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

Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements (Tables)

Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2018

Schedule of Fair Value, Assets and Liabilities Measured on Recurring Basis

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

Schedule of changes in fair value of financial instruments

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

Warrants Issuable [Member]

Fair Value Measurements, Recurring and Nonrecurring, Valuation Techniques

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	%

Fair Value for Derivative Contingently Issuable Warrant Liabilities

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	$	–

Helocyte [Member]

Fair Value for Derivative Contingently Issuable Warrant Liabilities

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	$	–

Helocyte [Member] | Convertible Debt [Member]

Fair Value for Derivative Contingently Issuable Warrant Liabilities

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

National Warrant Liabilities [Member]

Fair Value Measurements, Recurring and Nonrecurring, Valuation Techniques

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

Fair Value for Derivative Contingently Issuable Warrant Liabilities

($ 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

Caelum [Member] | Convertible Debt [Member]

Fair Value Measurements, Recurring and Nonrecurring, Valuation Techniques

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	%

Fair Value for Derivative Contingently Issuable Warrant Liabilities

($ 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

National Holdings Corporation [Member]

Schedule of Fair Value, Assets and Liabilities Measured on Recurring Basis

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