The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
1. Organization and Description of Business
Fortress Biotech, Inc. (“Fortress”
or the “Company”) is a biopharmaceutical company dedicated to acquiring, developing and commercializing novel pharmaceutical
and biotechnology products. Fortress develops and commercializes products both within Fortress and through certain of its subsidiary
companies, also referred to herein as the “Fortress Companies.” Additionally, the Company has a controlling interest
in National Holdings Corporation, a diversified independent brokerage company (together with its subsidiaries, herein referred
to as “NHLD” or “National”). In addition to its internal development programs, the Company leverages its
biopharmaceutical business expertise and drug development capabilities and provides funding and management services to help the
Fortress Companies achieve their goals. The Company and the Fortress Companies may seek licensings, acquisitions, partnerships,
joint ventures and/or public and private financings (including financings facilitated by NHLD) to accelerate and provide additional
funding to support their research and development programs.
As of March 31, 2017, in addition to NHLD,
the Company has several consolidated Fortress Companies, some of which contain product licenses, including Avenue Therapeutics,
Inc. (“
Avenue
”), Cellvation, Inc. (“
Cellvation
”), Journey Medical Corporation (“
Journey
”
or “
JMC
”), Coronado SO Co. (“
Coronado SO
”), Checkpoint Therapeutics, Inc. (“
Checkpoint
”),
Mustang Bio, Inc. (“
Mustang
”), Helocyte, Inc. (“
Helocyte
”), Escala Therapeutics, Inc. (“
Escala
”),
CB Securities Corporation (which holds investments classified as cash and cash equivalents), Caelum Biosciences, Inc. (“
Caelum
”)
and Cyprium Therapeutics, Inc. (“
Cyprium
”). In addition to the foregoing companies, Fortress also maintains
ownership positions in subsidiaries with minimal activity, including Innmune Limited.
National
On September 9, 2016, the Company, purchased
approximately 56.6% of NHLD’s common stock, par value $0.02 per share, at the purchase price of $3.25 per share in cash for
a total purchase price of approximately $22.9 million.
2. Summary of Significant Accounting
Policies
Basis of Presentation and Principles
of Consolidation
The accompanying unaudited interim condensed
consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United
States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.
In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments, which
include only normal recurring adjustments necessary for the fair statement of the balances and results for the periods presented.
Certain information and footnote disclosures normally included in the Company’s annual financial statements prepared in accordance
with GAAP have been condensed or omitted. These condensed consolidated financial statement results are not necessarily indicative
of results to be expected for the full fiscal year or any future period.
The unaudited condensed consolidated financial
statements and related disclosures have been prepared with the presumption that users of the unaudited condensed consolidated financial
statements have read or have access to the audited consolidated financial statements for the preceding fiscal year for each of
the Company, Avenue, Checkpoint, Mustang and National. Accordingly, these unaudited condensed consolidated financial statements
should be read in conjunction with the Company’s Form 10-K, which was filed with the United States Securities and Exchange
Commission (“SEC”) on March 16, 2017, from which the Company derived the balance sheet data at December 31, 2016,
as well as National’s Form 10-Q, filed with the SEC on February 14, 2017, Checkpoint’s Forms 10-K and 10-K/A, filed
with the SEC on March 17, 2017 and March 21, 2017, respectively, Mustang’s Form 10-K, filed with the SEC on March 31, 2017,
and Avenue’s Form 10-12G/A, filed with the SEC on March 27, 2017.
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The Company’s unaudited condensed
consolidated financial statements include the accounts of the Company and its subsidiaries: NHLD, Innmune Limited, Coronado SO,
Cyprium, Escala, JMC, CB Securities Corporation, Avenue, Checkpoint, Mustang, Helocyte, Cellvation and Caelum. All intercompany
balances and transactions have been eliminated.
The preparation of the Company’s
unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
unaudited condensed consolidated financial statements and the reported amounts of expenses during the reporting period.
Use of Estimates
The Company’s unaudited condensed
consolidated financial statements include certain amounts that are based on management’s best estimates and judgments. The
Company’s significant estimates include, but are not limited to, useful lives assigned to long-lived and intangible assets,
fair value measurements, stock-based compensation, common stock issued to acquire licenses, investments, accrued expenses, derivative
warrant liabilities, provisions for income taxes and contingencies. Due to the uncertainty inherent in such estimates, actual results
may differ from these estimates.
Significant Accounting Policies
There have been no material changes to
the Company’s significant accounting policies previously disclosed in the Company’s Form 10-K filed with the SEC on
March 16, 2017.
Recently Adopted Accounting Pronouncements
In March 2016, the Financial Accounting
Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09,
Compensation-Stock Compensation
(Topic 718): Improvements to Employee Share-Based Payment Accounting
. Under ASU 2016-09, companies will no longer record excess
tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess
tax benefits and tax deficiencies as income tax expense or benefit in the income statement and the APIC pools will be eliminated.
In addition, ASU 2016-09 eliminates the requirement that excess tax benefits be realized before companies can recognize them.
ASU 2016-09 also requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather
than as a financing activity. Furthermore, ASU 2016-09 will increase the amount an employer can withhold to cover income taxes
on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory
income tax withholding obligation. An employer with a statutory income tax withholding obligation will now be allowed to withhold
shares with a fair value up to the amount of taxes owed using the maximum statutory tax rate in the employee’s applicable
jurisdiction(s). ASU 2016-09 requires companies to classify the cash paid to a tax authority when shares are withheld to satisfy
their statutory income tax withholding obligation as a financing activity on the statement of cash flows. Under current GAAP,
it was not specified how these cash flows should be classified. In addition, companies will now have to elect whether to account
for forfeitures on share-based payments by (1) recognizing forfeitures of awards as they occur or (2) estimating the number of
awards expected to be forfeited and adjusting the estimate when it is likely to change, as is currently required. The Company
adopted ASU 2016-09 on January 1, 2017. The adoption did not have a material impact on its condensed consolidated financial statements
and related disclosures.
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment
. ASU 2017-04 removes Step
2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the
amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.
This standard will be effective for the Company beginning in the first quarter of fiscal year 2021 and is required to be applied
prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January
1, 2017. The Company adopted ASU 2017-04 on January 1, 2017. The adoption did not have a material impact on the Company’s
condensed consolidated financial statements and related disclosures.
Recent Accounting Pronouncements
In May 2014, the FASB issued
ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which requires entities to recognize revenue in a
way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration
the entities expect to receive in exchange for those goods or services. The new guidance also requires additional
disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts,
including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a
contract. The FASB subsequently issued ASU No. 2016-10,
Revenue from Contracts with Customers (Topic 606):
Identifying
Performance Obligations and Licensing
to address issues arising from implementation of the new revenue
recognition standard. ASU 2014-09 and ASU 2016-10 are effective for interim and annual periods beginning January 1,
2018, and may be adopted earlier, but not before January 1, 2017. The revenue standards are required to be adopted by taking
either a full retrospective or a modified retrospective approach. The Company is currently evaluating the impact, if any,
that ASU 2014-09 and ASU 2016-10 will have on its condensed consolidated financial statements and determining the transition
method, including the period of adoption that it will apply.
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
In January 2016, the FASB issued ASU
2016-01,
Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and
Liabilities
. ASU No. 2016-01 requires several targeted changes including that equity investments (except those accounted
for under the equity method of accounting, or those that result in consolidation of the investee) be measured at fair value
with changes in fair value recognized in net income. The new guidance also changes certain disclosure requirements and other
aspects of current U.S. GAAP. Amendments are to be applied as a cumulative-effect adjustment to the balance sheet as of
the beginning of the fiscal year of adoption. ASU 2016-01 is effective for fiscal years, and interim periods within those
years, beginning after December 15, 2017. Early adoption is not permitted with the exception of certain targeted
provisions. The Company is currently evaluating the impact, if any, of adoption of ASU 2016-01 on its condensed consolidated
financial statements and related disclosures.
In February 2016, the FASB issued
ASU 2016-02,
Leases (Topic 842).
ASU 2016-02 requires an entity to recognize right-of-use assets and lease liabilities
on its balance sheet and disclose key information about leasing arrangements. Lessees and lessors are required to disclose
qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess
the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently
evaluating the impact, if any, of adoption of ASU 2016-02 on its condensed consolidated financial statements and related
disclosures.
In June 2016, the FASB issued ASU
2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
. ASU
2016-13 requires that expected credit losses relating to financial assets are measured on an amortized cost basis and
available-for-sale debt securities be recorded through an allowance for credit losses. ASU 2016-13 limits the amount of
credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair
value and also requires the reversal of previously recognized credit losses if fair value increases. The new standard will be
effective on January 1, 2020 and may be adopted earlier. The Company is currently evaluating the impact, if any, that ASU
2016-13 will have on its condensed consolidated financial statements and related disclosures.
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
In August 2016, the FASB issued ASU 2016-15,
Statement
of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,
which addresses eight specific cash
flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are
presented and classified in the statement of cash flows. The standard is effective for fiscal years beginning after December 15,
2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period.
The Company is currently evaluating the impact, if any, of this new pronouncement on its condensed consolidated statements of cash flows
and related disclosures.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
. The new guidance requires that the reconciliation of the beginning-of-period
and end-of-period amounts shown in the statement of cash flows include restricted cash and restricted cash equivalents. If restricted
cash is presented separately from cash and cash equivalents on the balance sheet, companies will be required to reconcile the amounts
presented on the statement of cash flows to the amounts on the balance sheet. Companies will also need to disclose information
about the nature of the restrictions. The guidance is effective for fiscal years beginning after December 15, 2017, and interim
periods within those fiscal years. The Company is currently evaluating the impact, if any, of this new pronouncement on its condensed consolidated
statements of cash flows and related disclosures.
In January 2017, the FASB issued an ASU
2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
. The amendments in this update clarify
the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should
be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting
including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for fiscal periods beginning after December
15, 2017, including interim periods within those periods. The Company adopted ASU 2017-01 on January 1, 2017. The adoption did
not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.
3. National Holdings Corporation
On September 9, 2016, the Company, purchased
approximately 56.6% of National's common stock, par value $0.02 per share at the purchase price of $3.25 per share in cash.
On April 27, 2016, the Company entered
into an Agreement and Plan of Merger with National and a wholly owned subsidiary of the Company, providing for the acquisition
of National (the “Merger Agreement”). Pursuant to the Merger Agreement, and upon the terms and subject to the
conditions described therein, the Company agreed to cause its wholly owned subsidiary to commence a tender offer for all the issued
and outstanding shares of National’s common stock, par value $0.02 per share, at a purchase price of $3.25 per share (the
“Offer”). Upon expiration of the Offer on September 9, 2016 (and the subsequent settlement period), a total of approximately
7 million shares were validly tendered, representing approximately 56.6% of the outstanding shares of National on a fully-diluted
basis. The aggregate consideration paid by Fortress in the Offer was approximately $22.9 million, without giving effect to related
transaction fees and expenses. Fortress funded the payment with cash on hand.
