Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.10.0.1
Fair Value Measurements
9 Months Ended
Sep. 30, 2018
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.
 
Origo Acquisition Corporation
 
On August 10, 2018, Origo Acquisition Corporation (“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.
 
The Company’s investment in Origo was not eligible for the redemption and as such as of September 30, 2018, the Company wrote off its investment in Origo and recorded a decrease in fair-value of investment of $1.4 million for the nine months ended September 30, 2018.
In addition to its investment in Origo, the
Company
also provided Origo
with a working capital note of $0.3 million, the balance of which
was written
off in the quarter ended June 30, 2018.
 
Securities Owned
 
National
 
The fair value of National’s warrants, representing the cumulative value of warrants received in publicly traded companies that are not related parties, in which NSC as placement agent received warrants as the placement agent. National calculated the fair value of the warrants using a Black Scholes model. A summary of the weighted averages (in aggregate) of significant unobservable inputs (Level 3 inputs) used in measuring National’s warrants that are categorized within Level 3 of the fair value hierarchy as of June 30, 2018 is as follows:
 
 
 
June 30, 2018
Risk-free interest rate
 
1.93% – 2.73%
Expected dividend yield
 
–%
Expected term in years
 
0.14 – 4.83
Remaining volatility
 
49.7% – 381.0%
Strike price
 
$0.01 – $10.00
 
($ in thousands)
 
Fair Value of
Derivative
Warrants
 
Beginning balance at September 30, 2017
 
$
202
 
Trading revenue gain
 
 
392
 
Ending balance at June 30, 2018
 
$
594
 
 
Warrant Liabilities
 
Helocyte
 
The fair value of Helocyte’s warrant liability, which was issued in connection with Helocyte’s convertible note (see Note 11), as of September 30, 2018 approximated $0, as the probability of the conversion of the underlying notes approximated $0. The table below provides a summary:
 
($ in thousands)
 
Fair Value of
Derivative
Warrant
Liability
 
Beginning balance at January 1, 2018
 
$
87
 
Change in fair value of derivative liabilities
 
 
(87
)
Ending balance at September 30, 2018
 
$
 
 
Notes at Fair Value
 
Helocyte
 
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, 2018, the fair value approximated cost, as the convertible note approaches maturity, is as follows:
 
($ in thousands)
 
Helocyte
Convertible
Note, at Fair
value
 
Beginning balance at January 1, 2018
 
$
4,700
 
Payment of convertible notes
 
 
(4,076
)
Change in fair value of convertible notes
 
 
(291
)
Ending balance at September 30, 2018
 
$
333
 
 
Caelum
 
Caelum’s convertible debt, which is guaranteed by the Company, 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, 2018 is as follows:
 
 
 
September 30, 2018
 
Risk-free interest rate
 
 
2.195%- 2.560
%
Expected dividend yield
 
 
%
Expected term in years
 
 
0.29 – 0.95
 
Expected volatility
 
 
67.0
%
 
($ in thousands)
 
Caelum
Convertible
Note, at fair
value
 
Beginning balance at January 1, 2018
 
$
10,059
 
Change in fair value of convertible notes
 
 
265
 
Ending balance at September 30, 2018
 
$
10,324
 
 
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, 2018 and December 31, 2017:
 
 
 
Fair Value Measurement as of September 30, 2018
 
($ in thousands)
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Helocyte Convertible Note, at fair value
 
$
 
 
$
 
 
$
333
 
 
$
333
 
Caelum Convertible Note, at fair value
 
 
 
 
 
 
 
 
10,324
 
 
 
10,324
 
Total
 
$
 
 
$
 
 
$
10,657
 
 
$
10,657
 
 
 
 
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
 
$
 
 
$
 
 
$
87
 
 
$
87
 
Caelum Convertible Note, at fair value
 
 
 
 
 
 
 
 
10,059
 
 
 
10,059
 
Helocyte Convertible Note, at fair value
 
 
 
 
 
 
 
 
4,700
 
 
 
4,700
 
Total
 
$
 
 
$
 
 
$
14,846
 
 
$
14,846
 
 
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, 2018 and September 30, 2017:
 
 
 
Fair Value Measurement as of June 30, 2018
 
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
Assets -
National
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities owned, at fair value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate stocks
 
$
101
 
 
$
 
 
$
 
 
$
101
 
Municipal bonds
 
 
 
 
 
530
 
 
 
 
 
 
530
 
Restricted stock
 
 
 
 
 
1,912
 
 
 
 
 
 
1,912
 
Warrants
 
 
 
 
 
 
 
