UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2017

 

OR

 

¨

TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF 1934

 

From the transition period from __________ to__________.

 

Commission File Number 001-35366

 

FORTRESS BIOTECH, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		20-5157386
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)

 

2 Gansevoort Street, 9th Floor

New York, New York 10014

(Address of principal executive offices)

 

(781) 652-4500

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES   x     NO   ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES   x     NO   ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨
		Emerging growth company	¨

  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ¨

 

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  x

 

As of August 9, 2017, there were 50,527,604 shares of Common Stock of the issuer outstanding.

  

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Quarterly Report on Form 10-Q

TABLE OF CONTENTS

 

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Consolidated Financial Statements	3
	Condensed Consolidated Balance Sheets as of June 30, 2017 (unaudited) and December 31, 2016	3
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2017 and 2016 (unaudited)	4
	Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2017 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016 (unaudited)	6
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures About Market Risks	41
Item 4.	Controls and Procedures	42
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 3.	Defaults Upon Senior Securities	56
Item 4.	Mine Safety Disclosures	56
Item 5.	Other Information	57
Item 6.	Exhibits	57
	Signatures	58

 

 

PART I. FINANCIAL INFORMATION

Item 1.   Unaudited Condensed Consolidated Financial Statements

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

($ in thousands except for share and per share amounts)

 

		June 30,				December 31,
		2017				2016
		(Unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	144,344			$	88,294
Accounts receivable			3,336				1,830
Short-term investment (certificate of deposit)			20,038				-
Cash deposits with clearing organizations			1,040				1,030
Receivables from broker-dealers and clearing organizations			2,813				3,357
Forgivable loans receivable			1,397				1,712
Securities owned, at fair value			3,406				2,357
Inventory			299				203
Other receivables - related party			1,605				1,790
Prepaid expenses and other current assets			11,902				9,061
Total current assets			190,180				109,634
Property and equipment, net			7,329				7,376
Restricted cash			15,860				15,860
Long-term investments, at fair value			903				1,414
Intangible asset - license			16,533				17,408
Goodwill			18,645				18,645
Other assets			396				394
Total assets		$	249,846			$	170,731
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses		$	24,995			$	23,871
Accrued expense - related party			78				-
Accrued commissions and payroll payable			11,613				11,940
Deferred clearing and marketing credits			891				995
Securities sold, not yet purchased, at fair value			77				298
Interest payable			142				88
Interest payable - related party			326				77
Notes payable, short-term			3,007				1,000
Subsidiary convertible note, short-term, at fair value			3,211				1,031
Contingent consideration payable			630				424
Warrants issued in 2017 and issuable in 2016 - National			8,190				14,359
Contingently issuable liabilities			-				1,682
Derivative warrant liability			91				481
Other current liabilities			217				319
Total current liabilities			53,468				56,565
Notes payable, long-term (net of debt discount of $4,723 and $2,009 at June 30, 2017 and December 31, 2016, respectively)			39,274				22,528
Subsidiary convertible note, long-term, at fair value			1,462				3,656
Other long-term liabilities			5,026				5,014
Total liabilities			99,230				87,763
Commitments and contingencies
Stockholders' equity
Convertible preferred stock, $.001 par value, 129,767 Series C shares authorized, 0 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively			-				-
Common stock, $.001 par value, 100,000,000 shares authorized, 50,463,245 and 48,932,023 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively			50				49
Common stock issuable, 45,818 and 0 shares as of June 30, 2017 and December 31, 2016, respectively			189				-
Additional paid-in-capital			346,630				283,697
Accumulated deficit			(274,598	)			(245,251
Total stockholders' equity attributed to the Company			72,271				38,495
Non-controlling interests			78,345				44,473
Total stockholders' equity			150,616				82,968
Total liabilities and stockholders' equity		$	249,846			$	170,731

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

($ in thousands except for share and per share amounts)

(Unaudited)

  

		For the Three Months Ended June 30,								For the Six Months Ended June 30,
		2017				2016				2017				2016
Revenue
Fortress
Product revenue, net		$	4,054			$	981			$	6,139			$	1,364
Revenue - from a related party			350				1,249				1,043				1,526
Net Fortress revenue			4,404				2,230				7,182				2,890
National
Commissions			23,993				-				48,499				-
Net dealer inventory gains			2,366				-				4,877				-
Investment banking			10,592				-				17,653				-
Investment advisory			3,490				-				6,875				-
Interest and dividends			675				-				1,391				-
Transfer fees and clearing services			1,687				-				4,185				-
Tax preparation and accounting			3,144				-				4,000				-
Other			346				-				717				-
Total National revenue			46,293				-				88,197				-
Net revenue			50,697				2,230				95,379				2,890
Operating expenses
Fortress
Cost of goods sold - product revenue			878				324				1,347				324
Research and development			11,683				6,347				18,793				14,100
Research and development – licenses acquired			1,800				2,060				3,094				2,143
General and administrative			11,134				8,635				21,386				16,550
Total Fortress operating expenses			25,495				17,366				44,620				33,117
National
Commissions, compensation and fees			41,762				-				79,020				-
Clearing fees			618				-				1,356				-
Communications			682				-				1,404				-
Occupancy			936				-				1,944				-
Licenses and registration			427				-				832				-
Professional fees			991				-				2,254				-
Interest			4				-				8				-
Depreciation and amortization			500				-				1,006				-
Other administrative expenses			2,475				-				3,705				-
Total National operating expenses			48,395				-				91,529				-
Total operating expenses			73,890				17,366				136,149				33,117
Loss from operations			(23,193	)			(15,136	)			(40,770	)			(30,227	)
Other income (expenses)
Interest income			190				77				326				152
Interest expense and financing fee			(1,380	)			(529	)			(2,078	)			(1,149	)
Change in fair value of derivative liabilities			1,452				-				5,794				(89	)
Change in fair value of subsidiary convertible note			(188	)			-				(285	)			-
Change in fair value of investments			157				(801	)			(511	)			(1,719	)
Other income			13				-				13				-
Total other income (expenses)			244				(1,253	)			3,259				(2,805	)
Net loss			(22,949	)			(16,389	)			(37,511	)			(33,032	)
Less: net loss attributable to non-controlling interests			(5,584	)			(3,911	)			(8,164	)			(8,349	)
Net loss attributable to common stockholders		$	(17,365	)		$	(12,478	)		$	(29,347	)		$	(24,683	)
Basic and diluted net loss per common share		$	(0.43	)		$	(0.31	)		$	(0.73	)		$	(0.62	)
Weighted average common shares outstanding—basic and diluted			40,551,844				39,867,724				40,457,524				39,762,956

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Stockholders’ Equity

($ in thousands)

 (Unaudited)

 

										Common				Additional
		Common Stock								Shares				Paid-In				Accumulated				Non-Controlling				Total Stockholders'
		Shares				Amount				Issuable				Capital				Deficit				Interests				Equity
Balance at December 31, 2016			48,932,023			$	49			$	-			$	283,697			$	(245,251	)		$	44,473			$	82,968
Exercise of options for cash			20,000				-				-				27				-				-				27
Stock-based compensation expense			-				-				-				7,736				-				-				7,736
Issuance of restricted stock			1,489,146				1				-				(1	)			-				-				-
Issuance of subsidiaries' common shares for license expenses			-				-				-				1,712				-				-				1,712
Issuance of common stock under ESPP			22,076				-				-				42				-				-				42
Subsidiaries’ offering, net			-				-				-				92,991				-				-				92,991
Debt discount related to Opus Credit Facility			-				-				-				201				-				-				201
Issuance of warrants by subsidiary in conjunction with NSC debt			-				-				-				750				-				-				750
Issuance of warrants in connection with 2017 promissory notes			-				-				-				1,197				-				-				1,197
Conversion of subsidiaries notes payable			-				-				-				314				-				-				314
Common shares issuable for NHLD interest expense			-				-				189				-				-				-				189
Non-controlling interest in subsidiaries’			-				-				-				(42,036	)			-				42,036				-
Net loss attributable to non-controlling interest			-				-				-				-				-				(8,164	)			(8,164	)
Net loss attributable to common stockholders			-				-				-				-				(29,347	)			-				(29,347	)
Balance at June 30, 2017			50,463,245			$	50			$	189			$	346,630			$	(274,598	)		$	78,345			$	150,616

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

($ in thousands)

(Unaudited)

 

		For the Six Months Ended June 30,
		2017				2016
Cash Flows from Operating Activities:
Net Loss		$	(37,511	)		$	(33,032	)
Reconciliation of net loss to net cash used in operating activities:
Depreciation expense			543				74
Amortization expense of intangible asset			819				-
Amortization of debt discount			702				423
Amortization of product revenue license fee			267				21
Amortization of forgivable loans to registered representatives			362				-
Amortization of deferred clearing credit			(104	)			-
Stock-based compensation expense			7,736				5,889
Recovery for doubtful accounts			(256	)			-
Common shares issuable for NHLD interest expense			189				-
Change in fair value of investments			511				1,719
Change in fair value of derivative liabilities			(5,794	)			89
Change in fair value of subsidiary convertible note			285				-
Research and development-licenses acquired, expense			3,095				2,143
Change in fair value of subsidiaries’ assets and liabilities			10				249
Increase (decrease) in cash and cash equivalents resulting from changes in operating assets and liabilities:
Cash deposits with clearing organizations			(10	)			-
Accounts receivable			(1,506	)			(967	)
Receivables from broker-dealers and clearing organizations			544				-
Forgivable loans receivable			(47	)			-
Securities owned, at fair value			(1,049	)			-
Inventory			(96	)			(100	)
Other receivables - related party			185				(2,414	)
Prepaid expenses and other current assets			(2,590	)			195
Accounts payable and accrued expenses			(1,721	)			3,571
Accrued expense - related party			24				-
Securities sold, but not yet purchased, at fair value			(221	)			-
Interest payable			3				(1	)
Interest payable - related party			259				-
Other long-term liabilities			2				3,122
Net cash used in operating activities			(35,369	)			(19,019	)
Cash Flows from Investing Activities:
Purchase of research and development licenses			(665	)			(2,095	)
Purchase of property and equipment			(454	)			(4,300	)
Purchase of license			-				(350	)
Purchase of short-term investment (certificates of deposit)			(20,038	)			-
Security deposits refund			3				-
Security deposits collected			-				(1	)
Acquisition of business - National			(19	)			-
Collection on notes receivable - disposal of Gilman branches			8
Investment in Origo Acquisition Corp.			-				(175	)
Net cash used in investing activities			(21,165	)			(6,921	)

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Continued)

($ in thousands)

(Unaudited)

 

		For the Six Months Ended June 30,
		2017				2016
Cash Flows from Financing Activities:
Proceeds from subsidiaries' offering			93,853				570
Payment of costs related to subsidiaries' offering			(862	)			-
Proceeds from at-the-market offering			-				434
Payment of cost related to at-the-market offering			-				(49	)
Proceeds from NSC note			18,967				-
Payment of debt issuance costs associated with NSC Note			(1,939	)			-
Payment of NSC note			-				(2,792	)
Proceeds from exercise of stock options			27				-
Proceeds from issuance of common stock under ESPP			42				81
Proceeds from subsidiaries' Convertible Note			-				1,000
Payment of debt issuance costs associated with subsidiaries' Convertible Note			(4	)			(150	)
Proceeds from Opus Credit Facility			2,500				-
Net cash provided by (used in) financing activities			112,584				(906	)
Net increase (decrease) in cash and cash equivalents			56,050				(26,846	)
Cash and cash equivalents at beginning of period			88,294				98,182
Cash and cash equivalents at end of period		$	144,344			$	71,336
Supplemental disclosure of cash flow information:
Cash paid for interest		$	58			$	158
Supplemental disclosure of non-cash financing and investing activities:
Fortress
Issuance of restricted stock		$	1			$	2
Issuance of warrants by subsidiary in conjunction with NSC debt		$	750			$	-
Issuance of warrants in connection with 2017 Subordinated Note Financing		$	1,197			$	-
Issuance of warrants in connection with subsidiaries' Convertible Note		$	-			$	99
Debt discount related to Opus Credit Facility		$	201			$	-
Unpaid debt offering cost		$	79			$	-
Issuance of subsidiaries common shares for license		$	-			$	48
Common shares issuable for license acquired		$	1,682			$	-
Conversion of subsidiaries notes payable		$	314			$	-
NHLD
Fixed assets (acquired but not paid)		$	42			$	-
Business acquired:
Identifiable intangible asset acquired		$	211			$	-
Contingent consideration payable			(192	)			-
Cash paid		$	19			$	-

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

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 as the “Fortress Companies.” Additionally, the Company has a controlling interest in National Holdings Corporation, a diversified independent brokerage company (together with its subsidiaries, 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 licenses, 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 June 30, 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.

 

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-K, filed with SEC on December 29, 2016 and their Form 10-Q, filed with the SEC on May 15, 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.

  

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 National assets acquired and liabilities assumed and revenues and expenses are reported on a one quarter lag. Therefore, the National assets acquired and liabilities assumed included in these consolidated financial statements as of June 30, 2017 are actually the assets and liabilities as of March 31, 2017 and the revenues and expenses included in these consolidated financial statements for the quarter ending June 30, 2017 are actually the revenues and expenses for the quarter ending March 31, 2017.

 

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.

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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, with the exception of the policies listed below.

 

Cash and Cash Equivalents

 

The Company considers highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents at June 30, 2017 and at December 31, 2016 consisted of cash, money market funds and certificates of deposit in institutions in the United States. Balances at certain institutions have exceeded Federal Deposit Insurance Corporation insured limits and U.S. government agency securities.

 

Items with maturities greater than 90 days but less than one year at the time of acquisition are considered short-term investments.

 

Short-term Investments – Held to Maturity

 

The company classifies its certificates of deposit as held to maturity in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification (“ASC”) 320, Investments – Debt and Equity Securities. The Company considers all short-term investments with an original maturity in excess of three months when purchased to be short-term investments. In April 2017, the Company purchased $20.0 million of certificates of deposit with an original maturity of six months. At June 30, 2017, the Company had approximately $20.0 million in certificates of deposit with no more than $250,000 at any individual institution. The Company reassesses the appropriateness of the classification of its investments at the end of each reporting period. The Company has determined that its certificates of deposits should be classified as held-to-maturity as of June 30, 2017. There were no investments as of December 31, 2016. This classification was based upon management’s determination that it has the positive intent and ability to hold the securities until their maturity dates, as its investments mature within one year and the underlying cash invested in these securities is not required for current operations.

 

Investments consist of short-term FDIC insured certificates of deposit carried at amortized cost using the effective interest method. The cost of the Company’s certificates of deposit approximated fair value.

 

Recently Adopted Accounting Pronouncements

 

In March 2016, the 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.

 

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.

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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. As of June 30, 2017, the Company has not elected early adoption and has not concluded on an adoption method. The Company is in the process of analyzing its revenue recognition policies and the potential impact the standard may have on previously reported revenues and future revenues. The Company is still evaluating the impact on the condensed consolidated financial statements and related disclosures.

  

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.

  

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 May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, to a change to the terms or conditions of a share-based payment award. The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company is currently assessing the potential impact of adopting ASU 2017-09 on its condensed consolidated financial statements and related disclosures.

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently assessing the potential impact of adopting ASU 2017-11 on its condensed consolidated financial statements and related disclosures.

 

3. National Holdings Corporation Acquisition – Intangible Assets

 

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.

  

In connection with the purchase, the Company 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 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 carrying amount related to acquired intangible assets as of June 30, 2017 are as follows ($ in thousands):

 

Intangible assets at December 31, 2016		$	15,991
Amortization expense			(819	)
Intangible assets at June 30, 2017		$	15,172

 

The future amortization of these intangible assets is as follows ($ in thousands):

 

		Total
Six Months Ended December 31, 2017		$	831
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		$	15,172

 

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 six months ended June 30, 2017.

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

4. Broker-Dealers and Clearing Organizations, Other Receivables and Prepaid Expenses and Other Current Liabilities

 

At March 31, 2017, National’s receivables of $2.8 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 March 31, 2017 of $6.1 million, which principally represent trailing commissions, tax and accounting fees and investment banking fees and are net of an allowance for uncollectable accounts of $0.5 million and are included in prepaid expenses and other current assets in the Company's Condensed Consolidated Balance Sheet.

  

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 March 31, 2017, no allowance for doubtful accounts was required.

 

There were no unamortized forgivable loans outstanding at March 31, 2017 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				June 30,				December 31,
		Lives (in years)				2017				2016
Computer equipment			3			$	517			$	440
Furniture and fixtures			5				931				821
Leasehold improvements			Various				5,351				5,396
Total property and equipment							6,799				6,657
Less: accumulated depreciation							(801	)			(445	)
Property and equipment, net						$	5,998			$	6,212

 

Fortress's depreciation expense for the three months ended June 30, 2017 and 2016, was approximately $180,000 and $82,000, respectively, and was recorded in both research and development expense and general and administrative expense in the Condensed Consolidated Statements of Operations. Fortress's depreciation expense for the six months ended June 30, 2017 and 2016, was approximately $356,000 and $86,000, 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 March 31, 2017 consisted of the following ($ in thousands):

  

		March 31,				Estimated Useful
		2017				Lives (in years)
Equipment		$	861				5
Furniture and fixtures			82				5
Leasehold improvements			335				Lesser of useful life or term of lease
Capital leases (primarily composed of computer equipment)			276				5
Total property and equipment			1,554
Less: accumulated depreciation			(223	)
Property and equipment, net		$	1,331

  

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.