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The following table summarizes the preliminary
fair value of assets acquired and liabilities assumed at the date of the acquisition:
($ in thousands)
|
|
|
|
Assets
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
27,498
|
|
Accounts receivable
|
|
|
4,889
|
|
Cash deposits with clearing organizations
|
|
|
1,030
|
|
Receivable from brokers, dealers and clearing agencies
|
|
|
1,607
|
|
Securities owned, at fair value
|
|
|
2,178
|
|
Prepaid expenses and other current assets
|
|
|
1,985
|
|
Property and equipment
|
|
|
1,132
|
|
Restricted cash
|
|
|
353
|
|
Intangible assets - trademark
|
|
|
3,000
|
|
Intangible assets - customer list
|
|
|
13,500
|
|
Goodwill
|
|
|
18,645
|
|
Total assets
|
|
|
75,817
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Accrued compensation payable
|
|
$
|
14,029
|
|
Accounts payable and accrued expenses
|
|
|
6,079
|
|
Deferred clearing and marketing credits
|
|
|
1,007
|
|
Warrants issuable
|
|
|
13,406
|
|
Other current liabilities
|
|
|
707
|
|
Total liabilities assumed
|
|
|
35,228
|
|
Non-controlling interests
|
|
|
17,717
|
|
Net assets acquired
|
|
$
|
22,872
|
|
|
|
|
|
|
Cash and cash equivalents from National
|
|
$
|
27,498
|
|
Cash to NHLD Shareholders (Tender Offer)
|
|
|
22,872
|
|
Net cash acquired in acquisition of National
|
|
$
|
4,626
|
|
The preliminary estimated fair values of
the assets acquired and liabilities assumed will be finalized as further information is received regarding these items and analysis
of this information is completed. The Company preliminarily recognized $18.6 million of goodwill and does not expect goodwill to
be deductible for tax purposes.
Intangible assets consist of
trademark and customer lists acquired in the offer under the purchase method of accounting and are recorded at preliminary
fair value net of accumulated amortization since the purchase date. Amortization is calculated using the straight-line and
accelerated methods over the following estimated useful lives:
|
|
Useful life
|
Trademark
|
|
10 years
|
Customer lists
|
|
10 years
|
The gross carrying amounts related to acquired
intangible assets as of March 31, 2017 are as follows ($ in thousands):
Intangible assets at December 31, 2016
|
|
$
|
15,991
|
|
Amortization expense
|
|
|
(408
|
)
|
Intangible assets at March 31, 2017
|
|
$
|
15,583
|
|
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The future amortization of these intangible assets is as follows
($ in thousands):
|
|
Total
|
|
Nine Months Ended December 31, 2017
|
|
$
|
1,242
|
|
Year Ended December 31, 2018
|
|
|
1,649
|
|
Year Ended December 31, 2019
|
|
|
1,649
|
|
Year Ended December 31, 2020
|
|
|
1,654
|
|
Year Ended December 31, 2021
|
|
|
1,649
|
|
Thereafter
|
|
|
7,740
|
|
Total
|
|
$
|
15,583
|
|
The Company reviews its finite-lived intangible
assets for impairment when events or changes in circumstances indicate that the carrying amount of a finite-lived intangible asset
may not be recoverable. Recoverability of a finite-lived intangible asset is measured by a comparison of its carrying amount to
the undiscounted future cash flows expected to be generated by the asset. If the asset is considered to be impaired, the impairment
recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. There were
no indicators of impairment during the period ended March 31, 2017.
4.
Broker-Dealers and Clearing Organizations, Other Receivables and Prepaid Expenses and Other Current Liabilities
At December 31, 2016, National’s receivables of $2.9 million
from broker-dealers and clearing organizations represent net amounts due for commissions and fees associated with National’s
retail brokerage business as well as asset based fee revenue associated with National’s asset management advisory business.
National also has other receivables at December 31, 2016 of $3.9 million, which principally represent trailing commissions,
tax and accounting fees and investment banking fees and are net of an allowance for uncollectable accounts of $0.6 million and
are included in prepaid expenses and other current assets in the Company's Condensed Consolidated Balance Sheet.
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
5. Forgivable Loans Receivable
From time to time, National's operating
subsidiaries may make loans, evidenced by promissory notes, primarily to newly recruited independent financial advisors as an incentive
for their affiliation. The notes receivable balance is comprised of unsecured non-interest-bearing and interest-bearing loans (interest
ranging up to 9%). These notes have various schedules for repayment or forgiveness based on production or retention requirements
being met and mature at various dates through 2021. Amortization of loan forgiveness was included in commissions, compensation
and fees in the statement of operations. In the event the advisor’s affiliation with the subsidiary terminates, the advisor
is required to repay the unamortized balance of the note.
National provides an allowance for doubtful
accounts on the notes based on historical collection experience and continually evaluates the receivables for collectability and
possible write-offs where a loss is deemed probable. As of December 31, 2016, no allowance for doubtful accounts was required.
There were no unamortized forgivable loans
outstanding at December 31, 2016 attributable to registered representatives who ended their affiliation with National’s subsidiaries
prior to the fulfillment of their obligation.
6. Property and Equipment
Fortress's property and equipment, exclusive
of National's property and equipment, consisted of the following ($ in thousands):
|
|
Estimated Useful
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
Lives (in years)
|
|
|
2017
|
|
|
2016
|
|
Computer equipment
|
|
|
3
|
|
|
$
|
489
|
|
|
$
|
440
|
|
Furniture and fixtures
|
|
|
5
|
|
|
|
887
|
|
|
|
821
|
|
Leasehold improvements
|
|
|
Various
|
|
|
|
5,401
|
|
|
|
5,396
|
|
Total property and equipment
|
|
|
|
|
|
|
6,777
|
|
|
|
6,657
|
|
Less: accumulated depreciation
|
|
|
|
|
|
|
(621
|
)
|
|
|
(445
|
)
|
Property and equipment, net
|
|
|
|
|
|
$
|
6,156
|
|
|
$
|
6,212
|
|
Fortress's depreciation expense for the
three months ended March 31, 2017 and 2016, was approximately $176,000 and $4,000, respectively, and was recorded in both research
and development expense and general and administrative expense in the Condensed Consolidated Statements of Operations.
National's property and equipment as of December 31, 2016
consisted of the following ($ in thousands):
|
|
December 31,
|
|
|
Estimated Useful
|
|
|
2016
|
|
|
Lives (in years)
|
Equipment
|
|
$
|
719
|
|
|
5
|
Furniture and fixtures
|
|
|
71
|
|
|
5
|
Leasehold improvements
|
|
|
298
|
|
|
Lesser of useful life or term of lease
|
Capital leases (primarily composed of computer equipment)
|
|
|
276
|
|
|
5
|
Total property and equipment
|
|
|
1,364
|
|
|
|
Less: accumulated depreciation
|
|
|
(134
|
)
|
|
|
Property and equipment, net
|
|
$
|
1,230
|
|
|
|
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
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
Headache
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 received 13,409,962
Class A Preferred Units in the third-party company, representing 83% of the total 16,091,954 Class A Preferred Units. The fair
value of this investment was $0.3 million as of March 31, 2017 and December 31, 2016. The value of the Company’s investment
was determined based on a valuation which takes into consideration, when applicable, cash paid, 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. Based on these inputs
at March 31, 2017, the fair value of the Company’s investment approximated cost.
Origo Acquisition Corporation (formerly
CB Pharma Acquisition Corporation)
On December 19, 2016,
Origo Acquisition Corporation (“Origo”) entered into a merger agreement (“Origo Merger Agreement”)
with Aina Le’a Inc. (“Aina Le’a”), a residential and commercial real estate developer
in Hawaii.
On February 17, 2017, Origo sent a letter, as supplemented on February
22, 2017 (the “Termination Letter”), to Aina Le’a terminating the Origo Merger
Agreement.
On March 10, 2017, Origo’s shareholders approved an amendment to Origo’s
organizational documents extending the date by which Origo must consummate a merger to September 12, 2017.
As of March 31, 2017, the Company valued
its investment in Origo, a publicly traded company, utilizing the following assumptions: probability of a successful business combination
of 18.4%, and no dividend rate, which yielded an instrument value upon business combination of $9.83 per ordinary share for the
private placement shares. The rights and warrants were valued utilizing a binomial-lattice model at a value of $0.18 for each right
and $0.11 for each warrant. Based upon the valuation, the Company recorded a decrease in fair-value of investment of $0.7 million.
At March 31, 2017, the fair value of the Company’s investment in Origo was, $0.5 million. The Company’s working capital
note with Origo of $0.3 million can be converted to stock upon a successful business combination.
Contingently Issuable Warrant
Pursuant to the Company’s promissory
note with NSC of March 2015, as amended in July 2015 (the “NSC Note”), if the Company transfers any proceeds from the
NSC Note to a Fortress Company, such Fortress Company will issue to NSC Biotech Venture Fund I LLC a new promissory note on identical
terms as the NSC Note and NSC Biotech Venture Fund I LLC will also receive a warrant to purchase a number of shares of such 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.
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Avenue classified the fair value of the
contingently issuable warrants granted in connection with the transfer from Fortress of $3.0 million to Avenue under the NSC Note
as a derivative liability as there was a potential that Avenue would not have a sufficient number of authorized common shares available
to settle these instruments.
The fair value of Avenue’s contingently
issuable warrants was determined by applying management’s estimate of the probability of issuance of the contingently issuable
warrants together with an option pricing model, with the following key assumptions:
|
|
March 31,
2017
|
|
Risk-free interest rate
|
|
|
2.40
|
%
|
Expected dividend yield
|
|
|
-
|
|
Expected term in years
|
|
|
8.59
|
|
Expected volatility
|
|
|
83
|
%
|
Probability of issuance of the warrant
|
|
|
50
|
%
|
($ in thousands)
|
|
Avenue’s
Contingently
Issuable
Warrants
|
|
Beginning balance at January 1, 2017
|
|
$
|
302
|
|
Change in fair value
|
|
|
(4
|
)
|
Ending balance at March 31, 2017
|
|
$
|
298
|
|
Avenue Warrant Liabilities
On December 30, 2016, Avenue held a closing
of the sale of convertible promissory notes. In the closing, WestPark Capital, Inc., the placement agent (“
WestPark
”),
received a warrant (the “
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 WestPark Warrant has a ten-year term and 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. 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 Avenue’s warrant liabilities that are categorized within Level 3 of the fair value
hierarchy as of March 31, 2017 is as follows:
|
|
March 31,
2017
|
|
Risk-free interest rate
|
|
|
2.39
|
%
|
Expected dividend yield
|
|
|
-
|
|
Expected term in years
|
|
|
9.76
|
|
Expected volatility
|
|
|
86
|
%
|
There was no change in fair value of Avenue’s
warrant liability for the three months ended March 31, 2017.
