Alto Ingredients, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

9. Fair Value Measurements

9. Fair Value Measurements

9 Months Ended

Sep. 30, 2016

Fair Value Disclosures [Abstract]

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 records its warrants issued in December 2011 and July 2012 at fair value using Level 3 inputs.

Warrants – The Company’s warrants are valued using a Monte Carlo Binomial Lattice-Based valuation methodology, adjusted for marketability restrictions.

Significant assumptions used and related fair values for the warrants as of September 30, 2016 were as follows:

Original Issuance	Exercise Price		Volatility		Risk Free Interest Rate		Term (years)		Market Discount		Warrants Outstanding		Fair Value
7/3/2012	$	6.09		46.3%		0.52%		0.76		15.7%		211,000	$	296,000
12/13/2011	$	8.43		37.7%		0.25%		0.20		6.7%		138,000		30,000
													$	326,000

Significant assumptions used and related fair values for the warrants as of December 31, 2015 were as follows:

Original Issuance	Exercise Price		Volatility		Risk Free Interest Rate		Term (years)		Market Discount		Warrants Outstanding		Fair Value
7/3/2012	$	6.09		49.1%		0.86%		1.51		22.9%		211,000	$	200,000
12/13/2011	$	8.43		48.4%		0.65%		0.95		18.3%		138,000		73,000
													$	273,000

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 recurring fair value measurements by level at September 30, 2016 (in thousands):

	Fair
	Value			Level 1			Level 2		Level 3
Assets:
Derivative financial instruments (1)	$	3,242		$	3,242		$	–	$	–
	$	3,242		$	3,242		$	–	$	–

Liabilities:
Warrants (3)	$	(326	)	$	–		$	–	$	(326	)
Derivative financial instruments (4)		(3,492	)		(3,492	)		–		–
	$	(3,818	)	$	(3,492	)	$	–	$	(326	)

The following table summarizes recurring fair value measurements by level at December 31, 2015 (in thousands):

	Fair
	Value			Level 1			Level 2		Level 3
Assets:
Derivative financial instruments (1)	$	2,081		$	2,081		$	–	$	–
Defined benefit plan assets (2)
(pooled separate accounts):
Large U.S. Equity		3,662			–			3,662		–
Small/Mid U.S. Equity		1,099			–			1,099		–
International Equity		1,525			–			1,525		–
Fixed Income		6,281			–			6,281		–
	$	14,648		$	2,081		$	12,567	$	–
Liabilities:
Warrants (3)	$	(273	)	$	–		$	–	$	(273	)
Derivative financial instruments (4)		(1,848	)		(1,848	)		–		–
	$	(2,121	)	$	(1,848	)	$	–	$	(273	)

__________

(1)

Included in derivative instruments in the consolidated balance sheets.

(2)

Fair values of plan assets are determined annually and therefore are not included as of September 30, 2016. For further descriptions of these assets see the Company’s Form 10-K for the year ended December 31, 2015.

(3)

Included in warrant liabilities at fair value in the consolidated balance sheets.

(4)

Included in derivative instruments 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, 2015	$	273
Adjustments to fair value for the period		53
Balance, September 30, 2016	$	326

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details