##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2011
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 001-33710
 CLEAN DIESEL TECHNOLOGIES, INC.
  Delaware
    
    06-1393453(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 4567 Telephone Road, Suite 206
Ventura, CA 93003  (Address of principal executive offices) (Zip Code)
 (805) 639-9458
  þ o
 o o
  Large Accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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##### 



CLEAN DIESEL TECHNOLOGIES, INC.
 TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets
    
    
    1Condensed Consolidated Statements of Operations
    
    
    2Condensed Consolidated Statements of Cash Flows
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    30PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    31Item 1A. Risk Factors
    
    
    31Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    31Item 3. Defaults Upon Senior Securities
    
    
    31Item 4. [Removed and Reserved]
    
    
    31Item 5. Other Information
    
    
    31Item 6. Exhibits
    
    
    31SIGNATURES
    
    
    32EX-31.1EX-31.2EX-32
  EXPLANATORY NOTE
   i




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##### Table of Contents



CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
   
    
    Our auditors report for the year ended December 31, 2010
includes a going concern explanatory paragraph and we
need additional sources of funding in order to conduct our
operations for any reasonable length of time. Although we
issued $3 million of our 8% subordinated convertible notes
to Kanis S.A. on May 6, 2011, at this time no assurances
can be provided that we will have sufficient cash and
credit to sustain operations for a reasonable period of
time without obtaining additional funding;
    
    Historically, we have been dependent on a few major
customers for a significant portion of our companys
revenue and the revenue could decline if we are unable to
maintain or develop relationships with current of potential
customers, or if such customers reduce demand for our
products;
    
    Failure of one or more key suppliers to timely deliver
could prevent, delay or limit us from supplying products;
and
    
    Future growth of our business depends, in part, on market
acceptance of our catalyst products, successful
verification of our products and retention of our
verifications.
   ii




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##### Table of Contents



PART IFINANCIAL INFORMATION
 
 Item 1. Financial Statements
 CLEAN DIESEL TECHNOLOGIES, INC.
 
 Condensed Consolidated Balance Sheets

(In thousands, except share amounts)
(Unaudited)
 March 31,
    
    
    December 31,2011
    
    
    2010ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,245
    
    
    $
    5,007Accounts receivable, net
    
    
    7,460
    
    
    
    5,475Inventories
    
    
    6,097
    
    
    
    5,253Prepaid expenses and other current assets
    
    
    1,163
    
    
    
    1,818Total current assets
    
    
    15,965
    
    
    
    17,553Property and equipment, net
    
    
    3,050
    
    
    
    2,884Intangible assets, net
    
    
    7,029
    
    
    
    7,294Goodwill
    
    
    4,823
    
    
    
    4,671Other assets
    
    
    211
    
    
    
    246Total assets
    
    $
    31,078
    
    
    $
    32,648LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Line of credit
    
    $
    2,539
    
    
    $
    2,431Settlement obligation
    
    
    
    
    
    
    1,575Accounts payable
    
    
    6,562
    
    
    
    4,588Warrant liability
    
    
    766
    
    
    
    1,238Accrued expenses and other current liabilities
    
    
    4,206
    
    
    
    4,466Income taxes payable
    
    
    241
    
    
    
    455Total current liabilities
    
    
    14,314
    
    
    
    14,753Shareholder note payable
    
    
    1,437
    
    
    
    1,410Capital lease obligation
    
    
    38
    
    
    
    46Deferred tax liability
    
    
    1,132
    
    
    
    1,096Total liabilities
    
    
    16,921
    
    
    
    17,305Commitments and contingencies (Note 13)Stockholders equity:Preferred stock, par value $0.01 per share: authorized
100,000; no shares issued and
outstanding
    
    
    
    
    
    
    Common stock, par value $0.01 per share: authorized
12,000,000; issued and outstanding
3,987,812 and 3,959,208 shares at March 31,
2011 and December 31, 2010, respectively
    
    
    40
    
    
    
    40Additional paid-in capital
    
    
    173,848
    
    
    
    173,262Accumulated other comprehensive income (loss)
    
    
    312
    
    
    
    (239
    )Accumulated deficit
    
    
    (160,043
    )
    
    
    (157,720
    )Total stockholders equity
    
    
    14,157
    
    
    
