Fair Value Measurements
|9 Months Ended|
Sep. 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 $0.3 million 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. In August 2017, a clinical trial utilizing this device concluded that there was no strong statistical data demonstrating that the device provided relief from migraine headaches. Accordingly, the third-party company ceased operations and the Company wrote off its investment of $0.3 million. The fair value of this investment was nil as of September 30, 2017 and $0.3 million as of December 31, 2016.
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 termination letter, as supplemented on February 22, 2017, 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. On September 11, 2017, Origo’s shareholders approved a second amendment to the Articles of Association and extended the date by which to consummate a business combination to March 12, 2018.
On July 24, 2017, Origo entered into a Merger Agreement with High Times Holding Corp. (“HTH”), which was later amended on September 27, 2017 (“Amended Merger Agreement”). Pursuant to the terms of the Amended Merger Agreement, the Merger Sub will merge with and into HTH, with HTH continuing as the surviving entity (the “Merger”) and all holders of HTH equity securities and warrants, options and rights to acquire or securities that convert into HTH equity securities (collectively, “HTH Securities”) will convert into Origo common shares and, with respect to options, options to acquire Origo common shares.
The Merger Agreement also provides that, immediately prior to the Effective Time, Origo will reincorporate under the laws of the State of Nevada, whether by reincorporation, statutory conversion or otherwise.
As of September 30, 2017, the Company valued its investment in Origo, a publicly traded company, utilizing the following assumptions: probability of a successful business combination of 31.4%, and no dividend rate, which yielded an instrument value upon business combination of $10.61 per ordinary share for the private placement shares. The rights and warrants were valued utilizing a binomial-lattice model at a value of $0.33 for each right and $0.31 for each warrant. Based upon the valuation, the Company recorded a decrease in fair-value of investment of $0.2 million for the nine months ended September 30, 2017. At September 30, 2017, the fair value of the Company’s investment in Origo was, $0.9 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”), (see Note 11), 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 26, 2017, Avenue closed on an Initial Public Offering (“IPO”) raising gross proceeds of $38.0 million and issuing 6.3 million common 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.
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 26, 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.
Helocyte Warrant Liabilities
The fair value of Helocyte’s warrant liability, which was issued in connection with Helocyte’s convertible note (see Note 11), 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 Helocyte’s warrant liabilities that are categorized within Level 3 of the fair value hierarchy as of September 30, 2017 is as follows:
Caelum Warrant Liabilities
The fair value of Caelum's warrant liability, which was issued in connection with Caelum’s convertible note (see Note 11), 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 September 30, 2017 is as follows:
Helocyte Convertible Notes at Fair Value
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, 2017 is as follows:
Caelum Convertible Notes at Fair Value
Caelum’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 Caelum’s convertible debt that is categorized within Level 3 of the fair value hierarchy as of September 30, 2017 is as follows:
Avenue Convertible Notes at Fair Value
On June 26, 2017, upon completion of Avenue’s IPO, Avenue’s convertible debt automatically converted into approximately 49,749 common shares of Avenue, at $4.02, a 33% discount to the IPO price, pursuant to the terms of the Convertible Note. As of September 30, 2017, Avenue’s obligation to its note holders was satisfied.
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, 2017 and December 31, 2016:
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, 2017:
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 September 30, 2017. Such valuation (using Level 3 inputs) was determined by use of the Black-Scholes option pricing model using the following assumptions:
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, 2017:
For the nine months ended September 30, 2017, 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