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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 June 30, 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 June 30, 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 June 30, 2017, the Company valued its investment in Origo, a publicly traded company, utilizing the following assumptions: probability of a successful business combination of 24.3%, and no dividend rate, which yielded an instrument value upon business combination of $9.73 per ordinary share for the private placement shares. The rights and warrants were valued utilizing a binomial-lattice model at a value of $0.24 for each right and $0.18 for each warrant. Based upon the valuation, the Company recorded a decrease in fair-value of investment of $0.5 million for the six months ended June 30, 2017. At June 30, 2017, the fair value of the Company’s investment in Origo was, $0.7 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.

 

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.

 

On June 30, 2017, Avenue closed on an Initial Public Offering (“IPO”) raising gross proceeds of $37.9 million and issuing 6.3 million commons shares at $6.00 per share. As such, pursuant to the terms of Avenue’s $3.0 million NSC Note, Avenue issued to National a warrant to purchase 125,000 of its common shares at par. The issuance of the warrant relates to the completion of Avenue’s IPO in which Avenue’s raised gross proceeds from a third-party party exceeding five times the value of the debt. Upon the issuance of the warrant by Avenue, the Company was removed as the guarantor on the note.

 

($ in thousands)		Avenue’s Contingently Issuable Warrants
Beginning balance at January 1, 2017		$	302
Conversion into common shares			(750	)
Change in fair value			448
Ending balance at June 30, 2017		$	-

 

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. Avenue’s WestPark Warrant liability was measured at fair value using a Monte Carlo simulation valuation methodology.  

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Additionally, on June 30, 2017, in connection with Avenue’s IPO, Avenue issued 2,488 warrants to purchase common shares of Avenue at $4.02, a 33% discount to the IPO price of $6.00 to Westpark Capital in connection with their role as placement agent for Avenue’s 2016 Convertible Notes, which automatically converted to common shares of Avenue upon completion of the IPO.

 

($ in thousands)		Avenue’s Warrant Liability
Beginning balance at January 1, 2017		$	12
Conversion into common shares			(15	)
Change in fair value			3
Ending balance at June 30, 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 June 30, 2017 is as follows:

 

		June 30, 2017
Risk-free interest rate			1.720% -1.792	%
Expected dividend yield			-	%
Expected term in years			4.00 - 4.42
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			(76	)
Ending balance at June 30, 2017		$	91

 

Helocyte 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 June 30, 2017 is as follows:

  

		June 30, 2017
Risk-free interest rate			1.140% - 1.298	%
Expected dividend yield			-	%
Expected term in years			0.50 - 1.41
Expected volatility			59.1	%

 

 

($ in thousands)		Helocyte Convertible Note, at fair value
Beginning balance at January 1, 2017		$	4,487
Change in fair value of convertible notes			186
Ending balance at June 30, 2017		$	4,673

 

At June 30, 2017, upon completion of Avenue’s IPO, Avenue’s convertible debt automatically converted into approximately 47,949 common shares of Avenue, at $4.02, a 33% discount to the IPO price, pursuant to the terms of the Convertible Note. As of June 30, 2017, Avenue’s obligation to its note holders was satisfied.  

 

 

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
Conversion into common shares			(299	)
Change in fair value of convertible notes			99
Ending balance at June 30, 2017		$	-

 

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 June 30, 2017 and December 31, 2016:

 

		Fair Value Measurement as of June 30, 2017
($ in thousands)		Level 1				Level 2				Level 3				Total
Assets
Long-term investments, at fair value		$	-			$	-			$	903			$	903
Total		$	-			$	-			$	903			$	903
Liabilities
Warrant liabilities		$	-			$	-			$	91			$	91
Helocyte Convertible Note, at fair value			-				-				4,673				4,673
Total		$	-			$	-			$	4,764			$	4,764

 

		Fair Value Measurement as of December 31, 2016
($ in thousands)		Level 1				Level 2				Level 3				Total
Assets
Long-term investments, at fair value		$	-			$	-			$	1,414			$	1,414
Total		$	-			$	-			$	1,414			$	1,414
Liabilities
Contingently Issuable Warrants		$	-			$	-			$	302			$	302
Warrant liabilities			-				-				179				179
Helocyte Convertible Note, at fair value			-				-				4,487				4,487
Avenue Convertible Note, at fair value			-				-				200				200
Total		$	-			$	-			$	5,168			$	5,168

 

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 March 31, 2017:

 

		Fair Value Measurement as of March 31, 2017
($ in thousands)		Level 1				Level 2				Level 3				Total
Assets
National
Securities owned, at fair value
Corporate stocks		$	272			$	-			$	-			$	272
Municipal bonds			2,928				-				-				2,928
Restricted stock			-				206				-				206
Total		$	3,200			$	206			$	-			$	3,406
Liabilities
National
Securities sold, but not yet purchased at fair value
Contingent consideration		$	-			$	-			$	630			$	630
Corporate stocks			77				-				-				77
Warrants - National			-								8,190				8,190
Total		$	77			$	-			$	8,820			$	8,897

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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 received 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.

 

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 June 30, 2017. Such valuation (using level 3 inputs) was determined by use of the Black-Scholes option pricing model using the following assumptions:

 

		March 31, 2017
Dividend yield			-	%
Expected volatility			97.76	%
Risk-free interest rate			1.93	%
Life (in years)			4.5

 

($ in thousands)		National’s Warrants
Beginning balance at December 31, 2016		$	14,359
Change in fair value of derivative liability			(6,169	)
Ending balance at March 31, 2017		$	8,190

 

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 six months ended June 30, 2017:

 

($ in thousands)		Investment in Origo				Investment in laser device				Helocyte Convertible Note, at fair value				Avenue Convertible Note, at fair value				Warrants issued and issuable				Warrant liabilities				Total
Balance at December 31, 2016		$	1,164			$	250			$	4,487			$	200			$	14,661			$	179			$	20,941
Conversion into common shares			-				-				-				(299	)			(750	)			(15	)			(1,064	)
Issuance of warrants			-				-				-				-				(8,190	)			8,190				-
Change in fair value of investments			(511	)			-				-				-				-				-				(511	)
Change in fair value of convertible notes			-				-				186				99				-				-				285
Change in fair value of derivative liabilities			-				-				-				-				(5,721	)			(73	)			(5,794	)
Balance at June 30, 2017		$	653			$	250			$	4,673			$	-			$	-			$	8,281			$	13,857

 

For the six months ended June 30, 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 and six months ended June 30, 2017, the purchase price of licenses, totaling approximately $1.8 million and $3.1 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 June 30,								For the Six Months Ended June 30,
($ in thousands)		2017				2016				2017				2016
Fortress		$	300			$	-			$	300			$	-
Fortress Companies:
Checkpoint			-				2,060				400				2,060
Helocyte			-				-				-				83
Mustang			1,500				-				2,075				-
Caelum			-				-				219				-
Cyprium			-				-				100				-
Total		$	1,800			$	2,060			$	3,094			$	2,143

 

Fortress:

 

Effcon Laboratories, Inc.

 

In September 2016, the Company entered into a development and license agreement with Effcon Laboratories, Inc. (“Effcon”) for the development of extended release formulation of Methozolamide. Pursuant to the Agreement, Fortress paid an upfront fee of $0.2 million in December 2016. Additional payments are due for the achievement of five development milestones totaling $2.3 million and royalty payments in the mid-single digits are due on net sales of licensed products. Additionally, the Company agreed to fund a development budget of $1.6 million. During the three months ended June 30, 2017, a milestone of $0.3 million was achieved in connection with the successful completion of the Pilot Pharmacokinetics study, which was recorded on the Condensed Consolidated Statement of Operations in research and development – licenses acquired.

 

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. For the six months ended June 30, 2017, Checkpoint expensed a non-refundable milestone payment of $0.4 million associated with the successful completion of toxicology studies under the terms of the Jubilant License. For the six-month ended June 30, 2016, Checkpoint paid an upfront fee of $2.0 million, included in research and development-licenses acquired in the Condensed Consolidated Statements of Operations.

 

In connection with the Jubilant License, Checkpoint entered into a 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 June 30, 2017 and 2016, Checkpoint recognized $0.1 million and $1.0 million, respectively, and for the six months ended June 30, 2017 and 2016, Checkpoint recognized $0.6 million and $1.0 million, respectively, in revenue related to the sublicense agreement in the Condensed Consolidated Statements of Operations.

 

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 June 30, 2017 and 2016, approximately $9,000 and $3,000, respectively, was recognized in revenue from the collaboration agreement with TGTX in the Condensed Consolidated Statements of Operations. For the six months ended June 30, 2017 and 2016, approximately $38,000 and $20,000, 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 up to approximately $14.5 million in milestone payments 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 up to approximately $14.5 million in milestone payments 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 six months ended June 30, 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 up to approximately $0.1 million in milestone payments 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.

 

HER2 Technology License 

 

On May 31, 2017, Mustang entered into an exclusive license agreement with the COH for the use of human epidermal growth factor receptor 2 (HER2) CAR T technology (HER2 Technology), which will initially be applied in the treatment of glioblastoma multiforme. Pursuant to the Agreement, Mustang paid an upfront fee of $0.6 million on July 3, 2017; in addition, an annual maintenance fee of $50,000 will commence in 2019. Additional payments of up to $14.9 million are due upon and subject to the achievement of ten development milestones, and royalty payments in the mid-single digits are due on net sales of licensed products.

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

CS1 Technology License 

 

On May 31, 2017, Mustang entered into an exclusive license agreement with the COH for the use of CS1 specific CAR T technology (CS1 Technology) to be directed against multiple myeloma. Pursuant to the Agreement, Mustang paid an upfront fee of $0.6 million on July 3, 2017; in addition, an annual maintenance fee of $50,000 will commence in 2019. Additional payments of up to $14.9 million are due upon and subject to the achievement of ten development milestones, and royalty payments in the mid-single digits are due on net sales of licensed products.

 

PSCA Technology License 

 

On May 31, 2017, Mustang entered into an exclusive license agreement with the COH for the use of prostate stem cell antigen (PSCA) CAR T technology (PSCA Technology) to be used in the treatment of prostate cancer. Pursuant to the Agreement, Mustang paid an upfront fee of $0.3 million on July 3, 2017; in addition, an annual maintenance fee of $50,000 will commence in 2019. Additional payments of up to $14.9 million are due upon and subject to the achievement of ten development milestones, and royalty payments in the mid-single digits are due on net sales of licensed products.

 

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.

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

9. Sponsored Research Agreements

 

Checkpoint Therapeutics, Inc.

 

NeuPharma, Inc. Sponsored Research Agreement

 

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 June 30, 2017 and 2016, approximately $0.2 million and $0.2 million, respectively, was recognized in revenue in connection with the Sponsored Research Agreement in the Condensed Consolidated Statements of Operations. For the six months ended June 30, 2017 and 2016, approximately $0.4 million and $0.5 million, respectively, was recognized in revenue in connection with the Sponsored Research Agreement in the Condensed Consolidated Statements of Operations.

 

Helocyte, Inc.

 

PepVax and Triplex Clinical Research and Support Agreements

 

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 June 30, 2017 and 2016, Helocyte incurred expense of $0.5 million and nil, related to the Triplex Research Agreement and nil related to their PepVax Research Agreement, recorded as research and development expense in the Company’s Condensed Consolidated Statements of Operations. For the six months ended June 30, 2017 and 2016, Helocyte incurred expense of $1.0 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.

 

Pentamer Sponsored Research Agreement

 

On May 1, 2017, Helocyte and COH entered in a Sponsored Research Agreement for preclinical studies in connection with the development of Pentatmer. In June 2017, Helocyte made an upfront payment of $1.5 million to fund the development plan, the payment was recorded as a prepayment on the Condensed Consolidated Balance Sheets. For the three and six months ended June 30, 2017, Helocyte recorded approximately $12,000 in research and development expenses in the Company’s Condensed Consolidated Statements of Operations.  No such expense was incurred in 2016.

 

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 June 30, 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.  For the six months ended June 30, 2017 and 2016, Mustang incurred expense of $1.0 million and $1.0 million, respectively, recorded as research and development expense in the Company’s Condensed Consolidated Statements of Operations.  

 

CD 123 Clinical Research Support Agreement

 

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 approximately $20,000 and will contribute an additional $0.1 million per patient 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 and six months ended June 30, 2017 Mustang recorded approximately $22,000 and $0.6 million, respectively, in research and development expenses in the Company’s Condensed Consolidated Statements of Operations.  

 

 IL - 13 Clinical Research Support Agreement

 

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 approximately $10,000 and will contribute an additional $0.1 million per patient 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 and six months ended June 30, 2017, Mustang recorded approximately $11,000 and $1.0 million, respectively, in research and development expenses in the Company’s Condensed Consolidated Statements of Operations.  

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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 June 30, 2017 and 2016, Journey recognized expense of approximately $0.1 million and $21,000, respectively, which was recorded in costs of goods sold in the Company’s Condensed Consolidated Statements of Operations. For the six months ended June 30, 2017 and 2016, Journey recognized expense of approximately $0.3 million and $21,000, respectively, which was recorded in costs of goods sold in the Company’s Condensed Consolidated Statements of Operations.

  

11. Debt and Interest

 

Debt

 

Total debt consists of the following as of June 30, 2017 and December 31, 2016:

 

		June 30,				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
2017 Subordinated Note Financing			13,893				-				8.00	%		May - 2020
2017 Subordinated Note Financing			1,820				-				8.00	%		June - 2020
Opus Credit Facility			9,500				7,000				12.00	%		Sep - 2018
Helocyte Convertible Note, at fair value			1,076				1,031				5.00% - 8.00%			December 2017
Helocyte Convertible Note, at fair value			2,135				2,051				5.00% - 8.00%			March - 2018
Helocyte Convertible Note, at fair value			1,032				991				5.00% - 8.00%			April - 2018
Helocyte Convertible Note, at fair value			430				414				5.00% - 8.00%			May - 2018
Avenue Convertible Note, at fair value			-				200				5.00% - 8.00%			June - 2018
Total notes payable			51,677				30,224
Less: Discount on notes payable			4,723				2,009
Total notes payable		$	46,954			$	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 June 30, 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 I (“NAM Biotech Fund”) and NAM Special Situations Fund I QP, LLC (“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 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 June 30, 2017.

 

On May 1, 2017, the Company held a second closing of the 2017 Subordinated Note Financing and received gross proceeds of $8.6 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.

 

On May 31, 2017, the Company held a third closing of the 2017 Subordinated Note Financing and received gross proceeds of $5.3 million, before expenses. NSC received a placement agent fee of approximately $0.5 million in the third closing and warrants to purchase 147,806 shares of the Company’s common stock at an exercise price of $3.61 per share.

 

On June 30, 2017, the Company held a fourth closing of the 2017 Subordinated Note Financing and received gross proceeds of $1.8 million, before expenses. NSC received a placement agent fee of approximately $0.2 million in the fourth closing and warrants to purchase 38,315 shares of the Company’s common stock at an exercise price of $4.75 per share.

