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First quarter revenue in line with our estimates. Possible catalyst expansion into Honda Acura line.

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By Ian Gilson, PhD, CFA

Clean Diesel (Nasdaq-small:(CDTI - Free Report)  reported its 1Q13 results on May 10, 2013. Revenue was in line with our expectations as were the cost of goods. S.G.&A. were higher than estimated but below year ago levels. However they were above 4Q12 levels. R&D declined versus a year ago but it also increased versus the 4Q12. The other income was a far larger negative than we had expected and there was no tax rebate since the company has no past income to offset the losses. This builds a NOL which will reduce taxes when the company becomes profitable in the USA.

Catalyst sales to external customers increased from$4.4 million to $6.1 Million, or 39%. This is mainly due to the success of the Honda Accord, where CDTi is the catalyst supplier for both the 4 and 6 cylinder models. Since the Honda Acura line uses the same basic engines as the Accord, CDTi has a good chance of supplying catalyst systems for the Accord line. Honda and CDTi have reached an agreement on the method of pricing the rare earth metals that are used in making the catalysts. This may impart some volatility in both revenue and profits as the metals do fluctuate in price. In 1Q13 the catalyst division was profitable. CDTi works with Honda America on its requirements for catalyst systems.

The HD Diesel division was affected by the London Low Emission Zone program. However, as mentioned in prior reports, this program was highly competitive and the low margins impacted profits. In 1Q13 the operating loss was reduced even as revenue dropped by $5.3 million.

The company added two new distributers in the first quarter. One of them did buy some inventory, the other did not.

The Pirelli agreement should have an impact late this year. CDTi will supply systems to the JV, which will be the selling organization and it will receive a commission on the sales. The JV substantially increases the geographical exposure in Europe for CDTi.

In 1Q13 CDTI sold $2.7 million into the California retrofit market. CARB enforcement is increasing but is still at a relatively low level. This should increase during the year and we would expect HDD distributor sales to improve sequentially during 2013. One weak spot is the mining industry but an increase in school bus funding could offset this.

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