Quarterly report pursuant to sections 13 or 15(d)

9. FAIR VALUE MEASUREMENTS

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9. FAIR VALUE MEASUREMENTS
9 Months Ended
Sep. 30, 2013
Fair Value Disclosures [Abstract]  
9. 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 recorded its warrants issued from 2010 through 2013 at fair value and designated them as Level 3 on their issuance dates.

 

Warrants – Except for the warrants issued September 26, 2012, the warrants were valued using a Monte Carlo Binomial Lattice-Based valuation methodology, adjusted for marketability restrictions. The warrants issued September 26, 2012, did not contain any anti-dilution protection features. As a result, the warrants were valued using the Black-Scholes Valuation Model. Of the various inputs used, the volatility and the current price of the Company’s common stock most significantly impact the fair value adjustments of the warrants. As the Company’s common stock increases or decreases, the valuation of the warrants will increase or decrease, respectively. As the estimated volatility of the Company’s common stock increases or decreases, the valuation of the warrants will increase or decrease, respectively. These changes may result in significantly higher or lower fair value measurements from period to period.

 

Significant assumptions used and related fair values for the warrants as of September 30, 2013 were as follows:

  

Original Issuance   Exercise Price     Volatility    

Risk-Free

Interest

Rate

   

Term

(years)

    Discount for marketability restrictions     Warrants Outstanding     Fair Value  
06/21/2013   $ 7.70       58.7%       0.22%       1.49       27.7%       1,051,200     $ 494,600  
03/28/2013   $ 7.70       58.7%       0.22%       1.49       27.7%       788,400       370,300  
01/11/2013   $ 6.60       64.7%       1.01%       4.28       46.5%       1,708,700       1,940,500  
09/26/2012   $ 8.85       61.6%       0.33%       1.99       46.5%       1,770,800       315,000  
07/3/2012   $ 6.36       63.7%       1.01%       3.76       43.5%       1,812,400       2,018,100  
07/3/2012   $ 5.68       48.2%       0.02%       0.26       42.8%       803,900       34,700  
12/13/2011   $ 8.92       61.0%       0.63%       3.21       39.9%       305,700       318,000  
                                                    $ 5,491,200  

 

Significant assumptions used and related fair values for the warrants as of December 31, 2012 were as follows:

 

Original Issuance   Exercise Price     Volatility    

Risk-Free

Interest

Rate

   

Term

(years)

    Discount for marketability restrictions     Warrants Outstanding     Fair Value  
09/26/2012   $ 8.85       70.2%       0.36%       2.74       53.9%       1,833,000     $ 1,112,000  
07/3/2012   $ 7.50       76.1%       0.72%       4.51       55.5%       1,867,000       2,756,000  
07/3/2012   $ 6.45       69.3%       0.16%       1.01       55.5%       930,000       509,000  
12/13/2011   $ 12.45       74.4%       0.54%       3.95       52.3%       330,000       480,000  
10/6/2010   $ 1.80       76.0%       0.72%       4.80       46.4%       17,000       35,000  
                                                    $ 4,892,000  

 

Convertible Notes – The conversion feature imbedded in the convertible notes was valued using a combination of a Monte Carlo Binomial Lattice-Based valuation methodology, adjusted for marketability restrictions. Significant assumptions used and related fair value for the conversion feature as of September 30, 2013 were as follows:

 

Instrument  

Initial

Conversion

Price

    Volatility    

Risk-Free

Interest

Rate

   

Term

(years)

    Discount for marketability restrictions     Fair Value  
Series B Notes   $ 15.00       50.7%       0.04%       0.50       14.2%     $ 1,139,100  
                                                 

 

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, 2013 (in thousands):

 

    Level 1     Level 2     Level 3     Total  
Assets:                                
Commodity contracts(1)   $ 128     $     $     $ 128  
Total Assets   $ 128     $     $     $ 128  
                                 
Liabilities:                                
Warrants(2)   $     $     $ 5,491     $ 5,491  
Conversion feature(2)                 1,139       1,139  
Commodity contracts(3)     44                   44  
Total Liabilities   $ 44     $     $ 6,630     $ 6,674  

__________

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

(2)   Included in warrant liabilities and conversion features at fair value in the consolidated balance sheets.

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

 

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

 

    Level 1     Level 2     Level 3     Total  
Assets:                                
Commodity contracts(1)   $ 189     $     $     $ 189  
Total Assets   $ 189     $     $     $ 189  
                                 
Liabilities:                                
Warrants(2)   $     $     $ 4,892     $ 4,892  
Commodity contracts(3)     167                   167  
Total Liabilities   $ 167     $     $ 4,892     $ 5,059  

__________

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

(2)   Included in warrant liabilities and conversion features at fair value in the consolidated balance sheets.

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

 

For fair value measurements using significant unobservable inputs (Level 3), 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 changes in the Company’s fair value of its Level 3 inputs were as follows (in thousands):

 

    Warrants     Conversion Features  
Balance, December 31, 2012   $ 4,892     $  
Issuance of warrants in January offering     2,657        
Issuance of notes and warrants on March 28, 2013     1,572       1,401  
Issuance of notes on June 21, 2013           2,929  
Conversions of notes           (4,269 )
Exercises of warrants     (260 )      
Adjustments to fair value     (3,370 )     1,078  
Balance, September 30, 2013   $ 5,491     $ 1,139  

 

Other financial instruments not measured at fair value on a recurring basis include accounts receivable, net, accounts payable – trade, accrued liabilities, current portion – long-term debt, accrued preferred dividends, other liabilities and long-term debt. With the exception of long-term debt, the carrying amount approximates fair value because of the short maturity of these instruments as reported on the Company’s consolidated balance sheets as of September 30, 2013 and December 31, 2012. The carrying value of the long-term debt either has a short period to maturity or bears interest at a variable rate and therefore is also considered to approximate fair value.