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Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2019

Fair Value Disclosures [Abstract]

Fair Value of Financial Instruments

16. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company’s fair value measurements are estimated pursuant to a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date, giving highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable data (Level 3). In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. The lowest level input that is significant to a fair value measurement in its entirety determines the applicable level in the fair value hierarchy. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability, and may affect the valuation of the assets and liabilities and their placement within the hierarchy level. The three levels of inputs that may be used to measure fair value are defined as:

Level 1 - Quoted prices for identical assets and liabilities traded in active exchange markets.

Level 2 - Observable inputs other than Level 1 that are directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities inactive markets, or other observable inputs that can be corroborated by observable market data.

Level 3 - Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The Company has processes and controls in place to attempt to ensure that fair value is reasonably estimated. The Company performs due diligence procedures over third-party pricing service providers in order to support their use in the valuation process. Where market information is not available to support internal valuations, independent reviews of the valuations are performed and any material exposures are evaluated through a management review process.

While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The following is a description of the valuation methodologies used for complex financial instruments measured at fair value:

Warrant Valuation Methodologies

The warrants contain a dilutive issuance and other liability provisions that cause the warrants to be accounted for as a liability. Such warrant instruments are initially recorded and valued as a Level 3 liability and are accounted for at fair value with changes in fair value reported in earnings. There were no changes in the methodology to value the warrants during 2019. The Company worked with a third-party valuation expert estimating the value of the warrants at December 31, 2019 and 2018 using a Lattice model, with the following assumptions:

		2019				2018

Number of warrants outstanding			100,000				100,000
Expiration date			June 21, 2022				June 21, 2022
Exercise price		$	11.30			$	11.30
Stock price		$	3.00			$	6.70
Dividend yield			0	%			0	%
Average volatility rate			80	%			90	%
Risk free interest rate			1.59	%			2.47	%

An increase in any of the variables would cause an increase in the fair value of the warrants. Likewise, a decrease in any variable would cause a decrease in the value of the warrants. As of December 31, 2019, and 2018, the fair value of the warrants was $73 thousand and $425 thousand, respectively.

Marketable Equity Securities Valuation Methodologies

The fair value of marketable equity securities is based on quoted market prices obtained from independent pricing services. The Company has an investment in the marketable equity securities of Anfield Energy (“Anfield”), which it acquired as consideration for sales of certain mining operations. Anfield is traded in an active market under the trading symbol AEC:TSXV and has been classified as Level 1. Prior to May 2019, the Company also had an investment in Sutter Gold Mining Company (“Sutter”). In May 2019, Sutter’s secured lender made a demand for full repayment of Sutter’s indebtedness and gave notice to enforce its security, thereby forcing Sutter into bankruptcy. As a result, the fair value of the Company’s investment in the marketable equity securities of Sutter is $0.

		Anfield				Sutter

Number of shares owned			3,631,365				495,816
Quoted market price		$	0.08			$	0.00

Fair value		$	306,868			$	-

Other Financial Instruments

The carrying amount of cash and equivalents, oil and natural gas sales receivable, other current assets, accounts payable and accrued expenses approximate fair value due to the short-term nature of those instruments. The recorded amount for the credit facility discussed in Note 9-Debt, as of December 31, 2018 also approximated its fair market value due to the variable nature of the interest rate.

Recurring Fair Value Measurements

Recurring measurements of the fair value of assets and liabilities as of December 31, 2019 and 2018 are as follows:

		December 31, 2019																December 31, 2018
		Level 1				Level 2				Level 3				Total				Level 1				Level 2				Level 3				Total
(in thousands)
Assets:
Marketable Equity Securities			307				-				-				307				533				3				-				536
Total		$	307			$	-			$	-			$	307			$	533			$	3			$	-			$	536
Liabilities:
Warrants			-				-				73				73				-				-				425				425
Total		$	-			$	-			$	73			$	73			$	-			$	-			$	425			$	425

The following table presents a reconciliation of our Level 3 warrants measured at fair value

		Year Ended December 31,
		2019				2018
		(in thousands)
Fair value of Level 3 instruments liabilities beginning of period		$	425			$	1,200

Net unrealized (gain) loss on warrant valuation			(352	)			(775	)
			-
Fair value of Level 3 instruments liabilities end of period		$	73			$	425