CLEAN DIESEL TECHNOLOGIES INC (Form: 10-Q, Received: 11/13/2015 08:24:14)

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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, 2015

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
(State or other jurisdiction of
incorporation or organization)

06-1393453
(I.R.S. Employer
Identification No.)

1621 Fiske Place

Oxnard, CA 93033

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (805) 639-9458

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( §232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated filer o

Accelerated filer o

Non-accelerated filer o

Smaller reporting company þ

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of November 5, 2015, the outstanding number of shares of the registrant’s common stock, par value $0.01 per share, was 16,828,806.

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CLEAN DIESEL TECHNOLOGIES, INC.

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	Page
PART I — FINANCIAL INFORMATION	1

Item 1. Financial Statements (Unaudited)	1
Condensed Consolidated Balance Sheets	1
Condensed Consolidated Statements of Comprehensive Loss	2
Condensed Consolidated Statements of Cash Flows	3
Notes to Condensed Consolidated Financial Statements	4

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3. Quantitative and Qualitative Disclosures About Market Risk	27

Item 4. Controls and Procedures	27

PART II — OTHER INFORMATION	28

Item 1. Legal Proceedings	28

Item 1A. Risk Factors	28

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 3. Defaults Upon Senior Securities	28

Item 4. Mine Safety Disclosures	28

Item 5. Other Information	28

Item 6. Exhibits	28

SIGNATURES	29

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

As used in this Quarterly Report on Form 10-Q, the terms “CDTi” or the “Company” or “we,” “our” and “us” refer to Clean Diesel Technologies, Inc. and its consolidated subsidiaries.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, adopted pursuant to the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties, as well as assumptions, which could cause our results to differ materially from those expressed or implied by such forward-looking statements. Forward-looking statements generally are identified by the words “may,” “will,” “project,” “might,” “expects,” “anticipates,” “believes,” “intends,” “estimates,” “should,” “could,” “would,” “strategy,” “plan,” “continue,” “pursue,” or the negative of these words or other words or expressions of similar meaning. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements. These forward-looking statements are based on information available to us, are current only as of the date on which the statements are made, and are subject to numerous risks and uncertainties that could cause our actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, the forward-looking statements. For examples of such risks and uncertainties, please refer to the discussion under the caption “Risk Factors” contained in our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission (the “SEC”) on March 18, 2015 and important factors discussed in this report and our other filings with the SEC, including without limitation the following:

· We have incurred losses and have not experienced positive cash flows from operations in the past, and our independent registered public accounting firm expressed substantial doubt about our ability to continue as a going concern in their reports on our financial statements for the years ended December 31, 2014 and 2013. Our ability to achieve profitability and positive cash flows from operations, or finance negative cash flows from operations, could depend on reductions in our operating costs, which may not be achievable, or from increased sales, which may not occur;

· We could require additional working capital to maintain our operations in the form of funding from outside sources which may be limited, difficult to obtain, or unavailable on acceptable terms or not available at all, or in the case of an offering of common stock or securities convertible into or exercisable for common stock, may result in dilution to our existing stockholders;

· Future growth of our business depends, in part, on the general availability of funding for emissions control programs, enforcement of existing emissions-related environmental regulations, further tightening of emission standards worldwide, market acceptance of our catalyst products, and successful product verifications;

· We recently announced the hiring of a new Chief Executive Officer, and our Executive Team, with input from our Board of Directors, is in the process of accelerating the execution of our business strategy. However, we cannot assure you that we will successfully complete our transformation from serving as a manufacturer of emissions solutions to a developer and supplier of proprietary powders used by other catalyst manufacturers for supply to the global automotive industry or that those efforts will have the intended effect of increasing profitability;

· Currently, we derive the majority of our revenue from our catalyst coating business with Honda. We anticipate that our supply of coated catalysts to Honda will begin to significantly decline in the second half of 2017, as certain current vehicle models are phased out. Accordingly, it will be critical that our powder-to-coat business strategy produces revenues with new customers, which may include Honda directly or indirectly, to replace those from our current core catalyst business. In addition, we have an expired agreement with Honda that may limit our rights to commercialize certain technology within the scope of that agreement and adversely affect the ability to license certain technology;

· We may not be able to successfully market new products that are developed or obtain verification or approval of our new products;

· We depend on intellectual property and the failure to protect our intellectual property could adversely affect our future growth and success;

· We are subject to restrictions and must pay a royalty on certain sales of our products and technology in specified countries in Asia;

· If we are unable to attract and retain qualified personnel, it will harm the ability of our business to grow;

· We have entered into contractual agreements in connection with past sales of certain of our assets, which may expose us to liability for claims for indemnification under such agreements;

· Our results may fluctuate due to certain regulatory, marketing and competitive factors over which we have little or no control; and

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· We face constant changes in governmental standards by which our products are evaluated as well as competition and technological advances by competitors.

You should not place undue reliance on any forward-looking statements. Except as otherwise required by federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to other forward-looking statements.

iii

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

CLEAN DIESEL TECHNOLOGIES, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)

	September 30,		December 31,
	2015		2014
ASSETS
Current assets:
Cash	$	2,990	$	7,220
Accounts receivable, net	4,319		2,875
Inventories	6,808		6,298
Prepaid expenses and other current assets	1,115		1,448
Total current assets	15,232		17,841
Property and equipment, net	1,378		1,357
Intangible assets, net	2,064		2,662
Goodwill	4,744		5,177
Other assets	534		620
Total assets	$	23,952	$	27,657

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Line of credit	$	3,564	$	2,841
Accounts payable	4,663		3,022
Accrued expenses and other current liabilities	5,730		6,189
Income taxes payable	599		777
Total current liabilities	14,556		12,829
Shareholder notes payable	7,550		7,476
Deferred tax liability	313		359
Total liabilities	22,419		20,664
Commitments and contingencies (Note 12)
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 24,000,000; issued and outstanding 16,828,806 and 14,152,772 shares at September 30, 2015 and December 31, 2014, respectively	168		142
Additional paid-in capital	204,964		200,771
Accumulated other comprehensive loss	(4,891)		(2,865)
Accumulated deficit	(198,708)		(191,055)
Total stockholders’ equity	1,533		6,993
Total liabilities and stockholders’ equity	$	23,952	$	27,657

See accompanying notes to condensed consolidated financial statements.

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CLEAN DIESEL TECHNOLOGIES, INC.

Condensed Consolidated Statements of Comprehensive Loss

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2015		2014		2015		2014
Revenues	$	9,759	$	9,311	$	30,038	$	32,563
Cost of revenues	7,300		6,389		21,994		22,076
Gross profit	2,459		2,922		8,044		10,487
Operating expenses:
Selling, general and administrative	3,028		2,689		9,461		9,197
Research and development	2,303		1,828		6,276		4,596
Severance and other charges	3		805		4		1,182
Total operating expenses	5,334		5,322		15,741		14,975
Loss from continuing operations	(2,875)		(2,400)		(7,697)		(4,488)
Other income (expense):
Interest expense	(309)		(307)		(886)		(899)
Other income (expense), net	1,015		1,199		909		(914)
Total other income (expense)	706		892		23		(1,813)
Loss from continuing operations before income taxes	(2,169)		(1,508)		(7,674)		(6,301)
Income tax expense (benefit) from continuing operations	(28)		(117)		(88)		150
Net loss from continuing operations	(2,141)		(1,391)		(7,586)		(6,451)
Net loss from discontinued operations	(67)		(179)		(67)		(144)
Net loss	(2,208)		(1,570)		(7,653)		(6,595)
Foreign currency translation adjustments	(1,155)		(1,034)		(2,026)		(889)
Comprehensive loss	$	(3,363)	$	(2,604)	$	(9,679)	$	(7,484)

Basic and diluted net loss per common share:
Net loss from continuing operations	$	(0.13)	$	(0.11)	$	(0.50)	$	(0.56)
Net income from discontinued operations	-		(0.02)		-		(0.01)
Net loss	$	(0.13)	$	(0.13)	$	(0.50)	$	(0.57)
Basic and diluted weighted average shares outstanding	16,791		12,412		15,274		11,501

See accompanying notes to the condensed consolidated financial statements.

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CLEAN DIESEL TECHNOLOGIES, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine Months Ended
	September 30,
	2015		2014
Cash flows from operating activities:
Net loss	$	(7,653)	$	(6,595)
Net loss from discontinued operations	67		144
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization	660		752
Stock-based compensation expense	486		505
Loss (gain) on change in fair value of liability-classified warrants	(269)		945
Gain on foreign currency transactions	(545)		(470)
Loss related to litigation	-		123
Loss (gain) on disposal of property and equipment	1		(296)
Offering costs allocated to warrants issued	88		165
Other	91		(4)
Changes in operating assets and liabilities:
Accounts receivable	(1,690)		1,041
Inventories	(1,135)		(2,399)
Prepaid expenses and other assets	23		227
Accounts payable, accrued expenses and other current liabilities	1,189		(379)
Income taxes	511		(1,176)
Cash used in operating activities of continuing operations	(8,176)		(7,417)
Cash provided by (used in) operating activities of discontinued operations	(667)		173
Net cash used in operating activities	(8,843)		(7,244)
Cash flows from investing activities:
Purchases of property and equipment	(342)		(334)
Proceeds from sale of property and equipment	8		315
Distribution from unconsolidated affiliate	-		91
Net cash provided by (used in) investing activities of continuing operations	(334)		72
Net cash used in investing activities of discontinued operations	-		(8)
Net cash provided by (used in) investing activities	(334)		64
Cash flows from financing activities:
Net borrowings under demand line of credit	722		679
Proceeds from issuance of common stock and warrants, net of offering costs	4,490		6,114
Proceeds from exercise of warrants	-		1,000
Proceeds from exercise of stock options	-		275
Other	-		(18)
Net cash provided by financing activities	5,212		8,050
Effect of exchange rates on cash	(265)		77
Net change in cash	(4,230)		947
Cash at beginning of period	7,220		3,909
Cash at end of period	$	2,990	$	4,856

Significant noncash financing activity:
Issuance of warrants classified as derivative liability	$	845	$	1,531

See accompanying notes to the condensed consolidated financial statements.

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CLEAN DIESEL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Description of Business

Clean Diesel Technologies, Inc. (“CDTi” or the “Company”) currently commercializes its material technology by manufacturing and distributing light duty vehicle catalysts and heavy duty diesel emissions control systems and products to major automakers, distributors, integrators and retrofitters.

The Company is transitioning its business from being a niche manufacturer of emissions control solutions for the automotive and heavy duty diesel markets to becoming an advanced materials technology provider for these markets. The Company has a proven ability to develop proprietary materials incorporating various base metals that replace costly platinum group metals (“PGMs”) in coatings on vehicle catalytic converters. Recently, the Company has expanded its materials platform to include new synergized-PGM diesel oxidation catalysts (SPGM TM DOC), Base-Metal Activated Rhodium Support (BMARS TM ), and Spinel ™ technologies, and it is in the process of introducing these new catalyst technologies to OEMs and other vehicle catalyst manufacturers in a proprietary powder form. The Company believes that this powder-to-coat business model will allow it to achieve greater scale and higher return on its technology investment than in the past.

The Company’s business is driven by increasingly stringent global emission standards for internal combustion engines, which are major sources of a variety of harmful pollutants. It has operations in the United States (“U.S.”), Canada, the United Kingdom, France, Japan and Sweden as well as an Asian investment.

2. Liquidity and Going Concern

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. Therefore, the consolidated financial statements contemplate the realization of assets and liquidation of liabilities in the ordinary course of business. The Company has suffered recurring losses and negative cash flows from operations since inception, resulting in an accumulated deficit of $198.7 million at September 30, 2015. The Company has funded its operations through asset sales, credit facilities and other borrowings and equity sales.

At September 30, 2015, the Company had $3.0 million in cash, and based upon the Company’s current and anticipated usage of cash resources, the Company expects to require additional financing in the form of funding from outside sources during the next three to six months. The Company will evaluate the amount of cash needed, and the manner in which such cash will be raised, on an ongoing basis. The Company’s continuation as a going concern is dependent upon its ability to obtain adequate additional financing, which the Company has successfully secured since inception, including financing from equity sales and asset divestitures. However, there is no assurance that the Company will be able to achieve projected levels of revenue and maintain access to sufficient working capital, and accordingly, there is substantial doubt as to whether the Company’s existing cash resources and working capital are sufficient to enable it to continue its operations for the next twelve months.

