Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.7.0.1
Fair Value Measurements
 6 Months Ended
Jun. 30, 2017
Fair Value Disclosures [Abstract]  
Fair Value Measurements
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.
 
Laser Device for Treatment of Migraine Headache
 
On March 17, 2014, the Company invested $250,000 for a 35% ownership position in a third-party company developing a laser device to treat migraine headaches. The Company elected the fair value option for recording this investment. In conjunction with this investment, the Company received 13,409,962 Class A Preferred Units in the third-party company, representing 83% of the total 16,091,954 Class A Preferred Units. The fair value of this investment was $0.3 million as of June 30, 2017 and December 31, 2016. The value of the Company’s investment was determined based on a valuation which takes into consideration, when applicable, cash paid, cost of the investment, market participant inputs, estimated cash flows based on entity specific criteria, purchase multiples paid in other comparable third-party transactions, market conditions, liquidity, operating results and other qualitative and quantitative factors. Based on these inputs at June 30, 2017, the fair value of the Company’s investment approximated cost.
 
Origo Acquisition Corporation (formerly CB Pharma Acquisition Corporation)
 
On December 19, 2016, Origo Acquisition Corporation (“Origo”) entered into a merger agreement (“Origo Merger Agreement”) with Aina Le’a Inc. (“Aina Le’a”), a residential and commercial real estate developer in Hawaii. On February 17, 2017, Origo sent a letter, as supplemented on February 22, 2017 (the “Termination Letter”), to Aina Le’a terminating the Origo Merger Agreement.  On March 10, 2017, Origo’s shareholders approved an amendment to Origo’s organizational documents extending the date by which Origo must consummate a merger to September 12, 2017.
 
As of June 30, 2017, the Company valued its investment in Origo, a publicly traded company, utilizing the following assumptions: probability of a successful business combination of 24.3%, and no dividend rate, which yielded an instrument value upon business combination of $9.73 per ordinary share for the private placement shares. The rights and warrants were valued utilizing a binomial-lattice model at a value of $0.24 for each right and $0.18 for each warrant. Based upon the valuation, the Company recorded a decrease in fair-value of investment of $0.5 million for the six months ended June 30, 2017. At June 30, 2017, the fair value of the Company’s investment in Origo was, $0.7 million. The Company’s working capital note with Origo of $0.3 million can be converted to stock upon a successful business combination.
 
Contingently Issuable Warrant
 
Pursuant to the Company’s promissory note with NSC of March 2015, as amended in July 2015 (the “NSC Note”), if the Company transfers any proceeds from the NSC Note to a Fortress Company, such Fortress Company will issue to NSC Biotech Venture Fund I LLC a new promissory note on identical terms as the NSC Note and NSC Biotech Venture Fund I LLC will also receive a warrant to purchase a number of shares of such Fortress Company’s stock equal to 25% of the outstanding Fortress Company note divided by the lowest price for which the Fortress Company sells its equity in its first third party financing. The warrants issued will have a term of 10 years and an exercise price equal to the par value of the Fortress Company’s common stock and are accounted for in accordance with ASC 815, Derivatives and Hedging.
 
Avenue classified the fair value of the contingently issuable warrants granted in connection with the transfer from Fortress of $3.0 million to Avenue under the NSC Note as a derivative liability as there was a potential that Avenue would not have a sufficient number of authorized common shares available to settle these instruments.
 
On June 30, 2017, Avenue closed on an Initial Public Offering (“IPO”) raising gross proceeds of $37.9 million and issuing 6.3 million commons shares at $6.00 per share. As such, pursuant to the terms of Avenue’s $3.0 million NSC Note, Avenue issued to National a warrant to purchase 125,000 of its common shares at par. The issuance of the warrant relates to the completion of Avenue’s IPO in which Avenue’s raised gross proceeds from a third-party party exceeding five times the value of the debt. Upon the issuance of the warrant by Avenue, the Company was removed as the guarantor on the note.
 
