##### 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 June 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.
  
 Delaware(State or other jurisdiction of 
incorporation or organization)
    
    06-1393453(I.R.S. Employer
Identification No.)10 Middle Street, Suite 1100, Bridgeport, CT(Address of principal executive offices)
    
    06604(Zip Code)
 (203) 416-5290
(Registrants telephone number, including area code)
 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.
Quarterly Report on Form 10-Q
for the Quarter Ended June 30, 2010
INDEX
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Unaudited Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009
(Restated)
    
    
    3Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 2010 and 2009 (Restated)
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30,
2010 and 2009 (Restated)
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    23PART II. OTHER INFORMATIONItem 6. Exhibits
    
    
    24SIGNATURES
    
    
    25EX-31.AEX-31.BEX-32
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements
 CLEAN DIESEL TECHNOLOGIES, INC.
 
 Unaudited Condensed Consolidated Balance Sheets
 (In thousands, except share data)
 June 30,
    
    
    December 31,2010
    
    
    2009(Restated)Note 1ASSETSCurrent assets:Cash and cash equivalents
    
    $
    8,106
    
    
    $
    2,772Investments
    
    
    
    
    
    
    11,725Accounts receivable, net of allowance of $214 and $232, respectively
    
    
    218
    
    
    
    148Inventories, net
    
    
    822
    
    
    
    1,059Other current assets
    
    
    108
    
    
    
    294Total current assets
    
    
    9,254
    
    
    
    15,998Patents, net
    
    
    957
    
    
    
    898Fixed assets, net of accumulated depreciation of $425 and $369, respectively
    
    
    239
    
    
    
    294Other assets
    
    
    55
    
    
    
    57Total assets
    
    $
    10,505
    
    
    $
    17,247LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    454
    
    
    $
    301Accrued expenses
    
    
    567
    
    
    
    675Short-term debt
    
    
    3,243
    
    
    
    7,693Total current liabilities
    
    
    4,264
    
    
    
    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
8,213,988 and 8,213,988 shares, respectively
    
    
    82
    
    
    
    82Additional paid-in capital
    
    
    74,751
    
    
    
    74,694Accumulated other comprehensive loss
    
    
    (449
    )
    
    
    (381
    )Accumulated deficit
    
    
    (68,143
    )
    
    
    (65,817
    )Total stockholders equity
    
    
    6,241
    
    
    
    8,578Total liabilities and stockholders equity
    
    $
    10,505
    
    
    $
    17,247
  3




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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
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Restated)
    
    
    
    
    
    
    (Restated)Note 1
    
    
    
    
    
    
    Note 1Revenue:Product sales
    
    $
    370
    
    
    $
    342
    
    
    $
    982
    
    
    $
    654Technology licensing fees and royalties
    
    
    41
    
    
    
    33
    
    
    
    74
    
    
    
    67Total revenue
    
    
    411
    
    
    
    375
    
    
    
    1,056
    
    
    
    721Costs and expenses:Cost of product sales
    
    
    220
    
    
    
    217
    
    
    
    685
    
    
    
    451Cost of licensing fees and royalties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Selling, general and administrative
    
    
    1,512
    
    
    
    1,561
    
    
    
    2,733
    
    
    
    3,513Reimbursement of
expenses under grant program
    
    
    (77
    )
    
    
    
    
    
    
    (115
    )
    
    
    Severance charge
    
    
    (60
    )
    
    
    
    
    
    
    (163
    )
    
    
    510Research and development
    
    
    136
    
    
    
    127
    
    
    
    189
    
    
    
    186Patent amortization and other expense
    
    
    28
    
    
    
    140
    
    
    
    77
    
    
    
    209Operating costs and expenses
    
    
    1,759
    
    
    
    2,045
    
    
    
    3,406
    
    
    
    4,869Loss from operations
    
    
    (1,348
    )
    
    
    (1,670
    )
    
    
    (2,350
    )
    
    
    (4,148
    )Other income (expense):Interest income
    
    
    31
    
    
    
    49
    
    
    
    91
    
    
    
    141Other income (expense), net
    
    
    (34
    )
    
    
    442
    
    
    
    (67
    )
    
    
    321Net loss
    
    $
    (1,351
    )
    
    $
    (1,179
    )
    
    $
    (2,326
    )
    
    $
    (3,686
    )Basic and diluted loss per common share
    
    $
    (0.17
    )
    
    $
    (0.14
    )
    
    $
    (0.28
    )
    
    $
    (0.45
    )Basic and diluted weighted-average
number of common shares outstanding
    
    
    8,187
    
    
    
    8,138
    
    
    
    8,184
    
    
    
    8,138
  4




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CLEAN DIESEL TECHNOLOGIES, INC.
 