The Company has a $7.5 million secured demand financing facility backed by its receivables and inventory with Faunus Group International, Inc. (“FGI”) that terminates on August 15, 2016 and may be extended at the Company’s option for additional one-year terms. However, FGI can cancel the facility at any time. At September 30, 2015, the Company had $3.6 million in borrowings outstanding under this facility with $3.9 million available, subject to the availability of eligible accounts receivable and inventory balances for collateral. However, there is no guarantee that the Company will be able to borrow to the full limit of $7.5 million if FGI chooses not to finance a portion of its receivables or inventory.

On May 15, 2012, the Company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”) (the “Shelf Registration”), which was declared effective by the SEC on May 21, 2012. The Shelf Registration permits the Company to sell, from time to time, up to an aggregate of $50.0 million of various securities, provided that the Company may not sell its securities in a primary offering pursuant to the Shelf Registration or any other registration statement on Form S-3 with a value exceeding one-third of its public float in any 12-month period (unless the Company’s public float rises to $75.0 million or more). On May 19, 2015 and November 10, 2015, the Company filed shelf registration statements on Form S-3 and Form S-3/A, respectively, with the SEC to replace the existing Shelf Registration (collectively, the “Replacement Shelf”), which the Company anticipates will be declared effective later this year. Once declared effective, the Replacement Shelf will permit the Company to sell, from time to time, up to an aggregate of $50.0 million of various securities, provided that the Company may not sell its securities in a primary offering pursuant to the Replacement Shelf or any other registration statement on Form S-3 with a value exceeding one-third of its public float in any 12-month period (unless the Company’s public float rises to $75.0 million or more).

On April 4, 2014, the Company sold 2,030,000 units pursuant to the Shelf Registration for $3.40 per unit, with

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CLEAN DIESEL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

each unit consisting of one share of common stock and 0.4 of one warrant to purchase one share of common stock with an exercise price of $4.20 per share. The Company received net proceeds of $6.1 million after deducting placement agent fees and other offering expenses.

On October 20, 2014, the Company completed the sale of its Reno, Nevada-based custom fabricated exhaust parts and accessories business (the “Reno Business”) for $1.3 million in cash.

On November 4, 2014, the Company entered into subscription agreements to sell 1,385,000 shares of common stock and warrants to purchase up to an aggregate of 388,393 shares of common stock with an exercise price of $3.25 per share (the “Series A Warrants”), for a combined purchase price of $2.80 per share and 0.28 of one Series A Warrant, and other warrants to purchase up to an aggregate of 168,571 shares of common stock with an exercise price of $0.01 per share (the “Series B Warrants”) for a purchase price of $2.79 per Series B Warrant, pursuant to the Shelf Registration. The Company received net proceeds of $3.8 million after deducting placement agent fees and other offering expenses.

On November 11, 2014, the Company and Kanis S.A. (“Kanis”) entered into a letter agreement whereby Kanis agreed to amend the terms of the outstanding loans, in the aggregate principal amount of $7.5 million, made to the Company, such that (i) the maturity dates of all outstanding loans were extended to October 1, 2016; and (ii) the early redemption feature applicable to one of the outstanding loans was removed.

On June 2, 2015, the Company entered into an underwriting agreement to sell 2,500,000 units pursuant to the Shelf Registration for $2.05 per unit, with each unit consisting of one share of common stock and 0.2 of one warrant to purchase one share of common stock with an exercise price of $2.65 per share. The Company received net proceeds of $4.5 million after deducting the underwriting discounts and other offering expenses. For additional information, refer to Note 10, “Stockholders’ Equity”.

On October 7, 2015, the Company and Kanis entered into a letter agreement whereby Kanis agreed to amend the terms of the outstanding loans, in the aggregate principal amount of $7.5 million, made to the Company, such that the maturity dates of all outstanding loans were extended to October 1, 2018. For additional information, refer to Note 15, “Subsequent Events”.

3. Summary of Significant Accounting Policies

a. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC for interim financial reporting. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been reflected. Intercompany transactions and balances have been eliminated in consolidation. The results reported in these unaudited condensed consolidated financial statements should not necessarily be taken as indicative of results that may be expected for the entire year. Certain financial information that is normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), but is not required for interim reporting purposes, has been condensed or omitted. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

The preparation of financial statements in conformity with U.S. GAAP requires management of the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Actual results could differ materially from those estimates.

Discontinued Operations

In October 2014, the Company completed the sale of substantially all of the assets of its Reno Business, and the operations of this business were classified as discontinued operations for all periods presented in this report. Discontinued operations also includes costs for the Company’s liability to settle its indemnification matters with Johnson Matthey (“JM”) associated with the sale of Applied Utility Systems, Inc. (“AUS”), a former subsidiary of the Company, in 2009. All liabilities for the indemnification matters were settled and paid. In the statements of cash flows, the cash flows of discontinued operations are separately classified and aggregated.

For additional information, refer to Note 14, “Discontinued Operations”.

All discussions and amounts in the consolidated financial statements and related notes for all periods presented relate to continuing operations only, unless otherwise noted.

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CLEAN DIESEL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

b. Concentration of Risk

For the three months ended September 30, 2015 and 2014, one automotive OEM customer within the Catalyst segment accounted for 61% and 60%, respectively, of the Company’s revenues. For the nine months ended September 30, 2015 and 2014, one automotive OEM customer within the Catalyst segment accounted for 60% and 50%, respectively, of the Company’s revenues. This customer accounted for 44% and 50% of the Company’s accounts receivable at September 30, 2015 and December 31, 2014, respectively. No other customers accounted for 10% or more of the Company’s revenues or accounts receivable for these periods.

For the periods presented below, certain vendors accounted for 10% or more of the Company’s raw material purchases as follows:

		Three Months Ended		Nine Months Ended
		September 30,		September 30,
Vendor	Supplies	2015	2014	2015	2014
A	Substrates	40%	33%	42%	24%
B	Substrates	21%	*	16%	*
C	Catalysts	*	*	*	11%

* less than 10%

c. Net Loss per Share

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 dilutive potential common shares. Dilutive potential common shares include employee stock options and restricted share units and warrants and debt that are convertible into the Company’s common stock. Because the Company incurred net losses in the three and nine months ended September 30, 2015 and 2014, the effect of potentially dilutive securities has been excluded in the computation of net loss per share as their impact would be anti-dilutive. Potentially dilutive common stock equivalents excluded were 3.4 million and 2.4 million shares during the three months ended September 30, 2015 and 2014, respectively. Potentially dilutive common stock equivalents excluded were 3.0 million and 2.2 million shares during the nine months ended September 30, 2015 and 2014, respectively.

d. Fair Value Measurements

The Company measures certain financial assets and liabilities at fair value in accordance with a hierarchy which requires an entity to maximize the use of observable inputs which reflect market data obtained from independent sources and minimize the use of unobservable inputs. There are three levels of inputs that may be used to measure fair value:

· 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.

The Company records its liability-classified warrants at fair value in accordance with the fair value measurement framework. For additional information, refer to Note 11, “Warrants”. The valuation inputs hierarchy classification for the warrant liability measured at fair value on a recurring basis is summarized as follows (in thousands):

Warrant liability	Level 1	Level 2	Level 3
September 30, 2015	-	-	$	2,050
December 31, 2014	-	-	$	1,474

The following is a reconciliation of the warrant liability, included in accrued expenses and other current liabilities in the accompanying unaudited condensed consolidated balance sheets, measured at fair value using Level

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CLEAN DIESEL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

3 inputs (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2015		2014		2015		2014
Balance at beginning of period	$	2,591	$	1,647	$	1,474	$	939
Issuance of common stock warrants	—		—		845		1,531
Exercise of common stock warrants	—		—		-		(2,505)
Remeasurement of common stock warrants	(541)		(737)		(269)		945
Balance at end of period	$	2,050	$	910	$	2,050	$	910

e. Fair Value of Financial Instruments

Accounting Standards Codification (“ASC”) Topic 825, “Financial Instruments”, requires disclosure of the fair value of financial instruments for which the determination of fair value is practicable. The fair values of the Company’s cash, trade accounts receivable, prepaid expenses and other current assets, accounts payable and accrued expenses and other current liabilities approximate carrying values due to the short maturity of these instruments. The fair value of the line of credit approximates its carrying value due to the variable interest rates. The fair value of shareholder notes payable calculated using level 3 inputs, using a Black-Scholes option-pricing model to value the debt’s conversion factor and a net present value model was $7.7 million at September 30, 2015 and December 31, 2014.

f. Reclassifications

Certain prior-period amounts have been reclassified to conform to the current period presentation. These changes had no impact on the previously reported consolidated results of operations or stockholders’ equity. The Company reclassified $0.7 million from prepaid expenses and other current assets to income taxes payable on the condensed consolidated balance sheet at December 31, 2014 to net certain income taxes receivable and payable, per jurisdiction, and conform to the current period presentation.

g. Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. ASU No. 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)”. ASU No. 2014-09 requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In July 2015, the FASB finalized the delay of the effective date by one year, making the new standard effective for interim periods and annual periods beginning after December 15, 2017. Early adoption is permitted, but it is not permitted earlier than the original effective date. ASU No. 2014-09 provides for either full retrospective adoption or a modified retrospective adoption by which it is applied only to the most current period presented. The Company is currently in the process of evaluating the impact of the adoption of ASU No. 2014-09 on its consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. ASU No. 2014-15 defines management’s responsibility to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. It is effective for annual reporting periods ending after December 15, 2016, and for annual and interim reporting periods thereafter. Early adoption is permitted. The Company has not elected to early adopt, and it is currently in the process of evaluating the impact of the adoption of ASU No. 2014-15 on its consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, “Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs ”. ASU No. 2015-03 requires that debt issuance costs related to a recognized debt liability be reported on the consolidated statements of financial condition as a direct deduction from the carrying amount of that debt liability. It is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period with early application permitted for financial statements that have not been previously issued. The Company has not elected to early adopt, and it does not expect the impact of the adoption of ASU No. 2015-03 to be material to its consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement”. ASU No. 2015-05 provides clarification on whether a cloud computing arrangement includes a software license. If a software license is included, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a software license is not included, the arrangement should be accounted for as a service contract. It is effective for reporting periods beginning after December 15, 2015, with early adoption permitted. Entities can elect to adopt the standard update prospectively or retrospectively to arrangements entered into, or materially modified, after the effective date. The Company does not expect to early adopt ASU 2015-05, and it is currently in the process of evaluating the impact of the adoption of ASU No. 2015-05 on its consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”. ASU No. 2015-11 changes the measurement principle for inventory from the “lower of cost or market” to “lower of cost and net realizable value.” Net realizable value is defined as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.” ASU 2015-11 eliminates the guidance that entities consider replacement cost or net realizable value less an approximately normal profit margin in the subsequent measurement of inventory when cost is determined on a first-in, first-out or average cost basis. It is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company has not yet determined whether it will elect to early adopt ASU 2015-11, and it is currently in the process of evaluating the impact of the adoption of ASU No. 2015-11 on its consolidated financial statements.

4. Inventories

Inventories consist of the following (in thousands):

	September 30,		December 31,
	2015		2014
Raw materials	$	2,822	$	2,744
Work in process	646		902
Finished goods	3,340		2,652
	$	6,808	$	6,298

5. Goodwill and Intangible Assets

Goodwill

The change in the carrying amount of goodwill during the nine months ended September 30, 2015 was due to the effect of foreign currency translation.

Intangible Assets

Intangible assets consist of the following (in thousands):

	Useful Life	September 30,		December 31,
	in Years	2015		2014
Trade name	15 - 20	$	1,205	$	1,293
Patents and know-how	5 - 12	4,096		4,529
Customer relationships	4 - 8	741		837
		6,042		6,659
Less accumulated amortization		(3,978)		(3,997)
		$	2,064	$	2,662

The Company recorded amortization expense related to amortizable intangible assets of $0.1 million and $0.2 million during the three months ended September 30, 2015 and 2014, respectively. The Company recorded amortization expense related to amortizable intangible assets of $0.4 million and $0.5 million during the nine months ended September 30, 2015 and 2014, respectively.

Estimated amortization expense for each of the next five years is as follows (in thousands):

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

Years ending December 31:
Remainder of 2015	$	134
2016	$	445
2017	$	436
2018	$	162
2019	$	162
2020	$	162

6. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following (in thousands):

	September 30,		December 31,
	2015		2014
Accrued salaries and benefits	$	1,600	$	1,115
Accrued severance and other charges (1)	-		335
Accrued warranty (2)	301		373
Warrant liability (3)	2,050		1,474
Accrued indemnification settlement (4)	-		650
Liability for consigned precious metals	321		565
Other	1,458		1,677
	$	5,730	$	6,189

(1) For additional information, refer to Note 7, “Severance and Other Charges”.

(2) For additional information, refer to Note 8, “Accrued Warranty”.

(3) For additional information, refer to Note 11, “Warrants”.

(4) For additional information, refer to Note 14, “Discontinued Operations”.

