:
"We have made considerable progress during the first six months of 2008. We completed the assimilation of Engine Control Systems
acquired in December 2007. The sales results for the first half reflect the continued effect of the phase out of sales to General Motors
which started in the second half of 2007. We expect a significantly stronger second half for the current year as sales to Honda, Renault and
Mintec have begun to approach levels that were anticipated earlier in the year. In addition, we are gaining traction in the energy systems
business as evidenced by the Jacobs order of approximately $16.5 million which will contribute significantly to our top line and operating
results over the next 12 months."
For further details, please contact:
Catalytic Solutions, Inc. Canaccord Adams Buchanan Communications
Charlie Call, Chief Robert Finlay Charles Ryland
Executive Officer Bhavesh Patel Ben Willey
Steve Golden, Chief Christian Goodbody
Technical Officer
Nikhil Mehta, Chief
Financial Officer Tel: 020 7466 5000
Tel: 020 7050
6500
Tel: +1 (805) 486-4649
About Catalytic Solutions, Inc.
Catalytic Solutions operates in the field of catalysis, offering catalyst-based solutions for clean utilization of fossil fuels.
Catalytic Solutions was successfully admitted to AIM (AIM:CTS and CTSU), a market operated by the London Stock Exchange plc, in November
2006. The Company is focused on the creation, manufacture and supply of emission control catalysts for motor vehicles (gasoline and diesel
engines) and energy applications (gas turbines, boilers, gensets). Catalytic Solutions' catalysts are designed to deliver high value to
customers while benefiting the global environment through air quality improvement, sustainability and energy efficiency. With over eight
million parts supplied to customers since 1996, Catalytic Solutions' proven technical and manufacturing competence meets auto-makers' most
stringent requirements. In December 2007, the Company acquired Engine Control Systems, a manufacturer of technology-based emission control
systems giving Catalytic Solutions access to European manufacturing, product testing and development. Engine Control Systems develops, manufactures and supplies a full range of custom-built
technology-based and standard emission control products for original equipment, aftermarket and retrofit applications. The products are used
for treating harmful exhaust emissions, primarily in the heavy-duty diesel market. Engine Control Systems' technology-based products change
or modify the nature of the exhaust gases, thereby reducing hazardous elements rather than simply attenuating noise. In August 2006, the
Company acquired certain tangible and intangible assets from Applied Utility Systems and established Applied Utility Systems, Inc. (a wholly
owned subsidiary of the Company) as the operating company for the new business. Applied Utility Systems is engaged in designing and
installing systems relating to the clean and efficient use of fossil fuels, outside of their use in motor vehicles. The Company currently
has operations in the USA, Canada, France, Japan, Sweden and an Asian Joint Venture.
This announcement was approved by the Audit Committee of the Board of Directors on 5 September 2008. A copy of this release will be
available on the Company's website at www.catalyticsolutions.com.
The material set forth herein is for informational purposes only and is not intended, and should not be construed, as an offer of
securities for sale into the United States or any other jurisdiction. The securities of the Company described herein have not been
registered under the U.S. Securities Act of 1933, as Amended (the "Securities Act"), or the laws of any state, and may not be offered or
sold within the United States, except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of
the Securities Act and applicable state laws. There is no present intention to register the Company's securities in the United States or to
conduct a public offering of securities in the United States.
CHAIRMAN & CEO'S STATEMENT
Overview of results and operational performance
We are pleased to report the results for the six months ended 30 June 2008 during which the Company made good operational progress. The
Company reported revenue of $26.8 million, representing an increase of $1.1 million or 4% from the $25.7 million reported for the comparable
period in 2007. Gross profit increased 26% to $5.8 million from $4.6 million in the comparable period in 2007. Gross margins increased to
22% for the six months ended 30 June 2008 from 18% for the same period last year. The net operating loss of $9.3 million for the six month
period in 2008 is $3.7 million greater than the net operating loss of $5.6 million for the same period in 2007. The first half loss was
greater than original management expectations as new business from Honda, Renault and Mintec has been delayed until the latter part of this
financial year. This new business has now commenced and is approaching the anticipated volumes. The increase in revenue in the first half of
2008 when compared to the same period last year was related to sales of the newly acquired Engine Control Systems business unit which more than offset a decline in catalyst sales due to
the previously announced phase out in business with General Motors and delays and reductions in expected sales with new customers. The
increase in gross margins was due to the higher gross margins realized in the Engine Control Systems business.
First half business review
The first half of 2008 saw our Company make significant strides in pursuit of our goals.
Light-duty vehicle business: As anticipated in our 2007 annual report, our light-duty vehicle business has secured additional business
from Honda, Renault and Mintec. The new 2009 Acura TSX business from Honda underscores our long term relationship with this important
customer. In addition, the confirmation from Renault as an approved supplier of three-way catalysts for multiple car models and the
relationship developed with Mintec last year has resulted in significant orders. Shipments to Renault and Mintec commenced in June 2008.
Together, sales to these customers will have a positive impact on the top line growth during the second half of 2008 and 2009. We believe
that we have proven our innovative technology and the associated economic benefits to our customers and anticipate that business from these
customers will continue to grow as our technology increasingly penetrates additional vehicle models with these customers.
Energy systems business: The strengthening of the management team at our Applied Utility Systems subsidiary coupled with our development
efforts during the first half of 2008 to create new solutions in the energy systems market have now begun to pay dividends. As also
announced today, we have received a significant order valued at approximately $16.5 million from Jacobs Engineering Group Inc on behalf of
BP Products North America, Inc., one of the world's largest energy companies. The order entails the design, engineering and fabrication of
five selective catalytic reduction (SCR) systems for installation at a BP Refinery located in Whiting, Indiana. This order is the initial
portion of a total project with an estimated value of $17.9 million. The balance of the order under this project is anticipated in early
2009. We believe this project validates us as a serious competitor in this market. The revenue from this project is expected to provide a
solid contribution to our top line in the second half of 2008 and 2009.
Heavy-duty diesel systems business: The integration of Engine Control Systems, acquired in December 2007, is proceeding as planned. Our
catalyst technology is expected to be offered as part of a selected Engine Control Systems portfolio of heavy-duty diesel products sometime
in the first half of 2009. As reported earlier, this acquisition facilitates our entry into several markets, including the important
retrofit market in the USA for on-road and off-road diesel applications.
Research and development: Our product development activities continue to add to our portfolio and improve our technology leadership.
The Company has introduced several next generation products for test and validation across all the key markets. This technology leadership
we believe has the potential to bring significant new revenue streams to the Company. We have also made good progress towards establishing
new strategic alliances with materials suppliers that will continue to enhance our technology development.
Europe and Asia expansion: We continued to expand our operational footprint with the establishment of the Asian joint venture with the
Tanaka Kikinzoku Kogyo KK (TKK) group in the first quarter of 2008 and with the recent commencement of construction of our new manufacturing
facility in the Czech Republic. We believe that the Asian joint venture will provide the right vehicle for us to participate in the expected
growth in key markets such as Japan, China and the rest of the Asia-Pacific region. The Czech Republic facility will be a state-of-the-art
center of production that will help us serve our existing European and Middle East customers, while giving us the capability to go after
additional business in these important regions and in India. As reported earlier, we anticipate the investment in this new facility will be
in the range of $5 to $6 million over the next 2 to 3 years and we are actively pursuing negotiations with a commercial partner to fund a
portion of this investment.