  

Opus Credit Facility

 

As of June 30, 2017, the Company had $9.5 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 $1.6 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 June 30,								For the Three Months Ended June 30,
($ in thousands)		2017				2016				2017				2016
IDB Note
Interest		$	87			$	79			$	169			$	159
Amortization of fees			-				-				-				1
Total IDB Note			87				79				169				160
NSC Debt
Interest			84				144				155				311
Amortization of fees			40				54				73				422
Total NSC Debt			124				198				228				733
NHLD Debt
Interest			406				-				406				-
Amortization of fees			175				-				175				-
Total NHLD Debt			581				-				581				-
Opus Credit Facility
Interest			276				-				508				-
Amortization of fees			241				-				454				-
Total Opus Note			517				-				962				-
LOC Fees
Interest			7				3				15				7
Total LOC			7				3				15				7
Helocyte Convertible Note
Interest			57				-				111				-
Financing fee			-				249				1				249
Total Helocyte Convertible Note			57				249				112				249
Avenue Convertible Note
Interest			5				-				5				-
Financing fee			-				-				3				-
Total Helocyte Convertible Note			5				-				8				-
D&O Insurance
Interest			2				-				3				-
Total D&O Insurance			2				-				3				-
Total Interest Expense and Financing Fee		$	1,380			$	529			$	2,078			$	1,149

 

 

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:

 

		June 30,				December 31,
($ in thousands)		2017				2016
Accrued expenses:
Professional fees		$	1,748			$	1,253
Salaries, bonuses and related benefits			2,295				2,846
Accrued Severance			-				53
Ovamed manufacturing rights - short term component			-				900
Research and development			2,914				394
Dr. Falk Pharma milestone			2,852				2,634
Other			2,564				2,002
Total accrued expenses		$	12,373			$	10,082
Other long-term liabilities:
Deferred rent and long-term lease abandonment charge			5,026				5,014
Total other long-term liabilities		$	5,026			$	5,014

 

National's accounts payable and other accrued expenses as of March 31, 2017, consisted of the following:

 

		March 31,
		2017
Legal		$	766
Audit			287
Telecommunications			187
Data Services			348
Regulatory			1,061
Settlements			1,131
Deferred rent			630
Contingent consideration payable			121
Other			2,592
Total		$	7,123

 

13. Non-Controlling Interests

 

Non-controlling interests in consolidated entities, as recorded on the Condensed Consolidated Balance Sheets are as follows:

 

		As of June 30, 2017
($ in thousands)		Avenue				Coronado SO				Mustang				Checkpoint				JMC				Helocyte				Cellvation				Caelum				National Holdings				Total
NCI equity share		$	3,089			$	(236	)		$	47,009			$	22,026			$	(570	)		$	(1,677	)		$	(151	)		$	(3	)		$	17,022			$	86,509
Net loss attributed to non-controlling interests			(314	)			(7	)			(5,027	)			(6,707	)			(48	)			(599	)			(83	)			(251	)			4,872				(8,164	)
Non-controlling interests in consolidated entities		$	2,775			$	(243	)		$	41,982			$	15,319			$	(618	)		$	(2,276	)		$	(234	)		$	(254	)		$	21,894			$	78,345

 

 

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, as recorded on the Condensed Consolidated Statement of Operations are as follows:

 

		For the three months ended June 30, 2017
($ in thousands)		Avenue				Coronado SO				Mustang				Checkpoint (1)				JMC				Helocyte				Cellvation				Caelum				National Holdings				Total
Non-controlling interests in loss of consolidated entities		$	(246	)		$	(3	)		$	(3,353	)		$	(3,972	)		$	20			$	(276	)		$	(30	)		$	(106	)		$	2,382			$	5,584
Non-controlling ownership (3)			10.2	%			13.0	%			52.0	%			62.4	%			7.0	%			20.0	%			22.0	%			25.5	%			43.4

 

		For the three months ended June 30, 2016
($ in thousands)		Avenue				Coronado SO				Mustang				Checkpoint				JMC				Helocyte				Total
Non-controlling interests in loss of consolidated entities		$	(76	)		$	(5	)		$	(89	)		$	(3,476	)		$	(108	)		$	(157	)		$	(3,911	)
Non-controlling ownership (3)			11.5	%			13.0	%			10.0	%			64.3	%			8.1	%			20.4	%

 

		For the six months ended June 30, 2017
($ in thousands)		Avenue				Coronado SO				Mustang				Checkpoint (1)				JMC				Helocyte				Cellvation				Caelum				National Holdings				Total
Non-controlling interests in loss of consolidated entities		$	(314	)		$	(7	)		$	(5,027	)		$	(6,707	)		$	(48	)		$	(599	)		$	(83	)		$	(251	)		$	4,872			$	(8,164	)
Non-controlling ownership (3)			10.2	%			13.0	%			60.8	%			61.6	%			7.3	%			20.0	%			22.0	%			25.5	%			43.4	%

 

		For the six months ended June 30, 2016
($ in thousands)		Avenue				Coronado SO				Mustang				Checkpoint				JMC				Helocyte				Total
Non-controlling interests in loss of consolidated entities		$	(184	)		$	(10	)		$	(159	)		$	(7,513	)		$	(229	)		$	(254	)		$	(8,349	)
Non-controlling ownership (3)			11.5	%			13.0	%			10.0	%			64.3	%(1)			8.1	%			20.4	%

 

(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 and Avenue are 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 .

(3)

- Represents a weighted average of ownership during the periods presented.

 

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 six months ended June 30, 2017 and 2016:

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

		For the Six Months Ended June 30,
		2017				2016
Warrants to purchase Common Stock			603,316				515,068
Opus warrants to purchase Common Stock			1,880,000				-
Options to purchase Common Stock			1,101,193				1,754,365
Unvested Restricted Stock			9,864,417				8,705,137
Unvested Restricted Stock Units			1,258,372				1,374,083
Total			14,707,298				12,348,653

 

15. Stockholders’ Equity

 

Stock-based Compensation excluding National

 

As of June 30, 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 and six months ended June 30, 2017 and 2016:

 

		For the Three Months Ended June 30,								For the Six Months Ended June 30,
($ in thousands)		2017				2016				2017				2016
Employee awards		$	1,690			$	1,969			$	3,520			$	3,553
Non-employee awards			23				3				36				6
Fortress Companies (1)			3,094				1,051				4,180				2,330
Total stock-based compensation expense		$	4,807			$	3,023			$	7,736			$	5,889

 

(1)

Consists of approximately $19,000 of Avenue's compensation expenses, approximately $2.4 million of Checkpoint's compensation expense, approximately $73,000 of JMC's compensation expenses, approximately $34,000 of Helocyte's compensation expenses, approximately $6,000 of Cellvation's compensation expenses and approximately $183,000 of NHLD's compensation expenses on stock and option grants for the three months ended June 30, 2017 and consists of approximately $24,000 of Avenue's compensation expenses, approximately $3.4 million of Checkpoint's compensation expense, approximately $119,000 of JMC's compensation expenses, approximately $81,000 of Helocyte's compensation expenses, approximately $14,000 of Cellvation's compensation expenses and approximately $183,000 of NHLD's compensation expenses on stock and option grants for the six months ended June 30, 2017.   Consists of approximately $9,000 of Avenue's compensation expenses, approximately $0.8 million of Checkpoint's compensation expense, approximately $147,000 of JMC's compensation expenses and approximately $93,000 of Helocyte's compensation expenses on stock grants for the three months ended June 30, 2016, and approximately $18,000 of Avenue's compensation expenses, approximately $1.9 million of Checkpoint's compensation expense, approximately $328,000 of JMC's compensation expenses and approximately $93,000 of Helocyte's compensation expenses on stock grants for the six months ended June 30, 2016.

 

For the three months ended June 30, 2017 and 2016, approximately $2.4 million and $1.1 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 $2.2 million and $1.9 million, respectively, was included in general and administrative expenses in connection with grants made to employees, members of the board of directors and consultants.

 

For the six months ended June 30, 2017 and 2016, approximately $3.2 million and $2.4 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 $4.3 million and $3.5 million, respectively, was included in general and administrative expenses in connection with grants made to employees, members of the board of directors and consultants.

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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
Exercised			(20,000	)			1.37				67,600				-
Options vested and expected to vest at June 30, 2017			1,110,501			$	3.78			$	1,826,461				4.46
Options vested and exercisable			1,085,501			$	3.75			$	1, 826,461				4.43

 

As of June 30, 2017, and 2016, Fortress had unrecognized stock-based compensation expense related to options of nil and $33,000, respectively, with a weighted average vesting period of nil and 0.03 years, respectively. As of June 30, 2017, and 2016, Mustang had unrecognized stock-based compensation expense related to options of $2.8 million and nil, respectively, with a weighted average vesting period of 1.8 years and nil, respectively. As of June 30, 2017, and 2016, Journey had unrecognized stock-based compensation expense related to options of $0.2 million and $0.2 million, respectively, with a weighted average vesting period of 1.2 years and 0.9 years, respectively.

 

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			197,500				3.74
Restricted stock units forfeited			(15,000	)			2.98
Restricted stock units vested			(138,750	)			3.47
Unvested balance at June 30, 2017			11,249,908			$	2.52

 

As of June 30, 2017 and 2016, the Company had unrecognized stock-based compensation expense related to restricted stock and restricted stock unit awards of approximately $2.7 million and $6.4 million, respectively, which is expected to be recognized over the remaining weighted-average vesting period of 2.3 years and 2.4 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 June 30, 2017, 199,995 shares have been purchased and 5 shares are available for future sale under the Company’s ESPP. Share-based compensation expense recorded was approximately $40,000 and $30,000, respectively for the three months ended June 30, 2017 and 2016 and was approximately $75,000 and $56,000, respectively, for the six months ended June 30, 2017 and 2016.

 

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			608,505				3.61				518,724				4.86
Forfeited			(123,007	)			8.39				-				-
Outstanding as of June 30, 2017			2,748,951			$	3.40			$	940,203				3.77
Exercisable as of June 30, 2017			768,951			$	4.37			$	765,203				3.75

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Long-Term Incentive Program (“LTIP”)

 

On January 1, 2017 and 2016, the Compensation Committee granted 552,698 and 510,434, shares each to Lindsay Rosenwald and Michael Weiss, respectively. These equity grants, made in accordance with the LTIP, represent one percent (1%) of total outstanding shares of the Company as of the dates of such grants and were granted in recognition of their performance in 2016 and 2015. 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 for the 2017 grant and $1.4 million for the 2016 grant. For the three ended June 30, 2017 and 2016, the Company recorded approximately $0.2 million and $0.1 million, and approximately $0.3 million and $0.1 million, for the six months ended June 30, 2017 and 2016, respectively, related to these grants in general and administrative expenses on the Condensed Consolidated Statements of Operations. These grants are expensed by the Company over the remaining life of the LTIP which expires in July 2025.

 

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 June 30, 2017 and 2016, Checkpoint re-measured its non-employee grant and recorded expense of approximately $1.9 million and $0.5 million, respectively, and $2.4 million and $1.2 million, respectively, for the six months ended June 30, 2017 and 2016, 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 $0.4 million and $0.4 million, respectively, for the three months ended June 30, 2017 and 2016 and $1.0 million and $0.7 million, respectively, for the six months ended June 30, 2017 and 2016, in general and administrative expenses on the Condensed Consolidated Statements of Operations.

 

Avenue Therapeutics, Inc.

 

In connection with stock grants made to both employees and non-employees, Avenue for the three months ended June 30, 2017 and 2016, recorded approximately $10,000 and $4,000, respectively, as general and administrative expenses and approximately $10,000 and $4,000, respectively, as research and development expenses on the Condensed Consolidated Statements of Operations. For the six months ended June 30, 2017 and 2016, Avenue recorded approximately $12,000 and $9,000, respectively, as general and administrative expenses and approximately $12,000 and $9,000, respectively, as research and development expenses on the Condensed Consolidated Statements of Operations.

 

Journey Medical Corporation

 

During the six months ended June 30, 2017, JMC granted option awards to numerous sales employees exercisable for 320,000 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:

 

			June 30, 2017
Risk-free interest rate			1.14% - 2.25	%
Expected dividend yield			-	%
Expected term in years			5.00 - 6.98
Expected volatility			95.25% - 105.95	%

   

Mustang Bio, Inc.

 

The employment agreement grants Dr. Litchman an option to purchase 1,041,675 shares of Mustang common stock to acquire shares of common stock of Mustang (the “Option”). The Option has an exercise price per share equal to the fair market value of a share of Mustangs’ common stock $5.73 on the date of the grant of the stock option, subject to the conditions and vesting schedule set forth in his Employment Agreement.

 

On April 7, 2017, Mustang granted 200,000 options to two employees of Fortress, who provide services to Mustang in connection with our research and development. These options have an exercise price of $5.73, representing the fair market value of a share of Mustangs’ common stock on the date of the grant of the stock option.

 

Both grants have the following vesting schedule: 50% of the options vest over-time with 25% vesting over 12 months of continued service, with the remaining 25% vesting in 12 equal installments thereafter, subject to continued employment. The remaining 50% vest and become exercisable upon the occurrence of the following milestones being achieved: (i) 25% of the grant vest upon the dosing of the first patient in the first Phase 2 clinical trial of any Mustang product candidate, (ii) 25% of the grant vest upon the dosing of the first patient in the first Phase 2 clinical trial of a second Mustang product candidate, (iii) 25% of the grant vest upon Mustangs’ achievement of a fully-diluted market capitalization of $500,000,000 and (iv) 25% of the grant vest upon Mustangs’ achievement of a fully-diluted market capitalization of $1,000,000,000.

 

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, expected dividend yield, and a stock price of $5.73. Mustang does not expect to pay dividends in the foreseeable future. As a result, the expected dividend yield is 0%. The value associated with the market award vesting was determined utilizing a Monte Carlo simulation valuation methodology and the following assumptions:

 

		June 30, 2017
Risk-free interest rate			2.38	%
Expected dividend yield			-	%
Expected term in years			5.5 to 10.0
Expected volatility			77.3	%

   

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following table summarizes stock option activities for the six months ended June 30, 2017:

 

		Stock Options				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life (in years)
Nonvested at December 31, 2016			-			$	-				-
Options granted			1,241,675			$	5.73				9.81
Options outstanding			1,241,675				5.73				9.81
Options vested and exercisable at June 30, 2017			-			$	-				-

 

As of June 30, 2017, Mustang had unrecognized stock-based compensation expense related to options of $2.1 million with a weighted average vesting period of 9.81 years.

 

During the three and six months ended June 30, 2017, stock-based compensation associated with the amortization of stock option expense was approximately $64,000 and $0.1 million, respectively. During the three and six months ended June 30, 2016, stock-based compensation associated with the amortization of stock option expense was approximately $0.1 million and $0.3 million, respectively. Expenses were recorded in general and administrative expense on the condensed Consolidated Statements of Operations.

  

Helocyte, Inc.

 

For the three months ended June 30, 2017 and 2016, Helocyte re-measured its non-employee grants and recorded expense of approximately $25,000 and $68,000, respectively, in research and development expenses on the Condensed Consolidated Statements of Operations.

 

For the three months ended June 30, 2017 and 2016, Helocyte recorded approximately $8,000 and $25,000, respectively, as general and administrative expenses on the Condensed Consolidated Statements of Operations.

 

For the six months ended June 30, 2017 and 2016, Helocyte re-measured its non-employee grants and recorded expense of approximately $62,000 and $68,000, respectively, in research and development expenses on the Condensed Consolidated Statements of Operations.

 

For the six months ended June 30, 2017 and 2016, Helocyte recorded approximately $18,000 and $25,000, respectively, as general and administrative expenses on the Condensed Consolidated Statements of Operations.

 

Cellvation, Inc.

 

For the three and six months ended June 30, 2017, Cellvation recorded expenses for non-employee grants of approximately $2,000 and $5,000, respectively, 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 and six months ended June 30, 2017, Cellvation recorded approximately $4,000 and $8,000, respectively, 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 Raises

 

Avenue

 

On June 30, 2017, Avenue completed an initial public offering (“IPO”) of its common stock, which resulted in the issuance of 6,325,000 shares of its common stock, inclusive of 825,000 shares which were subject to an underwriter over-allotment. The shares were issued at $6.00 per share, resulting in net proceeds of approximately $34.5 million after deducting underwriting discounts and other offering costs. Immediately preceding the IPO, Avenue effected a 3-For-1 reverse stock split.

 

In conjunction with the closing of the IPO, Avenue issued warrants in connection with its NSC Debt and its Convertible Notes.

 

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”). 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.

 

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 June 30, 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.

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

As of June 30, 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.

 

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 June 30, 2017 and 2016, the Company invoiced TGTX $0.4 million and $0.2 million, respectively. For the six months ended June 30, 2017 and 2016, the Company invoiced TGTX $0.6 million and $0.3 million, respectively. At June 30, 2017, the amount receivable from TGTX approximated $0.3 million.

 

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 June 30, 2017, the Company had paid $1.2 million in rent under the Desk Space Agreements, and invoiced OPPM and TGTX approximately $0.1 Million and $0.5 million, respectively, for their prorated share of the rent base. In addition, for the six months ended June 30, 2017, the Company had incurred $0.2 million in connection with the build out of the space and recorded a receivable of $89,000 due from TGTX and $20,000 due from OPPM. At June 30, 2017, the amount due from TGTX approximated $0.2 million and the amount due from OPPM approximated $0.2 million.

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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 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 and six months ended June 30, 2017, NSC earned a placement agent fee of $1.6 million and $1.9 million, respectively, and a Placement Agent Warrant to purchase 508,505 shares of the Company’s common stock, all of which are outstanding, with exercise prices ranging from $3.61 to $4.75.

 

Avenue IPO

 

On June 30, 2017, Avenue completed an IPO in which NSC acted as co-manager and earned fees and commissions of approximately $2.3 million that were deducted from the proceeds.

 

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 subsidiaries’ certificates of incorporation.

 

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. 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.

 

On June 30, 2017, pursuant to the Founders’ Agreement, Avenue, in connection with its IPO, issued to Fortress approximately 158,000 shares of its common stock representing the 2.5% fee.

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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, Caelum, Helocyte and Mustang. Pursuant to the agreements with Avenue, Helocyte, Mustang and Caelum, 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 Caelum and Helocyte, and up to $7,500 per month from Avenue and Mustang. Checkpoint is billed at a blended hourly rate, for services incurred. For the three and six months ended June 30, 2017, Checkpoint incurred approximately $28,000 and $48,000, respectively, in hourly fees.

 

National

 

As of June 30, 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

 

NSC 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 March 31, 2017, National Securities had net capital of $7,924,058 which was $7,674,058 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, Inc. (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 March 31, 2017, vFinance Investments had net capital of $2,167,442 which was $1,167,442 in excess of its required net capital of $1,000,000. vFinance Investments' ratio of aggregate indebtedness to net capital was 0.8 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.

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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.

