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Warrants
3 Months Ended
Mar. 31, 2014
Warrants Disclosures [Abstract]  
Warrants Disclosures [Text Block]

10.    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, 2013

1,139,535

 

$

1.68

 

$1.25 - $10.40

Warrants exercised

(800,000)

 

$

1.25

 

$1.25

Outstanding at March 31, 2014

339,535

 

$

2.70

 

$1.25 - $10.40

Warrants exercisable at March 31, 2014

319,535

 

$

3.03

 

$1.25 - $10.40


        Warrant Liability


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


        The Company’s warrant liability is carried at fair value and is classified as Level 3 in the fair value hierarchy because the warrants are valued based on unobservable inputs. The Company determines the fair value of its warrant liability using a Monte Carlo simulation model, which utilizes multiple input variables to estimate the probability that market conditions will be achieved. This model is 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 its business combination with Catalytic Solutions, Inc. (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 assumptions used in the Monte Carlo simulation model to estimate the fair value of the warrant liability are as follows:



March 31,

2014


December 31, 2013

CDTi stock price

$

3.82

 

$

1.51

Strike price

$

1.25

 

$

1.25

Expected volatility

 

79.00%

 

 

73.60%

Risk-free interest rate

 

1.30%

 

 

1.80%

Dividend yield

 

 

 

Expected life in years

 

4.3

 

 

4.5


        The liability, included in accrued expenses and other current liabilities in the accompanying condensed consolidated balance sheets, is re-measured at the end of each reporting period with changes in fair value recognized in other expense in the condensed consolidated statements of comprehensive loss. Upon the exercise of a warrant that is classified as a liability, the fair value of the warrant exercised is re-measured on the exercise date and reclassified from warrant liability to additional paid-in capital. The Company recorded other expense of $2.1 million for the three months ended March 31, 2014 as a result of the change in fair value of the warrant liability which was primarily due to an increase in the Company’s stock price during the reporting period. During the three months ended March 31, 2014, as a result of the exercise of warrants to purchase 800,000 shares of the Company’s common stock, the warrant liability decreased $2.5 million, excluding the effects of remeasurement, with an offsetting increase to additional paid-in capital.