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 Helocyte’s warrant liabilities that are categorized
within Level 3 of the fair value hierarchy as of March 31, 2017 is as follows:
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
|
|
March
31,
2017
|
|
Risk-free interest rate
|
|
|
1.769% – 1.859
|
%
|
Expected dividend yield
|
|
|
-
|
%
|
Expected term in years
|
|
|
4.25 - 4.67
|
|
Expected volatility
|
|
|
70.0
|
%
|
Strike price
|
|
$
|
0.44
|
|
($ in thousands)
|
|
Fair Value of
Derivative
Warrant
Liability
|
|
Beginning balance at January 1, 2017
|
|
$
|
167
|
|
Change in fair value of derivative liabilities
|
|
|
(75
|
)
|
Ending balance at March 31, 2017
|
|
$
|
92
|
|
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 Helocyte’s convertible debt that is categorized within Level 3 of
the fair value hierarchy as of March 31, 2017 is as follows:
|
|
March 31,
2017
|
|
Risk-free interest rate
|
|
|
0.910% - 1.189
|
%
|
Expected dividend yield
|
|
|
-
|
%
|
Expected term in years
|
|
|
0.50 - 1.66
|
|
Expected volatility
|
|
|
61.7
|
%
|
($ in thousands)
|
|
Helocyte
Convertible
Note, at fair
value
|
|
Beginning balance at January 1, 2017
|
|
$
|
4,487
|
|
Change in fair value of convertible notes
|
|
|
93
|
|
Ending balance at March 31, 2017
|
|
$
|
4,580
|
|
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 Avenue’s convertible debt that is categorized within Level 3 of the
fair value hierarchy as of March 31, 2017 is as follows:
|
|
March 31,
2017
|
|
Risk-free interest rate
|
|
|
0.91% - 1.21
|
%
|
Expected dividend yield
|
|
|
-
|
%
|
Expected term in years
|
|
|
0.50 - 1.75
|
|
Expected volatility
|
|
|
61.7
|
%
|
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
($ in thousands)
|
|
Avenue
Convertible
Note, at fair
value
|
|
Beginning balance at January 1, 2017
|
|
$
|
200
|
|
Change in fair value of convertible notes
|
|
|
4
|
|
Ending balance at March 31, 2017
|
|
$
|
204
|
|
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
March 31, 2017 and December 31, 2016:
|
|
Fair Value Measurement as of March 31, 2017
|
|
($ in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments, at fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
746
|
|
|
$
|
746
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
746
|
|
|
$
|
746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingently Issuable Warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
298
|
|
|
$
|
298
|
|
Warrant liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
104
|
|
|
|
104
|
|
Helocyte Convertible Note, at fair value
|
|
|
-
|
|
|
|
-
|
|
|
|
4,580
|
|
|
|
4,580
|
|
Avenue Convertible Note, at fair value
|
|
|
-
|
|
|
|
-
|
|
|
|
204
|
|
|
|
204
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,186
|
|
|
$
|
5,186
|
|
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 December 31, 2016:
|
|
Fair Value Measurement as of December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities owned, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate stocks
|
|
$
|
172
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
172
|
|
Municipal bonds
|
|
|
930
|
|
|
|
-
|
|
|
|
-
|
|
|
|
930
|
|
Restricted stock
|
|
|
-
|
|
|
|
104
|
|
|
|
-
|
|
|
|
104
|
|
Total
|
|
$
|
1,102
|
|
|
$
|
104
|
|
|
$
|
-
|
|
|
$
|
1,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold, but not yet purchased at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate stocks
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1
|
|
Warrants issuable - National
|
|
|
|
|
|
|
|
|
|
|
10,096
|
|
|
|
10,096
|
|
Total
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
10,096
|
|
|
$
|
10,097
|
|
Warrants issuable - National
In accordance with
the Company’s Merger Agreement with National, since less than 80% of National's issued and outstanding shares of
common stock were tendered, National remains a publicly-traded company and National's stockholders post-tender offer will
receive from National a five-year warrant per held share to purchase an additional share of National's common stock at $3.25
as a dividend to all holders of National's common stock.
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
As National does not have the ability to
settle the warrants with unregistered shares and maintenance of an effective registration statement may be considered outside of
the Company’s control, net cash settlement of the warrants is assumed. The fair value of the 5.4 million National warrants
represents 43.4% of the warrants issued to non-Fortress shareholders. These are being classified as a liability in the condensed
consolidated statement of financial condition at March 31, 2017. Such valuation (using level 3 inputs) was determined by use
of the Black-Scholes option pricing model using the following assumptions:
|
|
December 31,
2016
|
|
Dividend yield
|
|
|
-
|
%
|
Expected volatility
|
|
|
98.23
|
%
|
Risk-free interest rate
|
|
|
1.93
|
%
|
Life (in years)
|
|
|
4.7
|
|
($ in thousands)
|
|
National’s
Warrants
|
|
Beginning balance at October 1, 2016
|
|
$
|
14,359
|
|
Change in fair value of derivative liability
|
|
|
(4,263
|
)
|
Ending balance at December 31, 2016
|
|
$
|
10,096
|
|
National listed the warrants on the Nasdaq
Capital Market under the symbol “NHLDW” in February 2017.
The table below provides a rollforward
of the changes in fair value of Level 3 financial instruments for the three months ended March 31, 2017:
($ in thousands)
|
|
Investment in
Origo
|
|
|
Investment in
laser device
|
|
|
Helocyte
Convertible
Note, at fair
value
|
|
|
Avenue
Convertible
Note, at fair
value
|
|
|
Contingently
Issuable
Warrants
|
|
|
Warrant
liabilities
|
|
|
Total
|
|
Balance at December 31, 2016
|
|
$
|
1,164
|
|
|
$
|
250
|
|
|
$
|
4,487
|
|
|
$
|
200
|
|
|
$
|
14,661
|
|
|
$
|
179
|
|
|
$
|
20,941
|
|
Change in fair value of investments
|
|
|
(668
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(668
|
)
|
Change in fair value of convertible notes
|
|
|
-
|
|
|
|
-
|
|
|
|
93
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
97
|
|
Change in fair value of derivative liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,267
|
)
|
|
|
(75
|
)
|
|
|
(4,342
|
)
|
Balance at March 31, 2017
|
|
$
|
496
|
|
|
$
|
250
|
|
|
$
|
4,580
|
|
|
$
|
204
|
|
|
$
|
10,394
|
|
|
$
|
104
|
|
|
$
|
16,028
|
|
For the three months ended March 31, 2017, no transfers occurred between Level 1, Level 2 and Level 3 instruments.
8. Licenses Acquired
In accordance with ASC 730-10-25-1,
Research and Development
, costs incurred in obtaining technology licenses are charged to research and development expense if
the technology licensed has not reached technological feasibility and has no alternative future use. The licenses purchased by
Mustang, Checkpoint, Helocyte, Caelum and Cyprium require substantial completion of research and development, regulatory and marketing
approval efforts in order to reach technological feasibility. As such, for the three months ended March 31, 2017, the purchase
price of licenses, totaling approximately $1.3 million, was classified as research and development-licenses acquired in the Condensed
Consolidated Statements of Operations.
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
|
|
For the Three Months Ended March 31,
|
|
($ in thousands)
|
|
2017
|
|
|
2016
|
|
Fortress Companies:
|
|
|
|
|
|
|
|
|
Checkpoint
|
|
$
|
400
|
|
|
$
|
-
|
|
Helocyte
|
|
|
-
|
|
|
|
83
|
|
Mustang
|
|
|
575
|
|
|
|
-
|
|
Caelum
|
|
|
219
|
|
|
|
-
|
|
Cyprium
|
|
|
100
|
|
|
|
-
|
|
Total
|
|
$
|
1,294
|
|
|
$
|
83
|
|
Checkpoint Therapeutics, Inc.
Jubilant Biosys Limited
In May 2016, Checkpoint entered into a
license agreement with Jubilant Biosys Limited (“
Jubilant
”), whereby Checkpoint obtained an exclusive, worldwide
license (the “
Jubilant License
”) to Jubilant’s family of patents covering compounds that inhibit BRD4,
a member of the BET domain for cancer treatment, including CK-103. In March 2017, Checkpoint expensed a non-refundable milestone
payment of $0.4 million upon the successful completion of toxicology studies under the terms of the Jubilant License, which is
included in research and development-licenses acquired in the Condensed Consolidated Statements of Operations for the three months
ended March 31, 2017.
In connection with the
Jubilant License, Checkpoint entered into a sublicense agreement (the “Sublicense Agreement”) with TG
Therapeutics, Inc. (“TGTX”), a related party, to develop and commercialize the compounds licensed in the field
of hematological malignancies, with Checkpoint retaining the right to develop and commercialize these compounds in the field
of solid tumors. Michael Weiss, Chairman of the Board of Directors of Checkpoint and the Company’s Executive
Vice Chairman, Strategic Development, is also the Executive Chairman, President and Chief Executive Officer and a stockholder
of TGTX. For the three months ended March 31, 2017, Checkpoint recognized $0.5 million in revenue related to the
Sublicense Agreement, including a milestone payment of $0.2 million upon the successful completion of toxicology studies
during March 2017, which is included in revenue – related party in the Condensed Consolidated Statements of Operations.
There was no related revenue recognized during the same period of 2016.
Dana-Farber Cancer Institute
In connection with its license
agreement with Dana-Farber, Checkpoint entered into a collaboration agreement with TGTX, a related party, to develop and
commercialize the anti-PD-L1 and anti-GITR antibody research programs in the field of hematological malignancies, while
Checkpoint retains the right to develop and commercialize these antibodies in the field of solid tumors. Michael Weiss,
Chairman of the Board of Directors of Checkpoint and Fortress’s Executive Vice Chairman, Strategic Development, is also
the Executive Chairman, President and Chief Executive Officer and a stockholder of TGTX. For the three months ended March 31,
2017 and 2016, approximately $28,000 and $17,000, respectively, was recognized in revenue from the collaboration agreement
with TGTX in the Condensed Consolidated Statements of Operations.
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Mustang Bio, Inc.