7. Severance and Other Charges

Severance and other charges consist of the following (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2015		2014		2015		2014
Employee severance expense	$	3	$	731	$	4	$	800
Lease exit costs	-		74		-		117
Legal settlements	-				-		265
Total severance and other charges	$	3	$	805	$	4	$	1,182

The following summarizes the activity in the Company’s accrual for severance and other charges (in thousands):

			Lease Exit
	Severance		Costs		Total
December 31, 2014	$	293	$	42	$	335
Provision	4		-		4
Payments	(297)		(42)		(339)
September 30, 2015	$	-	$	-	$	-

8. Accrued Warranty

The following summarizes the activity in the Company’s accrual for product warranty (in thousands):

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CLEAN DIESEL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

	Nine Months Ended
	September 30,
	2015		2014
Balance at beginning of period	$	373	$	453
Accrued warranty expense	316		500
Warranty claims paid	(336)		(467)
Translation adjustment	(52)		(17)
Balance at end of period	$	301	$	469

9. Debt

Debt consists of the following (in thousands):

		September 30,		December 31,
		2015		2014
Line of credit with FGI		$	3,564	$	2,841
$	1.5 million, 8% shareholder note due 2016 (1)	1,620		1,598
$	3.0 million, 8% subordinated convertible shareholder notes due 2016 (1)	2,970		2,947
$	3.0 million, 8% shareholder note due 2016 (1)	2,960		2,931
		11,114		10,317
Less current portion		(3,564)		(2,841)
		$	7,550	$	7,476

(1) The aggregate amount of unamortized debt discount was $0.1 million and $0.2 million at September 30, 2015 and December 31, 2014, respectively. Refer to Note 15, “Subsequent Events”, regarding recent amendments to the shareholder notes.

Line of Credit with FGI

At September 30, 2015, the Company had $3.2 million of gross accounts receivable pledged to FGI as collateral for short-term debt in the amount of $2.2 million. At September 30, 2015, the Company also had $1.4 million in borrowings outstanding against eligible inventory. The Company was in compliance with the terms of the FGI Facility at September 30, 2015. However, t here is no guarantee that the Company will be able to borrow to the full limit of $7.5 million if FGI chooses not to finance a portion of its receivables or inventory.

10. Stockholders’ Equity

June 2015 Offering

On June 2, 2015, the Company entered into an underwriting agreement with Cowen and Company, LLC, as the representative of the several underwriters identified therein, pursuant to which the Company agreed to offer and sell up to 2,500,000 units at a price to the public of $2.05 per unit (the “Offering”). Each unit consisted of one share of common stock and 0.2 of a warrant (the “Offering Warrants”) to purchase one share of common stock. The Offering Warrants have an exercise price of $2.65 per share and can be exercised during the period commencing after six months and ending five and a half years from the date of issuance.

The Company received gross proceeds of $5.1 million and net proceeds of $4.5 million after deducting the underwriting discounts and other offering expenses. The Offering Warrants are within the scope of ASC 815-40 and are required to be recorded as liabilities. For additional information, refer to Note 11, “Warrants”. Accordingly, of the $4.5 million in net proceeds, $3.7 million was allocated to the common stock and included in additional paid-in capital and $0.8 million was allocated to the warrant liability based on the fair value of the warrants on the issuance date. Additionally, $0.1 million of the underwriter discounts and other offering costs were allocated to the Offering Warrants, based on the relative fair value of the Offering Warrants and the common stock on the issuance date, and was included in other expense, net in the accompanying statements of comprehensive loss for the three and nine months ended September 30, 2015. The Company intends to use the net proceeds for general corporate purposes, which may include working capital, general and administrative expenses, capital expenditures and implementation of its strategic priorities. The Company may also use a portion of the net proceeds to acquire or invest in businesses, products and technologies that are complementary to its current business, although there are no present commitments or agreements for any such transactions.

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CLEAN DIESEL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

11. Warrants

Warrants outstanding and exercisable are summarized as follows:

		Weighted
		Average
		Exercise		Range of
	Shares	Price		Exercise Prices
Outstanding at December 31, 2014 (1)	1,610,069	$	3.54	$1.25 - $10.40
Issued	500,000	$	2.65	$2.65
Outstanding at September 30, 2015 (1)	2,110,069	$	3.33	$1.25 - $10.40
Exercisable at September 30, 2015 (1)	1,610,069	$	3.54	$1.25 - $10.40

(1) Includes 170,676 equity-classified warrants.

Warrant Classification

The Company evaluates warrants on issuance and at each reporting date to determine proper classification as equity or as a liability. The Offering Warrants require physical settlement by delivering registered shares, and the provisions of the warrant agreement include potential cash payments for failure to timely deliver shares and fractional share settlement. Accordingly, the Offering Warrants require liability classification.

Warrant Liability

The Company’s warrant liability is carried at fair value and is classified as Level 3 in the fair value hierarchy because the warrants are valued based on unobservable inputs.

The Company determines the fair value of its warrant liability using the Black-Scholes option-pricing model unless the warrants are subject to market conditions, in which case it uses a Monte Carlo simulation model, which utilizes multiple input variables to estimate the probability that market conditions will be achieved. These models are dependent on several variables, such as the warrant’s expected term, expected strike price, expected risk-free interest rate over the expected term of the instrument, expected dividend yield rate over the expected term and the expected volatility. The expected strike price for warrants with full-ratchet down-round price protection is based on a weighted average probability analysis of the strike price changes expected during the term as a result of the full-ratchet down-round price protection.

Due to the significant change in the Company following its business combination with Catalytic Solutions, Inc. (the “Merger”), CDTi’s pre-Merger historical price volatility was not considered representative of expected volatility going forward. Therefore, for warrants with an expected term that required a volatility look-back that pre-dated the Merger, the Company used an estimate based upon a weighted average of implied and historical volatility of a portfolio of peer companies and CDTi’s post-Merger historical volatility for the valuation of these warrants prior to 2015. For warrants with an expected term that did not require a volatility look-back that pre-dated the Merger, CDTi’s post-Merger historical price volatility was considered representative of expected volatility, and accordingly, only CDTi’s historical volatility was used for the valuation of these warrants prior to 2015. During 2015, the Company determined that its post-Merger historical volatility was considered representative of expected volatility for the valuation of its warrants. The expected life is equal to the remaining contractual life of the warrants.

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CLEAN DIESEL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The assumptions used in the Black-Scholes option-pricing model to estimate the fair value of the warrant liability for these warrants outstanding are as follows:

	September 30,		June 8,		December 31,
	2015		2015		2014
Issued April 2014
Number of warrants	812,000				812,000
CDTi stock price	$	1.53			$	1.81
Strike price	$	4.20			$	4.20
Expected volatility (1)	121.4%				86.6%
Risk-free interest rate	1.2%				1.6%
Dividend yield	–				–
Expected life in years	4.0				4.8
Issued November 2014
Number of warrants	388,393				388,393
CDTi stock price	$	1.53			$	1.81
Strike price	$	3.25			$	3.25
Expected volatility (1)	121.1%				86.5%
Risk-free interest rate	1.2%				1.6%
Dividend yield	–				–
Expected life in years	4.1				4.9
Issued June 2015
Number of warrants	500,000		500,000
CDTi stock price	$	1.53	$	2.09
Strike price	$	2.65	$	2.65
Expected volatility	111.6%		114.6%
Risk-free interest rate	1.4%		1.8%
Dividend yield	–		–
Expected life in years	5.2		5.5

(1) During 2015, the Company’s post-Merger historical volatility began to be considered representive of expected volatility for these warrants.

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CLEAN DIESEL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The assumptions used in the Monte Carlo simulation model to estimate the fair value of the warrant liability for warrants outstanding with full-ratchet down-round protection are as follows:

	September 30,		December 31,
	2015		2014
Issued July 2013
Number of warrants	159,000		159,000
CDTi stock price	$	1.53	$	1.81
Strike price	$	1.25	$	1.25
Expected volatility	98.3%		103.6%
Risk-free interest rate	0.9%		1.2%
Dividend yield	–		–
Expected life in years	2.8		3.5
Issued November 2014
Number of warrants	80,000		80,000
CDTi stock price	$	1.53	$	1.81
Strike price	$	1.75	$	1.75
Expected volatility (1)	98.2%		77.0%
Risk-free interest rate	1.2%		1.6%
Dividend yield	–		–
Expected life in years	4.1		4.9

(1) During 2015, the Company’s post-Merger historical volatility began to be considered representive of expected volatility for these warrants.

The warrant liability, included in accrued expenses and other current liabilities in the accompanying unaudited condensed consolidated balance sheets, is re-measured at the end of each reporting period with changes in fair value recognized in other expense, net in the accompanying unaudited condensed consolidated statements of comprehensive loss. Upon the exercise of a warrant that is classified as a liability, the fair value of the warrant exercised is re-measured on the exercise date and reclassified from warrant liability to additional paid-in capital. For additional information regarding the fair value of the warrant liability, amounts recognized in other income (expense) and amounts reclassified to additional paid-in capital upon exercise, refer to the warrant liability reconciliation in Note 3(d), “Summary of Significant Accounting Policies—Fair Value Measurements”.

12. Commitments and Contingencies

The Company is involved in legal proceedings from time to time in the ordinary course of its business. Management does not believe that any of these claims and proceedings against it is likely to have, individually or in the aggregate, a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows. Accordingly, the Company cannot determine the final amount, if any, of its liability beyond the amount accrued in the consolidated financial statements as of September 30, 2015, nor is it possible to estimate what litigation-related costs will be in the future.

By email dated June 26, 2015, the California Air Resources Board (“CARB”) asserted the Company had deficiencies in compliance with the Verification Procedure, Aftermarket Parts Regulations and the Vehicle Code. The penalty calculated by CARB for these alleged violations was $1.8 million, with the largest component relating to the use of empty center bodies to allow trucks to be placed back in service while warranty claims are being evaluated. This process is now explicitly permitted by regulation, but was not permitted at the time of the alleged violation. Although the Company disagreed, and continues to disagree, with CARB’s findings, the Company has cooperated with CARB’s investigation and is discussing with CARB whether and to what extent the payment of monetary penalties would be appropriate. After review and evaluation of CARB’s findings and publicly available CARB settlements for similar matters, the Company has accrued an expense of less than $0.1 million as of September 30, 2015 to resolve this matter. In the event that a mutually satisfactory agreement cannot be reached, the Company plans to defend any formal action taken by CARB.

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CLEAN DIESEL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

For information related to commitments and contingencies related to AUS, a former subsidiary of the Company that was sold in 2009, refer to Note 14, “Discontinued Operations”.

13. Segment Reporting and Geographic Information

The Company has two business division segments based on the products it delivers:

Catalyst division — The Catalyst division develops and produces catalysts to reduce emissions from gasoline, diesel and natural gas combustion engines that are offered for multiple markets and a wide range of applications. The Catalyst Division developed a family of unique high-performance catalysts, featuring inexpensive base-metals with low or even no platinum group metals to provide increased catalytic function and value for technology-driven automotive industry customers. The Catalyst division has supplied over twelve million parts to light duty vehicle customers since 2001. The Catalyst division also provides catalyst formulations for the Company’s Heavy Duty Diesel Systems division. Intersegment revenues are based on market prices.

Heavy Duty Diesel Systems division — The Heavy Duty Diesel Systems division designs and manufactures exhaust emissions control solutions. This division offers a full range of DuraFit ™ OEM replacement diesel particulate filters and products for the verified retrofit and non-retrofit OEM markets through its distributor/dealer network and direct sales. These products are used to reduce exhaust emissions created by on-road, off-road and stationary diesel and alternative fuel engines including propane and natural gas. The retrofit market in the U.S. is driven in particular by state and municipal environmental regulations and incentive funding for voluntary early compliance. The Heavy Duty Diesel Systems division derives significant revenues from retrofit with a portfolio of solutions verified by the California Air Resources Board and the United States Environmental Protection Agency.

Corporate — Corporate includes cost for personnel, insurance and public company expenses such as legal, audit and taxes that are not allocated down to the operating divisions.

Summarized financial information for the Company’s reportable segments is as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2015		2014		2015		2014
Revenues
Catalyst	$	6,655	$	6,186	$	20,348	$	18,286
Heavy Duty Diesel Systems	3,816		3,672		11,794		16,048
Eliminations (1)	(712)		(547)		(2,104)		(1,771)
Total	$	9,759	$	9,311	$	30,038	$	32,563

Income (loss) from continuing operations
Catalyst	$	(625)	$	90	$	(1,340)	$	673
Heavy Duty Diesel Systems	(650)		(640)		(1,512)		223
Corporate	(1,511)		(1,847)		(4,640)		(5,371)
Eliminations (1)	(89)		(3)		(205)		(13)
Total	$	(2,875)	$	(2,400)	$	(7,697)	$	(4,488)

(1) Elimination of Catalyst revenue and profit in ending inventory related to sales to Heavy Duty Diesel Systems.

