Fair Value Measurements
|12 Months Ended|
Dec. 31, 2016
|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 Headaches
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 entered into a Purchase Agreement with the third-party company, in which the Company received 13,409,962 Class A Preferred Units, representing 83% of a total 16,091,954 Class A Preferred Units. The fair value of this investment was $0.3 million as of December 31, 2016 and 2015. The value of the Company’s investment was determined based on a valuation which takes into consideration, when applicable, cash received, 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. The values at which the Company’s investments are carried on its books are adjusted to estimated fair value at the end of each quarter taking into account general economic and stock market conditions and those characteristics specific to the underlying investments. Based upon these inputs at December 31, 2016 and 2015, 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.
On December 19, 2016, Origo announced the execution of a Merger Agreement with Aina Le’a Inc., a residential and commercial real estate developer in Hawaii, pursuant to which Origo will merge with and into Aina Le’a Merger Sub, a wholly-owned subsidiary of Aina Le’a Inc. (the “Merger”). Under the Merger, shareholders and warrant holders in Origo will receive 0.6 shares or warrants of Aina’s common stock, respectively, for each share or warrant of Origo they hold. On March 10, 2017, Origo’s shareholders approved an amendment to Origo’s organizational documents extending the date by which Origo must consummate the Merger to September 12, 2017.
As of December 31, 2016, the Company valued its investment in Origo, a publicly traded company, utilizing the following assumptions: probability of a successful business combination of 51.53%, and no dividend rate, which yielded an underlying value of $8.16 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 0.85% and a strike price of $11.50 per share arriving at a value of $0.82 for each right and $0.58 for each warrant. A 51.53% probability of a successful business combination was applied to the values above arriving at an estimated value of $4.20 for the private placement shares, $0.42 for each right and $0.30 for each warrant. Based upon the valuation, the Company recorded a decrease in fair-value of investment of $1.1 million of which $25,000 represents a realized loss on the investment of the ordinary shares and the remaining $1.0 million was recorded as an unrealized loss. At December 31, 2016, the fair value of the Company’s investment in Origo was, $1.2 million. The Company’s working capital note with Origo of $0.3 million can be converted to stock upon a successful business combination.
Uracil Topical Cream
In April 2014, the Company paid $243,000 for an option to purchase the exclusive rights to a Phase 2, topical product, Uracil Topical Cream, from a third party and paid an additional $50,000 in August 2014 to extend the term of the option for a total purchase price of $0.3 million. The Company elected the fair value option for this investment. On September 30, 2014, the Company recognized a loss of $0.3 million in connection with the expiration of the option. For the year ended December 31, 2014, this loss was reflected in the Consolidated Statements of Operations.
Contingently Issuable Warrant
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 its NSC Note transferred from Fortress to Avenue on October 31, 2015 (issuance date) and December 31, 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.
The fair value of Avenue’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:
Mustang classified the fair value of the Contingently Issuable Warrants that may have been granted in connection with Mustang’s $3.6 million NSC Note transferred from Fortress to Mustang on July 5, 2016 (issuance date). In October 2016, Mustang issued 138,462 warrants with an exercise price at par. Upon the issuance of warrants, Fortress derecognized a liability related to contingently issuance warrants of $0.8 million.
The fair value of 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:
On October 30, 2015, Checkpoint issued 139,592 warrants to NSC after an initial closing of Checkpoint’s offering on September 30, 2015. The following table sets forth the changes in the estimated fair value for Checkpoint’s Level 3 classified derivative Contingently Issuable Warrant liabilities:
The fair value of Checkpoint’s Contingently Issuable Warrants was determined at various issuance dates from March 19, 2015 to August 31, 2015 (“Issuance Dates”) for $0.2 million and on October 30, 2015 for $0.6 million by applying management’s estimate of the probability of issuance of the Contingently Issuable Warrants together with the option pricing model with the following key assumptions:
Avenue Warrant Liabilities
On December 30, 2016, Avenue held a closing of the sale of convertible promissory notes. In the closing, WestPark Capital, Inc., (“WestPark”) the placement agent, received a warrant (“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 Avenue Warrant has a ten-year term and has a per share exercise price equal to the price per share at which any note sold to investors first converts into Avenue’s common stock. The fair value of Avenue’s WestPark 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 year ended December 31, 2016 is as follows:
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 year ended December 31, 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. 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 year ended December 31, 2016 is as follows:
Avenue’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 the convertible debt that is categorized within Level 3 of the fair value hierarchy for the year ended December 31, 2016 is as follows:
The following tables classify into the fair value hierarchy of Fortress' financial instruments, exclusive of National's financial instruments, measured at fair value on a recurring basis on the Consolidated Balance Sheets as of December 31, 2016 and 2015:
The following table shows the fair values hierarchy of National's financial instruments measured at fair value on a recurring basis on the Consolidated Balance Sheets as of September 30, 2016:
In accordance with the Merger Agreement, since less than 80% of National's issued and outstanding shares of common stock were tendered, National remains a publicly-traded company and stockholders post-tender offer will receive from National a five-year warrant per held share to purchase an additional share of the Company'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 (which did not exist at September 30, 2016) may be considered outside of the Company’s control, net cash settlement of the warrants is assumed. Accordingly, National was obligated to issue the warrants. The fair value of the 5.4 million warrants issuable (represents 44% of the warrants issued to non-Fortress shareholders) are being classified as a liability in the consolidated statement of financial condition at September 30, 2016. Such valuation (using level 3 inputs) was determined by use of the Black-Scholes option pricing model using the following assumptions:
In the Merger Agreement, National agreed to set a record date within ninety (90) days following the Acceptance Time (as defined therein) with respect to the distribution to its stockholders of warrants to purchase one share of its common stock for every share of its common stock owned at an exercise price of $3.25 per share (the “Warrants Issuable”). National announced on October 26, 2016, that it had established December 9, 2016 as the record date with respect to the Warrants Issuable.
As a result of “due bill” trading procedures, those persons who held shares of National’s common stock as of the record date, or who acquire shares of National's common stock in the market following the record date, and in each case who continue to hold such shares at the close of trading the date before the ex-dividend date to be established by The Nasdaq Stock Market with respect to the Warrants Issuable, will be entitled to receive a Warrants Issuable with respect to each share of National's common stock owned by such person as of the ex-dividend date.
Conversely, those persons who held shares of National's common stock as of the record date, or who acquire shares of National's common stock in the market following the record date, but in each case who do not hold such shares of National's common stock at the close of trading on the date before the ex-dividend date, will not be entitled to receive any Warrants Issuable with respect to such shares.
Therefore, a shareholder selling their shares of National’s common stock prior to the ex-dividend date would not receive any Warrants Issuable with respect to the shares that are sold by such person even if such person held the shares on the record date, since the shares of National's common stock sold would be accompanied by a “due-bill” entitling the buyer of those shares to receive the Warrants Issuable with respect to such shares.
The actual right to receive the Warrants Issuable with respect to any shares of National’s common stock requires still holding such shares until the ex-dividend date.
National listed the Warrants Issuable 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 years ended December 31, 2016 and 2015:
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