If a company’s business is so flimsy that optimistic analysts must resort to commenting on the company’s “body language” for good results, you know you’re in for a ride.

But if you dare look past Clean Diesel Technologies, Inc. (NASDAQ:CDTI) body language into the financials, rapidly dying legacy products, the emissions funding problems, lost tax credits, fleeing CFO, historical allegations of behavior believed detrimental to shareholders validated by federal regulators’ orders – and SEC charges against a CDTI promoter – you know it has all the markings of one short, unforgettable, miserable ride.

CDTI manufactures and distributes emission control systems and products for the light-duty vehicle and heavy-duty diesel market. The bull thesis contends the company will make progress in transforming its business and will make commercial strides with its DuraFit offering. Roth Capital, which notes it expects to receive or intends to seek business with CDTI in the next three months, reiterated its “buy” rating in a research report sent to investors Wednesday morning. With the stock sitting at about $2.17, Roth set a $2.50 price target.

Investors should check out other viewpoints here while we describe our concerns about CDTI and why we think the stock price should collapse.

*Terrible Financials

Investors may see in the table below that CDTI’s financial picture worsened in all three important areas:

Clean Diesel Tech. (CDTI) 1Q2015 1Q2014
Revenue $10.3 m $11.6 m
Operating Loss $-2.7 m $-1.5 m
Gross Margin   27%    32%


(Source: SEC filings)

And CDTI’s total losses zoomed up to $194 million. Earnings per share for 2014 remained in the red at $-0.78.

Indeed, CDTI’s independent auditor has “expressed substantial doubt about (CDTI’s) ability to continue as a going concern.”

Indeed, CDTI’s independent auditor has “expressed substantial doubt about (CDTI’s) ability to continue as a going concern.”

So the company is expected to continue spilling red ink on investors for some time. Check out what normally optimistic analysts anticipate:

(Source: Yahoo Finance)

At the same time, CDTI is torching its cash even faster than this time last year:

Clean Diesel Tech. (CDTI) 1Q2015 1Q2014
Cash $ 4.3 m $ 3.6 m
Cash Burn $ 3.0 m $ 1.5 m

(Source: SEC filings)

*Dilution Machine

So, at this rate, we imagine CDTI is gunning its dilution engine. We’re watching for another potentially dilutive stock offering right away.

Filing footnotes show that’s the way the company’s always done business.

Along with borrowing, credit facilities, and selling off its Nevada exhaust parts business, CDTI says it is staying alive with stock offerings. It has offered millions of shares of stock under a shelf registration – first in 2013. In 2014, it ripped out blocks totaling ~$11 million-worth of stock in April and November.

The shelf registration allows for $50 million in stock offerings. So look out below!  There’s plenty of room left for more potential dilution.

*Like Other Big Diluters

Retail investors now are thanking TheStreetSweeper for warning them just Wednesday about a similar stock – Gevo (GEVO).

Much like CDTI, bad financials pointed to the inevitable. And about 2 1/2 hours after TheStreetSweeper’s warning that a potentially dilutive offering loomed – Wham! Gevo ripped out a stock offering and now the stock is down over 20 percent in 48 hours.

That Gevo warning followed our tweet on Monday about Viggle. We noted its stock rally, but also massive debt, low cash and going concerns issues, thinking Viggle would issue stock soon. Sure enough, Viggle issued stock two days later, sending $4 shares crashing to~$3.

*Legacy Technology Dying Faster Than Anticipated

CDTI is hoping its new DuraFit will help take up the slack for the declining diesel retrofit business. But its own filings portray the increasing misery here:

“…we launched DuraFit™ to take advantage of the emerging market opportunity in replacement diesel particulate filters and to drive near-term sales. Our legacy diesel-retrofit business, however, declined much more than expected, negatively impacting our financial results for the year. While we are disappointed with our 2014 financial performance, we are pleased with the progress we have made advancing our technology initiatives.”

