NOTE 13—COMMON STOCK WARRANT LIABILITY

In connection with the Company’s emergence from bankruptcy proceedings on the Effective Date, Signature issued Warrants to purchase an aggregate of 15 million shares of the Company’s common stock to the Warrant Investors for an aggregate cash purchase price of $0.3 million. The Warrants have a term of 10 years and an original exercise price of $1.03 per share. The Warrants vest 20% on the Effective Date and 20% in annual installments until the Warrants are fully vested on the fourth anniversary of the Effective Date. The $0.3 million purchase price for the Warrants is payable as the Warrants vest. Accordingly, the Warrant Investors paid an aggregate amount of $60 thousand on the Effective Date. Additional payments of $60 thousand are required each subsequent vesting installment. The Warrants were issued to the Warrant Investors without registration in reliance on the exemption set forth in Section 4(2) of the Securities Act of 1933, as amended. The Warrants include customary terms that provide for certain adjustments of the exercise price and the number of shares of common stock to be issued upon exercise of the Warrants in the event of stock splits, stock dividends, pro rata distributions and certain fundamental transactions. In addition, the Warrants are also subject to full ratchet anti-dilution protection provision. During the term of the Warrants, the anti-dilution protection provision provides that certain issuances of new shares of common stock, at prices below the current exercise price of the Warrants, automatically reduces the exercise price to the lowest per share purchase price of any shares of common stock issued.

In October 2010, January 2011 and April 2011, restricted common stock was issued to our Directors under the Director Compensation Plan that triggered the ratchet protection and the Warrants’ exercise price dropped from $1.03 per share to $0.69 per share. Then, in July 2011, as part of the consideration paid for the NABCO acquisition (refer to Note 4—Business Combinations), the Company issued 3,012,048 shares of Signature common stock to the former owners of NABCO, which triggered the anti-dilution protection provisions of the Warrants. However, the holders of approximately 79% of the Warrants, including Signature Group Holdings, LLC and Kenneth Grossman, waived the anti-dilution provisions related to the shares issued as part of the NABCO transaction as it applied to them.

The Company utilizes a lattice option pricing model to estimate the fair value of the common stock warrant liability, which includes various assumptions, including expected term, volatility, risk-free interest rate, share issuance frequency and exercise price. For the years ended December 31, 2011 and 2010, the change in fair value of the common stock warrant liability was $(4.3) million and $0.6 million, respectively. The change in fair value during the year ended December 31, 2011 is primarily attributable to decreases in the underlying market price of the Company’s common stock and reductions in the remaining contractual term of the Warrants; partially offset by a decrease in exercise price to a weighted average exercise price of $0.68 per share caused by the anti-dilution protection provisions. The change in fair value during the year ended December 31, 2010 is primarily attributable to a decrease in the exercise price to $0.73 at December 31, 2010, caused by the anti-dilution provisions being triggered as a result of the annual issuance of restricted stock to non-employee directors.

Changes in fair value of common stock warrant liability consisted of the following:


	December 31,
(Dollars in thousands)	2011			2010
Common stock warrant liability, beginning balance	$	5,700		$	—
Issuance of common stock warrants		—			5,105
Change in fair value of common stock warrant liability		(4,297	)		595

Common stock warrant liability, ending balance	$	1,403		$	5,700

The following table summarizes the assumptions used to estimate the fair value of the common stock warrant liability as of:
	December 31,
	2011			2010
Expected term (years)		8.2			8.7
Volatility		40.00	%		43.00	%
Risk-free rate		1.57	%		3.05	%
Weighted average exercise price	$	0.68		$	0.73