    15,343Total liabilities and stockholders equity
    
    $
    31,078
    
    
    $
    32,648
  1




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 
 Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)
(Unaudited)
 Three Months EndedMarch 31,2011
    
    
    2010Revenues
    
    $
    13,784
    
    
    $
    12,445Cost of revenues
    
    
    9,777
    
    
    
    8,839Gross margin
    
    
    4,007
    
    
    
    3,606Operating expenses:Selling, general and administrative
    
    
    4,551
    
    
    
    3,037Research and development
    
    
    1,514
    
    
    
    988Recapitalization expense
    
    
    
    
    
    
    167Gain on sale of intellectual property
    
    
    
    
    
    
    (3,900
    )Total operating expenses
    
    
    6,065
    
    
    
    292(Loss) income from operations
    
    
    (2,058
    )
    
    
    3,314Other income (expense):Interest income
    
    
    6
    
    
    
    3Interest expense
    
    
    (213
    )
    
    
    (147
    )Other income (expense), net
    
    
    167
    
    
    
    (297
    )Total other expense
    
    
    (40
    )
    
    
    (441
    )(Loss) income from continuing operations before income taxes
    
    
    (2,098
    )
    
    
    2,873Income tax expense from continuing operations
    
    
    222
    
    
    
    206Net (loss) income from continuing operations
    
    
    (2,320
    )
    
    
    2,667Net loss from operations of discontinued Energy Systems division
    
    
    (3
    )
    
    
    (75
    )Net (loss) income
    
    $
    (2,323
    )
    
    $
    2,592Basic net (loss) income per share:Net (loss) income from continuing operations per share
    
    $
    (0.58
    )
    
    $
    4.85Net loss from discontinued operations per share
    
    
    
    
    
    
    (0.14
    )Net (loss) income per share
    
    $
    (0.58
    )
    
    $
    4.71Diluted net (loss) income per share:Net (loss) income from continuing operations per share
    
    $
    (0.58
    )
    
    $
    4.83Net loss from discontinued operations per share
    
    
    
    
    
    
    (0.13
    )Net (loss) income per share
    
    $
    (0.58
    )
    
    $
    4.70Weighted-average number of common shares outstanding:Basic
    
    
    3,984
    
    
    
    550Diluted
    
    
    3,984
    
    
    
    552
  2




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CLEAN DIESEL TECHNOLOGIES, INC.
 
 Condensed Consolidated Statements of Cash Flows

(In thousands)
(Unaudited)
 Three Months EndedMarch 31,2011
    
    
    2010Cash flows from operating activities:Net (loss) income
    
    $
    (2,323
    )
    
    $
    2,592Loss from discontinued operations
    
    
    3
    
    
    
    75Adjustments to reconcile net (loss) income to cash used in operating activities:Depreciation and amortization
    
    
    584
    
    
    
    310Recovery of doubtful accounts
    
    
    (2
    )
    
    
    (14
    )Compensation expense for options
    
    
    320
    
    
    
    46Amortization of debt discount and accretion of debt payment premium
    
    
    27
    
    
    
    Accelerated amortization of debt issuance costs
    
    
    75
    
    
    
    (Gain) loss on unconsolidated affiliate
    
    
    (10
    )
    
    
    56Loss on foreign currency transactions
    
    
    199
    
    
    
    301Gain on disposal of property and equipment
    
    
    (22
    )
    
    
    Gain on sale of intellectual property
    
    
    
    
    
    
    (3,900
    )Change in fair value of liability-classified warrants
    
    
    (433
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (1,847
    )
    
    
    2,069Inventories
    
    
    (721
    )
    
    
    (310
    )Prepaid expenses and other assets
    
    
    700
    
    
    
    750Accounts payable
    
    
    1,919
    
    
    
    57Income taxes payable
    
    
    (244
    )
    
    
    (538
    )Accrued expenses and other current liabilities
    
    
    (312
    )
    
    
    (1,550
    )Cash used in operating activities of continuing operations
    
    
    (2,087
    )
    
    
    (56
    )Cash used in operating activities of discontinued operations
    
    
    (3
    )
    
    
    (75
    )Net cash used in operating activities
    
    
    (2,090
    )
    
    
    (131
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (309
    )
    
    
    (78
    )Proceeds from sale of property and equipment
    
    
    22
    
    
    
    Proceeds from sale of intellectual property
    
    
    
    
    
