Quarterly report pursuant to Section 13 or 15(d)

10. FAIR VALUE MEASUREMENTS

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10. FAIR VALUE MEASUREMENTS
9 Months Ended
Sep. 30, 2015
Fair Value Disclosures [Abstract]  
10. 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, 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 September 30, 2015 were as follows:

 

Original Issuance   Exercise Price     Volatility     Risk Free Interest Rate     Term (years)     Market Discount     Warrants Outstanding     Fair Value  
07/3/2012   $ 6.09       50.0%       0.64%       1.76       25.3%       211,000     $ 355,000  
12/13/2011   $ 8.43       46.7%       0.33%       1.21       20.0%       138,000       146,000  
                                                    $ 501,000  

 

Significant assumptions used and related fair values for the warrants as of December 31, 2014 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       51.0%       0.19%       0.74       37.0%       473,000     $ 748,000  
07/3/2012   $ 6.09       56.1%       0.89%       2.51       32.8%       211,000       811,000  
12/13/2011   $ 8.43       54.3%       0.67%       1.95       28.7%       138,000       427,000  
                                                    $ 1,986,000  

 

The estimated fair value of the warrants is affected by the above underlying inputs. Observable inputs include the values of exercise price, stock price, term and risk-free interest rate. As separate inputs, an increase (decrease) in either the term or risk free interest rate will result in an increase (decrease) in the estimated fair value of the warrant.

 

Unobservable inputs include volatility and market discount. An increase (decrease) in volatility will result in an increase (decrease) in the estimated warrant value and an increase (decrease) in the market discount will result in a decrease (increase) in the estimated warrant fair value.

 

The volatility utilized was a blended average of the Company’s historical volatility and implied volatilities derived from a selected peer group. The implied volatility component has remained relatively constant over time given that implied volatility is a forward-looking assumption based on observable trades in public option markets. Should the Company’s historical volatility increase (decrease) on a go-forward basis, the resulting value of the warrants would increase (decrease).

 

The market discount, or a discount for lack of marketability, is quantified using a Black-Scholes option pricing model, with a primary model input of assumed holding period restriction. As the assumed holding period increases (decreases), the market discount increases (decreases), conversely impacting the value of the warrant fair value.

 

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, 2015 (in thousands):

 

    Level 1     Level 2     Level 3     Total  
Assets:                                
Commodity contracts(1)   $ 1,012     $     $     $ 1,012  
Total Assets   $ 1,012     $     $     $ 1,012  
                                 
Liabilities:                                
Warrants(2)   $     $     $ 501     $ 501  
Commodity contracts(3)     2,026                   2,026  
Total Liabilities   $ 2,026     $     $ 501     $ 2,527  

__________

(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, 2014 (in thousands):

 

    Level 1     Level 2     Level 3     Total  
Assets:                                
Commodity contracts(1)   $ 1,586     $     $     $ 1,586  
Total Assets   $ 1,586     $     $     $ 1,586  
                                 
Liabilities:                                
Warrants(2)   $     $     $ 1,986     $ 1,986  
Commodity contracts(3)     1,149                   1,149  
Total Liabilities   $ 1,149     $     $ 1,986     $ 3,135  

__________

(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):

 

Balance, December 31, 2014   $ 1,986  
Exercises of warrants     (72 )
Expiration of warrants     (527 )
Adjustments to fair value for the period     (886 )
Balance, September 30, 2015   $ 501