Fortress Biotech, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Fair Value Measurements

Fair Value Measurements

12 Months Ended

Dec. 31, 2020

6. 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.

Fair Value of Caelum

The Company values its investment in Caelum in accordance with ASC Topic 820, Fair Value Measurements and Disclosures, and as of December 31, 2020, estimated the fair value to be $17.6 million based on a per share value of $2.43. As of December 31, 2020, the following inputs were utilized to derive the value: risk free rate of return of 0.36%, volatility of 70% and a discount for lack of marketability of 21.0% to 31.0% based on maturity dates of various scenerios. Further, the Company considered the impact of the acquisition of Alexion by AZ, which if consummated, will shorten the timeframe in which the option will be exercised in accordance with the A&R DOSPA.

As of December 31, 2019, the estimated fair value of the Company’s investment in Caelum was $11.1 million based on a per share value of $1.54. As of December 31, 2019, the following inputs were utilized to derive the value: risk free rate of return of 1.6%, volatility of 70% and a discount for lack of marketability of 28.7%.

Caelum Warrant Liability

The fair value of Caelum's warrant liability, which was issued in connection with Caelum’s convertible note, was written up to the full value of the liability prior to the conversion of the notes in January 2019 (see Note 10). The fair value 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 Caelum’s warrant liabilities that are categorized within Level 3 of the fair value hierarchy as of January 2019 was as follows:


	January
	2019
Risk-free interest rate	2.905% - 2.909	%
Expected dividend yield	—	%
Expected term in years	3.84 - 3.96
Expected volatility	70	%

In connection with the DOSPA Caelum's convertible notes automatically converted into common shares of Caelum and the warrant liability payable to the placement agent in connection with the placement of the convertible notes was also issued (see Note 10).


	Fair Value of
	Derivative
	Warrant
($ in thousands)	Liability
Beginning balance at January 1, 2019	$	991
Issuance of warrant due to conversion of note		(991)
Ending balance at December 31, 2019	$	—

Caelum Convertible Notes

Caelum’s convertible debt was 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. As of December 31, 2018, conversion of the Caelum Convertible Notes was probable and as such the fair value approximated cost. The Caelum Convertible Notes were converted during 2019. As of January 2019 the following inputs were utilized to derive the notes’ fair value:


	January
	2019
Risk-free interest rate	2.302	%
Expected dividend yield	—	%
Expected term in years	0.32
Expected volatility	67	%


	Caelum
	Convertible
	Notes, at fair
($ in thousands)	value
Beginning balance at January 1, 2019	$	9,914
Change in fair value of convertible notes		(9,914)
Ending balance at December 31, 2019	$	—

Cyprium Warrant Liability

The fair value of the Cyprium Contingently Issuable Warrants in connection with the 2018 Venture Debt was determined by applying management’s estimate of the probability of issuance of the Contingently Issuable Warrants together with an option-pricing model, with the following key assumptions:


	December 31,
	2020		2019
Risk-free interest rate	0.69	%	1.92	%
Expected dividend yield	—		—
Expected term in years	10.0		10
Expected volatility	85	%	93	%
Probability of issuance of the warrant	100	%	5	%


	Cyprium
	Contingently
	Issuable Warrant
($ in thousands)	Liability
Beginning balance at January 1, 2019	$	—
Change in fair value		27
Ending balance at December 31, 2019	$	27
Change in fair value		1,189
Reclass partner company's warrants from liability to equity		(1,216)
Ending balance at December 31, 2020	$	—

The following tables classify into the fair value hierarchy of Fortress’ financial instruments, measured at fair value on a recurring basis on the Consolidated Balance Sheets as of December 31, 2020 and 2019:


	Fair Value Measurement as of December 31, 2020
($ in thousands)	Level 1		Level 2		Level 3		Total
Assets
Fair value of investment in Caelum	$	—	$	—	$	17,566	$	17,566
Total	$	—	$	—	$	17,566	$	17,566


	Fair Value Measurement as of December 31, 2019
($ in thousands)	Level 1		Level 2		Level 3		Total
Assets
Fair value of investment in Caelum	$	—	$	—	$	11,148	$	11,148
Total	$	—	$	—	$	11,148	$	11,148


	Fair Value Measurement as of December 31, 2019
($ in thousands)	Level 1		Level 2		Level 3		Total
Liabilities
Warrant liabilities	$	—	$	—	$	27	$	27
Total	$	—	$	—	$	27	$	27

The table below provides a roll forward of the changes in fair value of Level 3 financial instruments for the years ended December 31, 2020 and 2019:



	Investment in			Warrant
($ in thousands)	Caelum		Liabilities		Total
Balance at December 31, 2019	$	11,148	$	27	$	11,175
Change in fair value		—		1,189		1,189
Reclass partner company's warrants from liability to equity		—		(1,216)		(1,216)
Change in fair value of investments		6,418		—		6,418
Balance at December 31, 2020	$	17,566	$	—	$	17,566


	Investment		Caelum Convertible		Warrants
($ in thousands)	in Caelum			Notes	liabilities		Total
Balance at December 31, 2018	$	—	$	9,914	$	991	$	10,905
Conversion of convertible notes		—		(9,914)		—		(9,914)
Issuance of warrant		—		—		(991)		(991)
Fair value of investment		11,148		—		—		11,148
Change in fair value of derivative liability		—		—		27		27
Balance at December 31, 2019	$	11,148	$	—	$	27	$	11,175

- 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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