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Section 1: 10-K (FORM 10-K)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

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

 

For the Fiscal Year Ended December 31, 2017

or

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

For the Transition Period from ____ to _____.

 

Commission File No. 001-35366

 

FORTRESS BIOTECH, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware   20-5157386
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification No.)
     
2 Gansevoort Street, 9th Floor    
New York, New York 10014   10014
(Address of Principal Executive Offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (781) 652-4500

 

Securities registered pursuant to Section 12(b) of the Act:

 

(Title of Class)   (Name of exchange on which registered)

Common Stock, par value $0.001 per share

9.375% Series A Cumulative Redeemable Perpetual Preferred Stock

 

NASDAQ Capital Market

 

NASDAQ Capital Market

 

Securities registered pursuant to section 12(g) of the Act: None.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

 

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 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 the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

 

The aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter: $144,508,462 based upon the closing sale price of our common stock of $4.75 on that date. Common stock held by each officer and director and by each person known to own in excess of 5% of outstanding shares of our common stock has been excluded in that such persons may be deemed to be affiliates. The determination of affiliate status in not necessarily a conclusive determination for other purposes.

 

As of March 13, 2018, there were 51,342,513 shares of the registrant’s common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive proxy statement for its 2018 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.

 

 

 

 

 

 

FORTRESS BIOTECH, INC.

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

 

    Page
     
PART I   1
Item 1. Business. 1
Item 1B. Unresolved Staff Comments 32
Item 2. Properties 32
Item 3. Legal Proceedings 34
Item 4. Mine Safety Disclosures 34
     
PART II   35
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 35
Item 6. Selected Consolidated Financial Data 36
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 38
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 51
Item 8. Financial Statements and Supplementary Data. 52
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 52
Item 9A. Controls and Procedures. 52
Item 9B. Other Information 53
     
PART III   53
Item 10. Directors, Executive Officers and Corporate Governance 53
Item 11. Executive Compensation 53
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 53
Item 13. Certain Relationships and Related Transactions, and Director Independence 53
Item 14. Principal Accounting Fees and Services 53
     
PART IV   54
Item 15. Exhibits, Financial Statement Schedules. 54
Item 16. Form 10-K Summary. 59

 

 

 

 

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

 

Statements in this Annual Report on Form 10-K that are not descriptions of historical facts are forward-looking statements that are based on management’s current expectations and are subject to risks and uncertainties that could negatively affect our business, operating results, financial condition and stock price. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “potential,” “predicts,” “should,” or “will” or the negative of these terms or other comparable terminology. Factors that could cause actual results to differ materially from those currently anticipated include those set forth under “Item 1A. Risk Factors” including, in particular, risks relating to:

 

·our growth strategy;
·financing and strategic agreements and relationships;
·our need for substantial additional funds and uncertainties relating to financings;
·our ability to identify, acquire, close and integrate product candidates successfully and on a timely basis;
·our ability to attract, integrate and retain key personnel;
·the early stage of products under development;
·the results of research and development activities;
·uncertainties relating to preclinical and clinical testing;
·the ability to secure and maintain third-party manufacturing, marketing and distribution of our and our subsidiaries’ products;
·government regulation;
·patent and intellectual property matters;
·dependence on third-party manufacturers; and
·competition.

 

We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations or any changes in events, conditions or circumstances on which any such statement is based, except as required by law.

 

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PART I

 

Item 1. Business.

 

Overview

 

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 our subsidiary companies, also referred to herein as the “Fortress Companies.” Additionally, the Company maintains a controlling interest in National Holdings Corporation, a diversified independent brokerage company (together with its subsidiaries, herein referred to as “NHLD” or “National”). In addition to its internal development programs, the Company leverages its biopharmaceutical business expertise and drug development capabilities and provides funding and management services to help the Fortress Companies achieve their goals. The Company and the Fortress Companies may seek licensings, acquisitions, partnerships, joint ventures and/or public and private financings to accelerate and provide additional funding to support their research and development programs.

 

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. 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 drug candidate. We seek to acquire and invest in drugs, technologies and operating subsidiaries with high growth potential.

 

At the end of 2017, in addition to National, we had several consolidated Fortress Companies, which contain licenses to product candidate intellectual property, including Aevitas Therapeutics, Inc. (“Aevitas”), Avenue Therapeutics, Inc. (“Avenue”), Caelum Biosciences, Inc. (“Caelum”), Cellvation, Inc. (“Cellvation”), Checkpoint Therapeutics, Inc. (“Checkpoint”), Cyprium Therapeutics, Inc. (“Cyprium”), Helocyte, Inc. (“Helocyte”), Journey Medical Corporation (“Journey” or “JMC”), Mustang Bio, Inc. (“Mustang”), and Tamid Bio, Inc. (“Tamid”). We also maintained exclusive ownership positions in operational subsidiaries CB Securities Corporation, Innmune Limited and FBIO Acquisition, Inc. (the acquisition vehicle we used to obtain National) and majority ownership positions in acquisition companies for which we are actively seeking product candidate licenses, including Coronado SO Co., Escala Therapeutics, Inc., GeneXion Oncology, Inc., FBIO Acquisition Corp. IV and FBIO Acquisition Corps. VI - XIV.

 

The Fortress Companies

 

Aevitas Therapeutics, Inc.

 

Aevitas is a biopharmaceutical company focused on the development of adeno-associated virus (“AAV”) gene therapies in complement-mediated diseases. The proprietary technology, licensed from a leading university, uses AAV based gene therapy to restore lasting production of functional complement regulatory proteins, providing a potentially curative treatment. Aevitas aims to develop these potentially lifelong cures in multiple disease areas, including atypical hemolytic uremic syndrome, paroxysmal nocturnal hemoglobinuria and age-related macular degeneration. Originally incorporated on March 30, 2017, Aevitas is a Delaware corporation and is a majority-owned subsidiary of Fortress.

 

Avenue Therapeutics, Inc.

 

Avenue is a specialty pharmaceutical company focused on the development and commercialization of intravenous (IV) Tramadol for the management of moderate to moderately severe postoperative pain. IV Tramadol may fill a gap in the acute pain market between IV acetaminophen/NSAIDS and IV conventional narcotics. Avenue is currently evaluating IV Tramadol in a pivotal Phase 3 program for the management of postoperative pain with data expected in the second quarter of 2018. In February 2015, we purchased the exclusive license to IV Tramadol for the U.S. market from Revogenex Ireland Limited (“Revogenex”) and transferred it to Avenue. Avenue completed an initial public offering of its common stock and began trading on the Nasdaq Capital Market on June 26, 2017 under the ticker symbol “ATXI.” Originally incorporated on February 9, 2015, Avenue is a Delaware corporation and a controlled subsidiary of Fortress.

 

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Caelum Biosciences, Inc.

 

Caelum is a clinical stage biotechnology company focused on treatments for rare hematological diseases. Caelum’s lead asset, CAEL-101 (mAb 11-1F4), is a novel antibody licensed from Columbia University in January 2017 for the treatment of amyloid light chain (“AL”) amyloidosis, a rare systemic disease that can lead to vital organ failure and death. Phase 1a/1b data presented at the American Society of Hematology’s 59th Annual Meeting in December 2017 support CAEL-101’s potential to be a safe and well-tolerated therapy that promotes amyloid resolution. CAEL-101 has received Orphan Drug Designation from the U.S. Food and Drug Administration as a therapeutic agent for patients with AL amyloidosis, and as a radio-imaging agent in amyloidosis. Caelum expects to initiate a Phase 3 clinical program for CAEL-101 by the first quarter of 2019. Originally incorporated on June 10, 2015, Caelum is a Delaware corporation and a majority-owned subsidiary of Fortress.

 

Cellvation, Inc.

 

Cellvation is a clinical-stage biopharmaceutical company developing novel therapeutics for the treatment of traumatic brain injury (“TBI”). TBI is a leading cause of death and disability among adults and children in the United States. Cellvation secured exclusive, worldwide rights to clinical-stage cell therapies for the treatment of severe TBI from Texas Trauma Institute at the University of Texas Health Science Center in Houston, including: CEVA101 which is currently being investigated in separate multi-center Phase 2 studies for adults and children. The Phase 2 studies of CEVA101 are supported by grants in excess of ten million dollars from the National Institutes of Health (“NIH”) and Department of Defense. Cellvation is also developing CEVA-D, a novel bioreactor that enhances the anti-inflammatory potency of stem cells without genetic manipulation. In November 2017, Cellvation announced that the U.S. Food and Drug Administration (“FDA”) granted CEVA101 (autologous bone marrow-derived stem cells) Regenerative Medicine Advanced Therapy (“RMAT”) designation for the treatment of severe TBI. Originally incorporated on June 10, 2015, Cellvation is a Delaware corporation and a majority-owned subsidiary of Fortress.

 

Checkpoint Therapeutics, Inc.

 

Checkpoint is a clinical-stage, immuno-oncology biopharmaceutical company focused on the acquisition, development and commercialization of novel treatments for patients with solid tumor cancers. Checkpoint’s lead product candidate is a fully-human monoclonal antibody licensed from the Dana-Farber Cancer Institute that targets programmed death-ligand 1 (PD-L1). Checkpoint commenced a Phase 1 clinical study for its anti-PD-L1 antibody, CK-301, in October 2017, evaluating the safety and tolerability of CK-301 in checkpoint therapy-naïve patients with selected recurrent or metastatic cancers and plans to develop CK-301 as a treatment for patients with non-small cell lung cancer (“NSCLC”) and other solid tumors. In addition, Checkpoint is developing a small-molecule, targeted anti-cancer agent, CK-101, for the treatment of patients with epidermal growth factor receptor (EGFR) mutation-positive NSCLC. In September 2016, Checkpoint commenced the Phase 1 portion of a Phase 1/2 clinical study for CK-101. Checkpoint’s pipeline also includes antibodies that target glucocorticoid-induced TNFR-related protein (GITR) and carbonic anhydrase IX (CAIX), in addition to oral, small-molecule, targeted anti-cancer agents that inhibit bromodomain and extra-terminal (BET) proteins and poly (ADP-ribose) polymerase (PARP). Checkpoint’s common stock began trading on the Nasdaq Capital Market on June 26, 2017 under the ticker symbol “CKPT.” Originally incorporated on November 10, 2014, Checkpoint is a Delaware corporation and a controlled subsidiary of Fortress.

 

Cyprium Therapeutics, Inc.

 

Cyprium is a clinical-stage biopharmaceutical company focused on the development of novel therapies for the treatment of Menkes disease and related copper metabolism disorders. In March 2017, Cyprium and the Eunice Kennedy Shriver National Institute of Child Health and Human Development (“NICHD”), part of the NIH, executed a Cooperative Research and Development Agreement (“CRADA”) 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. Originally incorporated on June 18, 2014, Cyprium is a Delaware corporation and a majority-owned subsidiary of Fortress.

 

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Helocyte, Inc.

 

Helocyte is a clinical-stage biopharmaceutical company developing novel immunotherapies for the prevention and treatment of cytomegalovirus (“CMV”), a common virus that is typically asymptomatic in healthy individuals but can cause life-threatening disease in those with weakened or uneducated immune systems. Helocyte’s programs were developed in the laboratory of Don J. Diamond, Ph.D., Chair of the Department of Experimental Therapeutics at City of Hope National Medical Center in Duarte, California. Helocyte secured exclusive worldwide rights to Triplex, its universal, multi-antigen T-cell immunotherapeutic vaccine for controlling CMV in stem cell and solid organ transplant recipients. Triplex is currently being investigated in a multicenter Phase 2 clinical study of CMV control in allogeneic hematopoietic stem cell transplant recipients. The study is supported in part by grants from the National Cancer Institute. Helocyte has also secured exclusive worldwide rights to Pentamer, a universal multi-antigen vaccine drug candidate engineered to induce a broad neutralizing antibody response for the prevention of CMV. Pentamer is currently undergoing non-clinical development. Originally incorporated on July 1, 2015, Helocyte is a Delaware corporation and a majority-owned subsidiary of Fortress.

 

Journey Medical Corporation

 

Journey is an innovative company focused on developing, acquiring, licensing and commercializing branded dermatology products. Journey’s commercial portfolio comprises four marketed products: (1) Targadox®, a 50 mg immediate-release doxycycline hyclate coated tablet that is indicated as adjunctive therapy for severe acne; (2) Luxamend® Wound Cream, a water-based emulsion formulated for the treatment of superficial wounds, minor abrasions, dermal ulcers, donor sites, first- and second-degree burns and radiation; (3) Ceracade® Skin Emulsion, formulated for the treatment of dry skin conditions and pain relief associated with various types of dermatitis; and (4) Triderm®, a topical corticosteroid formulated for treatment of a variety of skin conditions, including eczema, dermatitis, allergies and rash, although JMC did not commence promotion of Triderm® until 2018. Targadox®, Luxamend® and Ceracade® are sold under Journey’s name, and Triderm® is sold pursuant to a co-promote agreement. Originally incorporated on July 18, 2014, Journey is a Delaware corporation and a majority-owned subsidiary of Fortress.

 

Mustang Bio, Inc.

 

Mustang is a clinical-stage biopharmaceutical company focused on the development and commercialization of novel cancer immunotherapy products designed to leverage the patient’s own immune system to eliminate cancer cells. Mustang aims to acquire rights to these technologies by licensing, acquisition, research and development or commercialization. Mustang has partnered with the City of Hope National Medical Center and the Fred Hutchinson Cancer Research Center to develop proprietary chimeric antigen receptor (“CAR”) engineered T cell (“CAR T”) therapies across many cancers, and with Harvard Medical School’s Beth Israel Deaconess Medical Center and the Harvard Stem Cell Institute for the development of CRISPR/Cas9-enhanced CAR T therapies in hematologic malignancies and solid tumors. Mustang’s common stock began trading on the Nasdaq Global Market on August 22, 2017 under the ticker symbol “MBIO.” Originally incorporated on March 13, 2015, Mustang is a Delaware corporation and a controlled subsidiary of Fortress.

 

Tamid Bio, Inc.

 

Tamid is a biopharmaceutical company focused on the development of AAV gene therapies in orphan diseases with unmet medical needs. In November 2017, Tamid entered into three exclusive licensing agreements with the University of North Carolina at Chapel Hill for three preclinical AAV gene therapies, developed in the lab of Matthew Hirsch, Ph.D., Assistant Professor, Ophthalmology at the UNC Gene Therapy center. Tamid’s product candidates’ targets include: ocular manifestations of Mucopolysaccharidosis type 1 (MPS1); dysferlinopathies; and corneal transplant rejection. Originally incorporated on June 10, 2015, Tamid is a Delaware corporation and a majority-owned subsidiary of Fortress. 

