Fair Value Measurements

6 Months Ended

Jun. 30, 2014

13. Fair Value Measurements

Accounting standards define fair value, outline a framework for measuring fair value, and detail the required disclosures about fair value measurements. Under these standards, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market. Standards establish a hierarchy in determining the fair market value of an asset or liability. The fair value hierarchy has three levels of inputs, both observable and unobservable. Standards require the utilization of the highest possible level of input to determine fair value.

Level 1 – inputs include quoted market prices in an active market for identical assets or liabilities.

Level 2 – inputs are market data, other than Level 1, that are observable either directly or indirectly. Level 2 inputs include quoted market prices for similar assets or liabilities, quoted market prices in an inactive market, and other observable information that can be corroborated by market data.

Level 3 – inputs are unobservable and corroborated by little or no market data.

Cash and Cash Equivalents. For cash and cash equivalents, the fair value, based upon Level 1 inputs, approximates carrying value due to the short-term nature of these instruments.

Inventories. The Company records its inventory, primarily corn inventory, at fair value only when the Company’s cost of corn purchased exceeds the market value for corn. The Company determines the market value of corn based upon Level 1 inputs using quoted market prices. The Company did not incur any write-down of its inventory during the three and six months ended June 30, 2014 or 2013.

Derivative Assets and Liabilities. The fair value of exchange-traded derivative instruments is based on Level 1 inputs using quoted market prices. Exchange-traded derivative instruments are recorded in the consolidated balance sheets at fair value. The Company did not have any exchange-traded derivative instruments at June 30, 2014 or December 31, 2013.

The fair value of the Company’s forward contract derivative instruments are derived based upon a market approach using Level 2 inputs, including the price at the delivery location adjusted for basis differentials, counterparty credit quality, the effect of the Company’s own credit worthiness, the time value of money and/or the liquidity of the market. The Company did not have any forward contract derivative instruments at June 30, 2014 or December 31, 2013.

Secured Debt. The Company has estimated the fair value of its secured debt obligations based upon discounted cash flows with Level 3 inputs, such as the terms that management believes would currently be available to the Company for similar issues of debt, taking into account the current credit risk of the Company and other market factors. In May 2014 the Company entered into an amended agreement with TriplePoint in which the loans outstanding were settled in exchange for a new loan with a May 2017 maturity date for $1.0 million which amortizes over 36 months and bears interest at a rate equal to 9% annum. The Company has determined using Level 3 inputs that the estimated fair value approximates book value as of June 30, 2014.

The following table sets forth the principal balance of the Company’s secured debt obligations and the associated estimated fair value (in thousands) as of June 30, 2014.

	June 30, 2014
Issuance	Principal Balance		Estimated Fair Value
TriplePoint - May 2014 Advance		970	902

The following table sets forth the principal balance of the Company’s secured debt obligations and the associated estimated fair value (in thousands) as of December 31, 2013.

	June 30, 2014				December 31, 2013
Issuance	Principal Balance		Estimated Fair Value		Principal Balance		Estimated Fair Value

TriplePoint - September 2010 Advance		-	$	-	$	917	$	847
TriplePoint - October 2011 Advance		-		-		6,657		5,942
TriplePoint - January 2012 Advance		-		-		3,495		3,079

Senior Secured Debt. The Company has estimated the fair value of the 2017 Notes, to be $31.2 million at June 30, 2014 based upon Level 1 inputs, including the market price of the Company’s common stock. The Company has valued the 2017 Notes and all of its components using the fair value option as there are no embedded instruments which qualify for equity presentation. See Note 7 above for the fair value inputs used to estimate the fair value of the 2017 Notes. On the date of issuance in May of 2014, the 2017 Notes were a term loan on recorded at fair value at that date.

Convertible Notes and Embedded Derivatives. The Company has estimated the fair value of the 2022 Notes, including the embedded derivatives, to be $17.2 million and $15.9 million at June 30, 2014 and December 31, 2013, respectively, based upon Level 2 inputs, including the market price of the 2022 Notes derived from actual trades of the 2022 Notes. The Company has estimated the fair value of the embedded derivatives on a stand-alone basis to be $0.7 million and $3.5 million at June 30, 2014 and December 31, 2013, respectively, based upon Level 2 inputs. See Note 5 above for the fair value inputs used to estimate the fair value of the 2022 Notes with and without the embedded derivatives and the fair value of the embedded derivatives.

Derivative Warrant Liability. In December 2013, the Company issued warrants to purchase 21,303,750 shares of the Company’s common stock. Based on the terms of the warrants, the Company determined the warrants qualify as a derivative and, as such, are presented as derivative warrant liability on the consolidated balance sheets and recorded at fair value each reporting period. The Company determined the estimated fair value of the warrants as of December 31, 2013 to be $7.2 million based upon Level 1 inputs, the quoted market prices of the warrants on such date. The Company determined the estimated fair value of the warrants as of June 30, 2014 to be $4.7 million based upon Level 2 inputs being an analysis of actual historical market trades of the warrants. The Company relied on Level 2 inputs for estimating the fair value of the warrants as of June 30, 2014 due to the lack of market trades of the warrants on June 30, 2014.

While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

- 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.

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