Quarterly report pursuant to Section 13 or 15(d)

Fair Value of Other Securities

v2.4.0.8
Fair Value of Other Securities
9 Months Ended
Sep. 30, 2014
Fair Value Disclosures [Abstract]  
FAIR VALUE OF OTHER SECURITIES
FAIR VALUE OF OTHER SECURITIES
The inputs or methodology used for valuing securities and financial instruments are not necessarily an indication of the risk associated with investing in those securities or financial instruments. The following tables provide the fair value measurements of applicable Company assets and liabilities by level within the fair value hierarchy as of September 30, 2014, and December 31, 2013. These assets and liabilities are measured on a recurring basis.
September 30, 2014
 
 
September 30, 2014
 
Fair Value
 
 
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Other equity securities
 
$
25,420,877

 
$

 
$

 
$
25,420,877

Warrant Investment
 
508,000

 

 

 
508,000

Total Assets
 
$
25,928,877

 
$

 
$

 
$
25,928,877

December 31, 2013
 
 
December 31, 2013
 
Fair Value
 
 
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Other equity securities
 
$
23,304,321

 
$

 
$

 
$
23,304,321

Total Assets
 
$
23,304,321

 
$

 
$

 
$
23,304,321

The changes for all Level 3 securities measured at fair value on a recurring basis using significant unobservable inputs for the nine months ended September 30, 2014 and September 30, 2013 are as follows:

Level 3 Rollforward
For the Nine Months Ended 9/30/14
 
Fair Value Beginning Balance
 
Acquisitions(2)
 
Total Realized and Unrealized Gains Included in Net Income
 
Return of Capital Adjustments Impacting Cost Basis of Securities
 
Fair Value Ending Balance
 
Changes in Unrealized Gains, Included In Net Income, Relating to Securities Still Held (1)
Other equity securities
 
$
23,304,321

 
$

 
$
2,990,376

 
$
(873,820
)
 
$
25,420,877

 
$
2,990,376

Warrant investment
 

 
122,500

 
385,500

 

 
508,000

 
385,500

Total
 
$
23,304,321

 
$
122,500

 
$
3,375,876

 
$
(873,820
)
 
$
25,928,877

 
$
3,375,876

For the Nine Months Ended 9/30/13
 
 
 
 
 
 
 
 
 
 
 
 
Other equity securities
 
$
19,707,126

 
$

 
$
3,509,432

 
$
(1,048,290
)
 
$
22,168,268

 
$
3,509,432

Warrant investment
 

 

 

 

 

 

Total
 
$
19,707,126

 
$

 
$
3,509,432

 
$
(1,048,290
)
 
$
22,168,268

 
$
3,509,432

 
 
 
 
 
 
 
 
 
 
 
 
 

(1) Located in Net realized and unrealized gain on other equity securities in the Consolidated Statements of Income
(2) Includes capitalized costs in addition to the purchase price
The Company utilizes the beginning of reporting period method for determining transfers between levels. There were no transfers between levels 1, 2 or 3 for the three- and nine-month periods ended September 30, 2014 and September 30, 2013.
Valuation Techniques and Unobservable Inputs
An equity security of a publicly traded company acquired in a private placement transaction without registration under the Securities Act of 1933, as amended (the “1933 Act”), is subject to restrictions on resale that can affect the security’s liquidity (and hence its fair value). If the security has a common share counterpart trading in a public market, the Company generally determines an appropriate percentage discount for the security in light of the restrictions that apply to its resale (taking into account, for example, whether the resale restrictions of Rule 144 under the 1933 Act apply). This pricing methodology applies if the Company has Level 2 trading securities.
The Company’s other equity securities, which represent securities issued by private companies, are classified as Level 3 assets. Valuation of these investments is determined by weighting various valuation metrics for each security. Significant judgment is required in selecting the assumptions used to determine the fair values of these investments. See Note 2, Significant Accounting Policies, for additional discussion.
For the year ended December 31, 2013, the Company’s investments in private companies were valued using one or a combination of the following valuation techniques: (i) analysis of valuations for publicly traded companies in a similar line of business (“public company analysis”), (ii) analysis of valuations for comparable M&A transactions (“M&A analysis”) and (iii) discounted cash flow analysis.
The public company analysis utilizes valuation multiples for publicly traded companies in a similar line of business as the portfolio company to estimate the fair value of such investment. Typically, the Company’s analysis focuses on the ratio of enterprise value to earnings before interest expense, income tax expense, depreciation and amortization (“EBITDA”) which is commonly referred to as an EV/EBITDA multiple. The Company selects a range of multiples given the trading multiples of similar publicly traded companies and applies such multiples to the portfolio company’s EBITDA to estimate the portfolio company’s trailing, proforma, projected or average (as appropriate) EBITDA to estimate the portfolio company’s enterprise value and equity value. The Company also selects a range of trading market yields of similar public companies and applies such yields to the portfolio company’s estimated distributable cash flow. When calculating these values, the Company applies a discount, when applicable, to the portfolio company’s estimated equity value for the size of the company and the lack of liquidity in the portfolio company’s securities.The M&A analysis utilizes valuation multiples for historical M&A transactions for companies or assets in a similar line of business as the portfolio company to estimate the fair value of such investment. Typically, the Company’s analysis focuses on EV/EBITDA multiples. The Company selects a range of multiples based on EV/EBITDA multiples for similar M&A transactions or similar companies and applies such ranges to the portfolio company’s analytical EBITDA to estimate the portfolio company’s enterprise value.
The discounted cash flow ("DCF") analysis is used to estimate the equity value for the portfolio company based on estimated DCF of such portfolio company. Such cash flows include an estimate of terminal value for the portfolio company. A present value of these cash flows is determined by using estimated discount rates (based on the Company’s estimate for weighted average cost of capital for such portfolio company).
Under all of these valuation techniques, the Company estimated operating results of its portfolio companies (including EBITDA). These estimates utilize unobservable inputs such as historical operating results, which may be unaudited, and projected operating results, which were based on expected operating assumptions for such portfolio company. The Company also consulted with management of the portfolio companies to develop these financial projections. These estimates were sensitive to changes in assumptions specific to such portfolio company as well as general assumptions for the industry. Other unobservable inputs utilized in the valuation techniques outlined above include: possible discounts for lack of marketability, selection of publicly-traded companies, selection of similar M&A transactions, selected ranges for valuation multiples, selected range of yields and expected required rates of return and weighted average cost of capital. The various inputs were weighted as appropriate, and other factors may have been weighted into the valuation, including recent capital transactions of the Company.
Changes in EBITDA multiples, or discount rates may change the fair value of the Company’s portfolio investments. Generally, a decrease in EBITDA multiples or DCF multiples, or an increase in discount rates, when applicable, may result in a decrease in the fair value of the Company’s portfolio investments.
For the nine months ended September 30, 2014, the Company’s investments in private companies were valued using one or a combination of the following valuation techniques: (i) public share price of private companies investments, discounted for a lack of marketability, (ii) recent sales price of private companies, discounted for any lack of marketability or liquidity due to an earn out or escrow agreement and (iii) discounted cash flow analysis. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may fluctuate from period to period. Additionally, the fair value of the Company’s investments may differ from the values that would have been used had a ready market existed for such investments and may differ materially from the values that the Company may ultimately realize.
As of both September 30, 2014 and December 31, 2013, the Company held a 6.7 percent equity interest in Lightfoot Capital Partners LP ("Lightfoot") and an 11.1 percent equity interest in VantaCore Partners LP ("VantaCore"). Please see Note 17 to these Consolidated Financial Statements and the Asset Portfolio and Related Developments section of Management's Discussion and Analysis for more detail relating to the sale of VantaCore on October 1, 2014.
Certain condensed combined financial information of the unconsolidated affiliates, Lightfoot and VantaCore, is presented in the following tables.
Assets
 
