Quarterly report pursuant to sections 13 or 15(d)

8. FAIR VALUE MEASUREMENTS

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8. FAIR VALUE MEASUREMENTS
 6 Months Ended
Jun. 30, 2012
Notes to Financial Statements  
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   June 30, 2012     December 31, 2011  
 Exercise price   $ 0.45     $ 0.45  
 Volatility     78.0 %     68.0 %
 Risk free interest rate     0.72 %     1.09 %
 Term (years)     5.30       5.90  
 Marketability discount     50.8 %     47.4 %

Based on the above, the Company estimated the fair value of these warrants to be $35,000 at June 30, 2012 and $226,000 at December 31, 2011.

 

Warrants issued in December 2011:

Assumptions   June 30, 2012      December 31, 2011   
Exercise price   $ 1.50     $ 1.50  
Volatility     80.8 %     68.0 %
Risk free interest rate     0.57 %     0.83 %
Term (years)     4.46       4.96  
Marketability discount     58.6 %     52.0 %

Based on the above, the Company estimated the fair value of these warrants to be $522,000 at June 30, 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 June 30, 2012 (in thousands):

      Level 1     Level 2     Level 3     Total  
  Liabilities:                                
  Warrants(1)   $ —     $ —     $ 557     $ 557  
  Commodity contracts(2)     165       —       —       165  
  Total Liabilities   $ 165     $ —     $ 557     $ 722  

__________

(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 were 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  
Adjustments to fair value for the period     (1,285 )
Balance, June 30, 2012   $ 557