License Agreement with the City of Hope
In March 2015, Mustang entered into an
exclusive license agreement with City of Hope (“COH”) to acquire intellectual property rights pertaining to CAR-T (the
“Original License”). On February 17, 2017, Mustang and COH amended and restated the Original License by entering
into three separate exclusive license agreements, one relating to CD123 (the “CD123 License”), one relating to IL-13
(the “IL-13 License”) and one relating to the spacer technology (the “Spacer License”). The total potential
consideration payable to COH by Mustang under the new license agreements, in equity or cash, did not, in the aggregate, change
materially from the Original License.
CD123 License
Pursuant to the CD123 License, Mustang
and COH acknowledge that an upfront fee was paid under the Original License. In addition, an annual maintenance fee will continue
to apply. COH is eligible to receive milestone payments totaling approximately $14.5 million upon and subject to the achievement
of certain milestones. Royalty payments in the mid-single digits are due on net sales of licensed products. Mustang is obligated
to pay COH a percentage of certain revenues received in connection with a sublicense in the mid-teens to mid-thirties, depending
on the timing of the sublicense in the development of any product. In addition, equity grants made under the Original License were
acknowledged, and the anti-dilution provisions of the Original License were carried forward.
IL-13 License
Pursuant to the IL-13 License, Mustang
and COH acknowledge that an upfront fee was paid under the Original License. In addition, an annual maintenance fee will continue
to apply. COH is eligible to receive milestone payments totaling approximately $14.5 million upon and subject to the achievement
of certain milestones. Royalty payments in the mid-single digits are due on net sales of licensed products. Mustang is obligated
to pay COH a percentage of certain revenues received in connection with a sublicense in the mid-teens to mid-thirties, depending
on the timing of the sublicense in the development of any product. In addition, equity grants made under the Original License were
acknowledged, and the anti-dilution provisions of the Original License were carried forward. During the three months ended March
31, 2017, Mustang recorded an expense of $0.3 million in connection with the achievement of certain milestones pursuant to the
IL-13 License.
Spacer License
Pursuant to the Spacer License, Mustang
and COH acknowledge that an upfront fee was paid under the Original License. In addition, an annual maintenance fee will continue
to apply. No royalties are due if the Spacer technology is used in conjunction with a CD123 CAR or an IL-13 CAR, and royalty payments
in the low single digits are due on net sales of licensed products if the Spacer technology is used in conjunction with other intellectual
property. Mustang is obligated to pay COH a percentage (in the mid-thirties) of certain revenues received in connection with a
sublicense. In addition, equity grants made under the Original License were acknowledged, and the anti-dilution provisions of the
Original License were carried forward.
IV/ICV Agreement
On February 17, 2017, Mustang entered into
an exclusive license agreement (the “IV/ICV Agreement”) with COH to acquire intellectual property rights in patent
applications related to the intraventricular and intracerebroventricular methods of delivering T cells that express CARs. Pursuant
to the IV/ICV Agreement, Mustang paid COH an upfront fee of $0.1 million in March 2017. COH is eligible to receive milestone payments
totaling approximately $0.1 million upon the achievement of a certain milestone as well as an annual maintenance fee. Royalty payments
in the low-single digits are due on net sales of licensed products and services.
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
License with University of California
On March 17, 2017, Mustang entered
into an exclusive license agreement with the Regents of the University of California (“UCLA License”) to acquire
intellectual property rights in patent applications related to the engineered anti-prostate stem cell antigen antibodies for
cancer targeting and detection. Pursuant to the UCLA Agreement, Mustang paid UCLA an upfront fee of $0.2 million on April 25,
2017. Annual maintenance fees also apply, additional payments are due upon achievement of certain development milestones,
and royalty payments in the mid-single digits are due on net sales of licensed products.
Caelum Biosciences, Inc.
License Agreement with Columbia University
In January 2017, Caelum entered into
an exclusive license agreement with Columbia University (“Columbia”) to secure worldwide license rights to
CAEL-101 (11-1F4), a chimeric fibril-reactive monoclonal antibody (mAb) being evaluated in a Phase 1a/1b study for the
treatment of amyloid light chain (“AL”) amyloidosis. This transaction was accounted for as an asset acquisition
pursuant to ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business,
as
the majority of the fair value of the assets acquired was concentrated in a group of similar assets, and the acquired assets
did not have outputs or employees
.
Caelum made an upfront payment of $0.2 million to Columbia upon execution of the
exclusive license and also granted Columbia 1,050,000 shares of Common Stock, representing 10% ownership of Caelum, as of
such date valued at $29,000 or $0.028 per share. Total consideration is included in research and development licenses
acquired on the Condensed Consolidated Statements of Operations. Under the terms of the agreement, Columbia is eligible
to receive additional milestone payments of up to $5.5 million upon the achievement of certain development milestones, in
addition to royalty payments for sales of the product. CAEL-101 is a novel antibody being developed for patients with AL
Amyloidosis, a rare systemic disorder caused by an abnormality of plasma cells in the bone marrow.
Cyprium Therapeutics, Inc.
License Agreement with
the
Eunice
Kennedy Shriver
National Institute of Child Health and Human Development
In March 2017, Cyprium and the
Eunice
Kennedy Shriver
National Institute of Child Health and Human Development (“
NICHD
”), part of the
National Institutes of Health (“
NIH
”), entered into a Cooperative Research and Development Agreement to
advance the clinical development of Phase 3 candidate CUTX-101 (copper histidinate injection) for the treatment of Menkes
disease. Cyprium and NICHD also entered into a worldwide, exclusive license agreement to develop and commercialize AAV-based
ATP7A gene therapy for use in combination with CUTX-101 for the treatment of Menkes disease and related copper transport
disorders. This transaction was accounted for as an asset acquisition pursuant to ASU 2017-01,
Business
Combinations (Topic 805): Clarifying the Definition of a Business,
as the majority of the fair value of the assets
acquired was concentrated in a group of similar assets, and the acquired assets did not have outputs or employees
.
Cyprium
made an upfront payment of $0.1 million to NICHD upon execution of the exclusive license, which has been included
in research and development-licenses acquired in the Condensed Consolidated Statements of Operations.
9. Sponsored Research Agreements
Checkpoint Therapeutics, Inc.
In connection with its license agreement
with NeuPharma, Inc. (“NeuPharma”), Checkpoint entered into a Sponsored Research Agreement with NeuPharma for certain
research and development activities. Effective January 11, 2016, TGTX, a related party, agreed to assume all costs associated with
this Sponsored Research Agreement and paid Checkpoint for all amounts previously paid by the Company. For the three months
ended March 31, 2017 and 2016, approximately $0.2 million and $0.3 million, respectively, was recognized in revenue in connection
with the Sponsored Research Agreement in the Condensed Consolidated Statements of Operations.
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Helocyte, Inc.
In March 2016, Helocyte entered into an Investigator-Initiated
Clinical Research Support Agreement, as amended, with the COH, to support a Phase 2 clinical study of its PepVax immunotherapy
for CMV control in allogeneic stem cell transplant recipients (“
PepVax Research Agreement
”). The Phase 2 study
is additionally supported by grants from the National Institutes of Health/National Cancer Institute (“
NCI
”).
In February 2016, Helocyte entered into an Investigator-Initiated
Clinical Research Support Agreement, as amended, with the COH, to support a Phase 2 clinical study of its Triplex immunotherapy
for CMV control in allogeneic stem cell transplant recipients (“
Triplex Research Agreement
”).
For the three months ended March 31, 2017 and 2016, Helocyte
incurred expense of $0.5 million and $1.0 million, related to the Triplex Research Agreement and $0.2 million and $1.0 million
related to their PepVax Research Agreement, recorded as research and development expense in the Company’s Condensed Consolidated
Statements of Operations.
Mustang Bio, Inc.
In connection with Mustang’s
license with COH for the development of CAR-T, Mustang entered into a Sponsored Research Agreement in which Mustang will fund
continued research in the amount of $2.0 million per year, payable in four equal annual installments, until 2020. For the
three months ended March 31, 2017 and 2016, Mustang incurred expense of $0.5 million and $0.5 million, respectively, recorded
as research and development expense in the Company’s Condensed Consolidated Statements of Operations.
On February 17, 2017, Mustang entered into
a Clinical Research Support Agreement for CD123. Pursuant to the terms of this agreement Mustang made an upfront payment of $19,450
and will contribute an additional $0.1 million related to patient costs in connection with the on-going investigator initiated
study. Further, Mustang agreed to fund approximately $0.2 million over three years pertaining to the clinical development of CD123.
For the three months ended March 31, 2017 Mustang recorded $19,450, in research and development expenses in the Company’s
Condensed Consolidated Statements of Operations.
Also on February 17, 2017, Mustang entered
into a Clinical Research Support Agreement for IL-13. Pursuant to the terms of this agreement Mustang made an upfront payment of
$9,238 and will contribute an additional $0.1 million related to patient costs in connection with the on-going investigator initiated
study. Further, Mustang agreed to fund approximately $0.2 million over three years pertaining to the clinical development of IL-13.
For the three months ended March 31, 2017, Mustang recorded $9,238 in research and development expenses in the Company’s
Condensed Consolidated Statements of Operations.
10. Intangibles, net
Journey Medical Corporation
Pursuant to the terms of Journey’s
license agreements for its branded products, Journey made upfront payments totaling $1.6 million. With the commencement of sales
of these products, Journey began amortization of these costs over their respective three year estimated useful life. For the three
months ended March 31, 2017 and 2016, Journey recognized expense of approximately $0.1 million and nil, respectively, which was
recorded in costs of goods sold in the Company’s Condensed Consolidated Statements of Operations.