 
4,132
 
 
 
4,132
 
Total
 
$
101
 
 
$
2,442
 
 
$
4,132
 
 
$
6,675
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities –
National 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities sold, but not yet purchased at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate stocks
 
$
18
 
 
$
 
 
$
 
 
$
18
 
Corporate debt
 
 
 
 
 
6
 
 
 
 
 
 
6
 
Contingent consideration
 
 
-
 
 
 
 
 
 
768
 
 
 
768
 
Total
 
$
18
 
 
$
6
 
 
$
768
 
 
$
792
 
 
 
 
Fair Value Measurement as of September 30, 2017
 
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
Assets -
National
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities owned, at fair value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate stocks
 
$
116
 
 
$
 
 
$
 
 
$
116
 
Municipal bonds
 
 
 
 
 
1,239
 
 
 
 
 
 
1,239
 
Restricted stock
 
 
 
 
 
82
 
 
 
 
 
 
82
 
Warrants
 
 
 
 
 
 
 
 
548
 
 
 
548
 
Total
 
$
116
 
 
$
1,321
 
 
$
548
 
 
$
1,985
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities -
National
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities sold, but not yet purchased at fair value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds
 
$
 
 
$
151
 
 
$
 
 
$
151
 
Contingent consideration
 
 
 
 
 
 
 
 
311
 
 
 
311
 
Warrants issued - National
 
 
 
 
 
 
 
 
5,597
 
 
 
5,597
 
Total
 
$
 
 
$
151
 
 
$
5,908
 
 
$
6,059
 
 
Warrants issued - National
 
On March 15, 2018, National,
 together with
Computershare Inc., a Delaware corporation (“Computershare”), and its wholly-owned subsidiary, Computershare Trust Company, N.A., a federally chartered trust company (and together with Computershare, the “Warrant Agent”) agreed to amend and restate the terms of the form of warrant agreement dated December 13, 2016 (the “Original Agreement”). The Amended and Restated Warrant Agreement (the “Amended Agreement”) explicitly provides that National shall not be required to pay cash if it cannot issue registered shares of Common Stock upon exercise of a Warrant and as such meeting the criteria for equity classification.
 
Accordingly, at March 15, 2018, the date of the amendment, the fair value of the warrants issued by National (represents 44% of the warrants issued to non-Fortress shareholders) was $13.6 million. Such valuation (using level 3 inputs) was determined by use of the Black-Scholes option pricing model using the following assumptions:
 
 
 
March 15, 2018
 
Dividend yield
 
 
%
Expected volatility
 
 
59.23
%
Risk-free interest rate
 
 
2.42
%
Life (in years)
 
 
3.49
%
 
The following table shows the fair value of the warrant liability on the Condensed Consolidated Balance Sheets as of June 30, 2018 and September 30, 2017:
 
($ in thousands)
 
National’s
Warrants
 
Beginning balance at September 30, 2017
 
$
5,597
 
Change in fair value of derivative liability
 
 
8,018
 
Ending balance at March 15, 2018
 
 
13,615
 
Reclassification of warrant to equity
 
 
(13,615
)
Ending balance at June 30, 2018
 
$
 
 
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, 2018:
 
($ in thousands)
 
Investment in
Origo
 
 
Helocyte
Convertible
Note, at fair
value
 
 
Caelum
Convertible
Note, at fair
value
 
 
Warrants
issued and
issuable
 
 
Warrant
liabilities
 
 
Total
 
Balance at December 31, 2017
 
$
1,390
 
 
$
4,700
 
 
$
10,059
 
 
$
5,597
 
 
$
87
 
 
$
21,833
 
Payment of convertible note
 
 
 
 
 
(4,076
)
 
 
 
 
 
 
 
 
 
 
 
(4,076
)
Reclassification of warrant liability from debt to equity
 
 
 
 
 
 
 
 
 
 
 
(13,615
)
 
 
 
 
 
(13,615
)
Change in fair value of investments
 
 
(1,390
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1,390
)
Change in fair value of convertible notes
 
 
 
 
 
(291
)
 
 
265
 
 
 
 
 
 
 
 
 
(26
)
Change in fair value of derivative liabilities
 
 
 
 
 
 
 
 
 
 
 
8,018
 
 
 
(87
)
 
 
7,931
 
Balance at September 30, 2018
 
$
 
 
$
333
 
 
$
10,324
 
 
$
 
 
$
 
 
$
10,657
 
 
For the nine months ended September 30, 2018, no transfers occurred between Level 1, Level 2 and Level 3 instruments.