Quarterly report pursuant to sections 13 or 15(d)

8. FAIR VALUE MEASUREMENTS.

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8. FAIR VALUE MEASUREMENTS.
 3 Months Ended
Mar. 31, 2012
Fair Value Disclosures [Text Block]

8. FAIR VALUE MEASUREMENTS.


The fair value hierarchy prioritizes the inputs used in valuation techniques into three levels as follows:


· Level 1 – Observable inputs – unadjusted quoted prices in active markets for identical assets and liabilities;

· Level 2 – Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data; and

· Level 3 – Unobservable inputs – includes amounts derived from valuation models where one or more significant inputs are unobservable. For fair value measurements using significant unobservable inputs, a description of the inputs and the information used to develop the inputs is required along with a reconciliation of Level 3 values from the prior reporting period.

The Company valued its warrants using a Monte Carlo Binomial Lattice-Based valuation methodology, adjusted for marketability restrictions. Significant assumptions used in the valuations for the dates noted are as follows:


Warrants issued in October 2010:


Assumptions   March 31, 2012   December 31, 2011
Exercise price   $0.45   $0.45
Volatility   76.0%   68.0%
Risk free interest rate   1.33%   1.09%
Term (years)   5.60   5.90
Marketability discount   50.3%   47.4%

Based on the above, the Company estimated the fair value of these warrants to be $115,000 at March 31, 2012 and $226,000 at December 31, 2011.


Warrants issued in December 2011:


Assumptions   March 31, 2012   December 31, 2011
Exercise price   $1.50   $1.50
Volatility   78.3%   68.0%
Risk free interest rate   1.04%   0.83%
Term (years)   4.71   4.96
Marketability discount   56.6%   52.0%

Based on the above, the Company estimated the fair value of these warrants to be $1,727,000 at March 31, 2012 and $1,695,000 at December 31, 2011.


Other Derivative Instruments – The Company’s other derivative instruments consist of commodity positions. The fair value of the commodity positions are based on quoted prices on the commodity exchanges and are designated as Level 1.


The following table summarizes fair value measurements by level at March 31, 2012 (in thousands):


    Level 1   Level 2   Level 3   Total
Liabilities:                                
Warrants(1)   $ —       $ —       $ 1,842     $ 1,842  
Commodity contracts(2)     21       —         —         21  
Total Liabilities   $ 21     $ —       $ 1,842     $ 1,863  

__________


(1) Included in other liabilities in the consolidated balance sheets.


(2) Included in accrued liabilities in the consolidated balance sheets.


The following tables summarize fair value measurements by level at December 31, 2011 (in thousands):


    Level 1   Level 2   Level 3   Total
Assets:                                
Commodity contracts(1)   $ 244       —         —       $ 244  
Total Assets   $ 244     $ —       $ —       $ 244  

__________


(1) Included in other current assets in the consolidated balance sheets.


    Level 1   Level 2   Level 3   Total
Liabilities:                                
Warrants(1)   $ —       $ —       $ 1,921     $ 1,921  
Commodity contracts(2)     500       —         —         500  
Total Liabilities   $ 500     $ —       $ 1,921     $ 2,421  

__________


(1) Included in other liabilities in the consolidated balance sheets.


(2) Included in accrued liabilities in the consolidated balance sheets.


The changes in the fair value of the Company’s Level 3 inputs are as follows (in thousands):


Balance, December 31, 2011   $ 1,921  
Warrant exercises     (112 )
Adjustments to fair value for the period     33  
Balance, March 31, 2012   $ 1,842