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
11. Debt and Interest
Debt
Total debt consists of the following as
of March 31, 2017 and December 31, 2016:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
|
|
($ in thousands)
|
|
2017
|
|
|
2016
|
|
|
Interest rate
|
|
|
Maturity
|
IDB Note
|
|
$
|
14,929
|
|
|
$
|
14,929
|
|
|
|
2.25
|
%
|
|
Feb - 2018
|
NSC Note
|
|
|
3,608
|
|
|
|
3,608
|
|
|
|
8.00
|
%
|
|
Sep - 2018
|
2017 Subordinated Note Financing
|
|
|
3,254
|
|
|
|
-
|
|
|
|
8.00
|
%
|
|
March - 2020
|
Opus Credit Facility
|
|
|
9,000
|
|
|
|
7,000
|
|
|
|
12.00
|
%
|
|
Sep - 2018
|
Helocyte Convertible Note, at fair value
|
|
|
1,054
|
|
|
|
1,031
|
|
|
|
5.00% - 8.00
|
%
|
|
December 2017
|
Helocyte Convertible Note, at fair value
|
|
|
2,093
|
|
|
|
2,051
|
|
|
|
5.00%
- 8.00
|
%
|
|
March - 2018
|
Helocyte Convertible Note, at fair value
|
|
|
1,011
|
|
|
|
991
|
|
|
|
5.00%
- 8.00
|
%
|
|
April - 2018
|
Helocyte Convertible Note, at fair value
|
|
|
422
|
|
|
|
414
|
|
|
|
5.00%
- 8.00
|
%
|
|
May - 2018
|
Avenue Convertible Note, at fair value
|
|
|
204
|
|
|
|
200
|
|
|
|
5.00% - 8.00
|
%
|
|
June - 2018
|
Total notes payable
|
|
|
35,575
|
|
|
|
30,224
|
|
|
|
|
|
|
|
Less: Discount on notes payable
|
|
|
2,549
|
|
|
|
2,009
|
|
|
|
|
|
|
|
Total notes payable, net
|
|
$
|
33,026
|
|
|
$
|
28,215
|
|
|
|
|
|
|
|
IDB Note
On February 13, 2014, the Company executed
a secured promissory note in favor of Israel Discount Bank of New York (“IDB”) in the amount of $15.0 million (the
“IDB Note”). As of March 31, 2017, the Company had $14.9 million outstanding under the IDB Note, secured by a $15.0
million pledge account.
2017 Subordinated Note Financing
On March 31, 2017, the Company entered
into Note Purchase Agreements (the “
Purchase Agreements
”) with NAM Biotech Fund II, LLC - Series I (“
NAM
Biotech Fund
”) and NAM Special Situations Fund I QP, LLC – FBIO Series I (“
NAM Special Situations Fund
”),
both of which are accredited investors, and sold subordinated promissory notes (the “
Notes
”) of the Company
(the “
2017 Subordinated Note Financing
”) in the aggregate principal amount of $3.25 million. The Notes bear
interest at the rate of 8% per annum; additionally, the Notes accrue paid-in-kind interest at the rate of 7% per annum, which
will be paid quarterly in shares of the Company’s common stock and/or shares of common stock of one of the Company’s
subsidiaries that are publicly traded, in accordance with the terms of the Notes. Each Note is due on the third anniversary of
its issuance, provided that the Company may extend the maturity date for two one-year periods in its sole discretion. The 2017
Subordinated Note Financing is for a minimum of $3.0 million and a maximum of $40.0 million (which the Company may, in its sole
discretion, increase to $50.0 million).
National Securities Corporation (“
NSC
”),
a subsidiary of National and a related party, (see Note 17), pursuant to a Placement Agency Agreement entered into between
the Company, NAM Biotech Fund and NSC (the “
NAM Placement Agency Agreement
”) and a Placement Agency Agreement entered into between the Company, NAM Special Situations Fund and NSC (together with the NAM Placement Agency Agreement,
the “
Placement Agency Agreements
”) acts as placement agent in the 2017 Subordinated Note Financing. Pursuant
to the terms of the Placement Agency Agreements, NSC receives (in addition to reimbursement of certain expenses) an aggregate cash
fee equal to 10% of the aggregate sales price of the Notes sold in the 2017 Subordinated Note Financing to NAM Biotech Fund and
NAM Special Situations Fund. The Placement Agent also receives warrants equal to 10% of the aggregate principal amount of the Notes
sold in the 2017 Subordinated Note Financing divided by the closing share price of the Company’s common stock on the date
of closing (the “
Placement Agent Warrants
”). The Placement Agent Warrants are exercisable immediately at such
closing share price for a period of five years. The Placement Agent will have a right of first offer for a period of 12 months
for any proposed issuance of the Company’s capital stock in a private financing, subject to certain exceptions, and will
also have the right to participate as an investor in subsequent financings.
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
In connection with the initial
closing of the 2017 Subordinated Note Financing, NSC received a cash fee of $325,400 and a Placement Agent Warrant to
purchase 87,946 shares of the Company’s common stock. The Company valued the Warrant at $0.2 million, which was
recorded as debt discount, in the Condensed Consolidated Balance Sheets as of March 31, 2017.
Opus Credit Facility
As of March 31, 2017, the Company had $9.0
million outstanding under the Opus Credit Facility (see Note 17), net of a debt discount related to the allocated value of the
warrants associated with the Opus Credit Facility of $1.8 million.
Interest Expense
The following table shows the details of
interest expense for all debt arrangements during the periods presented. Interest expense includes contractual interest and amortization
of the debt discount and amortization of fees represents fees associated with loan transaction costs, amortized over the life of
the loan:
|
|
For the Three Months Ended March 31,
|
|
($ in thousands)
|
|
2017
|
|
|
2016
|
|
IDB Note
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
82
|
|
|
$
|
80
|
|
Amortization of fees
|
|
|
-
|
|
|
|
1
|
|
Total IDB Note
|
|
|
82
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
NSC Debt
|
|
|
|
|
|
|
|
|
Interest
|
|
|
71
|
|
|
|
167
|
|
Amortization of fees
|
|
|
38
|
|
|
|
368
|
|
Total NSC Debt
|
|
|
109
|
|
|
|
535
|
|
|
|
|
|
|
|
|
|
|
Opus Credit Facility
|
|
|
|
|
|
|
|
|
Interest
|
|
|
232
|
|
|
|
-
|
|
Amortization of fees
|
|
|
208
|
|
|
|
-
|
|
Total Opus Note
|
|
|
440
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
LOC Fees
|
|
|
|
|
|
|
|
|
Interest
|
|
|
8
|
|
|
|
4
|
|
Total LOC
|
|
|
8
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Helocyte Convertible Note
|
|
|
|
|
|
|
|
|
Interest
|
|
|
54
|
|
|
|
-
|
|
Financing fee
|
|
|
1
|
|
|
|
-
|
|
Total Helocyte Convertible Note
|
|
|
55
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Avenue Convertible Note
|
|
|
|
|
|
|
|
|
Financing fee
|
|
|
3
|
|
|
|
-
|
|
Total Helocyte Convertible Note
|
|
|
3
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
D&O Insurance
|
|
|
|
|
|
|
|
|
Interest
|
|
|
1
|
|
|
|
-
|
|
Total D&O Insurance
|
|
|
1
|
|
|
|
-
|
|
Total Interest Expense and Financing Fee
|
|
$
|
698
|
|
|
$
|
620
|
|
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
12. Accrued Expenses and Other Long-Term Liabilities
Accrued expenses
and other long-term liabilities, excluding National, consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
($ in thousands)
|
|
2017
|
|
|
2016
|
|
Accrued expenses:
|
|
|
|
|
|
|
|
|
Professional fees
|
|
$
|
1,450
|
|
|
$
|
1,253
|
|
Salaries, bonuses and related benefits
|
|
|
3,532
|
|
|
|
2,846
|
|
Accrued Severance
|
|
|
-
|
|
|
|
53
|
|
Ovamed manufacturing rights – short term component
|
|
|
900
|
|
|
|
900
|
|
Research and development
|
|
|
680
|
|
|
|
394
|
|
Dr. Falk Pharma milestone
|
|
|
2,684
|
|
|
|
2,634
|
|
Other
|
|
|
1,874
|
|
|
|
2,002
|
|
Total accrued expenses
|
|
$
|
11,120
|
|
|
$
|
10,082
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities:
|
|
|
|
|
|
|
|
|
Deferred rent and long-term lease abandonment charge
|
|
|
5,020
|
|
|
|
5,014
|
|
Total other long-term liabilities
|
|
$
|
5,020
|
|
|
$
|
5,014
|
|
National's accounts payable and other
accrued expenses as of December 31, 2016, consisted of the following:
|
|
December 31,
|
|
|
|
2016
|
|
Legal
|
|
$
|
752
|
|
Audit
|
|
|
263
|
|
Telecommunications
|
|
|
178
|
|
Data Services
|
|
|
235
|
|
Regulatory
|
|
|
623
|
|
Settlements
|
|
|
421
|
|
Deferred rent
|
|
|
123
|
|
Contingent consideration payable
|
|
|
623
|
|
Other
|
|
|
1,995
|
|
Total
|
|
$
|
5,213
|
|
13. Non-Controlling Interests
Non-controlling interests in consolidated
entities are as follows:
|
|
As
of March 31, 2017
|
|
($ in
thousands)
|
|
Avenue
|
|
|
Coronado
SO
|
|
|
Mustang
|
|
|
Checkpoint
|
|
|
JMC
|
|
|
Helocyte
|
|
|
Cellvation
|
|
|
Caelum
|
|
|
National
Holdings
|
|
|
Total
|
|
NCI equity share
|
|
$
|
(842
|
)
|
|
$
|
(236
|
)
|
|
$
|
46,581
|
|
|
$
|
21,009
|
|
|
$
|
(543
|
)
|
|
$
|
(1,684
|
)
|
|
$
|
(153
|
)
|
|
$
|
(3
|
)
|
|
$
|
17,022
|
|
|
$
|
81,151
|
|
Net loss attributed to non-controlling
interests
|
|
|
(68
|
)
|
|
|
(4
|
)
|
|
|
(1,674
|
)
|
|
|
(2,734
|
)
|
|
|
(68
|
)
|
|
|
(323
|
)
|
|
|
(54
|
)
|
|
|
(145
|
)
|
|
|
2,490
|
|
|
|
(2,580
|
)
|
Non-controlling interests
in consolidated entities
|
|
$
|
(910
|
)
|
|
$
|
(240
|
)
|
|
$
|
44,907
|
|
|
$
|
18,275
|
|
|
$
|
(611
|
)
|
|
$
|
(2,007
|
)
|
|
$
|
(207
|
)
|
|
$
|
(148
|
)
|
|
$
|
19,512
|
|
|
$
|
78,571
|
|
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
|
|
As
of December 31, 2016
|
|
($ in
thousands)
|
|
Avenue
|
|
|
Coronado
SO
|
|
|
Mustang
|
|
|
Checkpoint
|
|
|
JMC
|
|
|
Helocyte
|
|
|
Cellvation
|
|
|
National
Holdings
|
|
|
Total
|
|
NCI equity share
|
|
$
|
(494
|
)
|
|
$
|
(217
|
)
|
|
$
|
12,376
|
|
|
$
|
32,160
|
|
|
$
|
(192
|
)
|
|
$
|
(612
|
)
|
|
$
|
4
|
|
|
$
|
17,643
|
|
|
$
|
60,668
|
|
Net loss attributed to non-controlling
interests
|
|
|
(349
|
)
|
|
|
(19
|
)
|
|
|
(1,805
|
)
|
|
|
(11,733
|
)
|
|
|
(355
|
)
|
|
|
(1,155
|
)
|
|
|
(158
|
)
|
|
|
(621
|
)
|
|
|
(16,195
|
)
|
Non-controlling interests
in consolidated entities
|
|
$
|
(843
|
)
|
|
$
|
(236
|
)
|
|
$
|
10,571
|
|
|
$
|
20,427
|
|
|
$
|
(547
|
)
|
|
$
|
(1,767
|
)
|
|
$
|
(154
|
)
|
|
$
|
17,022
|
|
|
$
|
44,473
|
|
The components of non-controlling interests
in loss of consolidated entities are as follows:
|
|
For
the three months ended March 31, 2017
|
|
($ in
thousands)
|
|
Avenue
|
|
|
Coronado
SO
|
|
|
Mustang
(2)
|
|
|
Checkpoint
(1)
|
|
|
JMC
|
|
|
Helocyte
|
|
|
Cellvation
|
|
|
Caelum
|
|
|
National
Holdings
|
|
|
Total
|
|
Non-controlling
interests in loss of consolidated entities
|
|
$
|
(68
|
)
|
|
$
|
(4
|
)
|
|
$
|
(1,674
|
)
|
|
$
|
(2,734
|
)
|
|
$
|
(68
|
)
|
|
$
|
(323
|
)
|
|
$
|
(54
|
)
|
|
$
|
(145
|
)
|
|
$
|
2,490
|
|
|
$
|
(2,580
|
)
|
Non-controlling ownership
|
|
|
10.2
|
%
|
|
|
13.0
|
%
|
|
|
52.0
|
%
|
|
|
62.4
|
%
|
|
|
7.0
|
%
|
|
|
20.0
|
%
|
|
|
22.0
|
%
|
|
|
25.5
|
%
|
|
|
43.4
|
%
|
|
|
|
|
|
(1)
|
– Checkpoint is consolidated with Fortress’s operations because Fortress maintains
voting control through its ownership of Checkpoint’s Class A common shares which provide for super-majority voting rights.