  

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 June 30, 2017		Sales				Development				National				Consolidated
Net Revenue		$	4,054			$	350			$	46,293			$	50,697
Direct cost of goods			(878	)			-				-				(878	)
Sales and marketing costs			(2,610	)			-				-				(2,610	)
Research and development			-				(13,483	)			-				(13,483	)
General and administrative			(293	)			(8,231	)			-				(8,524	)
National Expenses			-				-				(48,395	)			(48,395	)
Segment loss from operations		$	273			$	(21,364	)		$	(2,102	)		$	(23,193	)
Segment assets		$	5,447			$	167,787			$	76,612			$	249,846

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

		Dermatology				Pharmaceutical and
		Products				Biotechnology Product
Three Months Ended June 30, 2016		Sales				Development				Consolidated
Net Revenue		$	982			$	1,248			$	2,230
Direct cost of goods			(324	)			-				(324	)
Sales and marketing costs			(1,998	)			-				(1,998	)
Research and development			-				(8,407	)			(8,407	)
General and administrative			-				(6,637	)			(6,637	)
Segment loss from operations		$	(1,340	)		$	(13,796	)		$	(15,136	)
Segment assets		$	3,058			$	95,004			$	98,062

 

		Dermatology				Pharmaceutical and Biotechnology
($ in thousands)		Products				Product
Six Months Ended June 30, 2017		Sales				Development				National				Consolidated
Net Revenue		$	6,139			$	1,043			$	88,197			$	95,379
Direct cost of goods			(1,347	)			-				-				(1,347	)
Sales and marketing costs			(4,877	)			-				-				(4,877	)
Research and development			-				(21,887	)			-				(21,887	)
General and administrative			(612	)			(15,897	)			-				(16,509	)
National Expenses			-				-				(91,529	)			(91,529	)
Segment loss from operations		$	(697	)		$	(36,741	)		$	(3,332	)		$	(40,770	)
Segment assets		$	5,447			$	167,787			$	76,612			$	249,846

 

		Dermatology				Pharmaceutical and
		Products				Biotechnology
Six Months Ended June 30, 2016		Sales				Product Development				Consolidated
Net Revenue		$	1,364			$	1,526			$	2,890
Direct cost of goods			(324	)			-				(324	)
Sales and marketing costs			(3,884	)			-				(3,884	)
Research and development			-				(16,243	)			(16,243	)
General and administrative			-				(12,666	)			(12,666	)
Segment loss from operations		$	(2,844	)		$	(27,383	)		$	(30,227	)
Segment assets		$	3,058			$	95,004			$	98,062

 

Significant Customers

 

For the three months ended June 30, 2017, two of the Company’s customers each accounted for more than 10.0% of its total gross revenue in the amount of $4.2 million and $2.2 million, respectively. The revenue from these customers is captured in the product revenue, net line item within the Condensed Consolidated Statements of Operations. For the six months ended June 30, 2017, two of the Company’s customers each accounted for more than 10.0% of its total gross revenue in the amount of $5.3 million and $3.8 million, respectively. The revenue from these customers is captured in the product revenue, net line item within the Condensed Consolidated Statements of Operations.

 

For the three months ended June 30, 2016, three of our customers accounted for more than 10.0% of our total revenue in the amount of $0.3 million, $0.3 million, and $0.3 million, respectively. The revenue from these customers is captured in the product revenue, net line item within the Condensed Consolidated Statement of Operations. For the six months ended June 30, 2016, three of our customers accounted for more than 10.0% of our total revenue in the amount of $0.6 million, $0.3 million, and $0.3 million, respectively.

 

At June 30, 2017, two of the Company’s customers each accounted for more than 10.0% of its total accounts receivable balance in the amount of $2.1 million and $0.7 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.

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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

 

NSC Note

 

On July 5, 2017, the Company and Avenue repaid their respective outstanding NSC Notes totaling $3.6 million. Avenue repaid $3.0 million and the Company repaid $0.6 million.\

 

Fortress Note Payable - Avenue

 

On July 25, 2017, Avenue repaid its Fortress Note in the amount of $3.8 million.

 

 

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this Form 10-Q. Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expect,” “anticipate,” “intend,” “believe,” “may,” “plan”, “seek” or similar language. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our business and financial performance are subject to substantial risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the information set forth under the heading “Risk Factors” herein and in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

Overview

 

Since inception on June 28, 2006, we have been a biopharmaceutical company involved in the development of novel immunotherapy agents for the treatment of autoimmune diseases and cancer. We focus on acquiring, developing and commercializing novel pharmaceutical and biotechnology products. We develop and commercialize products both within Fortress and through certain of our subsidiary companies, which are sometimes 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 our internal development programs, we leverage our biopharmaceutical business expertise and drug development capabilities to provide funding and management services to help Fortress Companies achieve their goals. The Company and the Fortress Companies may seek licenses, 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. References in this report to “we,” “us,” “our,” “the Company” and “Fortress” refer to Fortress Biotech, Inc. and the Fortress Companies.

 

Business Strategy

 

Our business approach is designed for maximum flexibility, allowing us to invest in a broad array of new technologies with clinical and commercial potential and products related to financial services. It enables us to move quickly to take advantage of time-sensitive opportunities when necessary and provides us with a range of options that allow us to select what we believe is the most advantageous corporate or financial structure for each investment candidate. We seek to acquire and invest in drugs, technologies and operating subsidiaries with high growth potential. We have made significant progress with the above initiatives and believe our novel business approach will provide opportunities to achieve synergies across multiple Fortress Companies.

 

As of June 30, 2017, we had 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, as of June 30, 2017, we are the majority owner of National.

  

Recent Events

 

Fortress

 

On March 31, 2017, we entered into Note Purchase Agreements with NAM Biotech Fund II, LLC and NAM Special Situations Fund I QP, LLC, both of which are accredited investors, in connection with our subordinated promissory note financing (the “2017 Subordinated Note Financing”).

 

National Securities Corporation (“NSC”), a subsidiary of National and a related party (see Note 17 in the Notes to Unaudited Condensed Consolidated Financial Statements above), acts as the placement agent in the 2017 Subordinated Note Financing. NSC receives a cash placement agent fee equal to 10% of the aggregate proceeds raised and warrants equal to 10% of the aggregate principal amount of the notes sold divided by the closing share price of our common stock on the date of closing.

 

As of June 30, 2017, we had issued notes totaling approximately $19.0 million in the 2017 Subordinated Note Financing and, in connection therewith, paid placement agent fees of approximately $1.9 million to NSC. In addition, as of June 30, 2017, we had issued warrants to NSC for 508,505 shares of our common stock in connection with the 2017 Subordinated Note Financing.

 

 

Avenue Therapeutics, Inc.

 

On June 30, 2017, Avenue completed an initial public offering (“IPO”) of its common stock, resulting in net proceeds of approximately $34.5 million after deducting underwriting discounts, and other offering costs. Avenue expects to use the proceeds from the above transaction to initiate their first Phase 3 trial in patients with moderate-to-severe pain following bunionectomy.

 

On May 19, 2017, Avenue announced that Notice of Allowance had been received from the U.S. Patent and Trademark Office (USPTO) for a new patent application (U.S. Application No. 15/163,111), entitled "Intravenous Administration of Tramadol.” The patent application describes and claims a dosing regimen of intravenous (IV) 50 mg tramadol that provides certain pharmacokinetic parameters that are similar to those of 100 mg tramadol HCl administered orally every 6 hours at steady state. This patent application falls under Avenue’s licensing agreement with Revogenex Ireland Ltd.

 

Checkpoint

 

On June 26, 2017, Checkpoint’s common stock commenced trading on the NASDAQ Capital Market under the symbol “CKPT” and ceased trading on the OTCQX^® Best Market.

 

Caelum Biosciences, Inc.

 

On June 1, 2017 Caelum entered a biopharmaceutical manufacturing agreement with Patheon N.V. for process development and current good manufacturing practices (cGMP) production of Caelum’s lead therapy CAEL-101. The agreement will support Phase 2/3 studies of CAEL-101 for the treatment of amyloid light chain (“AL”) amyloidosis, a rare systemic disorder that leads to the buildup of amyloid proteins in and around tissues, nerves and organs, resulting in organ damage and high mortality rates. CAEL-101 is currently being evaluated by study sponsor Columbia University (“Columbia”) in a Phase 1b study in AL amyloidosis.  

 

In May 2017 study sponsor Columbia dosed the final patient in the Phase 1b clinical trial of CAEL-101.

 

In April 2017, the U.S. Department of Health & Human Services confirmed the transfer of two U.S. Food and Drug Administration (FDA) Orphan Drug Designations for CAEL-101 (also known as 11-1F4) from Columbia to Caelum. The two Orphan Drug Designations include the use of CAEL-101 as a therapeutic agent for patients with AL amyloidosis, and the use of CAEL-101 as a radio-imaging agent in amyloidosis. Caelum in-licensed CAEL-101 from Columbia in January 2017.

 

Mustang Bio, Inc.

 

Licenses 

On May 31, 2017 Mustang entered into exclusive, worldwide licensing agreements City of Hope (“COH”) for the use of three novel CAR T therapies in the development of cancer treatments. The CAR T therapies covered under the agreements include: human epidermal growth factor receptor 2 (HER2) CAR T technology (HER2 Technology), which will initially be applied in the treatment of glioblastoma multiforme; CS1-specific CAR T technology (CS1 Technology) to be directed against multiple myeloma; and prostate stem cell antigen (PSCA) CAR T technology (PSCA Technology) to be used in the treatment of prostate cancer. All three technologies were developed in the laboratory of Stephen J. Forman, M.D., director of COH’s T cell Immunotherapy Research Laboratory.

 

In April 2017, Mustang appointed Manuel Litchman, M.D., as President and Chief Executive Officer. Dr. Litchman also joined Mustang’s Board of Directors. Michael S. Weiss, who oversaw Mustang’s corporate operations on an interim basis, will continue to serve as Chairman of the Board of Directors.

 

 

Reportable Business Segments

 

For presentation purposes, Results of Operations is presented on a detailed revenue and expense basis rather than on a reportable business segment basis. Our operations are subject to wide fluctuations due to our early stage of development. The following provides a summary of revenues and expenses for the periods presented.

 

Results of Operations

 

General

 

For the six months ended June 30, 2017, we generated $95.4 million of net revenue of which $88.2 million of revenue relates to National, $1.0 million of revenue is in connection with Checkpoint’s collaborative agreements with TGTX and $6.1 million of revenue relates primarily to the sale of Journey branded products. At June 30, 2017, we had an accumulated deficit of $274.6 million. While we may in the future generate revenue from a variety of sources, including license fees, milestone payments, research and development payments in connection with strategic partnerships and/or product sales, our and our subsidiaries’ current product candidates are at an early stage of development and may never be successfully developed or commercialized. Accordingly, we expect to continue to incur substantial losses from operations for the foreseeable future, and there can be no assurance that we will ever generate significant revenues.

 

 

For the six months ended June 30, 2017 we had $1.3 million of costs of goods sold in connection with the sale of JMC branded products, compared to $0.3 million at June 30, 2016.

 

Research and Development Expenses

 

Research and development costs primarily consist of personnel related expenses, including salaries, benefits, travel, and other related expenses, stock-based compensation, payments made to third parties for license and milestone costs related to in-licensed products and technology, payments made to third party contract research organizations for preclinical and clinical studies, investigative sites for clinical trials, consultants, the cost of acquiring and manufacturing clinical trial materials, costs associated with regulatory filings and patents, laboratory costs and other supplies.

 

Also included in research and development expense is the total purchase price for the licenses acquired during the applicable reporting period.

 

For the three months ended June 30, 2017 and 2016, research and development expenses were approximately $11.7 million and $6.3 million, respectively. Additionally, during the three months ended June 30, 2017 and 2016, we expensed $1.8 million and $2.1 million, respectively, in costs related to the acquisition of licenses. Noncash, stock-based compensation expense included in research and development for the three months ended June 30, 2017 and 2016, was $2.4 million and $1.1 million, respectively.

 

Included in the $11.7 million and $6.3 million figures for the three months ended June 30, 2017 and 2016, respectively, are the following subsidiary level expenses related to license development: Avenue: $0.4 million and $0.3 million; Checkpoint: $5.5 million and $2.8 million; Escala: $0.2 million and $0.3 million; Helocyte: $0.9 million and $0.1 million; and Mustang $2.5 million and $0.5 million. Additionally, for the three months ended June 30, 2017 and 2016, expenses related to CNDO-109 and TSO were $0.1 million and $0.1 million, and $0.2 million and $0.2 million, respectively. Also included in research and development expenses for the three months ended June 30, 2017 and 2016, were $1.6 million and $0.9 million, respectively, of employee costs.

 

For the six months ended June 30, 2017 and 2016, research and development expenses were approximately $18.8 million and $14.1 million, respectively. Additionally, during the six months ended June 30, 2017 and 2016, we expensed $3.1 million and $2.1 million, respectively, in costs related to the acquisition of licenses. Noncash, stock-based compensation expense included in research and development for the six months ended June 30, 2017 and 2016, was $3.2 million and $2.4 million, respectively.

 

Included in the $18.8 million and $14.1 million research and development expense figures for the six months ended June 30, 2017 and 2016, respectively are the following subsidiary level expenses related to license development: Avenue: $0.6 million and $0.8 million; Checkpoint: $8.8 million and $4.4 million; Escala: $0.5 million and $0.6 million; Helocyte: $1.9 million and $2.1 million; and Mustang: $3.2 million and $1.0 million. Additionally, for the six months ended June 30, 2017 and 2016, expenses related to CNDO-109 and TSO were $0.2 million and $0.6 million, and $0.2 million and $0.4 million respectively. Employee costs of $2.8 million and $2.0 million were also included in research and development expenses for the six-months ended June 30, 2017 and 2016, respectively. We anticipate research and development expenses will increase in future periods, reflecting continued and increasing product development costs.

 

General and Administrative Expenses

 

General and administrative expenses consist principally of personnel-related costs, professional fees for legal, consulting, audit and tax services, rent and other general operating expenses not otherwise included in research and development expenses. For the three months ended June 30, 2017 and 2016, general and administrative expenses were approximately $11.1 million and $8.8 million, respectively. Noncash, stock-based compensation expense included in general and administrative expenses for the three months ended June 30, 2017 and 2016, was $2.2 million and $1.9 million, of which $1.3 million and $1.4 million relates to Fortress, $0.1 million and $0.2 million relates to JMC, $0.3 million and nil relates to Mustang, and $0.4 million and $0.4 million relates to Checkpoint, respectively. 

 

Included in the remaining $8.9 million and $6.9 million figures for the three months ended June 30, 2017 and 2016, respectively are the following subsidiary level expenses, which include subsidiary employee costs: JMC: $2.8 million and $1.9 million; Checkpoint: $0.9 million and $1.0 million; Helocyte: $0.2 million and $0.5 million; Mustang: $1.4 million and $0.4 million, Avenue: $0.3 million and $0.2 million, Caelum: $0.2 million and nil. Also included in general and administrative expenses for the three months ended June 30, 2017 and 2016, respectively were costs related to Fortress of: $1.5 million and $1.0 million of employee costs, $0.3 million and $0.9 million of legal costs, $0.2 million and $0.2 million for rent and $1.1 million and $1.2 million of public company costs.

 

For the six months ended June 30, 2017 and 2016, general and administrative expenses were approximately $21.4 million and $16.7 million, respectively. Noncash, stock-based compensation expense included in general and administrative expenses for the six months ended June 30, 2017 and 2016, was $4.3 million and $3.5 million, of which $2.8 million and $2.4 million relates to Fortress, $0.1 million and $0.3 million relates to JMC, $0.3 million and nil relates to Mustang, and $1.0 million and $0.7 million relates to Checkpoint, respectively. We anticipate general and administrative expenses will increase in future periods, reflecting continued and increasing costs associated with:

 

 

·

support of our expanded research and development activities;

·

support of business development activities; and

·

an expanding infrastructure and increased professional fees and other costs associated therewith.

 

Included in the remaining $17.1 million and $13.2 million figures for the six months ended June 30, 2017 and 2016, respectively are the following subsidiary level expenses: JMC: $5.4 million and $3.6 million; Checkpoint: $1.7 million and $1.6 million; Helocyte: $0.5 million and $0.7 million; Escala: $37,000 and $0.7 million; and Mustang: $2.1 million and $0.6 million. Also included in general and administrative expenses for the six months ended June 30, 2017 and 2016, respectively were $2.9 million and $2.1 million of employee costs, $0.7 million and $1.8 million of legal costs, $0.4 million and $0.9 million of rent, and $2.4 million and $1.7 million of public company costs related to Fortress.

 

Comparison of three months ended June 30, 2017 and 2016

 

		For the Three Months Ended June 30,								Change
($ in thousands, except per share amounts)		2017				2016				$				%
Revenue
Fortress
Product revenue, net		$	4,054			$	981			$	3,073				313	%
Revenue - from a related party			350				1,249				(899	)			-72	%
Net Fortress revenue			4,404				2,230				2,174				97	%
National
Commissions			23,993				-				23,993				100	%
Net dealer inventory gains			2,366				-				2,366				100	%
Investment banking			10,592				-				10,592				100	%
Investment advisory			3,490				-				3,490				100	%
Interest and dividends			675				-				675				100	%
Transfer fees and clearing services			1,687				-				1,687				100	%
Tax preparation and accounting			3,144				-				3,144				100	%
Other			346				-				346				100	%
Total National revenue			46,293				-				46,293				100	%
Net revenue			50,697				2,230				48,467				2173	%
Operating expenses
Fortress
Cost of goods sold - product revenue			878				324				554				171	%
Research and development			11,683				6,347				5,336				84	%
Research and development – licenses acquired			1,800				2,060				(260	)			-13	%
General and administrative			11,134				8,635				2,499				29	%
Total Fortress operating expenses			25,495				17,366				8,129				47	%
National
Commissions, compensation and fees			41,762				-				41,762				100	%
Clearing fees			618				-				618				100	%
Communications			682				-				682				100	%
Occupancy			936				-				936				100	%
Licenses and registration			427				-				427				100	%
Professional fees			991				-				991				100	%
Interest			4				-				4				100	%
Depreciation and amortization			500				-				500				100	%
Other administrative expenses			2,475				-				2,475				100	%
Total National operating expenses			48,395				-				48,395				100	%
Total operating expenses			73,890				17,366				56,524				325	%
Loss from operations			(23,193	)			(15,136	)			8,057				53	%
Other income (expenses)
Interest income			190				77				113				147	%
Interest expenses			(1,380	)			(529	)			(851	)			161	%
Change in fair value of derivative liabilities			1,452				-				1,452				-100	%
Change in fair value of subsidiary convertible note			(188	)			-				(188	)			100	%
Change in fair value of investments			157				(801	)			958				-120	%
Other income			13				-				13				-100	%
Total other income (expenses)			244				(1,253	)			1,497				119	%
Net loss			(22,949	)			(16,389	)			6,560				40	%
Less: net loss attributable to non-controlling interest			(5,584	)			(3,911	)			1,673				43	%
Net loss attributable to common stockholders		$	(17,365	)		$	(12,478	)		$	4,887				39	%

 

  

Net revenues increased $48.5 million or 2173% from the three months ended June 30, 2016 to the three months ended June 30, 2017. The increase in net revenue is related to an increase in product revenue of $3.3 million associated with Journey’s branded products, offset slightly by a decrease in Journey’s co-promote revenue of $0.3 million, as well as a decrease of $0.9 million in collaboration revenue between Checkpoint and TGTX. National’s revenue increased by $46.3 million of which $24.0 million is commissions, this increase was due to the acquisition of National September 2016 with no revenue attributable to National prior to the acquisition.