Liquidity: The increased working capital needs due to the anticipated growth in light-duty vehicle sales and the delays experienced
during the last 12 months in starting the Renault and Mintec shipments have increased the expected capital requirements of the Company. In
addition, the Company is now investing in the new and long planned Czech Republic plant necessary to support its growing European customer
demand. The Company's consolidated cash position at 30 June 2008 was $8.9 million which exceeds the $4.2 million requirement in compliance
with the terms of its borrowing facilities. Accordingly, the Company is taking a number of actions, including pursuing negotiations with a
commercial partner to fund a portion of the investment in the Czech Republic manufacturing plant and carefully controlling capital and
operating expenditures. The Company is in the process of selling its freehold premises in Ontario, Canada to enable the planned relocation
of its operations to a leasehold facility in December 2008. This sale is expected to realize approximately $1.9 million (gross) of cash upon successful closing. The Company has also put in place
a debt facility that allows a one-time draw down of up to $3.3 million. The Company has the ability to draw down on this facility on or
before 1 January 2009, which it expects to do. This is, however, only a short term facility and is repayable upon the sooner of the closing
of any financing (which results in aggregate proceeds to the Company of at least $3.0 million) and 1 July 2009. The Board and Management are
also evaluating various alternatives to raise further long term capital.
Core business strategy
Catalytic Solutions' strategy remains unchanged. We target customers within specific markets where our catalysts and catalyst systems
create significant economic value for our customers, and the Company is able to capture a meaningful share of the added value as profit. We
intend to continue to supply the light-duty motor vehicle market with a focus on sales growth in diesel applications while maintaining a
strong base for the business in gasoline engine catalytic converters. Diversity is a key element of our strategic plan. New markets and
applications in energy/power generation and heavy-duty diesel emission control systems provide the opportunity for higher margins through
diversification beyond the three-way catalyst market. The Company intends to expand its capabilities in these areas through strategic
acquisitions and partnerships that create more effective market and sales channels to sell more catalysts.
Technology
Catalytic Solutions has developed and owns intellectual property rights to a novel technology for creating and manufacturing catalysts
known as Mixed Phase Catalyst (MPC�). Catalytic Solutions' technology involves the self-assembly of a ceramic oxide matrix with catalytic
metals precisely positioned within three-dimensional structures.
The MPC� design gives Catalytic Solutions catalyst products two critical attributes which differentiate them from competing offerings:
* Superior stability that allows heat-resistant high performance with very low levels of precious metals; and
* Base metal activation allows base metals to be used instead of costly platinum group metals (PGM) without compromising catalytic
performance.
Catalytic Solutions made significant progress in translating these key attributes to product development initiatives in 2007 for diesel
and gasoline-powered applications in addition to energy/power generation emissions control. Key technical milestones were attained in
further reductions in PGM usage in three-way catalysts for gasoline engines - advances that will considerably strengthen commercial
prospects for Catalytic Solutions' customers. Major progress has also been made in diesel oxidation catalysts (DOC) - where high performance
products are now available for light- and heavy-duty opportunities with reduced PGM cost.
Zero-PGM product development - the breakthrough impact of MPC� design - has accelerated across all segments. The Zero-PGM technology was
targeted at diesel filters to control particulates; de-NOx catalysts for diesel and energy applications and active development under way
with a major OEM on three-way catalysts for gasoline engines. These advances have set the stage for continued potential commercial
opportunities across all segments in the second half of 2008 and beyond.
Catalytic Solutions continues to strengthen its intellectual property portfolio having filed several patents during the first half of
2008 for the expanding portfolio of low-PGM and activated base metal products.
Summary and outlook
In summary, our Company has developed quite significantly during the first six months of 2008. Commercially, we are in a stronger
position than at any other time in recent years. The new business generated during the first half of 2008 is expected to contribute to
significantly higher revenue in the second half of 2008 and in 2009. We continue to closely monitor our cash position and will take
appropriate action this year to strengthen our liquidity and raise the necessary capital. We have three vibrant businesses, which together
are expected to provide a platform for growth and improved financial performance in the second half of 2008 and continuing well into the
future as we continue to leverage our core catalyst technology and selectively penetrate new markets with new solutions.
Alexander "Hap" Ellis, III Charles F. Call
Non-Executive Director, Chairman Chief Executive Officer
BUSINESS & FINANCIAL REVIEW
The Company reports its interim 2008 financial results under U.S. GAAP, consistent with prior periods and the placing and admission to
AIM.
Business overview
Catalytic Solutions operates in the field of catalysis, offering catalyst-based solutions for the clean utilization of fossil fuels.
Catalytic Solutions was successfully admitted to AIM (AIM:CTS and CTSU), a market operated by the London Stock Exchange plc, in November
2006. The Company is focused on the creation, manufacture and supply of emission control catalysts for motor vehicles (gasoline and diesel
engines) and energy applications (gas turbines, boilers, gensets). Catalytic Solutions' catalysts are designed to deliver high value to
customers, while benefiting the global environment through air quality improvement, sustainability and energy efficiency. With over eight
million parts supplied to customers since 1996, Catalytic Solutions' proven technical and manufacturing competence meets auto-makers' most
stringent requirements. In December 2007, the Company acquired Engine Control Systems, a manufacturer of technology-based emission control
systems, giving Catalytic Solutions access to European manufacturing, product testing and development. Engine Control Systems develops, manufactures and supplies a full range of custom-built
technology-based and standard emission control products for original equipment, aftermarket and retrofit applications. The products are used
for treating harmful exhaust emissions primarily in the heavy-duty diesel market. Engine Control Systems' technology-based products change
or modify the nature of the exhaust gases, thereby reducing hazardous elements rather than simply attenuating noise. In August 2006, the
Company acquired certain tangible and intangible assets from Applied Utility Systems and established Applied Utility Systems, Inc. (a wholly
owned subsidiary of the Company) as the operating company for the new business. Applied Utility Systems is engaged in designing and
installing systems relating to the clean and efficient use of fossil fuels outside of their use in motor vehicles.
The Company currently has operations in the USA, Canada, France, Japan and Sweden. The Company also formed an Asian Joint Venture in the
first quarter of 2008.
Key performance indicators
The Company considers its key performance indicators to be the revenue and gross margin of its principal automotive, gasoline and diesel
light-duty vehicle (LDV) catalyst operations, revenue and margin growth in the energy/power generation and industrial boiler markets
facilitated by Applied Utility Systems, revenue, gross margin, and operating margin in the off-road and retrofit heavy-duty diesel (HDD)
operations of its Engine Control Systems subsidiary, operating expenses and operating cash flow measured against a predetermined budget, and
development progress toward commercialisation of its key growth opportunities in the light- and heavy-duty diesel markets.
