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

Quarterly report pursuant to sections 13 or 15(d)

8. FAIR VALUE MEASUREMENTS

8. FAIR VALUE MEASUREMENTS

3 Months Ended

Mar. 31, 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 have been 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 quarter-over-quarter, the valuation of the warrants will increase or decrease, respectively. As the estimated volatility of the Company’s common stock increases or decreases quarter-over quarter, 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 March 31, 2014 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		56.4%		0.13%		1.00		22.1%		788,000	$	5,098,000
06/21/2013	$	7.59		55.4%		0.13%		1.24		24.2%		1,051,000		6,703,000
01/11/2013	$	6.32		60.6%		1.32%		3.79		41.0%		813,000		5,343,000
09/26/2012	$	8.85		54.6%		0.29%		1.49		40.6%		1,639,000		7,382,000
07/3/2012	$	6.09		60.2%		0.90%		3.26		39.3%		976,000		6,462,000
12/13/2011	$	8.43		60.8%		0.90%		2.71		36.6%		281,000		1,691,000
													$	32,679,000

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
													$	8,215,000

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 March 31, 2014 (in thousands):

	Level 1		Level 2		Level 3		Total
Assets:
Commodity contracts⁽¹⁾	$	388	$	–	$	–	$	388
Total Assets	$	388	$	–	$	–	$	388

Liabilities:
Warrants⁽²⁾	$	–	$	–	$	32,679	$	32,679
Commodity contracts⁽³⁾		301		–		–		301
Total Liabilities	$	301	$	–	$	32,679	$	32,980

__________

(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 were as follows (in thousands):

	Warrants
Balance, December 31, 2013	$	8,215
Adjustments to fair value for the period		35,844
Exercises of warrants		(11,377	)
Expiration of warrants		(3	)
Balance, March 31, 2014	$	32,679

- 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