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Fair value of financial instruments | 9 Months Ended
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Sep. 30, 2015
Fair Value Disclosures [Abstract] |
Fair value of financial instruments | 8. Fair value of financial instruments As of September 30, 2015, and December 31, 2014, the Company measured its financial assets and liabilities under the amended ASC 820, Fair Value Measurements and Disclosures of the Accounting Standards Codification, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. It also establishes a three-level valuation hierarchy for disclosures of fair value measurement as follows: Level 1 — quoted prices in active markets for identical assets or liabilities; Level 2 — other significant observable inputs for the assets or liabilities through corroborations with market data at the measurement date; and Level 3 — significant unobservable inputs that reflect management’s best estimate of what market participants would use to price the assets or liabilities at the measurement date. Private placement warrants liability As of September 30, 2015 and December 31, 2014, the Company’s liability for Private Placement Warrants was measured at fair value under ASC 820. The Company’s liability for the Private Placement Warrants is measured at fair value based on unobservable inputs, and thus is considered a Level 3 financial instrument. The Company analyzes financial instruments with features of both liabilities and equity under ASC 480, Distinguishing Liabilities from Equity and ASC 815, Derivatives and Hedging. As of September 30, 2015 and December 31, 2014, the Company estimated the fair value of its liability for Private Placement Warrants with a publicly traded stock pricing approach using the Black-Scholes option pricing model. The inputs of the Black-Scholes option pricing model included the following:
|  | September 30, 2015 |  |  | December 31, 2014 |
Market value of the Company’s common stock |  | $ | 22.71 |  |  | $ | 51.61 |
Exercise price |  | $ | 13.00 |  |  | $ | 13.00 |
Risk-free interest rate |  |  | 0.12 | % |  |  | 0.39 | %
Estimated price volatility |  |  | 55.00 | % |  |  | 55.00 | %
Contractual term |  |  | 0.58 years |  |  |  | 1.33 years |
Dividend yield |  |  | — |  |  |  | — |
The market value of the Company’s common stock was based on its closing price on September 30, 2015 and December 31, 2014, the date of each valuation. The volatility factors noted above represented the upper end of the range of implied volatility of publicly traded call options of benchmark companies. If all other assumptions were held constant, a 10% change in the estimated price volatility in the Black-Scholes option pricing model would have an insignificant effect on the recorded liability of the Private Placement Warrants. The following table summarizes the change in the estimated fair value of the Company’s Level 3 Private Placement Warrants liability in the nine months ended September 30, 2015:
Balance at December 31, 2014 |  | $ | 11,036 |
Fair value of private placement warrants exercised |  |  | (255 | )
Change in the value of private placement warrants |  |  | (8,040 | )
Balance at September 30, 2015 |  | $ | 2,741 |
For the three and nine months ended September 30, 2015, the Company recognized income of $8,750,000 and $8,040,000, respectively, due to a decrease in the estimated fair value of the Company’s Private Placement Warrants. For the three and nine months ended September 30, 2014, the Company recognized income of $858,000 and $1,190,000, respectively, due to a decrease in the estimated fair value of the Company’s liability for Private Placement Warrants. This income was recorded as “Private placement warrant” within “Other (income) expense” in the Company’s unaudited condensed consolidated statements of operations for the respective periods. Contingent consideration liability As described in Note 4, “Acquisitions” a portion of the purchase price for the acquisition of Powertrain is in the form of contingent consideration. The contingent consideration consists of two components, a Base Earn-out Payment and an Additional Earn-out Payment, both as defined in the APA. The Base Earn-out Payment is payable in cash while the Additional Earn-out Payment is payable in cash and/or shares of the Company’s common stock at the Company’s discretion. As of September 30, 2015, the Company’s potential contingent consideration payment relating to its acquisition of Powertrain was measured at fair value under ASC Topic 820. The Company’s liability for this contingent consideration was measured at fair value based on unobservable inputs, and thus is considered a Level 3 financial instrument. The fair value of the liability determined by this analysis was primarily driven by the Company’s expectations of achieving the performance targets required by the APA for Powertrain. The expected performance targets were used in a Monte Carlo simulation which provided for the most likely earn-out payment which was then discounted to its present value in order to derive a fair value of the Base Earn-out Payment. A Modified Black-Scholes call option model considering the actual and forecasted share price, the measurement period and a volatility factor was used to derive a fair value of the Additional Earn-out Payment. As of September 30, 2015, the primary inputs of the Monte Carlo simulation model included the estimated performance