|
|
(2)
|
– Mustang is consolidated with Fortress’s operations because Fortress maintains voting control through its ownership
of Mustang’s Class A preferred shares which provide super-majority voting rights.
|
|
|
For
the three months ended March 31, 2016
|
|
($ in
thousands)
|
|
Avenue
|
|
|
Coronado
SO
|
|
|
Mustang
|
|
|
Checkpoint
|
|
|
JMC
|
|
|
Helocyte
|
|
|
Total
|
|
Non-controlling
interests in loss of consolidated entities
|
|
$
|
(108
|
)
|
|
$
|
(5
|
)
|
|
$
|
(70
|
)
|
|
$
|
(4,037
|
)
|
|
$
|
(121
|
)
|
|
$
|
(97
|
)
|
|
$
|
(4,438
|
)
|
Non-controlling ownership
|
|
|
11.5
|
%
|
|
|
13.0
|
%
|
|
|
10.0
|
%
|
|
|
62.7
|
%
|
|
|
8.1
|
%
|
|
|
8.3
|
%
|
|
|
|
|
14. Net Loss per Common Share
Basic net loss per share is calculated
by dividing net loss by the weighted-average number of shares of common stock outstanding for the period, without consideration
for common stock equivalents. Diluted net loss per share is computed by dividing net loss by the weighted-average number of common
stock and common stock equivalents outstanding for the period.
The Company’s common stock equivalents,
including unvested restricted stock, options, and warrants have been excluded from the computation of diluted net loss per share
as the effect would be to reduce the net loss per share. Therefore, the weighted average common stock outstanding used to calculate
both basic and diluted net loss per share is the same.
The following shares of potentially dilutive
securities have been excluded from the computations of diluted weighted average shares outstanding, as the effect of including
such securities would be anti-dilutive at the end of the three months ended March 31, 2017 and 2016:
|
|
For the Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Warrants to purchase Common Stock
|
|
|
383,453
|
|
|
|
544,835
|
|
Opus warrants to purchase Common Stock
|
|
|
1,860,000
|
|
|
|
-
|
|
Options to purchase Common Stock
|
|
|
1,105,502
|
|
|
|
1,779,365
|
|
Unvested Restricted Stock
|
|
|
9,912,161
|
|
|
|
7,922,021
|
|
Unvested Restricted Stock Units
|
|
|
1,249,232
|
|
|
|
885,083
|
|
Total
|
|
|
14,510,348
|
|
|
|
11,131,304
|
|
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
15. Stockholders’ Equity
Stock-based Compensation excluding National
As of March 31, 2017, the Company had four
equity compensation plans: the Fortress Biotech, Inc. 2007 Stock Incentive Plan, the Fortress Biotech, Inc. 2013 Stock Incentive
Plan, as amended, the Fortress Biotech, Inc. 2012 Employee Stock Purchase Plan and the Fortress Biotech, Inc. Long Term Incentive
Plan.
The following table summarizes the stock-based
compensation expense from stock option awards, restricted common stock awards, employee stock purchase programs and warrants granted
by Fortress for the three months ended March 31, 2017 and 2016:
|
|
For the Three Months Ended March 31,
|
|
($ in thousands)
|
|
2017
|
|
|
2016
|
|
Employee awards
|
|
$
|
1,830
|
|
|
$
|
1,584
|
|
Non-employee awards
|
|
|
13
|
|
|
|
3
|
|
Fortress Companies (1)
|
|
|
1,086
|
|
|
|
1,279
|
|
Total stock-based compensation expense
|
|
$
|
2,929
|
|
|
$
|
2,866
|
|
|
(1)
|
Consists of approximately $5,000 of Avenue's
compensation expenses, approximately $1.0 million of Checkpoint's compensation expenses, approximately $46,000 of JMC's compensation
expenses, approximately $47,000 of Helocyte's compensation expenses and approximately $8,000 of Cellvation's compensation expenses
on equity grants for the three months ended March 31, 2017.
Consists of approximately $9,000 of Avenue's
compensation expenses, approximately $1.1 million of Checkpoint's compensation expenses, and approximately $0.2 million of JMC's
compensation expenses on equity grants for the three months ended March 31, 2016.
|
For the three months ended March 31, 2017
and 2016, approximately $0.8 million and $1.3 million, respectively, of stock based compensation expense was included in research
and development expenses in connection with equity grants made to employees and consultants and approximately $2.1 million and
$1.6 million, respectively, was included in general and administrative expenses in connection with grants made to employees, members
of the board of directors and consultants.
The following table summarizes Fortress stock option activities
excluding activity related to Fortress Companies:
|
|
Number of shares
|
|
|
Weighted
average
exercise price
|
|
|
Total weighted
average intrinsic
value
|
|
|
Weighted
average
remaining
contractual life
(years)
|
|
Options vested and expected to vest at December 31, 2016
|
|
|
1,130,501
|
|
|
$
|
3.73
|
|
|
$
|
602,451
|
|
|
|
4.93
|
|
No activity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options vested and expected to vest at March 31, 2017
|
|
|
1,130,501
|
|
|
$
|
3.73
|
|
|
$
|
1,216,285
|
|
|
|
4.69
|
|
Options vested and exercisable
|
|
|
1,105,501
|
|
|
$
|
3.71
|
|
|
$
|
1,216,285
|
|
|
|
4.66
|
|
As of March 31, 2017 and 2016, the Company
had unrecognized stock-based compensation expense related to options of nil and $62,000, respectively, with a weighted average
vesting period of nil and 0.1 years, respectively.
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The following table summarizes Fortress’s
restricted stock and restricted stock unit award activity, excluding activity related to Fortress Companies (which is discussed
below):
|
|
Number of shares
|
|
|
Weighted average
grant price
|
|
Unvested balance at December 31, 2016
|
|
|
10,094,095
|
|
|
$
|
2.49
|
|
Restricted stock granted
|
|
|
1,325,396
|
|
|
|
2.70
|
|
Restricted stock vested
|
|
|
(213,333
|
)
|
|
|
2.75
|
|
Restricted stock units granted
|
|
|
215,000
|
|
|
|
3.61
|
|
Restricted stock units vested
|
|
|
(41,250
|
)
|
|
|
3.54
|
|
Unvested balance at March 31, 2017
|
|
|
11,379,908
|
|
|
$
|
2.53
|
|
As of March 31, 2017, the Company had unrecognized
stock-based compensation expense related to restricted stock and restricted stock unit awards of approximately $3.4 million and
$0.8 million, respectively, which is expected to be recognized over the remaining weighted-average vesting period of 2.8 years
and 3.5 years, respectively.
Employee Stock Purchase Plan
Eligible employees can purchase the Company’s
Common Stock at the end of a predetermined offering period at 85% of the lower of the fair market value at the beginning or end
of the offering period. The ESPP is compensatory and results in stock-based compensation expense.
As of March 31, 2017, 177,919 shares have
been purchased and 22,081 shares are available for future sale under the Company’s ESPP. Share-based compensation expense
recorded for the three months ended March 31, 2017 and 2016, was approximately $35,000 and $27,000, respectively.
Warrants
The following table summarizes Fortress warrant activities,
excluding activities related to Fortress Companies:
|
|
Number of shares
|
|
|
Weighted average
exercise price
|
|
|
Total weighted
average intrinsic
value
|
|
|
Weighted average
remaining
contractual life
(years)
|
|
Outstanding as of December 31, 2016
|
|
|
2,263,453
|
|
|
$
|
3.62
|
|
|
$
|
79,800
|
|
|
|
4.74
|
|
Granted
|
|
|
167,946
|
|
|
|
3.37
|
|
|
|
-
|
|
|
|
4.96
|
|
Outstanding as of March 31, 2017
|
|
|
2,431,399
|
|
|
$
|
3.60
|
|
|
$
|
209,800
|
|
|
|
2.37
|
|
Exercisable as of March 31, 2017
|
|
|
471,399
|
|
|
$
|
6.08
|
|
|
$
|
139,800
|
|
|
|
1.98
|
|
Long-Term Incentive Program (“LTIP”)
On January 1, 2017, the
Compensation Committee granted 552,698 shares each to Lindsay Rosenwald and Michael Weiss. These equity grants, made in
accordance with the LTIP, represent one percent (1%) of total outstanding shares of the Company and were granted in
recognition of their performance in 2016. The shares are subject to repurchase by the Company until both of the following
conditions are met: (i) the Company’s market capitalization increases by a minimum of $100.0 million, and (ii) the
employee is either in the service of the Company as an employee or as a Board member (or both) on the tenth anniversary of
the LTIP, or the eligible employee has had an involuntary separation from service (as defined in the LTIP). The
Company’s repurchase option on such shares will also lapse upon the occurrence of a corporate transaction (as defined
in the LTIP) if the eligible employee is in service on the date of the corporate transaction. The fair value of each grant on
the grant date was approximately $1.5 million. The Company recorded approximately $0.1 million related to these grants. The
Company is expensing these grants over 8.3 years, which is the life of the LTIP.