 Unaudited Condensed Consolidated Statements of Cash Flows
 (In thousands)
 Six Months EndedJune 30,2010
    
    
    2009(Restated)Note 1Operating activitiesNet loss
    
    $
    (2,326
    )
    
    $
    (3,686
    )Adjustments to reconcile net loss to cash used in operating activities:Depreciation and amortization
    
    
    94
    
    
    
    93Compensation expense for options, warrants and stock awards
    
    
    57
    
    
    
    418Recovery for doubtful accounts, net
    
    
    
    
    
    
    (134
    )Unrealized gain on investments, net
    
    
    
    
    
    
    (161
    )Loss on abandonment of patents
    
    
    3
    
    
    
    150Changes in operating assets and liabilities:Accounts receivable
    
    
    (70
    )
    
    
    424Inventories, net
    
    
    237
    
    
    
    51Other current assets and other assets
    
    
    188
    
    
    
    53Accounts payable, accrued expenses and other liabilities
    
    
    45
    
    
    
    14Net cash used for operating activities
    
    
    (1,772
    )
    
    
    (2,778
    )Investing activitiesSale of investments
    
    
    11,725
    
    
    
    Patent costs
    
    
    (95
    )
    
    
    (48
    )Purchase of fixed assets
    
    
    (9
    )
    
    
    (127
    )Net cash provided by (used for) investing activities
    
    
    11,621
    
    
    
    (175
    )Financing activitiesProceeds from short-term debt
    
    
    2,161
    
    
    
    3,471Repayment of short-term debt
    
    
    (6,611
    )
    
    
    (51
    )Net cash (used for) provided by financing activities
    
    
    (4,450
    )
    
    
    3,420Effect of exchange rate changes on cash
    
    
    (65
    )
    
    
    44Net increase in cash and cash equivalents
    
    $
    5,334
    
    
    $
    511Cash and cash equivalents at beginning of the period
    
    
    2,772
    
    
    
    3,976Cash and cash equivalents at end of the period
    
    $
    8,106
    
    
    $
    4,487Supplemental non-cash activities:Accumulated amortization of abandoned assets
    
    $
    2
    
    
    $
    4Supplemental disclosures:Cash paid for interest
    
    $
    46
    
    
    $
    29
  5




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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:
    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
 6




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##### Table of Contents



As previouslyreported
    
    
    Adjustment
    
    
    Revised(In thousands)Patent amortization and other expense
    
    $
    37
    
    
    $
    103
    
    
    $
    140Operating costs and expenses
    
    
    1,942
    
    
    
    103
    
    
    
    2,045Loss from operations
    
    
    (1,567
    )
    
    
    (103
    )
    
    
    (1,670
    )Net loss
    
    
    (1,076
    )
    
    
    (103
    )
    
    
    (1,179
    )Basic and diluted loss per common share
    
    
    (0.13
    )
    
    
    
    
    
    
    (0.14
    )
  As previouslyreported
    
    
    Adjustment
    
    
    Revised(In thousands)Patent amortization and other expense
    
    $
    72
    
    
    $
    137
    
    
    $
    209Operating costs and expenses
    
    
    4,732
    
    
    
    137
    
    
    
    4,869Loss from operations
    
    
    (4,011
    )
    
    
    (137
    )
    
    
    (4,148
    )Net loss
    
    
    (3,549
    )
    
    
    (137
    )
    
    
    (3,686
    )Basic and diluted loss per common share
    
    
    (0.44
    )
    
    
    
    
    
    
    (0.45
    )
  As previouslyreported
    
    
    Adjustment
    
    
    Revised(In thousands)Net loss
    
    $
    (3,549
    )
    
    $
    (137
    )
    
    $
    (3,686
    )Loss on abandonment of patents
    
    
    13
    
    
    
    137
    
    
    
    150Accumulated amortization of abandoned assets
    
    
    
    
    
    
    4
    
    
    
    4
 Revenue Recognition:
 ® ®
   7




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Valuation of Accounts Receivable:
  Cost of Revenue:
  Patent Expense:
  Basic and Diluted Loss per Common Share:
  8




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Income Taxes:
    Fair Value of Financial Instruments:
   Recently Adopted and Recently Issued Accounting Pronouncements:
  Note 2. Investments
    9




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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.
  June 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
    
    $
    
    
    
    $
    
    10




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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
  June 30,
    
    
    December 31,2010
    
    
    2009(In thousands)Finished Platinum Plus fuel-borne catalyst
    
    $
    164
    
    
    $
    85Platinum concentrate/metal
    
    
    251
    
    
    
    449Hardware
    
    
    413
    
    
    
    587Other
    
    
    63
    
    
    
    11$
    891
    
    
    $
    1,132Less: inventory reserves
    
    
    (69
    )
    
    
    (73
    )Inventories, net
    
    $
    822
    
    
    $
    1,059
 Note 4. Short-term Debt
   11




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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
    
    
    876,410
    
    
    $
    10.40Granted
    
    
    
    
    
    $
    Exercised
    
    
    
    
    
