Note 5 - Fair Value Measurement of Instruments

9 Months Ended

Jun. 30, 2011

Fair Value Disclosures [Text Block]

5.  FAIR VALUE MEASUREMENT OF INSTRUMENTS

Zoltek adopted ASC 820 on October 1, 2008. ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The fair value hierarchy for disclosure of fair vale measurements under ASC 820 is as follows:

Level 1 – Valuations based on quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.

Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

The Company adopted ASC 815-40 on October 1, 2009. In connection with the adoption, the Company determined that its outstanding warrants as of the adoption date, which include warrants issued in May 2006, July 2006, October 2006 and December 2006, are not indexed to the Company’s own stock. Accordingly, these warrants should be treated as a fair value liability, which requires separate accounting pursuant to ASC 815-40. The fair value of the warrants was reclassified from equity to a fair value liability on October 1, 2009.

The Company used a Black-Scholes pricing model to determine the fair value of the warrants. Fair values under the Black-Scholes model are partially based on the expected remaining life of the warrants, which is an unobservable input. Therefore, we have deemed the fair value liability associated with the outstanding warrants to have Level 3 inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

The fair value of the warrants is determined using the Black-Scholes option-pricing model with the following weighted average assumption as of June 30, 2011:

	July 2006			October 2006			December 2006
Warrants issued	34,370 shares			102,835 shares			827,789 shares
Expiration of warrants	July 2011			October 2011			December 2012
Per share exercise price of warrants	$	28.06		$	28.06		$	28.06
Expected remaining life of warrants (in years)		0.02			0.32			1.46
Risk-free interest rate		0.02	%		0.02	%		0.19	%
Stock volatility		70.95	%		70.95	%		70.95	%
Dividend yield		0.00	%		0.00	%		0.00	%

A fair value liability of $3.1 million was established as of October 1, 2009. The adoption of ASC 815-40 also resulted in a cumulative adjustment to accumulated deficit of $12.6 million and a cumulative adjustment to additional paid-in capital of $15.6 million. The warrants are remeasured and adjusted to fair value at the end of each reporting period. If the warrants are not exercised, the fair value liability will continue to be remeasured each quarter over the remaining contractual life of the warrants.

At June 30, 2011, the Company remeasured the outstanding warrant liability and recorded a fair value of $0.7 million. As a result of the remeasurement, the Company recorded a change in fair value associated with these warrants as a gain totaling $1.1 million and $0.6 million for the three and nine months ended June 30, 2011, respectively.

Beginning in the quarter ended June 30, 2010, the Company determined that liability classification of its restricted shares was appropriate based on the recent trend of settling restricted shares in cash. The unamortized fair value of the restricted shares was reclassified from equity to a liability carried at fair value on April 1, 2010. The fair value of the restricted shares is determined using the current market price for the shares and an estimated forfeiture rate, an unobservable input. Although the market price of the shares is based on quoted market prices in an active market, the forfeiture rate is considered to be a significant input and therefore we have deemed the liability associated with the restricted shares to be Level 3.

The fair value of warrants and restricted shares outstanding as of June 30, 2011 was as follows (amounts in thousands, except share and per share amounts):

			Shares				Fair Value Measurements at June 30, 2011
Description	Fair Value Per Share		Issuable Upon Exercise		June 30, 2011		Level 1		Level 2		Level 3
Warrants -- Date of Issuance
July 2006		-		34,370		-		-		-		-
October 2006		0.020		102,835		2		-		-		2
December 2006		0.880		827,789		726		-		-		726
Restricted Shares						133		-		-		133
Total					$	861	$	-	$	-	$	861

The warrants balance decreased by $0.6 million related to expiration of warrants and a change in fair value to $0.7 million at June 30, 2011, from $1.3 million at September 30, 2010. The restricted shares balance decreased by $0.1 million related to the settlements of vested restricted shares and the decrease in fair value for a total balance of $0.1 million at June 30, 2011, from $0.2 million at September 30, 2010.  The outstanding balance of restricted stock shares outstanding was 30,000 shares at June 30, 2011.  These shares granted in fiscal 2009 vest 50% in December 2011 and 50% in December 2012,