 

National Holdings Corporation

 

National, a Delaware corporation organized in 1996, operates through its wholly-owned subsidiaries which principally provide financial services. Through its broker-dealer, investment advisory and other subsidiaries, National: (1) offers full service retail brokerage and wealth management services to high net worth individual and institutional clients, (2) provides investment banking, merger and acquisition and advisory services to micro, small and mid-cap high growth companies, (3) engages in trading securities, including making markets in micro and small-cap NASDAQ and other exchange listed stocks, (4) provides liquidity in the United States Treasury marketplace ,and (5) to a lesser extent, provides tax preparation, fixed insurance sales and licensed mortgage brokerage services. National is a majority-owned subsidiary of Fortress. 

 

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Product Candidates held by Fortress and Other Intellectual Property

 

Fortress continues to develop, a lysate (disrupted CTV-1 cells, cell membrane fragments, cell proteins and other cellular components) that activates donor Natural Killer (“NK”), (“CNDO-109”). CTV-1 is a leukemic cell line re-classified as a T-cell acute lymphocytic leukemia (“ALL”). In November 2007, we entered into a license agreement, since amended, with University College London Business PLC (“UCLB”), under which we received an exclusive, worldwide license to develop and commercialize CNDO-109 to activate NK cells for the treatment of cancer-related and other conditions and a non-exclusive license to certain clinical data solely for use in the IND for CNDO-109. The manufacturing process for CNDO-109 activated NK cells is currently under development. We have produced a master cell bank and a working cell bank of CTV-1 cells in collaboration with BioReliance Corp, and we have contracted with Progenitor Cell Therapy, LLC and WuXi AppTec for services related to development, manufacture and testing services. We have sponsored a Phase 1/2 study in patients with AML who were in their first complete remission (“CR1”) and who were at a high risk of relapsing. This study has completed enrollment but is remaining open to follow the long-term relapse-free survival status of patients.

 

With respect to CNDO-109, we have exclusive rights to International Patent Application No. PCT/GB2006/000960 and all pending United States and foreign counterpart applications including granted U.S. Patents No. 8,257,970 and 8,637,308 and the corresponding national phase applications granted in Australia and India and filed in Canada, India, Europe and Japan, directed to the stimulation of NK cells and related CNDO-109 compositions and methods including methods for the treatment of cancer and other conditions. This patent family has been in-licensed on an exclusive basis from UCLB. The CNDO-109 patent has an expiration date of January 2029 in the absence of any patent term extension. By way of an amendment to the license agreement with UCLB, we also have exclusive rights to International Application No. PCT/GB2010/051135 and all pending United States and foreign counterpart applications including pending United States Patent Application Serial No. 12/833,694 and the corresponding national phase applications filed in Brazil, China, Israel, Singapore and South Africa, directed to the preservation of activated NK cells and related compositions and methods. The CNDO-109 patents that may issue from the former patent family would expire in July 2030 in the absence of any patent term extension. The amendment includes rights to certain additional confidential technologies as well.

 

Fortress is also party to a Development and License Agreement with Effcon Laboratories, Inc. (“Effcon”), which granted Fortress exclusive development and commercialization rights to an extended release formulation of methazalomide. Effcon leads the development efforts in connection therewith under Fortress’ supervision and direction.

 

Fortress is party to a license agreement with GeneMedicine, Inc. (“GeneMedicine”), which granted Fortress exclusive development and commercialization rights over products using GeneMedicine’s oncolytic adenovirus technology. Under the GeneMedicine license, we have an exclusive, worldwide license under three patent families assigned to GeneMedicine to develop and commercialize certain compositions of matter directed to (i) recombinant vectors comprising a transcriptional regulatory sequence operably linked to a therapeutic transgene, such as tumor suppressor gene, cytotoxic gene, anti-angiogenic gene and the like; (ii) methods of co-expression of IL-12 and IL-23; and (iii) a method of enhancing transduction efficiency of a recombinant adenovirus expression vector into a tumor cell in a solid tumor. The foregoing three patent families include counterparts in Europe and selected Asian jurisdictions, scheduled to expire in 2024, 2028 and 2026, respectively. The granted U.S. counterparts of the first two patent families enjoy patent term adjustments, which extend the terms of these patents out to 2027 and 2030, respectively, without taking into account any further potential extensions under patent term restoration provisions of U.S. patent laws.

 

Our goal is to obtain, maintain and enforce patent protection for our and, in some cases, our subsidiaries’ product candidates, formulations, processes, methods and any other proprietary technologies, preserve our trade secrets, and operate without infringing on the proprietary rights of other parties, both in the United States and in other countries. Our policy is to actively seek to obtain, where appropriate, the broadest intellectual property protection possible for our and, in some cases, our subsidiaries’ product candidates, proprietary information and proprietary technology through a combination of contractual arrangements and patents, both in the United States and abroad. However, patent protection may not afford us with complete protection against competitors who seek to circumvent our patents.

 

We also depend upon the skills, knowledge, experience and know-how of our and our subsidiaries’ management and research and development personnel, as well as that of our advisers, consultants and other contractors. To help protect our proprietary know-how, which is not patentable, and for inventions for which patents may be difficult to enforce, we and our subsidiaries currently rely and will in the future rely on trade secret protection and confidentiality agreements to protect our interests. To this end, we and our subsidiaries require all of our employees, consultants, advisers and other contractors to enter into confidentiality agreements that prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries and inventions important to our business.

 

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National owns the following federally registered marks: vFinance, Inc.®, vFinance.com, Inc.®, AngelSearch® and Gilman Ciocia®.

 

Competition - Fortress

 

We and our subsidiaries operate in highly competitive segments of the biotechnology and biopharmaceutical markets. We face competition from many different sources, including commercial pharmaceutical and biotechnology enterprises, academic institutions, government agencies, and private and public research institutions. Many of our and our subsidiaries’ competitors have significantly greater financial, product development, manufacturing and marketing resources than us. 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 cancer research, some in direct competition with us and our subsidiaries. We and our subsidiaries also may compete with these organizations to recruit scientists and clinical development personnel. Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies.

 

Each cancer indication for which we or any of our subsidiaries may develop products has a number of established therapies with which our candidates will compete. With respect to CNDO-109, most major pharmaceutical companies and many biotechnology companies are aggressively pursuing new cancer development programs, including both therapies with traditional, as well as novel, mechanisms of action. Some of the anticipated competitor treatments for AML include Daiichi Sankyo, Inc.’s quizartinib, Macrogenic Inc.’s Flotetuzumab, Celgene Corporation’s Vidaza (azacitabine) currently approved as a treatment for myelodysplastic syndrome, Agios Inc.’s Ivosidenib and Abbvie Inc./Genentech Inc.’s Venclexta (venetoclax), which are currently being developed as a treatment for AML, any or all of which could change the treatment paradigm of acute leukemia. Each of these compounds is further along in clinical development than is the CDNO-109 activated NK cell product.

 

Competition - National

 

National is engaged in a highly competitive business. With respect to one or more aspects of its business, National’s competitors include member organizations of the New York Stock Exchange and other registered securities exchanges in the United States and Canada, the U.K., Europe and members of FINRA. Many of these organizations have substantially greater personnel and financial resources and more sales offices than National. Discount brokerage firms affiliated with commercial banks provide additional competition, as well as companies that provide electronic on-line trading. In many instances, National is also competing directly for customer funds with investment opportunities offered by real estate, insurance, banking, and savings and loans industries.

 

The securities industry has become considerably more concentrated and more competitive since National was founded, as numerous securities firms have either ceased operations or have been acquired by or merged into other firms. In addition, companies not engaged primarily in the securities business, but with substantial financial resources, have acquired leading securities firms. These developments have increased competition from firms with greater capital resources than those of National.

 

Since the adoption of the Gramm-Leach-Bliley Act of 1999, commercial banks and thrift institutions have been able to engage in traditional brokerage and investment banking services, thus increasing competition in the securities industry and potentially increasing the rate of consolidation in the securities industry.

 

National also competes with other securities firms for successful sales representatives, securities traders and investment bankers. Competition for qualified employees and independent contractors in the financial services industry is intense. National’s continued ability to compete effectively depends on its ability to attract new employees and independent contractors and to retain and motivate its existing employees and independent contractors.

 

In addition, National’s tax preparation business is also subject to extensive competition. National competes with national tax return preparers such as H&R Block, Jackson Hewitt, and Liberty Tax, among others. The remainder of the tax preparation industry is highly fragmented and includes regional tax preparation services, accountants, attorneys, small independently owned companies, and financial service institutions that prepare tax returns as ancillary parts of their business. To a much lesser extent, National competes with the on-line and software self-preparer market.

 

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Government Regulation and Product Approval - Fortress

 

Government authorities in the United States, at the federal, state and local level, and other countries extensively regulate, among other things, the research, development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, post-approval monitoring and reporting, marketing and export and import of products such as those we and our subsidiaries are developing.

 

United States Pharmaceutical Product Development Process

 

In the United States, the FDA regulates pharmaceutical (drug and biologic) products under the Federal Food, Drug and Cosmetic Act, and implementing regulations. Pharmaceutical products are also subject to other federal, state and local statutes and regulations. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product-development process, approval process or after approval, may subject an applicant to administrative or judicial sanctions. FDA sanctions could include refusal to approve pending applications, withdrawal of an approval, a clinical hold, warning letters, product recalls, product seizures, total or partial suspension of production or distribution injunctions, fines, refusals of government contracts, restitution, disgorgement or civil or criminal penalties. Any agency or judicial enforcement action could have a material adverse effect on us. The process required by the FDA before a pharmaceutical product may be marketed in the United States generally includes the following:

 

·completion of preclinical laboratory tests, animal studies and formulation studies according to good laboratory practices (“GLPs”) or other applicable regulations;
·submission to the FDA of an Investigational New Product Drug Application (“IND”), which must become effective before human clinical trials may begin in the United States;
·performance of adequate and well-controlled human clinical trials according to the FDA’s current good clinical practices (“GCPs”), to establish the safety and efficacy of the proposed pharmaceutical product for its intended use;
·submission to the FDA of a New Drug Application (“NDA”) or Biologic License Application (“BLA”) for a new pharmaceutical product;
·satisfactory completion of an FDA inspection of the manufacturing facility or facilities where the pharmaceutical product is produced to assess compliance with the FDA’s current Good Manufacturing Practices (“cGMP”), to assure that the facilities, methods and controls are adequate to preserve the pharmaceutical product’s identity, strength, quality and purity;
·potential FDA audit of the preclinical and clinical trial sites that generated the data in support of the NDA/ BLA; and
·FDA review and approval of the NDA/BLA.

 

The lengthy process of seeking required approvals and the continuing need for compliance with applicable statutes and regulations require the expenditure of substantial resources and approvals are inherently uncertain.

 

Products for somatic cell therapy are derived from a variety of biologic sources, including directly harvested autologous, allogeneic, or cultured cell lines. Product safety requires that these sources be well characterized, uniform, and not contaminated with hazardous adventitious agents. Also, cells directly from humans pose additional product safety issues. Because of the complex nature of these products, a controlled, reproducible manufacturing process and facility are required and relied on to produce a uniform product. The degree of reliance on a controlled process varies depending on the nature of the product. Because complete chemical characterization of a biologic product is not feasible for quality control, the testing of the biologic potency receives particular attention and is costly.

 

Before testing any compounds with potential therapeutic value in humans, the pharmaceutical product candidate enters the preclinical testing stage. Preclinical tests include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies to assess the potential safety and activity of the pharmaceutical product candidate. The conduct of the preclinical tests must comply with federal regulations and requirements including GLPs. The sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data, any available clinical data or literature and a proposed clinical protocol, to the FDA as part of the IND. The IND automatically becomes effective 30 days after receipt by the FDA unless the FDA places the IND on a clinical hold within that 30-day time period. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. The FDA may also impose clinical holds on a pharmaceutical product candidate at any time before or during clinical trials due to safety concerns or non-compliance. Accordingly, we cannot be certain that submission of an IND will result in the FDA allowing clinical trials to begin, or that, once begun, issues will not arise that suspend or terminate such clinical trial.

 

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Clinical trials involve the administration of the pharmaceutical product candidate to healthy volunteers or patients under the supervision of qualified investigators, generally physicians not employed by the sponsor. Clinical trials are conducted under protocols detailing, among other things, the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria, and the parameters to be used to monitor subject safety. Each protocol must be submitted to the FDA if conducted under a U.S. IND. Clinical trials must be conducted in accordance with GCP requirements. Further, each clinical trial must be reviewed and approved by an IRB or ethics committee if conducted outside of the United States, at or servicing each institution at which the clinical trial will be conducted. An IRB or ethics committee is charged with protecting the welfare and rights of trial participants and considers such items as whether the risks to individuals participating in the clinical trials are minimized and are reasonable in relation to anticipated benefits. The IRB or ethics committee also approves the informed consent form that must be provided to each clinical trial subject or his or her legal representative and must monitor the clinical trial until completed. We intend to use third-party clinical research organizations (“CROs”) to administer and conduct our planned clinical trials and will rely upon such CROs, as well as medical institutions, clinical investigators and consultants, to conduct our trials in accordance with our clinical protocols and to play a significant role in the subsequent collection and analysis of data from these trials. The failure by any of such third parties to meet expected timelines, adhere to our protocols or meet regulatory standards could adversely impact the subject product development program. Human clinical trials are typically conducted in three sequential phases that may overlap or be combined:

 

·Phase 1. The pharmaceutical product is usually introduced into healthy human subjects and tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion. In the case of some products for severe or life-threatening diseases, such as cancer treatments, especially when the product may be too inherently toxic to ethically administer to healthy volunteers, the initial human testing is often conducted in patients.
·Phase 2. The pharmaceutical product is evaluated in a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance, optimal dosage and dosing schedule.
·Phase 3. Clinical trials are undertaken to further evaluate dosage, clinical efficacy and safety in an expanded patient population at geographically dispersed clinical trial sites. These clinical trials are intended to establish the overall risk/benefit ratio of the product and provide an adequate basis for product labeling. Generally, two adequate and well-controlled Phase 3 clinical trials are required by the FDA for approval of an NDA/BLA or foreign authorities for approval of marketing applications.

