##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 Form 10-Q
 
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2010
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the transition period from 
 to
 Commission file number: 001-33710
 
 CLEAN DIESEL TECHNOLOGIES, INC.
 (Exact name of registrant as specified in its charter)
 
 Delaware
    
    06-1393453(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)4567 Telephone Road, Suite 206, Ventura, CA
    
    93003(Address of principal executive offices)
    
    (Zip Code)
 (Registrants telephone number, including area code) (805) 639-9458
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o(Do not check if a smaller reporting company.)
    
    Smaller reporting company þ
 o þ




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##### 



CLEAN DIESEL TECHNOLOGIES, INC.
 TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4T. Controls and Procedures
    
    
    27PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    28Item 1A. Risk Factors
    
    
    28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28Item 3. Defaults Upon Senior Securities
    
    
    28Item 4. [Removed and Reserved]
    
    
    28Item 5. Other Information
    
    
    28Item 6. Exhibits
    
    
    28SIGNATURES
    
    
    29Exhibit 31.1Exhibit 31.2Exhibit 32.1
  EXPLANATORY NOTE
    2




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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
   
    
    our ability to successfully integrate the operations of Catalytic Solutions, Inc.
(CSI) and realize the benefits of the Merger;
    
    our need to refinance CSIs credit facility and obtain additional financing to support
our business;
    
    any failure of our new management team to operate effectively;
    3




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 CLEAN DIESEL TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except share data)
 September 30,
    
    
    December 31,2010
    
    
    2009(Restated)Note 1ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,525
    
    
    $
    2,772Investments
    
    
    
    
    
    
    11,725Accounts receivable, net of allowance of $248 and $232, respectively
    
    
    198
    
    
    
    148Inventories, net
    
    
    907
    
    
    
    1,059Other current assets
    
    
    172
    
    
    
    294Total current assets
    
    
    4,802
    
    
    
    15,998Patents, net
    
    
    968
    
    
    
    898Fixed assets, net of accumulated depreciation of $424 and $369, respectively
    
    
    219
    
    
    
    294Other assets
    
    
    56
    
    
    
    57Total assets
    
    $
    6,045
    
    
    $
    17,247LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    665
    
    
    $
    301Accrued expenses
    
    
    563
    
    
    
    675Short-term debt
    
    
    
    
    
    
    7,693Total current liabilities
    
    
    1,228
    
    
    
    8,669Commitments and contingencies (Note 7)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
1,368,998 and 1,368,988 shares, respectively
    
    
    14
    
    
    
    14Additional paid-in capital
    
    
    74,846
    
    
    
    74,762Accumulated other comprehensive loss
    
    
    (407
    )
    
    
    (381
    )Accumulated deficit
    
    
    (69,636
    )
    
    
    (65,817
    )Total stockholders equity
    
    
    4,817
    
    
    
    8,578Total liabilities and stockholders equity
    
    $
    6,045
    
    
    $
    17,247
   4




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Restated)
    
    
    
    
    
    
    (Restated)Note 1
    
    
    
    
    
    
    Note 1Revenue:Product sales
    
    $
    283
    
    
    $
    225
    
    
    $
    1,265
    
    
    $
    879Technology licensing fees and royalties
    
    
    58
    
    
    
    28
    
    
    
    132
    
    
    
    95Total revenue
    
    
    341
    
    
    
    253
    
    
    
    1,397
    
    
    
    974Costs and expenses:Cost of product sales
    
    
    131
    
    
    
    217
    
    
    
    816
    
    
    
    668Cost of licensing fees and royalties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Selling, general and administrative
    
    
    1,662
    
    
    
    1,324
    
    
    
    4,395
    
    
    
    4,837Reimbursement of expenses under grant program
    
    
    (44
    )
    
    
    
    
    
    
    (159
    )
    
    
    Severance charge
    
    
    
    
    
    
    448
    
    
    
    (163
    )
    
    
    958Research and development
    
    
    55
    
    
    
    128
    
    
    
    244
    
    
    
    314Patent amortization and other expense
    
    
    32
    
    
    