Net sales by geographic region based on the location of sales organization is as follows (in thousands):

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CLEAN DIESEL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2015		2014		2015		2014
United States	$	6,127	$	5,972	$	18,770	$	17,068

Canada	2,787		2,413		8,744		12,129
Europe	845		926		2,524		3,366
Total international	3,632		3,339		11,268		15,495
Total revenues	$	9,759	$	9,311	$	30,038	$	32,563

14. Discontinued Operations

The Reno Business

On October 20, 2014, the Company completed the sale of its Reno Business for $1.3 million in cash. The net assets held for sale of the Reno Business were eliminated from the Company’s balance sheet as of the sale date, and the Company recognized a gain of $0.2 million. Historically, the Reno Business was a component of the Company’s Heavy Duty Diesel Systems division.

Applied Utility Systems, Inc.

The Company is undergoing a sales and use tax audit by the State of California (the “State”) on AUS for the period of 2007 through 2009. The audit has identified a project performed by the Company during that time period for which sales tax was not collected and remitted and for which the State asserts that proper documentation of resale may not have been obtained and that the Company owes sales tax of $1.5 million, inclusive of interest. The Company contends and believes that it received sufficient and proper documentation from its customer to support not collecting and remitting sales tax from that customer and is actively disputing the audit report with the State. On August 12, 2013, the Company appeared at an appeals conference with the State Board of Equalization (“BOE”). On July 21, 2014, the Company received a Decision and Recommendation (“D&R”) from the BOE. The D&R’s conclusion was that the basis for the calculation of the aforementioned $1.5 million tax due should be reduced from $12.2 million to $9.0 million with a commensurate reduction in the tax owed to the State. Regardless of this finding, the Company continues to believe that it will prevail in this matter, as it believes that the State did not adequately address the legal arguments related to the Company’s acceptance of the valid resale certificate from its customer. The Company has not agreed to these findings, and therefore, it will be appealing at a higher level at the BOE. Based on a re-audit, the BOE lowered the tax due to $0.9 million, inclusive of interest. The Company continues to not agree with these findings based on the aforementioned reasons. However, in October 2015, the Company offered to settle this case for $0.1 million, which is based on the expected cost of continuing to contest this audit. Accordingly, an accrual was charged to discontinued operations for the three and nine months ended September 30, 2015 for the recent offer to settle this case. Should the Company not prevail with the recent offer to settle this case, it plans to continue with the appeals process. Further, should the Company not prevail in this case, it will pursue reimbursement from the customer for all assessments from the State.

On November 15, 2013, BP Products North America (“BP”) instituted claims against Johnson Matthey (“JM”) as the parent company of and purchaser of Applied Utility Systems, Inc. (“AUS”), a former subsidiary of the Company. On May 12, 2010, JM tendered to the Company a claim for indemnification under the Asset Purchase Agreement dated October 1, 2009 (the “Asset Purchase Agreement”) among JM, the Company and AUS. On June 11, 2013, BP, JM and the Company entered into a settlement agreement and mutual release pursuant to which they settled all claims. This settlement agreement had no material impact on the Company. Under the indemnification clauses of the Asset Purchase Agreement, the Company may be liable for legal expenses incurred by JM. These legal costs may be offset against funds withheld by JM from the acquisition of AUS.

In connection with the Asset Purchase Agreement, on October 1, 2009, JM presented the Company with an indemnification claim seeking recovery of the net amount of $0.9 million after offsetting the funds withheld by JM from the acquisition of AUS. These claims were for matters relating to various customer contracts that JM purchased, including the BP contract discussed above. The Company and JM entered into discussions relating to the application of offsets and the validity of the claims presented. On June 3, 2015, JM and the Company entered into a settlement and release agreement pursuant to which they settled all claims for $0.7 million. This settlement was paid

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CLEAN DIESEL TECHNOLOGIES, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

with an initial $0.1 million installment upon execution of the settlement and release agreement, and the remaining balance was paid in July 2015.

In presenting discontinued operations, general corporate overhead expenses that have been historically allocated to the Reno Business for segment presentation purposes are not included in discontinued operations. The following table presents revenue and expense information for discontinued operations (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2015		2014		2015		2014
Revenue	$	-	$	1,021	$	-	$	2,822
Expenses	(67)		(1,200)		(67)		(2,966)
Net loss from discontinued operations	$	(67)	$	(179)	$	(67)	(144)

15. Subsequent Events

On October 7, 2015, the Company entered into a letter agreement (the “Agreement”) with Kanis, whereby Kanis agreed to amend the terms of the outstanding loans made to the Company, such that (i) the maturity date and payment premium on the outstanding 8% shareholder note due on October 1, 2016 in the aggregate principal amount of $1,500,000 was extended to October 1, 2018; (ii) the maturity date on the outstanding 8% subordinated convertible note due on October 1, 2016 in the aggregate principal amount of $3,000,000 was extended to October 1, 2018; and (iii) the maturity date on the outstanding 8% shareholder note due on October 1, 2016 in the aggregate principal amount of $3,000,000 was extended to October 1, 2018. Pursuant to the terms of the Agreement, the Company agreed to amend the terms of certain outstanding warrants issued to Kanis in order to (i) extend the expiration date until November 11, 2019 and, (ii) with respect to warrants to purchase up to 75,000 shares of the Company’s common stock, reduce the exercise price to $1.75 per share. The Company is in the process of evaluating the effect of these amendments on its consolidated financial statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Opera tions

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q should also be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2014. This discussion contains forward-looking statements, the accuracy of which involves risks and uncertainties. Refer to the “Cautionary Note Concerning Forward-Looking Statements” at the beginning of this Quarterly Report on Form 10-Q. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, as a result of many important factors, including those set forth in Part I — Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

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

Overview

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

Over the past decade, we have developed several generations of high performance catalysts, including our low-PGM MPC® catalysts that are used on certain new Honda vehicles. Recently, we have expanded our materials platform to include new synergized-PGM diesel oxidation catalysts, or SPGM TM DOCs, Base-Metal Activated Rhodium Support, or BMARS TM , and Spinel ™ technologies. Initial vehicle tests using these new technologies have demonstrated dramatic PGM savings compared to current OEM catalysts. We are in the process of introducing these new catalyst technologies to OEMs and other vehicle catalyst manufacturers in a proprietary powder form, which will allow them to capture the benefits of our advanced catalyst technology in their own manufacturing operations.

We also supply heavy duty diesel emissions control systems and products to major automakers, distributors, integrators and retrofitters.

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

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

Catalyst: Utilizing our advanced materials technology platform, we develop and produce catalysts to reduce emissions from gasoline, diesel and natural gas combustion engines. Most catalytic systems require significant amounts of costly PGMs to operate effectively. Using our proprietary mixed-phase catalyst, or MPC ® , technology, we have developed a family of unique high-performance catalysts, featuring inexpensive base-metals with low or even no PGM content. We have recently developed a new generation of catalyst technologies, which we believe will enable further advances in catalyst performance and further reductions in PGM usage. Since 2001, we have supplied over twelve million parts to light duty vehicle OEM customers. Our Catalyst division is also a supplier of products for our Heavy Duty Diesel Systems division. Revenues from our Catalyst division accounted for 61% and 51% of the total consolidated revenues for the nine months ended September 30, 2015 and 2014, respectively.

Heavy Duty Diesel Systems: We specialize in the design and manufacture of exhaust emissions control solutions for a wide range of heavy duty diesel applications. We offer a full range of DuraFit ™ OEM replacement diesel particulate filters, or DPFs, and products for the verified retrofit and non-retrofit OEM markets through our distribution/dealer network and direct sales. We believe we offer one of the industry’s most comprehensive portfolios of emissions control systems for use in engine retrofit programs that have been evaluated and verified as compliant with applicable state and federal regulations,

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as well as regulations imposed by several European countries. We have received certification from the Verification of Emission Reduction Technologies Association (VERT) for our Purifilter ® exhaust gas recirculation (EGR) diesel particulate filter system, which expands our retrofit market opportunities into South America and other international locations. Sales of emissions control systems by our Heavy Duty Diesel Systems division are driven by the regulation of diesel emissions, particularly in the State of California. Revenues from our Heavy Duty Diesel Systems division accounted for 39% and 49% of the total consolidated revenues for the nine months ended September 30, 2015 and 2014, respectively.

Strategy

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

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

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

Recent Developments

Appointment of New Chief Executive Officer and Acceleration of Transformation

We recently announced the hiring of a new Chief Executive Officer, Matthew Beale, a seasoned executive who has been serving on our Board. Our Executive Team, with input from our Board of Directors, is in the process of accelerating the execution of our business strategy. Among other things, we expect to aggressively complete our transformation from serving as a manufacturer of emissions solutions to a developer and supplier of proprietary powders used by other catalyst manufacturers for supply to the global automotive industry.

In addition, in connection with our ongoing strategic review, we are evaluating our business portfolio as well as our factory and employee utilization and other metrics with a view to more closely align revenues and expenses.

Initial Vehicle and Engine Test Results

New products developed for our powder-to-coat business model include the following:

· SPGM TM diesel oxidation catalyst technology . Preliminary engine and vehicle test results indicate the achievement of emission control and system performance comparable to a leading OEM catalyst product while reducing PGM usage by over 80%.

· BMARS TM technology. Initial test results also demonstrate that BMARS TM , with one catalyst and 50% less PGM, outperformed the OEM’s typical two-catalyst system on a popular passenger car. These results provide OEMs the prospect of eliminating one of the catalyst units altogether, while achieving a greater than 50% PGM cost reduction on the remaining catalyst unit.

· Spinel ™ technology. Initial vehicle test results demonstrated that a Spinel ™ underfloor catalyst with 97% less PGM usage achieved emissions control performance equivalent to the OEM catalyst. Testing of the Spinel ™ close coupled catalyst is currently underway with results expected later in 2015.

Collaboration Agreement

We recently entered into a collaboration agreement with AP Exhaust Technologies, Inc., or AP Exhaust, to commercialize next-generation catalysts. This collaboration aims to bring to market our latest catalyst technologies, which include MPC ® , BMARS ™ and Spinel ™ , across portions of AP Exhaust’s extensive aftermarket catalytic converter product line. This collaboration agreement is also expected to involve a powder-to-coat business model whereby we would sell AP Exhaust enabling proprietary catalytic powders that AP Exhaust would precision coat onto catalytic converter substrates in its state-of-the-art coating facility. The initial drive to commercialization will target the North American aftermarket for light duty replacement catalytic converters, and it is designed to achieve large-scale, rapid commercialization of our advanced catalyst technologies.

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Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures in the financial statements. Critical accounting policies are those accounting policies that may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and that have a material impact on financial condition or operating performance. While we base our estimates and judgments on our experience and on various other factors that we believe to be reasonable under the circumstances, actual results may differ from these estimates under different assumptions or conditions.

We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, allowance for doubtful accounts, inventory valuation, product warranty reserves, accounting for income taxes, goodwill, impairment of long-lived assets other than goodwill, stock-based compensation and liability-classified warrants have the greatest potential impact on our unaudited condensed consolidated financial statements. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2014 for a more complete discussion of our critical accounting policies and estimates.

Recently Issued Accounting Guidance

Refer to Note 3(g), “Summary of Significant Accounting Policies—Recent Accounting Pronouncements”.

Factors Affecting Future Results

Advanced Materials Strategy

Our strategy is to transition from being a niche manufacturer of emissions control solutions for the automotive and heavy duty diesel OEM, retrofit and replacement markets to becoming an advanced materials technology provider of proprietary powders for these markets. We believe that the transition to a powder-to-coat business model will allow us to achieve greater scale and higher return on our technology investment than in the past. In support of this strategy, we have filed a significant number of patents that underpin next-generation technology for our advanced low-PGM catalysts, and we have recently completed an initial series of vehicle tests to validate our next-generation technologies. It is our intention to invest in developing and commercializing these catalyst technologies. As a consequence, we anticipate that we will continue to expand our intellectual property portfolio with additional patents in 2015 and beyond. In addition, we will invest in other development and marketing activities, including hiring of personnel and incurring costs for outside testing and consulting.