6 months ended 30 June 6 months ended 30 June 2007
2008 Percentage change
$ $
Sales
Catalysts LDV 10.9M 16.7M (35)%
Applied Utility Systems 1.3M 9.1M (85)%
Engine Control Systems 14.6M - N/A
HDD
Total 26.8M 25.7M 4%
Gross profit
Catalysts LDV 0.8M 2.6M (68)%
Applied Utility Systems 0.4M 2.0M (82)%
Engine Control Systems 4.6M - N/A
HDD
Total 5.8M 4.6M 26%
Gross margin 21.7% 18.0% 380 basis points
Operating expenses 15.2M 10.2M 48%
Operating loss (9.3)M (5.6)M 67%
Company operating performance
Profit and loss accounts: The Company reported revenue of $26.8 million for the six month period ended 30 June 2008, representing an
increase of $1.1 million or 4% from the $25.7 million reported for the comparable 2007 period. Revenue growth was achieved following the
Engine Control Systems acquisition in December 2007. This partially offset anticipated declines in catalyst sales in the light-duty vehicle
business and in the energy systems business. Light-duty vehicle sales to General Motors began phasing out in the second half of 2007 and
have continued to decline through the first half of 2008, with the anticipated increases from new customers (Renault and Mintec) not
occurring until June 2008. Energy systems sales in 2007 were driven by the Flying J contract which was completed in late 2007 and the newly
announced Jacobs contract was received later than expected resulting in a revenue decline in the first half of 2008 versus last year. Gross
profit for the six months ended 30 June 2008 rose 26% to $5.8 million from $4.6 million for the comparable 2007 period and gross margin increased to 22% from 18%. Operating expenses totalled $15.2
million for six months ended 30 June 2008, up by $5.0 million or 49% from $10.2 million reported for the comparable 2007 period. The
increase in operating expenses was primarily due to the inclusion of Engine Control Systems expenses, which were not included in the prior
year, equity-based compensation expense and increased research and development expense.
The Company reported an operating loss of $9.3 million for the six months ended 30 June 2008, an increase of 66% from the operating loss
of $5.6 million reported for the comparable 2007 period. The increased operating loss was primarily due to lower catalyst and energy systems
sales and increased operating expenses as discussed above.
After taking into consideration the operating losses and interest expense, net of interest income, the Company reported a net loss of
$10.2 million or $(0.15) per share for the period ended June 30, 2008, compared to a net loss of $4.9 million or $(0.08) per share for the
period ended June 30, 2007. The diluted net loss per share excludes certain dilutive potential common shares, employee stock options and
other warrants that are convertible into the Company's common stock, as their effect is anti-dilutive on loss from continuing operations.
Balance sheet: As of 30 June 2008, the Company had cash and short term investments totalling $8.9 million compared to $28.9 million at
30 June 2007 and $17.4 million at 31 December 2007. Trade receivables of $6.2 million (net of doubtful accounts) as of 30 June 2008 were
down from $8.8 million as of 31 December 2007. Inventory of $13.6 million was up by $3.1 million from $10.5 million on 31 December 2007 as
stocks were built up in anticipation of shipments to new customers.
Cash flow: Net cash used in operating activities increased to $9.3 million for the period ended 30 June 2008 from $2.8 million used for
the comparable period in 2007. The higher cash usage was driven primarily by the higher net loss in the first half of 2008 versus the same
period in 2007.
Liquidity: The Company had net cash of $8.9 million at the end of the period. The Company is in compliance with all covenants associated
with its debt facilities. The Company has suffered recurring losses and negative cash flows from operations since its inception, resulting
in an accumulated deficit at 30 June 2008. The Company has historically funded its operations through equity and bank borrowings. As
discussed in more detail in the footnotes accompanying the financial statements, the Company has undertaken certain actions to improve
liquidity. The Company plans to raise additional capital in the near term through a combination of the sale of assets, funding from
strategic partners and other means.
Risks and uncertainties
Business history and net operating losses: The Company has a relatively short operating history as it was established in 1996, and since
inception, it has incurred recurring losses from operations. There can be no assurance that the Company will move into profitability at any
stage. There is also no assurance that any net operating losses will be available to the Company in the future as an offset against future
profits for income tax purposes.
Projections: This release includes forward-looking statements. Forward-looking statements are identified by words such as
''believe,'' ''anticipate,'' ''expect,'' ''intend,'' ''plan,'' ''will,'' ''may,'' ''should,'' ''could,'' ''think,'' ''estimate'' and
''predict,'' and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations
of future events or circumstances are forward-looking statements. We based these forward-looking statements on our current expectations and
projections about future events. Our actual results could differ materially from those discussed in, or implied by, these forward-looking
statements. Factors that could cause actual results to differ from those implied by the forward-looking statements include a number of
risks and uncertainties, described below, which could have a material impact on the Company's long term performance and prospects.
Additional factors are discussed in our AIM admission document, which was published in November 2006. The Company assumes no responsibility to update any of the forward-looking statements contained herein.
Further, any indication in this announcement of the price at which common shares have bought or sold in the past cannot be relied upon as a
guide to future performance.
Product development: Some of the Company's products for light and heavy duty diesel vehicles and energy/power generation are still in
the development or testing stage with targeted customers. The Company is developing technologies in these areas which are intended to have a
commercial application. However, there is no guarantee that such technologies will actually result in any commercial applications. The
Company's proposed operations are subject to all of the risks inherent in a developing business enterprise, including the likelihood of
continued operating losses, although the Company has sought to mitigate these risks by jointly developing its new products, where possible,
with respected partners. The likelihood of the Company's business success must be considered in light of the problems, expenses,
difficulties, complications, and delays frequently encountered in connection with the growth of an existing business, the development of
products and channels of distribution, and current and future development in several key technical fields, as well as the competitive and regulatory environment in which the Company operates.
Market acceptance: While the Directors believe that there exists a viable market for the Company's developing products, there can be no
assurance that such technology will succeed as an alternative to its competitor's existing and new products. The development of a market for
the products is affected by many factors, some of which are beyond the Company's control. The adoption cycles of the Company's key customers
are lengthy and require extensive interaction between the Company and the customer to develop an effective and reliable catalyst for a
particular application. Whilst the Company continues to develop and test products with key customers, there can be no guarantee that all
such products will be accepted and commercialized. The Company's relationships with its customers are based on purchase orders rather than
long-term formal supply agreements. However, once a catalyst has successfully completed the testing stage for a particular application, it
is generally the only catalyst used on that application and therefore highly unlikely that, unless there are any defects, the customer will try to replace that catalyst with a competing
product.
If a market fails to develop or develops more slowly than anticipated, the Company may be unable to recover the costs it will have
incurred in the development of its products and may never achieve profitability. In addition, the Directors cannot guarantee that the
Company will continue to develop, manufacture or market its products or components if market conditions do not support the continuation of
the product or component.
Commercial and strategic relationships: The Company relies on its relationships with relatively few key customers for the development of
particular applications of the Company's technology. The Company is not currently planning to actively pursue new business with certain U.S.
automakers, which previously accounted for a significant part of the Company's customer base. The success of the Company will therefore
depend on its ability to maintain other existing customer relationships and also initiate, develop and maintain beneficial commercial
relationships with other parties. The successful realization of the Company's business model requires the establishment and maintenance of
beneficial commercial and strategic relationship with other parties in the industry.
Dependency on customer sales volumes: The Company's catalysts are often incorporated into the products or processes of third parties.
The sale of such catalysts are therefore dependent on the sale of the product or process of which they form part and there can be no
assurance that such third party's products or processes will achieve commercial success.
Third party suppliers: Due to customer demands, the Company is required to source critical materials and components such as ceramic
substrates from single suppliers. Failure of one or more of the Company's key suppliers to deliver could prevent, delay or limit the Company
from supplying products because the Company would be required to qualify an alternative supplier. For certain customers, the Company is
required to purchase PGM materials. As commodities, PGM materials are subject to daily price fluctuations and significant volatility, based
on global market conditions. Historically, the cost of the PGM used in the manufacturing process has been passed through to the customer.