September 30, 2014
 
December 31, 2013
Current assets
 
$
60,451,310

 
$
50,545,378

Noncurrent assets
 
550,676,592

 
554,029,979

Total Assets
 
$
611,127,902

 
$
604,575,357

Liabilities
 
 
 
 
Current liabilities
 
$
33,630,413

 
$
29,159,353

Noncurrent liabilities
 
193,522,187

 
185,653,304

Total Liabilities
 
$
227,152,600

 
$
214,812,657

 
 
 
 
 
Partner's equity
 
383,975,302

 
389,762,700

Total liabilities and partner's equity
 
$
611,127,902

 
$
604,575,357


 
 
For the Three Months Ending
 
For the Nine Months Ending
 
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
Revenues
 
$
48,289,666

 
$
40,481,062

 
$
124,727,402

 
$
106,112,586

Operating expenses
 
42,443,219

 
34,175,660

 
112,883,618

 
91,022,483

Other income (expenses)
 
673,479

 
(1,124,731
)
 
4,868,653

 
7,995,030

Net income
 
$
6,519,926

 
$
5,180,671

 
$
16,712,437

 
$
23,085,133

 
 
 
 
 
 
 
 
 
EBITDA
 
$
14,005,447

 
$
12,943,273

 
$
41,113,399

 
$
45,701,881



For the nine months ended September 30, 2014, the Company’s Warrant Investment was valued using the Black-Scholes model. The Black-Scholes model incorporates the fair value of the business, the time value of money, the option's strike price, volatility of business and the time to the option's expiry. Due to the inherent uncertainty of determining the fair value of Warrant investments that do not have a readily available market value, the fair value of the Company’s warrant investments may fluctuate from period to period. Additionally, the fair value of the Company’s warrant investments may differ from the values that would have been used had a ready market existed for such investments and may differ materially from the values that the Company may ultimately realize.

The following section describes the valuation methodologies used by the Company for estimating fair value for financial instruments not recorded at fair value, but fair value is included for disclosure purposes only, as required under disclosure guidance related to the fair value of financial instruments.
Cash and Cash Equivalents — The carrying value of cash, amounts due from banks, federal funds sold and securities purchased under resale agreements approximates fair value.
Financing Notes Receivable — Based on the interest rates for similar financial instruments, the carrying value of the financing notes receivable are considered to approximate fair value.
Long-term Debt — The fair value of the Company’s long-term debt is calculated, for disclosure purposes, by discounting future cash flows by a rate equal to the Company’s current expected rate for an equivalent transaction.
Line of Credit — The carrying value of the line of credit approximates the fair value due to its short-term nature.
Carrying and Fair Value Amounts
 
 
Level within fair value hierarchy
 
September 30, 2014
 
December 31, 2013
 
 
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Financial Assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
Level 1
 
$
5,476,216

 
$
5,476,216

 
$
17,963,266

 
$
17,963,266

Financing notes receivable
 
Level 2
 
$
15,510,956

 
$
15,510,956

 
$

 
$

Financial Liabilities:
 

 

 

 

Long-term debt
 
Level 2
 
$
67,942,000

 
$
67,942,000

 
$
70,000,000

 
$
70,000,000

Line of credit
 
Level 1
 
$

 
$

 
$
81,935

 
$
81,935