    98
    
    
    
    109
    
    
    
    307Operating costs and expenses
    
    
    1,836
    
    
    
    2,215
    
    
    
    5,242
    
    
    
    7,084Loss from operations
    
    
    (1,495
    )
    
    
    (1,962
    )
    
    
    (3,845
    )
    
    
    (6,110
    )Other income (expense):Interest income
    
    
    2
    
    
    
    46
    
    
    
    93
    
    
    
    187Other income (expense), net
    
    
    
    
    
    
    (26
    )
    
    
    (67
    )
    
    
    295Net loss
    
    $
    (1,493
    )
    
    $
    (1,942
    )
    
    $
    (3,819
    )
    
    $
    (5,628
    )Basic and diluted loss per common share
    
    $
    (1.09
    )
    
    $
    (1.43
    )
    
    $
    (2.80
    )
    
    $
    (4.15
    )Basic and diluted weighted-average number of
common shares outstanding (Note 1)
    
    
    1,365
    
    
    
    1,356
    
    
    
    1,364
    
    
    
    1,356
   5




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CLEAN DIESEL TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
 Nine Months EndedSeptember 30,2010
    
    
    2009(Restated)Note 1Operating activitiesNet loss
    
    $
    (3,819
    )
    
    $
    (5,628
    )Adjustments to reconcile net loss to cash used in operating activities:Depreciation and amortization
    
    
    140
    
    
    
    139Compensation expense for options, warrants and stock awards
    
    
    84
    
    
    
    579Provision (Recovery) for doubtful accounts, net
    
    
    23
    
    
    
    (148
    )Unrealized gain on investments, net
    
    
    
    
    
    
    (185
    )Loss on abandonment of patents and equipment
    
    
    3
    
    
    
    195Changes in operating assets and liabilities:Accounts receivable
    
    
    (73
    )
    
    
    622Inventories, net
    
    
    152
    
    
    
    73Other current assets and other assets
    
    
    122
    
    
    
    112Accounts payable, accrued expenses and other liabilities
    
    
    252
    
    
    
    41Net cash used for operating activities
    
    
    (3,116
    )
    
    
    (4,200
    )Investing activitiesSale of investments
    
    
    11,725
    
    
    
    Patent costs
    
    
    (125
    )
    
    
    (88
    )Purchase of fixed assets
    
    
    (15
    )
    
    
    (121
    )Net cash provided by (used for) investing activities
    
    
    11,585
    
    
    
    (209
    )Financing activitiesProceeds from short-term debt
    
    
    2,161
    
    
    
    4,735Repayment of short-term debt
    
    
    (9,854
    )
    
    
    (51
    )Net cash (used for) provided by financing activities
    
    
    (7,693
    )
    
    
    4,684Effect of exchange rate changes on cash
    
    
    (23
    )
    
    
    (27
    )Net increase in cash and cash equivalents
    
    $
    753
    
    
    $
    248Cash and cash equivalents at beginning of the period
    
    
    2,772
    
    
    
    3,976Cash and cash equivalents at end of the period
    
    $
    3,525
    
    
    $
    4,224Supplemental non-cash activities:Accumulated amortization of abandoned assets
    
    $
    35
    
    
    $
    277Supplemental disclosures:Cash paid for interest
    
    $
    47
    
    
    $
    55
   6




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CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Note 1. Significant Accounting Policies
 Basis of Presentation:
      Reclassifications:
  Revision of Prior Period Amounts:
   7




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As previouslyreported
    
    
    Adjustment
    
    
    Revised(In thousands)Patents, net
    
    $
    1,083
    
    
    $
    (185
    )
    
    $
    898Total assets
    
    
    17,432
    
    
    
    (185
    )
    
    
    17,247Accumulated deficit
    
    
    (65,632
    )
    
    
    (185
    )
    
    
    (65,817
    )Total stockholders equity
    
    
    8,763
    
    
    
    (185
    )
    
    
    8,578Total liabilities and stockholders equity
    
    
    17,432
    
    
    
    (185
    )
    