DuraFit ™

In the third quarter of 2014, we introduced CDTi’s DuraFit™ OEM replacement DPFs through independent distributors to provide an alternative to OEM manufactured parts. According to market analysis firm Power System Research, manufacturers in North America have produced an average of 250,000 heavy duty on-road diesel vehicles equipped with DPFs each year since 2007 to comply with EPA requirements. The typical OEM warranty on DPFs is 5 years and has expired for many of these vehicles with more continuing to expire in the coming years. As 2007 and newer DPFs from OEMs fail and require replacement, non-OEM DPFs will be needed as replacements. According to a 2012 industry report, the market for medium and heavy duty vehicle after-treatment maintenance and repair is projected to grow from $0.3 billion in 2010 to $3.0 billion by 2017. Recent announcements regarding our progress with the launch of DuraFit™ include:

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

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

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

· We are opening four new distribution centers in the U.S., further strengthening our best-in-class service model and enabling us more efficiently meet order fulfillment and the technical support and service needs

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of our end customers.

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

As expected, sales from these products were modest in 2014, with increased sales expected in 2015 and beyond.

Customer Dependency and Relationship with Honda

Historically, we have derived a significant portion of our revenue from a limited number of customers. Sales to Honda represented 60% of our revenues for the nine months ended September 30, 2015 and 52% of our revenues for the year ended December 31, 2014. However, based on discussions with Honda, and acceleration of our powder-to-coat strategy, we anticipate that our supply of coated catalysts to Honda will begin to significantly decline in the second half of 2017, as certain current vehicle models are phased out. Accordingly, it will be critical that our powder-to-coat business strategy produces revenues with new customers, which may include Honda, directly or indirectly, to replace those from our current core catalyst business.

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

Government Funding and Standards

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

Macroeconomic Factors Impacting the Automotive Industry

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

In addition, our business, operations, results of operation and financial condition may be affected by other factors, including those discussed in Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2014, and our other filings with the Securities and Exchange Commission, or SEC.

Results of Operations

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

Comparison of Three Months Ended September 30, 2015 to Three Months Ended September 30, 2014

Revenues

	Three Months Ended September 30,
			% of			% of
			Total			Total	Change
	2015		Revenues	2014		Revenues	$		%
	($ in thousands)
Catalyst	$	6,655	68%	$	6,186	66%	$	469	8%
Heavy Duty Diesel Systems	3,816		39%	3,672		39%	144		4%
Intercompany revenues	(712)		-7%	(547)		-5%	(165)		(30)%
Total revenues	$	9,759	100%	$	9,311	100%	$	448	5%

Excluding intercompany revenues, the increase in revenues for our Catalyst division was due to an increase in demand from our Japanese OEM customer, including the new model that we announced in March of 2015, which entered production in January of 2015. Further, unit volume for this customer increased by 7% for vehicles currently in mass production.

The increase in revenues for the Heavy Duty Diesel Systems division was due to a $1.6 million increase in DuraFit™ sales, which are beginning to ramp, partially offset by a sharp downturn in retrofit due to a compliance deadline in California during the prior year period.

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

Gross profit

	Three Months Ended September 30,
			% of			% of	Percentage point change
	2015		Revenues (1)	2014		Revenues (1)	in gross profit margin
	($ in thousands)
Catalyst	$	1,803	27%	$	1,763	28%	(1)%
Heavy Duty Diesel Systems	745		20%	1,161		32%	(12)%
Intercompany eliminations	(89)		–	(2)		–	–
Total gross profit	$	2,459	25%	$	2,922	31%	(6)%

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

The gross margin for our Catalyst division remained fairly consistent.

The decrease in gross margin for our Heavy Duty Diesel Systems division was a result of DuraFit™ launch costs and a supply chain that we are in the process of optimizing.

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Operating expenses

	Three Months Ended September 30,
			% of			% of
			Total			Total	Change
	2015		Revenues	2014		Revenues	$		%
	($ in thousands)
Selling, general and administrative	$	3,028	31%	$	2,689	29%	$	339	13%
Research and development	2,303		24%	1,828		20%	475		26%
Severance and other charges	3		0%	805		9%	(802)		(100)%
Total operating expenses	$	5,334	55%	$	5,322	57%	$	12	0%

Selling, general and administrative expenses

The increase was primarily due to a prior period reversal of certain incentive based compensation and an increase in consulting fees to support newer strategies and products.

Research and development expenses

The increase was primarily due to development work and outside testing related to new products and employee-related costs to support our technology initiatives.

Severance and other charges

The decrease was due to higher severance costs in the prior year period.

Other expense

	Three Months Ended September 30,
					Change
	2015		2014		$		%
	($ in thousands)
Interest expense	$	(309)	$	(307)	$	(2)	(1)%
Other expense, net	1,015		1,199		(184)		15%
Total other expense	$	706	$	892	$	(186)	21%

The decrease in total other expense was primarily due to the warrant liability re-measurements.

Income Tax Expense (Benefit)

We incurred income tax benefit of $0.1 million in the three months ended September 30, 2014. The effective income tax rates were 1.0% and 7.8% for the three months ended September 30, 2015 and 2014, respectively. For interim income tax reporting, we estimate our annual effective tax rate and apply it to our year-to-date pre-tax loss. Tax jurisdictions with a projected or year-to-date loss for which a tax benefit cannot be realized are excluded from the annualized effective tax rate. The difference between our effective tax rate and the U.S. statutory tax rate is primarily related to the valuation allowance offsetting the deferred tax assets in both the U.S. and United Kingdom jurisdictions as well as to a foreign tax rate differential related to Sweden and Canada.

Comparison of Nine Months Ended September 30, 2015 to Nine Months Ended September 30, 2014

Revenues

	Nine Months Ended September 30,
			% of			% of
			Total			Total	Change
	2015		Revenues	2014		Revenues	$		%
	($ in thousands)
Catalyst	$	20,348	68%	$	18,286	56%	$	2,062	11%
Heavy Duty Diesel Systems	11,794		39%	16,048		49%	(4,254)		(27)%
Intercompany revenues	(2,104)		-7%	(1,771)		-5%	(333)		(19)%
Total revenues	$	30,038	100%	$	32,563	100%	$	(2,525)	(8)%

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The decrease in revenues for our Heavy Duty Diesel Systems division was due to a sharp downturn in retrofit due to a compliance deadline in California during the prior year period, partially offset by a $3.6 million increase in DuraFit™ sales, which are beginning to ramp.

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

Gross profit

	Nine Months Ended September 30,
			% of			% of	Percentage point change
	2015		Revenues (1)	2014		Revenues (1)	in gross profit margin
	($ in thousands)
Catalyst	$	5,365	26%	$	5,003	27%	(1)%
Heavy Duty Diesel Systems	2,884		24%	5,497		34%	(10)%
Intercompany eliminations	(205)		–	(13)		–	–
Total gross profit	$	8,044	27%	$	10,487	32%	(5)%

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

The gross margin for our Catalyst division remained fairly consistent.

The decrease in gross margin for our Heavy Duty Diesel Systems division was a result of the aforementioned decrease in revenues, coupled with the impact of fixed costs. Further, gross margin was impacted by DuraFit™ launch costs and a supply chain that we are in the process of optimizing.

Operating expenses

	Nine Months Ended September 30,
			% of			% of
			Total			Total	Change
	2015		Revenues	2014		Revenues	$		%
	($ in thousands)
Selling, general and administrative	$	9,461	31%	$	9,197	28%	$	264	3%
Research and development	6,276		20%	4,596		14%	1,680		37%
Severance and other charges	4		0%	1,182		4%	(1,178)		(100)%
Total operating expenses	$	15,741	52%	$	14,975	46%	$	766	5%

Selling, general and administrative expenses

The increase was primarily due an increase in consulting fees to support newer strategies and products and a prior period $0.3 million gain on the sale of a building at one of our foreign locations, partially offset by employee-related cost savings.

Research and development expenses

The increase was primarily due to development work and outside testing related to new products and employee-related costs to support our technology initiatives.

Severance and other charges

The decrease was due to litigation settlement costs, settlement of a customer dispute and higher severance costs in the prior year period.

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Other expense

	Nine Months Ended September 30,
					Change
	2015		2014		$		%
	($ in thousands)
Interest expense	$	(886)	$	(899)	$	13	1%
Other expense, net	909		(914)		1,823		199%
Total other expense	$	23	$	(1,813)	$	1,836	101%

The decrease in total other expense was primarily due to a $1.2 million decrease in losses for the warrant liability re-measurement driven largely by lower stock prices and foreign exchange gains in the current year period.

Income Tax Expense (Benefit)

We incurred income tax expense (benefit) of $(0.1) million and $0.2 million in the nine months ended September 30, 2015 and 2014, respectively. The effective income tax rates were 1.1% and (2.4)% for the nine months ended September 30, 2015 and 2014, respectively. For interim income tax reporting, we estimate our annual effective tax rate and apply it to our year-to-date pre-tax loss. Tax jurisdictions with a projected or year-to-date loss for which a tax benefit cannot be realized are excluded from the annualized effective tax rate. The difference between our effective tax rate and the U.S. statutory tax rate is primarily related to the valuation allowance offsetting the deferred tax assets in both the U.S. and United Kingdom jurisdictions as well as to a foreign tax rate differential related to Sweden and Canada.

Liquidity and Capital Resources

Historically, the revenue that we have generated has not been sufficient to fund our operating requirements and debt servicing needs. Notably, we have suffered recurring losses since inception. As of September 30, 2015, we had an accumulated deficit of $198.7 million compared to $191.1 million at December 31, 2014. We have also had negative cash flows from operations from inception. Our primary sources of liquidity in recent years have been asset sales, credit facilities and other borrowings and equity sales.

We had $3.0 million in cash at September 30, 2015 compared to $7.2 million at December 31, 2014. At September 30, 2015, $1.6 million of our cash was held by foreign subsidiaries in Canada, Sweden and the United Kingdom. We do not intend to repatriate any amount of this cash to the United States as it will be used to fund our subsidiaries’ operations. If we decide to repatriate unremitted foreign earnings in the future, it could have negative tax implications.

We have a $7.5 million secured demand financing facility backed by our receivables and inventory with Faunus Group International, Inc., or FGI, that terminates on August 15, 2016 and may be extended at our option for additional one-year terms. However, FGI can cancel the facility at any time. For details regarding the FGI facility, refer to the “—Description of Indebtedness” discussion below. At September 30, 2015, we had $3.6 million in borrowings outstanding under this facility with $3.9 million available, subject to the availability of eligible accounts receivable and inventory balances for collateral. However, there is no guarantee that we will be able to borrow to the full limit of $7.5 million if FGI chooses not to finance a portion of our receivables or inventory.

On May 15, 2012, we filed a shelf registration statement on Form S-3 with the SEC, or the Shelf Registration, which permits us to sell, from time to time, up to an aggregate of $50.0 million of various securities. However, we may not sell our securities in a primary offering pursuant to the Shelf Registration or any other registration statement on Form S-3 with a value exceeding one-third of our public float in any 12-month period (unless our public float rises to $75.0 million or more). On May 19, 2015 and November 10, 2015, we filed shelf registration statements on Form S-3 and Form S-3/A, respectively, with the SEC to replace the existing Shelf Registration, which we anticipate will be declared effective later this year. Shelf registration statements are intended to provide us with additional flexibility to access capital markets for general corporate purposes, subject to market conditions and our capital needs.

On April 4, 2014, we completed a registered direct offering under the Shelf Registration in which we sold 2,030,000 shares of common stock and warrants to purchase 812,000 shares of common stock and received net proceeds of $6.1 million after deducting placement agent fees and other offering expenses.

On October 20, 2014, we completed the sale of our Reno, Nevada-based custom fabricated exhaust parts and accessories business for $1.3 million in cash.

On November 4, 2014, we entered into subscription agreements to sell 1,385,000 shares of common stock,

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Series A Warrants to purchase up to an aggregate of 388,393 shares of common stock, and Series B Warrants to purchase up to an aggregate of 168,571 shares of common stock. We received net proceeds of $3.8 million after deducting placement agent fees and other offering expenses.

On November 11, 2014, we and Kanis S.A., or Kanis, entered into a letter agreement whereby Kanis agreed to amend the terms of the outstanding loans, in the aggregate principal amount of $7.5 million, made to us, such that (i) the maturity dates of all outstanding loans were extended to October 1, 2016; and (ii) the early redemption feature applicable to one of the outstanding loans was removed.

On June 2, 2015, we entered into an underwriting agreement to sell 2,500,000 shares of common stock and warrants to purchase up to an aggregate of 500,000 shares of common stock. We received net proceeds of $4.5 million after underwriting discounts and other offering expenses.

On October 7, 2015, we and Kanis entered into a letter agreement whereby Kanis agreed to amend the terms of the outstanding loans, in the aggregate principal amount of $7.5 million, made to us, such that the maturity dates of all outstanding loans were extended to October 1, 2018. In addition, pursuant to the terms of the letter agreement, we agreed to amend the terms of certain outstanding warrants issued to Kanis in order to (i) extend the expiration date until November 11, 2019 and, (ii) with respect to warrants to purchase up to 75,000 shares of our common stock, reduce the exercise price to $1.75 per share.

