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

9 Months Ended

Sep. 30, 2018

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

On August 10, 2018, Origo Acquisition Corporation (“Origo”) entered into a Termination and Mutual Release between Origo and Hightimes Holding Corp. (“HTH”), HTHC Merger Sub, Inc. (“Merger Sub”) and Jose Aldeanueva, pursuant the terms of the Merger Agreement, dated July 24, 2017, as amended, effectively terminating the possibility of a business combination. Additionally, on August 10, 2018 the officers and directors of Origo notified shareholders of their intention to dissolve and liquidate in accordance with the Memorandum and Articles of Association of Origo. In accordance with the liquidation, Origo redeemed all of its outstanding ordinary shares that were included in the units issued in its initial public offering (the “Public Shares”), at a per-share redemption price of approximately $11.00. The redemption was completed on August 15, 2018.

The Company’s investment in Origo was not eligible for the redemption and as such as of September 30, 2018, the Company wrote off its investment in Origo and recorded a decrease in fair-value of investment of $1.4 million for the nine months ended September 30, 2018.

In addition to its investment in Origo, the

Company

also provided Origo

with a working capital note of $0.3 million, the balance of which

was written

off in the quarter ended June 30, 2018.

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 June 30, 2018 is as follows:

		June 30, 2018
Risk-free interest rate		1.93% – 2.73%
Expected dividend yield		–%
Expected term in years		0.14 – 4.83
Remaining volatility		49.7% – 381.0%
Strike price		$0.01 – $10.00

($ in thousands)	Fair Value of Derivative Warrants
Beginning balance at September 30, 2017	$	202
Trading revenue gain		392
Ending balance at June 30, 2018	$	594

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 September 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 September 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 September 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 September 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 September 30, 2018 is as follows:

	September 30, 2018
Risk-free interest rate		2.195%- 2.560	%
Expected dividend yield		–	%
Expected term in years		0.29 – 0.95
Expected volatility		67.0	%

($ in thousands)	Caelum Convertible Note, at fair value
Beginning balance at January 1, 2018	$	10,059
Change in fair value of convertible notes		265
Ending balance at September 30, 2018	$	10,324

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 September 30, 2018 and December 31, 2017:

	Fair Value Measurement as of September 30, 2018
($ in thousands)	Level 1		Level 2		Level 3		Total
Liabilities
Helocyte Convertible Note, at fair value	$	–	$	–	$	333	$	333
Caelum Convertible Note, at fair value		–		–		10,324		10,324
Total	$	–	$	–	$	10,657	$	10,657

	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 June 30, 2018 and September 30, 2017:

	Fair Value Measurement as of June 30, 2018
	Level 1		Level 2		Level 3		Total
Assets - National
Securities owned, at fair value
Corporate stocks	$	101	$	–	$	–	$	101
Municipal bonds		–		530		–		530
Restricted stock		–		1,912		–		1,912
Warrants		–		–		4,132		4,132
Total	$	101	$	2,442	$	4,132	$	6,675

Liabilities – National
Securities sold, but not yet purchased at fair value:
Corporate stocks	$	18	$	–	$	–	$	18
Corporate debt				6		–		6
Contingent consideration		-		–		768		768
Total	$	18	$	6	$	768	$	792

	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,

together with

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 June 30, 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 June 30, 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 nine months ended September 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		(1,390	)		–			–		–			–			(1,390	)
Change in fair value of convertible notes		–			(291	)		265		–			–			(26	)
Change in fair value of derivative liabilities		–			–			–		8,018			(87	)		7,931
Balance at September 30, 2018	$	–		$	333		$	10,324	$	–		$	–		$	10,657

For the nine months ended September 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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