    
    2,000Net cash (used in) provided by investing activities
    
    
    (287
    )
    
    
    1,922Cash flows from financing activities:Net borrowings under demand line of credit
    
    
    2,539
    
    
    
    Borrowings under line of credit
    
    
    
    
    
    
    248Repayment of line of credit
    
    
    (2,540
    )
    
    
    (2,073
    )Proceeds from exercise of warrants
    
    
    227
    
    
    
    Payment of settlement obligation
    
    
    (1,575
    )
    
    
    Repayment of capital lease obligations
    
    
    (8
    )
    
    
    (7
    )Payments for debt issuance costs
    
    
    (115
    )
    
    
    Net cash used in financing activities
    
    
    (1,472
    )
    
    
    (1,832
    )Effect of exchange rates on cash
    
    
    87
    
    
    
    (48
    )Net change in cash and cash equivalents
    
    
    (3,762
    )
    
    
    (89
    )Cash and cash equivalents at beginning of period
    
    
    5,007
    
    
    
    2,336Cash and cash equivalents at end of period
    
    $
    1,245
    
    
    $
    2,247Supplemental disclosures:Cash paid for interest
    
    $
    180
    
    
    $
    107Cash paid for income taxes
    
    $
    621
    
    
    $
    646
  3




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
 1. Organization
 a. Description of Business
  b. Merger
    c. Liquidity
     4




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CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
 2. Summary of Significant Accounting Policies
 a. Stockholders Equity
  b. Principles of Consolidation
  c. Concentration of Risk
  Three Months EndedMarch 31,Customer
    
    2011
    
    
    2010A
    
    
    24
    %
    
    
    22
    %B
    
    
    2
    %
    
    
    17
    %
    March 31,
    
    
    December 31,Customer
    
    2011
    
    
    2010A
    
    
    18
    %
    
    
    16
    %B
    
    
    3
    %
    
    
    14
    %
   Three Months EndedMarch 31,Vendor
    
    2011
    
    
    2010A
    
    
    20
    %
    
    
    22
    %B
    
    
    8
    %
    
    
    16
    %C
    
    
    11
    %
    
    
    13
    %
  5




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
 d. Use of Estimates
  e. Recapitalization Expense
  f. Net (Loss) Income per Share
   g. Comprehensive (Loss) Income
  Three Months EndedMarch 31,2011
    
    
    2010Net (loss) income
    
    $
    (2,323
    )
    
    $
    2,592Unrealized gain on foreign currency translation
    
    
    551
    
    
    
    317Comprehensive (loss) income
    
    $
    (1,772
    )
    
    $
    2,909
 h. Fair Value Measurements
  6




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
  
    
    Level 1: Quoted prices (unadjusted) in active markets for identical assets or
liabilities;
    
    Level 2: Inputs other than quoted prices included within Level 1 that are either
directly or indirectly observable including quoted prices for similar instruments in active
markets and quoted prices for identical or similar instruments in markets that are not
active; and
    
    Level 3: Unobservable inputs in which little or no market activity exists, therefore
requiring an entity to develop its own assumptions about the assumptions that market
participants would use in pricing.
   i. Accounting Changes
 ASU 2010-28, Intangibles Goodwill and Other (Topic 350):
When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative
Carrying Amounts (ASU 2010-28
 j. Reclassifications
  3. Merger with CDTI
   7




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
    Fair value of CDTI common stock at October 15, 2010
    
    $
    7,401Fair value of stock options and warrants at October 15, 2010
    
    
    171Total purchase consideration
    
    $
    7,572
   Cash and cash equivalents
    
    $
    3,916Accounts receivable
    
    
    175Inventory
    
    
    761Other assets
    
    
    326Property and equipment
    
    
    216Intangible assets
    
    
    3,306Goodwill
    
    
    246Total assets acquired
    
    
    8,946Liabilities assumed
    
    
    (1,374
    )Total purchase consideration
    
    $
    7,572
   8




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
   WeightedAverageUseful Life inYears
    
    
    Fair ValueTrade name
    
    
    15.5
    
    
    $
    390Patents
    
    
    15.5
    
    
    
    1,446Backlog
    
    
    1.0
    
    
    
    180Customer relationships
    
    
    4.5
    
    
    
    1,290Total intangible assets acquired
    
    
    
    
    