We continue to pursue revenue generating opportunities relating to special government mandated retrofit programs in California and potentially others in various jurisdictions domestically and internationally. Opportunities such as these require cash investment in operating expenses and working capital such as inventory and receivables prior to realizing profits and cash from sales. Additionally, as previously discussed, we intend to pursue aggressive development of our materials science platform which will require cash investment.

Based on our current cash levels and our current and anticipated usage of cash resources, we expect to require additional financing in the form of funding from outside sources during the next three to six months. We will evaluate the amount of cash needed, and the manner in which such cash will be raised, on an ongoing basis. Our continuation as a going concern is dependent upon our ability to obtain adequate additional financing, which we have successfully secured since inception, including financing from equity sales and asset divestitures. However, there is no assurance that we will be able to achieve projected levels of revenue and maintain access to sufficient working capital, and accordingly, there is substantial doubt as to whether our existing cash resources and working capital are sufficient to enable us to continue our operations for the next twelve months.

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

	Nine Months Ended September 30,
							Change
	2015			2014			$			%
	($ in thousands)
Cash provided by (used in):
Operating activities	$	(8,843	)	$	(7,244	)	$	(1,599	)	(22)%
Investing activities	$	(334	)	$	64		$	(398	)	(622)%
Financing activities	$	5,212		$	8,050		$	(2,838	)	(35)%

Cash used in operating activities

Our largest source of operating cash flows is cash collections from our customers following the sale of our products and services. Our primary uses of cash for operating activities are for purchasing inventory in support of the products that we sell, personnel related expenditures, facilities costs and payments for general operating matters. Cash flows were largely impacted by the loss from operations, adjusted for non-cash items, including depreciation and amortization, stock-based compensation, change in fair value of the liability-classified warrants, and foreign currency gains. The cash flows of the current year period were also impacted by the timing of sales and collections, net of other working capital changes. The cash flows of the prior year period were also impacted by increased on-hand inventory resulting from a sharp downturn in retrofit demand coupled with DuraFit™ sales that have not yet begun to ramp increased tax obligations associated with a foreign location.

Cash provided by (used in) investing activities

The increase in cash used in investing activities was due to proceeds from the sale of a building at one of our

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foreign location and the return of most of our investment balance for our dissolved joint venture with Pirelli both in the prior period.

Cash provided by financing activities

The decrease in cash provided by financing activities was due to higher proceeds from a common stock and warrant offering, pursuant to our Shelf Registration, and proceeds from the exercise of warrants in the prior year period.

Description of Indebtedness

	September 30,		December 31,
	2015		2014
	($ in thousands)
Line of credit with FGI	$	3,564	$	2,841
$1.5 million, 8% shareholder note due 2016	1,620		1,598
$3.0 million, 8% subordinated convertible shareholder notes due 2016	2,970		2,947
$3.0 million, 8% shareholder note due 2016	2,960		2,931
	$	11,114	$	10,317

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

Under the FGI facility, FGI can elect to purchase eligible accounts receivables from us and certain of our subsidiaries at up to 80% of the value of such receivables (retaining a 20% reserve). At FGI’s election, FGI may advance us up to 80% of the value of any purchased accounts receivable, subject to the $7.5 million limit. Reserves retained by FGI on any purchased receivable are expected to be refunded to us net of interest and fees on advances once the receivables are collected from customers. We may also borrow against eligible inventory up to the inventory sublimit as determined by FGI subject to the aggregate $7.5 million limit under the FGI facility and certain other conditions. At September 30, 2015, the inventory sublimit was the lesser of $1.5 million or 50% of the aggregate purchase price paid for accounts receivable purchased under the FGI facility. While the overall credit limit and inventory sublimit were not changed, borrowing against Honda inventory has been limited to $0.2 million by FGI due to their concerns about customer concentration.

The interest rate on advances or borrowings under the FGI facility is the greater of (i) 6.50% per annum and (ii) 2.50% per annum above the prime rate, as defined in the FGI facility, and was 6.50% at September 30, 2015 and December 31, 2014.

We were in compliance with the terms of the FGI facility at September 30, 2015. However, there is no guarantee that we will be able to borrow the full limit of $7.5 million if FGI chooses not to finance a portion of our receivables or inventory.

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

Capital Expenditures

As of September 30, 2015, we had no material commitments for capital expenditures and no material commitments are anticipated in the near future.

Off-Balance Sheet Arrangements

As of September 30, 2015 and December 31, 2014, we had no off-balance sheet arrangements.

Commitments and Contingencies

As of September 30, 2015, other than office leases, employment agreements with key executive officers and the obligation to fund our portion (5%) of the losses of our Asian investment, we had no material commitments other than the liabilities reflected in our unaudited condensed consolidated financial statement included elsewhere in this Quarterly Report on Form 10-Q. For additional information, refer to Note 12, “Commitments and Contingencies”.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

In evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 (1) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (2) is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

Refer to Note 12 to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

Item 1A. Risk Factors

Not applicable.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Refer to the Exhibit Index immediately following the signature page, which is incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	CLEAN DIESEL TECHNOLOGIES, INC.


Date: November 13, 2015	By:	/s/ Matthew Beale
		Matthew Beale
		Chief Executive Officer
		(Principal Executive Officer)


Date: November 13, 2015	By:	/s/ David E. Shea
		David E. Shea
		Chief Financial Officer
		(Principal Financial Officer)

Table of Contents

Exhibit Index

Exhibit No.		Description of Exhibit

2.1		Asset Purchase Agreement, dated as of October 20, 2014, between Clean Diesel Technologies, Inc., ECS Holdings, Inc., Engine Control Systems Ltd., and SES USA Inc. (incorporated by reference to Exhibit 2.1 to CDTi’s Current Report on Form 8-K (SEC file number 001-33710) filed on October 21, 2014).

3.1		Restated Certificate of Incorporation of Clean Diesel Technologies, Inc., as amended through May 23, 2012. (incorporated by reference to Exhibit 3.1 to CDTi’s Annual Report on Form 10-K (SEC file number 001-33710) filed on March 18, 2015).

3.2		By-Laws of Clean Diesel Technologies, Inc. as amended through November 6, 2008 (incorporated by reference to Exhibit 3.1 to CDTi’s Quarterly Report on Form 10-Q (SEC file number 001-33710) filed on November 10, 2008).

4.1		Specimen of Certificate for Clean Diesel Technologies, Inc. Common Stock (incorporated by reference to Exhibit 4.1 to CDTi’s Post-Effective Amendment No. 1 to Form S-4 on Form S-3 (SEC file number 333-166865) filed on November 10, 2010).

4.2		Form of Investor Warrant issued on July 3, 2013 (incorporated by reference to Exhibit 4.1 to CDTi’s Current Report on Form 8-K (SEC file number 001-33710) filed on July 3, 2013).

4.3		Form of Investor Warrant issued on April 4, 2014 (incorporated by reference to Exhibit 4.1 to CDTi’s Current Report on Form 8-K (SEC file number 001-33710) filed on April 1, 2014).

4.4		Form of Investor Series A Warrant issued on November 7, 2014 (incorporated by reference to Exhibit 4.1 to CDTi’s Current Report on Form 8-K (SEC file number 001-33710) filed on November 4, 2014).

4.5		Form of Investor Warrant issued on June 8, 2015 (incorporated by reference to Exhibit 4.1 to CDTi’s Current Report on Form 8-K (SEC file number 001-33710) filed on June 3, 2015).

10.1†		Employment Agreement, dated July 27, 2015, between Hans Eric Bippus and Clean Diesel Technologies, Inc. (incorporated by reference to Exhibit 10.3 CDTi’s Quarterly Report on Form 10-Q (SEC file number 001-33710) filed on August 6, 2015).

10.2		Letter Agreement dated October 7, 2015 between Clean Diesel Technologies, Inc. and Kanis S.A. (incorporated by reference to Exhibit 10.1 to CDTi’s Current Report on Form 8-K (SEC file number 001-33710) filed on October 13, 2015).

10.3*†		Employment Agreement, dated October 22, 2015, between Matthew Beale and Clean Diesel Technologies, Inc.

31.1*		Certification of Matthew Beale pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of David E. Shea pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32**		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*		XBRL Instance Document.

101.SCH*		XBRL Taxonomy Extension Schema Document.

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document.

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101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*		XBRL Taxonomy Extension Label Linkbase Document.

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document.


*		Filed herewith

**		Furnished herewith

†		Indicates a management contract or compensatory plan or arrangement

Exhibit 10.3

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (“Agreement”) is made as of October 22, 2015 (the “Effective Date”) by and between Clean Diesel Technologies, Inc., a Delaware corporation (“CDTI” or the “Company”), and Matthew Beale (“Executive”).

WHEREAS, CDTI and Executive desire to enter into an agreement setting forth the terms and conditions of Executive’s employment with CDTI;

NOW THEREFORE, in consideration of the mutual promises of the parties and the mutual benefits they will gain by the performance thereof, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties do hereby agree as follows:

1. Employment .

CDTI employs Executive, and Executive hereby accepts employment with CDTI, upon the terms and conditions set forth in this Agreement for the period beginning on the Effective Date and ending on October 22, 2018. This Agreement supersedes and replaces any other employment or consulting agreement between Executive and CDTI.

2. Position and Duties.

(a) Executive shall serve as Chief Executive Officer of CDTI and shall have the normal duties, responsibilities and authority of such position, subject to the power of the Board of Directors of CDTI (“Board”) to expand or limit such duties, responsibilities and authority.

(b) Executive shall report to the Board. Executive shall devote Executive’s best efforts and all of Executive’s business time and attention (except for permitted vacation periods, reasonable periods of illness or other incapacity) to the business and affairs of CDTI. Executive shall perform Executive’s duties and responsibilities hereunder to the best of Executive’s abilities in a diligent, trustworthy, businesslike and efficient manner.

(c) Executive will be subject to, and will comply with, the policies, standards and procedures generally applicable to senior management employees of CDTI from time to time.

3. Compensation and Benefits.

(a) Base Salary . Executive will receive an annual base salary of $325,000 per year, effective as of the Effective Date, less applicable payroll withholdings and payable in accordance with CDTI’s normal payroll practices. This salary shall be subject to annual review by CDTI in accordance with its general policies as in effect from time to time.

(b) Annual Bonus . Executive shall be eligible to receive an annual bonus based on CDTI’s achievement of financial objectives established by the Board and the Executive’s achievement of agreed-to personal business objectives. The amount of any Annual Bonus will be based upon the degree to which such objectives are met, and will vary from 0% of Base Salary to a maximum of 119% of Base Salary with a target of 70% of Base Salary and with

payout at the discretion of the Board. The Annual Bonus will be prorated based on the number of days Executive is employed during a calendar year. The bonus with respect to any calendar year shall be paid no later than 45 days from the date on which audited financial statements covering such calendar year are filed on Form 10-K.

(c) Equity Incentive . Within thirty (30) days of the Effective Date, CDTi shall issue to Executive an equity award of 500,000 non-qualified stock options. The vesting schedule for this equity award shall be 250,000 options (50%) vesting on March 31, 2016 and the remaining 250,000 options (50%) vesting on December 31, 2016. This equity award shall be issued under and governed by the terms of CDTI’s Amended and Restated Stock Incentive Plan (the “Plan”) and, including equity awards of stock options, shall be issued at 100% of the closing fair market value on the date of grant. All of Executive’s unvested stock options will vest immediately upon Executive’s Termination Without Cause or Resignation for Good Reason concurrent with or subsequent to a Change in Control. “Change in Control” means a change in ownership or control of CDTI effected through any of the following transactions:

(i) A merger, consolidation or other reorganization, unless securities representing more than fifty-one percent (51%) of the total combined voting power of the voting securities of the successor company are immediately thereafter beneficially owned, directly or indirectly, by the persons who beneficially owned CDTI’s outstanding voting securities immediately prior to such transaction; or

(ii) A sale, transfer or other disposition of all or substantially all of CDTI’s assets in liquidation or dissolution of CDTI; or

(iii) The acquisition, directly or indirectly by any person or related group of persons (other than CDTI or a person that directly or indirectly controls, is controlled by, or is under common control with, CDTI), of beneficial ownership of securities possessing more than fifty-one percent (51%) of the total combined voting power of CDTI’s outstanding securities pursuant to a transfer of the then issued and outstanding voting securities of CDTI by one or more of CDTI’s shareholders; or

(iv) During any period of two (2) consecutive years, individuals who, at the beginning of such period, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director of the Board subsequent to the date of adoption of this Plan whose election, or a nomination for election by CDTI’s shareholders, was approved by the vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of any individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Board, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Securities Exchange Act of 1934.