This limits the economic risk of changes in market prices to PGM usage in excess of nominal amounts allowed by the customer. However, going
forward there can be no assurance that the Company will continue to be successful passing PGM price risk on to its current and future
customers to minimize the risk of financial loss. Additionally, PGM material is accounted for as inventory and therefore subject to lower of cost or market adjustments on a regular basis at the end
of accounting periods. A drop in market prices relative to the purchase price of PGM could result in a write down of inventory.
Due to the high value of PGM materials, special measures have been taken to secure and insure the inventory. There is a risk that these
measures may be inadequate and expose the Company to financial loss.
Environmental concerns and possibility of litigation in the future: Customers rely upon the Company's products to meet their emissions
control standards imposed upon them by government. Failure of the catalyst to meet such standards could expose the Company to claims from
its customers. The Company's products are also integrated into goods used by consumers and therefore a malfunction or the inadequate design
of the Company's products could result in product liability claims. Any liability for environmental harm or for damages resulting from
technical faults or failures could be substantial and could materially adversely affect the Company's business and results of operations. In
addition, a well-publicized actual or perceived problem could adversely affect the market's perception of the Company's products, which
would materially impact upon the Company's financial condition and operating results.
Nikhil A. Mehta
Chief Financial Officer
CATALYTIC SOLUTIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2008 and 2007 and December 31, 2007
(In thousands, except for share information)
Assets
6/30/2008 6/30/2007 12/31/2007
( (
Unaudited Unaudited
) )
Current assets:
Cash and cash equivalents
$ 8,923 $ 28,896 $ 17,444
Short-term investments
6 - -
Trade accounts receivable, net
6,177 4,977 8,798
Inventories
13,567 4,609 10,467
Prepaid expenses and other current assets
1,697 1,999 1,455
Total current assets
30,370 40,481 38,164
Property and equipment, net
10,290 6,649 10,656
Intangible assets, net
8,194 2,995 8,734
Goodwill
7,869 2,600 7,753
Other assets
1,503 109 602
58,226 52,834 65,909
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt
450 - 408
Accounts payable
6,288 5,264 7,428
Accrued salaries and benefits
2,161 1,428 2,157
Accrued expenses
4,980 1,911 3,610
Total current liabilities
13,879 8,603 13,603
Long-term debt
16,810 3,000 15,494
Deferred tax liability
2,528 - 2,535
Total liabilities
33,217 11,603 31,632
Stockholders' equity:
Common stock, no par value. Authorized 148,500,000 shares; issued and outstanding 69,821,050 shares, 63,953,889 shares and 69,756,461
shares at June 30, 2008, June 30, 2007
and December 31, 2007, respectively
158,132 145,537 156,562
Treasury stock at $10 per share (60,000 shares at June 30, 2008, June 30, 2007 and December 31, 2007, respectively)
(100) (100) (100)
Accumulated other comprehensive income
340 5 427
Accumulated deficit
(133,363) (104,211) (122,612)
Total stockholders' equity
25,009 41,231 34,277
58,226 52,834 65,909
See accompanying notes to consolidated financial statements.
CATALYTIC SOLUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands)
6 months ended Year ended
6/30/2008 6/30/2007 12/31/2007
( (
Unaudited Unaudited
) )
Revenues $ 26,833 $ 25,719 $ 41,767
Cost of revenues 21,005 21,083 35,444
5,828 4,636 6,323
Operating expenses:
Sales and marketing 2,980 1,192 2,793
Research and development 5,703 4,019 8,682
General and administrative 6,485 5,011 10,241
In-process research and development - - 6,635
Delphi bid - - 2,668
Total operating expenses 15,168 10,222 31,019
Loss from operations (9,340) (5,586) (24,696)
Other income (expense):
Interest income 421 760 1,352
Interest expense (914) (85) (246)
Other (83) (12) 270
(576) 663 1,376
Loss before provision for income taxes (9,916) (4,923) (23,320)
Provision for income taxes 254 12 16
Net loss (10,170) (4,935) (23,336)
Loss per share:
Basic and diluted $ (0.15) $ (0.08) $ (0.36)
Weighted average number of common shares outstanding (000's):
Basic and diluted 69,700 63,954 64,371
See accompanying notes to consolidated financial statements.
CATALYTIC SOLUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
6 months ended Year ended
6/30/2008 6/30/2007 12/31/2007
( (
Unaudited Unaudited
) )
Cash flows from operating
activities:
Net loss $ (10,170) $ (4,935) $ (23,336)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization 1,757 1,434 2,798
Write-off of acquired in-process research and - - 6,635
development
Recovery of doubtful accounts, (34) - (422)
net
Stock-based compensation 375 439 921
Warrant expense for Cycad 19 - -
issuance
Deferred income taxes - - (11)
Loss on disposal of property - - 15
and equipment
Changes in operating assets
and liabilities:
Accounts receivable 2,678 (1,867) (1,624)
Inventories (3,087) (1,155) (1,914)
Prepaid expenses and other (867) 383 1,411
assets
Accounts payable (1,143) 1,315 1,175
Accrued expenses 1,119 1,574 1,894
Net cash used in operating (9,353) (2,812) (12,458)
activities
Cash flows from investing
activities:
Sales/(purchases) and maturities of (6) 799 798
available-for-sale securities
Purchases of property and (860) (502) (1,436)
equipment
Purchase of Engine Control Systems, net of cash - - (18,065)
acquired
Net cash provided by/(used (866) 297 (18,703)
in) investing activities
Cash flows from financing
activities:
Borrowings under line of 2,826 - 5,408
credit
Repayments under line of (1,228) - -
credit
Proceeds from issuance of debt - - 3,500
Net proceeds from issuance of - 34 8,663
common shares
Net proceeds from exercise of - - 34
options
Repayment of long-term debt (197) - -
Payments for debt issuance - - (492)
costs
Net cash provided by 1,401 34 17,113
financing activities
Effect of exchange rates on 297 - 115
cash
Net change in cash and cash (8,521) (2,481) (13,933)
equivalents
Cash and cash equivalents, 17,444 31,377 31,377
beginning of period
Cash and cash equivalents, end $ 8,923 $ 28,896 $ 17,444
of period
Supplemental disclosures of
cash flow information:
Cash paid during the year for:
Interest 525 - 32
Income taxes 310 13 27
Non cash investing and
financing activities:
Warrants issued for Engine - - 1,880
Control Systems acquisition
Warrants issued to Cycad 614 - -
Group, LLC
See accompanying notes to
consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Preparation
a. Description of Business
Catalytic Solutions offers catalyst-based solutions for clean utilization of fossil fuels. Catalytic Solutions was successfully admitted
to AIM (AIM:CTS and CTSU), a market operated by the London Stock Exchange plc, in November 2006. The Company is focused on the creation,
manufacture and supply of emissions control catalysts for motor vehicles (gasoline and diesel engines) and energy applications (gas
turbines, boilers, gensets). Catalytic Solutions' catalysts are designed to deliver high value to customers, while benefiting the global
environment through air quality improvement, sustainability and energy efficiency. With over eight million parts supplied to customers since
1996, Catalytic Solutions' proven technical and manufacturing competence meets auto-makers' most stringent requirements. In December 2007,
the Company acquired Engine Control Systems, a manufacturer of technology-based emission control systems giving Catalytic Solutions access
to European manufacturing, product testing and development. Engine Control Systems develops, manufactures and supplies a full range of custom-built technology-based and standard emission control
products for original equipment, aftermarket and retrofit applications. The products are used for treating harmful exhaust emissions,
primarily in the heavy-duty diesel market. Engine Control Systems' technology-based products change or modify the nature of the exhaust
gases, thereby reducing hazardous elements rather than simply attenuating noise. In August 2006, the Company acquired certain tangible and
intangible assets from Applied Utility Systems and established Applied Utility Systems, Inc. (a wholly owned subsidiary of the Company) as
the operating company for the new business. Applied Utility Systems is engaged in designing and installing systems relating to the clean and
efficient use of fossil fuels, outside of their use in motor vehicles. The Company's strategy includes focused acquisitions to accelerate
growth and propagation of our core technology. The Company attempted to acquire Delphi's Catalyst division in 2007. The Company expensed $2,668,000 related to the failed attempt to acquire that
business. The Company currently has operations in the USA, Canada, France, Japan and Sweden. In the first quarter of 2008, the Company also
formed a joint venture in Asia with Tanaka Kikinzoku Kogyo KK (TKK) to supply emission reduction catalysts throughout Asia.