($ in thousands)
 
Avenue’s
Contingently
Issuable
Warrants
 
Beginning balance at January 1, 2017
 
$
302
 
Conversion into common shares
 
 
(750
)
Change in fair value
 
 
448
 
Ending balance at June 30, 2017
 
$
-
 
 
Avenue Warrant Liabilities
 
On December 30, 2016, Avenue held a closing of the sale of convertible promissory notes. In the closing, WestPark Capital, Inc., the placement agent (“WestPark”), received a warrant (the “WestPark Warrant”) to purchase the number of shares of Avenue’s common stock equal to $10,000 divided by the price per share at which any note sold to investors first converts into Avenue’s common stock. The WestPark Warrant has a ten-year term. Avenue’s WestPark Warrant liability was measured at fair value using a Monte Carlo simulation valuation methodology.  
 
Additionally, on June 30, 2017, in connection with Avenue’s IPO, Avenue issued 2,488 warrants to purchase common shares of Avenue at $4.02, a 33% discount to the IPO price of $6.00 to Westpark Capital in connection with their role as placement agent for Avenue’s 2016 Convertible Notes, which automatically converted to common shares of Avenue upon completion of the IPO.
 
($ in thousands)
 
Avenue’s
Warrant
Liability
 
Beginning balance at January 1, 2017
 
$
12
 
Conversion into common shares
 
 
(15
)
Change in fair value
 
 
3
 
Ending balance at June 30, 2017
 
$
-
 
 
Helocyte Warrant Liabilities
 
The fair value of Helocyte’s warrant liability was measured at fair value 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 June 30, 2017 is as follows:
 
 
 
June 30,
2017
 
Risk-free interest rate
 
 
  1.720% -1.792
%
Expected dividend yield
 
 
-
%
Expected term in years
 
 
    4.00 - 4.42
 
Expected volatility
 
 
70.0
%
Strike price
 
$
0.44
 
 
($ in thousands)
 
Fair Value of
Derivative
Warrant
Liability
 
Beginning balance at January 1, 2017
 
$
167
 
Change in fair value of derivative liabilities
 
 
(76
)
Ending balance at June 30, 2017
 
$
91
 
 
Helocyte Convertible Notes at Fair Value
 
Helocyte’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 Helocyte’s convertible debt that is categorized within Level 3 of the fair value hierarchy as of June 30, 2017 is as follows:
  
 
 
June 30,
2017
 
Risk-free interest rate
 
 
    1.140% - 1.298
%
Expected dividend yield
 
 
-
%
Expected term in years
 
 
    0.50 - 1.41
 
Expected volatility
 
 
59.1
%
 
($ in thousands)
 
Helocyte
Convertible
Note, at fair
value
 
Beginning balance at January 1, 2017
 
$
4,487
 
Change in fair value of convertible notes
 
 
186
 
Ending balance at June 30, 2017
 
$
4,673
 
 
At June 30, 2017, upon completion of Avenue’s IPO, Avenue’s convertible debt automatically converted into approximately 47,949 common shares of Avenue, at $4.02, a 33% discount to the IPO price, pursuant to the terms of the Convertible Note. As of June 30, 2017, Avenue’s obligation to its note holders was satisfied.  
 
  ($ in thousands)
 
Avenue
Convertible
Note, at fair
value
 
Beginning balance at January 1, 2017
 
$
200
 
Conversion into common shares
 
 
(299
)
Change in fair value of convertible notes
 
 
99
 
Ending balance at June 30, 2017
 
$
-
 
 
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, 2017 and December 31, 2016:
 
 
 
Fair Value Measurement as of June 30, 2017
 
($ in thousands)
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term investments, at fair value
 
$
-
 
 
$
-
 
 
$
903
 
 
$
903
 
Total
 
$
-
 
 
$
-
 
 
$
903
 
 
$
903
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Warrant liabilities
 
$
-
 
 
$
-
 
 
$
91
 
 
$
91
 
Helocyte Convertible Note, at fair value
 
 
-
 
 
 
-
 
 
 
4,673
 
 
 
4,673
 
Total
 
$
-
 
 
$
-
 
 
$
4,764
 
 
$
4,764
 
 
 
 
Fair Value Measurement as of December 31, 2016
 
($ in thousands)
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term investments, at fair value
 
$
-
 
 
$
-
 
 
$
1,414
 
 
$
1,414
 
Total
 
$
-
 
 
$
-
 
 
$
1,414
 
 
$
1,414
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingently Issuable Warrants
 
$
-
 
 
$
-
 
 
$
302
 
 
$
302
 
Warrant liabilities
 
 
-
 
 
 
-
 
 
 