 

Cost of goods sold increased by $0.6 million or 171% from the three months ended June 30, 2016 to the three months ended June 30, 2017 due to the increase in Journey branded product revenue in the second quarter of 2017 as compared to the second quarter of 2016.

 

Research and development expenses increased $5.3 million or 84% from the three months ended June 30, 2016 to the three months ended June 30, 2017. This increase is attributable to increases in spending of: $0.6 million for Helocyte related to clinical trial agreements with the COH for the development of Pentamer, $0.3 million for Fortress related to Effcon CRO, $1.9 million for Mustang and $2.1 million for Checkpoint related to increased clinical research activity, (inclusive of $0.2 million and $0.2 million, respectively, of employee cost increases), and $0.1 million each for Caelum and Cyprium for sponsored research. Personnel costs related to Fortress increased by $0.2 million during the three months ended June 30, 2017 as compared to the three months ended June 30, 2016, as a result of an increase in employee headcount while non-cash stock compensation expenses increased by $1.3 million, due to the increase in the valuation of non-employee awards granted by Checkpoint.

 

During the three months ended June 30, 2017, we made expenditures totaling $1.8 million in connection with new research and development licenses as follows: for Mustang $1.5 million, and Fortress $0.3 million, compared with $2.1 million in new research and development licenses purchased by Checkpoint during the three months ended June 30, 2016.   

 

General and administrative expenses increased $2.5 million or 29% from the three months ended June 30, 2016 to the three months ended June 30, 2017. The increase is related to $0.9 million for the continued building of our sales and marketing infrastructure at JMC (including increasing the headcount of its out-sourced sales force from 15 to 29), $0.9 million for the increase in headcount excluding JMC (of which $0.5 million relates to Fortress, $0.1 million to Caelum and $0.1 million to Mustang). Finally, stock compensation expense increased by $0.3 million from the three months ended June 30, 2016 due to new stock grants by Mustang.

 

National’s operating expenses increased by $48.4 million or 100% for the three months ended June 30, 2017, this increase is related to our acquisition of National in September 2016. We incurred no costs related to National for the three months ended June 30, 2016.

 

Interest expense increased $0.9 million, or 161% from the three months ended June 30, 2016 to the three months ended June 30, 2017. The increase in interest is primarily related to amounts owed under the Opus Credit Facility and the 2017 Subordinated Note Financing. 

 

Comparison of six months ended June 30, 2017 and 2016

 

		For the Six Months Ended June 30,								Change
($ in thousands, except per share amounts)		2017				2016				$				%
Revenue
Fortress
Product revenue, net		$	6,139			$	1,364			$	4,775				350	%
Revenue - from a related party			1,043				1,526				(483	)			-32	%
Net Fortress revenue			7,182				2,890				4,292				149	%
National
Commissions			48,499				-				48,499				100	%
Net dealer inventory gains			4,877				-				4,877				100	%
Investment banking			17,653				-				17,653				100	%
Investment advisory			6,875				-				6,875				100	%
Interest and dividends			1,391				-				1,391				100	%
Transfer fees and clearing services			4,185				-				4,185				100	%
Tax preparation and accounting			4,000				-				4,000				100	%
Other			717				-				717				100	%
Total National revenue			88,197				-				88,197				100	%
Net revenue			95,379				2,890				92,489				3200	%
Operating expenses
Fortress
Cost of goods sold - product revenue			1,347				324				1,023				316	%
Research and development			18,793				14,100				4,693				33	%
Research and development – licenses acquired			3,094				2,143				951				44	%
General and administrative			21,386				16,550				4,836				29	%
Total Fortress operating expenses			44,620				33,117				11,503				35	%
National
Commissions, compensation and fees			79,020				-				79,020				100	%
Clearing fees			1,356				-				1,356				100	%
Communications			1,404				-				1,404				100	%
Occupancy			1,944				-				1,944				100	%
Licenses and registration			832				-				832				100	%
Professional fees			2,254				-				2,254				100	%
Interest			8				-				8				100	%
Depreciation and amortization			1,006				-				1,006				100	%
Other administrative expenses			3,705				-				3,705				100	%
Total National operating expenses			91,529				-				91,529				100	%
Total operating expenses			136,149				33,117				103,032				311	%
Loss from operations			(40,770	)			(30,227	)			10,543				35	%
Other income (expenses)
Interest income			326				152				174				114	%
Interest expenses			(2,078	)			(1,149	)			929				81	%
Change in fair value of derivative liabilities			5,794				(89	)			5,883				6610	%
Change in fair value of subsidiary convertible note			(285	)			-				(285	)			100	%
Change in fair value of investments			(511	)			(1,719	)			(1,208	)			-70	%
Other income			13				-				13				-100	%
Total other income (expenses)			3,259				(2,805	)			6,064				216	%
Net loss			(37,511	)			(33,032	)			4,479				14	%
Less: net loss attributable to non-controlling interest			(8,164	)			(8,349	)			(185	)			-2	%
Net loss attributable to common stockholders		$	(29,347	)		$	(24,683	)		$	4,664				19	%

 

 

Net revenues increased $92.5 million or 3200% from the six months ended June 30, 2016 to the six months ended June 30, 2017. The increase in net revenue is related to an increase in product revenue of $5.3 million associated with Journey’s branded products, offset slightly by a decrease in Journey’s co-promote revenue of $0.6 million, as well as a decrease of $0.5 million in collaboration revenue between Checkpoint and TGTX. National’s revenue increased by $88.2 million of which $48.5 million is commissions, this increase was due to the acquisition in of National September 2016 with no revenue attributable to National prior to the acquisition.

 

 Cost of goods sold increased by $1.0 million or 316% from the six months ended June 30, 2016 to the six months ended June 30, 2017 due to Journey branded product revenue in 2017 versus three months of sales during the six-month period ended June 30, 2016.

 

Research and development expenses increased $4.7 million or 33% from the six months ended June 30, 2016 to the six months ended June 30, 2017. This increase is attributable to increases in spending of: $3.1 million for Checkpoint related to development programs and $2.1 million related to Mustang for sponsored research. Personnel costs increased by $1.2 million during the six months ended June 30, 2017 as compared to the six months ended June 30, 2016, as a result of an increase in employees at the subsidiary level while non-cash stock compensation expenses increased by $0.8 million.

 

During the six months ended June 30, 2017, we made expenditures totaling $3.1 million in connection with new research and development licenses as follows: for Mustang $2.1 million, Checkpoint $0.4 million, Caelum $0.2 million, Cyprium $0.1 million, and Fortress $0.3 million compared with $2.1 million in new research and development licenses purchased by Checkpoint during the six months ended June 30, 2016.

 

  General and administrative expenses increased $4.8 million or 29% from the six months ended June 30, 2016 to the six months ended June 30, 2017. The increase is related to $1.5 million for the continued building of our sales and marketing infrastructure at JMC (including increasing the headcount of its out-sourced sales force from 15 to 29), $1.4 million for the increase in headcount excluding JMC (of which $0.8 million relates to Fortress, $0.3 million to Caelum, and $0.1 million to Mustang). Finally, stock compensation expense increased by $0.9 million from the six months ended June 30, 2016 due to grants made to new employees.

 

 

National’s operating expenses increased by $91.5 million or 100% for the six months ended June 30, 2017, this increase is related to our acquisition of National in September 2016. We incurred no costs related to National for the six months ended June 30, 2016.

 

Interest expense increased $0.9 million or 81% from the six months ended June 30, 2016 to the six months ended June 30, 2017. The increase in interest is primarily related to amounts owed under the Opus Credit Facility and the 2017 Subordinated Note Financing.

 

Liquidity and Capital Resources

 

We may require additional financing to fully develop and prepare regulatory filings, obtain regulatory approvals for our existing and new product candidates, fund operating losses, and, if deemed appropriate, establish or secure through third parties manufacturing for our potential products, sales and marketing capabilities. We have funded our operations to date primarily through the sale of equity and debt securities. We believe that our current cash, including access to committed lines of credit, is sufficient to fund operations for at least the next twelve months. A failure to raise capital as and when needed would have a material adverse impact on our financial condition and our ability to pursue our business strategies. We may seek funds through equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing. Adequate additional funding may not be available to us on acceptable terms or at all. If adequate funds are not available to us when needed, we may be required to delay, curtail or eliminate one or more of our research and development programs and, potentially, delay our growth strategy.

 

Cash Flows for the Six Months Ended June 30, 2017 and 2016

 

		For the Six Months Ended June 30,
($ in thousands)		2017				2016
Statement of cash flows data:
Total cash (used in)/provided by:
Operating activities		$	(35,369	)		$	(19,019	)
Investing activities			(21,165	)			(6,921	)
Financing activities			112,584				(906	)
Net increase (decrease) in cash and cash equivalents		$	56,050			$	(26,846	)

 

Operating Activities

 

Net cash used in operating activities increased $16.4 million from the six months ended June 30, 2016, compared to the six months ended June 30, 2017. The increase was primarily due to the decrease of $5.9 million in the fair value of derivative liabilities related to $6.2 million of National's contingently issuable warrants, an increase of $4.5 million in net loss, a decrease in the fair value of investments of $1.2 million, and a decrease of $9.6 million in changes in operating assets and liabilities partially offset by an increase of $1.3 million of depreciation and amortization expense of which $0.4 million related to amortization of National's intangible assets related to our ownership in National, and $1.0 million increase of expense related to research and development-licenses acquired.

  

Investing Activities

 

Net cash used in investing activities increased $14.2 million from the six months ended June 30, 2016, compared to the six months ended June 30, 2017 The increase is primarily due to a $20.0 million increase in the purchase of short-term investments with the purchase of certificates of deposit by Mustang, offset by the decrease of $3.8 million in the purchase of property and equipment as the build-out of the New York City office is complete, as well as a decrease of $1.4 million in funds used to purchase research and development licenses. 

 

Financing Activities

 

Net cash provided by financing activities was $112.6 million for the six months ended June 30, 2017, compared to $0.9 million of net cash used financing activities for the six months ended June 30, 2016. During the six months ended June 30, 2017, net proceeds from subsidiaries’ offerings were $92.4 million, net proceeds from the 2017 Subordinated Note Financing were $17.0 million, and proceeds from the Opus credit facility were $2.5 million. During the six months ended June 30, 2016, we paid-off $2.8 million of the NSC Note, partially offset by proceeds from subsidiary offering of $0.6 million, proceeds from at-the-market offering of $0.4 million and proceeds from subsidiaries’ Convertible Note of $1.0 million.

 

Item 3.   Quantitative and Qualitative Disclosures About Market Risks

 

Market risk represents the risk of loss that may result from the change in value of financial instruments due to fluctuations in their market price. Market risk is inherent in all financial instruments. Market risk may be exacerbated in times of trading illiquidity when market participants refrain from transacting in normal quantities and/or at normal bid-offer spreads. Our exposure to market risk is directly related to derivatives, debt and equity linked instruments related to our financing activities.

 

 

Our assets and liabilities are denominated in U.S. dollars. Consequently, we have not considered it necessary to use foreign currency contracts or other derivative instruments to manage changes in currency rates. We do not now, nor do we plan to, use derivative financial instruments for speculative or trading purposes. However, these circumstances might change.

 

The primary quantifiable market risk associated with our financial instruments is sensitivity to changes in interest rates. Interest rate risk represents the potential loss from adverse changes in market interest rates. We use an interest rate sensitivity simulation to assess our interest rate risk exposure. For purposes of presenting the possible earnings effect of a hypothetical, adverse change in interest rates over the 12-month period from our reporting date, we assume that all interest rate sensitive financial instruments will be impacted by a hypothetical, immediate 100 basis point increase in interest rates as of the beginning of the period. The sensitivity is based upon the hypothetical assumption that all relevant types of interest rates that affect our results would increase instantaneously, simultaneously and to the same degree. We do not believe that our cash and equivalents have significant risk of default or illiquidity.

 

The sensitivity analyses of the interest rate sensitive financial instruments are hypothetical and should be used with caution. Changes in fair value based on a 1% or 2% variation in an estimate generally cannot be extrapolated because the relationship of the change in the estimate to the change in fair value may not be linear. Also, the effect of a variation in a particular estimate on the fair value of financial instruments is calculated independent of changes in any other estimate; in practice, changes in one factor may result in changes in another factor, which might magnify or counteract the sensitivities. In addition, the sensitivity analyses do not consider any action that we may take to mitigate the impact of any adverse changes in the key estimates.

  

Based on our analysis, for the years ended December 31, 2015, December 31, 2016 and for the interim period through June 30, 2017, we determined the effect of a 100+/- basis point change in interest rates on the value of our financial instruments and the resultant effect on our net loss to be immaterial.

 

Item 4.   Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness, as of June 30, 2017, of the design and operation of our disclosure controls and procedures, as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

No change in internal control over financial reporting occurred during the most recent quarter with respect to our operations, which materially affected, or is reasonable likely to materially affect, our internal controls over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1.   Legal Proceedings

 

None.

 

Item 1A.   Risk Factors

  

Investing in our Common Stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q including the consolidated financial statements and the related notes, as well as the risks, uncertainties and other information set forth in the reports and other materials filed or furnished by our majority-controlled subsidiaries National Holdings Corporation (“NHLD” or “National”), Checkpoint Therapeutics, Inc. (“Checkpoint”), Mustang Bio, Inc. (“Mustang”) and Avenue Therapeutics, Inc. (“Avenue”) with the SEC, before deciding to invest in shares of our Common Stock. If any of the following risks or the risks included in the public filings of NHLD, Checkpoint, Mustang or Avenue were to materialize, our business, financial condition, results of operations, and future growth prospects could be materially and adversely affected. In that event, the market price of our Common Stock could decline and you could lose part of or all of your investment in our Common Stock.

 

Risks Related to our Growth Strategy

 

If we acquire, enter into joint ventures with or obtain a controlling interest in companies in the future, it could adversely affect our operating results and the value of our Common Stock thereby diluting stockholder value and disrupting our business.

  

As part of our growth strategy, we might acquire, enter into joint ventures with, or obtain a significant ownership stake in other companies. Acquisitions of, joint ventures with and investments in other companies, such as our acquisition of a controlling interest in NHLD, involve numerous risks, including, but not necessarily limited to:

 

 

·	risk of entering new markets in which we have little to no experience;

 

·	diversion of financial and managerial resources from existing operations;

 

·	successfully negotiating a proposed acquisition or investment timely and at a price or on terms and conditions favorable to us;

 

·	the impact of regulatory reviews on a proposed acquisition or investment;

 

·	the outcome of any legal proceedings that may be instituted with respect to the proposed acquisitions or investment;

 

·	with respect to an acquisition, difficulties in integrating operations, technologies, services and personnel; and

 

·	potential inability to maintain relationships with customers of the companies we may acquire or invest in.

 

 If we fail to properly evaluate potential acquisitions, joint ventures or investments, we might not achieve the anticipated benefits of any such transaction, we might incur costs in excess of what we anticipate, and management resources and attention might be diverted from other necessary or valuable activities.

 

If certain of our subsidiaries cannot innovate and develop products and services and/or continue to commercialize biopharmaceutical products or grow our and their respective businesses, we may not be able to generate revenue.

 

Our growth strategy also depends on our and our subsidiaries’ ability to generate revenue. If we and our subsidiaries cannot innovate and develop products and services or continue to commercialize current and future biopharmaceutical products or grow their respective businesses, we may not be able to generate revenue growth as anticipated.

 

We may not be able to generate returns for our investors if certain of our subsidiaries, most of which have limited or no operating history, no commercialized revenue generating products, and are not yet profitable, cannot obtain additional third-party financing.

 

As part of our growth strategy, we have made and will likely continue to make substantial investments in our subsidiaries, which at the time of investment generally have limited or no operating history, no commercialized revenue generating products, and require additional third-party financing to fund product and services development or acquisitions. Our business depends in large part on one or more of our subsidiaries’ ability to innovate, in-license, acquire or invest in successful biopharmaceutical products, develop financial services and/or acquire companies in increasingly competitive and highly regulated markets. If certain of our subsidiaries do not successfully obtain additional third-party financing to commercialize products, successfully acquire companies or participate in the financial services industry, as applicable, the value of our businesses and our ownership stakes in our subsidiaries may be materially adversely affected.