 

Post-approval studies, or Phase 4 clinical trials, may be conducted after initial marketing approval. These studies are used to gain additional experience from the treatment of patients in the intended therapeutic indication and may be requested by the FDA as a condition of approval.

 

Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and written IND safety reports must be submitted to the FDA and the investigators for serious and unexpected adverse events or any finding from tests in laboratory animals that suggests a significant risk for human subjects. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, if at all. The FDA or the sponsor or, if used, its data safety monitoring board may suspend a clinical trial at any time on various grounds, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB or ethics committee can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s or ethics committee’s requirements or if the pharmaceutical product has been associated with unexpected serious harm to patients.

 

Concurrent with clinical trials, companies usually complete additional animal studies and must also develop additional information about the chemistry and physical characteristics of the pharmaceutical product as well as finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the pharmaceutical product candidate and, among other things, must develop methods for testing the identity, strength, quality and purity of the final pharmaceutical product. Additionally, appropriate packaging must be selected, tested and stability studies must be conducted to demonstrate that the pharmaceutical product candidate does not undergo unacceptable deterioration over its shelf life.

 

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United States Review and Approval Processes

 

The results of product development, preclinical studies and clinical trials, along with descriptions of the manufacturing process, analytical tests conducted on the chemistry of the pharmaceutical product, proposed labeling and other relevant information are submitted to the FDA as part of an NDA/BLA requesting approval to market the product.

 

The NDA/BLA review and approval process is lengthy and difficult and the FDA may refuse to approve an NDA/BLA if the applicable regulatory criteria are not satisfied or may require additional clinical data or other data and information. Even if such data and information is submitted, the FDA may ultimately decide that the NDA/BLA does not satisfy the criteria for approval. If a product receives regulatory approval, the approval may be significantly limited to specific diseases and dosages or the indications for use may otherwise be limited, which could restrict the commercial value of the product. Further, the FDA may require that certain contraindications, warnings or precautions be included in the product labeling. Drug manufacturers and their subcontractors are required to register their establishments with the FDA, and are subject to periodic unannounced inspections by the FDA for compliance with cGMPs, which impose certain procedural and documentation requirements upon us and our third-party manufacturers. We cannot be certain that we, our subsidiaries or our suppliers will be able to comply with the cGMP and other FDA regulatory requirements.

 

Post-Approval Requirements

 

Any pharmaceutical products for which we or our subsidiaries receive FDA approvals are subject to continuing regulation by the FDA, including, among other things, record-keeping requirements, reporting of adverse experiences with the product, providing the FDA with updated safety and efficacy information, product sampling and distribution requirements, complying with certain electronic records and signature requirements and complying with FDA promotion and advertising requirements, which include, among others, standards for direct-to-consumer advertising, promoting pharmaceutical products for uses or in patient populations that are not described in the pharmaceutical product’s approved labeling (known as “off-label use”), industry-sponsored scientific and educational activities, and promotional activities involving the internet. Failure to comply with FDA requirements can have negative consequences, including adverse publicity, enforcement letters from the FDA, mandated corrective advertising or communications with doctors, and civil or criminal penalties.

 

The FDA also may require Phase 4 testing, risk minimization action plans and surveillance to monitor the effects of an approved product or place conditions on an approval that could restrict the distribution or use of the product.

 

Orphan Drugs

 

Under the Orphan Drug Act, special incentives exist for sponsors to develop products for rare diseases or conditions, which are defined to include those diseases or conditions that affect fewer than 200,000 people in the United States. Requests for orphan drug designation must be submitted before the submission of an NDA or BLA. In June 2012, we were notified by the FDA that CNDO-109 was granted orphan drug designation and in September 2012, the USPTO issued the first U.S. patent covering CNDO-109. If CNDO-109 is commercialized, we will be obligated to pay UCLB annual royalties based upon the net sales of product or if we sublicense CNDO-109, a portion of sub-licensing revenue we receive, if any.

 

If a product that has an orphan drug designation is the first such product to receive FDA approval for the disease for which it has such designation, the product is entitled to orphan product exclusivity for that use. This means that, subsequent to approval, the FDA may not approve any other applications to market the same drug for the same disease, except in limited circumstances, for seven years. The FDA may approve a subsequent application from another person if the FDA determines that the application is for a different drug or different use, or if the FDA determines that the subsequent product is clinically superior, or that the holder of the initial orphan drug approval cannot assure the availability of sufficient quantities of the drug to meet the public’s need. If the FDA approves someone else’s application for the same drug that has orphan exclusivity, but for a different use, the competing drug could be prescribed by physicians outside its FDA approval for the orphan use, notwithstanding the existence of orphan exclusivity. A grant of an orphan designation is not a guarantee that a product will be approved. If a sponsor receives orphan drug exclusivity upon approval, there can be no assurance that the exclusivity will prevent another person from receiving approval for the same or a similar drug for the same or other uses.

 

Pediatric Information

 

Under the Pediatric Research Equity Act, or PREA, NDAs and BLAs or supplements to NDAs and BLAs must contain data to assess the safety and effectiveness of the treatment for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the treatment is safe and effective. The FDA may grant full or partial waivers, or deferrals, for submission of data. Unless otherwise required by regulation, PREA does not apply to any product for an indication for which orphan designation has been granted.

 

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The Best Pharmaceuticals for Children Act, or BPCA, provides BLA holders a six-month extension of any exclusivity-patent or non-patent-for a product if certain conditions are met. Conditions for exclusivity include the FDA’s determination that information relating to the use of a new drug in the pediatric population may produce health benefits in that population, FDA making a written request for pediatric studies, and the applicant agreeing to perform, and reporting on, the requested studies within a specific time frame.

 

Other Healthcare Laws and Compliance Requirements

 

In the United States, our and our subsidiaries’ activities are potentially subject to regulation by various federal, state and local authorities in addition to the FDA, including the Centers for Medicare and Medicaid Services (formerly the Health Care Financing Administration), other divisions of the United States Department of Health and Human Services (e.g., the Office of Inspector General), the United States Department of Justice and individual United States Attorney offices within the Department of Justice, and state and local governments.

 

Pharmaceutical Coverage, Pricing and Reimbursement

 

In the United States and markets in other countries, sales of any products for which we and our subsidiaries receive regulatory approval for commercial sale will depend in part on the availability of reimbursement from third-party payors, including government health administrative authorities, managed care providers, private health insurers and other organizations. Third-party payors are increasingly examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety and efficacy, and, accordingly, significant uncertainty exists as to the reimbursement status of newly approved therapeutics. Adequate third-party reimbursement may not be available for our products to enable us and our subsidiaries to realize an appropriate return on our investment in research and product development. We are unable to predict the future course of federal or state healthcare legislation and regulations, including the Affordable Care Act.

 

International Regulation

 

In addition to regulations in the United States, there are a variety of foreign regulations governing clinical trials and commercial sales and distribution of any product candidates. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval.

 

Government Regulation and Supervision - National

 

The securities industry, the Broker-Dealer Subsidiaries, and National’s investment adviser businesses are subject to extensive regulation by the SEC, FINRA, NFA, state securities regulators and other governmental regulatory authorities. The principal purpose of these regulations is the protection of customers and the securities markets. The SEC is the federal agency charged with the administration of the federal securities laws. Much of the regulation of broker-dealers, however, has been delegated to self-regulatory organizations, such as FINRA, that adopt rules, subject to approval by the SEC, which govern their members and conduct periodic examinations of member firms' operations. Securities firms are also subject to regulation by state securities commissions in the states in which they are registered. All of the Broker-Dealer Subsidiaries are registered broker-dealers with the SEC and members of FINRA. They are licensed to conduct activities as a broker-dealer in all 50 states, the District of Columbia and Puerto Rico.

 

In addition, as registered broker-dealers and members of FINRA, the Broker-Dealer Subsidiaries are subject to the SEC's Uniform Net Capital Rule 15c3-1 (“Rule 15c3-1”), which is designed to measure the general financial integrity and liquidity of a broker-dealer and requires the maintenance of minimum net capital. Net capital is defined as the net worth of a broker-dealer subject to certain adjustments. In computing net capital, various adjustments are made to net worth that exclude assets not readily convertible into cash. Additionally, the regulations require that certain assets, such as a broker-dealer's position in securities, be valued in a conservative manner so as to avoid overstating of the broker-dealer's net capital.

 

National Securities is subject to Rule 15c3-1, which, among other things, requires the maintenance of minimum net capital. In February 2015, pursuant to a directive form FINRA, National Securities reverted back to using the alternative method of computing net capital from the aggregate indebtedness method. At September 30, 2017, National Securities had net capital of $9.2 million which was $9.0 million in excess of its required net capital of $250,000. National Securities is exempt from the provisions of Rule 15c-3-3 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. Calculations of net capital and claimed exemptions are reviewed by an independent audit firm on an annual basis.

 

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vFinance Investments is also subject to Rule 15c3-1, 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 in Rule 15c3-1, shall not exceed 15 to 1. At September 30, 2017, vFinance Investments had net capital of $1.4 million which was $0.4 million in excess of its required net capital of $1.0 million. vFinance Investments ratio of aggregate indebtedness to net capital was 0.8 to 1. vFinance Investments is exempt from the provisions of Rule 15c-3-3 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. Calculations of net capital and claimed exemptions are reviewed by an independent audit firm on an annual basis.

 

National’s tax preparation business is also subject to extensive regulation. Federal legislation requires income tax return preparers to, among other things, register as a tax preparer, set forth their signatures and identification numbers on all tax returns prepared by them, and retain all tax returns prepared by them for three years. Federal laws also subject income tax preparers to accuracy-related penalties in connection with the preparation of income tax returns. Preparers may be prohibited from further acting as income tax return preparers if they continuously and repeatedly engage in specified misconduct. In addition, authorized IRS e-filer providers are required to comply with certain rules and regulations, as per IRS Publication 1345 and other notices of the IRS applicable to e-filing.

 

IRS regulations require among other things, that all tax return preparers use a Preparer Tax Identification Number (“PTIN”) as their identifying number on federal tax returns filed after December 31, 2010; require all tax return preparers to be authorized to practice before the IRS as a prerequisite to obtaining or renewing a PTIN; causing all previous issued PTIN’s to expire on December 31, 2010 unless properly renewed; allowing the IRS to conduct tax compliance checks on tax return preparers; and defining the individuals who are considered “tax return preparers” for the PTIN applicants. The IRS also conducts background checks on PTIN applicants.

 

The Gramm-Leach-Bliley Act and related Federal Trade Commission regulations require National to adopt and disclose customer privacy policies.

 

Employees

 

As of December 31, 2017, we had 68 full-time employees at Fortress and the Fortress Companies and as of September 30, 2017 National had 320 full-time employees and 730 independent contractors.

 

Executive Officers of Fortress

 

The following table sets forth certain information about our executive officers as of December 31, 2017.

 

Name   Age   Position
Lindsay A. Rosenwald, M.D.   62   Chairman of the Board of Directors, President and Chief Executive Officer
Robyn M. Hunter   56   Chief Financial Officer
George Avgerinos, Ph.D.   64   Senior Vice President, Biologics Operations
Michael S. Weiss   51   Executive Vice Chairman Strategic Development

 

Lindsay A. Rosenwald, M.D. has served as a member of the Board of Directors since October 2009 and as Chairman, President and Chief Executive Officer of the Company since December 2013. In addition, Dr. Rosenwald currently serves as President and Chief Executive Officer of Aevitas Therapeutics, Inc. and Tamid Bio, Inc. From November 2014 to August 2015 he served as President and Chief Executive Officer of Checkpoint Therapeutics, Inc. Dr. Rosenwald currently serves as a member of the board of directors of Aevitas Therapeutics, Inc., Avenue Therapeutics, Inc. (Nasdaq: ATXI), Caelum Biosciences, Inc., Cellvation, Inc., Checkpoint Therapeutics, Inc. (Nasdaq: CKPT), Cyprium Therapeutics, Inc., Helocyte, Inc., Journey Medical Corporation, Mustang Bio, Inc. (Nasdaq: MBIO) and Tamid Bio, Inc. Dr. Rosenwald is Co-Portfolio Manager and Partner of Opus Point Partners Management, LLC, an asset management firm in the life sciences industry, which he joined in 2009. Prior to that, from 1991 to 2008, he served as the Chairman of Paramount BioCapital, Inc. Dr. Rosenwald received his B.S. in finance from Pennsylvania State University and his M.D. from Temple University School of Medicine.

 

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Robyn M. Hunter was appointed as the Company’s Chief Financial Officer on June 26, 2017. Ms. Hunter has more than 30 years of financial and operational experience in an array of industries. Since June 2011, Ms. Hunter has served as the Company’s Vice President and Corporate Controller where she has implemented financial and operational processes, procedures and policies to facilitate the Company’s execution of its growth strategy. From January 2006 to May 2011, Ms. Hunter served as Senior Vice President and Chief Financial Officer of Schochet Associates. From August 2004 to January 2006, Ms. Hunter served as the Corporate Controller for Indevus Pharmaceuticals. From 1990 to 2004, Ms. Hunter held several positions from Accounting Manager to Vice President and Treasurer of The Stackpole Corporation. Ms. Hunter holds a Bachelor of Arts degree in Economics from Union College in Schenectady New York.

 

George Avgerinos, Ph.D. has served as our Senior Vice President, Biologics Operations since June 2013. Dr. Avgerinos joined us from AbbVie, Inc., where he was Vice President, HUMIRA® Manufacturing Sciences and External Partnerships. In his 22-year career at AbbVie, Inc., formerly Abbott Laboratories, formerly BASF Bioresearch Corporation (BASF), Dr. Avgerinos was responsible for many aspects of biologics development and operations. These included the HUMIRA® operations franchise, global biologics process and manufacturing sciences, biologics CMC, manufacturing operations, and third-party manufacturing. During his tenure, Dr. Avgerinos led and participated in the development of numerous clinical candidates which included the launch of HUMIRA®. He supported expansion of the supply chain to over $9.0 billion in annual global sales. Dr. Avgerinos’ efforts on HUMIRA® have been recognized with numerous awards, including the prestigious Abbott’s Chairman’s award in 2011. Dr. Avgerinos received a B.A. in Biophysics from the University of Connecticut and a Ph.D. in Biochemical Engineering from the Massachusetts Institute of Technology.

