Fair Value Measurements
|9 Months Ended|
Sep. 30, 2016
|Fair Value Disclosures [Abstract]|
|Fair Value Measurement||
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 $250,000 as of September 30, 2016 and December 31, 2015. 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 September 30, 2016, the fair value of the Company’s investment approximated cost.
Origo Acquisition Corporation (formerly CB Pharma Acquisition Corporation)
On June 10, 2016 CB Pharma Acquisition Corp (“CB Pharma”) held an extraordinary general meeting of shareholders (the “Meeting”). At the Meeting, the shareholders approved each of the following items: (i) an amendment to the CB Pharma’s Amended and Restated Memorandum and Articles of Association (the “Charter”) to extend the date by which CB Pharma has to consummate a business combination from June 12, 2016 to December 12, 2016 (the “Extension”), (ii) an amendment to the Charter to allow the holders of the CB Pharma’s ordinary shares issued in the their initial public offering to elect to convert their shares into their pro rata portion of the funds held in trust, if the Extension is approved, and (iii) the change of CB Pharma’s name from “CB Pharma Acquisition Corp.” to “Origo Acquisition Corporation” (“Origo”). In connection with the Meeting, the Company transferred 1,050,000 of its CB Pharma ordinary shares to Origo. The Company retained ownership of 265,000 Origo shares.
As of September 30, 2016, the Company valued its investment in Origo, a publicly traded company, utilizing the following assumptions: probability of a successful business combination of 31.89%, and no dividend rate, which yielded an underlying value of $5.04 per ordinary share for the private placement shares. The rights and warrants were valued utilizing a binomial-lattice model which assumes a volatility of 25.6%, a risk free rate of return of 1.14% and a strike price of $11.50 per share arriving at a value of $0.50 for each right and $0.13 for a warrant. A 31.89% probability of a successful business combination was applied to the values above arriving at an estimated value of $1.61 for the private placement shares, $0.16 for each right and $0.04 for each warrant. Based upon the valuation, the Company recorded a decrease in fair-value of investment of $1.8 million of which $25,000 represents a realized loss on the investment of the ordinary shares and the remaining $1.775 million was recorded as an unrealized loss. At September 30, 2016, the fair value of the Company’s investment in Origo was, $0.4 million. Additionally, as of September 30, 2016, Origo had net assets of approximately $31.7 million. The Company’s working capital note of $0.3 million can be converted to stock upon a successful business combination.
Pursuant to the Amended NSC Note (see Note 11), if a Fortress Company has the proceeds of the NSC Note transferred to it, such Fortress Company will issue a note to NSC and NSC will also receive a warrant to purchase a number of shares of the 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 that may have been granted in connection with Avenue’s $3.0 million of their NSC Note transferred from Fortress to Avenue on October 31, 2015 (issuance date) and September 30, 2016 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.
Mustang classified the fair value of the Contingently Issuable Warrants that may have been granted in connection with Mustang’s $3.6 million of their NSC Note transferred from Fortress to Mustang on July 5, 2016 (issuance date) and September 30, 2016 as a derivative liability as there was a potential that Mustang would not have a sufficient number of authorized common shares available to settle these instruments.
The fair value of Avenue’s and Mustang’s Contingently Issuable Warrants 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:
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 the Company’s warrant liabilities that are categorized within Level 3 of the fair value hierarchy for the three and nine months ended September 30, 2016 is as follows:
Convertible Notes at Fair Value
Helocyte’s convertible debt is measured at fair value using the Monte Carlo simulation valuation methodology. At September 30, 2016, the fair value equaled the proceeds received. A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the convertible debt that is categorized within Level 3 of the fair value hierarchy for the three and nine months ended September 30, 2016 is as follows:
The following tables classify into the fair value hierarchy financial instruments measured at fair value on a recurring basis on the Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015:
Certain positions in common stock were received as compensation for investment banking services. Restricted common stock may be freely traded only upon the effectiveness of a registration statement covering them or upon the satisfaction of the requirements of Rule 144, including the requisite holding period.
The table below provides a rollforward of the changes in fair value of Level 3 financial instruments for the nine months ended September 30, 2016 and 2015:
For the nine months ended September 30, 2016 and 2015, no transfers occurred between Level 1, Level 2 and Level 3 instruments.
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.
Reference 1: http://www.xbrl.org/2003/role/presentationRef