Annual report pursuant to section 13 and 15(d)

12. FAIR VALUE MEASUREMENTS

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12. FAIR VALUE MEASUREMENTS
 12 Months Ended
Dec. 31, 2013
Fair Value Disclosures [Abstract]  
12. 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 2011 through 2013 and its conversion features associated with its convertible notes at fair value and designated them as Level 3 on their issuance date.

 

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, due to no anti-dilution protection features, were valued using the Black-Scholes Valuation Model.

 

Significant assumptions used and related fair values for the warrants as of December 31, 2013 were as follows:

 

Original Issuance   Exercise Price     Volatility     Risk Free Interest Rate     Term (years)     Market Discount     Warrants Outstanding     Fair Value  
06/21/2013   $ 7.59       52.4%       0.13%       1.24       22.7%       1,051,000     $ 660,000  
03/28/2013   $ 7.59       52.4%       0.13%       1.20       22.7%       788,000       495,000  
01/11/2013   $ 6.32       63.3%       1.27%       4.03       43.8%       1,709,000       2,892,000  
09/26/2012   $ 8.85       58.5%       0.38%       1.74       42.3%       1,771,000       702,000  
07/3/2012   $ 6.09       61.2%       1.27%       3.51       40.2%       1,812,000       3,008,000  
07/3/2012   $ 5.47       52.8%       0.01%       0.01       42.3%       804,000       3,000  
12/13/2011   $ 8.43       60.4%       0.78%       2.95       37.9%       306,000       455,000  
                                                    $ 8,215,000  

 

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)     Market Discount     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 Monte Carlo Binomial Lattice-Based valuation methodology, adjusted for marketability restrictions. The Company estimated the fair value of the conversion feature until the retirement of the convertible notes in December 2013.

 

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 December 31, 2013 (in thousands):

 

    Level 1     Level 2     Level 3     Total  
Assets:                                
Commodity contracts(1)   $ 961     $ –     $ –     $ 961  
Total Assets   $ 961     $ –     $ –     $ 961  
                                 
Liabilities:                                
Warrants(2)   $ –     $ –     $ 8,215     $ 8,215  
Commodity contracts(3)     859       –       –       859  
Total Liabilities   $ 859     $ –     $ 8,215     $ 9,074  

__________

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

(2) Included in warrant liabilities 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   $ –     $ –     $ 4,892     $ 4,892  
Commodity contracts(2)     167       –       –       167  
Total Liabilities   $ 167     $ –     $ 4,892     $ 5,059  

__________

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

(2) Included in other current 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, 2011   $ 1,921     $ –  
Issuance of warrants in July offering     3,380       –  
Issuance of warrants in September offering     1,658       –  
Exercises of warrants     (113 )     –  
Adjustments to fair value for the period     (1,954 )     –  
Balance, December 31, 2012   $ 4,892     $ –  
Issuance of warrants in January offering   $ 2,657     $ –  
Issuance of notes and warrants in March offering     1,572       1,401  
Issuance of notes in June offering     –       2,929  
Conversions of notes     –       (5,205 )
Exercises of warrants     (260 )     –  
Adjustments to fair value for the period     (646 )     875  
Balance, December 31, 2013   $ 8,215     $ –