 

Michael S. Weiss has served as our Executive Vice Chairman, Strategic Development since February 2014. He has served as Executive Vice Chairman, Strategic Development of Fortress Biotech since February 2014. He currently serves as a member of the board of directors of several of the Company’s subsidiaries, including: Aevitas Therapeutics, Inc., Avenue Therapeutics, Inc. (Nasdaq: AXTI), Caelum Biosciences, Inc., Cellvation, Inc., Checkpoint Therapeutics, Inc. (Nasdaq: CKPT), Cyprium Therapeutics, Inc. Helocyte, Inc., Mustang Bio, Inc. (Nasdaq: MBIO) and Tamid Bio, Inc. Mr. Weiss is currently the Executive Chairman of Mustang Bio, Inc. (where he served as interim CEO from March 2015 to April 2017), the Chairman of the Board of Directors of Checkpoint Therapeutics, Inc. (where he served as interim CEO from August 2015 to October 2015), and Chairman of the Board of Directors of National Holdings Corporation (Nasdaq: NHLD), all three of which are controlled subsidiaries of Fortress. Since December 2011, Mr. Weiss has served in multiple capacities at TG Therapeutics, Inc., a related party, and is currently its Executive Chairman, Chief Executive Officer and President. He is a co-founder of, and has been a managing partner and principal of, Opus Point Partners Management, LLC since 2008. In 1999, Mr. Weiss founded Access Oncology which was later acquired by Keryx Biopharmaceuticals (Nasdaq: KERX) in 2004. Following the merger, Mr. Weiss remained as CEO of Keryx. He began his professional career as a lawyer with Cravath, Swaine & Moore LLP. Mr. Weiss earned his B.S. in Finance from The University of Albany and his J.D. from Columbia Law School.

 

Available Information

 

We and certain of our majority-controlled subsidiaries file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information statements and amendments to reports filed or furnished pursuant to Sections 13(a), 14 and 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The public may obtain these filings at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at http://www.sec.gov that contains reports, proxy and information statements and other information regarding our Company and other companies that file materials with the SEC electronically. Copies of our and certain of our majority-controlled subsidiaries’ reports on Form 10-K, Forms 10-Q and Forms 8-K may be obtained, free of charge, electronically through our website at www.fortressbiotech.com.

 

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 Annual Report on Form 10-K 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, Checkpoint, Mustang, and 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 National, 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.

 

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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 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.

 

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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. In addition, there has been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators. 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. Such collaborators may also consider alternative product candidates or technologies for similar indications that may be available to collaborate on and whether such a collaboration could be more attractive than the one with us or our subsidiaries for any future product candidate.

 

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.

 

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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.

 

Our and our subsidiaries’ employees, consultants, or third-party partners may engage in misconduct or other improper activities, including but not necessarily limited to noncompliance with regulatory standards and requirements or internal procedures, policies or agreements to which such employees, consultants and partners are subject, any of which could have a material adverse effect on our business.

 

We and our subsidiaries are exposed to the risk of employee fraud or other misconduct. Misconduct by employees, consultants, or third party partners could include intentional failures to comply with FDA regulations, provide accurate information to the FDA, comply with manufacturing standards we have established, comply with federal and state healthcare fraud and abuse laws and regulations, report financial information or data accurately, comply with internal procedures, policies or agreements to which such employees, consultants or partners are subject, or disclose unauthorized activities to us and our subsidiaries. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee, consultant, or third-party misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. The precautions we and our subsidiaries take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us and our subsidiaries from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us or our subsidiaries, and we or our subsidiaries are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business and results of operations, including the imposition of significant fines or other sanctions.

 

We and our subsidiaries receive a large amount of proprietary information from potential or existing licensors of intellectual property and potential acquisition target companies, all pursuant to confidentiality agreements. The confidentiality and proprietary invention assignment agreements that we and our subsidiaries have in place with each of our employees and consultants prohibit the unauthorized disclosure of such information, but such employees or consultants may nonetheless disclose such information through negligence or willful misconduct. Any such unauthorized disclosures could subject us and our subsidiaries to monetary damages and/or injunctive or equitable relief. The notes, analyses and memoranda that we and our subsidiaries have generated based off such information are also valuable to our businesses, and the unauthorized disclosure or misappropriation of such materials by our and our subsidiaries’ employees and consultants could significantly harm our strategic initiatives – especially if such disclosures are made to our competitor companies.

 

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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 also have numerous early-stage subsidiaries that rely heavily on third parties for the development and manufacturing of their products and product candidates.

 

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 our inception. As of December 31, 2017, we had an accumulated deficit of approximately $312.1 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 or contract with third parties for performance of a variety of critical 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 designing and executing clinical trials;

 

·participating in regulatory approval processes;

 

·formulating and manufacturing products for clinical development programs and commercial sale; 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.

 

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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;

 

·changes in regulatory requirements by government authorities for our product candidates;

 

·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 March 2010, known as the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or collectively the ACA. 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.

 

Among the provisions of the ACA of importance to our potential product candidates are:

 

·an annual, nondeductible fee on any entity that manufactures, or imports specified branded prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government healthcare programs;

 

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·an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1% and 13.0% of the average manufacturer price for branded and generic drugs, respectively;

 

·expansion of healthcare fraud and abuse laws, including the federal False Claims Act and the federal Anti-Kickback Statute, new government investigative powers and enhanced penalties for non-compliance;

 

·a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for a manufacturer’s outpatient drugs to be covered under Medicare Part D;

 

·extension of a manufacturer’s Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations;

 

·expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals and by adding new mandatory eligibility categories for certain individuals with income at or below 138% of the federal poverty level, thereby potentially increasing a manufacturer’s Medicaid rebate liability;

 

·expansion of the entities eligible for discounts under the 340B Drug Pricing Program;

 

·the new requirements under the federal Open Payments program and its implementing regulations;

 

·a new requirement to annually report drug samples that manufacturers and distributors provide to physicians; and

 

·a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.

 

The Supreme Court upheld the ACA in the main challenge to the constitutionality of the law in 2012. The Supreme Court also upheld federal subsidies for purchasers of insurance through federally facilitated exchanges in a decision released in June 2015. Any remaining legal challenges to the ACA are viewed generally as not significantly impacting the implementation of the law if the plaintiffs prevail.

 

The U.S. President signed an Executive Order in 2017 instructing federal agencies to waive or delay requirements of the ACA that impose economic or regulatory burdens on states, families, the health-care industry and others. Modifications to or repeal of all or certain provisions of the ACA have been attempted in Congress as a result of the outcome of the recent presidential and congressional elections, consistent with statements made by the incoming administration and members of Congress during the presidential and congressional campaigns and following the election. In January 2017, Congress voted to adopt a budget resolution for fiscal year 2017, or the Budget Resolution, that authorizes the implementation of legislation that would repeal portions of the ACA. The Budget Resolution is not a law. However, it is widely viewed as the first step toward the passage of legislation that would repeal certain aspects of the ACA. In March 2017, following the passage of the budget resolution for fiscal year 2017, the U.S. House of Representatives passed legislation known as the American Health Care Act of 2017, which, if enacted, would amend or repeal significant portions of the ACA. Attempts in the Senate in 2017 to pass similar ACA repeal legislation, including the Better Care Reconciliation Act of 2017, were unsuccessful. However, in December 2017, the Tax Cuts and Jobs Act was enacted, which includes a provision that effectively repeals the ACA’s individual mandate by reducing the tax penalty for failing to maintain minimum essential coverage to zero.

 

Legislative proposals such as expanding the Medicaid drug rebate program to the Medicare Part D program, providing authority for the government to negotiate drug prices under the Medicare Part D program and lowering reimbursement for drugs covered under the Medicare Part B program have been raised in Congress but have been met with opposition and have not been enacted so far.

 

The administration can rely on its existing statutory authority to make policy changes that could have an impact on the drug industry. For example, the Medicare program has in the past proposed to test alternative payment methodologies for drugs covered under the Part B program and finalized a proposal to pay hospitals less for Part B-covered drugs purchased through the 340B Drug Pricing Program effective January 1, 2018.

 

We expect that the ACA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we receive for any approved drug. Any reduction in reimbursement from Medicare or other government healthcare programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability or commercialize our drugs.

 

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The United Kingdom’s announced withdrawal from the EU could have a negative effect on global economic conditions and financial markets, EU regulatory procedures and our business.

 

In June 2016, a majority of voters in the United Kingdom, or the UK, elected in a national referendum to withdraw from the EU. In March 2017, the UK government formally initiated the withdrawal process. That pending withdrawal, currently scheduled to occur in or before March 2019, has created significant uncertainty about the future relationship between the UK and the EU, including with respect to the laws and regulations that will apply as the UK determines which EU laws to replace or replicate upon withdrawal. The pending withdrawal has also given rise to calls for the governments of other EU member states to consider withdrawal. These developments, or the perception that any of them could occur, have had and may continue to have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Any of these factors could depress economic activity and restrict access to capital, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

 

The UK’s withdrawal from the EU also means that the EMA, from which we and certain of our subsidiaries must obtain approval to sell any product in the EU, must relocate from its current headquarters in the UK to a new location within the EU. This relocation of the EMA could significantly disrupt its operations, which could cause delays in the EMA’s review and approval of marketing authorization applications. Such a disruption could impact any future applications for EMA approval of our and our subsidiaries’ drug candidates, which could have a material adverse effect on our business, financial condition and results of operations and growth prospects.

 

Our, and our subsidiaries’, current and future relationships with customers and third-party payors in the United States and elsewhere may be subject, directly or indirectly, to applicable anti-kickback, fraud and abuse, false claims, transparency, health information privacy and security and other healthcare laws and regulations, which could expose us or our subsidiaries to criminal sanctions, civil penalties, contractual damages, reputational harm, administrative burdens and diminished profits and future earnings.

 

Healthcare providers, physicians and third-party payors in the US and elsewhere will play a primary role in the recommendation and prescription of any product candidates for which we, or our subsidiaries, obtain marketing approval. Our, and our subsidiaries’, future arrangements with third-party payors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations, including, without limitation, the federal Anti-Kickback Statute and the federal False Claims Act, which may constrain the business or financial arrangements and relationships through which we and our subsidiaries sell, market and distribute any product candidates for which we obtain marketing approval. In addition, we or our subsidiaries may be subject to transparency laws and patient privacy regulation by the federal and state governments and by governments in foreign jurisdictions in which we conduct our business. The applicable federal, state and foreign healthcare laws and regulations that may affect our ability to operate, or our subsidiaries’ ability to operate, include, but are not necessarily limited to:

 

·the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under federal and state healthcare programs, such as Medicare and Medicaid;

 

·federal civil and criminal false claims laws and civil monetary penalty laws, including the federal False Claims Act, which impose criminal and civil penalties, including civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, including the Medicare and Medicaid programs, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government; the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;

 

·HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their respective implementing regulations, which impose obligations on covered healthcare providers, health plans, and healthcare clearinghouses, as well as their business associates that create, receive, maintain or transmit individually identifiable health information for or on behalf of a covered entity, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;

 

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·the federal Open Payments program, which requires manufacturers of certain drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program, with specific exceptions, to report annually to the Centers for Medicare & Medicaid Services, or CMS, information related to “payments or other transfers of value” made to physicians, which is defined to include doctors, dentists, optometrists, podiatrists and chiropractors, and teaching hospitals and applicable manufacturers and applicable group purchasing organizations to report annually to CMS ownership and investment interests held by the physicians and their immediate family members. Data collection began on August 1, 2013 with requirements for manufacturers to submit reports to CMS by March 31, 2014 and 90 days after the end each subsequent calendar year. Disclosure of such information was made by CMS on a publicly available website beginning in September 2014; and

 

·analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers; state and foreign laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers; state and foreign laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state and foreign laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

 

Efforts to ensure that our business and our subsidiaries’ business arrangements with third parties will comply with applicable healthcare laws and regulations may involve substantial costs. It is possible that governmental authorities will conclude that our or our subsidiaries’ business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our or our subsidiaries’ operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, including, without limitation, damages, fines, imprisonment, exclusion from participation in government healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations, which could have a material adverse effect on our business. If any of the physicians or other healthcare providers or entities with whom we expect to do business, including our collaborators, is found not to be in compliance with applicable laws, it may be subject to criminal, civil or administrative sanctions, including exclusions from participation in government healthcare programs, which could also materially affect 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.

 

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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.

 

The types of disputes which may arise between us and our subsidiaries and the third parties from whom we and our subsidiaries license intellectual property include, but are not limited to:

 

·the scope of rights granted under such license agreements and other interpretation-related issues;

 

·the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to such license agreements;

 

·the sublicensing of patent and other rights under our license agreements and/or collaborative development relationships, and the rights and obligations associated with such sublicensing;

 

·the diligence and development obligations under license agreements (which may include specific diligence milestones) and what activities or achievements satisfy those diligence obligations;

 

·whether or not the milestones associated with certain milestone payment obligations have been achieved or satisfied;

 

·the applicability or scope of indemnification claims or obligations under such license agreements;

 

·the permissibility and advisability of, and strategy regarding, the pursuit of potential third-party infringers of the intellectual property that is the subject of such license agreements;

 

·the calculation of royalty, sublicense revenue and other payment obligations under such license agreements;

 

·the extent to which license rights, if any, are retained by licensors under such license agreements;

 

·whether or not a material breach has occurred under such license agreements and the extent to which such breach, if deemed to have occurred, is or can be cured within applicable cure periods, if any;

 

·disputes regarding patent filing and prosecution decisions, as well as payment obligations regarding past and ongoing patent expenses;

 

·the inventorship and ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our partners; and

 

·the priority of invention of patented technology.

 

In addition, the agreements under which we and our subsidiaries currently license intellectual property or technology from third parties are complex, and certain provisions in such agreements may be susceptible to multiple interpretations or may conflict in such a way that puts us in breach of one or more agreements, which would make us susceptible to lengthy and expensive disputes with one or more of such third-party licensing partners. The resolution of any contract interpretation disagreement that may arise could narrow what we believe to be the scope of our and our subsidiaries’ rights to the relevant intellectual property or technology, or increase what we believe to be our and our subsidiaries’ financial or other obligations under the relevant agreements, either of which could have a material adverse effect on our business, financial condition, results of operations and prospects. Moreover, if disputes over intellectual property that we or our subsidiaries have licensed prevent or impair our ability to maintain our current licensing arrangements on commercially acceptable terms, we or our subsidiaries may be unable to successfully develop and commercialize the affected product candidates, which could have a material adverse effect on our business, financial conditions, results of operations and prospects.

 

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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.