b. Liquidity
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company
has suffered recurring losses and negative cash flows from operations since its inception, resulting in an accumulated deficit at June 30,
2008. The Company has funded its operations through equity sales, convertible debt, and bank borrowings.
The increased working capital needs due to the anticipated growth in light-duty vehicle sales and the delays experienced during the last
12 months in starting the Renault and Mintec shipments have increased the expected capital requirements of the Company. In addition, the
Company is now investing in the new and long planned Czech Republic plant necessary to support its growing European customer demand.
As reported in the annual report for 2007, the Company's current bank debt agreements contain certain covenants for which the Company
was in compliance at June 30, 2008. These covenants are almost exclusively based on the performance of the Company's Engine Control Systems
subsidiary, and the Company expects to meet each of these. The principal covenant that applies to the Company, exclusive of the results of
its Engine Control Systems subsidiary, requires the Company to maintain a cash amount on its balance sheet (excluding Engine Control Systems
cash) of not less than twice the amount outstanding under a $2.1 million term loan. The Company's consolidated cash position at June 30 2008
was $8.9 million which exceeds the $4.2 million requirement in accordance with these terms.
Accordingly, the Company is taking a number of actions, including pursuing negotiations with a commercial partner to fund a portion of
the investment in the Czech Republic manufacturing plant and carefully controlling capital and operating expenditures. The Company is in the
process of selling its freehold premises in Ontario, Canada to enable the planned relocation of its operations to a leasehold facility in
December 2008. This sale is expected to realize approximately $1.9 million (gross) of cash upon successful closing. The Company has also put
in place a debt facility that allows a one-time draw down of up to $3.3 million. The Company has the ability to draw down on this facility
on or before January 1, 2009. The Company expects to borrow against this facility. This is, however, only a short term facility and is
repayable upon the sooner of the closing of any financing (which results in aggregate proceeds to the Company of at least $3.0 million) and
July 1, 2009. The Board and Management are also evaluating various alternatives to raise further long term capital.
c. Preparation based on U.S. Generally Accepted Accounting Principles (U.S. GAAP)
The consolidated financial statements and accompanying notes are presented in US$ and have been prepared in accordance with U.S. GAAP.
2. Summary of Significant Accounting Policies
a. Principles of Consolidation
The consolidated financial statements include the financial statements of Catalytic Solutions, Inc. and its majority-owned subsidiaries.
All significant inter-company balances and transactions have been eliminated in consolidation.
b. Fiscal Year/Period
The Company uses a fiscal year ending on December 31.
c. Concentration of Risk
For the six months ended June 30, 2008, June 30, 2007 and twelve months ended December 31, 2007, certain customers accounted for 10% or
more of the Company's revenues as follows:
6 months ended Year ended
Customer 6/30/2008 6/30/2007 12/31/2007
( (
Unaudited Unaudited
) )
A 32% 28% 44%
B 2% 30% 23%
C - 35% 24%
For purposes of the presentation provided above, customers A and B are automotive manufacturers and customer C is a refinery. Customer C
represents the cumulative sales to the various suppliers of the end customer who designates to which suppliers to sell.
As of the six months ended June 30, 2008, June 30, 2007 and twelve months ended December 31, 2007, certain customers accounted for 10%
or more of the Company's accounts receivable balance as follows:
Customer 6/30/2008 6/30/2007 12/31/2007
( (
Unaudited Unaudited
) )
A 22% 31% 26%
B 10% - -
C - 30% 31%
Customers above, except C, are automotive manufacturers. Customer C is a refinery.
For the six months ended June 30, 2008, June 30, 2007 and twelve months ended December 31, 2007, certain vendors accounted for 10% or
more of the Company's raw material purchases as follows:
6 months ended Year ended
Vendor 6/30/2008 6/30/2007 12/31/2007
( (
Unaudited Unaudited
) )
A 20% 24% 30%
B 17% 10% 7%
C 15% 36% 30%
D 12% - -
The vendors above are substrate and chemical suppliers.
d. Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America
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: stock-based
compensation, allowance for doubtful accounts, accounting for construction-type contracts, inventory valuation, taxes, investments,
valuation of long-lived assets, and accrued liabilities. Actual results could differ from those estimates.
e. Cash and Cash Equivalents
Cash and cash equivalents of $8,923,000, $28,896,000 and $17,444,000 at June 30, 2008, June 30, 2007 and December 31, 2007,
respectively, consist of cash balances, money market mutual funds, and highly liquid corporate bonds with an initial term of less than three
months. For purposes of the consolidated statements of cash flows, the Company considers the money market funds and all highly liquid debt
instruments with original maturities of three months or less to be cash equivalents.
f. Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the
Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable. The Company determines the
allowance based on historical write*off experience and past*due balances over 60 days that are reviewed individually for collectability.
Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is
considered remote. The Company does not have any off*balance sheet credit exposure related to its customers.
g. Investments
Investments at June 30, 2008 consist of corporate bonds. The Company classifies these securities as available-for-sale. The Company held
$6,000 in investments at June 30, 2008.
Available-for-sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are reported as a separate component of other comprehensive income or loss
until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific-identification basis.
