Fair Value Measurements
|9 Months Ended|
Sep. 30, 2021
|Fair Value Measurements|
|Fair Value Measurements||
6. Fair Value Measurements
The Company follows accounting guidance on fair value measurements for financial assets and liabilities measured at fair value on a recurring basis. Under the accounting guidance, fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.
The accounting guidance requires fair value measurements be classified and disclosed in one of the following three categories:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Observable inputs other than Level 1 prices for similar assets or liabilities that are directly or indirectly observable in the marketplace.
Level 3: Unobservable inputs which are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques,
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.
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, 2021, based on notification from AstraZeneca of their intent to exercise their exclusive option to purchase Caelum for the option price of $150 million (see Note 3), the Company wrote up the carrying value of its investment in Caelum to the 42.4% share of the net proceeds it expects to receive upon distribution of the option exercise price. Accordingly, the fair value of the Company’s investment in Caelum at September 30, 2021 was deemed to be $56.9 million. This amount reflects deduction of the 10% escrow holdback, to be distributed in 24 months, as well as deductions for legal expenses and fees, approximating $1.1 million.
As of December 31, 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 $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 ranging from 21% to 31% based on the maturity date assumptions of various scenarios. Further, the Company considered the impact of the acquisition of Alexion by AstraZeneca, which shortened the timeframe in which the option could be exercised in accordance with the A&R DOSPA.
Journey Warrant Liabilities
Placement Agent Warrants
In connection with Journey’s Preferred Stock offering (see Note 11), upon a Qualified Financing (defined as an external financing of $25.0 million or greater), Journey will issue warrants to the placement agent (the “Placement Agent Warrants”) to purchase 5% of the shares of common stock into which the Preferred Stock converts. The Placement Agent Warrants have a term of five years and are exercisable at a 15% discount to the Qualified Financing price. The Company valued the Placement Agent Warrants using a Monte Carlo simulation valuation methodology. A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring Journey’s warrant liability that are categorized within Level 3 of the fair value hierarchy as of September 30, 2021 was as follows:
At September 30, 2021, the value of the placement agent warrants was deemed to be $0.5 million.
Contingent Payment Derivative
In connection with the license, collaboration, and assignment agreement (the “DFD Agreement”) (see Note 7), between Journey and Dr. Reddy’s Laboratories, LTD (“DRL”) for a modified release oral minocycline for the treatment of rosacea (DFD-29”), Journey agreed to pay DRL additional consideration upon either an initial public offering of Journey’s common stock (“Journey IPO”) or an acquisition of Journey, with the agreement specifying that only one payment can be made. The contingent payment associated with a Journey IPO, is deemed to be achieved if, upon the completion of a Journey IPO, Journey’s market capitalization on a fully diluted basis is $150 million or greater at the close of business on the date of the Journey IPO. The payment due for the achievement of the Journey IPO criteria is as follows: (a) issue DRL a number of shares of Journey’s common stock equal to $5.0 million as calculated using a fifteen (15) day volume weighted average price of Journey’s closing price, measured fifteen (15) days following the Journey IPO/up-listing, without any additional consideration (financial or otherwise) from DRL; or (b) make a cash payment to DRL equal to $5.0 million.
In the event the Journey IPO contingency is not satisfied, and Journey or its affiliate executes a definitive agreement for an acquisition event during the period beginning on June 29, 2021 and ending twenty-four (24) months after the regulatory approval of DFD-29, Journey shall pay to DRL: (a) 20% of the value of DFD-29 attributable to the acquisition event, if such acquisition event occurs between closing and NDA approval; or (b) 12% of the value of DFD-29 attributable to the acquisition event, if such acquisition event occurs within 24 months after NDA approval.
The Company valued this contingent payment utilizing a Probability Weighted Expected Return Method (PWERM) model. A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring Journey’s derivative liability that are categorized within Level 3 of the fair value hierarchy as of September 30, 2021 was as follows:
At September 30, 2021 the value of the contingent payment warrant is $3.8 million, and was recorded on the unaudited condensed consolidated balance sheet. No liability was recorded at December 31, 2020.
The following tables classify into the fair value hierarchy of Fortress’ financial instruments, measured at fair value as of September 30, 2021 and December 31, 2020:
The tables below provide a roll-forward of the changes in fair value of Level 3 financial instruments as of September 30, 2021:
During the nine month period ended September 30, 2021, 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/disclosureRef