 

Moreover, in all interactions with regulatory authorities, the company is exposed to liability risks under the Foreign Corrupt Practices Act or similar anti-bribery laws.

 

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;

 

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·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 or the product characteristics or benefit-risk profile unfavorable 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.

 

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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 predominantly on third parties to manufacture our preclinical and clinical pharmaceutical supplies and expect to continue to rely heavily 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 heavily 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 and authorities 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 or comparable authorities, 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 and commercial product could be unfit for sale. 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.

 

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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 heavily 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.

 

We and certain of our subsidiaries rely on clinical data and results obtained by third parties that could ultimately prove to be inaccurate or unreliable.

 

As part of the strategy implemented by us and our subsidiaries to mitigate development risk, we and certain of our subsidiaries seek to develop product candidates with validated mechanisms of action and we utilize biomarkers to assess potential clinical efficacy early in the development process. This strategy necessarily relies upon clinical data and other results produced or obtained by third parties, which may ultimately prove to be inaccurate or unreliable. If the third party data and results we and certain of our subsidiaries rely upon prove to be inaccurate, unreliable or not applicable to the product candidates of us and our subsidiaries, we could make inaccurate assumptions and conclusions about the product candidates of us and our subsidiaries, and our research and development efforts could be compromised and called into question during the review or any marketing applications we submit.

 

 24 

 

 

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.

  

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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, or the scope of issued patents may not extend to competitive product candidates and their formulations and uses developed or produced by others;

 

·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. Moreover, we or our subsidiaries may be subject to a third-party pre-issuance submission of prior art to the PTO, or become involved in opposition, derivation, reexamination, inter partes review, post-grant review or interference proceedings challenging our patent rights or the patent rights of others. The costs of these proceedings could be substantial, and it is possible that our efforts to establish priority of invention would be unsuccessful, resulting in a material adverse effect on our US patent position. An adverse determination in any such submission, patent office trial, proceeding or litigation could reduce the scope of, render unenforceable, or invalidate, our patent rights, allow third parties to commercialize our technology or products and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights. In addition, if the breadth or strength of protection provided by our patents and patent applications is threatened, it could dissuade companies from collaborating with us to license, develop or commercialize current or future product candidates. 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. Despite these efforts, any of these parties may breach the agreements and may unintentionally or willfully disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. Moreover, if any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be harmed.

 

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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. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the US and other jurisdictions are typically not published until 18 months after a first filing, or in some cases not at all. Therefore, we and our subsidiaries cannot know with certainty whether we and our subsidiaries or our licensors were the first to make the inventions claimed in patents or pending patent applications that we and our subsidiaries own or licensed, or that we and our subsidiaries or our licensors were the first to file for patent protection of such inventions. In the event that a third party has also filed a US patent application relating to our product candidates or a similar invention, depending upon the priority dates claimed by the competing parties, we may have to participate in interference proceedings declared by the PTO to determine priority of invention in the US. The costs of these proceedings could be substantial, and it is possible that our efforts to establish priority of invention would be unsuccessful, resulting in a material adverse effect on our U.S. patent position. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain.

 

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. Any claims we or our subsidiaries assert against accused infringers could provoke these parties to assert counterclaims against us or our subsidiaries alleging that we or our subsidiaries infringe their patents; or provoke those parties to petition the PTO to institute inter partes review against the asserted patents, which may lead to a finding that all or some of the claims of the patent are invalid. In addition, in a patent infringement proceeding, a court may decide that a patent of ours or our subsidiaries is invalid or unenforceable, in whole or in part, construe the patent’s claims narrowly or refuse to stop the other party from using the technology at issue on the grounds that our or our subsidiaries’ patents do not cover the technology in question. 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.

 

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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, and requirements regarding company presentations and interactions with healthcare professionals. 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.

 

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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 $101.2 million, $65.7 million and $50.5 million for the years ended December 31, 2017, 2016 and 2015, respectively. At December 31, 2017, we had an accumulated deficit of approximately $312.1 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.

 

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At December 31, 2017, the total amount of debt outstanding was $67.5 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 promissory note with IDB may limit our ability to finance future operations or satisfy capital needs or to engage in, expand or pursue our business activities. It 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, 2017, 2016 and 2015 we incurred R&D expenses of approximately $52.5 million, $35.1 million and $29.8 million, respectively. 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.

 

 30 

 

 

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 December 31, 2017, Lindsay A. Rosenwald, M.D. our Chairman, President and Chief Executive Officer, beneficially owned 13.0% of our issued and outstanding capital stock, including 40,000 Series A Preferred Shares. At December 31, 2017, Michael S. Weiss, our Executive Vice Chairman, Strategic Development, beneficially owned 15.2% 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 50,991,285 million outstanding shares of our Common Stock, inclusive of outstanding equity awards, as of December 31, 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.

 

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We and certain of our subsidiaries have never paid and currently do not intend to pay cash dividends in the near future except for the dividend we pay on our Preferred A shares. 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, except for the dividend we pay on our Preferred A shares, 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 1B.Unresolved Staff Comments

 

None.

 

Item 2.Properties

 

Fortress

 

On October 3, 2014, we entered into a 15-year lease for office space at 2 Gansevoort Street, New York, NY 10014, at an average annual rent of $2.7 million. We took possession of this space, which serves as our principal executive offices, in December 2015, and took occupancy in April 2016. Total rent expense, over the full term of the lease for this space will approximate $40.7 million. In conjunction with the lease, we entered into Desk Space Agreements with two related parties: OPPM and TGTX, to occupy 10% and 45%, respectively, of the office space that requires them to pay their share of the average annual rent of $0.3 million and $1.1 million, respectively. The total net rent expense to us will approximate $16.0 million over the lease term. These initial rent allocations will be adjusted periodically for each party based upon actual percentage of the office space occupied. Additionally, we have reserved the right to execute desk space agreements with other third parties and those arrangements will also affect the cost of the lease actually borne by us.

 

In October 2015, we entered into a 5-year lease for approximately 6,100 square feet of office space in Waltham, MA at an average annual rent of approximately $0.2 million. We took occupancy of this space in January 2016.

 

 32 

 

 

Journey

 

In June 2017, Journey extended its lease for 2,295 square feet of office space in Scottsdale, AZ by one year, at an average annual rent of approximately $55,000, which represents the total rent expense under the extended term of the lease. Journey originally took occupancy of this space in November 2014 and extended the lease term by one year in June 2016.

 

Mustang

 

On October 27, 2017, Mustang entered into a lease agreement with WCS - 377 Plantation Street, Inc., a Massachusetts nonprofit corporation (“Landlord”). Pursuant to the terms of the lease agreement, Mustang agreed to lease 27,043 sf from the Landlord, located at 377 Plantation Street in Worcester, MA (the “Facility”), through November 2026, subject to additional extensions at Mustang’s option. Base rent, net of abatements of $0.6 million over the lease term, totals approximately $3.6 million, on a triple-net basis. Mustang plans to make improvements to the facility of approximately $3.5 million.

 

The Facility is expected to be operational for the production of personalized CAR T therapies in 2018.

 

National

 

National owns no real property. Its corporate headquarters are in space leased by National in New York, NY and Boca Raton, FL. Independent contractors individually lease the branch offices that are operated by those independent contractors. National also leases additional office space, all of which are set forth in the table below.

 

National’s leases expire between November of 2017 and October 2026. National believes the rent at each of its locations is reasonable based on current market rates and conditions. We consider the facilities of National and those of its subsidiaries to be reasonably insured and adequate for the foreseeable needs of National and its subsidiaries.

 

The following chart provides information related to these lease obligations as of September 30, 2017:

 

Address 

Approximate
Square

Footage 

   Approximate
Annual Base
Lease Rental
   Note 

Lease 

Termination

Date 

200 Vesey Street, 25th Floor, New York, NY   15,988   $767,424      27-Feb-26
410 Park Ave, 14th Floor, New York, NY   11,885   $594,250   (a)  30-Oct-18
600 University Street, Suite 2900, Seattle, WA   9,860   $295,275      31-Oct-26
2875 NE 191st Street, Suite 601, Aventura, FL   5,208   $237,745      31-May-21
1200 N. Federal Highway, Suite 400, Boca Raton, FL   11,510   $213,741      31-Aug-21
14802 N. Dale Mabry Blvd., Suite 101 and 204, Tampa, FL   7,038   $156,174      31-Dec-21
35-30 Francis Lewis Blvd., Suite 205, Flushing, NY   4,600   $142,140      31-Aug-21
2711 North Haskell Avenue, Suite 2950, Dallas, TX   5,253   $120,000      month to month
540 Gidney Ave, Newburgh, NY   4,535   $95,034      30-Jun-21
11 Raymond Ave, Suite 22, Poughkeepsie, NY   3,558   $97,409      30-Jun-18
4000 Rt. 66, Suite 331, Tinton Falls, NJ   6,721   $92,101      30-Nov-20
500 Portion Rd, Suite 2 & 4, Lake Ronkonkoma, NY   3,727   $90,423      1-Jan-18
181 East Jericho Turnpike, 2nd Floor, Mineola, NY   3,165   $83,944      30-Apr-25
7370 College Parkway, Fort Meyers, FL   3,749   $71,718      30-Nov-19
1550-1556 Third Ave, Suite 306, New York, NY   1,212   $66,830      30-Nov-17
5839 Main St, Williamsville, NY   3,159   $65,791      31-Dec-18
3535 Military Trail, Suite 201/202, Jupiter, FL   2,944   $65,195      Six months notice
28050 US Hwy 19 North, Suite 300, Clearwater, FL   3,165   $60,452      30-Apr-20
1200 N. Federal Highway, Suite 215, Boca Raton, FL   3,214   $54,638      31-Jul-20
11 Raymond Ave, Suite 21, Poughkeepsie, NY   2,200   $54,341      31-Jul-20
1580 South Main Street, Suite 101, Boerne, TX   2,224   $44,480      28-Feb-20
1501 W. Fairbanks Ave, Winter Park, FL   1,840   $36,000      Six months notice
20 Squadron Blvd., Suite 103, New City, NY   2,042   $34,900      31-Aug-19
3301 Bonita Beach Rd, Suite 107, Bonita Beach, FL   1,740   $26,970      31-Aug-18
44 Stelton Rd, Suite 235, Piscataway, NJ   1,242   $23,158      month to month
2170 West State Road 434, Suite 376, Longwood, FL   940   $15,927      30-Sep-18

 

(a)This lease is sublet to an unaffiliated entity

 

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Item 3.Legal Proceedings

 

Fortress Biotech, Inc.

 

Dr. Falk Pharma, GmbH (“Dr. Falk Pharma”) and Fortress are among the parties to that certain Collaboration Agreement dated March 20, 2012, whereby they agreed to collaborate to develop a product for treatment of Crohn’s disease.  A dispute has arisen between Dr. Falk Pharma and Fortress with respect to their relative rights and obligations under the Collaboration Agreement.  Specifically, Dr. Falk Pharma contends that it fulfilled its contractual obligations to Fortress and is entitled to the final milestone payment due under the Collaboration Agreement - EUR 2.5 million.  Fortress contends that no such payment is due because a condition of the EUR 2.5 million payment was the delivery of a clinical study report that addressed the primary and secondary objectives of a Phase II trial, and Fortress contends that Dr. Falk Pharma failed to deliver such report.  Dr. Falk Pharma disputes that it failed to deliver such report and further disputes that the delivery of such report is a condition of Fortress’s obligation to make the EUR 2.5 million payment.  After the parties’ attempts to negotiate a settlement of the dispute were unsuccessful, Dr. Falk Pharma filed a lawsuit against Fortress in Frankfurt, Germany to recover the EUR 2.5 million plus interest and attorneys’ fees, and Fortress was served with the English translation of the lawsuit on August 11, 2016.  Fortress retained counsel in Germany and, on December 14, 2016, filed an answer to the complaint, denying that it had any liability to Dr. Falk Pharma.  On August 2, 2017, Fortress received a judgment from the court in Frankfurt awarding the full amount (EUR 2.5 million) plus interest to Dr. Falk Pharma.  Fortress appealed the decision to the Higher Regional Court of Frankfurt on August 28, 2017 and intends to continue to defend its position vigorously on appeal.

 

Fortress Biotech, Inc. and Mustang Bio, Inc.

 

On January 15, 2016, Dr. Winson Tang (“Tang”) filed a Complaint against us in the Superior Court of the State of California, County of Los Angeles. Winson Tang v. Lindsay Rosenwald et al., Case No. BC607346. As amended, the Complaint alleged a breach of contract by us and two of our officers, Dr. Rosenwald and Mr. Weiss, and two claims against other Defendants, including Mustang. On November 3, 2017, Tang and Defendants entered into a Settlement Agreement regarding this matter.

 

Item 4.Mine Safety Disclosures

 

Not applicable.

 

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PART II

 

Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information for Common Stock

 

We became a public company on November 17, 2011. Our Common Stock is listed for trading on the NASDAQ Capital Market under the symbol “FBIO.” The following table sets forth the high and low intraday sales prices of our Common Stock for each full quarterly period within the two most recent fiscal years.

 

   2017   2016 
   High   Low   High   Low 
First quarter  $3.91   $2.25   $3.29   $2.34 
Second quarter  $4.98   $3.15   $4.15   $2.44 
Third quarter  $4.89   $3.83   $3.14   $2.38 
Fourth quarter  $4.84   $3.26   $3.01   $1.95 

 

Holders of Record

 

As of March 13, 2018, there were approximately 345 holders of record of our Common Stock. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders who shares may be held in trust by other entities.

 

Dividends

 

We have never paid cash dividends and currently intend to retain our future earnings, if any, to fund the development and growth of our business.

 

Stock Performance Graph

 

The following shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or incorporated by reference into any of our other filings under the Exchange Act or the Securities Act of 1933, as amended, except to the extent we specifically incorporate it by reference into such filing.

 

This graph compares the cumulative total return on our Common Stock with that of the NASDAQ Composite and the NASDAQ Biotechnology index. This chart adjusts prices for stock splits and assumes the reinvestment of any dividends. The stock price performance on the following graph is not necessarily indicative of future stock price performance.

 

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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Fortress Biotech, Inc., the NASDAQ Composite Index , and the NASDAQ

Biotechnology Index

 

 

   12/31/2012   12/31/2013   12/31/2014   12/31/2015   12/31/2016   12/31/2017 
Fortress Biotech, Inc.  $100.00   $58.31   $54.10   $61.86   $59.87   $88.47 
NASDAQ Composite  $100.00   $138.32   $156.85   $165.84   $178.28   $228.63 
NASDAQ Biotechnology  $100.00   $165.54   $221.53   $247.10   $194.19   $235.12 

 

*$100 invested in December 31, 2012 in stock or index, including reinvestment of dividends.

