Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v2.4.0.8
Fair Value Measurements
 6 Months Ended
Dec. 31, 2013
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Note 4 - Fair Value Measurements
The Company follows authoritative guidance related to fair value measurement and disclosure, which establishes a three level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement using market participant assumptions at the measurement date. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:
•
Level 1: Quoted prices in active markets for identical assets.
•
Level 2: Significant other observable inputs – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, either directly or indirectly, for substantially the full term of the financial instrument.
•
Level 3: Significant unobservable inputs.
The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and the consideration of factors specific to the asset or liability. The Company's policy is to recognize transfers in and/or out of a fair value hierarchy as of the end of the reporting period for which the event or change in circumstances caused the transfer. The Company has consistently applied the valuation techniques discussed above for all periods presented. During the six months ended December 31, 2013, and 2012, there have been no transfers in and/or out of Level 1, Level 2, or Level 3.

Assets and liabilities measured on a recurring basis
The Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities, are carried at cost, which approximates fair value due to the short term maturity of these instruments. The recorded value of the Line of Credit and Note Payable (see Note 2 - Debt) approximates fair value due to their variable interest rate structure.

The following table presents items required to be measured at fair value on a recurring basis by the level in which they are classified within the valuation hierarchy as follows:
 
December 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Securities available for sale (1)
50

 
—

 
—

 
50

 
$
50

 
$
—

 
$
—

 
$
50

Liabilities:
 
 
 
 
 
 
 
Contingent consideration payable (2)
$
—

 
$
—

 
$
4,096

 
$
4,096

 
 
 
 
 
 
 
 
 
June 30, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Securities available for sale (1)
44

 
—

 
—

 
44

 
$
44

 
$
—

 
$
—

 
$
44

Liabilities:
 
 
 
 
 
 
 
Contingent consideration payable (2)
$
—

 
$
—

 
$
3,940

 
$
3,940

(1) Included in the unaudited condensed consolidated balance sheets under prepaid and other assets.
(2) See Note 12 - Commitments and Contingencies, below for additional information about this item.
The contingent consideration payable is a standalone liability that is measured at fair value on a recurring basis for which there is no available quoted market price, principal market, or market participants. The inputs for this instrument are unobservable and therefore classified as Level 3 inputs. The calculation of this liability is a significant management estimate and uses drilling and production projections, consistent with the Company's reserve report for NP, to estimate future production bonus payments, and a discount rate that is reflective of the Company's credit adjusted borrowing rate. Inputs are reviewed by management on an annual basis and the liability is estimated by converting estimated future production bonus payments to a single net present value using a discounted cash flow model. Payments of future production bonuses are sensitive to Poplar's 60 days rolling gross production average. The contingent consideration payable would increase with significant production increases and/or a reduction in the discount rate.
The following table presents information about significant unobservable inputs to the Company's Level 3 financial liability measured at fair value on a recurring basis as follows:
Description
 
Valuation technique
 
Significant unobservable inputs
 
December 31,
2013
 
June 30,
2013
Contingent consideration payable
 
Discounted cash flow model
 
Discount rate
 
8.0%
 
8.0%
 
 
 
 
First production payout
 
December 31, 2015
 
December 31, 2015
 
 
 
 
Second production payout
 
December 31, 2016
 
December 31, 2016

Adjustments to the fair value of the contingent consideration payable are recorded in the unaudited condensed consolidated statements of operations under net interest income. The following table presents a roll forward of the contingent consideration payable for the six months ended December 31, 2013:
 
Total
 
(In thousands)
Fiscal year beginning balance
$
3,940

Accretion of contingent consideration payable
156

December 31, 2013
$
4,096


Assets and liabilities measured on a nonrecurring basis
The Company also utilizes fair value to perform an annual impairment test on its oil and gas properties, or whenever events and circumstances indicate that a decline in the recoverability of their carrying value may have occurred. Fair value is estimated using expected undiscounted future cash flows from oil and gas properties. The inputs used to determine such fair value are primarily based upon internally developed cash flow models and are also classified within Level 3. For the six months ended December 31, 2013, no events or circumstances were identified that would indicate that an impairment of our oil and gas properties has occurred.