179
 
 
 
179
 
Helocyte Convertible Note, at fair value
 
 
-
 
 
 
-
 
 
 
4,487
 
 
 
4,487
 
Avenue Convertible Note, at fair value
 
 
-
 
 
 
-
 
 
 
200
 
 
 
200
 
Total
 
$
-
 
 
$
-
 
 
$
5,168
 
 
$
5,168
 
 
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, 2017:
 
 
 
Fair Value Measurement as of March 31, 2017
 
($ in thousands)
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
National
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities owned, at fair value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate stocks
 
$
272
 
 
$
-
 
 
$
-
 
 
$
272
 
Municipal bonds
 
 
2,928
 
 
 
-
 
 
 
-
 
 
 
2,928
 
Restricted stock
 
 
-
 
 
 
206
 
 
 
-
 
 
 
206
 
Total
 
$
3,200
 
 
$
206
 
 
$
-
 
 
$
3,406
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
National
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities sold, but not yet purchased at fair value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration
 
$
-
 
 
$
-
 
 
$
630
 
 
$
630
 
Corporate stocks
 
 
77
 
 
 
-
 
 
 
-
 
 
 
77
 
Warrants - National
 
 
-
 
 
 
 
 
 
 
8,190
 
 
 
8,190
 
Total
 
$
77
 
 
$
-
 
 
$
8,820
 
 
$
8,897
 
 
Warrants issuable - National
 
In accordance with the Company’s Merger Agreement with National, since less than 80% of National's issued and outstanding shares of common stock were tendered, National remains a publicly-traded company and National's stockholders post-tender offer received from National a five-year warrant per held share to purchase an additional share of National's common stock at $3.25 as a dividend to all holders of National's common stock.
 
As National does not have the ability to settle the warrants with unregistered shares and maintenance of an effective registration statement may be considered outside of the Company’s control, net cash settlement of the warrants is assumed. The fair value of the 5.4 million National warrants represents 43.4% of the warrants issued to non-Fortress shareholders. These are being classified as a liability in the condensed consolidated statement of financial condition at June 30, 2017. Such valuation (using level 3 inputs) was determined by use of the Black-Scholes option pricing model using the following assumptions:
 
 
 
March 31,
2017
 
Dividend yield
 
 
-
%
Expected volatility
 
 
97.76
%
Risk-free interest rate
 
 
1.93
%
Life (in years)
 
 
4.5
 
 
($ in thousands)
 
National’s
Warrants
 
Beginning balance at December 31, 2016
 
$
14,359
 
Change in fair value of derivative liability
 
 
(6,169
)
Ending balance at March 31, 2017
 
$
8,190
 
 
National listed the warrants on the Nasdaq Capital Market under the symbol “NHLDW” in February 2017.
 
The table below provides a rollforward of the changes in fair value of Level 3 financial instruments for the six months ended June 30, 2017:
 
($ in thousands)
 
Investment in
Origo
 
 
Investment in
laser device
 
 
Helocyte
Convertible
Note, at fair
value
 
 
Avenue
Convertible
Note, at fair
value
 
 
Warrants
issued and
issuable
 
 
Warrant
liabilities
 
 
Total
 
Balance at December 31,
2016
 
$
1,164
 
 
$
250
 
 
$
4,487
 
 
$
200
 
 
$
14,661
 
 
$
179
 
 
$
20,941
 
  Conversion into
common shares
 
 
-
 
 
 
-
 
 
 
-
 
 
 
(299
)
 
 
(750
)
 
 
(15
)
 
 
(1,064
)
  Issuance of warrants
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
(8,190
)
 
 
8,190
 
 
 
-
 
Change in fair value of investments
 
 
(511
)
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
(511
)
Change in fair value of convertible notes
 
 
-
 
 
 
-
 
 
 
186
 
 
 
99
 
 
 
-
 
 
 
-
 
 
 
285
 
Change in fair value of derivative liabilities
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
(5,721
)
 
 
(73
)
 
 
(5,794
)
Balance at June 30, 2017
 
$
653
 
 
$
250
 
 
$
4,673
 
 
$
-
 
 
$
-
 
 
$
8,281
 
 
$
13,857
 
 
For the six months ended June 30, 2017, no transfers occurred between Level 1, Level 2 and Level 3 instruments.