Available-for-sale securities are subject to periodic impairment review. Losses are recognized when management determines that a decline
in value is other than temporary, which requires judgment regarding the amount and timing of recovery. The impairment is charged to earnings
and a new cost basis for the security is established. To determine whether an impairment is other than temporary, the Company considers
whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating the
cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for
the impairment, the severity and duration of the impairment, changes in value subsequent to year-end and forecasted performance of the
Company issuing the security
Premiums and discounts are amortized or accreted over the life of the related available-for-sale security as an adjustment to yield
using the effective*interest method. Interest income is recognized when earned.
h. Inventories
Inventories are stated at the lower of cost (specific*identification method) or market (net realizable value). Finished goods inventory
includes materials, labor, and manufacturing overhead.
i. Property and Equipment
Property and equipment are stated at cost. Property and equipment under capital leases are stated at the present value of the minimum
lease payments. Depreciation and amortization have been provided using the straight*line method over the following estimated useful lives:
Machinery and equipment 2 - 10 years
Furniture and fixtures 2 - 5 years
Computer hardware and software 2 - 5 years
Vehicles 2 - 5 years
When an asset is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any
resulting gain or loss is recognized. Repairs and maintenance are charged to expense as incurred and major replacements or betterments are
capitalized. Property and equipment held under capital leases and leasehold improvements are amortized straight-line over the shorter of the
lease term or estimated useful life of the asset. Total depreciation at June 30, 2008, June 30, 2007 and December 31, 2007, respectively,
was $1,248,000, $1,014,000 and $2,058,000, respectively.
j. Goodwill
Goodwill is recorded when the purchase price of an acquisition exceeds the estimated fair value of the net identified tangible and
intangible assets acquired. Goodwill is tested for impairment on an annual basis and written down when impaired. The Company performed the
annual goodwill impairment testing as of October 31, 2007. It was determined that the fair value of the reporting unit (as determined using
the expected present value of future cash flows) was greater than carrying amount of the reporting unit and therefore there was no
impairment to the carrying amount of the reporting unit.
k. Purchased Intangible Assets
Purchased intangible assets are carried at cost, less accumulated amortization. Amortization is computed on a straight-line basis over
the estimated useful lives of the respective assets, ranging from 1 to 20 years. Intangible assets consist of trade names, a non-competition
agreement, patents and know-how, and work-in-progress on a construction contract, assembled and trained workforce, and customer
relationships.
l. Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax basis and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment
date. A valuation allowance against deferred tax assets is required if, based on the weight of available evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be realized. The valuation allowance should be sufficient to reduce the
deferred tax asset to the amount that is more likely than not to be realized. Beginning with the adoption of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) as of
January 1, 2007, the Company recognizes the effect of income tax positions only if those positions are more likely than not of being
sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in
recognition or measurement are reflected in the period in which the change in judgment occurs. Prior to the adoption of FIN 48, the Company
recognized the effect of income tax positions only if such positions were probable of being sustained.
m. Revenue Recognition
The Company generally recognizes revenue when products are shipped and the customer takes ownership and assumes risk of loss, collection
of the relevant receivable is probable, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. There
are certain customers whose revenue recognition policy is free on board (FOB) destination point. For these customers, revenue is recognized
upon receipt at the customer's warehouse. This generally occurs within five days from shipment date.
Applied Utility Systems accounts for revenue and earnings from construction contracts under the percentage-of-completion accounting in
accordance with AICPA Statement of Position 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts".
Under this method, Applied Utility Systems recognizes revenue measured by the percentage of cost incurred to date to estimated total cost
for each contract. This method is used because management considers total cost to be the best available measure of progress on the
contracts. Because of inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used may change
materially.
Contract cost includes all direct labor and related fringe benefits, materials installed in the project, and subcontractor costs.
Indirect labor and related fringe benefits and selling, general and administrative expenses are charged to operations as incurred.
Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in estimated
job profitability resulting from job performance, job conditions, claims, change orders, and settlements, are accounted for as changes in
estimates in the current period. Amounts representing contract change orders, claims or other items are included in revenues only when they
can be reliably estimated and realization is probable.
Engine Control Systems generally recognizes revenue when the product is shipped. For customers with FOB destination, revenue is not
recognized until delivered. For sales with associated installation, revenue is recognized upon completion of installation.
n. Research and Development
Research and development costs are generally expensed as incurred.
o. Long-Lived Assets
In accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," assets such as property, plant, and
equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value
less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be
presented separately in the appropriate asset and liability sections of the balance sheet.
p. Stock Compensation
The Company uses the modified prospective transition method for accounting for stock options as prescribed by SFAS 123R, "Share-Based
Payment," which revised SFAS 123, "Accounting for Stock-Based Compensation." In 2007, the Company modified the Plan to adopt a market
criteria. These options are valued using a Monte Carlo univariate options pricing model. At June 30, 2008, June 30, 2007 and December 31,
2007, stock-based compensation expense was $375,000, $439,000 and $921,000, respectively.
q. Foreign Currency
The functional currency of Engine Control Systems is the Canadian Dollar, while that of its subsidiaries Unikat and Engine Control
Systems AB in Sweden is the Swedish Krona. The functional currency of the Company's Japanese branch office is the Japanese Yen. Assets and
liabilities of the foreign locations are translated into U.S. dollars at period-end exchange rates. The resulting adjustments are charged or
credited directly to accumulated comprehensive income (loss) within Stockholders' Equity. Revenue and expense accounts are translated at the
average exchange rates for the period. All realized and unrealized transaction adjustments are included in other income (loss).
3. Trade Accounts Receivable
Trade accounts receivable consisted of the following:
6/30/2008 6/30/2007 12/31/2007
(Unaudited) $ (Unaudited) $ $
Non-contract trade accounts
receivable, less allowance
for doubtful accounts of
$46,000 at June 30, 2008, 5,663,000 3,368,000 5,604,000
$0 at June 30, 2007 and
$81,000 at December 31, 2007
Completed contracts 269,000 79,000 2,750,000
Contracts in progress 245,000 1,530,000 444,000
6,177,000 4,977,000 8,798,000
At June 30, 2008, June 30, 2007 and December 31, 2007, there are no amounts included in receivables under retainage provisions in
contracts.
In December 2005, the Company fully reserved an accounts receivable balance from Delphi in the amount of $422,000. The $422,000
represents the amount owed to Catalytic Solutions at the time of Delphi's filing for bankruptcy protection in October 2005. The entire
balance was reserved when the Company determined it was unlikely that Delphi would improve the priority of the debt beyond those of general
creditors and a probable loss would be incurred by the Company. In 2007, the Company sold its interest in the receivable at 102.5% of value.
The Company continues to reserve the amount as a contingent liability as the buyer has the ability to demand a refund if Delphi refused the
Company's claim.
4. Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts consisted of the following:
6 months ended Year ended
6/30/2008 6/30/2007 12/31/2007
(Unaudited) $ (Unaudited) $ $
Costs incurred on uncompleted 1,911,000 8,871,000 934,000
contracts
Estimated earnings 860,000 3,129,000 529,000
2,771,000 12,000,000 1,463,000
Less: Billings to date (3,128,000) (11,030,000) (1,349,000)
(357,000) 970,000 114,000
The following table details the net balance of $(357,000), $970,000 and $114,000 included in the accompanying balance sheet under
prepaid expense and other current assets at June 30, 2008, June 30, 2007 and December 31, 2007, respectively:
6 months ended Year ended
6/30/2008 6/30/2007 12/31/2007
(Unaudited) $ (Unaudited) $ $
Costs and estimated earnings in
excess of billings on uncompleted 149,000 1,461,000 127,000
contracts
Billings in excess of costs and
estimated earnings on uncompleted (506,000) (491,000) (13,000)
contracts
(357,000) 970,000 114,000
5. Inventories
Inventories consisted of the following:
6/30/2008 6/30/2007 12/31/2007
(Unaudited) $ (Unaudited) $ $
Finished goods 8,077,000 2,350,000 4,807,000
Work in progress 2,280,000 446,000 1,641,000
Raw materials 3,210,000 1,813,000 4,019,000
13,567,000 4,609,000 10,467,000
6. Property and Equipment
Property and equipment consisted of the following:
6/30/2008 6/30/2007 12/31/2007
(Unaudited) $ (Unaudited) $ $
Buildings and land 2,489,000 - 2,510,000
Furniture and fixtures 2,912,000 2,440,000 2,753,000
Computer hardware and software 3,170,000 2,010,000 2,551,000
Machinery and equipment 15,085,000 12,929,000 15,000,000
Vehicles 131,000 172,000 131,000
23,787,000 17,551,000 22,945,000
Less accumulated depreciation (13,497,000) (10,902,000) (12,289,000)
10,290,000 6,649,000 10,656,000
7. Stockholders' Equity
a. Secondary Offering on AIM of London Stock Exchange
In connection with the acquisition of Engine Control Systems on December 20, 2007, the Company completed issuance by way of a placing
(Placing) of 5,770,400 new common shares in Catalytic Solutions for net proceeds of $8,663,000 and issued warrants to purchase 3,117,115
shares of common shares as part of the consideration paid the sellers of Engine Control Systems (see warrants under section (9)(f)).
