13. Fair Value Measurements

 

The following table presents our assets and liabilities at September 30, 2012, measured at fair value on a recurring basis:

 

						Fair Value Measurements at September 30, 2012
						Quoted				Significant
						Prices				Other				Significant
						in Active				Observable				Unobservable
						Markets				Inputs				Inputs
		Total				(Level 1)				(Level 2)				(Level 3)
Assets:
Certificates of deposit		$	740,939			$	-			$	740,939			$	-
Gold put derivative			10,571				-				10,571				-
Total Assets		$	751,510			$	-			$	751,510			$	-
Liabilities:
Gold call derivative		$	227,282			$	-			$	227,282			$	-
Gold forward derivative			715,536				-				715,536				-
Derivative liability - contingent dividend			444,800				-				-				444,800
Total Liabilities		$	1,387,618			$	-			$	942,818			$	444,800

 

The following table presents our assets and liabilities at December 31, 2011, measured at fair value on a recurring basis:

 

						Fair Value Measurements at December 31, 2011
						Quoted				Significant
						Prices				Other				Significant
						in Active				Observable				Unobservable
						Markets				Inputs				Inputs
		Total				(Level 1)				(Level 2)				(Level 3)
Assets:
Certificates of deposit		$	2,211,287			$	-			$	2,211,287			$	-
Total Assets		$	2,211,287			$	-			$	2,211,287			$	-
Liabilities:
Derivative liability - contingent dividend		$	1,025,000			$	-			$	-			$	1,025,000
Total Liabilities		$	1,025,000			$	-			$	-			$	1,025,000

 

During the three and nine month periods ended September 30, 2012 and 2011, there were no transfers of assets or liabilities between Level 1, Level 2, or Level 3.

 

Following is a description of the valuation methodologies used for the Company's financial instruments measured at fair value on a recurring basis as well as the general classification of such instruments pursuant to the valuation hierarchy.

 

Certificates of Deposit - To estimate the fair value of certificates of deposit, cash flows are evaluated and then discounted using the appropriate market rates for the applicable maturities. The certificates of deposit are classified within Level 2 of the valuation hierarchy as valuation inputs are primarily based on readily observable pricing information for similar instruments.

 

Derivative liability - contingent dividend - The Company's contingent dividend derivative liability is valued using models with various observed and unobservable market inputs and classified as Level 3 in the valuation hierarchy. These market inputs include volatility, stock price, maturity date, and discount rate.

 

Gold Put and Call Derivative - The Company's gold put and gold call are valued based on a Black-Scholes model with various observable inputs. These market inputs include volatility of gold prices, gold strike prices, maturity dates of the options, exercise prices of the options, and risk-free interest rates.

 

Gold Forward Derivative - The Company's gold forward is valued based on observable market changes in the forward prices for gold.

 

The following table indicates the changes in the level 3 financial instruments for the three months ended September 30, 2012 and 2011:

 

		Contingent Dividend
		Payment On
		Convertible
		Preferred Stock
Balance at July 1, 2012		$	540,300
Change in fair value			(95,500	)
Balance at September 30, 2012		$	444,800
Balance at July 1, 2011		$	3,656,684
Change in fair value			(1,661,584	)
Balance at September 30, 2011		$	1,995,100

 

The following table indicates the changes in the level 3 financial instruments for the nine months ended September 30, 2012 and 2011:

 

		Contingent Dividend
		Payment On
		Convertible
		Preferred Stock
Balance at January 1, 2012		$	1,025,000
Change in fair value			(580,200	)
Balance at September 30, 2012		$	444,800
Balance at January 1, 2011		$	4,873,192
Change in fair value			(2,878,092	)
Balance at September 30, 2011		$	1,995,100

 

For Level 3 liabilities that were measured at fair value on a recurring basis during the three and nine month periods ended September 30, 2012, the following table presents the fair value of those liabilities as of the measurement date, valuation techniques and related unobservable inputs of those liabilities:

 

Fair Value

Valuation Techniques

Unobservable Input

Quantitative Inputs Used

Derivative liability - contingent dividend

$

444,800

Monte-Carlo Simulation

Discount Rate

12

%

 

 

The carrying amount of cash and cash equivalents, and trade payables approximates fair value because of the short-term maturity of these financial instruments. The carrying value of long-term debt obligations approximates fair value at September 30, 2012, and December 31, 2011. The fair value of assets and liabilities whose carrying value approximates fair value is determined using Level 2 inputs, with the exception of cash and cash equivalents (Level 1). The fair values of long-term debt obligations with the exception of the Auramet debt obligation are based on current market rates for bonds of the same risk and maturities. The fair value of the Auramet debt obligation was at market value as the obligation was recently entered into by the Company.