Fair Value Measurements

6 Months Ended

Jun. 30, 2015

Note 5 – Fair Value Measurements

The Company follows a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to measurements involving unobservable inputs (Level 3). The three levels of the fair value hierarchy are as follows:

Level 1 inputs - observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 inputs - other inputs that are directly or indirectly observable in the marketplace.

Level 3 inputs - unobservable inputs which are supported by little or no market activity.

The level in the fair value hierarchy within which a fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

The following table presents the placement in the fair value hierarchy of the Company’s assets and liabilities measured at fair value on a recurring basis:

	June 30, 2015
	Level 1		Level 2		Level 3		Total

LIABILITIES:
Contingent consideration	$	-	$	-	$	747,000	$	747,000

Commodity swap contracts	$	-	$	320,190	$	-	$	320,190

	December 31, 2014
	Level 1		Level 2		Level 3		Total

LIABILITIES:
Contingent consideration	$	-	$	-	$	747,000	$	747,000

Commodity swap contracts	$	-	$	3,023,271	$	-	$	3,023,271

The fair value of financial instruments including cash and cash equivalents, notes and accounts receivable and notes and accounts payable are not materially different from their carrying amounts. The fair values of marketable securities are estimated based on the closing share price on the quoted market price for those investments. Cost basis is determined by specific identification of securities sold. Under the fair value hierarchy, the fair value of cash and cash equivalents is classified as a Level 1 measurement and the fair value of notes payable are classified as Level 2 measurements.

Commodity Swaps Contracts

The commodity swap contracts, categorized in level 2 of the fair value hierarchy, are valued by comparing the futures price at the measurement date of the natural gas commodity specified in the contract to the fixed price to be paid by the Company. See Note 6 – Derivative Financial Instruments for more information regarding the commodity swap contracts.

Contingent Consideration Liability

The contingent consideration liability categorized in level 3 of the fair value hierarchy arose as a result of the JDOG Marketing acquisition in June 2013. The purchase agreement for the transaction provided for contingent “earn-out” payments in the form of validly issued, fully paid and non-assessable shares of the Company’s common stock for a period of five years after the closing of the transaction if the acquired business achieved a minimum annual EBITDA target of $810,432. This amount was JDOG Marketing’s EBITDA for the year ended December 31, 2011. If the acquired business’s actual EBITDA for a given year is less than the target EBITDA, then no earn-out payment is due and payable for that period. If the acquired business’s actual EBITDA for a given year meets or exceeds the target EBITDA, then an earn-out payment in an amount equal to actual EBITDA divided by target EBITDA multiplied by $575,000 will have been earned for that year. Due to the earn-out structure, the maximum amount that could be earned over the five year period is indeterminate.

Valuation of the contingent consideration liability for financial statement purposes was conducted by an independent third-party valuation firm. Inputs and assumptions used in the valuation were reviewed for reasonableness by the Company in the course of the valuation process and have been updated to reflect changes in the Company’s business environment.

The Company calculated a first year earn-out payment of $671,638 as its best estimate for financial reporting purposes and this amount is included as a component of the valuation. The Company does not believe an earn-out payment is due to JDOG Marketing as a result of payments made by the Ohio utilities to JDOG Marketing during 2013 that were disallowed by the PUCO. Richard M. Osborne, father of the Company’s chief executive officer and the Company’s former chairman and chief executive officer believes that JDOG Marketing is entitled to the earn-out. Mr. Osborne and JDOG Marketing have filed a suit against the Company for the earn-out payment for 2013. In addition, the acquired business did not achieve the minimum annual EBITDA target in 2014 and, as a result, the Company has notified Mr. Osborne that no earn-out payment is due for 2014. See Note 14 – Commitments and Contingencies for more information.

The following table reconciles the beginning and ending balances of the contingent consideration liability categorized under level 3 of the fair value hierarchy.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

	Contingent
	Consideration Liability

Opening balance December 31, 2014	$	747,000

Transfers into level 3		-
Transfers out of level 3		-
Total (gains) losses for period:
Included in net income		-
Included in other comprehensive income		-
Purchases		-
Sales		-
Settlements		-
Issuances		-

Closing balance June 30, 2015	$	747,000

The following table summarizes quantitative information used in determining the fair value of the Company’s liabilities categorized in level 3 of the fair value hierarchy.

Quantitative Information about Level 3 Fair Value Measures

	Fair Value at		Valuation
	June 30, 2015		Techniques	Unobservable Input	Range

Contingent Consideration	$	747,000	Monte Carlo analysis	Forecasted annual EBITDA	$0.5 - $0.7 million
				Weighted avg cost of capital	14.0% - 14.0%
				U.S. Treasury yields	0.2% - 0.8%

			Discounted cash flow	U.S. Treasury yields	0.2% - 0.8%
				Credit spread	2.2% - 2.8%

The significant unobservable inputs used in the fair value measure of the Company’s contingent consideration liability are its weighted average cost of capital, various U.S. Treasury yields, and the Company’s credit spread above the risk free rate. Significant increases (decreases) in any of these inputs in isolation would result in a significantly lower (higher) fair value measure. An additional significant unobservable input for this fair value measure is the Company’s forecasted annual EBITDA related to its GNR subsidiary. A significant increase (decrease) in this input would result in a significant increase (decrease) in the fair value measure.

- 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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