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Fortress Companies
Checkpoint Therapeutics, Inc.
Checkpoint has a long-term incentive plan
under which it has issued grants to both employees and non-employees. For the three months ended March 31, 2017 and 2016, Checkpoint
re-measured its non-employee grant and recorded expense of approximately $0.4 million and $0.8 million, respectively, in research
and development expenses on the Condensed Consolidated Statements of Operations.
Certain Checkpoint employees and directors
also have been awarded restricted stock under Checkpoint’s 2015 Incentive Plan. Checkpoint recorded stock-based compensation
expense of $0.5 million and $0.3 million, respectively, for the three months ended March 31, 2017 and 2016, respectively, on the
Condensed Consolidated Statements of Operations.
Checkpoint recorded approximately $0.1
million of option expense in general and administrative expenses on the Condensed Consolidated Statements of Operations, related
to an award with a market condition for the three months ended March 31, 2017.
Avenue Therapeutics, Inc.
For the three months ended March 31, 2017
and 2016, Avenue recorded approximately $2,000 and $5,000, respectively, as general and administrative expenses and approximately
$2,000 and $5,000, respectively, as research and development expenses on the Condensed Consolidated Statements of Operations.
Journey Medical Corporation
During the quarter ended March 31, 2017,
JMC granted option awards to numerous sales employees exercisable for 290,000 shares of Journey common stock pursuant to its equity
award plan.
The fair value of stock options granted
was determined on the grant date using assumptions for risk free interest rate, the expected term, expected volatility, and expected
dividend yield. The stock price was determined utilizing a discounted cash flow model to determine the weighted market value of
invested capital. JMC does not expect to pay dividends in the foreseeable future. As a result, the expected dividend yield is 0%.
The expected term for stock options granted with service conditions represents the average period the stock options are expected
to remain outstanding and is based on the expected term calculated using the approach prescribed by the SEC's Staff Accounting
Bulletin No. 110 for “plain vanilla” options. JMC obtained the risk-free interest rate from publicly available data
published by the Federal Reserve. The volatility rate was computed based on a comparison of average volatility rates of similar
companies. The fair value of options granted in 2017 was estimated using the following assumptions:
|
|
|
|
March 31,
2017
|
|
Risk-free interest rate
|
|
|
1.93% - 2.22
|
%
|
Expected dividend yield
|
|
|
-
|
%
|
Expected term in years
|
|
|
5.38 - 6.98
|
%
|
Expected volatility
|
|
|
103.98% - 105.95
|
%
|
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
During the three months ended March 31,
2017 and 2016, stock-based compensation associated with the amortization of stock option expense was approximately $38,000 and
$0.1 million, respectively. JMC also recorded approximately $8,000 and $35,000 related to the restricted stock during the three months
ended March 31, 2017 and 2016, respectively. Expenses were recorded in general and administrative expense on the Condensed Consolidated
Statements of Operations.
Helocyte, Inc.
For the three months ended March 31, 2017
and 2016, Helocyte re-measured its non-employee grants and recorded expense of approximately $37,000 and $62, respectively, in
research and development expenses on the Condensed Consolidated Statements of Operations.
For the three months ended March 31, 2017
and 2016, the Company recorded approximately $10,000 and $500, respectively, as general and administrative expenses on the Condensed
Consolidated Statements of Operations.
Cellvation, Inc.
For the three months ended March 31, 2017,
Cellvation recorded expenses for non-employee grants of approximately $3,000, in research and development expenses on the Condensed
Consolidated Statements of Operations. There was no expense during the same period in 2016.
For the three months ended March 31, 2017,
Cellvation recorded approximately $5,000, in connection with a grant made to its Chief Executive Officer, as general and administrative
expenses on the Condensed Consolidated Statements of Operations. There was no expense during the same period in 2016.
Capital Raise
Mustang
In September 2016, Mustang entered into
a Placement Agent Agreement with NSC relating to Mustang’s offering of shares of common stock in a private placement. Pursuant
to the Placement Agent Agreement, Mustang agreed to pay NSC a cash fee of 10.0% of the gross proceeds from the offering and grant
NSC a warrant exercisable for shares of Mustang common stock equal to 10% of the aggregate number of shares of common stock sold
in the offering (the “Placement Agent Warrants”). In addition, Mustang and the investors entered into a unit purchase
agreement (the “Unit Purchase Agreement”). The common stock and Warrants were sold in units, with each unit consisting
of 10,000 shares of Mustang’s common stock, and Warrants exercisable for 2,500 shares of common stock at an exercise price
of $8.50 per share. The purchase price was $65,000 per Unit. The warrants have a five-year term and are only exercisable for cash.
On January 31, 2017, Mustang held a
sixth closing of its private placement for gross proceeds of $55.5 million, before expenses. Mustang issued 8,536,774
unregistered shares of common stock and 2,134,193 warrants in connection with this closing. NSC received
a placement agent fee of $5.5 million or approximately 10% of the gross proceeds. In addition, NSC received 853,677 warrants
or approximately 10% of the shares issued.
On March 31, 2017, Mustang closed an
additional private placement with substantially similar terms as the offering described above resulting in gross proceeds of
$0.4 million, before expenses. Mustang issued 64,000 unregistered shares of common stock and 16,000 warrants in connection
with this transaction. NSC received a placement agent fee of approximately $42,000 or approximately 10% of the gross
proceeds. In addition, NSC received 6,400 warrants or approximately 10% of the shares issued.
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Pursuant to the Founders Agreement (see
note 17), Mustang issued 215,019 shares to Fortress in 2017, representing 2.5% of the aggregate number of shares of common stock
issued in the offerings noted above. For the three months ended March 31, 2017, Mustang recorded expense of approximately $1.2
million, related to this issuance (based upon the fair value of common shares on the date of issuance), which is included in general
and administrative expenses in Mustang’s Statements of Operations.
As of March 31, 2017, the Company determined
that the warrants still did not meet the definition of a derivative and continued to qualify for equity recognition.
16. Commitments and Contingencies
Indemnification
In accordance with its certificate of incorporation,
bylaws and indemnification agreements, the Company has indemnification obligations to its officers and directors for certain events
or occurrences, subject to certain limits, while they are serving at the Company’s request in such capacity. There have been
no claims to date, and the Company has director and officer insurance to address such claims. Pursuant to agreements with clinical
trial sites, the Company provides indemnification to such sites in certain conditions.
Legal Proceedings - Fortress
In the ordinary course of business, the
Company and its subsidiaries may be subject to both insured and uninsured litigation. Suits and claims may be brought against the
Company by customers, suppliers, partners and/or third parties (including tort claims for personal injury arising from clinical
trials of the Company’s product candidates and property damage) alleging deficiencies in performance, breach of contract,
etc., and seeking resulting alleged damages.
Litigation and Regulatory Matters - National
National and its subsidiaries are defendants
or respondents in various pending and threatened arbitrations, administrative proceedings and lawsuits seeking compensatory damages.
Several cases have no stated alleged damages. Claim amounts are infrequently indicative of the actual amounts National will be
liable for, if any. Further, National has a history of collecting amounts awarded in these types of matters from its registered
representatives that are still affiliated, as well as from those that are no longer affiliated. Many of these claimants also seek,
in addition to compensatory damages, punitive or treble damages, and all seek interest, costs and fees. These matters arise in
the normal course of business. National intends to vigorously defend itself in these actions, and the ultimate outcome of these
matters cannot be determined at this time.
Liabilities for potential losses from complaints,
legal actions, government investigations and proceedings are established where National believes that it is probable that a liability
has been incurred and the amount of loss can be reasonably estimated. In making these decisions, management bases its judgments
on its knowledge of the situations, consultations with legal counsel and its historical experience in resolving similar matters.
In many lawsuits, arbitrations and regulatory proceedings, it is not possible to determine whether a liability has been incurred
or to estimate the amount of that liability until the matter is close to resolution. However, accruals are reviewed regularly and
are adjusted to reflect National’s estimates of the impact of developments, rulings, advice of counsel and any other information
pertinent to a particular matter. Because of the inherent difficulty in predicting the ultimate outcome of legal and regulatory
actions, management cannot predict with certainty the eventual loss or range of loss related to such matters.
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
17. Related Party Transactions
Shared Services Agreement with TGTX
TGTX and the Company entered into an arrangement
to share the cost of certain research and development employees. The Company’s Executive Vice Chairman, Strategic Development,
is Executive Chairman and Interim Chief Executive Officer of TGTX. Under the terms of the Agreement, TGTX will reimburse the Company
for the salary and benefit costs associated with these employees based upon actual hours worked on TGTX related projects. For the
three months ended March 31, 2017 and 2016, the Company invoiced TGTX $0.2 million and $0.1 million, respectively.
Desk Space Agreements with TGTX and
OPPM
In connection with the
Company’s Desk Space Agreements with TGTX and
Opus
Point Partners Management, LLC (“OPPM”),
as of March 31, 2017, the Company had paid $0.6 million in rent
under the Desk Space Agreements, and invoiced OPPM and TGTX approximately $57,000 and $0.3 million, respectively, for their
prorated share of the rent base. In addition, for the three months ended March 31, 2017, the Company had incurred $0.1
million in connection with the build out of the space and recorded a receivable of $54,000 due from TGTX and $12,000 due from
OPPM.
Opus Credit Facility
In September 2016, the Company and Opus Point Health Innovations
Fund (“OPHIF”) entered into a Credit Facility Agreement (the “Opus Credit Facility”). Fortress’s
Chairman, President and Chief Executive Officer (Lindsay A. Rosenwald) and Fortress’s Executive Vice President, Strategic
Development (Michael Weiss), are Co-Portfolio Managers and Partners of OPPM,
an affiliate of OPHIF. As such, all of the disinterested directors of Fortress’s board of directors approved the terms of
the Opus Credit Facility and related agreements (see Note 11).
2017 Subordinated Note Financing
On March 17, 2017, the Company and
National Securities Corporation (“
NSC
”), a subsidiary of National, of which the Company owns 56.6% and
Michael Weiss serves as Chairman of the Board of Directors, entered into placement agency agreements with NAM Biotech Fund
and NAM Special Situation Fund in connection with the sale of subordinated promissory notes (see Note 11). Pursuant to the
terms of the agreements, NSC will receive a placement agent fee in cash of 10% of the debt raised and warrants equal to 10%
of the aggregate principal amount of debt raised divided by the closing share price of the Company’s common stock on
the date of closing.
For the three months ended March 31, 2017, NSC earned a placement
agent fee of $0.3 million and a Placement Agent Warrant to purchase 87,946 shares of the Company’s common stock.
