Clean Diesel Technologies: "the future looks very promising"

Cant see First Berlin's reccommendtaion holding for long!!!

SUBJECT: Clean Diesel Technologies, Inc. (CDTI US)

ANALYST: Ellis Acklin and Meghan Moreland



CURRENT RATING: Buy

PRICE TARGET: $2.00

PREVIOUS CLOSING PRICE: $1.80



KEY POINTS

Clean Diesel announced this morning it has secured $9.5m in commitments in a private placement to new and existing shareholders, including some of the company’s own managers. While the fundraising strengthens the company’s balance sheet and falls within our expectations, the accompanying issue of 7 million warrants, if exercised, will double the number of new shares being created, further diluting the share.



In total, an aggregate of seven million separable units of common stock and warrants will be issued. The seven million shares of common stock will be placed at $1.35 per share and the warrants will be divided equally in two classes. Class A warrants will entitle the holder until 2 July, 2007 to purchase, for $2.00 per share, one share of common stock for every two shares acquired in the offering. Class B warrants will entitle the holder until 29 December, 2007 to purchase, for $2.50 per share, one share of common stock for every two shares acquired in the offering. If all Class A and Class B warrants are exercised, the total number of common stock outstanding will increase by an additional seven million shares. When this financing is completed, Clean Diesel will have 33.2m common shares outstanding and approximately 44.9m shares on a fully diluted basis.



In our model, we had anticipated a capital increase to take place sometime around the New Year, given the company’s weak cash position, which we projected at $0.051 for FY/06. Given this, we outlined in our last Clean Diesel update (23 November 2006) that we expected between $8m and $12m to be raised in the near future. While the $9.5m currently secured in the form of common stock at $1.35 per share falls within our expectations, we did not expect management to issue further warrants. These warrants, should they be exercised, would lead to further dilution of the share.



We will adjust our DCF model to account for the capital measure, after the timing of the issue has been clarified. We expect the improved balance sheet to offset some of the dilutive effects of the warrants and will lower our WACC to reflect the improved financial position. For now we maintain our Buy Rating and Price Target of $2.00.









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