    $
    3,306
  4. Goodwill and Intangible Assets
 Goodwill
  Balance at December 31, 2010 (1)
    
    $
    4,671Effect of translation adjustment
    
    
    152Balance at March 31, 2011
    
    $
    4,823
 
 (1)
    
    Reflects the impact of measurement period adjustments (see Note 3). Intangible Assets
  Useful Life
    
    
    March 31,
    
    
    December 31,in Years
    
    
    2011
    
    
    2010Trade name
    
    
    15  20
    
    
    $
    1,187
    
    
    $
    1,165Patents and know-how
    
    
    5  16
    
    
    
    5,524
    
    
    
    5,416Backlog
    
    
    1
    
    
    
    180
    
    
    
    180Customer relationships
    
    
    4  8
    
    
    
    2,584
    
    
    
    2,5449,475
    
    
    
    9,305Less accumulated amortization
    
    
    
    
    
    
    (2,446
    )
    
    
    (2,011
    )$
    7,029
    
    
    $
    7,294
  9




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
  Years ending December 31:Remainder of 2011
    
    $
    1,1512012
    
    
    1,0332013
    
    
    8712014
    
    
    7912015
    
    
    726
 5. Accrued Expenses and Other Current Liabilities
  March 31,
    
    
    December 31,2011
    
    
    2010Accrued salaries and benefits
    
    $
    1,534
    
    
    $
    1,515Accrued professional and consulting fees
    
    
    459
    
    
    
    750Accrued severance
    
    
    177
    
    
    
    258Accrued warranty
    
    
    494
    
    
    
    466Other
    
    
    1,542
    
    
    
    1,477$
    4,206
    
    
    $
    4,466
 6. Severance Charges
  Three Months EndedMarch 31,2011
    
    
    2010Balance at beginning of period
    
    $
    258
    
    
    $
    670Accrued severance expense
    
    
    
    
    
    
    Paid severance expense
    
    
    (85
    )
    
    
    (240
    )Translation adjustment
    
    
    4
    
    
    
    Balance at end of period
    
    $
    177
    
    
    $
    430
  7. Accrued Warranty
  Three Months EndedMarch 31,2011
    
    
    2010Balance at beginning of period
    
    $
    466
    
    
    $
    371Accrued warranty expense
    
    
    69
    
    
    
    59Warranty claims paid
    
    
    (55
    )
    
    
    (34
    )Translation adjustment
    
    
    14
    
    
    
    10Balance at end of period
    
    $
    494
    
    
    $
    406
 10




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
 8. Debt
  March 31,
    
    
    December 31,2011
    
    
    2010Line of credit
    
    $
    2,539
    
    
    $
    2,431Shareholder note payable
    
    
    1,437
    
    
    
    1,410Capital lease obligation
    
    
    38
    
    
    
    464,014
    
    
    
    3,887Less current portion
    
    
    (2,539
    )
    
    
    (2,431
    )$
    1,475
    
    
    $
    1,456
 Line of Credit with Fifth Third Bank
  Secured Demand Facility with FGI
     11




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
   Shareholder Note Payable and Payment of Settlement Obligation
    9. Warrants
  WeightedAverageExercise
    
    
    Range ofShares
    
    
    Price
    
    
    Exercise PricesOutstanding at December 31, 2010
    
    
    942,870
    
    
    $
    16.36
    
    
    $
    2.80 - $169.47Warrants exercised
    
    
    (28,604
    )
    
    $
    7.92
    
    
    $
    7.92Warrants expired / forfeited
    
    
    (830
    )
    
    $
    60.00
    
    
    $
    60.00Outstanding at end of period
    
    
    913,436
    
    
    $
    16.59
    
    
    $
    2.80 - $169.47Warrants exercisable at March 31, 2011
    
    
    888,436
    
    
    $
    16.76
    
    
    $
    2.80 - $169.47Aggregate intrinsic value
    
    $
    584,787
  Warrant Liability
  12




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
     March 31,
    
    
    December 31,2011
    
    
    2010Expected volatility
    
    
    38.1
    %
    
    
    47.9
    %Risk-free interest rate
    
    
    1.3
    %
    
    
    1.2
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Forfeiture rate
    
    
    0.0
    %
    
    
    0.0
    %Closing price of Clean Diesel Technologies, Inc. common stock
    
    $
    8.60
    
    
    $
    9.49
   Balance at December 31, 2010
    
    $
    1,238Exercise of common stock warrants
    
    
    (39
    )Remeasurement of common stock warrants
    
    
    (433
    )Balance at March 31, 2011
    
    $
    766
 13




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
 10. Shared Based Payment
  Weighted
    