forecast, stock price volatility and a risk free interest rate. The volatility factor was primarily derived from our historical stock price volatility as well as the implied volatility of publicly traded call options of benchmark companies. If all other assumptions were held constant, a ten percentage point change in the volatility factor would result in an immaterial increase or decrease in the fair value of the contingent consideration. As of September 30, 2015, the Company has recorded an $8,150,000 contingent consideration liability within “Other accrued liabilities” on its unaudited condensed consolidated balance sheet which represented a $50,000 decrease from the prior valuation of this contingent consideration liability as of June 30, 2015. Also as described in Note 4, “Acquisitions” a portion of the purchase price for the acquisition of Bi-Phase was in the form of contingent consideration. This contingent consideration, payable to TPB, Inc., was based upon certain sales of Bi-Phase fuel systems over a period of three to five years. The contingent consideration relating to the Company’s acquisition of Bi-Phase was measured at fair value under ASC Topic 820 at the Bi-Phase Date of Acquisition. The Company’s liability for this contingent consideration was measured at fair value based on unobservable inputs, and thus was considered a Level 3 financial instrument. The fair value of the liability determined by this analysis was primarily driven by the Company’s expectations of sales following the closing date for each liquid propane engine sold by the Company that incorporated any part of the Bi-Phase fuel system or related technology as defined in the Membership Interest Purchase Agreement. Based on these expectations, the Company performed a discounted cash flow analysis to determine the fair value of the contingent consideration liability. The primary inputs of the discounted cash flow analysis included estimated units to be shipped, the “per unit” agreed-upon fee and discount rate. As a result, the Company initially recorded a $540,000 contingent consideration liability within “Other accrued liabilities” on its unaudited condensed consolidated balance sheet at the Bi-Phase Date of Acquisition. The following table summarizes the change in the estimated fair value of the Company’s Level 3 contingent consideration liability in the nine months ended September 30, 2015:
Balance at December 31, 2014 |  | $ | — |
Powertrain Date of Acquisition |  |  | 8,200 |
Bi-Phase Date of Acquisition |  |  | 540 |
Change in the value of contingent consideration |  |  | (50 | )
Balance at September 30, 2015 |  | $ | 8,690 |
For the three and nine months ended September 30, 2015, the Company recognized income of $50,000 due to a decrease in the estimated fair value of the Company’s contingent consideration liability in connection with the acquisition of Powertrain. For the three and nine months ended September 30, 2014, the Company recognized income of $3,208,000 and $3,782,000, respectively, due to a decrease in the estimated fair value of the Company’s contingent consideration liability arising from the acquisition of 3PI in 2014. This income was classified within “Other (income) expense” in the Company’s unaudited condensed consolidated statements of operations for the respective periods. Financial liabilities measured at fair value The following table summarizes fair value measurements by level as of September 30, 2015, for the Company’s level 3 financial liabilities measured at fair value on a recurring basis:
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Private placement warrants liability |  |  | — |  |  |  | — |  |  | $ | 2,741 |
Contingent consideration |  |  | — |  |  |  | — |  |  |  | 8,690 |
The following table summarizes fair value measurement by level as of December 31, 2014, for the Company’s level 3 financial liability measured at fair value on a recurring basis:
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Private placement warrants liability |  |  | — |  |  |  | — |  |  | $ | 11,036 |
Financial assets and liabilities not measured at fair value As of September 30, 2015 and December 31, 2014, the Company’s revolving line of credit and term debt, including accrued interest, recorded on the unaudited condensed consolidated balance sheets were carried at cost. The carrying value of the revolving line of credit and term debt approximated fair value because the interest rates fluctuate with market interest rates or the fixed rates approximate current rates offered to the Company for debt with similar terms and maturities, and the Company’s credit profile had not changed significantly since the origination of these financial liabilities. Under ASC 825, Financial Instruments, these financial liabilities were defined as Level 2 in the three-level valuation hierarchy, as the inputs to their valuation are market observable. The carrying value of cash, accounts receivable, inventories, prepaid expenses and other current assets, accounts payable and other accrued liabilities approximated fair value because of their short maturities.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=36462937&loc=d3e19207-110258 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13537-108611 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13504-108611 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13433-108611 + Details
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