 

Equity Compensation Plans

 

The information required by Item 5 of Form 10-K regarding equity compensation plans is incorporated herein by reference to “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

 

Item 6.Selected Consolidated Financial Data

 

As part of our growth strategy, we continue to leverage our substantial biopharmaceutical business, financial and drug development expertise to invest in the acquisition, development and commercialization of novel pharmaceutical and other biomedical products. We are employing a variety of approaches and corporate structures to acquire rights to and finance a diverse portfolio of innovative pharmaceutical and biotechnology products, technologies and companies. These may include licensing, partnerships, joint ventures, and private or public spin-outs. We believe these activities will diversify our product development and, over time, may enhance shareholder value through potential royalty, milestone and equity payments, fees as well as potential product revenues. As a result, the data in the following table might not be indicative of future financial conditions and/or results of operations.

 

 36 

 

 

   For the Years Ended December 31, 
($ in thousands, except per share
amounts)
  2017   2016   2015   2014   2013 
Revenue                         
Fortress                         
Product revenue, net  $15,520   $3,587   $273   $-   $- 
Revenue - from a related party   1,725    2,570    590    -    - 
Net Fortress revenue   17,245    6,157    863    -    - 
                          
National                         
Commissions   96,807    5,388    -    -    - 
Net dealer inventory gains   15,108    253    -    -    - 
Investment banking   25,064    2,829    -    -    - 
Investment advisory   14,528    904    -    -    - 
Interest and dividends   2,764    155    -    -    - 
Transfer fees and clearing services   7,393    386    -    -    - 
Tax preparation and accounting   7,439    338    -    -    - 
Other   1,236    70    -    -    - 
Total National revenue   170,339    10,323    -    -    - 
Net revenue   187,584    16,480    863    -    - 
                          
Operating expenses                         
Fortress                         
Cost of goods sold – product revenue   3,658    790    -    -    - 
Research and development   48,322    29,602    18,402    10,239    25,682 
Research and development – licenses acquired   4,164    5,532    11,408    -    - 
General and administrative   50,897    34,003    21,584    10,413    10,098 
Total Fortress operating expenses   107,041    69,927    51,394    20,652    35,780 
                          
National                         
Commissions, compensation and fees   155,187    10,414    -    -    - 
Clearing fees   2,343    144    -    -    - 
Communications   2,767    177    -    -    - 
Occupancy   4,286    193    -    -    - 
Licenses and registration   1,726    147    -    -    - 
Professional fees   4,531    327    -    -    - 
Interest   14    1    -    -    - 
Depreciation and amortization   2,089    545    -    -    - 
Other administrative expenses   8,808    315    -    -    - 
Total National operating expenses   181,751    12,263    -    -    - 
Total operating expenses   288,792    82,190    51,394    20,652    35,780 
Loss from operations   (101,208)   (65,710)   (50,531)   (20,652)   (35,780)
                          
Other income (expenses)                         
Interest income   819    298    245    662    545 
Interest expense and financing fee   (5,860)   (3,690)   (1,484)   (1,338)   (1,923)
Change in fair value of derivative liabilities   8,391    (1,039)   (438)   -    - 
Change in fair value of subsidiary convertible note   (457)   (78)   -    -    - 
Change in fair value of investments   226    (1,071)   (1,675)   942    - 
Other loss   (234)   -    -    -    - 
Total other income (expenses)   2,885    (5,580)   (3,352)   266    (1,378)
Loss before income taxes   (98,323)   (71,290)   (53,883)   (20,386)   (37,158)
                          
Income tax expense   1,513    -    -    -    - 
Net loss   (99,836)   (71,290)   (53,883)   (20,386)   (37,158)
Less: net loss attributable to non-controlling interest   (32,960)   (16,195)   (5,455)   -    - 
Net loss attributable to common stockholders  $(66,876)  $(55,095)  $(48,428)  $(20,386)  $(37,158)
                          
Basic and diluted net loss per common share  $(1.61)  $(1.38)  $(1.24)  $(0.56)  $(1.22)
                          
Weighted average common shares outstanding—basic and diluted   41,658,733    39,962,657    39,146,589    36,323,596    30,429,743 
                          
Financial Condition:                         
Cash and cash equivalents  $113,915   $88,294   $98,182   $49,759   $99,521 
Total assets  $245,950   $170,731   $118,610   $89,325   $100,539 
Current liabilities  $67,428   $56,565   $10,579   $4,077   $11,210 
Long-term liabilities  $58,020   $31,198   $23,758   $14,725   $8,137 
Stockholders’ equity  $120,502   $82,968   $84,273   $70,523   $81,278 

 

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Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information appearing elsewhere in this Form 10-K.

 

We are 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 our subsidiary companies, also referred to herein as the “Fortress Companies.” Additionally, in 2016, we acquired a controlling interest in National Holdings Corporation, a diversified independent brokerage company. In addition to our internal development programs, we leverage our biopharmaceutical business expertise and drug development capabilities and provides funding and management services to help the Fortress Companies achieve their goals. We may seek licensings, acquisitions, partnerships, joint ventures and/or public and private financings to accelerate and provide additional funding to support their research and development programs.

 

2017 Activity

 

Fortress Biotech, Inc.

 

2017 Subordinated Notes

 

In March, 2017, we entered into Note Purchase Agreements with NAM Biotech Fund II, LLC - Series I and NAM Special Situations Fund I QP, LLC – FBIO Series I, 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, 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 December 31, 2017, we had issued notes totaling approximately $28.4 million in the 2017 Subordinated Note Financing and, in connection therewith, paid placement agent fees of approximately $2.8 million to NSC. In addition, as of December 31, 2017, we had issued warrants to NSC for 716,180 shares of our common stock in connection with the 2017 Subordinated Note Financing.

 

Series A Preferred Offering

 

In November 2017, we raised gross proceeds of $25.0 million in an underwritten public offering of one million shares of 9.375% Series A Cumulative Redeemable Perpetual Preferred Stock (“Series A Preferred Stock”) at a price of $25.00 per share. The Series A Preferred Stock received an “A-” investment-grade rating from Egan-Jones Rating Co., an independent, unaffiliated rating agency.

 

Net proceeds totaled approximately $22.2 million in the Series A Preferred Stock offering after the payment of fees of $2.8 million to NSC.

 

Aevitas Therapeutics, Inc.

 

Aevitas Therapeutics, Inc. (“Aevitas”) began operations in July 2017 to develop novel gene therapy approaches for complement-mediated diseases. The proprietary technology was licensed from a leading university and uses adeno-associated virus (AAV)-based gene therapy to restore lasting production of functional complement regulatory proteins, providing a potentially curative treatment. 

 

Avenue Therapeutics, Inc.

 

In May, 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. The patent (U.S. Patent No. 9,693,949) was issued in July 2017.

 

 38 

 

 

In June, 2017, Avenue completed an initial public offering of its common stock, resulting in net proceeds of approximately $34.2 million after deducting underwriting discounts and other offering costs of which $2.3 million was paid to NSC a subsidiary of National and a related party.

 

Avenue initiated its first Phase 3 trial in patients with moderate-to-severe pain following bunionectomy with the dosing of its first patient in September 2017. Avenue anticipates receipt of topline data from this study in the second quarter of 2018. In December 2017, Avenue dosed the first patient in the Phase 3 safety trial of IV tramadol for the management of moderate to moderately severe pain. This safety study is a key component of Avenue’s pivotal Phase 3 development program for IV tramadol.

 

Caelum Biosciences, Inc.

 

In January, 2017, Caelum acquired its lead asset, CAEL-101 (mAb 11-1F4), through a license with Columbia University. CAEL-101 is a novel antibody in Phase 1b clinical trials for the treatment of AL amyloidosis, a rare systemic disorder that leads to the buildup of amyloid proteins in and around tissues, nerves and organs, (“AL Amyloidosis”), resulting in organ damage and high mortality rates. Interim Phase 1a/1b data on CAEL-101 was presented at the American Society of Hematology meeting in December 2016.

 

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.

 

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

 

In June, 2017 Caelum entered a biopharmaceutical manufacturing agreement with Patheon Biologics, LLC for process development and current good manufacturing practices (“cGMP”) production of CAEL-101. The agreement will support Phase 2/3 studies of CAEL-101 for the treatment of AL amyloidosis

 

During the third quarter of 2017 Caelum completed a third party financing of Convertible Notes. In connection with this financing Caelum raised $9.9 million and paid a 10% financing fee of approximately $1.0 million to NSC, a subsidiary of National.

 

In December 2017 Caelum announced full Phase 1a/1b clinical data demonstrating the ability of CAEL-101, to bind to light-chain amyloid fibrils and achieve early and clinically efficacious organ responses in patients with relapsed and refractory amyloid light chain (“AL”) amyloidosis. The data were presented by Columbia University on December 10th in an oral session at the 59th American Society of Hematology Annual Meeting.

 

Cellvation, Inc.

 

In November 2017, the FDA granted Cellvation’s CEVA101 Regenerative Medicine Advanced Therapy (“RMAT”) designation for the treatment of traumatic brain injury (“TBI”). Under terms of the RMAT designation, the FDA will help facilitate the program’s expedited development and review and will provide guidance on generating the evidence needed to support approval of CEVA101 for TBI. The RMAT designation makes a regenerative medicine advanced therapy product eligible for the same actions to expedite the development and review of a marketing application that are available to drugs that receive Breakthrough Therapy Designation, including timely advice and interactive communications with FDA, as well as proactive and collaborative involvement by senior FDA managers and experienced review and regulatory health project management staff. A product designated as an RMAT also may be eligible for other FDA-expedited programs, such as Priority Review. The FDA also may conduct a rolling review of products in its expedited programs, reviewing portions of a marketing application before the complete application is submitted.

 

Checkpoint Therapeutics, Inc.

 

On June 26, 2017, Checkpoint’s common stock commenced trading on the NASDAQ Capital Market under the symbol “CKPT”.

 

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In October 2017, Checkpoint dosed its first patient in a Phase 1 clinical study evaluating the safety and tolerability of its anti-PD-L1 antibody, CK-301, in checkpoint therapy-naïve patients with selected recurrent or metastatic cancers. The Phase 1 CK-301 Study is a first-in-human, Phase 1, open-label, multicenter study. The study will initially enroll patients in study sites across Australia and New Zealand.

 

Coronado SO Co.

 

In October 2017, Coronado SO Co. transferred its proprietary interests and rights in its lead product candidate to a third party.

 

Cyprium Therapeutics, Inc.

 

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, 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. 

 

Escala Therapeutics, Inc.

 

In July 2017, Escala discontinued its development of ManNAc and as such returned the license to NIH and discontinued its funding of cooperative research and development of ManNAc. No expense was incurred in connection with the discontinuation of this development program.  

 

Mustang Bio, Inc.

 

City of Hope Licenses

 

In February, 2017, Mustang entered into an exclusive license agreement (the “IV/ICV Agreement”) with City of Hope (“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, in March 2017, Mustang paid COH an upfront fee of $0.1 million. An additional annual maintenance fee is also payable going forward.

 

In March 2015, Mustang entered into an exclusive license agreement with COH to acquire intellectual property rights pertaining to CAR-T (the “Original License”). In February, 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.

 

In May, 2017 Mustang entered into exclusive, worldwide licensing agreements 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.

 

License with University of California

 

In March, 2017, Mustang entered into an exclusive license agreement with the Regents of the University of California to acquire intellectual property rights in patent applications related to the engineered anti-prostate stem cell antigen antibodies for cancer targeting and detection.

 

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Appointment of Dr. Manuel Litchman as CEO

 

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, remains as Chairman of the Board of Directors.

 

Fred Hutchinson Cancer Research Center License

 

Effective July, 2017, Mustang entered into an exclusive, worldwide licensing agreement with Fred Hutchinson Cancer Research Center (“Fred Hutch”), for the use of a CAR T therapy related to autologous T cells engineered to express a CD20-specific chimeric antigen receptor (“CD20 Technology” or “CD20”). As part of the transaction, Mustang also entered into an investigator-initiated clinical trial agreement to provide partial funding for a Phase 1/2 clinical trial at Fred Hutch evaluating the safety and efficacy of the CD20 Technology in patients with relapsed or refractory B-cell non-Hodgkin lymphomas. The trial commenced during the fourth quarter of 2017.

 

Nasdaq Global Market Listing

 

On August 22, 2017, Mustang commenced trading on the Nasdaq Global Market under the symbol “MBIO”.

 

Cell Processing Facility

 

In October, 2017, Mustang entered into a lease agreement for a 27,043 sf facility in Massachusetts for the production of personalized CAR T therapies. Mustang expects the facility to be operational in 2018.

 

License with Harvard University

 

In December 2017, Mustang entered into a license agreement with Harvard University and a research collaboration agreement with Beth Israel Deaconess Medical Center for the development of CRISPR/Cas9-enhanced CAR T therapies for the treatment of cancer.

 

Capital Raise

 

In 2017, Mustang closed on gross proceeds of approximately $56.0 million, before expenses, in private placements of shares and warrants. In connection with its private placement they paid NSC, a subsidiary of National and a related party, $5.6 million in placement agent fees.

 

Tamid Bio, Inc.

 

Tamid Bio, Inc. (“Tamid”) began operations in December 2017 and focuses on the development of adeno-associated virus (“AAV”) gene therapies in orphan diseases with unmet medical needs.

 

Licenses with University of North Carolina at Chapel Hill

 

As part of its formation, Tamid entered into three exclusive licensing agreements with the University of North Carolina at Chapel Hill (“UNC-Chapel Hill”) for three preclinical AAV gene therapies. Tamid’s lead program, Tamid-001, targets the ocular manifestations of Mucopolysaccharidosis type I (“MPS I”), a rare and progressively debilitating disorder, caused by mutations in the IDUA gene, leading to the accumulation of glycosaminoglycans (“GAGs”) in multiple organs. Tamid also in-licensed two earlier-stage assets, which will target dysferlinopathies and corneal transplant rejection.

 

Critical Accounting Policies and Use of Estimates

 

See Note 2 to the Consolidated Financial Statements.