    
    17,247
  8




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As previouslyreported
    
    
    Adjustment
    
    
    Revised(In thousands)Patent amortization and other expense
    
    $
    56
    
    
    $
    42
    
    
    $
    98Operating costs and expenses
    
    
    2,173
    
    
    
    42
    
    
    
    2,215Loss from operations
    
    
    (1,920
    )
    
    
    (42
    )
    
    
    (1,962
    )Net loss
    
    
    (1,900
    )
    
    
    (42
    )
    
    
    (1,942
    )Basic and diluted loss per common share
    
    
    (1.40
    )
    
    
    (0.03
    )
    
    
    (1.43
    )
  As previouslyreported
    
    
    Adjustment
    
    
    Revised(In thousands)Patent amortization and other expense
    
    $
    128
    
    
    $
    179
    
    
    $
    307Operating costs and expenses
    
    
    6,905
    
    
    
    179
    
    
    
    7,084Loss from operations
    
    
    (5,931
    )
    
    
    (179
    )
    
    
    (6,110
    )Net loss
    
    
    (5,449
    )
    
    
    (179
    )
    
    
    (5,628
    )Basic and diluted loss per common share
    
    
    (4.02
    )
    
    
    (0.13
    )
    
    
    (4.15
    )
  As previouslyreported
    
    
    Adjustment
    
    
    Revised(In thousands)Net loss
    
    $
    (5,449
    )
    
    $
    (179
    )
    
    $
    (5,628
    )Loss on abandonment of patents
    
    
    16
    
    
    
    179
    
    
    
    195Accumulated amortization of abandoned assets
    
    
    270
    
    
    
    7
    
    
    
    277
 Revenue Recognition:
 ® ®
    9




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Valuation of Accounts Receivable:
  Cost of Revenue:
  Patent Expense:
  Basic and Diluted Loss per Common Share:
   10




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Income Taxes:
    Fair Value of Financial Instruments:
   Recently Adopted and Recently Issued Accounting Pronouncements:
  Note 2. Investments
     11




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
    
    Defines fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the
measurement date;
    
    Establishes a three-level hierarchy (valuation hierarchy) for fair value measurements;
    
    Requires consideration of the Companys creditworthiness when valuing liabilities; and
    
    Expands disclosures about instruments measured at fair value.
  
    
    Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets.
    
    Level 2 inputs to the valuation methodology include quoted prices for similar assets
and liabilities in active markets, and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the financial
instrument.
    
    Level 3 inputs to the valuation methodology are unobservable and significant to the
fair value measurement.
  September 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Auction rate securities
    
    $
    
    
    
    $
    10,577Auction rate securities right
    
    
    
    
    
    
    1,148Total investments
    
    $
    
    
    
    $
    11,725Classified as current assets
    
    
    
    
    
    
    11,725Classified as non-current assets
    
    $
    
    
    
    $
    
     12




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2010SignificantUnobservableInputs(Level 3)(In thousands)Fair value at beginning of period
    
    $
    11,725Purchases
    
    
    Sales
    
    
    (11,725
    )Transfers (out) in
    
    
    Unrealized gain (loss) included in statement of operations
    
    
    Fair value at end of period
    
    $
    Change in unrealized gain (loss)
    
    $
    
 Note 3. Inventories
  September 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Finished Platinum Plus fuel-borne catalyst
    
    $
    130
    
    
    $
    85Platinum concentrate/metal
    
    
    246
    
    
    
    449Hardware
    
    
    510
    
    
    
    587Other
    
    
    93
    
    
    
    11$
    979
    
    
    $
    1,132Less: inventory reserves
    
    
    (72
    )
    
    
    (73
    )Inventories, net
    
    $
    907
    
    
    $
    1,059
 Note 4. Short-term Debt
    13




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Note 5. Stockholders Equity
   Note 6. Stock-Based Compensation
    Weighted-Weighted-
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicShares*
    
    
    Price
    
    
    Term in Years
    
    
    ValueOptions Outstanding as of December 31, 2009
    
    
    146,068
    
    
    $
    62.41Granted
    
    
    
    
    
    $
    Exercised
    
    
    
