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Warrants

12 Months Ended

Dec. 31, 2013

11. Warrants

From time to time, the Company issues warrants to purchase its common stock. These warrants have been issued for consulting services, in connection with the Company’s issuance of debt and sales of its common stock.

Warrant activity is summarized as follows:

	Shares	Weighted Average Exercise Price	Range of Exercise Prices
Outstanding at December 31, 2011	929,914	$15.13	$2.80 - $169.47
Warrants issued	50,000	$2.26	$2.09 - $3.80
Warrants expired	(56,824)	$123.37	$75.00– $169.47
Outstanding at December 31, 2012	923,090	$7.77	$2.09 – $48.90
Warrants issued	993,600	$1.25	$1.25
Warrants cancelled	(128,333)	$7.92	$7.92
Warrants expired	(648,822)	$8.40	$7.92 - $48.90
Outstanding at December 31, 2013	1,139,535	$1.68	$1.25 - $10.40
Warrants exercisable at December 31, 2013	1,119,535	$1.67	$1.25 - $10.40

On September 30, 2013, the Company and Kanis S.A. agreed to cancel a warrant to purchase 128,333 shares of Company common stock at $7.92 per share. The warrant was originally issued on December 22, 2010 and was scheduled to expire on December 22, 2013.

The Company determines the grant-date fair value of warrants using the Black-Scholes option-pricing model unless the awards 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 instrument’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 the Merger, CDTi’s pre-Merger historical price volatility was not considered representative of expected volatility going forward. Therefore, the Company has 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 its warrants. The expected life is equal to the contractual life of the warrants.

The weighted-average assumptions used in determining the grant date fair value for warrants issued in 2013 and 2012 were as follows:

	December 31,
	2013	2012
CDTi stock price	$ 1.16	$ 2.11
Strike price	$ 1.25	$ 2.26
Expected volatility	80.5%	91.6%
Risk-free interest rate	1.6%	0.9%
Dividend yield	─	─
Expected life in years	5.0	6.0

Warrant Classification

The Company evaluates warrants on issuance and at each reporting date to determine proper classification as equity or as a liability.

At December 31, 2012, the Company had 379,678 outstanding warrants with an exercise price of $7.92, and original issuance date of October 15, 2010 that it is required to physically settle 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. These warrants expired unexercised on October 15, 2013.

The 865,000 of Offering Warrants issued in 2013 also require settlement in registered shares. In addition, the Offering Warrants and warrants to purchase 94,000 shares of Company common stock issued concurrently with the public offering in a private placement include full-ratchet down-round price protection features. Accordingly, if the Company issues or sells equity securities for a consideration per share less than the exercise price of the warrants or changes the purchase or conversion price of securities convertible, exercisable or exchangeable for common stock, the exercise price of the warrants will adjust to such lower per share consideration amount, subject to certain exceptions. Because of these provisions, these warrants are not indexed to the Company’s stock, and, therefore, require liability classification under ASC 815, “Derivatives and Hedging.”

The contracts for the remaining warrants, including 34,600 issued to the Underwriters in 2013 pursuant to the Underwriting Agreement, 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 sheets and are only valued on the issuance date and not subsequently revalued. The Company evaluated the balance sheet classification of all warrants at December 31, 2013 and noted no changes.

The Company’s warrant liability is carried at fair value and is classified as Level 3 in the fair value hierarchy because they are valued based on unobservable inputs. The Company determines the fair value of its warrant liability using a Monte Carlo simulation model, as described above.

The assumptions used in the Monte Carlo simulation model to estimate the fair value of the warrant liability as of December 31, 2013 and 2012 are as follows:


	December 31, 2013	December 31, 2012
CDTi stock price	$ 1.51	$ 2.17
Strike price	$ 1.25	$ 7.92
Expected volatility	73.6%	71.3%
Risk-free interest rate	1.8%	0.3%
Dividend yield	─	─
Expected life in years	4.51	0.8

The liability, included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets, is re-measured at the end of each reporting period with changes in fair value recognized in other expense in the consolidated statements of comprehensive loss.

The following is a reconciliation of the warrant liability measured at fair value using Level 3 inputs (in thousands):


	Year Ended December 31,
	2013	2012
Balance at beginning of period	$ 10	$ 100
Issuance of common stock warrants	749	─
Re-measurement of common stock warrants	180	(90)
Balance at end of period	$ 939	$ 10