Quarterly report pursuant to sections 13 or 15(d)

8. FAIR VALUE MEASUREMENTS.

v2.3.0.15
8. FAIR VALUE MEASUREMENTS.
 9 Months Ended
Sep. 30, 2011
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.

Convertible Notes and Warrants – The Company has recorded its Convertible Notes and Warrants at fair value and designated them as Level 3.

The Convertible Notes were valued using a combination of a Monte Carlo Binomial Lattice-Based valuation methodology for the embedded conversion feature, adjusted for marketability restrictions, combined with a discounted cash flow model for the payment stream of the debt instrument. The significant assumptions used in the valuations are as follows:

Assumptions
September 30, 2011
December 31, 2010
Stock price
$0.29
$5.04
Volatility
68.7%
68.4%
Risk free interest rate
0.06%
0.29%
Term (years)
0.61
1.03
Marketability discount
21.1%
27.0%
Discount rate of debt instrument
30.0%
30.0%

Based on the above, the Company estimated the fair value of the Convertible Notes to be $10,896,000 and $38,108,000 at September 30, 2011 and December 31, 2010, respectively.

The Warrants were valued using a Monte Carlo Binomial Lattice-Based valuation methodology, adjusted for marketability restrictions. The significant assumptions used in the valuations are as follows:

Assumptions
September 30, 2011
December 31, 2010
Stock price
$0.29
$5.04
Volatility
74.2%
63.5%
Risk free interest rate
1.20%
2.71%
Term (years)
6.10
6.90
Marketability discount
52.1%
44.4%

Based on the above, the Company estimated the fair value of the Warrants to be $292,000 and $5,718,000 at September 30, 2011 and December 31, 2010, respectively.

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 September 30, 2011 (in thousands):

   
Level 1
   
Level 2
   
Level 3
   
Total
 
Liabilities:
                       
Convertible notes
  $ —     $ —     $ 10,896     $ 10,896  
Warrants (1)
    —       —       292       292  
Commodity contracts (2)
    140       —       —       140  
Total Liabilities
  $ 140     $ —     $ 11,188     $ 11,328  

__________

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

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

The following table summarizes fair value measurements by level at December 31, 2010 (in thousands):

   
Level 1
   
Level 2
   
Level 3
   
Total
 
Liabilities:
                       
Convertible notes
  $ —     $ —     $ 38,108     $ 38,108  
Warrants (1)
    —       —       5,718       5,718  
Commodity contracts (2)
    15       —       —       15  
Total Liabilities
  $ 15     $ —     $ 43,826     $ 43,841  

__________

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

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

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

   
Convertible Notes
   
Warrants
 
Balance, December 31, 2010
  $ 38,108     $ 5,718  
Principal payments
    (25,670 )     —  
Adjustments to fair value for the period
    (1,542 )     (5,426 )
Balance, September 30, 2011
  $ 10,896     $ 292