Quarterly report pursuant to Section 13 or 15(d)

Fair Value of Other Securities

v2.4.1.9
Fair Value of Other Securities
3 Months Ended
Mar. 31, 2015
Fair Value Disclosures [Abstract]  
FAIR VALUE OF OTHER SECURITIES
FAIR VALUE OF OTHER SECURITIES
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The following tables provide the fair value measurements of applicable Company assets and liabilities by level within the fair value hierarchy as of March 31, 2015, and December 31, 2014. These assets and liabilities are measured on a recurring basis.
March 31, 2015
 
 
March 31, 2015
 
Fair Value
 
 
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Other equity securities
 
$
10,363,438

 
$

 
$

 
$
10,363,438

Total Assets
 
$
10,363,438

 
$

 
$

 
$
10,363,438

December 31, 2014
 
 
December 31, 2014
 
Fair Value
 
 
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Other equity securities
 
9,572,181

 

 

 
9,572,181

Total Assets
 
$
9,572,181

 
$

 
$

 
$
9,572,181

The changes for all Level 3 securities measured at fair value on a recurring basis using significant unobservable inputs for the three months ended March 31, 2015 and 2014, are as follows:
Level 3 Rollforward
For The Three Months Ended March 31, 2015
 
Fair Value Beginning Balance
 
Acquisitions
 
Disposals
 
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
 
$
9,217,181

 
$

 

 
$
679,798

 
$
341,459

 
$
10,238,438

 
$
679,798

Warrant investment
 
355,000

 

 

 
(230,000
)
 

 
125,000

 
(230,000
)
Total
 
$
9,572,181

 
$

 
$

 
$
449,798

 
$
341,459

 
$
10,363,438

 
$
449,798

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For The Three Months Ended March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other equity securities
 
$
23,304,321

 
$

 
$

 
$
1,294,182

 
$
(491,260
)
 
$
24,107,243

 
$
1,294,182

Total
 
$
23,304,321

 
$

 
$

 
$
1,294,182

 
$
(491,260
)
 
$
24,107,243

 
$
1,294,182


(1) Located in Net realized and unrealized gain on other equity securities in the Consolidated Statements of Income
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 months ended March 31, 2015, and March 31, 2014.
In accordance with ASC 820, the Company fair values their derivative financial instruments. Please refer to Note 15, Interest Rate Hedge Swaps, for more information.
Valuation Techniques and Unobservable Inputs
The Company’s other equity securities, which represent securities issued by private companies, are classified as Level 3 assets. 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 three months ended March 31, 2015, the Company’s Warrant Investment was valued using a binomial option pricing model. The key assumptions used in the binomial model are the fair value of equity of the underlying business; the Warrant's strike price; the expected volatility of equity; the time to the Warrant's expiry; the risk-free rate, and the expected dividend yields. Due to the inherent uncertainty of determining the fair value of the Warrant Investment, which does not have a readily available market, the assumptions used the binomial model to value the Company’s Warrant Investment were based on Level 2 and Level 3 inputs. These inputs, including the expected volatility and the fair value of equity of the underlying business, may vary significantly from period-to-period, and accordingly, the fair value as of March 31, 2015 may differ materially from the amount that the Company may ultimately realize.
At March 31, 2014, 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.
Quantitative Table for Valuation Techniques Used as of March 31, 2014
The following table summarizes the significant unobservable inputs that the Company used to value its portfolio investments categorized as Level 3 as of March 31, 2014:
Significant Unobservable Inputs Used To Value Portfolio Investments
March 31, 2014
 
 
 
 
 
 
Unobservable Inputs
 
Range
 
Weighted Average
Assets at Fair Value
 
Fair Value
 
Valuation Technique
 
 
Low
 
High
 
Other equity securities, at fair value
 
$
24,107,243

 
Public company historical EBITDA analysis
 
Historical EBITDA Valuation Multiples
 
9.6x
 
10.6x
 
10.1x
 
 
 
 
Public company projected EBITDA analysis
 
Projected EBITDA Valuation Multiples
 
8.3x
 
9.3x
 
8.8x
 
 
 
 
M&A company analysis
 
EV/LTM 2012 EBITDA
 
8.3x
 
9.3x
 
8.8x
 
 
 
 
Discounted cash flow
 
Weighted Average Cost of Capital
 
9.5x
 
14.0%
 
11.8%

As of March 31, 2015, the Company’s investment in Lightfoot is its only remaining private company investment. Lightfoot in turn owns a combination of public and private investments. Therefore Lightfoot was valued using a combination of the following valuation techniques: (i) public share price of private companies' investments discounted for a lack of marketability, with the discount estimated at 16.6 percent to 21.3 percent and (ii) discounted cash flow analysis using an estimated discount rate of 12.0 percent to 14.0 percent. 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 investment may fluctuate from period to period. Additionally, the fair value of the Company’s investment may differ from the values that would have been used had a ready market existed for such investment and may differ materially from the values that the Company may ultimately realize.
As of both March 31, 2015 and March 31, 2014, the Company held a 6.7 percent equity interest in Lightfoot. As of March 31, 2014, the Company held a 11.1 percent equity interest in Vantacore.
Certain condensed combined financial information of the unconsolidated affiliate, Lightfoot, is presented in the following tables (in thousands).
 
 
March 31, 2015
 
December 31, 2014
Assets
 
 
 
 
Current assets
 
$
21,854

 
$
25,783

Noncurrent assets
 
382,670

 
382,957

Total Assets
 
$
404,524

 
$
408,740

Liabilities
 
 
 
 
Current liabilities
 
$
14,099

 
$
14,318

Noncurrent liabilities
 
114,008

 
113,810

Total Liabilities
 
$
128,107

 
$
128,128

 
 
 
 
 
Partner's equity
 
276,417

 
280,612

Total liabilities and partner's equity
 
$
404,524

 
$
408,740


 
 
For The Three Months Ended
 
 
March 31, 2015
 
March 31, 2014
Revenues
 
$
13,557

 
$
13,213

Operating expenses
 
15,128

 
13,584

Other income (expenses)
 
3,834

 
3,770

Net income
 
$
2,263

 
$
3,399

 
 
 
 
 
EBITDA
 
$
8,034

 
$
7,500



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.
Escrow Receivable — The escrow receivable due to the Company as of March 31, 2015, which relates to the sale of VantaCore, is anticipated to be released upon satisfaction of certain post-closing obligations and the expiration of certain time periods (50 percent to be released 12 months after the October 1, 2014 closing date (i.e. October 1, 2015), and the other 50 percent released 18 months after close (i.e. April 1, 2016)). The fair value of the escrow receivable is reflected net of a discount for the potential that the full amount due to the Company would not be realized.
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 expected market 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
 
March 31, 2015
 
December 31, 2014
 
 
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Financial Assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
Level 1
 
$
26,634,586

 
$
26,634,586

 
$
7,578,164

 
$
7,578,164

Escrow receivable
 
Level 2
 
$
2,438,500

 
$
2,438,500

 
$
2,438,500

 
$
2,438,500

Financing notes receivable
 
Level 2
 
$
20,881,295

 
$
20,881,295

 
$
20,687,962

 
$
20,687,962

Financial Liabilities:
 
 
 
 
 
 
 
 
Long-term debt
 
Level 2
 
$
66,178,000

 
$
66,178,000

 
$
67,060,000

 
$
67,060,000

Line of credit
 
Level 2
 
$
565,583

 
$
565,583

 
$
32,141,277

 
$
32,141,277