Note 9 - Fair Value Measurement of Instruments

3 Months Ended

Dec. 31, 2011

Fair Value Disclosures [Text Block]

9.  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 warrants is determined using the Black-Scholes option-pricing model with the following weighted average assumptions as of December 31, 2011:

Outstanding Warrant Issuances
	December 2006
Warrants issued	827,789 shares
Expiration of warrants	December 2012
Per share exercise price of warrants	$	28.06
Expected remaining life of warrants		0.96
Risk-free interest rate		0.10	%
Stock volatility		72.25	%
Dividend yield		0.00	%

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 as of December 31, 2011 and September 30, 2011, was as follows (amounts in thousands, except per share amounts):

					Fair Value Measurement
Description	Fair Value Per Share		Shares Issuable Upon Exercise		Total		Level 1		Level 2		Level 3
Warrants --December 2006 Issuance
As of December 31, 2011		0.13		827,789	$	104	$	-	$	-	$	104
As of September 30, 2011		0.11		827,789	$	94	$	-	$	-	$	94
Restricted Shares
As of December 31, 2011					$	121	$	-	$	-	$	121
As of September 30, 2011					$	92	$	-	$	-	$	92

During the first quarter of fiscal 2012, 102,835 warrants expired. The fair value liability balance of warrants increased by less than $0.1 million related to an increase in fair value due to an increase in stock price. The balance of warrants at December 31, 2011 was $0.1 million from $0.1 million at September 30, 2011. The restricted shares balance increased by less than $0.1 million related to an increase in fair value for a total balance of $0.1 million at December 31, 2011, from $0.1 million at September 30, 2011. The balance of restricted stock outstanding was 30,000 shares at December 31, 2011.