Annual report pursuant to Section 13 and 15(d)

Fair Value Measurements

v3.19.1
Fair Value Measurements
 12 Months Ended
Dec. 31, 2018
Fair Value Disclosures [Abstract]  
Fair Value Disclosures
5. 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.
 
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 December 31, 2017, the Company valued its investment in Origo, a publicly traded company, utilizing the following assumptions: probability of a successful business combination of 46.53%, and no dividend rate, which yielded an underlying value of $10.65 per ordinary share for the private placement shares. The rights and warrants were valued utilizing a binomial-lattice model utilizing a risk-free rate of return of 1.28% and a strike price of $11.50 per share arriving at a value of $1.06 for each right and $1.07 for each warrant as of December 31, 2017. Time to expected business combination/ liquidation was 0.05 at December 31, 2017. At December 31, 2017, the fair value of the Company’s investment in Origo was $1.4 million, respectively. The Company also had a working capital note with Origo of $0.3 million.
 
On August 10, 2018, Origo entered into a Termination and Mutual Release between Origo and Hightimes Holding Corp. (“HTH”), HTHC Merger Sub, Inc. (“Merger Sub”) and Jose Aldeanueva, pursuant the terms of the Merger Agreement, dated July 24, 2017, as amended, effectively terminating the possibility of a business combination. Additionally, on August 10, 2018 the officers and directors of Origo notified shareholders of their intention to dissolve and liquidate in accordance with the Memorandum and Articles of Association of Origo. In accordance with the liquidation, Origo redeemed all of its outstanding ordinary shares that were included in the units issued in its initial public offering (the “Public Shares”), at a per-share redemption price of approximately $11.00. The redemption was completed on August 15, 2018. Since the Company’s investment in Origo, was not eligible for the redemption, the Company wrote off its investment in Origo and recorded a decrease in fair-value of investment of $1.4 million for the year ended December 31, 2018. The Company’s working capital note of $0.3 million, was also written off in the year ended December 31, 2018.
 
Contingently Issuable Warrant
 
 
Pursuant to the terms of the 2018 Venture Notes (see Note 9), if a partner company receives proceeds from the 2018 Venture Notes, such partner company will issue a note to the fund and the fund will receive a warrant to purchase a number of shares of the partner company ’s stock equal to 25% of the outstanding partner company note divided by the lowest price for which the partner 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 partner company’s common stock and are accounted for in accordance with ASC 815,
 
Derivatives and Hedging.
 
For the twelve months ended December 31, 2018, Aevitas, Cellvation and Cyprium received funds from the 2018 Venture Notes. The Company evaluated whether or not a third party financing was probable at December 31, 2018 for each of the entities and determined that it was not, as such the Company did not record any value associated with the contingently issued warrants. The Company did not have any borrowings under this note in 2017.
 
Warrant Liabilities
 
Helocyte
 
The fair value of Helocyte’s warrant liability, which was issued in connection with Helocyte’s convertible note, as of December 31, 2018 and 2017, approximated nil and $87,000, respectively. During 2018 the notes matured and were paid off (see Note 9) and as such the warrant was not issued.. 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 December 31, 2017 are as follows:
 
   
December 31
  
   
2018
    
2017
  
Risk-free interest rate     NA       2.04% - 2.08 %
Expected dividend yield     NA       - %
Expected term in years     NA       3.50 – 3.92  
Expected volatility     NA       70 %
 
($ in thousands)
  
Fair Value of
Derivative
Warrant
Liability
  
Beginning balance at January 1, 2017   $ 167  
Change in fair value of derivative liabilities     (80 )
Ending balance at December 31, 2017   $ 87  
Change in fair value of derivative liabilities     (87 )
Ending balance at December 31, 2018   $ –  
 
Caelum
 
The fair value of Caelum's warrant liability, which was issued in connection with Caelum’s convertible note, was written up to the full value of the liability at December 31, 2018 due to the conversion of the notes in January 2019 (see Note 21). The fair value at December 31, 2018 and 2017 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 December 31, 2018 and 2017 are as follows:
 
   
December 31
  
   
2018
    
2017
  
Risk-free interest rate     2.905% -2.909 %     2.154% - 2.168 %
Expected dividend yield     – %     – %
Expected term in years     3.84 – 3.96       4.58 - 4.71  
Expected volatility     70 %     70 %
 
($ in thousands)
  
Fair Value of
Derivative
Warrant
Liability
  
Beginning balance at January 1, 2017   $ -  
Additions     225  
Change in fair value of derivative liabilities     (3 )
Ending balance at December 31, 2017   $ 222  
Change in fair value of derivative liabilities     769  
Ending balance at December 31, 2018   $ 991  
 
Convertible Notes at Fair Value
 
Helocyte
 
For the year ended December 31, 2017, Helocyte’s convertible debt was 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 the convertible debt that is categorized within Level 3 of the fair value hierarchy is presented in the following table. For the year ended December 31, 2018 the note was not valued as it matured and was paid off. For the year ended December 31, 2017 the following input were utilized to derive the note’s fair value:
 
