B. FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2014

Fair Value Disclosures [Abstract]

B. FAIR VALUE MEASUREMENTS

Certain financial instruments are reported at fair value on the Consolidated Balance Sheets. Under fair value measurement accounting guidance, fair value is defined as the amount that would be received from the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants, i.e., an exit price. To estimate an exit price, a three-level hierarchy is used. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or a liability, into three levels. Yuma Energy, Inc. (“the Company”) uses a market valuation approach based on available inputs and the following methods and assumptions to measure the fair values of its assets and liabilities, which may or may not be observable in the market.

Fair Value of Financial Instruments (other than Commodity Derivative, see below) – The carrying values of financial instruments, excluding commodity derivatives, comprising current assets and current liabilities approximate fair values due to the short-term maturities of these instruments.

Derivatives – The fair values of the Company’s commodity derivatives are considered Level 2 as their fair values are based on third-party pricing models which utilize inputs that are either readily available in the public market, such as natural gas and oil forward curves and discount rates, or can be corroborated from active markets or broker quotes. These values are then compared to the values given by the Company’s counterparties for reasonableness. The Company is able to value the assets and liabilities based on observable market data for similar instruments, which results in the Company using market prices and implied volatility factors related to changes in the forward curves. Derivatives are also subject to the risk that counterparties will be unable to meet their obligations. Because the Company’s commodity derivative counterparty was Société Générale at September 30, 2014, the Company has not considered non-performance risk in the valuation of its derivatives.

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques, and at least one significant model assumption or input is unobservable. For the Company, Level 3 financial liabilities consisted of embedded derivatives related to the conversion features in the Series A Preferred Stock issued and outstanding July 1, 2011, and the Series B Preferred Stock issued and outstanding in July and August of 2012. As there was no current market for these securities, the determination of fair value required significant judgment or estimation. The Company valued the automatic conditional conversion, re-pricing/down-round, change of control, and default Series A and Series B Preferred Stock provisions using a Monte Carlo simulation model, with the assistance of an independent valuation consultant. These models incorporated transaction details such as the stock price of comparable companies in the same industry, contractual terms, maturity, and risk free interest rates, as well as assumptions about future financings, volatility, and holder behavior as of issuance, and each quarter thereafter for each of the Series A and the Series B Preferred Stock.

	Fair value measurements at September 30, 2014
		Significant
	Quoted Prices	Other	Significant
	in Active	Observable	Unobservable
	Markets	Inputs	Inputs
	(Level 1)	(Level 2)	(Level 3)	Total
Assets:
Commodity derivatives – oil	$ -	$ 873,601	$ -	$ 873,601
Commodity derivatives – gas	-	58,575	-	58,575
Total assets	$ -	$ 932,176	$ -	$ 932,176
Liabilities:
Commodity derivatives – gas	$ -	$ 20,849	$ -	$ 20,849
Preferred stock derivative liability	-	-	-	-
Total Liabilities	$ -	$ 20,849	$ -	$ 20,849

	Fair value measurements at December 31, 2013
		Significant
	Quoted Prices	Other	Significant
	in Active	Observable	Unobservable
	Markets	Inputs	Inputs
	(Level 1)	(Level 2)	(Level 3)	Total
Assets:
Commodity derivatives – oil	$ -	$ 818,637	$ -	$ 818,637
Total assets	$ -	$ 818,637	$ -	$ 818,637
Liabilities:
Commodity derivatives – gas	$ -	$ 472,564	$ -	$ 472,564
Commodity derivatives – oil	-	423,217	-	423,217
Preferred stock derivative liability	-	-	51,290,414	51,290,414
Total Liabilities	$ -	$ 895,781	$ 51,290,414	$ 52,186,195

Commodity derivative instruments listed above include collars, swaps, and three-way collars. For additional information on the Company’s commodity derivatives, see Note C – Commodity Derivative Instruments.

At June 30, 2014 and as of the end of each of the prior quarters, level 3 inputs were used as inputs to a Monte Carlo option pricing model to calculate the value of Series A and Series B Preferred Stock and common stock. The June 30, 2014 calculation resulted in a value per share on a fully diluted and as-converted basis of $3,061. The actual simulation considered an approximate log-normal distribution for the market capital of the Company, and was estimated to evolve monthly over time (two steps per month) through February 28, 2015. At June 30, 2014, it was assumed that, in the event of a failed merger or other events, there was some modest probability that at the end of 2014 or early in 2015, the Company would either complete a Liquidity Event (as described in Note D – Stock Awards and Their Treatment) or be sold. Each simulation considered and accounted for the probability of the completion of a Liquidity Event with some probability in each half-month time period in 2014. The volatility was assumed to be 39.45% and was derived from implied volatilities of a number of public companies (tickers: AXAS, CRK, CRZO, GDP, PQ, SFY, SGY and WRES) adjusted for the Company’s relatively lower amount of financial leverage at June 30, 2014.

On September 10, 2014, the value of the preferred stock and associated derivative was marked to market. The preferred stock was converted to common stock as further described in Note J – Merger with Pyramid Oil Company. With the conversion of the shares of preferred stock to common stock, the value of the associated derivative liability was marked to market, then transferred to common stock equity.

A summary of the value and the changes in the Company’s assets and liabilities classified as Level 3 measurements during the periods ended September 30, 2014 and December 31, 2013 is presented below:

	Preferred Stock
	Derivative Liability
September 30, 2014	$ -
December 31, 2013	51,290,414
Total change	$ (51,290,414)

Debt – The Company’s debt is recorded at the carrying amount on its Consolidated Balance Sheets. For further discussion of the Company’s debt, please see Note F – Debt. The carrying amount of floating-rate debt approximates fair value because the interest rates are variable and reflective of market rates.

Asset Retirement Obligations (“AROs”) – The Company estimates the fair value of AROs based on discounted cash flow projections using numerous estimates, assumptions and judgments regarding such factors as the existence of a legal obligation for an ARO, amounts and timing of settlements, the credit-adjusted risk-free rate to be used and inflation rates.