 

Results of Operations

 

General

 

For the year ended December 31, 2017, we generated $187.6 million of net revenue of which $170.3 million net of $19.5 million of fees earned on Fortress and Fortress Companies eliminated in consolidation, of revenue relates to National, $1.7 million of revenue is in connection with Checkpoint’s collaborative agreements with TGTX and $15.6 million of revenue relates primarily to the sale of Journey branded products. At December 31, 2017, we had an accumulated deficit of $312.1 million primarily as a result of research and development expenses, purchases of in-process research and development and general and administrative expenses. 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 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.

 

 41 

 

 

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 licenses and milestones 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 is the total purchase price for the licenses acquired during the period.

 

For the years ended December 31, 2017, 2016 and 2015, total research and development expenses were $48.3 million, $29.6 million and $18.4 million, respectively. Direct external research and development costs with respect to Fortress and each of our subsidiaries for the years ended December 31, 2017, 2016 and 2015 were: for Fortress: $7.7 million, $2.0 million and $3.6 million; Avenue: $6.4 million, $0.9 million and $0.7 million; Cellvation: $0.3 million, $0.2 million and nil; Checkpoint: $16.1 million, $10.1 million and $4.9 million; Escala: $0.5 million, $0.9 million and $0.8 million; Helocyte: $4.8 million, $4.7 million and nil; Mustang: $7.7 million, $2.2 million and $1.5 million; Caelum $3.0 million, nil and nil; Cyprium $0.7 million, nil and nil; Aevitas $0.6 million, nil and nil; Coronado SO $0.4 million, nil and nil. Stock based compensation expense included in research and development expenses in 2017, 2016 and 2015 was $4.0 million, $4.7 million and $5.8 million, respectively.

 

For the years ended December 31, 2017, 2016 and 2015, costs related to the acquisition of licenses were $4.2 million, $5.5 million and $11.4 million, respectively.

 

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 and not included in expenses related to National. For the years ended December 31, 2017, 2016 and 2015, general and administrative expenses were $50.9 million, $34.0 million and $21.6 million, respectively. Stock based compensation expense included in general and administrative expenses in 2017, 2016 and 2015 was $9.4 million, $7.4 million and $8.5 million, 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.

 

National Operating Expenses

 

Commissions include those expenses based on commission revenue, net dealer inventory gains revenue, as well as compensation to non-broker employees of National. For the years ended December 31, 2017 and 2016, National operating expenses were $181.8 million and $12.3 million, respectively.

 

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Comparison of Years Ended December 31, 2017 and 2016

 

   For the Years Ended December 31,   Change 
($ in thousands)  2017   2016   $   % 
Revenue                    
Fortress                    
Product revenue, net  $15,520   $3,587   $11,933    333%
Revenue - from a related party   1,725    2,570    (845)   (33)%
Net Fortress revenue   17,245    6,157    11,088    180%
                     
National                    
Commissions   96,807    5,388    91,419    1,697%
Net dealer inventory gains   15,108    253    14,855    5,872%
Investment banking   25,064    2,829    22,235    786%
Investment advisory   14,528    904    13,624    1,507%
Interest and dividends   2,764    155    2,609    1,683%
Transfer fees and clearing services   7,393    386    7,007    1,815%
Tax preparation and accounting   7,439    338    7,101    2,101%
Other   1,236    70    1,166    1,666%
Total National revenue   170,339    10,323    160,016    1,550%
Net revenue   187,584    16,480    171,104    1,038%
                     
Operating expenses                    
Fortress                    
Cost of goods sold – product revenue   3,658    790    2,868    363%
Research and development   48,322    29,602    18,720    63%
Research and development – licenses acquired   4,164    5,532    (1,368)   (25)%
General and administrative   50,897    34,003    16,894    50%
Total Fortress operating expenses   107,041    69,927    37,114    53%
                     
National                    
Commissions, compensation and fees   155,187    10,414    144,773    1,390%
Clearing fees   2,343    144    2,199    1,527%
Communications   2,767    177    2,590    1,463%
Occupancy   4,286    193    4,093    2,121%
Licenses and registration   1,726    147    1,579    1,074%
Professional fees   4,531    327    4,204    1,286%
Interest   14    1    13    1,300%
Depreciation and amortization   2,089    545    1,544    283%
Other administrative expenses   8,808    315    8,493    2,696%
Total National operating expenses   181,751    12,263    169,488    1,382%
Total operating expenses   288,792    82,190    206,602    251%
Loss from operations   (101,208)   (65,710)   (35,498)   54%
                     
Other income (expenses)                    
Interest income   819    298    521    175%
Interest expenses   (5,860)   (3,690)   (2,170)   59%
Change in fair value of derivative liabilities   8,391    (1,039)   9,430    (908)%
Change in fair value of subsidiary convertible note   (457)   (78)   (379)   486%
Change in fair value of investments   226    (1,071)   1,297    (121)%
Other loss   (234)   -    (234)   100%
Total other income (expenses)   2,885    (5,580)   8,465    (152)%
Loss before income taxes   (98,323)   (71,290)   (27,033)   38%
                     
Income tax expense   1,513    -    1,513    100%
Net loss   (99,836)   (71,290)   (28,546)   40%
Less: net loss attributable to non-controlling interest   (32,960)   (16,195)   (16,765)   104%
Net loss attributable to common stockholders  $(66,876)  $(55,095)  $(11,781)   21%

 

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For the year ended December 31, 2017, $170.3 million of revenue was from NHLD, $1.7 million of revenue was in connection with Checkpoint’s collaborative agreements with TGTX, and $15.6 million of revenue related primarily to the sale of Journey branded products.

 

Cost of goods sold increased by $2.9 million or 363% due to the growth in branded sales by JMC of $11.9 million or 333% due to increases in Targadox of $12.1 million, Luxamend $0.5 million and Ceracade $0.2 million, offset by a decrease in Dermasorb of $0.9 million from the year ended December 31, 2016 to the year ended December 31, 2017.  

 

Research and development expenses increased $18.7 million, or 63%, from the year ended December 31, 2016 to the year ended December 31, 2017. This increase was primarily due to a $12.3 million increase in our Fortress Companies research and development expenses, as a result of continued clinical development under their licenses, a $3.1 million increase in sponsored research, a net increase in employee costs of $2.5 million, a $0.4 million increase in consulting costs, and a $0.4 million increase in other R&D-related expenses.

 

During the year ended December 31, 2017, we invested $4.2 million in new and existing research and development programs with various partners. Consisting of the licensing by Mustang of intellectual property related to CAR T from COH, the Fred Hutchinson Cancer Research Center and Harvard University for $1.9 million, Mustang’s milestone payments to COH in conjunction with the development of IL-13 of $0.5 million, Mustang’s $0.5 million payment to the Regents of the University of California to acquire intellectual property rights in patent applications related to the engineered anti-prostate stem cell antigen antibodies for cancer targeting and detection, Checkpoint’s payments totaling $0.4 million for a milestone payment due upon the successful completion of toxicology studies under the terms of the license agreement with Jubilant, Caelum’s payments totaling $0.2 million for worldwide license rights to CAEL-101, Cyprium’s purchase of $0.1 million for a worldwide, exclusive license from the NIH to develop and commercialize an AAV based gene therapy, called AAV-ATP7A, for the treatment of Menkes disease; Tamid’s purchase of $0.3 million for exclusive licenses from the University of North Carolina at Chapel Hill for three preclinical AAV gene therapies, and Fortress’ milestone payment totaling $0.3 million under a license agreement with Effcon Laboratories for the completion of a Pilot PK study related to the development of the extended release formulation of methazolamide.

 

General and administrative expenses of Fortress increased $16.9 million, or 50%, from the year ended December 31, 2016 to the year ended December 31, 2017. This increase is largely due to a $4.0 million increase in outsourced headcount costs for our sales force, as headcount growth is fueled by increased branded sales by JMC, and a $3.1 million increase in legal fees. Of these legal fees, $2.2 million relates to the settlement of Mustang’s Winson Tang lawsuit, $2.9 million increase in patent, license acquisition and general corporate legal costs incurred by Mustang, offset by a decrease of $1.7 million in legal fees incurred by Fortress due to the costs incurred in 2016 related to the acquisition of National and a decrease of $0.2 million in legal fees incurred by Helocyte, due to less patent reimbursement costs. In addition, salaries and benefits increased $3.4 million, with $0.6 million attributable to Caelum headcount costs, $0.5 million due to an increase in Mustang headcount, $0.3 million in increased Avenue headcount costs, and $2.0 million due to an increase in general staffing levels for Fortress and certain of our subsidiaries for business development and growth. The Company also faced accounting increases of $0.2 million, due to and subsequent to the preparation of subsidiaries becoming public companies. In addition, consulting expenses increased by $0.6 million, and general and other expenses increased $5.6 million, which consisted of product samples and packaging $0.9 million, $0.3 million in increased travel costs, outside services $0.7 million, board of directors’ fees $0.5 million, public company costs $0.4 million, depreciation $0.4 million, insurance $0.2 million, and dues and subscriptions $0.2 million. Stock-compensation expense increased by $2.0 million primarily due to new stock grants made to new employees.

 

National’s operating expenses increased $169.5 million, or 1,382% from the year ended December 31, 2016 to the year ended December 31, 2017 due to a full year of expenses included in consolidated results for the year ended December 31, 2017. Results for the year ended December 31, 2016 include National’s expenses incurred from the acquisition date of September 9, 2016, to September 30, 2016, National’s fiscal year end date.

 

Total other income (expenses) increased $8.5 million, or 152%, from a loss of $5.6 million for the year ended December 31, 2016 to income of $2.9 million for the year ended December 31, 2017, primarily due to an increase of $9.4 million in the change in fair value of derivative liabilities, $1.3 million increase in the fair value of investments and $0.5 million increase in interest income, offset by $2.2 million increase in interest expense, $0.4 decrease in the fair value of Helocyte’s convertible notes and $0.2 decrease in the value of our investment in Argus.

 

Non-controlling interests increased $16.8 million, or 104%, from the year ended December 31, 2016 to the year ended December 31, 2017. This increase reflects the increase in costs related to our subsidiaries.

 

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Comparison of Years Ended December 31, 2016 and 2015

 

  

For the Years Ended

December 31,

   Change 
($ in thousands)  2016   2015   $   % 
Revenue                    
Fortress                    
Product revenue, net  $3,587   $273   $3,314    1,214%
Revenue - from a related party   2,570    590    1,980    336%
Net Fortress revenue   6,157    863    5,294    613%
                     
National                    
Commissions   5,388    -    5,388    100%
Net dealer inventory gains   253    -    253    100%
Investment banking   2,829    -    2,829    100%
Investment advisory   904    -    904    100%
Interest and dividends   155    -    155    100%
Transfer fees and clearing services   386    -    386    100%
Tax preparation and accounting   338    -    338    100%
Other   70    -    70    100%
Total National revenue   10,323    -    10,323    100%
Net revenue   16,480    863    15,617    1,810%
                     
Operating expenses                    
Fortress                    
Cost of goods sold – product revenue   790    -    790    100%
Research and development   29,602    18,402    11,200    61%
Research and development – licenses acquired   5,532    11,408    (5,876)   (52)%
General and administrative   34,003    21,584    12,419    58%
Total Fortress operating expenses   69,927    51,394    18,533    36%
                     
National                    
Commissions, compensation and fees   10,414    -    10,414    100%
Clearing fees   144    -    144    100%
Communications   177    -    177    100%
Occupancy   193    -    193    100%
Licenses and registration   147    -    147    100%
Professional fees   327    -    327    100%
Interest   1    -    1    100%
Depreciation and amortization   545    -    545    100%
Other administrative expenses   315    -    315    100%
Total National operating expenses   12,263    -    12,263    100%
Total operating expenses   82,190    51,394    30,796    60%
Loss from operations   (65,710)   (50,531)   (15,179)   30%
                     
Other income (expenses)                    
Interest income   298    245    53    22%
Interest expenses   (3,690)   (1,484)   (2,206)   149%
Change in fair value of derivative liabilities   (1,039)   (438)   (601)   137%
Change in fair value of subsidiary convertible note   (78)   -    (78)   100%
Change in fair value of investments   (1,071)   (1,675)   604    (36)%
Total other income (expenses)   (5,580)   (3,352)   (2,228)   66%
Net loss   (71,290)   (53,883)   (17,407)   32%
                     
Less: net loss attributable to non-controlling interest   (16,195)   (5,455)   (10,740)   197%
Net loss attributable to common stockholders  $(55,095)  $(48,428)  $(6,667)   14%

 

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For the year ended December 31, 2016, $10.3 million of revenue was from NHLD, $2.6 million of revenue was in connection with Checkpoint’s collaborative agreements with TGTX, and $3.6 million of revenue related primarily to the sale of Journey branded products.

 

Cost of goods sold increased by $0.8 million or 100% due to the commencement of branded sales by JMC.

 

Research and development expenses increased $11.2 million, or 61%, from the year ended December 31, 2015 to the year ended December 31, 2016. This increase was primarily due to an $8.1 million increase in our Fortress Companies research and development expenses, as a result of continued clinical development under their licenses, a $5.2 million increase in sponsored research, a net increase in employee costs of $0.7 million, a $0.2 million increase in consulting costs, a $0.1 million increase in expenses related to CNDO 109, and a decrease of $2.9 million in expenses related to TSO product development. The 2015 costs related to the $2.7 million potential payment due Dr. Falk Pharma in connection with its delivery of the Clinical Study Report (“CSR”) (though the Company disputes the adequacy of the CSR and does not believe the payment is due). We expect to incur expenses related to our research and development efforts going forward with existing product candidates as well as potentially acquired new products. Additionally, stock-based compensation expenses decreased by $1.1 million from the year ended December 31, 2015 to the year ended December 31, 2016. The decrease primarily relates to a decrease of $0.8 million at Fortress and $0.4 million of expenses related to the stock grants by Checkpoint, offset by an increase of $0.2 million related to new stock grants made by Helocyte.

 

During the year ended December 31, 2016, we invested $5.5 million in new and existing research and development programs with various partners. These investments consisted of the purchase by Mustang of CAR T from COH for $1.7 million, Checkpoint’s payments totaling $3.2 million for the licenses to develop a portfolio of fully human immuno-oncology antibodies and small molecule target anti-cancer agents, Cellvation’s payments totaling $0.3 million for upfront license fees and reimbursement of patent expenses to University of Texas, Helocyte’s purchase of $0.1 million to develop novel immunotherapies for the prevention and treatment of CMV from COH, and Fortress’ purchase totaling $0.3 million for oncolytic adenovirus technology and the extended release formulation of methazolamide.

