| Fair Value Measurements |
7. Fair Value Measurements Certain of the Company’s financial instruments are not measured at fair value on a recurring bass but are recorded at amounts that approximate their fair value due to their liquid or short-term nature, such as accounts payable, accrued expenses and other current liabilities. Origo Acquisition Corporation A shareholder meeting of “Origo Acquisition Corporation” (“Origo”) was held on March 12, 2018, at which the Origo shareholders approved the extension of the date by which to consummate a business combination to June 12, 2018. As of March 31, 2018, the Company valued its investment in Origo, a publicly traded company, utilizing the following assumptions: probability of a successful business combination of 38.4%, and no dividend rate, which yielded an instrument value upon business combination of $10.96 per ordinary share for the private placement shares. The rights and warrants were valued utilizing a binomial-lattice model at a value of $0.44 for each right and $0.36 for each warrant. Based upon the valuation, the Company recorded a decrease in fair-value of investment of $0.1 million for the three months ended March 31, 2018. At March 31, 2018, the fair value of the Company’s investment in Origo was, $1.3 million. The Company’s working capital note with Origo of $0.3 million can be converted to stock upon a successful business combination. Securities Owned National The fair value of National’s warrants, representing the cumulative value of warrants received in publicly traded companies’, in which NSC as placement agent received warrants as the placement agent. National calculated the fair value of the warrants using a Black Scholes model. A summary of the weighted averages (in aggregate) of significant unobservable inputs (Level 3 inputs) used in measuring National’s warrants that are categorized within Level 3 of the fair value hierarchy as of March 31, 2018 is as follows:
| | | December 31,
2017 | | | Risk-free interest rate | | | 1.53% 2.2 | % | | Expected dividend yield | | | | % | | Expected term in years | | | .43 4.35 | | | Remaining volatility | | | 369.19% 59.69 | % | | Strike price | | | $0.01 $10.00 | | | ($in thousands) | | Fair Value of
Derivative
Warrants | | | Beginning balance at September 30, 2017 | | $ | 548 | | | Change in fair value of derivative liabilities | | | 138 | | | Ending balance at December 31, 2017 | | $ | 686 | | Warrant Liabilities Helocyte The fair value of Helocyte’s warrant liability, which was issued in connection with Helocyte’s convertible note (see Note 11), was measured using a Monte Carlo simulation valuation methodology. A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring Helocyte’s warrant liabilities that are categorized within Level 3 of the fair value hierarchy as of March 31, 2018 is as follows: | | | March 31,
2018 | | | Risk-free interest rate | | | 2.411% - 2.447 | % | | Expected dividend yield | | | - | % | | Expected term in years | | | 3.25 3.67 | | | Expected volatility | | | 70.0 | % | | Strike price | | $ | 0.46 | | | ($in thousands) | | Fair Value of
Derivative
Warrant
Liability | | | Beginning balance at January 1, 2018 | | $ | 87 | | | Change in fair value of derivative liabilities | | | (9) | | | Ending balance at March 31, 2018 | | $ | 78 | | Notes at Fair Value Helocyte Helocyte’s convertible note is measured at fair value using the Monte Carlo simulation valuation methodology. A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring Helocyte’s convertible debt that is categorized within Level 3 of the fair value hierarchy as of March 31, 2018 is as follows: | | | March 31, 2018 | | | Risk-free interest rate | | | 1.96%- 2.21 | % | | Expected dividend yield | | | - | % | | Expected term in years | | | 0.58 1.67 | | | Expected volatility | | | 53.1 | % | | ($in thousands) | | Helocyte
Convertible
Note, at fair
value | | | Beginning balance at January 1, 2018 | | $ | 4,700 | | | Payment of convertible notes | | | (1,858) | | | Change in fair value of convertible notes | | | (331) | | | Ending balance at March 31, 2018 | | $ | 2,511 | | Caelum Caelum’s convertible debt is measured at fair value using the Monte Carlo simulation valuation methodology. A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring Caelum’s convertible debt that is categorized within Level 3 of the fair value hierarchy as of March 31, 2018 is as follows: | | | March 31, 2018 | | | Risk-free interest rate | | | 1.71%- 2.17 | % | | Expected dividend yield | | | - | % | | Expected term in years | | | 0.21 1.46 | | | Expected volatility | | | 53.1 | % | | ($in thousands) | | Caelum
Convertible
Note, at fair
value | | | Beginning balance at January 1, 2018 | | $ | 10,059 | | | Change in fair value of convertible notes | | | 81 | | | Ending balance at March 31, 2018 | | $ | 10,140 | |