    
    
    $
    Forfeited
    
    
    (1,111
    )
    
    $
    16.23Expired
    
    
    (17,046
    )
    
    $
    71.79Options outstanding as of September 30, 2010
    
    
    127,911
    
    
    $
    61.57
    
    
    
    3.4
    
    
    $
    Options exercisable as of September 30, 2010
    
    
    123,413
    
    
    $
    63.06
    
    
    
    3.2
    
    
    $
    
 
 *
    
    Table does not include 6,667 shares issued in 2009 as a restricted
stock award under the Plan.   14




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Note 7. Commitments and Contingencies
 Legal Proceedings
   Note 8. Related Party Transactions
    15




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Note 9. Significant Customers
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Customer A
    
    
    *
    
    
    
    *
    
    
    
    38.7
    %
    
    
    *Customer B
    
    
    15.5
    %
    
    
    *
    
    
    
    *
    
    
    
    *Customer C
    
    
    13.8
    %
    
    
    *
    
    
    
    *
    
    
    
    *Customer D
    
    
    10.6
    %
    
    
    *
    
    
    
    *
    
    
    
    *Customer E
    
    
    *
    
    
    
    20.0
    %
    
    
    *
    
    
    
    11.5
    %Customer F
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    10.4
    %Customer G
    
    
    *
    
    
    
    11.6
    %
    
    
    *
    
    
    
    *Customer H
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    13.6
    %
 *
    
    Represents less than 10% revenue for that customer in the applicable
period. There were no other customers that represented 10% or more of
revenue for the periods indicated.   16




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Note 10. Comprehensive Loss
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net loss
    
    $
    (1,493
    )
    
    $
    (1,942
    )
    
    $
    (3,819
    )
    
    $
    (5,628
    )Other comprehensive income
(loss):Foreign currency translation
adjustment
    
    
    (42
    )
    
    
    (64
    )
    
    
    26
    
    
    
    (20
    )Comprehensive loss
    
    $
    (1,535
    )
    
    $
    (2,006
    )
    
    $
    (3,793
    )
    
    $
    (5,648
    )
  17




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Note 11. Geographic Information
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenue:U.S.
    
    $
    88
    
    
    $
    111
    
    
    $
    306
    
    
    $
    489U.K./Europe
    
    
    239
    
    
    
    91
    
    
    
    1,050
    
    
    
    374Asia
    
    
    14
    
    
    
    51
    
    
    
    41
    
    
    
    111Total
    
    $
    341
    
    
    $
    253
    
    
    $
    1,397
    
    
    $
    974
  September 30,
    
    
    December 31,2010
    
    
    2009(In thousands)U.S.
    
    $
    4,274
    
    
    $
    15,551Foreign
    
    
    1,771
    
    
    
    1,696Total assets
    
    $
    6,045
    
    
    $
    17,247
 Note 12. Severance Charges
    (In thousands)Balance at December 31, 2009
    
    $
    389Provisions (Reversals)
    
    
    (163
    )Payments
    
    
    (226
    )Balance at September 30, 2010
    
    $
    
  18




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Note 13. Merger
  
    
    For accounting purposes, CSI is considered to be acquiring the Company.
    
    In exchange for their shares of CSI common stock, the shareholders of CSI will receive
shares, and warrants to purchase shares, of Clean Diesel common stock. CSI shareholders will
receive such numbers of Clean Diesel common stock so that after the Merger, CSI will own
approximately 60% of the outstanding shares of Clean Diesel common stock. In addition, CSI
shareholders will receive warrants to purchase up to 3 million shares of Clean Diesel common
stock.
    
    The Merger is conditional among other matters on obtaining Clean Diesel stockholder
approval and CSI shareholder approval and also a number of further closing requirements
including that Clean Diesel and CSI each have $1.0 million in cash or equivalent at the time
of the Merger.
    