Notwithstanding the foregoing, a transaction shall not constitute a Change in Control if its sole purpose is to change the legal jurisdiction of the Corporation’s incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Corporation’s securities immediately before such transaction. In the event of any conflict between the terms of this Agreement and the terms of the Plan or the agreement evidencing the

Option, including without limitation vesting terms or the definition of “Cause,” the terms of this Agreement shall govern.

(d) Fringe Benefits . Executive shall be entitled to participate in all of CDTI’s employee benefit programs for which CDTI employees are generally eligible, subject to the terms and conditions of such programs. Those programs currently include group medical, dental and vision insurance; 401(k) plan; life insurance; short-term and long-term disability insurance; and paid vacation and sick leave. All benefits are subject to change at the sole discretion of the Board and/or CDTI.

(i) Executive shall be entitled to four (4) weeks of vacation per year, with a maximum accrual of eight (8) weeks. Such vacation time shall accrue and will be paid out upon termination of employment subject to customary payroll withholding in accordance with CDTI’s general practices.

(ii) CDTi will pay Executive a temporary housing allowance of $3,000 per month for the cost of maintaining a temporary residence in the Oxnard, CA area for twelve (12) months from the Effective Date. All such reimbursements will be credited against any relocation expenses for Executive that CDTi agrees to cover in the future. Executive acknowledges that payments made under this paragraph 3(d)(ii) may be taxable income to Executive.

(e) Reimbursement of Business Expenses . CDTI shall reimburse Executive for all reasonable expenses incurred by Executive in the course of performing Executive’s duties under this Agreement which are consistent with CDTI’s policies in effect from time to time with respect to travel, entertainment and other business expenses, subject to CDTI’s requirements with respect to reporting and documentation of such expenses. Such reimbursements shall be payable in accordance with CDTI’s general reimbursement practices. Notwithstanding the foregoing, any reimbursement of expenses or in-kind benefit Executive is entitled to receive shall, to the extent subject to Section 409A of the Internal Revenue Code, be subject to the following: (x) such reimbursements shall be paid no later than the last day of Executive’s taxable year following the taxable year in which the expense was incurred, (y) the amount of expenses eligible for reimbursement, or in-kind benefits to be provided, during any taxable year of Executive shall not affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year of Executive, and (z) the right to reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit.

4. Termination.

(a) Employment At-Will and Termination . Executive’s employment with CDTI will be “at will” (i.e., either Executive or CDTI may terminate Executive’s employment at any time for any reason, with or without Cause). Executive’s employment and this Agreement may be terminated as follows:

(i) Either party may terminate this Agreement and Executive’s employment for any reason upon thirty (30) days’ written notice to the other party that this Agreement is being terminated;

(ii) The parties may terminate this Agreement and Executive’s employment for any reason without notice upon mutual written agreement of the parties;

(iii) CDTI may terminate Executive’s employment and this Agreement immediately upon written notice to Executive at any time that the Board has determined that there is Cause for such termination. For purposes of this Agreement, “Cause” shall mean Executive’s (A) gross negligence or severe or continued misconduct in the performance of Executive’s material duties; (B) commission of or pleas of “guilty” or “no contest” to a felony offense or commission of any unlawful or criminal act which would be detrimental to the reputation or character of CDTI; (C) participation in fraud or an act of dishonesty against CDTI; (D) intentional material damage to or misappropriation of CDTI property; material breach of company policies or regulations, or (E) material breach of this Agreement that is not cured to CDTI’s reasonable satisfaction within five (5) days after written notice thereof to Executive (provided that any such breach which is not capable of cure, shall immediately constitute “Cause”);

(iv) This Agreement shall terminate immediately upon Executive’s death or Disability. “Disability” means Executive’s physical or mental incapacity to perform a substantial portion of his duties and responsibilities for any period or periods which, in the aggregate, total 90 or more calendar days within any 12-month period; or

(v) Executive may resign for Good Reason. For purposes of this Agreement, Executive will have Good Reason to terminate Executive’s employment with CDTI upon the occurrence of any of the following: (A) a material diminution in the nature or scope of Executive’s responsibilities, duties or authority; (B) CDTI’s requirement that Executive be based at any location more than 50 miles from CDTI’s office locations in Oxnard, CA or Markham, ON; (C) any other action or inaction that constitutes a material breach by CDTI of this Agreement; or (D) a material diminution in Executive’s Base Salary unless such reduction is part of an across-the-board reduction for the Chief Executive Officer and his/her direct reports (except that an across-the-board reduction resulting in the diminution in Executive’s Base Salary due to or within six (6) months of a Change in Control is excluded and still constitutes Good Reason). Executive may not resign for Good Reason unless (A) Executive provides written notice of Executive’s intent to resign to the Board and of the occurrence of a condition constituting Good Reason for resignation under this paragraph within ninety (90) days of the initial existence of such, (B) CDTI has not remedied the alleged violation(s) within thirty (30) days of receipt of such written notice, and (C) Executive’s employment terminates no later than one hundred twenty (120) days following the initial existence of such condition. For purposes of this paragraph written notice must include a detailed description of the facts and circumstances of the violation allegedly constituting Good Reason and such notice must be given in accordance with applicable CDTI policy, or in the absence of such policy, to the Chair of the Board or the General Counsel of CDTI.

(b) Payments Upon Termination . Upon termination of Executive’s employment for any reason, Executive shall be entitled to receive any salary and benefits that are accrued and unpaid as of the date of termination.

(i) Termination for Cause or Resignation . If Executive resigns Executive’s employment for any reason other than for Good Reason pursuant to Paragraph 4(a)(v) above, is terminated by CDTI or the Board for Cause pursuant to Paragraph 4(a)(iii), or is terminated by mutual agreement of the parties pursuant to Paragraph 4(a)(ii) above, all compensation and benefits will cease immediately and Executive will receive none of the Severance Benefits (as defined below) or any other severance pay.

(ii) Termination Without Cause or Executive’s Resignation for Good Reason . If Executive resigns for Good Reason under Paragraph 4(a)(v) above or Executive’s employment with CDTI is terminated by CDTI for any reason other than for Cause (and not as a result of Executive’s death or Disability) or Disability or by mutual agreement of the parties pursuant to Paragraph 4(a)(ii) above, subject to Paragraph 4(c) below, Executive will receive the following compensation (“Severance Benefits”):

(A) an amount equal to twelve (12) months of Executive’s current base salary at the time of termination (less required withholdings) payable in installments pursuant to the Company’s regular payroll practices commencing on the first payroll date occurring on or after the later of the expiration of the revocation period of the Release (as defined below) or 35 days after Executive’s termination date;

(B) for a period of twelve (12) months following Executive’s termination date, Company payment of continuation coverage under COBRA (section 4980 of the Internal Revenue Code of 1986) of Executive’s medical, dental and vision coverage under the Company’s group health plan as in effect immediately before Executive’s termination, after which Executive may elect continuation coverage at his own expense under COBRA and the California Continuation Benefits Replacement Act (“Cal-COBRA”); provided, however, that such extended Company-paid coverage will only be provided to the extent that it is not determined by the Company to be discriminatory under section 105(h) of the Code or under any other section of the Code or other applicable law. If the extension of such Company-paid coverage is determined by the Company to be discriminatory under section 105(h) of the Code or other applicable law, (including but not limited to the 2010 Patient Protection and Affordable Care Act, as amended by the 2010 Health Care and Education Reconciliation Act), then in lieu of paying the COBRA premiums for such continuation coverage, the Company, in its sole discretion, may elect to instead pay Executive on the first day of each month of any remaining portion of such twelve-month period, a fully taxable cash payment equal, on an after-tax basis, to the COBRA premiums for that month, subject to applicable tax withholdings (such amount, the “ Special Severance Payment ”), for the remainder of such period. Executive may, but is not obligated to, use such Special Severance Payment toward the cost of COBRA premiums ; and

(C) an amount equal to a prorated portion (based on the number of full months of Executive’s employment during the year of termination) of Executive’s Annual Bonus for the year in which the termination occurs calculated and payable pursuant to the terms of the applicable bonus program in effect as determined by the Board; provided, however, that such payment shall be made to the Executive no later than 45 days from the date on which audited financial statements covering such calendar year are filed on Form 10-K.

(iii) Disability. If Executive’s employment is terminated due to Disability, subject to Paragraph 4(c) below, Executive will receive the following compensation (“Severance Benefits”):

(A) an amount equal to six (6) months of Executive’s current base salary at the time of termination (less required withholdings) payable in installments pursuant to the Company’s regular payroll practices commencing on the first payroll date occurring on or after the later of the expiration of the revocation period of the Release (as defined below) or 35 days after Executive’s termination date;

(B) for the period of six (6) months following Executive’s termination date, Company payment of continuing coverage under COBRA of medical, dental and vision coverage under the Company’s group health plan in effect immediately before Executive’s termination, after which Executive may elect continuation coverage at his own expense under COBRA (and Cal-COBRA; provided, however, that such Company-paid extended coverage will only be provided to the extent that it is not determined by the Company to be discriminatory under section 105(h) of the Code or under any other section of the Code or other applicable law. If the extension of such Company-paid coverage is determined by the Company to be discriminatory under section 105(h) of the Code or other applicable law, (including but not limited to the 2010 Patient Protection and Affordable Care Act, as amended by the 2010 Health Care and Education Reconciliation Act), then in lieu of paying the COBRA premiums for such continuation coverage, the Company, in its sole discretion, may elect to instead pay Executive on the first day of each month of any remaining portion of such six-month period, a fully taxable cash payment equal, on an after-tax basis, to the COBRA premiums for that month, subject to applicable tax withholdings (such amount, the “ Special Severance Payment ”), for the remainder of such period. Executive may, but is not obligated to, use such Special Severance Payment toward the cost of COBRA premiums ; and

occurs calculated and payable pursuant to the terms of the applicable bonus program in effect as determined by the Board; provided, however, that such payment shall be made to the Executive no later than 45 days from the date on which audited financial statements covering such calendar year are filed on Form 10-K.

(D) Notwithstanding the foregoing, any benefits that Executive shall become entitled to receive under CDTI’s long-term disability insurance program as it may from time to time be in effect shall reduce the Severance Benefits payable under this Paragraph 4(b)(ii).

(c) Release and Commencement of Severance Benefits . As a condition of receiving any Severance Benefits under this Paragraph 4, Executive is required to sign (and not revoke) a Severance Agreement and Release of All Claims (“Release”) against CDTI and related entities and individuals, in a form to be provided by CDTI, within 45 days after his termination date. Payment of Severance Benefits shall not commence until after the time for revocation of the Release has expired (if the period for signing and not revoking the Release begins in one taxable year for the Executive and ends in the subsequent taxable year, the payment of any Severance Benefits will begin in the second taxable year).

(d) 409A . The parties intend that the Severance Benefits provided under this Agreement will be deemed not to be deferred compensation subject to section 409A of the Code (“section 409A”) to the maximum extent provided in the exceptions provided in the Treasury Regulations for short term deferrals (section 1.409A-1(b)(4)) and separation pay plans (section 1.409A-1(b)(9)). All Severance Benefits shall be paid within the period ending no later than the last day of the second taxable year of the Executive following the taxable year in which the Executive’s separation from service occurs, in conformance with section 1.409A-1(b)(9) of the Treasury Regulations. T o the extent that the payment of any amount under this Paragraph 4 constitutes deferred compensation, any payment or benefit due upon Executive’s termination of employment will only be paid or provided to Executive once Executive’s termination qualifies as a “separation from service” under section 409A. If Executive is a “specified employee” within the meaning of section 409A, any such payment scheduled to occur during the first six (6) months following Executive’s separation from service shall not be paid until the earlier of the date of Executive’s death or the first regularly scheduled payroll date following the six (6) month anniversary date of such separation from service and shall include payment of any amount that was otherwise scheduled to be paid prior thereto. It is the intent of the Company and Executive that any right of Executive to receive installment payments hereunder shall, for all purposes of Section 409A, be treated as a right to a series of separate payments. While the Company intends that income provided to Executive pursuant to this Agreement will not be subject to taxation under Section 409A, the Company does not guarantee any particular tax effect for income provided to Executive pursuant to this Agreement. In any event, except for the Company’s responsibility to withhold applicable income and employment taxes from compensation paid or provided to Executive, the Company shall not be responsible for the payment of any applicable taxes on compensation paid or provided to Executive pursuant to this Agreement.

(e) Return of Property . Upon termination of Executive’s employment or whenever requested by CDTI, Executive will immediately return all CDTI property, tangible or (where returnable) intangible, in Executive’s possession.