The following tables classify the fair value hierarchy of Fortress's financial instruments, exclusive of National's financial instruments, measured at fair value as of March 31, 2018 and December 31, 2017: | | | Fair Value Measurement as of March 31, 2018 | | | ($in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | | | Assets | | | | | | | | | | | | | | | Long-term investments, at fair value | | $ | | | $ | | | $ | 1,272 | | $ | 1,272 | | | Total | | $ | | | $ | | | $ | 1,272 | | $ | 1,272 | | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | Warrant liabilities | | $ | | | $ | | | $ | 78 | | $ | 78 | | | Caelum Convertible Note, at fair value | | | | | | | | | 10,140 | | | 10,140 | | | Helocyte Convertible Note, at fair value | | | | | | | | | 2,511 | | | 2,511 | | | Total | | $ | | | $ | | | $ | 12,729 | | $ | 12,729 | | | | | Fair Value Measurement as of December 31, 2017 | | | ($in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | | | Assets | | | | | | | | | | | | | | | Long-term investments, at fair value | | $ | | | $ | | | $ | 1,390 | | $ | 1,390 | | | Total | | $ | | | $ | | | $ | 1,390 | | $ | 1,390 | | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | Warrant liabilities | | $ | | | $ | | | $ | 87 | | $ | 87 | | | Caelum Convertible Note, at fair value | | | | | | | | | 10,059 | | | 10,059 | | | Helocyte Convertible Note, at fair value | | | | | | | | | 4,700 | | | 4,700 | | | Total | | $ | | | $ | | | $ | 14,846 | | $ | 14,846 | |
The following table shows the fair values hierarchy of National's financial instruments measured at fair value on a recurring basis on the Condensed Consolidated Balance Sheets as of December 31, 2017 and September 30, 2017: | | | Fair Value Measurement as of December 31, 2017 | | | | | Level 1 | | Level 2 | | Level 3 | | Total | | | Assets | | | | | | | | | | | | | | | National | | | | | | | | | | | | | | | Securities owned, at fair value | | | | | | | | | | | | | | | Corporate stocks | | $ | 65 | | $ | - | | $ | - | | $ | 65 | | | Municipal bonds | | | 3,452 | | | - | | | - | | | 3,452 | | | Restricted stock | | | - | | | 75 | | | - | | | 75 | | | Warrants | | | - | | | - | | | 686 | | | 686 | | | Total | | $ | 3,517 | | $ | 75 | | $ | 686 | | $ | 4,278 | | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | National | | | | | | | | | | | | | | | Securities sold, but not yet purchased at fair value | | | | | | | | | | | | | | | Contingent consideration | | | - | | | - | | | 717 | | | 717 | | | Warrants issued - National | | | - | | | - | | | 6,671 | | | 6,671 | | | Total | | $ | - | | $ | - | | $ | 7,388 | | $ | 7,388 | | | | | Fair Value Measurement as of September 30, 2017 | | | | | Level 1 | | Level 2 | | Level 3 | | Total | | | Assets | | | | | | | | | | | | | | | National | | | | | | | | | | | | | | | Securities owned, at fair value | | | | | | | | | | | | | | | Corporate stocks | | $ | 116 | | $ | - | | $ | - | | $ | 116 | | | Municipal bonds | | | 1,239 | | | - | | | - | | | 1,239 | | | Restricted stock | | | - | | | 82 | | | - | | | 82 | | | Warrants | | | - | | | - | | | 548 | | | 548 | | | Total | | $ | 1,355 | | $ | 82 | | $ | 548 | | $ | 1,985 | | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | National | | | | | | | | | | | | | | | Securities sold, but not yet purchased at fair value | | | | | | | | | | | | | | | Municipal bonds | | | 151 | | | - | | | - | | | 151 | | | Contingent consideration | | | - | | | - | | | 311 | | | 311 | | | Warrants issued - National | | | - | | | - | | | 5,597 | | | 5,597 | | | Total | | $ | 151 | | $ | - | | $ | 5,908 | | $ | 6,059 | | Warrants issued - National
The fair value of the 5.4 million warrants issued by National (represents 44% of the warrants issued to non-Fortress shareholders) are being classified as a liability in the Condensed Consolidated Statement of Operations at March 31, 2018. Such valuation (using level 3 inputs) was determined by use of the Black-Scholes option pricing model using the following assumptions: | | | December 31,
2017 | | | Dividend yield | | | | % | | Expected volatility | | | 46.13 | % | | Risk-free interest rate | | | 2.20 | % | | Life (in years) | | | 3.69 | | | ($ in thousands) | | National’s
Warrants | | | Beginning balance at September 30, 2017 | | $ | 5,597 | | | Change in fair value of derivative liability | | | 1,074 | | | Ending balance at December 31, 2017 | | $ | 6,671 | | National listed the warrants on the Nasdaq Capital Market under the symbol “NHLDW” in February 2017.
The table below provides a roll-forward of the changes in fair value of Level 3 financial instruments for the three months ended March 31, 2018: | ($ in thousands) | | Investment in
Origo | | Helocyte
Convertible
Note, at fair
value | | Caelum
Convertible
Note, at fair
value | | Warrants
issued and
issuable | | Warrant
liabilities | | Total | | | Balance at December 31, 2017 | | $ | 1,390 | | $ | 4,700 | | $ | 10,059 | | $ | 5,597 | | $ | 87 | | $ | 21,833 | | | Payment of convertible note | | | - | | | (1,858) | | | - | | | - | | | - | | | (1,858) | | | Change in fair value of investments | | | (118) | | | - | | | - | | | - | | | - | | | (118) | | | Change in fair value of convertible notes | | | - | | | (331) | | | 81 | | | - | | | - | | | (250) | | | Change in fair value of derivative liabilities | | | - | | | - | | | - | | | 1,074 | | | (9) | | | 1,065 | | | Balance at March 31, 2018 | | $ | 1,272 | | $ | 2,511 | | $ | 10,140 | | $ | 6,671 | | $ | 78 | | $ | 20,672 | | For the three months ended March 31, 2018, no transfers occurred between Level 1, Level 2 and Level 3 instruments.
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