Fair Value Measurements

9 Months Ended

Sep. 30, 2016

Fair Value Measurements

Fair Value Measurements

13.     Fair Value Measurements

Financial assets and liabilities and nonfinancial assets and liabilities are measured at fair value under a framework of a fair value hierarchy which prioritizes the inputs into valuation techniques used to measure fair value into three broad levels.  This hierarchy gives the highest priority to quoted prices (unadjusted) in active markets and the lowest priority to unobservable inputs.  Further, financial assets and liabilities should be classified by level in their entirety based upon the lowest level of input that was significant to the fair value measurement. The three levels of the fair value hierarchy per ASC 820 are as follows:

Level 1:  Unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.

Level 2:  Quoted prices in inactive markets for identical assets or liabilities, quoted prices for similar assets or liabilities in active markets, or other observable inputs either directly related to the asset or liability or derived principally from corroborated observable market data.

Level 3:  Unobservable inputs due to the fact that there is little or no market activity. This entails using assumptions in models which estimate what market participants would use in pricing the asset or liability.

The following table summarizes the Company’s financial assets and liabilities at fair value on a recurring basis at September 30, 2016 and December 31, 2015, by respective level of the fair value hierarchy:

	Level 1		Level 2		Level 3		Total
	(in thousands)
At September 30, 2016
Assets:
Cash and cash equivalents	$	3,415	$	—	$	—	$	3,415
Trade accounts receivable		506		—		—		506
Short-term investments		456		—		—		456
	$	4,377	$	—	$	—	$	4,377
Liabilities:
Warrant liability	$	—	$	—	$	3,031	$	3,031
	$	—	$	—	$	3,031	$	3,031
At December 31, 2015
Assets:
Cash and cash equivalents	$	4,077	$	—	$	—	$	4,077
Trade accounts receivable		546		—		—		546
Short-term investments		72		—		—		72
	$	4,695	$	—	$	—	$	4,695
Liabilities:
Warrant liability	$	—	$	—	$	210	$	210
Derivative liability		—		—		488		488
	$	—	$	—	$	698	$	698

The Company’s cash equivalents, comprised principally of U.S. treasury securities, are classified within Level 1 of the fair value hierarchy.

The Company’s trade accounts receivable is classified within Level 1 of the fair value hierarchy and is related to the sale of metals at our Velardeña Properties and the lease of the oxide plant lease that are valued at published metals prices per the terms of the refining and smelting agreements or lease rates per the plant lease agreement.

At September 30, 2016 and December 31, 2015, the Company recorded a liability for warrants to acquire the Company’s stock as a result of anti-dilution clauses in the warrant agreements that could result in a resetting of the warrant exercise price in the event the Company were to issue additional shares of its common stock in a future transaction at a price lower than the current exercise price of the warrants (see Note 15). The Company assesses the fair value of its warrant liability at the end of each reporting period, with changes in the value recorded as “Warrant derivative (loss) gain” on the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss. The valuation policies are approved by the Chief Financial Officer who reviews and approves the inputs used in the fair value calculations and the changes in fair value measurements from period to period for reasonableness. Fair value measurements are discussed with the Company’s Chief Executive Officer, as deemed appropriate. The warrant liability has been recorded at fair value as of September 30, 2016 and December 31, 2015 based primarily on a valuation performed by a third party expert using a Monte Carlo simulation, which falls within Level 3 of the fair value hierarchy.  The valuation model takes into account the probability that the Company could issue additional shares in a future transaction at a lower price than the current exercise price of the warrants.

The beneficial conversion feature of the Sentient Note represents an embedded derivative as defined by ASC 815 (see Note 11). ASC 815 provides that a derivative instrument’s fair value must be bifurcated from the host contract and separately recorded on the Company’s Condensed Consolidated Balance Sheets. At December 31, 2015 and at each of the conversion dates (see Note 11), the Company had recorded a derivative liability related to the beneficial conversion feature of the Sentient Note. On June 10, 2016, the remaining Sentient Note and related embedded derivative had been fully retired.  The Company assesses the fair value of the derivative liability at the end of each reporting period, with changes in the value recorded as “Derivative loss” on the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss. The valuation policies are approved by the Chief Financial Officer who reviews and approves the inputs used in the fair value calculations and the changes in fair value measurements from period to period for reasonableness. Fair value measurements are discussed with the Company’s Chief Executive Officer, as deemed appropriate. The derivative liability was recorded at fair value at December 31, 2015 and each of the conversion dates based primarily on a valuation performed by a third party expert using a Monte Carlo simulation, which falls within Level 3 of the fair value hierarchy. The valuation model takes into account, among other items: 1) the probability of successfully achieving stockholder approval of the loan’s conversion feature, 2) future variations in the Company’s stock price, and 3) the probability of entering into an equity transaction prior to the Loan maturity date that would lower the conversion price.

In addition to the warrant exercise prices (see Note 15) and Sentient Note conversion price (see Note 11) other significant inputs to the warrant valuation model at September 30, 2016 and December 31, 2015 and derivative valuation model at December 31, 2015 included the following as applicable:

	September 30,		December 31,
	2016		2015
Company's ending stock price	$	0.76	$	0.20
Company's stock volatility		110%		85%
Applicable risk free interest rate		0.87%		1.48%

An increase or decrease in the Company’s stock price, in isolation, would result in a relatively lower or higher fair value measurement respectively.  A decrease in the probability of the issuance of additional common stock at a lower price than the current warrant exercise price would result in a lower value for the warrants. The table below highlights the change in fair value of the warrant and derivative liabilities.

	Fair Value Measurements
	Using Significant Unobservable
	Inputs (Level 3)
	Warrant Liabilities		Derivative  Liability
	(in thousands)
Ending balance at December 31, 2015	$	210	$	488
Conversion of Sentient Loan (see Note 11)		—		(488)
Change in estimated fair value		2,821		—
Ending balance at September 30, 2016	$	3,031	$	—

Non-recurring Fair Value Measurements

There were no non-recurring fair value measurements at September 30, 2016.