(f) Upon termination of Executive’s employment with CDTI for any reason, Executive shall promptly resign from any position as an officer, director or fiduciary of CDTI.

5. Protection of Confidential Information .

(a) Executive acknowledges that in connection with his employment with CDTI, he will be given access to or will obtain Confidential Information (as defined below) with respect to CDTI’s business and employees. Executive will use the Confidential Information only to carry out Executive’s job duties under this Agreement. Executive will hold this information strictly confidential and will not use or disclose it, except in performance of Executive’s obligations to CDTI, without CDTI’s express written consent. Executive’s obligation to maintain the confidentiality of the Confidential Information of CDTI and to refrain from using such information for any improper purpose will continue during Executive’s employment with CDTI and at all times thereafter, unless and to the extent that such Confidential Information (i) was otherwise available to Executive from a source other than CDTI, (ii) becomes generally known to, and available for use by, the public other than as a result of the acts or omissions of the Executive in contravention of this Paragraph 5, or (iii) is required to be disclosed by applicable law, court order or other legal process.

(b) Executive shall deliver to CDTI at the termination of his employment, or at any other time CDTI may request, all memoranda, notes, plans, records, reports, computer tapes, printouts and software and other documents and data (and copies thereof) relating to the Confidential Information, Work Product (as defined below) or the business of CDTI which Executive may then possess or have under Executive’s control.

(c) “Confidential Information” includes but is not limited to the following: (i) trade secrets, ideas, processes, formulas, data, programs, other works of authorship, knowhow, improvements, discoveries, developments, designs and techniques; (ii) information regarding plans for research, development, new products, marketing and selling, business plans, budgets and unpublished financial statements, licenses, prices, costs, supplies, customers and information regarding the skills and compensation of other employees, directors or consultants of CDTI or any Affiliate; (iii) confidential marketing information (including without limitation marketing strategies, customer or client names and requirements for product and services, prices, margins and costs); and (iv) other confidential business information of CDTI or any Affiliate. For purposes of this Agreement, “Affiliate” means any trade or business under common control with CDTI, as that term is defined in sections 414(b) and 414(c) of the Code.

6. Protection of Intellectual Property.

Executive agrees that all inventions, innovations, improvements, developments, methods, techniques, processes, algorithms, data, databases, designs, analyses, drawings, reports, and all similar or related information, all software, copyrights, and other works of authorship, all other intellectual property or proprietary rights (including any patents, registrations or similar rights that may issue from the foregoing), and all tangible embodiments of any of the foregoing (in any form

or medium, whether now known or hereafter existing), which relate to CDTI’s or any Affiliate’s actual or anticipated business, research and development or existing or future products or services and which are conceived, developed, contributed to, or made by Executive while employed by CDTI or any Affiliate thereof (collectively, “Work Product”), belong to and are the property of CDTI or such Affiliate, as applicable, and Executive hereby assigns to CDTI or such Affiliate, as applicable, any right, title and interest Executive may have in and to the Work Product, free and clear of any claims for compensation or restrictions on the use or ownership thereof. Executive will promptly disclose such Work Product to CDTI and perform all actions reasonably requested by CDTI (whether during or after his employment) to establish, record, perfect and otherwise confirm such ownership, and protect, maintain and enforce CDTI’s and the Affiliate’s rights, as applicable, in such Work Product (including, without limitation, by executing assignments, consents, powers of attorney, and other instruments and providing affidavits and testifying in any proceeding).

7. Post-Employment Covenants .

(a) Non-Solicitation of Employees. For a period of two (2) years following termination of Executive’s employment with CDTI, Executive shall not knowingly solicit or encourage, directly or indirectly, in person or through others, any employee of the Company whom Executive worked with at the Company or any Affiliate to terminate his or her relationship with the Company or its Affiliate or to alter his or her relationship with the Company to the Company’s detriment; provided, however, that generalized advertisement of employment opportunities including in trade or industry publications (not focused specifically on or directed in any way at the employees or an employee of CDTI) shall not be deemed to cause a breach of this Paragraph 7(a).

(b) Non-Solicitation of Customers. For a period of two (2) years following termination of Executive’s employment with CDTI, Executive shall not knowingly solicit, divert or take away, or attempt to solicit, divert or take away, any person, firm or company that was, at any time during the period of twelve (12) months preceding the termination of Executive’s employment, a client of CDTI and with whom during that twelve (12) month period Executive had business dealings on behalf of CDTI or any Affiliate, for the purpose of selling or providing a product or service that competes with or displaces a product or service of CDTI that Executive had some material involvement in or received Confidential Information about while employed by CDTI.

(c) If, at the time of enforcement of this Paragraph 7, a court of competent jurisdiction holds that the restrictions stated herein are unreasonable under circumstances then existing with respect to (i) any part of the time period covered by these covenants, (ii) any activity covered by these covenants, or (iii) any other aspect of these covenants, any adverse determination will be implemented as narrowly as possible and will not affect these covenants with respect to any other time period, activity or other aspect covered by these covenants.

(d) Enforcement. Each of the parties acknowledges that (i) the covenants and restrictions contained in this Paragraph 7, and the protections for Confidential Information and Work Product under Paragraphs 5 and 6, are necessary, fundamental and required for the protection and continued conduct of CDTI’s business, (ii) such covenants and restrictions

relate to matters which are of a special, unique and extraordinary character and which give these covenants a special, unique value and (iii) breach of these covenants may cause CDTI or its Affiliates irreparable harm which cannot be adequately compensated by monetary damages, and therefore in the event of a breach or threatened breach of this Agreement, CDTI or its Affiliates or their applicable successors or assigns may, in addition to other rights and remedies existing in their favor, apply to any court of competent jurisdiction for specific performance and/or immediate injunctive or other relief in order to enforce, or prevent any breaches of, the provisions of this Agreement. Executive agrees that the restrictions contained in Paragraphs 5, 6 and 7 are reasonable.

8. General Provisions.

(a) Arbitration . Except for claims for injunctive relief brought pursuant to Paragraph 7, any dispute or controversy arising out of or relating to this Agreement, or the employment relationship created by this Agreement, including the termination of that relationship and any allegations of unfair or discriminatory treatment arising under state or federal law or otherwise, will be resolved exclusively by final and binding arbitration, except where the law specifically forbids the use of arbitration as a final and binding remedy. The arbitration shall be administered by the Judicial Arbitration and Mediation Service (“JAMS”) (www.jamsadr.com) and shall be conducted exclusively under the then-current Employment Arbitration Rules & Procedures and JAMS Policy on Employment Arbitration Minimum Standards of Procedural Fairness, and the California Code of Civil Procedure (available at www.jamsadr.com). The arbitration will take place before a single neutral arbitrator in Ventura, California. CDTI shall be responsible for the fees and expenses of the arbitrator in connection with the Arbitration. Executive shall be responsible for his attorney fees and any costs required by JAMS necessary to commence the arbitration, if so commenced at Executive’s request, but in no event shall Executive be responsible for any costs beyond those which he would be required to incur if he filed a civil action in court concerning the dispute or controversy. The parties shall have all the rights, remedies and defenses available in a civil action for the dispute or controversy. The arbitrator shall issue a written award that includes the arbitrator’s essential findings and conclusions, and shall have the authority to assess attorneys’ fees and costs of the prevailing party to the losing party. The arbitrator will not have the authority to amend, modify, supplement or change the terms and conditions of employment as set forth in this Agreement. This arbitration provision will not prohibit either party from seeking injunctive relief pending the outcome of the arbitration or an order confirming or vacating the award in a court of competent jurisdiction.

(b) Severability . Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein.

(c) Complete Agreement . This Agreement embodies the complete agreement and understanding of the parties with respect to the subject matter hereof and supersedes and

preempts any prior understandings, agreements or representations by or between the parties, written or oral, which may have related to the subject matter hereof. There are no other agreements or understandings, written or oral, in effect between the parties relating to the subject matter of this Agreement, unless expressly referenced in this Agreement.

(d) Counterparts . This Agreement may be executed in separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement. Facsimile or scanned and emailed counterpart signatures to this Agreement shall be acceptable and binding on the parties hereto.

(e) Successors and Assigns . Except as otherwise provided herein, this Agreement shall bind and inure to the benefit of and be enforceable by Executive, CDTI and their respective successors and assigns; provided that the rights and obligations of Executive under this Agreement shall not be assignable.

(f) Governing Law and Jurisdiction . All issues and questions concerning the construction, validity, enforcement and interpretation of this Agreement and the exhibits hereto shall be governed by, and construed in accordance with, the laws of the State of California. Except as provided in Paragraph 8(a), each of the parties hereto submits to the exclusive jurisdiction and venue of any state or federal court sitting in the County of Ventura, California.

(g) Waiver of Jury Trial . AS A SPECIFICALLY BARGAINED FOR INDUCEMENT FOR EACH OF THE PARTIES HERETO TO ENTER INTO THIS AGREEMENT (AFTER HAVING THE OPPORTUNITY TO CONSULT WITH COUNSEL), EACH PARTY HERETO EXPRESSLY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY LAWSUIT OR PROCEEDING RELATING TO OR ARISING IN ANY WAY FROM THIS AGREEMENT OR THE MATTERS CONTEMPLATED HEREBY .

(h) Amendment and Waiver . The provisions of this Agreement may be amended or waived only with the prior written consent of CDTI (as approved by the Board) and Executive.

(i) Representations and Warranties of Executive . Executive hereby represents and warrants that Executive’s employment with CDTI on the terms and conditions set forth herein and Executive’s execution and performance of this Agreement do not constitute a breach or violation of any other agreement, obligation or understanding with any third party. Executive represents that Executive is not bound by any agreement or any other existing or previous business relationship which conflicts with, or may conflict with, the performance of Executive’s obligations hereunder or prevent the full performance of Executive’s duties and obligations hereunder.

(j) No Strict Construction . The language used in this Agreement shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction shall be applied against any party.

(k) No Third Party Beneficiaries . Nothing in this Agreement, express or implied, is intended or shall be construed to give any Person other than the parties to this Agreement and their respective heirs, executors, administrators, successors or permitted assigns any legal or

equitable right, remedy or claim under or in respect of any agreement or any provision contained herein.

(l) Notices . All notices, requests and other communications under this Agreement must be in writing and shall be deemed to have been duly given only if delivered by email or facsimile transmission, personal delivery with written receipt, or mail delivery by overnight courier prepaid, using the following contact information:

If to Executive:	Matthew Beale
	203 N. Main Street
	Santa Ana, CA 92701
	email: mmbeale@gmail.com

If to CDTI:	Clean Diesel Technologies, Inc.
	1621 Fiske Place
	Oxnard, CA 93033
	Attention: General Counsel
	Fax: 805-639-9466
	email: pedro@cdti.com

(m) Survival . The covenants contained in Paragraphs 4(b), 5, 6 and 7 will survive any termination or expiration of this Agreement.

(n) Review and Enforceability of Agreement . Executive represents and warrants that prior to executing this Agreement, Executive reviewed each and every provision of this Agreement and understands same, and that Executive had a full opportunity to have this Agreement review by legal counsel of Executive’s own choosing.

IN WITNESS WHEREOF , the parties hereto have executed this Agreement on the date first written above.

MATTHEW BEALE, Executive:	CLEAN DIESEL TECHNOLOGIES, INC.,

	By:	/s/ Charles R. Engles

/s/ Matthew Beale	Title:		Chairman of the Board of Directors
[Signature]

Exhibit 31.1

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Matthew Beale, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q (this “report”) of Clean Diesel Technologies, Inc. (the “registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 13, 2015	By:	/s/ Matthew Beale
		Matthew Beale
		Chief Executive Officer
		(Principal Executive Officer)

Exhibit 31.2

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, David E. Shea, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q (this “report”) of Clean Diesel Technologies, Inc. (the “registrant”);

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 13, 2015	By:	/s/ David E. Shea
		David E. Shea
		Chief Financial Officer
		(Principal Financial Officer)

Exhibit 32

Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,

18 U.S.C. Section 1350

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, in their capacities as officers of Clean Diesel Technologies, Inc. (the “Registrant”), do each hereby certify, that, to the best of such officer’s knowledge:

(1) The Quarterly Report on Form 10-Q of the Registrant for the period ended September 30, 2015 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

/s/ Matthew Beale
Matthew Beale
Chief Executive Officer
(Principal Executive Officer)
November 13, 2015


/s/ David E. Shea
David E. Shea
Chief Financial Officer
(Principal Financial Officer)
November 13, 2015

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and is not being “filed” as part of the Form 10-Q or as a separate disclosure document for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to liability under that section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act except to the extent that this Exhibit 32 is expressly and specifically incorporated by reference in any such filing.

A signed original of this written statement required by Section 906 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.