10. Warrants

Warrant activity for the six months ended June 30, 2011 and warrant information as of June 30, 2011 is summarized as follows:


				Weighted
				Average
				Exercise		Range of
	Shares			Price		Exercise Prices
Outstanding at December 31, 2010		942,870		$	16.36		$2.80 - $169.47
Warrants exercised		(49,779	)	$	7.92		$7.92
Warrants expired / forfeited		(830	)	$	60.00		$60.00

Outstanding at June 30, 2011		892,261		$	16.79		$2.80 - $169.47


Warrants exercisable at June 30, 2011		867,261		$	16.98		$2.80 - $169.47


Aggregate intrinsic value	$	19,225

In the six months ended June 30, 2011, the Company issued an aggregate 49,779 shares of common stock related to the exercise of warrants originally issued to CSI’s Class A shareholders in the Merger. The Company received cash proceeds of $0.4 million related to these exercises. There were no warrant exercises in the six months ended June 30, 2010.

Warrant Liability

Certain warrants are not afforded equity treatment because the Company is required to physically settle the contract by delivering registered shares. In addition, while the relevant warrant agreement does not require cash settlement if the Company fails to maintain registration of the warrant shares, it does not specifically preclude cash settlement. Accordingly, the Company’s agreement to deliver registered shares without express terms for settlement in the absence of continuous effective registration is presumed to create a liability to settle these warrants in cash, requiring liability classification. The liability is remeasured at the end of each reporting period with changes in fair value recognized in other income (expense) until such time as the warrants are exercised or expire. The Company had 379,678 and 429,457 warrants at June 30, 2011 and December 31, 2010, respectively, with an original grant date of October 15, 2010, exercise price of $7.92 and original contractual life of three years, classified as liabilities in the accompanying condensed consolidated balance sheets.

The contracts for the remaining warrants allow for settlement in unregistered shares and do not contain any other characteristics that would result in liability classification. Accordingly, these instruments have been classified in stockholders’ equity in the accompanying consolidated balance sheet at June 30, 2011 and December 31, 2010. The warrants that are accounted for as equity are only valued on the issuance date and not subsequently revalued.

The Company evaluated the balance sheet classification of all warrants at June 30, 2011 noting no changes.

The warrants classified as liabilities are considered Level 3 in the fair value hierarchy because they are valued based on unobservable inputs. The Company determined the fair value of its liability-classified warrants using a Monte Carlo simulation model, which utilizes multiple input variables to estimate the probability that market conditions will be achieved. The assumptions used in the Monte Carlo simulation model as of June 30, 2011 and December 31, 2010 were as follows:


	June 30,			December 31,
	2011			2010
Expected volatility		36.8	%		47.9	%
Risk-free interest rate		0.8	%		1.2	%
Forfeiture rate		0.0	%		0.0	%
Closing price of Clean Diesel Technologies, Inc. common stock	$	4.75		$	9.49

Due to the significant change in the Company following the Merger, CDTI’s historical price volatility was not considered representative of expected volatility going forward. Therefore, the Company utilized an estimate based upon the implied volatility of a portfolio of peer companies.

The following is a reconciliation of the warrant liability measured at fair value using Level 3 inputs for the six months ended June 30, 2011 (in thousands):


Balance at December 31, 2010	$	1,238
Exercise of common stock warrants		(39	)
Remeasurement of common stock warrants		(1,091	)

Balance at June 30, 2011	$	108