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Warrants | 9 Months Ended
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Sep. 30, 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:
|  |  | Weighted Average Exercise Price |  |
|  |  |  | Range of Exercise Prices
| Shares |  |
Outstanding at December 31, 2013 | 1,139,535 |  | $ | 1.68 |  | $1.25 - $10.40
Issued | 812,000 |  | $ | 4.20 |  | $4.20
Exercised | (800,000) |  | $ | 1.25 |  | $1.25
Outstanding at September 30, 2014 | 1,151,535 |  | $ | 3.76 |  | $1.25 - $10.40
Warrants exercisable at September 30, 2014 | 339,535 |  | $ | 2.70 |  | $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 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 its business combination with Catalytic Solutions, Inc. (the “Merger”), CDTi’s pre-Merger historical price volatility was initially not considered representative of expected volatility going forward. Therefore, for warrants with an expected term that required a volatility look-back that pre-dates the Merger, the Company 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 these warrants. For warrants with an expected term that does not require a volatility look-back that pre-dates the Merger, CDTi’s post-Merger historical price volatility was considered representative of expected volatility going forward, and accordingly, only CDTi’s historical volatility was used for the valuation of these warrants. The expected life is equal to the remaining contractual life of the warrants. The Offering warrants require physical settlement 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 assumptions used in the Black-Scholes option-pricing model to estimate the fair value of the warrant liability for these warrants are as follows:
| September 30, 2014 |  | April 4, 2014
Warrants valued |  | 812,000 |  |  | 812,000
CDTi stock price | $ | 1.72 |  | $ | 2.95
Strike price | $ | 4.20 |  | $ | 4.20
Expected volatility |  | 83.6% |  |  | 84.9%
Risk-free interest rate |  | 1.8% |  |  | 1.9%
Dividend yield |  | ─ |  |  | ─
Expected life in years |  | 5.0 |  |  | 5.5
The assumptions used in the Monte Carlo simulation model to estimate the fair value of the warrant liability for warrants with full-ratchet down-round protection are as follows:
| September 30, 2014 |  | December 31, 2013
Warrants valued |  | 159,000 |  |  | 959,000
CDTi stock price | $ | 1.72 |  | $ | 1.51
Strike price | $ | 1.25 |  | $ | 1.25
Expected volatility (1) |  | 104.9% |  |  | 73.6%
Risk-free interest rate |  | 1.4% |  |  | 1.8%
Dividend yield |  | ─ |  |  | ─
Expected life in years |  | 3.8 |  |  | 4.5
(1) At September 30, 2014, the Company's post-Merger historical volatility began to be considered representive of expected volatility going forward for these warrants. |  |  |  |  |
The warrant liability, included in accrued expenses and other current liabilities in the accompanying unaudited condensed consolidated balance sheets, is re-measured at the end of each reporting period with changes in fair value recognized in other income (expense) in the unaudited 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 income of $0.7 million for the three months ended September 30, 2014 as a result of the change in fair value of the warrant liability, which was primarily due to a decrease in the Company’s stock price during this period. The Company recorded other expense of $0.9 million for the nine months ended September 30, 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 nine months ended September 30, 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 re-measurement, with an offsetting increase to additional paid-in capital.

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