*Emissions Funding Gets Cut

CDTI has relied upon tighter emission standards and emissions control programs to help generate money. But CDTI is losing access to those matters, as its SEC filing explains so well. Please see the full notation on page 13:

“Future growth of our business depends in part on the general availability of funding for emissions control programs, which can be affected for economic as well as political reasons. For example, in light of the recent budget crisis in California, funding was not available … its start date was pushed back. Additionally, funding for the EPA’s Diesel Emissions Reductions Act, or DERA, for 2014 has been substantially reduced … future funding remains uncertain…”

*Extreme Dependence on One Customer Backfires

Honda’s motorcycle division reached an agreement in 2010 with CDTI for developing ZPGM catalysts. Disappointingly, that was a purchase order arrangement. Unfortunately, the deal expired in March 2014. Read the notation on page 14:

“Manufacturers typically seek to have two or more sources of critical components; however, there can be no assurance that manufacturers for which we are a shared supplier will not sole source the products we supply.”

*Merger Issues: Damages Loss Carryforward, Tax Credits

These days, CDTI can’t even seem to catch a break even when it’s losing millions and grasping at tax loss straws:

“The Merger adversely affects our ability to take advantage of the significant U.S. federal tax loss carryforwards and tax credits accumulated.

… our ability to use our net operating losses and credits in future tax years has been significantly limited. In addition, due to the “ownership change,” our federal research and development credits have also been limited and, consequently, we do not anticipate being able to use any of these credits that existed as of the date of the Merger in future tax years.”

And, this time, the stock offerings may hurt not just those poor souls holding stock, but the company itself:

“Our limited ability to use these net operating losses and tax credits as a result of the Merger or otherwise, including as a result of equity offerings subsequent to the Merger, could have an adverse effect on our results of operations.”

*Executives Suddenly Resign

Often, an early sign of big trouble is a sudden executive departure. And CDTI has had its CEO resign to “pursue other opportunities” in December 2013, along with the chairman and the CFO in 2014.

Maybe CDTI had set itself up for problems with its creation of the “Office of the CEO” which two people shared. After an apparent blowup, Nihil Mehta suddenly resigned “for good reason,” six months after serving as part of the Office of the CEO. The board axed the Office of the CEO and appointed Christopher J. Harris to serve as president and chief executive on July 2, 2014. On July 31, 2014, Mr. Mehta resigned.

As it turns out, Mr. Mehta wasn’t the first CFO who has butted heads with CDTI.

*Fined: Fires CFO for Reporting Conduct Believed Detrimental to Shareholders

Financial and ethical concerns raised by a proposed merger got a former CFO fired when he reported them to directors.

The US Labor Department’s OSHA investigated the whistleblower’s allegations in 2010 and ordered the company to fork out $1.9 million.

According to the labor department’s September 2013 announcement:

“The former CFO believed that a proposed merger was: detrimental to the company, critical financial information had been withheld from board members, and the conflict of interest violated internal company controls mandated by the Securities and Exchange Commission as well as the company’s own corporate code of ethics.”

None less than the Assistant Secretary of Labor for Occupational Safety and Health Dr. David Michaels sent a strong warning to CDTI.

“We protect those who are courageous enough to speak out, even internally, about violations of securities rules and regulations.”

Dr. Michaels added:

“This order should send a clear message to publicly traded companies that silencing those who try to do the right thing is unacceptable.”

*SEC Charges: Investor Relations Firm Partner, CDTI Promoter

Thirteen times between June 20, 2013 and July 7, 2014, the name Kevin M. McGrath appears as the contact person for more information on CDTI’s financial information in SEC filings. An example is here.

About two weeks after the last filing bearing Mr. McGrath’s name, the SEC issued a press release headlined: “SEC Charges Investor Relations Executive With Insider Trading While Preparing Clients’ Press Releases”

The SEC charged Mr. McGrath with insider trading on confidential information he learned about CDTI and another client, Misonix Inc., while he helped prepare their press releases.

“McGrath used one hand to help clients draft their press releases while using the other to trade illegally in their stock,” said Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office.

The SEC alleged that Mr. McGrath worked on a press release announcing a big CDTI order and minutes after finding out on May 24, 2011, that the press release would be issued the next day, he bought 1,000 shares of stock. On the stock rise, he sold and profited over $6,000, according to the release.

Mr. McGrath agreed to pay $25,044 to settle the charges.

Such results are one more reason investors should be cautious whenever they see hype coming from companies.