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

Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

Fair Value Measurements

9 Months Ended

Sep. 30, 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

As of September 30, 2020, the Company valued its investment in Caelum in accordance with ASC Topic 820, Fair Value Measurements and Disclosures, and estimated the fair value to be $11.7 million based on a per share value of $1.62. As of September 30, 2020, the following inputs were utilized to derive the value: risk free rate of return of 0.12%, volatility of 70% and a discount for lack of marketability of 28.6%.

As of December 31, 2019, the Company valued its investment in Caelum in accordance with ASC Topic 820, Fair Value Measurements and Disclosures, and estimated the fair value to be $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%.

Cyprium Warrant Liability

During the quarter ended September 30, 2020, Cyprium raised approximately $8.0 million in Perpetual Preferred Shares (“Cyprium Offering,” see Note 14). The Cyprium Offering coupled with the repayment of the 2018 Venture Debt (see Note 10), triggered the issuance of the Cyprium Warrant, in that a price per share could be established. As such these events resulted in Cyprium recording the Cyprium Warrant as issued rather than contingently issuable.

The fair value of the Cyprium 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:


	September 30, 2020		December 31, 2019
Risk-free interest rate	0.69	%	1.92	%
Expected dividend yield	—		—
Expected term in years	10.0		10.0
Expected volatility	85	%	93	%
Probability of issuance of the warrant	100	%	5	%


	Cyprium
	Contingently
	Issuable Warrant
($ in thousands)	Liability
Beginning balance at January 1, 2020	$	27
Change in fair value		1,189
Reclass partner company's warrants from liability to equity		(1,216)
Ending balance at September 30, 2020	$	-

The following tables classify into the fair value hierarchy of Fortress’ financial instruments, measured at fair value as of September 30, 2020 and December 31, 2019:


	Fair Value Measurement as of September 30, 2020
($ in thousands)	Level 1		Level 2		Level 3		Total
Assets
Fair value of investment in Caelum	$	—	$	—	$	11,723	$	11,723
Total	$	—	$	—	$	11,723	$	11,723


	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 as of September 30, 2020:



	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		575		—		575
Balance at September 30, 2020	$	11,723	$	—	$	11,723

As of September 30, 2020, no transfers occurred between Level 1, Level 2 and Level 3 instruments.

- 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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