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FAIR VALUE MEASUREMENTS
 12 Months Ended
Dec. 31, 2021
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASUREMENTS

14. FAIR VALUE MEASUREMENTS

 

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 2021. The Company estimated the value of the warrants at December 31, 2021 and 2020, with the following assumptions:

 

   2021   2020 
     
Number of warrants outstanding   50,000    50,000 
Expiration date   June 21, 2022    June 21, 2022 
Exercise price  $3.92   $3.92 
Stock price  $3.27   $3.68 
Dividend yield   0%   0%
Average volatility rate (1)   66%   120%
Probability of down-round event (2)   0%   0%
Risk free interest rate   0.11%   0.11%

 

(1) The average volatility represents the Company’s volatility measurement, the observed volatility of our peer group over a similar period, and the stock market volatility as of the valuation date.
(2) Represents the estimated probability of a future down-round event during the remaining term of the warrants.

 

At December 31, 2021 and 2020, the Company used the average value calculated by the Black-Scholes model as opposed to a Monte Carlo model, because the strike price is set at the floor of $3.92 and therefore cannot be rounded down further. An increase in any of the inputs would cause an increase in the fair value of the warrants. Likewise, a decrease in any input would cause a decrease in the fair value of the warrants.

 

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.

 

   December 31, 
   2021   2020 
     
Number of shares owned   2,421,180    2,421,180 
Quoted market price  $0.07874   $0.07455 
           
 Fair value  $190,641   $180,500 

 

Asset Retirement Obligations

 

The Company measures the fair value of asset retirement obligations as of the date a well is acquired or the date a well begins drilling using a discounted cash flow method based on unobservable inputs in the market and therefore are designated as Level 3 within the valuation hierarchy. See Note 8-Asset Retirement Obligations.

 

 

Other Assets and Liabilities

 

The Company evaluates the fair value on a non-recurring basis of properties acquired in business combinations. The fair value of the oil and gas properties is determined based upon estimated future discounted cash flow, a Level 3 input, using estimated production which we reasonably expect, and estimated prices adjusted for differentials. Unobservable inputs include estimated future oil and natural gas production, prices, operating and development costs, and a discount rate of 10%, all Level 3 inputs within the fair value hierarchy.

 

The Company evaluates the fair value on a non-recurring basis of its Riverton, Wyoming real estate assets when circumstances indicate that the value has been impaired. At December 31, 2021, the Company estimated the fair value of its real estate assets based on a market approach with comparison to recent comparable sales, all Level 3 inputs within the fair value hierarchy.

 

The carrying value of financial instruments included in current assets and current liabilities approximate fair value due to the short-term nature of those instruments.

 

Recurring Fair Value Measurements

 

Recurring measurements of the fair value of assets and liabilities as of December 31, 2021 and 2020 are as follows:

 

   December 31, 2021   December 31, 2020 
   Level 1   Level 2   Level 3   Total   Level 1   Level 2   Level 3   Total 
(in thousands)
Current Assets:                                        
Marketable Equity Securities  $191   $-   $-   $191   $181   $-   $-   $181 
                                         
Current Liabilities:                                        
Warrants  $-   $-   $19   $19   $-   $-   $-   $- 
                                         
Non-current Liabilities:                                        
Warrants  $-   $-   $-   $-   $-   $-   $95   $95 

 

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

 

   2021   2020 
   Year Ended December 31, 
   2021   2020 
   (in thousands) 
Fair value of Level 3 instruments liabilities at beginning of period  $95   $73 
Net unrealized (gain) loss on warrant valuation   (76)   22
Fair value of Level 3 instruments liabilities at end of period  $19   $95