Fortress Biotech, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

Fair Value Measurements

6 Months Ended

Jun. 30, 2018

7.	Fair Value Measurements

Certain of the Company’s financial instruments are not measured at fair value on a recurring basis 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 June 12, 2018, at which the Origo shareholders approved the extension of the date by which to consummate a business combination from June 12, 2018 to September 12, 2018.

As of June 30, 2018, the Company valued its investment in Origo, a publicly traded company, utilizing the following assumptions: probability of a successful business combination of 13.93%, and no dividend rate, which yielded an instrument value upon business combination of $1.80 per ordinary share for the private placement shares. The rights and warrants were valued utilizing a binomial-lattice model at a value of $0.18 for each right and $0.30 for each warrant. Based upon the valuation, the Company recorded a decrease in fair-value of investment of $0.8 million for the six months ended June 30, 2018. At June 30, 2018, the fair value of the Company’s investment in Origo was, $0.6 million. During the three and six months ended June 30, 2018, the Company recorded an expense of $0.3 million in connection with its working capital note to Origo, reflecting the decrease in likelihood of a consummation of a business combination. Should Origo fail to successfully complete a business combination prior September 12, 2018, the value of the Company’s investment in Origo may be minimal.

Securities Owned

National

The fair value of National’s warrants, representing the cumulative value of warrants received in publicly traded companies that are not related parties, 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:

		March 31, 2018
Risk-free interest rate		1.63% 2.56%
Expected dividend yield		%
Expected term in years		0.18 4.11
Remaining volatility		56.4% 386.1%
Strike price		$0.01 $10.00

($ in thousands)	Fair Value of Derivative Warrants
Beginning balance at September 30, 2017	$	202
Trading revenue gain		1,349
Ending balance at March 31, 2018	$	1,551

Warrant Liabilities

Helocyte

The fair value of Helocyte’s warrant liability, which was issued in connection with Helocyte’s convertible note (see Note 11), as of June 30, 2018 approximated $0, as the probability of the conversion of the underlying notes approximated $0. The table below provides a summary:

($ in thousands)	Fair Value of Derivative Warrant Liability
Beginning balance at January 1, 2018	$	87
Change in fair value of derivative liabilities		(87)
Ending balance at June 30, 2018	$

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 June 30, 2018, the fair value approximated cost, as the convertible note approaches maturity, is as follows:

($ in thousands)	Helocyte Convertible Note, at Fair value
Beginning balance at January 1, 2018	$	4,700
Payment of convertible notes		(4,076)
Change in fair value of convertible notes		(291)
Ending balance at June 30, 2018	$	333

Caelum

Caelum’s convertible debt, which is guaranteed by the Company, 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 June 30, 2018 is as follows:

	June 30, 2018
Risk-free interest rate		1.89%- 2.37	%
Expected dividend yield		-	%
Expected term in years		0.21 1.21
Expected volatility		53.0	%

($ in thousands)	Caelum Convertible Note, at fair value
Beginning balance at January 1, 2018	$	10,059
Change in fair value of convertible notes		181
Ending balance at June 30, 2018	$	10,240

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 June 30, 2018 and December 31, 2017:

	Fair Value Measurement as of June 30, 2018
($ in thousands)	Level 1		Level 2		Level 3		Total
Assets
Long-term investments, at fair value	$	-	$	-	$	565	$	565
Total	$	-	$	-	$	565	$	565

Liabilities
Warrant liabilities	$	-	$	-	$	-	$	-
Helocyte Convertible Note, at fair value		-		-		333		333
Caelum Convertible Note, at fair value		-		-		10,240		10,240
Total	$	-	$	-	$	10,573	$	10,573

	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 March 31, 2018 and September 30, 2017:

	Fair Value Measurement as of March 31, 2018
	Level 1		Level 2		Level 3		Total
Assets
National
Securities owned, at fair value
Corporate stocks	$	32	$		$		$	32
Municipal bonds				1,183				1,183
Restricted stock				1,046				1,046
Warrants				-		1,551		1,551
Total	$	32	$	2,229	$	1,551	$	3,812

Liabilities
National
Securities sold, but not yet purchased at fair value:
Corporate stocks		2						2
Corporate debt				6				6
Contingent consideration						889		889
Total	$	2	$	6	$	889	$	897

	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	$	116	$	1,321	$	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

On March 15, 2018, National, Computershare Inc., a Delaware corporation (“Computershare”), and its wholly-owned subsidiary, Computershare Trust Company, N.A., a federally chartered trust company (and together with Computershare, the “Warrant Agent”) agreed to amend and restate the terms of the form of warrant agreement dated December 13, 2016 (the “Original Agreement”). The Amended and Restated Warrant Agreement (the “Amended Agreement”) explicitly provides that National shall not be required to pay cash if it cannot issue registered shares of Common Stock upon exercise of a Warrant and as such meeting the criteria for equity classification.

Accordingly, at March 15, 2018, the date of the amendment, the fair value of the warrants issued by National (represents 44% of the warrants issued to non-Fortress shareholders) was $13.6 million. Such valuation (using level 3 inputs) was determined by use of the Black-Scholes option pricing model using the following assumptions:

	March 15, 2018
Dividend yield			%
Expected volatility		59.23	%
Risk-free interest rate		2.42	%
Life (in years)		3.49	%

The following table shows the fair value of the warrant liability on the Condensed Consolidated Balance Sheets as of March 31, 2018 and September 30, 2017:

($ in thousands)	National’s Warrants
Beginning balance at September 30, 2017	$	5,597
Change in fair value of derivative liability		8,018
Ending balance at March 15, 2018		13,615
Reclassification of warrant to equity		(13,615)
Ending balance at March 31, 2018	$

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 six months ended June 30, 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		-		(4,076)		-		-		-		(4,076)
Reclassification of warrant liability from debt to equity		-		-		-		(13,615)		-		(13,615)

Change in fair value of investments		(825)		-		-		-		-		(825)
Change in fair value of convertible notes		-		(291)		181		-		-		(110)
Change in fair value of derivative liabilities		-		-		-		8,018		(87)		7,931
Balance at June 30, 2018	$	565	$	333	$	10,240	$	0	$	0	$	11,138

For the six months ended June 30, 2018, no transfers occurred between Level 1, Level 2 and Level 3 instruments.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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