    $
    Forfeited
    
    
    (6,667
    )
    
    $
    2.71Expired
    
    
    (100,999
    )
    
    $
    11.98Options outstanding as of June 30, 2010
    
    
    768,744
    
    
    $
    10.26
    
    
    
    3.7
    
    
    $
    Options exercisable as of June 30, 2010
    
    
    738,411
    
    
    $
    10.52
    
    
    
    3.5
    
    
    $
    
 
 *
    
    Table does not include 40,000 shares issued in 2009 as a restricted
stock award under the Plan.    12




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Note 7. Commitments and Contingencies
 Legal Proceedings
   Note 8. Related Party Transactions
    13




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Note 9. Significant Customers
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2010
    
    2009
    
    2010
    
    2009Customer A
    
    36.8%
    
    *
    
    49.2%
    
    *Customer B
    
    *
    
    13.3%
    
    *
    
    *Customer C
    
    *
    
    26.9%
    
    *
    
    14.0%Customer D
    
    *
    
    *
    
    *
    
    18.4%
 
 *
    
    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.  Note 10. Comprehensive Loss
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(in thousands)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Net loss
    
    $
    (1,351
    )
    
    $
    (1,179
    )
    
    $
    (2,326
    )
    
    $
    (3,686
    )Other comprehensive income
(loss):Foreign currency translation
adjustment
    
    
    14
    
    
    
    53
    
    
    
    68
    
    
    
    44Comprehensive loss
    
    $
    (1,337
    )
    
    $
    (1,126
    )
    
    $
    (2,258
    )
    
    $
    (3,642
    )
 14




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Note 11. Geographic Information
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(in thousands)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Revenue:U.S.
    
    $
    118
    
    
    $
    157
    
    
    $
    218
    
    
    $
    378U.K./Europe
    
    
    293
    
    
    
    186
    
    
    
    811
    
    
    
    283Asia
    
    
    
    
    
    
    32
    
    
    
    27
    
    
    
    60Total
    
    $
    411
    
    
    $
    375
    
    
    $
    1,056
    
    
    $
    721
  June 30,
    
    
    December 31,2010
    
    
    2009(In thousands)U.S.
    
    $
    8,841
    
    
    $
    15,551Foreign
    
    
    1,664
    
    
    
    1,696Total assets
    
    $
    10,505
    
    
    $
    17,247
 Note 12. Severance Charges
    (In thousands)Balance at December 31, 2009
    
    $
    389Provisions (Reversals)
    
    
    (163
    )Payments
    
    
    (226
    )Balance at June 30, 2010
    
    $
    
 Note 13. Merger
  15




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
    
    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
    16




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
  Results of Operations
 Three Months ended June 30, 2010 Compared to Three Months ended June 30, 2009
      17




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Three Months EndedJune 30,2010
    
    
    2009(In thousands)Compensation and benefits
    
    $
    647
    
    
    $
    1,033Non-cash stock-based compensation
    
    
    27
    
    
    
    208Total compensation and benefits
    
    
    674
    
    
    
    1,241Professional services
    
    
    616
    
    
    
    171Travel
    
    
    69
    
    
    
    77Occupancy
    
    
    101
    
    
    
    209Bad debt (recovery) provision
    
    
    
    
    
    
    (134
    )Depreciation and all other
    
    
    52
    
    
    
    (3
    )Total selling, general and administrative expenses
    
    $
    1,512
    
    
    $
    1,561
         18




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Six Months ended June 30, 2010 Compared to Six Months ended June 30, 2009
     19




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Six Months EndedJune 30,2010
    
    
    2009(In thousands)Compensation and benefits
    
    $
    1,267
    
    
    $
    2,049Non-cash stock-based compensation
    
    
    57
    
    
    
    410Total compensation and benefits
    
    
    1,324
    
    
    
    2,459Professional services
    
    
    942
    
    
    
    418Travel
    
    
    120
    
    
    
    188Occupancy
    
    
    223
    
    
    
    444Bad debt (recovery) provision
    
    
    
    
    
    
    (134
    )Depreciation and all other
    
    
    124
    
    
    
    138Total selling, general and administrative expenses
    
    $
    2,733
    
    
    $
    3,513
           20




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Liquidity and Capital Resources
   21




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22




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Capital Expenditures
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  23




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PART II. OTHER INFORMATION
 
 Item 6. Exhibits
  ExhibitNumber
    
    Description31(a)
    
    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Exchange Act.31(b)
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Exchange Act.32
    
    Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Rule 18 U.S.C. Section 1350.
 24




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SIGNATURES
  CLEAN DIESEL TECHNOLOGIES, INC.
(Registrant)By:
    /s/  Michael L. AsmussenMichael L. AsmussenDirector, President and

Chief Executive Officer  By:
    /s/  John B. WynneJohn B. WynneInterim Chief Financial Officer,

Vice President and Treasurer  25