    
    Weighted AverageAverage
    
    
    RemainingExercise
    
    
    Contractual Term
    
    
    Aggregate IntrinsicOptions
    
    
    Price
    
    
    (in years)
    
    
    ValueOutstanding at January 1, 2011
    
    
    151,801
    
    
    $
    53.55
    
    
    
    3.25
    
    
    
    Granted
    
    
    182,459
    
    
    $
    5.68
    
    
    
    9.96
    
    
    
    Cancelled
    
    
    (30,161
    )
    
    $
    64.42
    
    
    
    
    
    
    
    Outstanding at March 31, 2011
    
    
    304,099
    
    
    $
    23.75
    
    
    
    7.82
    
    
    $
    532,780Exercisable at March 31, 2011
    
    
    201,203
    
    
    $
    32.65
    
    
    
    6.74
    
    
    $
    266,390Available for grant at March 31, 2011
    
    
    393,768
   Expected volatility
    
    
    77.4
    %Risk-free interest rate
    
    
    2.0
    %Dividend yield
    
    
    0.0
    %Expected life in years
    
    
    5.25
  11. TCC Joint Venture
   14




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
    12. Sale of Energy Systems Division
   13. Contingencies
 Legal Proceedings
    15




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
   Sales and use tax audit
  14. Segment Reporting
  Heavy Duty Diesel Systems division
 Catalyst division ®
 Corporate
 Discontinued operations
 16




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
   Three Months EndedMarch 31,2011
    
    
    2010Net salesHeavy Duty Diesel Systems
    
    $
    9,458
    
    
    $
    7,499Catalyst
    
    
    4,667
    
    
    
    5,084Corporate
    
    
    
    
    
    
    Eliminations (1)
    
    
    (341
    )
    
    
    (138
    )Total
    
    $
    13,784
    
    
    $
    12,445Income (loss) from operationsHeavy Duty Diesel Systems
    
    $
    267
    
    
    $
    1,102Catalyst (2)
    
    
    (474
    )
    
    
    3,658Corporate
    
    
    (1,834
    )
    
    
    (1,446
    )Eliminations
    
    
    (17
    )
    
    
    Total
    
    $
    (2,058
    )
    
    $
    3,314
 
 (1)
    
    Elimination of Catalyst revenue related to sales to Heavy Duty Diesel Systems.(2)
    
    Catalyst division income from operations includes a $3.9 million gain on sale of
intellectual property to TKK in the three months ended March 31, 2010.  Three Months EndedMarch 31,2011
    
    
    2010United States
    
    $
    5,843
    
    
    $
    5,767Canada
    
    
    5,764
    
    
    
    5,150Europe
    
    
    2,177
    
    
    
    1,528Total
    
    $
    13,784
    
    
    $
    12,445
  15. Subsequent Events
   17




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CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
    18




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The Merger was accounted for as a reverse acquisition and, as a result, our companys (the
legal acquirer) consolidated financial statements are now those of CSI (the accounting acquirer),
with the assets and liabilities, and revenues and expenses, of CDTI included effective from October
15, 2010, the date of the closing of the Merger. For information regarding CDTIs financial
condition and results of operations as well as CDTIs financial statements and related notes
thereto reflecting CDTIs business as a stand-alone company for periods prior to the Merger, please
see our Annual Report on Form 10-K for the year ended December 31, 2009 and our Quarterly Reports
on Form 10-Q for periods prior to the closing of the Merger.
 The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our condensed consolidated financial statements and related
notes included elsewhere in this Quarterly Report on Form 10-Q . This Quarterly Report on Form 10-Q
should also be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended
December 31, 2010. This discussion contains forward-looking statements, the accuracy of which
involves risks and uncertainties, see Cautionary Statement Concerning Forward-Looking Statements
at the beginning of this Quarterly Report on Form 10-Q . Our actual results could differ materially
from those anticipated in these forward-looking statements for many reasons, as a result of many
important factors, including the consolidation of CDTI for periods after October 15, 2010, as well
as those set forth in Part I  Item 1A Risk Factors of our Annual Report on Form 10-K for the
fiscal year ended December 31, 2010.
 Overview
   Heavy Duty Diesel Systems: ® ®
 Catalyst:
 Sources of Revenues and Expenses
 Revenues
  19