  

If we cannot continue to fund our and certain of our subsidiaries’ research and development programs, we and our subsidiaries may be required to reduce product development, which will adversely impact our growth strategy.

 

Our and certain of our subsidiaries’ research and development (“R&D”) programs will require substantial additional capital to conduct research, preclinical testing and human studies, establish pilot scale and commercial scale manufacturing processes and facilities, and establish and develop quality control, regulatory, marketing, sales and administrative capabilities to support these programs. We expect to fund our and certain of our subsidiaries’ R&D activities from a combination of cash generated from royalties and milestones from our partners in various past, ongoing and future collaborations and additional equity or debt financings from third parties. These financings could depress our stock price. If additional funds are required to support our or our subsidiaries’ operations and such funds cannot be obtained on favorable terms, we and certain of our subsidiaries may not be able to develop products, which will adversely impact our growth strategy.

 

Collaborative relationships with third parties could cause us or certain of our subsidiaries to expend significant resources and incur substantial business risk with no assurance of financial return.

 

We anticipate substantial reliance upon strategic collaborations for marketing and commercializing our and certain of our subsidiaries’ existing product candidates, and we and our subsidiaries may rely even more on strategic collaborations for R&D of other product candidates. We and certain of our subsidiaries may sell product offerings through strategic partnerships with pharmaceutical and biotechnology companies. If we or our subsidiaries are unable to establish or manage such strategic collaborations on terms favorable to us in the future, our revenue and drug development may be limited.

 

 

If we or certain of our subsidiaries enter into R&D collaborations during the early phases of drug development, success will in part depend on the performance of research collaborators. Neither we nor certain of our subsidiaries will directly control the amount or timing of resources devoted by research collaborators to activities related to product candidates. Research collaborators may not commit sufficient resources to our or our subsidiaries’ R&D programs. If any research collaborator fails to commit sufficient resources, the preclinical or clinical development programs related to the collaboration could be delayed or terminated. Also, collaborators may pursue existing or other development-stage products or alternative technologies in preference to those being developed in collaboration with us or our subsidiaries. Finally, if we or certain of our subsidiaries fail to make required milestone or royalty payments to collaborators or to observe other obligations in agreements with them, the collaborators may have the right to terminate or stop performance of those agreements.

 

Establishing strategic collaborations is difficult and time-consuming. Our and certain of our subsidiaries’ discussions with potential collaborators may not lead to the establishment of collaborations on favorable terms, if at all. Potential collaborators may reject collaborations based upon their assessment of our and our subsidiaries’ financial, regulatory or intellectual property position. Even if we or our subsidiaries successfully establish new collaborations, these relationships may never result in the successful development or commercialization of product candidates or the generation of sales revenue. To the extent that we or our subsidiaries enter into collaborative arrangements, the related product revenues are likely to be lower than if we or our subsidiaries directly marketed and sold products.

 

Management of our relationships with collaborators will require:

 

·	significant time and effort from our management team, as well as from the management teams of our subsidiaries;

 

·	coordination of our and certain of our subsidiaries’ marketing and R&D programs with the respective marketing and R&D priorities of our collaborators; and

 

·	effective allocation of our and our subsidiaries’ resources to multiple projects.

 

 As we continue to execute our growth strategy, we may be subject to further government regulation which would adversely affect our operations.

 

If we engage in business combinations and other transactions that result in holding passive investment interests in a number of entities, we may become subject to regulation under the Investment Company Act of 1940, as amended (the “Investment Company Act”). If we do become subject to the Investment Company Act, we would be required to register as an investment company and could be expected to incur significant registration and compliance costs in the future.

 

We may not be able to manage our anticipated growth, which may in turn adversely impact our business.

 

We will need to continue to expend funds on improving our infrastructure to address our anticipated growth. Acquisitions of companies or products could place a strain on our management, and administrative, operational and financial systems. In addition, we may need to hire, train and manage more employees, focusing on their integration with us and corporate culture. Integration and management issues associated with increased acquisitions may require a disproportionate amount of our management’s time and attention and distract our management from other activities related to running our business.

 

We may not be able to hire or retain key officers or employees for our Company, and in some cases, our subsidiaries, to implement our business strategy and develop products and businesses.

 

Our success depends on the continued contributions of our executive officers, financial, scientific and technical personnel and consultants, and on our ability to attract additional personnel for us and, in some cases, our subsidiaries as we continue to implement our growth strategy and acquire and invest in companies with varied businesses. During our and our subsidiaries’ operating history, many essential responsibilities have been assigned to a relatively small number of individuals. However, as we continue to implement our growth strategy and our subsidiaries grow, the demands on our key employees will expand and we will need to recruit additional qualified employees for us and, possibly, for our subsidiaries. The competition for such qualified personnel is intense, and the loss of services of certain key personnel or our or our subsidiaries’ inability to attract additional personnel to fill critical positions could adversely affect our business.

 

We currently depend heavily upon the efforts and abilities of our management team and the management teams of our subsidiaries. The loss or unavailability of the services of any of these individuals could have a material adverse effect on our business, prospects, financial condition and results. In addition, we have not obtained, do not own, nor are we the beneficiary of key-person life insurance for any of our and our subsidiaries’ key personnel. We only maintain a limited amount of directors’ and officers’ liability insurance coverage. There can be no assurance that this coverage will be sufficient to cover the costs of the events that may occur, in which case, there could be a substantial impact on our and our subsidiaries’ ability to continue operations.

 

 

Certain of our officers and directors serve in similar roles with our subsidiaries, affiliates, related parties and other parties with whom we transact business; ongoing and future relationships and transactions between these parties could result in conflicts of interest.

 

We share directors and/or officers with certain of our subsidiaries, affiliates, related parties or other companies with which we transact business, and such arrangements could create conflicts of interest in the future, including with respect to the allocation of corporate opportunities. While we believe that we have put in place policies and procedures to identify such conflicts and that any existing agreements that may give rise to such conflicts and any such policies or procedures were negotiated at arm’s length in conformity with fiduciary duties, such conflicts of interest may nonetheless arise. The existence and consequences of such potential conflicts could expose us and our subsidiaries to lost profits, claims by our investors and creditors, and harm to our and our subsidiaries’ results of operations.

  

Risks Related to Our Biopharmaceutical Business and Industry

 

We are an early-stage company, with limited operating history on which stockholders can base an investment decision.

 

We are primarily an early-stage biopharmaceutical company and certain of our subsidiaries, on whose success we largely rely, are also early-stage biopharmaceutical companies. To date, we and certain of our subsidiaries have engaged primarily in R&D and investment activities and have not generated any revenues from product sales. We and certain of our subsidiaries have incurred significant net losses since inception. As of June 30, 2017, we had an accumulated deficit of approximately $274.6 million. We and certain of our subsidiaries have not demonstrated the ability to perform the functions necessary for the successful commercialization of any of our products. The successful commercialization of our and certain of our subsidiaries’ products will require us and our subsidiaries to perform a variety of functions, including, but not necessarily limited to:

 

·	identifying, developing, and commercializing product candidates;

 

·	entering into successful licensing and other arrangements with product development partners;

 

·	continuing to undertake pre-clinical development and clinical trials;

 

·	participating in regulatory approval processes;

 

·	formulating and manufacturing products; and

 

·	conducting sales and marketing activities.

 

Our operations have been limited to acquiring, developing and securing the proprietary rights for, and undertaking pre-clinical development and clinical trials of product candidates, and making investments in other companies. These operations provide a limited basis for our stockholders and prospective investors to assess our ability to commercialize product candidates, develop potential product candidates and make successful investments in other companies, as well as for you to assess the advisability of investing in our securities. Each of these requirements will require substantial time, effort and financial resources.

 

If we or certain of our subsidiaries are unable to establish or maintain sales and marketing capabilities or fail to enter into agreements with third parties to market, distribute and sell products that may be successfully developed, neither we nor our subsidiaries may be able to effectively market and sell products and continue to generate product revenue.

 

Neither we nor our biopharmaceutical subsidiaries (other than Journey Medical Corporation) currently have the infrastructure for the sales, marketing and distribution of any of our product candidates, and we and certain of our subsidiaries must build and maintain this infrastructure or make arrangements with third parties to perform these functions in order to continue to commercialize any products that we may successfully develop. The establishment and development of a sales force, either by us, certain of our subsidiaries or jointly with a partner, or the establishment of a contract sales force to market any products we or our subsidiaries may develop, is expensive and time-consuming and could delay any product launch or compromise the successful commercialization of products. If we, certain of our subsidiaries, or our respective partners, are unable to establish and maintain sales and marketing capabilities or any other non-technical capabilities necessary to commercialize any products that may be successfully developed, we or certain of our subsidiaries will need to contract with third parties to market and sell such products. We or certain of our subsidiaries may not be able to establish arrangements with third parties on acceptable terms, or at all.

  

If any of our or certain of our subsidiaries’ product candidates that are successfully developed do not achieve broad market acceptance among physicians, patients, healthcare payors and the medical community, the revenues that any such product candidates generate from sales will be limited.

 

Even if our or certain of our subsidiaries’ product candidates receive regulatory approval, they may not gain market acceptance among physicians, patients, healthcare payors and the medical community. Coverage and reimbursement of our or certain of our subsidiaries’ product candidates by third-party payors, including government payors, generally is also necessary for commercial success. The degree of market acceptance of any approved products will depend on a number of factors, including, but not necessarily limited to:

 

·	the efficacy and safety as demonstrated in clinical trials;

 

·	the timing of market introduction of such product candidate as well as competitive products;

 

 

·	the clinical indications for which the product is approved;

 

·	acceptance by physicians, major operators of hospitals and clinics and patients of the product as a safe and effective treatment;

 

·	the potential and perceived advantages of product candidates over alternative treatments;

 

·	the safety of product candidates seen in a broader patient group, including its use outside the approved indications;

 

·	the cost of treatment in relation to alternative treatments;

 

·	the availability of adequate reimbursement and pricing by third parties and government authorities;

 

·	the approval, availability, market acceptance and reimbursement for a companion diagnostic, if any;

 

·	relative convenience and ease of administration;

 

·	the prevalence and severity of side effects and adverse events;

 

·	the effectiveness of our sales and marketing efforts; and

 

·	unfavorable publicity relating to the product.

 

If any product candidate is approved but does not achieve an adequate level of acceptance by physicians, hospitals, healthcare payors and patients, we or certain of our subsidiaries may not generate sufficient revenue from these products and in turn we may not become or remain profitable.

 

Healthcare reform and changes to restrictions on reimbursements are difficult to predict and may limit our financial returns.

  

Our ability and the ability of certain of our subsidiaries and all of our respective collaborators to commercialize product candidates that are successfully developed may depend, in part, on the extent to which government health administration authorities, private health insurers and other organizations will reimburse consumers for the cost of these products. These third parties are increasingly challenging both the need for and the price of new drug products. Significant uncertainty exists as to the reimbursement status of newly approved therapeutics. Adequate third-party reimbursement may not be available for our or certain of our subsidiaries’ product candidates, which would prevent those product candidates from selling at price levels sufficient to realize an appropriate return on investments in research and product development.

 

Additionally, we are unable to predict the future course of federal or state health care legislation and regulations, including regulations related to the health care reform legislation enacted in 2010, known as the Affordable Care Act. The Affordable Care Act and any revisions or replacements of that Act, any substitute legislation, and other changes in the law or regulatory framework could have a material adverse effect on our business.

 

Failure to be included in formularies developed by managed care organizations and coverage by other organizations may negatively impact the utilization of our and certain of our subsidiaries’ products, which could harm our and our subsidiaries’ market shares and could have a material adverse effect on our business and financial condition.

 

Managed care organizations and other third party payors try to negotiate the pricing of medical services and products to control their costs. Managed care organizations and pharmacy benefit managers typically develop formularies to reduce their cost for medications. Formularies can be based on the prices and therapeutic benefits of the available products. Due to their lower costs, generic products are often favored. The breadth of the products covered by formularies varies considerably from one managed care organization to another, and many formularies include alternative and competitive products for treatment of particular medical conditions. Failure to be included in such formularies or to achieve favorable formulary status may negatively impact the utilization and market share of our and certain of our subsidiaries’ products. If our and our subsidiaries’ products are not included within an adequate number of formularies or adequate reimbursement levels are not provided, or if those policies increasingly favor generic products, this could have a material adverse effect on our business and financial condition.

 

Our product candidates and certain of our subsidiaries’ product candidates are at an early stage of development and may not be successfully developed or commercialized.

 

Our existing product candidates, and most of our subsidiaries’ product candidates remain in the early stage of development and will require substantial further capital expenditures, development, testing and regulatory clearances prior to commercialization. The development and regulatory approval process takes several years and it is not likely that our product candidates or all our subsidiaries’ product candidates, even if successfully developed and approved by the FDA, would be commercially available for several years. Of the large number of drugs in development, only a small percentage successfully completes the FDA regulatory approval process and is commercialized. Accordingly, even if we and our subsidiaries are able to obtain the requisite financing to fund development programs, we cannot assure you that any of our or our subsidiaries’ product candidates will be successfully developed or commercialized, which could result in the failure of our business and a loss of your investment in our Company.

 

 

Because we and certain of our subsidiaries in-license certain product candidates from third parties, any dispute with the licensors or the non-performance of such license agreements may adversely affect our and our subsidiaries’ ability to develop and commercialize the applicable product candidates.

  

All of our existing product candidates and certain of our subsidiaries’ product candidates, including related intellectual property rights, were in-licensed from third parties. Under the terms of the license agreements, the licensors generally have the right to terminate such agreements in the event of a material breach. The licenses require us and certain of our subsidiaries to make annual, milestone or other payments prior to commercialization of any product and our and our subsidiaries’ ability to make these payments depends on the ability to generate cash in the future. These license agreements also generally require the use of diligent and reasonable efforts to develop and commercialize product candidates.

 

If there is any conflict, dispute, disagreement or issue of non-performance between us or one of our subsidiaries, on the one hand, and the respective licensing partner, on the other hand, regarding the rights or obligations under the license agreements, including any conflict, dispute or disagreement arising from a failure to satisfy payment obligations under such agreements, the ability to develop and commercialize the affected product candidate may be adversely affected.

 

Product candidates that we or certain of our subsidiaries advance into clinical trials may not receive regulatory approval.

 

Pharmaceutical development has inherent risk. We and certain of our subsidiaries will be required to demonstrate through well-controlled clinical trials that product candidates are effective with a favorable benefit-risk profile for use in their target indications before seeking regulatory approvals for their commercial sale. Success in early clinical trials does not mean that later clinical trials will be successful, as product candidates in later-stage clinical trials may fail to demonstrate sufficient safety or efficacy despite having progressed through initial clinical testing. Also, we or our subsidiaries may need to conduct additional clinical trials that are not currently anticipated. Companies frequently suffer significant setbacks in advanced clinical trials, even after earlier clinical trials have shown promising results. As a result, product candidates that we or our subsidiaries advance into clinical trials may not receive regulatory approval.

 

In addition, even if our or certain of our subsidiaries’ product candidates were to obtain approval, regulatory authorities may approve any of such product candidates or any future product candidate for fewer or more limited indications than we or our subsidiaries request, may not approve the price we or our subsidiaries intend to charge for our products, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve a product candidate with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that product candidate. Any of these scenarios could compromise the commercial prospects for one or more of our or our subsidiaries current or future product candidates.

 

Any product candidates we or certain of our subsidiaries advance into clinical development are subject to extensive regulation, which can be costly and time consuming, cause unanticipated delays or prevent the receipt of the required approvals to commercialize product candidates.

 

The clinical development, manufacturing, labeling, storage, record-keeping, advertising, promotion, import, export, marketing and distribution of any product candidate, including our product candidates, and certain of our subsidiaries’ product candidates, is subject to extensive regulation by the FDA in the United States and by comparable health authorities in foreign markets. In the United States, neither we nor our subsidiaries are permitted to market our product candidates until such product candidate’s Biologics License Application (“BLA”) or New Drug Application is approved by the FDA. The process of obtaining approval is expensive, often takes many years and can vary substantially based upon the type, complexity and novelty of the products involved. Certain of our subsidiaries’ development of individualized immunotherapies, if any, will face similar challenges. In addition to the significant clinical testing requirements, our and our subsidiaries’ ability to obtain marketing approval for product candidates depends on obtaining the final results of required non-clinical testing, including characterization of the manufactured components of our and our subsidiaries’ product candidates and validation of our and our subsidiaries’ manufacturing processes. The FDA may determine that our or our subsidiaries’ product manufacturing processes, testing procedures or facilities are insufficient to justify approval. Approval policies or regulations may change and the FDA has substantial discretion in the pharmaceutical approval process, including the ability to delay, limit or deny approval of a product candidate for many reasons. Despite the time and expense invested in clinical development of product candidates, regulatory approval is never guaranteed.

