Quarterly report pursuant to Section 13 or 15(d)

8. FAIR VALUE MEASUREMENTS

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8. FAIR VALUE MEASUREMENTS
 9 Months Ended
Sep. 30, 2014
Fair Value Disclosures [Abstract]  
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 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 Company’s 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, and 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 price of 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 Company’s warrants as of September 30, 2014 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   51.2%   0.13%   0.99     35.6%     473,000   $ 1,732,000  
07/3/2012   $6.09   52.3%   1.07%   2.76     31.7%     391,000     2,361,000  
12/13/2011   $8.43   52.0%   0.58%   2.21     29.2%     138,000     700,000  
                            1,002,000   $ 4,793,000  

 

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

 

Original Issuance   Exercise Price   Volatility   Risk-Free Interest Rate   Term (years)   Discount for marketability restrictions   Warrants Outstanding   Fair Value  
03/28/2013   $7.59   52.4%   0.13%   1.20     22.7%     788,000   $ 495,000  
06/21/2013   $7.59   52.4%   0.13%   1.24     22.7%     1,051,000     660,000  
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  
                            8,241,000   $ 8,215,000  

 

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

 

The following table summarizes fair value measurements by level at September 30, 2014 (in thousands):

 

    Level 1     Level 2     Level 3     Total  
Assets:                                
Commodity contracts(1)   $ 1,130     $ –     $ –     $ 1,130  
Total Assets   $ 1,130     $ –     $ –     $ 1,130  
                                 
Liabilities:                                
Warrants(2)   $ –     $ –     $ 4,793     $ 4,793  
Commodity contracts(3)     659       –       –       659  
Total Liabilities   $ 659     $ –     $ 4,793     $ 5,452  

__________

(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 other current liabilities in the consolidated balance sheets.

 

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.

 

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 with respect to its warrants were as follows (in thousands):

 

Fair value of warrants, December 31, 2013   $ 8,215  
Adjustments to fair value for the period     37,465  
Exercises of warrants     (40,884 )
Expiration of warrants     (3 )
Fair value of warrants, September 30, 2014   $ 4,793