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##### Table of Contents



Cost of revenues
  Selling, general and administrative expenses
   Research and development expenses
  Recapitalization expenses
  Total other income (expense)
  Critical Accounting Policies and Estimates
   20




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##### Table of Contents



Recent Developments
 Sale of $3 Million 8% Subordinated Convertible Notes Due 2016
  New Financing Agreement with FGI; repayment of Fifth Third Bank
  Repayment of Settlement Obligation
  Factors Affecting Future Results
 Consolidation of CDTI
  Factors Affecting our Heavy Duty Diesel Systems Division
  21




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##### Table of Contents



Factors Affecting our Catalyst Division
  Supply of Catalyst Division Products to Heavy Duty Diesel Systems Division
  Results of Operations
 Comparison of Three Months Ended March 31, 2011 to Three Months Ended March 31, 2010
 Revenues
  22




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##### Table of Contents



Three Months      Ended March 31% of
    
    
    
    
    
    
    % of2011
    
    
    Total Revenue
    
    
    2010
    
    
    Total Revenue
    
    
    $ Change
    
    
    % Change(Dollars in millions)Heavy Duty Diesel Systems
    
    $
    9.4
    
    
    
    68.1
    %
    
    $
    7.5
    
    
    
    60.5
    %
    
    $
    1.9
    
    
    
    25.3
    %Catalyst
    
    
    4.7
    
    
    
    34.1
    %
    
    
    5.1
    
    
    
    41.1
    %
    
    
    (0.4
    )
    
    
    (7.8
    )%Intercompany revenue
    
    
    (0.3
    )
    
    
    (2.2
    )%
    
    
    (0.2
    )
    
    
    (1.6
    )%
    
    
    (0.1
    )
    
    
    50.0
    %Total revenue
    
    $
    13.8
    
    
    
    100.0
    %
    
    $
    12.4
    
    
    
    100.0
    %
    
    $
    1.4
    
    
    
    11.3
    %
     Cost of revenues
  Gross Profit
  Three Months      Ended March 31% of
    
    
    
    
    
    
    % of2011
    
    
    Revenue (1)
    
    
    2010
    
    
    Revenue (1)
    
    
    $ Change
    
    
    % Change(Dollars in millions)Heavy Duty Diesel Systems
    
    $
    2.9
    
    
    
    30.9
    %
    
    $
    2.5
    
    
    
    33.3
    %
    
    $
    0.4
    
    
    
    16.0
    %Catalyst
    
    
    1.1
    
    
    
    23.4
    %
    
    
    1.1
    
    
    
    21.6
    %
    
    
    
    
    
    
    
    %Total gross profit
    
    $
    4.0
    
    
    
    29.0
    %
    
    $
    3.6
    
    
    
    29.0
    %
    
    $
    0.4
    
    
    
    11.1
    %
 
 (1)
    
    Division calculation based on division revenue. Total based on total revenue.  23




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##### Table of Contents



Operating Expenses
  Three Months Ended March 31% of
    
    
    
    
    
    
    % of2011
    
    
    Total Revenue
    
    
    2010
    
    
    Total Revenue
    
    
    $ Change
    
    
    % Change(Dollars in millions)Selling, general and administrative
    
    $
    4.6
    
    
    
    33.3
    %
    
    $
    3.0
    
    
    
    24.2
    %
    
    $
    1.6
    
    
    
    53.3
    %Research and development
    
    
    1.5
    
    
    
    10.9
    %
    
    
    1.0
    
    
    
    8.1
    %
    
    
    0.5
    
    
    
    50.0
    %Recapitalization expenses
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    1.6
    %
    
    
    (0.2
    )
    
    
    (100
    %)Gain on sale of intellectual
property
    
    
    
    
    
    
    
    
    
    
    (3.9
    )
    
    
    (31.5
    )%
    
    
    3.9
    
    
    
    (100
    %)Total operating expenses
    
    $
    6.1
    
    
    
    44.2
    %
    
    $
    0.3
    
    
    
    2.4
    %
    
    $
    5.8
    
    
    
    1,933.3
    %
  Selling, general and administrative expenses
  Research and development expenses
  24