  

The FDA and other regulatory agencies can delay, limit or deny approval of a product candidate for many reasons, including, but not limited to:

 

·	the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials or those of certain of our subsidiaries;

 

·	our or certain of our subsidiaries’ inability to demonstrate to the satisfaction of the FDA that a product candidate is safe and effective for any indication;

 

 

·	the FDA may not accept clinical data from trials which are conducted by individual investigators or in countries where the standard of care is potentially different from that of the United States;

 

·	the results of clinical trials may not meet the level of statistical significance required by the FDA for approval;

 

·	the FDA may disagree with the interpretation of data from preclinical studies or clinical trials;

 

·	the FDA may fail to approve the manufacturing processes or facilities or those of third-party manufacturers with which we, or certain of our subsidiaries or our respective collaborators contract for clinical and commercial supplies; or

 

·	the approval policies or regulations of the FDA may significantly change in a manner rendering the clinical data insufficient for approval.

 

With respect to foreign markets, approval procedures vary among countries and, in addition to the aforementioned risks, can involve additional product testing, administrative review periods and agreements with pricing authorities. In addition, recent events raising questions about the safety of certain marketed pharmaceuticals may result in increased cautiousness by the FDA and comparable foreign regulatory authorities in reviewing new pharmaceuticals based on safety, efficacy or other regulatory considerations and may result in significant delays in obtaining regulatory approvals. Any delay in obtaining, or inability to obtain, applicable regulatory approvals would prevent us or our subsidiaries from commercializing our product candidates.

 

Any product candidate we or certain of our subsidiaries advance into clinical trials may cause unacceptable adverse events or have other properties that may delay or prevent their regulatory approval or commercialization or limit their commercial potential.

 

Unacceptable adverse events caused by any of our or certain of our subsidiaries’ product candidates that we advance into clinical trials could cause regulatory authorities to interrupt, delay or stop clinical trials and could result in the denial of regulatory approval by the FDA or other regulatory authorities for any or all targeted indications and markets. This, in turn, could prevent us or certain of our subsidiaries from commercializing the affected product candidate and generating revenues from its sale. For example, in Phase 1/2 oncology trials, dose limiting toxicity (“DLT”) stopping rules are commonly applied.

 

Neither we nor certain of our subsidiaries have completed testing of all our product candidates for the treatment of the indications for which we intend to seek product approval in humans, and we currently do not know the extent of adverse events, if any, that will be observed in patients who receive any of our or our subsidiaries’ product candidates. If any of our or our subsidiaries’ product candidates cause unacceptable adverse events in clinical trials, neither we nor our subsidiaries may be able to obtain regulatory approval or commercialize such products or, if such product candidates are approved for marketing, future adverse events could cause us or certain of our subsidiaries to withdraw such products from the market.

  

Delays in the commencement of our and certain of our subsidiaries’ clinical trials could result in increased costs and delay our or certain of our subsidiaries’ ability to pursue regulatory approval.

 

The commencement of clinical trials can be delayed for a variety of reasons, including, but not necessarily limited to, delays in:

 

·	obtaining regulatory clearance to commence a clinical trial;

 

·	identifying, recruiting and training suitable clinical investigators;

 

·	reaching agreement on acceptable terms with prospective clinical research organizations (“CROs”) and trial sites, the terms of which can be subject to extensive negotiation, may be subject to modification from time to time and may vary significantly among different CROs and trial sites;

 

·	obtaining sufficient quantities of a product candidate for use in clinical trials;

 

·	obtaining Institutional Review Board (“IRB”) or ethics committee approval to conduct a clinical trial at a prospective site;

 

·	identifying, recruiting and enrolling patients to participate in a clinical trial; and

 

·	retaining (or replacing) patients who have initiated a clinical trial but may withdraw due to adverse events from the therapy, insufficient efficacy, fatigue with the clinical trial process or personal issues.

 

Any delays in the commencement of our or certain of our subsidiaries’ clinical trials will delay our or our subsidiaries’ ability to pursue regulatory approval for product candidates. In addition, many of the factors that cause, or lead to, a delay in the commencement of clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate.

 

 

Suspensions or delays in the completion of clinical testing could result in increased costs and delay or prevent our or certain of our subsidiaries’ ability to complete development of that product or generate product revenues.

 

Once a clinical trial has begun, patient recruitment and enrollment may be slower than we anticipate. Clinical trials may also be delayed as a result of ambiguous or negative interim results or difficulties in obtaining sufficient quantities of product manufactured in accordance with regulatory requirements and on a timely basis. Further, a clinical trial may be modified, suspended or terminated by us or our subsidiaries, an IRB, an ethics committee or a data safety monitoring committee overseeing the clinical trial, any clinical trial site with respect to that site, or the FDA or other regulatory authorities, due to a number of factors, including, but not necessarily limited to:

 

·	failure to conduct the clinical trial in accordance with regulatory requirements or our or our subsidiaries’ clinical protocols;

 

·	inspection of the clinical trial operations or clinical trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;

 

·	stopping rules contained in the protocol;

  

·	unforeseen safety issues or any determination that the clinical trial presents unacceptable health risks; and

 

·	lack of adequate funding to continue the clinical trial.

 

Changes in regulatory requirements and guidance also may occur, and we or certain of our subsidiaries may need to amend clinical trial protocols to reflect these changes. Amendments may require us or certain of our subsidiaries to resubmit clinical trial protocols to IRBs for re-examination, which may in turn impact the costs and timing of, and the likelihood of successfully completing, a clinical trial. If we or our subsidiaries experience delays in the completion of, or if we must suspend or terminate, any clinical trial of any product candidate, our ability or the ability of our subsidiaries to obtain regulatory approval for that product candidate will be delayed and the commercial prospects, if any, for the product candidate may suffer as a result. In addition, many of these factors may also ultimately lead to the denial of regulatory approval of a product candidate.

 

Even if approved, any product candidates that we or certain of our subsidiaries may develop and market may be later withdrawn from the market or subject to promotional limitations.

 

Neither we nor certain of our subsidiaries may be able to obtain the labeling claims necessary or desirable for the promotion of our product candidates if approved. We and certain of our subsidiaries may also be required to undertake post-marketing clinical trials. If the results of such post-marketing studies are not satisfactory or if adverse events or other safety issues arise after approval, the FDA or a comparable regulatory agency in another country may withdraw marketing authorization or may condition continued marketing on commitments from us or our subsidiaries that may be expensive and/or time consuming to complete. In addition, if we or others identify adverse side effects after any of our or our subsidiaries’ products are on the market, or if manufacturing problems occur, regulatory approval may be withdrawn and reformulation of our or our subsidiaries’ products, additional clinical trials, changes in labeling of our or our subsidiaries’ products and additional marketing applications may be required. Any reformulation or labeling changes may limit the marketability of such products if approved.

 

We and certain of our subsidiaries currently rely on third parties to manufacture our preclinical and clinical pharmaceutical supplies and expect to continue to rely on them and other contractors to produce commercial supplies of our products, and our dependence on third-party suppliers could adversely impact our business.

 

We and certain of our subsidiaries depend on third party manufacturers for product supply. If our or our subsidiaries’ contract manufacturers cannot successfully manufacture material that conforms to our specifications and with FDA regulatory requirements, we will not be able to secure and/or maintain FDA approval for those products. Our and our subsidiaries’ third-party suppliers will be required to maintain compliance with cGMPs and will be subject to inspections by the FDA and comparable agencies in other jurisdictions to confirm such compliance. In the event that the FDA or such other agencies determine that our third-party suppliers have not complied with cGMP, the relevant clinical trials could be terminated or subjected to a clinical hold until such time as we are able to obtain appropriate replacement material and/or applicable compliance. Any delay, interruption or other issues that arise in the manufacture, packaging, or storage of our products as a result of a failure of the facilities or operations of our third-party suppliers to pass any regulatory agency inspection could significantly impair our ability to develop and commercialize our and our subsidiaries’ products.

 

 

We and certain of our subsidiaries also rely on our manufacturers to purchase from third-party suppliers the materials necessary to produce product candidates for anticipated clinical trials. There are a small number of suppliers for certain capital equipment and raw materials that are used to manufacture those products. We do not have any control over the process or timing of the acquisition of these raw materials by our manufacturers. Moreover, we currently do not have any agreements for the commercial production of these raw materials. Any significant delay in the supply the raw material components for an ongoing clinical trial could considerably delay completion of our and our subsidiaries’ clinical trials, product testing and potential regulatory approval.

  

We do not expect to have the resources or capacity to commercially manufacture our and certain of our subsidiaries’ products internally, if approved, and will likely continue to be dependent upon third-party manufacturers. Our dependence on third parties to manufacture and supply clinical trial materials and any approved products may adversely affect our and our subsidiaries’ ability to develop and commercialize products in a timely or cost-effective manner, or at all.

 

We and certain of our subsidiaries rely on third parties to conduct clinical trials. If these third parties do not meet agreed upon deadlines or otherwise conduct the trials as required, our or our subsidiaries’ clinical development programs could be delayed or unsuccessful and neither we nor our subsidiaries may be able to obtain regulatory approval for or commercialize our product candidates when expected or at all.

 

Neither we nor certain of our subsidiaries have the ability to conduct all aspects of our preclinical testing or clinical trials ourselves. We and certain of our subsidiaries intend to and do use CROs to conduct planned clinical trials and will and do rely upon such CROs, as well as medical institutions, clinical investigators and consultants, to conduct our trials in accordance with specified clinical protocols. These CROs, investigators and other third parties will and do play a significant role in the conduct of our and certain of our subsidiaries’ trials and the subsequent collection and analysis of data from the clinical trials.

 

There is no guarantee that any CROs, investigators and other third parties upon which we and our subsidiaries rely for administration and conduct of our clinical trials will devote adequate time and resources to such trials or perform as contractually required. If any of these third parties fail to meet expected deadlines, fail to adhere to our clinical protocols or otherwise perform in a substandard manner, our or our subsidiaries’ clinical trials may be extended, delayed or terminated. If any of the clinical trial sites terminate for any reason, we or our subsidiaries may lose follow-up information on patients enrolled in our ongoing clinical trials unless the care of those patients is transferred to another qualified clinical trial site. In addition, principal investigators for our and our subsidiaries’ clinical trials may serve as scientific advisers or consultants to us from time to time and receive cash or equity compensation in connection with such services. If these relationships and any related compensation result in perceived or actual conflicts of interest, the integrity of the data generated at the applicable clinical trial site may be jeopardized.

 

If our competitors develop treatments for any of the target indications of our or certain of our subsidiaries’ product candidates that are approved more quickly, marketed more successfully or demonstrated to be more effective, the commercial opportunity with respect to that product candidate will be reduced or eliminated.

 

We and certain of our subsidiaries operate in highly competitive segments of the biopharmaceutical markets and face competition from many different sources, including commercial pharmaceutical enterprises, academic institutions, government agencies, and private and public research institutions. Our and our subsidiaries’ product candidates, if successfully developed and approved, will compete with established therapies, as well as new treatments that may be introduced by our competitors. Many of our and our subsidiaries’ competitors have significantly greater financial, product development, manufacturing and marketing resources than those of ours and our subsidiaries. Large pharmaceutical companies have extensive experience in clinical testing and obtaining regulatory approval for drugs. In addition, many universities and private and public research institutes are active in clinical and pre-clinical research, some in direct competition with us. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. New developments, including the development of other biological and pharmaceutical technologies and methods of treating disease, occur in the pharmaceutical and life sciences industries at a rapid pace. Developments by competitors may render our and our subsidiaries’ product candidates obsolete or noncompetitive. We and our subsidiaries will also face competition from these third parties in establishing clinical trial sites and patient registration for clinical trials and in identifying and in-licensing new product candidates.

 

We or certain of our subsidiaries may incur substantial product liability or indemnification claims relating to the clinical testing of product candidates.

 

We and certain of our subsidiaries face an inherent risk of product liability exposure related to the testing of product candidates in human clinical trials, and claims could be brought against us if use or misuse of one of our or our subsidiaries’ product candidates causes, or merely appears to have caused, personal injury or death. While we and our subsidiaries have and/or intend to maintain product liability insurance relating to clinical trials, that coverage may not be sufficient to cover potential claims and we or our subsidiaries may be unable to maintain such insurance. Any claims against us or our subsidiaries, regardless of their merit, could severely harm our or our subsidiaries’ financial condition, strain management and other resources or destroy the prospects for commercialization of the product which is the subject of any such claim. We are unable to predict if we or our subsidiaries will be able to obtain or maintain product liability insurance for any products that may be approved for marketing. Additionally, we and certain of our subsidiaries have entered into various agreements under which we indemnify third parties for certain claims relating to product candidates. These indemnification obligations may require us or our subsidiaries to pay significant sums of money for claims that are covered by these indemnifications.

 

 

We and certain of our subsidiaries may use biological materials and hazardous materials, and any claims relating to improper handling, storage or disposal of these materials could be time consuming and costly.

 

We and certain of our subsidiaries may use hazardous materials, including chemicals and biological agents and compounds that could be dangerous to human health and safety or the environment. Our and certain of our subsidiaries’ operations may also produce hazardous waste products. Federal, state and local laws and regulations govern the use, generation, manufacture, storage, handling and disposal of these materials and wastes. Compliance with applicable environmental laws and regulations may be expensive, and current or future environmental laws and regulations may impair our product development efforts. In addition, neither we nor our subsidiaries can entirely eliminate the risk of accidental injury or contamination from these materials or wastes. Neither we nor our subsidiaries carry specific biological or hazardous waste insurance coverage, and our property and casualty and general liability insurance policies specifically exclude coverage for damages and fines arising from biological or hazardous waste exposure or contamination. Accordingly, in the event of contamination or injury, we or any of our subsidiaries could be held liable for damages or penalized with fines in an amount exceeding our respective resources, and clinical trials or regulatory approvals could be suspended.

 

Although we maintain workers’ compensation insurance to cover costs and expenses incurred due to injuries to our and our subsidiaries’ employees resulting from the use of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. Neither we nor our subsidiaries maintain insurance for environmental liability or toxic tort claims that may be asserted in connection with the storage or disposal of biological or hazardous materials.

 

In addition, we and certain of our subsidiaries may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.

 

Our success depends upon our and certain of our subsidiaries’ ability to obtain and maintain intellectual property rights and take advantage of certain regulatory market exclusivity periods.

 

Our success depends, in large part, on our and certain of our subsidiaries’ ability to obtain patent protection for product candidates and their formulations and uses. The patent application process is subject to numerous risks and uncertainties, and there can be no assurance that we, our subsidiaries, or our respective partners will be successful in obtaining patents. These risks and uncertainties include, but are not necessarily limited to, the following:

  

·	patent applications may not result in any patents being issued;

 

·

our and our subsidiaries’ competitors, many of which have substantially greater resources than us, our subsidiaries, or our partners, and many of which have made significant investments in competing technologies, may seek, or may already have obtained, patents that may limit or interfere with our or our subsidiaries’ ability to make, use, and sell potential product candidates;

 

·	there may be significant pressure on the U.S. government and other international governmental bodies to limit the scope of patent protection both inside and outside the United States for disease treatments that prove successful as a matter of public policy regarding worldwide health concerns; and

 

·	countries other than the United States may have patent laws less favorable to patentees than those upheld by U.S. courts, allowing foreign competitors a better opportunity to create, develop and market competing products.

 

In addition, patents that may be issued or in-licensed may be challenged, invalidated, modified, revoked, circumvented, found to be unenforceable, or otherwise may not provide any competitive advantage. Third parties are often responsible for maintaining patent protection for our product candidates and those of our subsidiaries, at our and their expense.  If that party fails to appropriately prosecute and maintain patent protection for a product candidate, our and our subsidiaries’ ability to develop and commercialize or products may be adversely affected and we may not be able to prevent competitors from making, using and selling competing products. Such a failure to properly protect intellectual property rights relating to any of our or our subsidiaries’ product candidates could have a material adverse effect on our financial condition and results of operations.

 

In addition, U.S. patent laws may change, which could prevent or limit us or our subsidiaries from filing patent applications or patent claims to protect products and/or technologies or limit the exclusivity periods that are available to patent holders. For example, on September 16, 2011, the Leahy-Smith America Invents Act (the “Leahy-Smith Act”), was signed into law, and includes a number of significant changes to U.S. patent law. These include changes to transition from a “first-to-invent” system to a “first-to-file” system and to the way issued patents are challenged. The formation of the Patent Trial and Appeal Board now provides a quicker and less expensive process for challenging issued patents. These changes may favor larger and more established companies that have more resources to devote to patent application filing and prosecution. The USPTO implemented the America Invents Act on March 16, 2013.

 

We and our subsidiaries and our respective partners also rely on trade secrets and proprietary know-how to protect product candidates. Although we have taken steps to protect our and our subsidiaries’ trade secrets and unpatented know-how, including entering into confidentiality agreements with third parties, and confidential information and inventions agreements with employees, consultants and advisers, third parties may still come upon this same or similar information independently.

 

 

We also may rely on the regulatory period of market exclusivity for any of our or our subsidiaries’ biologic product candidates that are successfully developed and approved for commercialization. Although this period in the United States is generally 12 years from the date of marketing approval (depending on the nature of the specific product), there is a risk that the U.S. Congress could amend laws to significantly shorten this exclusivity period, as initially proposed by President Obama. Once any regulatory period of exclusivity expires, depending on the status of our and our subsidiaries’ patent coverage and the nature of the product, we may not be able to prevent others from marketing products that are biosimilar to or interchangeable with our or our subsidiaries’ products, which would materially adversely affect us.

  

If we, certain of our subsidiaries or our respective partners are sued for infringing intellectual property rights of third parties, it will be costly and time consuming, and an unfavorable outcome in that litigation would have a material adverse effect on our business.