b. Warrants
In June 2008, the Company issued warrants to purchase 1,250,000 shares of common stock as part of the consideration for a standing line
of credit with Cycad Group, LLC. The warrants are valued at $614,000.
In December 2007, The Company issued warrants to purchase 3,117,115 shares of common stock to Capital Works LLC as part of the
consideration to acquire Engine Control Systems. The warrants are valued at $1,880,094 and are included as part of the purchase price of
Engine Control Systems.
The exercisable warrants and their associated exercise prices are shown below at June 30, 2008, June 30, 2007 and December 31, 2007:
6/30/2008 6/30/2007 12/31/2007
( (
Unaudited Unaudited
) )
Warrants exercisable into common stock 37,500 37,500 37,500
(issued in US$)
Exercise price $1.67 $1.67 $1.67
Warrants exercisable into common stock 4,367,115 - 3,117,115
(issued in GB�)
Exercise price $1.51 - $1.68
8. Long Term Debt
In December 2007, the Company and its subsidiaries including Engine Control Systems entered in borrowing agreements with Fifth Third
Bank as part of the cash consideration paid for the purchase of Engine Control Systems on December 20, 2007. The borrowing agreements
provided for three facilities including a revolving line of credit and two term loans. The line of credit is a two-year revolving term
operating loan up to a maximum principal amount of $10.2 million, with availability based upon eligible accounts receivable and inventory.
At June 30, 2008, the outstanding balance was $8.3 million with excess capacity of $0.1 million. The other facilities are a five-year
non-revolving term loan of up to $2.5 million and a non-revolving term loan of $3.5 million with a term longer than five years. Total
borrowing on the three facilities as of June 30, 2008 is $14.3 million. The loans are collateralized by the assets of the Company. The
interest rate on the first two facilities is variable based upon Canadian Prime Rate and the third is fixed at 13%, with a weighted average of 8.3% at December 31, 2007. The $2.5 million term loan has mandatory
repayments quarterly. The current portion is $450,000 as of June 30, 2008. The Company is also subject to covenants on minimum levels of
tangible capital funds, fixed charge coverage, earnings before income tax, depreciation and amortization, funded debt to earnings before
income tax, depreciation and amortization and a minimum cash balance in relation to the balance of facility 2. In the event of default, the
bank may demand payment on all amounts outstanding immediately. The Company is also restricted from paying Corporate Distributions in
excess of $250,000. The loan agreement also includes a material adverse change clause, exercisable if, in the opinion of the bank, there is
a material adverse change in the financial condition, ownership or operation of Engine Control Systems or the Company. If the bank deems
that a material adverse change has occurred, the bank may terminate the Company's right to borrow under the agreement and demand payment of all amounts outstanding under the agreement.
The Company has also put in place a debt facility that allows a one-time draw down of up to $3.3 million should the Company require
additional liquidity during the year. The Company has the ability to draw down on this facility on or before January 1, 2009 or the closing
of any financing which results in aggregate proceeds to the Company of at least $3.0 million. There has been no borrowing as of the date of
this report.
The Company entered into a note payable of $3,000,000 as part of the Applied Utility Systems acquisition. The note is due August 28,
2009 and accrues interest at 5.36%. At June 30, 2008 the Company had accrued $296,000 of unpaid interest on the note.
Long*term debt at June 30, 2008, June 30, 2007 and December 31, 2007 is summarized as follows:
6/30/2008 6/30/2007 12/31/2007
(Unaudited) $ (Unaudited) $ $
Line of credit 8,628,000 - 7,048,000
Note payable 3,000,000 3,000,000 3,000,000
Term loans 5,632,000 - 5,854,000
17,260,000 3,000,000 15,902,000
Less current portion (450,000) - (408,000)
16,810,000 3,000,000 15,494,000
Annual scheduled principal payments of long-term debt are: $0.2 million, $12.1 million, $0.5 million, $0.5 million, and $3.9 million for
the period ended June 30, 2008 and years ended 2009, 2010, 2011, and 2012, respectively.
9. Income Taxes
Effective January 1, 2007, the Company adopted Financial Accounting Standards Interpretation, or FIN, No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" (FIN 48). FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a
company's income tax return, and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN 48 utilizes a two-step approach for evaluating uncertain tax positions accounted for in accordance
with SFAS No. 109, "Accounting for Income Taxes" (SFAS No. 109). Step one, Recognition, requires a company to determine if the weight of
available evidence indicates that a tax position is more likely than not to be sustained upon audit, including resolution of related appeals
or litigation processes, if any. Step two, Measurement, is based on the largest amount of benefit, which is more likely than not to be realized on ultimate settlement. The cumulative effect of adopting FIN
48 on January 1, 2007 is recognized as a change in accounting principle, recorded as an adjustment to the opening balance of retained
earnings on the adoption date. As a result of the implementation of FIN 48, the Company recognized no change in the liability for
unrecognized tax benefits related to tax positions taken in prior periods, and no corresponding change in retained earnings. Additionally,
FIN 48 specifies that tax positions for which the timing of the ultimate resolution is uncertain should be recognized as long-term
liabilities. The Company made no reclassifications between current taxes payable and long term taxes payable upon adoption of FIN 48. The
Company's total amount of unrecognized tax benefits as of the January 1, 2007 adoption date and June 30, 2008 was $107 million and $125
million, respectively.
The tax years 2002 to 2007 remain open to examination by the major domestic taxing jurisdictions to which we are subject.
In assessing the potential realization of deferred tax assets, consideration is given to whether it is more likely than not that some
portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the Company
attaining future taxable income during the periods in which those temporary differences become deductible. In addition, the utilization of
net operating loss carry forwards may be limited due to restrictions imposed under applicable federal and state tax laws due to a change in
ownership. Based upon the level of historical operating losses and future projections, management believes it is more likely than not that
the Company will not realize the deferred tax assets.
10. Net Earnings per Share (EPS)
Basic net loss per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net loss
per share is computed using the weighted-average number of common shares and excludes certain dilutive potential common shares outstanding,
as their effect is anti-dilutive on loss from continuing operations. Dilutive potential common shares consist of employee stock options and
other warrants that are convertible into the Company's common stock.