   
December 31
  
   
2018
    
2017
  
Risk-free interest rate     NA       1.53% - 1.72 %
Expected dividend yield     NA       -  
Expected term in years     NA       0.50 - 0.911  
Expected volatility     NA       52.4 %
 
($ in thousands)
  
Helocyte
Convertible
Note, at fair
value
  
Beginning balance at January 1, 2017   $ 4,487  
Change in fair value of convertible notes     213  
Ending balance at December 31, 2017   $ 4,700  
Payment of convertible note     (4,408 )
Change in fair value of convertible notes     (292 )
Ending balance at December 31, 2018   $ –  
 
Caelum
 
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. As of December 31, 2018, conversion of the Caelum Convertible Note was probable and as such the fair value approximated cost. For the years ended December 31, 2018 and 2017 the following input were utilized to derive the note’s fair value:
 
   
December 31
  
   
2018
    
2017
  
Risk-free interest rate     2.302 %     1.506%- 1.851 %
Expected dividend yield     – %     - %
Expected term in years     0.32       0.46 – 1.70  
Expected volatility     67 %     70.0 %
 
($ in thousands)
  
Caelum
Convertible
Note, at fair
value
  
Beginning balance at January 1, 2017   $ –  
Additions   $ 9,914  
Change in fair value of convertible notes     145  
Ending balance at December 31, 2017   $ 10,059  
Change in fair value of convertible notes     (145 )
Ending balance at December 31, 2018   $ 9,914  
 
The following tables classify into the fair value hierarchy of Fortress’ financial instruments, measured at fair value on a recurring basis on the Consolidated Balance Sheets as of December 31, 2018 and 2017:
 
   
Fair Value Measurement as of December 31, 2018
  
($ in thousands)
  
Level 1
    
Level 2
    
Level 3
    
Total
  
Liabilities
                                
Warrant liabilities   $ –     $ –     $ 991     $ 991  
Helocyte Convertible Note, at fair value     –       –       –       –  
Caelum Convertible Note, at fair value     –       –       9,914       9,914  
Total   $ –     $ –     $ 10,905     $ 10,905  
 
   
Fair Value Measurement as of December 31, 2017
  
($ in thousands)
  
Level 1
    
Level 2
    
Level 3
    
Total
  
Assets
                                
Long-term investments, at fair value   $ –     $ –     $ 1,390     $ 1,390  
Total   $ –     $ –     $ 1,390     $ 1,390  
                                 
Liabilities
                                
Warrant liabilities   $ –     $ –     $ 309     $ 309  
Caelum Convertible Note, at fair value     –       –       10,059       10,059  
Helocyte Convertible Note, at fair value     –       –       4,700       4,700  
Total   $ –     $ –     $ 15,068     $ 15,068  
 
The table below provides a roll forward of the changes in fair value of Level 3 financial instruments for the years ended December 31, 2018 and 2017:
 
   
Investment
    
Convertible Notes at fair value
    
Warrants 
1
    
Warrant
        
($ in thousands)
  
in Origo
    
Helocyte
    
Caelum
    
National
    
liabilities
    
Total
  
Balance at December 31, 2017   $ 1,390     $ 4,700     $ 10,059     $ 5,597     $ 87     $ 21,833  
Payment of convertible note     –       (4,408 )     –       –       –       (4,408 )
Disposal of National     –       –       –       (5,597 )     222       (5,375 )
Change in fair value of investments     (1,390 )     –       –       –       –       (1,390 )
Change in fair value of convertible notes     –       (292 )     (145 )     –       –       (437 )
Change in fair value of derivative liabilities     –       –       –       –       682       682  
Balance at December 31, 2018   $ –     $ –     $ 9,914     $ –     $ 991     $ 10,905  
 
               
Convertible Notes, at fair value
                    
($ in thousands)
  
Investment in
Origo
    
Investment in
laser device
    
Helocyte
    
Avenue
    
Caelum
    
Warrants 
1
 National
    
Warrant
liabilities
    
Total
  
Balance at December 31, 2016
  
$
1,164
    
$
250
    
$
4,487
    
$
200
    
$
-
    
$
14,673
    
$
167
    
$
20,941
  
Additions during the period
    
–
      
–
      
–
      
–
      
9,914
      
–
      
–
      
9,914
  
Conversion into common shares
    
–
      
–
      
–
      
(299
)
    
–
      
(765
)
    
–
      
(1,064
)
Loss on write off investment
    
–
      
(250
)
    
–
      
–
      
–
      
–
      
–
      
(250
)
Change in fair value of investments
    
226
      
–
      
–
      
–
      
–
      
–
      
–
      
226
  
Change in fair value of convertible notes
    
–
      
–
      
213
      
99
      
145
      
–
      
–
      
457
  
Change in fair value of derivative liabilities
    
–
      
–
      
–
      
–
      
–
      
(8,311
)
    
(80
)
    
(8,391
)
Balance at December 30, 2017
  
$
1,390
    
$
-
    
$
4,700
    
$
–
    
$
10,059
    
$
5,597
    
$
87
    
$
21,833
  
 
Note 1: Warrants issued and issuable related to National