Note 12 - Fair Value Measurement of Instruments

12 Months Ended

Sep. 30, 2011

Fair Value Disclosures [Text Block]

12. 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 value 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 liability carried at fair value, which requires separate accounting pursuant to ASC 815-40. The fair value of the warrants was reclassified from equity to a liability carried at fair value 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 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 assumptions as of September 30, 2011:

Outstanding Warrant Issuances
	October 2006			December 2006
Warrants issued	102,835 shares			827,789 shares
Expiration of warrants	October 2011			December 2012
Per share exercise price of warrants	$	28.06		$	28.06
Expected remaining life of warrants		0.07			1.21
Risk-free interest rate		0.02	%		0.11	%
Stock volatility		71.09	%		71.09	%
Dividend yield		0.00	%		0.00	%

A liability carried at fair value of $3.1 million was established related to the warrants 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 liability will continue to be remeasured each quarter over the remaining contractual life of the warrants.

At September 30, 2011, the Company remeasured the outstanding warrant liability and recorded a fair value of $0.1 million. As a result of the remeasurement, the Company recorded a change in fair value associated with these warrants as a gain totaling $1.2 million for fiscal 2011.

Beginning in the quarter ended June 30, 2010, the Company determined that liability classification of its restricted shares is appropriate based on the recent practice 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 are based on quoted prices in an active market, the forfeiture rate is considered to be a significant input and therefore we have deemed the derivative liability associated with the restricted shares to be Level 3.

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

							Fair Value Measurements at September 30, 2011
Description	Fair Value Per Share		Shares  Issuable Upon Exercise		September 30, 2011		Level 1		Level 2		Level 3
Warrants -- Date of Issuance
October 2006		-		102,835		-		-		-		-
December 2006		0.11		827,789		94		-		-		94
Restricted Shares				30,000		92		-		-		92
Total					$	186	$	-	$	-	$	186

The fair value of warrants and restricted shares outstanding as of September 30, 2010 was as follows (amounts in thousands, except per share amounts):

							Fair Value Measurements at September 30, 2010
Description	Fair Value Per Share		Shares Issuable Upon Exercise		September 30, 2010		Level 1		Level 2		Level 3
Warrants -- Date of Issuance
May 2006		0.12		274,406		34		-		-		34
July 2006		0.21		34,370		7		-		-		7
October 2006		0.44		102,835		46		-		-		46
December 2006		1.48		827,789		1,222		-		-		1,222
Restricted Shares				51,250		206		-		-		206
Total					$	1,515	$	-	$	-	$	1,515