Because the Company incurred losses in the periods ended June 30, 2008, June 30, 2007 and December 31, 2007, the effect of dilutive
securities totaling 9,770,000, 5,928,000 and 8,520,000 equivalent shares, respectively, has been excluded in net loss per share, as their
impact would be anti-dilutive. The basic and diluted EPS is shown in the table below:
6 months ended Year ended
6/30/2008 6/30/2007 12/31/2007
(Unaudited) $ (Unaudited) $ $
Numerator: ($)
Net loss (10,170,000) (4,935,000) (23,336,000)
Denominator:
Weighted average shares 69,700,000 63,954,000 64,371,000
Net loss per share
Basic and diluted $(0.15) $(0.08) $(0.36)
11. Related-party Transactions
One of the Company's investors is Honda Motor Company. Honda is also one of the Company's largest OEM customers accounting for in excess
of $8 million of sales for the six months ended June 30, 2008 and in excess of $7 million of sales for the six months ended June 30, 2007.
The Company pays a royalty to Honda based on a percentage of catalyst sales to non-Honda OEM automotive customers. Total royalties earned by
Honda for the six months ended June 30, 2008 and June 30, 2007 were $10,000 and $168,000, respectively. The accounts receivable balance for
Honda was $1.4 million and $1.6 million at June 30, 2008 and June 30, 2007, respectively. The accounts payable balance for Honda as of June
30, 2008 and June 30, 2007 was $5,000 and $75,000, respectively.
12. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill at June 30, 2008, June 30, 2007 and December 31, 2007, respectively, are as follows:
Balance at June 30, 2007 (Unaudited) $ 2,600,000
Acquisition of Engine Control Systems 5,031,000
Effect of translation adjustment 122,000
Balance at December 31, 2007 7,753,000
Adjustment to goodwill 124,000
Effect of translation adjustment (8,000)
Balance at June 30, 2008 (Unaudited) $ 7,869,000
Intangible assets at June 30, 2008, June 30, 2007 and December 31, 2007, respectively, are summarized as follows:
Useful life 6/30/2008 6/30/2007 12/31/2007
(Unaudited) $ (Unaudited) $ $
Trade name 15-20 years 2,284,000 1,517,000 2,307,000
Non-compete agreement 3 years 111,000 111,000 111,000
Patents and know-how 5-10 years 5,872,000 1,879,000 5,863,000
Acquired contract 1.4 years 353,000 353,000 353,000
work-in-progress
Customer relationships 8 years 1,288,000 - 1,285,000
9,908,000 3,860,000 9,919,000
Less accumulated amortization (1,714,000) (865,000) (1,185,000)
8,194,000 2,995,000 8,734,000
Aggregate amortization for amortizable intangible assets, using the straight-line amortization method, for the six months ended June 30,
2008 and June 30, 2007 and the year ended December 31, 2007 was $509,000, $420,000 and $740,000, respectively. Estimated amortization
expense for existing intangible assets for the next five years is: $414,000 in the second half of 2008, $967,000 in 2009, $1,173,000 in
2010, $941,000 in 2011, and $753,000 in 2012.
13. Segment Reporting
The Company has three operating segments:
a) Automotive gasoline and diesel light-duty vehicle catalyst operations (LDV Catalysts)
b) Energy/power generation and industrial boiler markets (Applied Utility Systems)
c) Off-road and retrofit heavy-duty diesel operations (Engine Control Systems HDD)
Light-Duty Vehicle Catalysts - The light-duty vehicle market represents our largest business segment. Catalytic Solutions applies the
catalyst coatings on catalytic converters for gasoline-powered passenger vehicles. Typically automobile catalyst suppliers use a blend of
PGM - specifically rhodium, palladium and platinum - to achieve a desired emission profile. This is a competitive marketplace, experiencing
soaring metal prices. However, the Company has proprietary catalytic coating technologies that enable it to compete with established global
suppliers at some of the world's largest automobile manufacturers, and win significant business. Catalytic Solutions has developed
world-class technologies and customers recognize that, by working collaboratively with Catalytic Solutions, they can substantially reduce
the amount of catalytic metals necessary for emission controls.
Applied Utility Systems Energy - In 2006, the Company purchased Applied Utility Systems (Applied Utility Systems), a small,
entrepreneurial engineering house that offered innovative solutions for emission controls for power plants and industrial boilers. Catalytic
Solutions brought in seasoned managers to help the Applied Utility Systems team advance their solutions on two fronts: 1) selective
catalytic reduction (SCR) technologies, where Applied Utility Systems' design and Catalytic Solutions' catalyst technologies provide a
compelling value proposition for gas-turbine operators; and 2) overall emission controls for industrial boilers, where Catalytic Solutions
and Applied Utility Systems can improve efficiency, lower pollutants and even lower carbon dioxide (CO2) emissions.
Engine Control Systems Heavy-Duty Diesel - Our second largest business segment is heavy-duty diesel, which includes a retrofit of legacy
diesel fleets with emission control systems and the emerging opportunity for new engine emission controls for off-road vehicles. In order to
aggressively compete in this sector, the Company made an important acquisition at the end of 2007. In December 2007, the Company purchased
Engine Control Systems, a Newmarket, Ontario, Canada-based innovator focused on a variety of heavy-duty vehicle applications. Engine Control
Systems facilitates the Company's point of entry into what management believes to be an even more significant niche market for the Company.
The retrofit market in the U.S.A. is driven in particular by state and municipal environmental regulations and incentive funding for
voluntary early compliance. Engine Control Systems is a market leader in retrofit with a broad portfolio of solutions verified by the
California Air Resources Board and the United States Environmental Protection Agency (U.S. EPA).
Summarized financial information for our reportable segments are shown in the following table:
6 months ended Year ended
6/30/2008 6/30/2007 12/31/2007
Net sales (Unaudited) $ (Unaudited) $ $
Catalyst LDV 10,909 16,658 29,792
Applied Utility Systems - 1,320 9,061 11,633
Energy
Engine Control Systems - HDD 14,604 - 342
Total 26,833 25,719 41,767
Operating income (loss)
Catalyst LDV (9,284) (6,811) (18,636)
Applied Utility Systems - (1,363) 1,225 748
Energy
Engine Control Systems - HDD 1,307 - (6,808)
Total (9,340) (5,586) (24,696)
Depreciation and amortization
Catalyst LDV 933 1,401 2,697
Applied Utility Systems - 281 33 70
Energy
Engine Control Systems - HDD 543 - 31
Total 1,757 1,434 2,798
Total assets
Catalyst LDV 18,810 47,430 30,650
Applied Utility Systems - 6,553 5,404 4,748
Energy
Engine Control Systems - HDD 32,863 - 30,511
Total 58,226 52,834 65,909
Capital expenditures
Catalyst LDV 786 491 1,385
Applied Utility Systems - 27 11 51
Energy
Engine Control Systems - HDD 47 - -
Total 860 502 1,436
Net sales by geographic region are shown in the following table:
6 months ended Year ended
6/30/2008 6/30/2007 12/31/2007
(Unaudited) $ (Unaudited) $ $
United States 14,304 25,719 41,525
Canada 7,121 - 243
Europe 5,408 - (1)
Total 26,833 25,719 41,767
Net fixed assets by geographic region are shown in the following table:
6/30/2008 6/30/2007 12/31/2007
(Unaudited) $ (Unaudited) $ $
United States 7,020 6,649 7,254
Canada 2,850 - 2,987
Europe 420 - 415
Total 10,290 6,649 10,656
This information is provided by RNS
The company news service from the London Stock Exchange
END
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