Founders Agreements
The Company has entered into Founders
Agreements and, in some cases, Exchange Agreements with certain of its subsidiaries as described in the Company’s Form
10-K for the year ended December 31, 2016, filed with the SEC on March 16, 2017. The following table summarizes, by
subsidiary, the effective date of the Founders Agreements and PIK dividend or equity fee payable to the Company in accordance
with the terms of the Founders Agreements, Exchange Agreements and the subsidaries’ certificates of incorporation.
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Fortress Company
|
|
Effective Date
(1)
|
|
PIK Dividend as
a % of fully
diluted
outstanding
capitalization
|
|
|
Class of Stock
Issued
|
Helocyte
|
|
March 20, 2015
|
|
|
2.5
|
%
|
|
Common Stock
|
Avenue
|
|
February 17, 2015
|
|
|
2.5
|
%
|
|
Common Stock
|
Mustang
|
|
March 13, 2015
|
|
|
2.5
|
%
|
|
Common Stock
|
Checkpoint
|
|
March 17, 2015
|
|
|
0.0
|
%
(2)
|
|
Common Stock
|
Cellvation
|
|
October 31, 2016
|
|
|
2.5
|
%
|
|
Common Stock
|
Caelum
|
|
January 1, 2017
|
|
|
2.5
|
%
|
|
Common Stock
|
Cyprium
|
|
March 13, 2017
|
|
|
2.5
|
%
|
|
Common Stock
|
(1) –
Represents
the effective date of each subsidiary’s Founders Agreement. While certain Founders Agreements may have been
amended and restated subsequently, as described in the Company’s Form 10-K for the year ended December 31, 2016 filed
with the SEC on March 16, 2017, each PIK dividend and equity fee is payable on the annual anniversary of the effective date
of the original Founders Agreement.
(2) –
Instead of a
PIK dividend, Checkpoint pays the Company an annual equity fee in shares of Checkpoint’s common stock equal to
2.5% of Checkpoint’s fully diluted outstanding capitalization.
Management Services Agreements
The Company has entered in Management Services
Agreements (the “MSAs”) with certain of its subsidiaries as described in the Company’s Form 10-K for the year
ended December 31, 2016, filed with the SEC on March 16, 2017. The following table summarizes, by subsidiary, the effective date
of the MSA and the annual consulting fee payable by the subsidiary to the Company in quarterly installments:
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fortress
Company
|
|
Effective Date
|
|
R&D
|
|
|
G&A
|
|
|
Annual MSA Fee
(Income)/Expense
|
|
Helocyte
|
|
March 20, 2015
|
|
$
|
250
|
|
|
$
|
250
|
|
|
$
|
500
|
|
Avenue
|
|
February 17, 2015
|
|
|
250
|
|
|
|
250
|
|
|
|
500
|
|
Mustang
|
|
March 13, 2015
|
|
|
250
|
|
|
|
250
|
|
|
|
500
|
|
Checkpoint
|
|
March 17, 2015
|
|
|
250
|
|
|
|
250
|
|
|
|
500
|
|
Cellvation
|
|
October 31, 2016
|
|
|
250
|
|
|
|
250
|
|
|
|
500
|
|
Caelum
|
|
January 1, 2017
|
|
|
250
|
|
|
|
250
|
|
|
|
500
|
|
Cyprium
|
|
March 13, 2017
|
|
|
250
|
|
|
|
250
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fortress
|
|
|
|
|
(1,750
|
)
|
|
|
(1,750
|
)
|
|
|
(3,500
|
)
|
Consolidated (Income)/Expense
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Chord Advisors, LLC
In May 2015, the Company entered into
a full service consulting agreement with Chord Advisors, LLC (“Chord”) to provide advisory accounting services.
Under the terms of the agreement, the Company pays Chord $10,000 per month to provide technical accounting and financial
reporting support. Either party upon 30-days written notice can terminate the agreement. Mr. Horin, Managing Partner of
Chord, serves as Interim Chief Financial Officer to Avenue, Helocyte and Mustang. Pursuant to the agreements with Avenue,
Helocyte and Mustang, Chord provides back office accounting support and accounting policy and financial reporting services,
including the services of Mr. Horin. Chord receives up to $5,000 per month from Avenue and Helocyte, and up to $7,500 per
month from Mustang. Checkpoint is billed at a blended hourly rate, for services incurred. For the three months ended March 31,
2017, Checkpoint incurred approximately $28,000 in hourly fees.
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
National
As of March 31, 2017, the Company owns
approximately 56.6% of National. The Company’s Executive Vice Chairman, Strategic Development is the Chairman of the Board
of National.
Additionally, the Company’s Chairman,
President and Chief Executive Officer and the Company’s Executive Vice Chairman, Strategic Development are both Co-Portfolio
Managers and Partners of OPPM which owns approximately 4.6% of National. In the normal course, National provides the Company and
the Company’s subsidiaries with placement agent services in connection with third party raises.
18. Net Capital Requirements of Broker-Dealer Subsidiaries
National Securities is subject to the SEC's
Uniform Net Capital Rule (Rule 15c3-1) (the "Rule"), which, among other things, requires the maintenance of minimum net
capital. At December 31, 2016, National Securities had net capital of $8,562,434 which was $8,312,434 in excess of its required
net capital of $250,000. National Securities is exempt from the provisions of the SEC's Rule 15c3-3 since it is an introducing
broker-dealer that clears all transactions on a fully disclosed basis and promptly transmits all customer funds and securities
to clearing brokers.
vFinance Investments is also subject to
the Rule, which, among other things, requires the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness
to net capital, both as defined, shall not exceed 15 to 1. At December 31, 2016, vFinance Investments had net capital of $2,319,352
which was $1,319,352 in excess of its required net capital of $1,000,000. vFinance Investments' ratio of aggregate indebtedness
to net capital was 0.7 to 1. vFinance Investments is exempt from the provisions of the SEC's Rule 15c3-3 since it is an introducing
broker-dealer that clears all transactions on a fully disclosed basis and promptly transmits all customer funds and securities
to clearing brokers.
Advances, dividend payments and other equity
withdrawals from the Company's broker-dealer subsidiaries are restricted by the regulations of the SEC, and other regulatory agencies.
These regulatory restrictions may limit the amounts that a subsidiary may dividend or advance to the Company.
19. Off Balance Sheet Risk and Concentrations of Credit Risk
National is engaged in trading and providing
a broad range of securities brokerage and investment services to a diverse group of retail and institutional clientele, as well
as corporate finance and investment banking services to corporations and businesses. Counterparties to National’s business
activities include broker-dealers and clearing organizations, banks and other financial institutions. National uses clearing brokers
to process transactions and maintain customer accounts for National on a fee basis. National permits the clearing firms to extend
credit to its clientele secured by cash and securities in the client’s account. National’s exposure to credit risk
associated with the non-performance by its customers and counterparties in fulfilling their contractual obligations can be directly
impacted by volatile or illiquid trading markets, which may impair the ability of customers and counterparties to satisfy their
obligations to National. National has agreed to indemnify the clearing brokers for losses they incur while extending credit to
National’s clients. It is National’s policy to review, as necessary, the credit standing of its customers and counterparties.
Amounts due from customers that are considered uncollectible by the clearing broker are charged back to National by the clearing
broker when such amounts become determinable. Upon notification of a charge back, such amounts, in total or in part, are then either
(i) collected from the customers, (ii) charged to the broker initiating the transaction and/or (iii) charged to operations, based
on the particular facts and circumstances.
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
National maintains cash in bank deposits,
which, at times, may exceed federally insured limits. National has not experienced and does not expect to experience losses on
such accounts.
A short sale involves the sale of a security
that is not owned in the expectation of purchasing the same security (or a security exchangeable) at a later date at a lower price.
A short sale involves the risk of a theoretically unlimited increase in the market price of the security that would result in a
theoretically unlimited loss.
20. Segment Information
The Company operates in three reportable
segments, Dermatology Product Sales, Pharmaceutical and Biotechnology Product Development and National. The accounting policies
of the Company’s segments are the same as those described in Note 2. The following tables summarize, for the periods indicated,
operating results by reportable segment:
Cost of goods sold is directly related
to product sales only. Revenues derived from co-promote revenue had no cost of goods sold
|
|
Dermatology
|
|
|
Pharmaceutical
and
Biotechnology
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Products
|
|
|
Product
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
Sales
|
|
|
Development
|
|
|
National
|
|
|
Consolidated
|
|
Net Revenue
|
|
$
|
2,085
|
|
|
$
|
693
|
|
|
$
|
41,904
|
|
|
$
|
44,682
|
|
Direct cost of goods
|
|
|
(469
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(469
|
)
|
Sales and marketing costs
|
|
|
(2,267
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,267
|
)
|
Research and development
|
|
|
-
|
|
|
|
(8,404
|
)
|
|
|
-
|
|
|
|
(8,404
|
)
|
General and administrative
|
|
|
(319
|
)
|
|
|
(7,666
|
)
|
|
|
-
|
|
|
|
(7,985
|
)
|
National Expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
(43,134
|
)
|
|
|
(43,134
|
)
|
Segment loss from operations
|
|
$
|
(970
|
)
|
|
$
|
(15,377
|
)
|
|
$
|
(1,230
|
)
|
|
$
|
(17,577
|
)
|
Segment assets
|
|
$
|
4,039
|
|
|
$
|
159,175
|
|
|
$
|
48,697
|
|
|
$
|
211,911
|
|
Significant Customers
For the three months ended March
31, 2017, two of the Company’s customers each accounted for more than 10.0% of its total gross revenue in the amount
of $0.8 million and $0.5 million, respectively. The revenue from these customers is captured in the product revenue, net
line item within the Condensed Consolidated Statements of Operations. The Company had no customers that accounted for 10.0%
of its total gross revenue for the three months ended March 31, 2016.
At March 31, 2017, two of the
Company’s customers each accounted for more than 10.0% of its total accounts receivable balance in the amount of $0.8
million and $0.5 million, respectively.
At December 31, 2016, two of the
Company’s customers each accounted for more than 10.0% of its total accounts receivable balance in the amount of $1.1
million and $0.5 million, respectively.
Net Revenue from Pharmaceutical and Biotechnology
Product Development represents collaboration revenue from TGTX in connection with Checkpoint, which is classified as related party
revenue.
21. Subsequent Events
2017 Subordinated Note Financing Second
Closing
On May 1, 2017, the Company held a second
closing of the 2017 Subordinated Note Financing and received gross proceeds of $8.55 million, before expenses. NSC received a placement
agent fee of approximately $0.9 million in the second closing and warrants to purchase 234,438 shares of the Company’s common
stock at an exercise price of $3.65 per share.