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##### Table of Contents



Other expense, net
 Three Months Ended March 31% of
    
    
    
    
    
    
    % of2011
    
    
    Total Revenue
    
    
    2010
    
    
    Total Revenue(Dollars in millions)Interest expense
    
    $
    (0.2
    )
    
    
    (1.4
    )%
    
    $
    (0.1
    )
    
    
    (0.8
    )%Gain on change in fair value of
derivative financial
instruments
    
    
    0.4
    
    
    
    2.9
    %
    
    
    
    
    
    
    Foreign currency exchange losses
    
    
    (0.3
    )
    
    
    (2.2
    )%
    
    
    (0.4
    )
    
    
    (3.2
    )%All other, net
    
    
    0.1
    
    
    
    0.7
    %
    
    
    0.1
    
    
    
    0.8
    %Total other expense, net
    
    $
    
    
    
    
    0.0
    %
    
    $
    (0.4
    )
    
    
    (3.2
    )%
   Net loss
  Liquidity and Capital Resources
   25




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##### Table of Contents



Three Months Ended March 312011
    
    
    2010
    
    
    $ Change
    
    
    % Change(Dollars in millions)Cash provided by (used in):Operating activities
    
    $
    (2.1
    )
    
    $
    (0.1
    )
    
    $
    (2.0
    )
    
    
    (2000.0
    )%Investing activities
    
    $
    (0.3
    )
    
    $
    1.9
    
    
    $
    (2.2
    )
    
    
    (115.8
    )%Financing activities
    
    $
    (1.5
    )
    
    $
    (1.8
    )
    
    $
    0.3
    
    
    
    16.7
    %
 Cash used in operating activities
   26




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##### Table of Contents



Cash (used in) provided by investing activities
   Cash used in financing activities
   Description of Indebtedness
  March 31,
    
    
    December 31,2011
    
    
    2010(Dollars in millions)Line of credit
    
    $
    2.5
    
    
    $
    2.4Loan from shareholder
    
    
    1.4
    
    
    
    1.4Capital lease obligations
    
    
    0.1
    
    
    
    0.1Total borrowings
    
    $
    4.0
    
    
    $
    3.9
 FGI Financing Facility
   27




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##### Table of Contents



Loan from Kanis S.A.
     8% Subordinated Convertible Notes Due 2016
   28




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##### Table of Contents



Fifth Third Bank
    Capital Expenditures
  Off-Balance Sheet Arrangements
  Commitments and Contingencies
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  29




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##### Table of Contents



Item 4. Controls and Procedures
 Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  30




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##### Table of Contents



PART IIOTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Default Upon Senior Securities
  
 Item 4. (Removed and Reserved)
 
 Item 5. Other Information
  
 Item 6. Exhibits
 No.
    
    Description10.1
    
    Letter agreement, dated January 13, 2011, among Fifth Third Bank, Catalytic Solutions, Inc. and
certain other direct or indirect subsidiaries of the registrant (incorporated by reference to
Exhibit 10.1 of Form 8-K filed January 20, 2011)10.2
    
    Form of Agreement of Sale of Accounts and Security Agreement, dated February 14, 2011, between
Faunus Group International, Inc. and Clean Diesel Technologies, Inc. (incorporated by reference
to Exhibit 10.1 of Form 8-K filed February 16, 2011)10.3
    
    Form of Agreement of Guaranty, dated February 14, 2011, between Faunus Group International, Inc.
and Clean Diesel Technologies, Inc., Clean Diesel International, LLC, Catalytic Solutions, Inc.,
Engine Control Systems, Ltd., Engine Control Systems Limited, Clean Diesel Technologies Limited,
Engine Control Systems Europe AB, ECS Holdings, Inc., Catalytic Solutions Holdings, Inc. and CSI
Aliso, Inc. (incorporated by reference to Exhibit 10.2 of Form 8-K filed February 16, 2011)31.1*
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2*
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232*
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
 
 *
    
    Filed herewith 31




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##### Table of Contents



SIGNATURES
  CLEAN DIESEL TECHNOLOGIES, INC.
(Registrant)Date: May 12, 2011
    By:
    /s/ Charles F. CallCharles F. CallDirector and Chief Executive OfficerDate: May 12, 2011
    By:
    /s/ Nikhil A. MehtaNikhil A. MehtaChief Financial Officer and Treasurer 32