 

Our success also depends on our ability, many of our subsidiaries’ ability and the ability of any of our respective current or future collaborators to develop, manufacture, market and sell product candidates without infringing the proprietary rights of third parties. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we and our subsidiaries are developing products, some of which may be directed at claims that overlap with the subject matter of our or our subsidiaries’ intellectual property. Because patent applications can take many years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that our or our subsidiaries’ product candidates or proprietary technologies may infringe. Similarly, there may be issued patents relevant to our or our subsidiaries’ product candidates of which we are not aware.

 

There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and biopharmaceutical industries generally. If a third-party claims that we, our subsidiaries or any of our respective licensors, suppliers or collaborators infringe the third party’s intellectual property rights, we or our subsidiaries may have to, among other things:

 

·	obtain licenses, which may not be available on commercially reasonable terms, if at all;

 

·	abandon an infringing product candidate or redesign products or processes to avoid infringement;

 

·	pay substantial damages, including the possibility of treble damages and attorneys’ fees, if a court decides that the product or proprietary technology at issue infringes on or violates the third party’s rights;

 

·	pay substantial royalties, fees and/or grant cross-licenses to product candidates; and/or

 

·	defend litigation or administrative proceedings which may be costly regardless of outcome, and which could result in a substantial diversion of financial and management resources.

 

We or certain of our subsidiaries may be involved in lawsuits to protect or enforce patents or the patents of licensors, which could be expensive, time consuming and unsuccessful.

 

Competitors may infringe our or certain of our subsidiaries’ patents or the patents of our respective licensors. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time consuming. An adverse result in any litigation or defense proceedings could put one or more of our or our subsidiaries’ patents at risk of being invalidated, found to be unenforceable, or interpreted narrowly and could likewise put patent applications at risk of not issuing. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our or our subsidiaries’ confidential information could be compromised by disclosure during this type of litigation.

 

We or certain of our subsidiaries may be subject to claims that our or our subsidiaries’ consultants or independent contractors have wrongfully used or disclosed to us or our subsidiaries alleged trade secrets of their other clients or former employers.

  

As is common in the biopharmaceutical industry, we and certain of our subsidiaries engage the services of consultants to assist in the development of product candidates. Many of these consultants were previously employed at, or may have previously been or are currently providing consulting services to, other pharmaceutical companies, including our and our subsidiaries’ competitors or potential competitors. We or our subsidiaries may become subject to claims related to whether these consultants have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers or their former or current customers. Litigation may be necessary to defend against these claims. Even if we or our subsidiaries are successful in defending these claims, litigation could result in substantial costs and be a distraction to management.

 

 

Any product for which we or our subsidiaries obtain marketing approval could be subject to restrictions or withdrawal from the market and we or our subsidiaries may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with products, when and if any of them is approved.

 

Any product for which we or our subsidiaries obtain marketing approval, along with the manufacturing processes and facilities, post-approval clinical data, labeling, advertising and promotional activities for such product, will be subject to continual requirements of and review by the FDA and comparable regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, registration requirements, cGMP requirements relating to quality control, quality assurance and corresponding maintenance of records and documents, requirements regarding the distribution of samples to physicians and recordkeeping. Even if we or our subsidiaries obtain regulatory approval of a product, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. We or our subsidiaries also may be subject to state laws and registration requirements covering the distribution of products. Later discovery of previously unknown problems with products, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in actions such as:

 

·	restrictions on product manufacturing, distribution or use;

 

·	restrictions on the labeling or marketing of a product;

 

·	requirements to conduct post-marketing studies or clinical trials;

 

·	warning letters;

 

·	withdrawal of the products from the market;

 

·	refusal to approve pending applications or supplements to approved applications that we or our subsidiaries submit;

 

·	voluntary or mandatory recall;

 

·

fines;

 

·	suspension or withdrawal of marketing or regulatory approvals;

 

·	refusal to permit the import or export of products;

 

·	product seizure or detentions;

 

·	injunctions or the imposition of civil or criminal penalties; and

 

·	adverse publicity.

  

If we, our subsidiaries or our respective suppliers, third-party contractors, clinical investigators or collaborators are slow to adapt, or are unable to adapt, to changes in existing regulatory requirements or adoption of new regulatory requirements or policies, we, our subsidiaries, or our respective collaborators may lose marketing approval for products when and if any of them are approved, resulting in decreased revenue from milestones, product sales or royalties.

 

Internet and internal computer system failures or compromises of our systems or the security of confidential information could damage our reputation and harm our business.

 

Although a significant portion of our business is conducted using traditional methods of contact and communications such as face-to-face meetings, a portion of our business and the business of our subsidiaries is conducted through the Internet. We could experience system failures and degradations in the future. We also rely on space and office-sharing arrangements that impose additional burdens on our ability to maintain the security of confidential information. We cannot assure you that we will be able to prevent an extended and/or material system failure or the unintentional disclosure of confidential information if any of the following or similar events occurs:

 

·	human error;

 

·	subsystem, component, or software failure;

 

·	a power or telecommunications failure;

 

·	an earthquake, fire, or other natural disaster or act of God;

 

·	hacker attacks or other intentional acts of vandalism; or

 

·	terrorist acts or war.

 

 

We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative or executive action, either in the United States or abroad.

 

We cannot predict the likelihood, nature or extent of how government regulation that may arise from future legislation or administrative or executive action taken by the U.S. presidential administration may impact our business and industry. In particular, the U.S. President has taken several executive actions, including the issuance of a number of Executive Orders, that could impose significant burdens on, or otherwise materially delay, the FDA’s ability to engage in routine regulatory and oversight activities such as implementing statutes through rulemaking, issuance of guidance, and review and approval of marketing applications. Notably, on January 23, 2017, President Trump ordered a civilian hiring freeze for all executive departments and agencies, including the FDA, which prohibits the FDA from filling employee vacancies or creating new positions. Under the terms of the order, the freeze will remain in effect until implementation of a plan to be recommended by the Director for the Office of Management and Budget (“OMB”) in consultation with the Director of the Office of Personnel Management, to reduce the size of the federal workforce through attrition. An under-staffed FDA could result in delays in FDA’s responsiveness or in its ability to review submissions or applications, issue regulations or guidance or implement or enforce regulatory requirements in a timely fashion or at all. Moreover, on January 30, 2017, President Trump issued an Executive Order, applicable to all executive agencies, including the FDA, which requires that for each notice of proposed rulemaking or final regulation to be issued in fiscal year 2017, the agency shall identify at least two existing regulations to be repealed, unless prohibited by law. These requirements are referred to as the “two-for-one” provisions. This Executive Order includes a budget neutrality provision that requires the total incremental cost of all new regulations in the 2017 fiscal year, including repealed regulations, to be no greater than zero, except in limited circumstances. For fiscal years 2018 and beyond, the Executive Order requires agencies to identify regulations to offset any incremental cost of a new regulation and approximate the total costs or savings associated with each new regulation or repealed regulation. In interim guidance issued by the Office of Information and Regulatory Affairs within OMB on February 2, 2017, the administration indicates that the “two-for-one” provisions may apply not only to agency regulations, but also to significant agency guidance documents. It is difficult to predict how these requirements will be implemented, and the extent to which they will impact the FDA’s ability to exercise its regulatory authority. If these executive actions impose constraints on the FDA’s ability to engage in oversight and implementation activities in the normal course, our business may be negatively impacted.

  

Risks Relating to our Finances, Capital Requirements and Other Financial Matters

 

We are an early-stage company with a history of operating losses that is expected to continue and we are unable to predict the extent of future losses, whether we will generate significant or any revenues or whether we will achieve or sustain profitability.

 

We are an early-stage company and our prospects must be considered in light of the uncertainties, risks, expenses and difficulties frequently encountered by companies in their early stages of operations. We continue to generate operating losses in all periods including losses from operations of approximately $65.7 million, $50.5 million and $20.7 million for the years ended December 31, 2016, 2015 and 2014, respectively, and losses from operations of $40.8 million for the six months ended June 30, 2017. At June 30, 2017, we had an accumulated deficit of approximately $274.6 million. We expect to make substantial expenditures and incur increasing operating costs and interest expense in the future and our accumulated deficit will increase significantly as we expand development and clinical trial activities for our product candidates and finance investments in certain of our existing and new subsidiaries in accordance with our growth strategy. Our losses have had, and are expected to continue to have, an adverse impact on our working capital, total assets and stockholders’ equity. Because of the risks and uncertainties associated with product development and our investments in certain of our subsidiaries, we are unable to predict the extent of any future losses, whether we will ever generate significant or any revenues or if we will ever achieve or sustain profitability.

 

At June 30, 2017, the total amount of debt outstanding was $44.0 million.  If we default on our obligations, the holders of our debt may declare the outstanding amounts immediately payable together with accrued interest. If an event of default occurs, we may not be able to cure it within any applicable cure period, if at all. If the maturity of our indebtedness is accelerated, we may not have sufficient funds available for repayment or we may not have the ability to borrow or obtain sufficient funds to replace the accelerated indebtedness on terms acceptable to us, or at all. In addition, the terms of our current indebtedness and any future indebtedness may limit our ability to finance future operations or satisfy capital needs or to engage in, expand or pursue our business activities. They may also prevent us from engaging in activities that could be beneficial to our business and our stockholders unless we repay the outstanding debt, which may not be desirable or possible.

 

We may need substantial additional funding and may be unable to raise capital when needed, which may force us to delay, curtail or eliminate one or more of our R&D programs, commercialization efforts and planned acquisitions and potentially change our growth strategy.

 

Our operations have consumed substantial amounts of cash since inception. During the years ended December 31, 2016, 2015 and 2014, we incurred R&D expenses of approximately $35.1 million, $29.8 million and $10.2 million, respectively. For the six months ended June 30, 2017, we incurred research and development expenses of approximately $18.8 million. We expect to continue to spend significant amounts on our growth strategy. We believe that our current cash and cash equivalents will enable us to continue to fund operations in the normal course of business for at least the next 12 months.  Until such time, if ever, as we can generate a sufficient amount of product revenue and achieve profitability, we expect to seek to finance potential cash needs. Our ability to obtain additional funding when needed, changes to our operating plans, our existing and anticipated working capital needs, the acceleration or modification of our planned R&D activities, expenditures, acquisitions and growth strategy, increased expenses or other events may affect our need for additional capital in the future and require us to seek additional funding sooner than anticipated. In addition, if we are unable to raise additional capital when needed, we might have to delay, curtail or eliminate one or more of our R&D programs and commercialization efforts and potentially change our growth strategy.

  

 

Raising additional funds by issuing securities or through licensing or lending arrangements may cause dilution to our existing stockholders, restrict our operations or require us to relinquish proprietary rights.

 

To the extent that we raise additional capital by issuing equity securities, the share ownership of existing stockholders will be diluted. Any future debt financing may involve covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, redeem our stock, make certain investments and engage in certain merger, consolidation or asset sale transactions, among other restrictions. In addition, if we raise additional funds through licensing or sublicensing arrangements, it may be necessary to relinquish potentially valuable rights to our or our subsidiaries’ product candidates, or grant licenses on terms that are not favorable to us.

 

If we fail to maintain proper and effective internal control over financial reporting in the future, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, investors’ views of us and, as a result, the value of our Common Stock.

 

Pursuant to Section 404 of the Sarbanes Oxley Act of 2002 and related rules, our management is required to report on, and our independent registered public accounting firm is required to attest to, the effectiveness of our internal control over financial reporting. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. To comply with the requirements of being a reporting company under the Exchange Act, we may need to further upgrade our systems, including information technology, implement additional financial and management controls, reporting systems and procedures and hire additional accounting and finance staff. If material weaknesses or deficiencies in our internal controls exist and go undetected, our financial statements could contain material misstatements that, when discovered in the future could cause us to fail to meet our future reporting obligations and cause the price of our Common Stock to decline.

 

Risks Associated with our Capital Stock

 

Some of our executives, directors and principal stockholders can control our direction and policies, and their interests may be adverse to the interests of our other stockholders.

 

At June 30, 2017, Lindsay Rosenwald, our Chairman, President and Chief Executive Officer, beneficially owned 13.5% of our issued and outstanding capital stock. At June 30, 2017, Michael Weiss, our Executive Vice Chairman, Strategic Development, beneficially owned 15.9% of our issued and outstanding capital stock. By virtue of their holdings and membership on our Board of Directors, Dr. Rosenwald and Mr. Weiss may individually influence our management and our affairs and may make it difficult for us to consummate corporate transactions such as mergers, consolidations or the sale of all or substantially all of our assets that may be favorable from our standpoint or that of our other stockholders.

 

The market price of our Common Stock may be volatile and may fluctuate in a way that is disproportionate to our operating performance.

 

Our stock price may experience substantial volatility as a result of a number of factors, including, but not necessarily limited to:

 

·	announcements we make regarding our or our subsidiaries’ current product candidates, acquisition of potential new product candidates and companies and/or in-licensing through multiple subsidiaries;

 

·	sales or potential sales of substantial amounts of our Common Stock or issuance of debt;

 

·	our or our subsidiaries’ delay or failure in initiating or completing pre-clinical or clinical trials or unsatisfactory results of any of these trials;

 

·	announcements about us, our subsidiaries or about our competitors, including clinical trial results, regulatory approvals or new product introductions;

 

·	developments concerning our or our subsidiaries’ licensors and/or product manufacturers;

 

·	litigation and other developments relating to our or our subsidiaries’ patents or other proprietary rights or those of our competitors;

 

·	conditions in the pharmaceutical or biotechnology industries;

 

·	governmental regulation and legislation;

 

·	unstable regional political and economic conditions, such as those caused by the U.S. presidential administration change;

 

·	variations in our anticipated or actual operating results; and

 

·	change in securities analysts’ estimates of our performance, or our failure to meet analysts’ expectations.

 

 

Many of these factors are beyond our control. The stock markets in general, and the market for pharmaceutical and biotechnological companies in particular, have historically experienced extreme price and volume fluctuations. These fluctuations often have been unrelated or disproportionate to the operating performance of these companies. These broad market and industry factors could reduce the market price of our Common Stock, regardless of our actual operating performance.

 

Sales of a substantial number of shares of our Common Stock, or the perception that such sales may occur, may adversely impact the price of our Common Stock.

 

Almost all of the 50.5 million outstanding shares of our Common Stock, inclusive of outstanding equity awards, as of June 30, 2017 are available for sale in the public market, either pursuant to Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”), or an effective registration statement. In addition, pursuant to our current shelf registration statement on Form S-3, we may issue and sell shares of our common stock having an aggregate offering price of up to $53.0 million from time to time. Any sale of a substantial number of shares of our Common Stock could cause a drop in the trading price of the Common Stock on the Nasdaq Stock Market.

  

We and certain of our subsidiaries have never paid and currently do not intend to pay cash dividends in the near future. As a result, capital appreciation, if any, will be your sole source of gain.

 

We and certain of our subsidiaries have never paid cash dividends on any of our or their capital stock, or made stock dividends, and we and many of our subsidiaries currently intend to retain future earnings, if any, to fund the development and growth of our businesses, and retain our stock positions. In addition, the terms of existing and future debt agreements may preclude us and certain of our subsidiaries from paying cash of stock dividends. Equally, our subsidiaries are governed by their own boards of directors with individual governance and decision-making regimes and mandates to oversee such subsidiaries in accordance with their respective fiduciary duties. As a result, we alone cannot determine the acts of our subsidiaries that could maximize value to you, such as declaring cash or stock dividends. As a result, capital appreciation, if any, of our Common Stock will be your sole source of gain for the foreseeable future.

 

Provisions in our certificate of incorporation, our bylaws and Delaware law might discourage, delay or prevent a change in control of our Company or changes in our management and, therefore, depress the trading price of our Common Stock.

 

Provisions of our certificate of incorporation, our bylaws and Delaware law may have the effect of deterring unsolicited takeovers or delaying or preventing a change in control of our Company or changes in our management, including transactions in which our stockholders might otherwise receive a premium for their shares over then-current market prices. In addition, these provisions may limit the ability of stockholders to approve transactions that they may deem to be in their best interests. These provisions include:

 

·	the inability of stockholders to call special meetings; and

 

·

the ability of our Board of Directors to designate the terms of and issue new series of preferred stock without stockholder approval, which could include the right to approve an acquisition or other change in our control or could be used to institute a rights plan, also known as a poison pill, that would work to dilute the stock ownership of a potential hostile acquirer, likely preventing acquisitions that have not been approved by our Board of Directors.

 

In addition, the Delaware General Corporation Law prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns, or within the last three years has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.

 

The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our Common Stock. They could also deter potential acquirers of our Company, thereby reducing the likelihood that you could receive a premium for your Common Stock in an acquisition.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

  

None.

 

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

Exhibit
Number		Exhibit Title
31.1		Certification of Chairman, President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of the Chairman, President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document.
101.SCH		XBRL Taxonomy Extension Schema Document.
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.

 

  

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	FORTRESS BIOTECH, INC.
August 9, 2017	By:	/s/ Lindsay A. Rosenwald, M.D.
		Lindsay A. Rosenwald, M.D., Chairman, President and Chief Executive Officer (Principal Executive Officer)
August 9, 2017	By:	/s/ Robyn M. Hunter
		Robyn M. Hunter Chief Financial Officer (Principal Financial Officer)

 

 

Exhibit Index

  

Exhibit
Number		Exhibit Title
31.1		Certification of Chairman, President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of the Chairman, President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document.
101.SCH		XBRL Taxonomy Extension Schema Document.
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.