    The Company will amend its certificate of incorporation to effect a reverse stock split
in a ratio ranging from 1-for-3 to 1-for-8 of all issued and outstanding shares of Clean
Diesel common stock, the final ratio to be determined within the discretion of the Clean
Diesel Board of Directors, to occur immediately before the closing of the Merger.
     Note 14. Subsequent Events
   19




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20




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion of our business and analysis of our financial condition and results of
operations reflects our business as of September 30, 2010, prior to giving effect to the Merger,
and should be read in conjunction with our unaudited condensed consolidated interim financial
statements and the related notes thereto appearing elsewhere in this Form 10-Q and our audited
consolidated financial statements and related notes thereto and the description of our business
appearing in the Form 10-K . For additional financial information on CSI, please see the historical
financial data of CSI, the unaudited pro forma condensed financial information of the combined
company, and other information materials filed with the Form S-4 .
 This discussion contains forward-looking statements that involve risks and uncertainties. See
Cautionary Note Regarding Forward-Looking Statements. Known and unknown risks, uncertainties and
other factors could cause our actual results to differ materially from those projected in any
forward-looking statements. In evaluating these statements, you should specifically consider
various factors, including, but not limited to, those set forth under the caption Risk Factors in
the Form 10-K and the Form S-4 .
 Results of Operations
 Three Months ended September 30, 2010 Compared to Three Months ended September 30, 2009
       21




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Three Months EndedSeptember 30,2010
    
    
    2009(In thousands)Compensation and benefits
    
    $
    634
    
    
    $
    784Non-cash stock-based compensation
    
    
    27
    
    
    
    159Total compensation and benefits
    
    
    661
    
    
    
    943Professional services
    
    
    753
    
    
    
    127Travel
    
    
    68
    
    
    
    78Occupancy
    
    
    93
    
    
    
    115Bad debt (recovery) provision
    
    
    23
    
    
    
    (14
    )Depreciation and all other
    
    
    64
    
    
    
    75Total selling, general and administrative expenses
    
    $
    1,662
    
    
    $
    1,324
        22




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Nine Months ended September 30, 2010 Compared to Nine Months ended September 30, 2009
      23




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Nine Months EndedSeptember 30,2010
    
    
    2009(In thousands)Compensation and benefits
    
    $
    1,901
    
    
    $
    2,833Non-cash stock-based compensation
    
    
    84
    
    
    
    569Total compensation and benefits
    
    
    1,985
    
    
    
    3,402Professional services
    
    
    1,695
    
    
    
    545Travel
    
    
    188
    
    
    
    266Occupancy
    
    
    316
    
    
    
    495Bad debt (recovery) provision
    
    
    23
    
    
    
    (148
    )Depreciation and all other
    
    
    188
    
    
    
    277Total selling, general and administrative expenses
    
    $
    4,395
    
    
    $
    4,837
           24




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Liquidity and Capital Resources
   25




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Capital Expenditures
   26




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##### Table of Contents



Subsequent Event
  Selected Financial Data
 Year EndedDecember 31,2009
    
    
    2008Reflecting post one-for-six split capitalization
    
    (In thousands)Revenue
    
    $
    1,221
    
    
    $
    7,475Net loss
    
    $
    (6,932
    )
    
    $
    (9,373
    )Net loss per share, basic and diluted
    
    $
    (5.10
    )
    
    $
    (6.91
    )Dividends per share
    
    $
    
    
    
    $
    Weighted average number of common shares, basic and diluted
    
    
    1,358
    
    
    
    1,356
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
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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. Defaults Upon Senior Securities
  
 Item 4. [Removed and Reserved]
 
 Item 5. Other Information.
  
 Item 6. Exhibits.
 ExhibitNumber
    
    Description31.1
    
    
    Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a)31.2
    
    
    Certification of Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a)32.1
    
    
    Certifications of Chief Executive Officer and Chief Financial Officer required by Rule
13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States
Code
  28




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##### Table of Contents



SIGNATURES
  CLEAN DIESEL TECHNOLOGIES, INC.
(Registrant)By:
    /s/  Charles F. CallCharles F. CallDirector and Chief Executive OfficerDate: November 15, 2010By:
    /s/  Nikhil A. MehtaNikhil A. MehtaChief Financial Officer and Treasurer   29