 

General and administrative expenses increased $12.4 million, or 58%, from the year ended December 31, 2015 to the year ended December 31, 2016. This increase is largely due to a $4.3 million increase in legal fees. Of these legal fees, $2.1 million relates to the acquisition of National, $0.7 million relates to intellectual property, $0.6 million relates to Mustang’s Winston Tang lawsuit, $0.5 million relates to Checkpoint’s filing to become a public company, and $0.4 million relates to general legal expenses. In addition, salaries and benefits increased $4.9 million, with $2.2 million attributable to an increase in Journey staff due to product rollouts, $0.8 million due to an increase in Checkpoint headcount, and $1.9 million due to an increase in general staffing levels for Fortress and certain of our subsidiaries for business development and growth. The Company also faced accounting increases of $1.1 million, due to and subsequent to the preparation of subsidiaries becoming public companies, as well as rent increases of $1.0 million. In addition, consulting expenses increased by $0.6 million, and general and other expenses increased $1.8 million, which consisted of product samples and packaging $0.2 million, product storage $0.2 million, investor relations $0.2 million, board of directors fees $0.2 million, depreciation $0.1 million, taxes $0.1 million, insurance $0.1 million, dues and subscriptions $0.1 million, and $0.6 million general expenses. Stock-compensation expense decreased by $1.3 million primarily due to the one-time expense associated with subsidiary warrants granted to our Chief Executive Officer and Executive Vice Chairman, Strategic Development in July 2015 offset by expense related to new stock grants made to Checkpoint, Helocyte and Cellvation employees and consultants in 2016.

 

Total other expenses increased $2.2 million, or 66%, from the year ended December 31, 2015 to the year ended December 31, 2016, primarily due to an increase of $1.2 million in the amortization of debt discount, $1.0 million of fees related to the Helocyte debt offering and $0.6 million of change in fair value of contingently issuable warrants related to the contingently issuable common stock warrant in connection with Avenue’s $3.0 million NSC Note, and offset by $0.6 million in the value of our investment in Origo Acquisition Corporation.

 

Non-controlling interests increased $10.7 million, or 197%, from the year ended December 31, 2015 to the year ended December 31, 2016. This increase reflects the increase in costs related to our subsidiaries.

 

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Cash Flows for the Three Years Ended December 31, 2017, 2016 and 2015

 

   For the Years Ended December 31, 
($ in thousands)  2017   2016   2015 
Statement of cash flows data:               
Total cash (used in)/provided by:               
Operating activities  $(85,430)  $(45,812)  $(20,378)
Investing activities   (41,629)   (6,060)   7,885 
Financing activities   154,207    42,905    60,916 
Net increase (decrease) in cash and cash equivalents  $27,148   $(8,967)  $48,423 

 

Operating Activities

 

Net cash used in operating activities increased by $39.6 million from the year ended December 31, 2016 to the year ended December 31, 2017, primarily due to a $28.5 million increase in net loss, a $9.4 million decrease of change in fair value of derivative liabilities, a $4.2 million decrease in change in operating assets and liabilities, a $1.7 million decrease of common shares issuable for license expenses, and a $1.3 million decrease in change in fair value of our long-term investments. This increase was partially offset by a $1.9 million increase in stock-based compensation expense, an increase of $2.4 million of depreciation and amortization expense, a $1.0 million increase of common shares issuable and issued for PIK interest expense, an increase of $0.4 million in change in fair value of subsidiaries' convertible notes, a $0.3 million increase of issuance common shares for research and development expenses, a $0.3 million of loss on write off investment, and an increase of research and development-licenses acquired, expense of $0.3 million.

 

Net cash used in operating activities increased by $25.4 million from the year ended December 31, 2015 to the year ended December 31, 2016, primarily due to a $17.4 million increase in net loss, a $6.7 million decrease of research and development-licenses acquired, a $2.2 million decrease in stock-based compensation expense, a $3.2 million decrease in change in operating assets and liabilities and a $0.6 million decrease in change in fair value of our long-term investments. This increase was partially offset by $1.7 million of common shares issuable for license expenses, $1.2 million increase of amortization of debt discount, an increase in financing fees on subsidiaries' convertible notes of $1.0 million, an increase of $0.9 million of depreciation and amortization expense and an increase of $0.6 million in change in fair value of derivative liabilities.

 

Investing Activities

 

Net cash used in investing activities of $41.6 million during the year ended December 31, 2017 primarily relates to $56.1 million in purchase of short-term investments with the purchase of certificates of deposit by Mustang and Avenue, $3.4 million in licenses acquired, $2.1 million in purchase of property and equipment, and $0.3 million of security deposits funded, offset by $20.1 million of redemption of short-term investment.

  

Net cash used in investing activities of $6.1 million during the year ended December 31, 2016 primarily relates to $3.8 million in licenses being acquired in 2016, $6.4 million in purchase of property and equipment, and $0.4 million in purchase of license, offset by $4.6 million of net cash acquired in our acquisition of National.

  

Net cash provided by investing activities of $7.9 million during the year ended December 31, 2015 primarily relates to a net $20.0 million proceeds on maturity of marketable securities, offset by $1.3 million related to JMC’s acquisition of the rights to distribute a dermatological product, acquisition of research and development licenses of Fortress Companies of $10.5 million, a working capital loan of $0.2 million to CB Pharma (now Origo Acquisition Corp. (“Origo”)) and construction in process of $0.3 million, primarily related to the buildout of our new office in New York, NY.

 

Financing Activities

 

Net cash provided by financing activities of $154.2 million for the year ended December 31, 2017 primarily relates to net proceeds in connection with issuance of Series A preferred stock of $22.2 million, net proceeds from subsidiaries’ offerings, issuance of common stock under ESPP and exercise of stock options of $95.3 million, net proceeds from the 2017 Subordinated Note Financing of $28.3 million, net proceeds from the Opus credit facility of $2.5 million, and net proceeds from subsidiaries’ Convertible Note of $9.8 million, offset by repayment of the NSC note of $3.6 million and cash payment of dividends of $0.3 million.

 

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Net cash provided by financing activities of $42.9 million for the year ended December 31, 2016 primarily relates to net proceeds in connection with third-party financings of certain Fortress Companies of $36.8 million, net proceeds of $7.0 million from the Opus Credit Facility, $4.0 million from subsidiaries’ convertible debt, $0.2 million issuance of common stock under ESPP, $0.9 million in proceeds from IDB Note and $0.4 million in May 2016 from our then existing at-the-market facility. During the year ended December 31, 2016, we paid-off $6.4 million of the NSC Note, from which the proceeds of $10.0 million were received in February of 2015.

 

Net cash provided by financing activities of $60.9 million for the year ended December 31, 2015 primarily relates to net proceeds in connection with a third-party financing of a Fortress Company of $51.5 million, gross proceeds of $10.0 million from the NSC Note and $0.2 million in proceeds related to the exercise of stock options, partially offset by $0.9 million in debt issuance costs associated with the NSC Note.

 

Liquidity and Capital Resources - Fortress

 

We fund our operations through cash on hand, the sale of debt and third-party financings. At December 31, 2017, we had cash, cash equivalents and restricted cash of $131.3 million of which $25.0 million relates to Fortress, $19.2 million relates to Checkpoint, $35.0 million relates to Mustang, $15.1 million relates to National, $11.8 million relates to Avenue, $7.0 million relates to Caelum, $0.8 million relates to Journey plus restricted cash of $17.4 million, of which $14.9 million is collateralizing the IDB Note, $0.6 million of which is securing a letter of credit used as a security deposit for the New York, NY lease that became effective on October 3, 2014, $0.5 million secures the Worcester, Massachusetts lease signed by Mustang that became effective on October 27, 2017, and $1.4 million is National’s restricted cash.

 

During 2016, we entered into a working capital line of credit with Opus Point Healthcare Innovations Fund L.P. for $25.0 million. As of December 31, 2017, we had $9.5 million borrowed under this facility. In addition, Caelum closed on convertible notes for net proceeds of $9.8 million in 2017, Avenue raised net proceeds of $34.2 million in its IPO in June 2017, and Mustang raised net proceeds of $50.3 million in three separate private placement closings in 2017.

 

Further, in November 2017, we received net proceeds of $22.2 million related to the issuance of shares of 9.375% Series A Cumulative Redeemable Perpetual Preferred stock in a private placement, and during 2017, we raised an additional $0.2 million from the issuance of our common shares in connection with our ESPP.

 

We may require additional financing to fully develop and prepare regulatory filings and 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, and 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 and cash equivalents is sufficient to fund operations for at least the next twelve months. Our 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.

 

Liquidity and Capital Resources - National

 

   Ending Balance
September 30,
 
($ in thousands)  2017   2016 
Cash  $18,963   $21,694 
Receivables from broker-dealers and clearing organizations   7,395    3,357 
Securities owned – at fair value   1,985    2,357 
Accounts payable, accrued expenses and other liabilities   18,780    19,106 

 

At September 30, 2017 and 2016, 52% and 45%, respectively, of National’s total assets consisted of cash, securities owned and receivables from clearing brokers and other broker-dealers. The level of cash used in each asset class is subject to fluctuation based on market volatility, revenue production and trading activity in the marketplace.

 

In addition, as registered broker-dealers and members of FINRA, the Broker-Dealer Subsidiaries are subject to the SEC’s Uniform Net Capital Rule 15c3-1 (“Rule 15c3-1”), which is designed to measure the general financial integrity and liquidity of a broker-dealer and requires the maintenance of minimum net capital. Net capital is defined as the net worth of a broker-dealer subject to certain adjustments. In computing net capital, various adjustments are made to net worth that exclude assets not readily convertible into cash. Additionally, the regulations require that certain assets, such as a broker-dealer’s position in securities, be valued in a conservative manner so as to avoid overstating of the broker-dealer’s net capital.

 

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National Securities is subject to Rule 15c3-1, which, among other things, requires the maintenance of minimum net capital. In February 2015, pursuant to a directive form FINRA, National Securities reverted back to using the alternative method of computing net capital from the aggregate indebtedness method. At September 30, 2017, National Securities had net capital of $9.2 million which was $9.0 million 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. Calculations of net capital and claimed exemptions are reviewed by an independent audit firm on an annual basis.

 

vFinance Investments is also subject to Rule 15c3-1, 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 September 30, 2017, vFinance Investments had net capital of $1.4 million which was $0.4 million in excess of its required net capital of $1.0 million. vFinance Investments ratio of aggregate indebtedness to net capital was 0.8 to 1. vFinance Investments is exempt from the provisions of 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. Calculations of net capital and claimed exemptions are reviewed by an independent audit firm on an annual basis.

 

Advances, dividend payments and other equity withdrawals from the 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. During 2017 and 2016, the Broker-Dealer Subsidiaries were in compliance with the rules governing dividend payments and other equity withdrawals.

 

National extends unsecured credit in the normal course of business to its brokers. The determination of the appropriate amount of the reserve for uncollectible accounts is based upon a review of the amount of credit extended, the length of time each receivable has been outstanding, and the specific individual brokers from whom the receivables are due.

 

The objective of liquidity management is to ensure that National has ready access to sufficient funds to meet commitments, fund deposit withdrawals and efficiently provide for the credit needs of customers.

 

National’s primary sources of liquidity include our cash flow from operations and the sale of its securities and other financing activities. National believes that it has sufficient funds from operations to fund its ongoing operating requirements through at least 2018. However, National may need to raise funds to enhance its working capital and for strategic purposes.

 

At September 30, 2017, National Holdings Corporation had no interest-bearing debt.

 

National does not have any material commitments for capital expenditures. National routinely purchases computer equipment and technology to maintain or enhance the productivity of its employees, and such capital expenditures have amounted to $1.7 million and $0.9 million during fiscal years ended September 30, 2017 and 2016, respectively.

 

Contingent Contractual Payments

 

The following table summarizes our contractual obligations as of December 31, 2017, excluding amounts related to contingent milestone payments, as described below.

 

   Payments due by period 
       Less than   1 to 3   4 to 5   After 5 
($ in thousands)  Total   1 year   years   years   years 
Note Payable and interest (1)  $75,608   $18,242   $57,366   $-   $- 
Operating leases (2)   21,208    1,414    3,428    3,325    13,041 
Annual sublicense fees (3)   33,937    19,947    10,718    1,632    1,640 
Purchase obligations (4)                         
Total  $130,753   $39,603   $71,512   $4,957   $14,681 

 

(1)Relates to the IDB Note, Opus credit facility, 2017 Subordinated Note Financing, Helocyte Convertible Notes and Caelum Convertible Notes.
(2)Relates to our New York, NY lease, Scottsdale, AZ, as well as Waltham, MA, and Worcester MA leases. For the New York, NY lease that commenced in 2016, we have in place Desk Share Agreements that reimburse us for $21.2 million of the $40.7 million obligation through the term of the lease.

 

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(3)Annual sublicense fees and payments owed under sponsored research agreements and clinical research support agreements are projected through 2027 and include payments of which $15.3 million is for Mustang, $6.0 million is for Caelum, $4.3 million is for Fortress , $3.1 million is for Helocyte, $2.6 million is for Cellvation, $2.4 million is for Tamid, $0.2 million is for JMC, $0.1 million is for Cyprium, and $0.1 million os for Aevitas. At December 31, 2017 $3.1 million related to Falk is recorded in accrued expenses.
(4)We have $56.2 million of open purchase orders of which $20.1 million are for JMC, $16.6 million for Checkpoint, $8.3 million for Mustang, $4.4 million for Caelum, $3.7 million for Avenue, $1.8 million for Fortress, $1.0 million for Helocyte and $0.3 million for Cellvation. A majority of our purchase orders may be cancelled without significant penalty to us or our subsidiaries.

 

In February 2014, we entered into the IDB Note, under which we can borrow up to $15.0 million. At December 31, 2017, the amount of debt outstanding under the IDB Note was $14.9 million.

 

In September 2016, Fortress entered into a Credit Facility Agreement with Opus Point Healthcare Innovations Fund, LP (“Opus”). Under the terms of this agreement Fortress may borrow up to $25.0 million with interest art 12% per annum. At December 31, 2017, $9.5 million of debt was outstanding.

 

During 2016 Helocyte entered into an agreement with Aegis Capital Corp. (“Aegis”) to raise up to $5.0 million in convertible notes. The notes have an initial term of 18 months, which can be extended at the option of the holder, on one or more occasions, for up to 180 days and accrue simple interest at the rate of 5% per annum for the first 12 months and 8% per annum simple interest thereafter. These notes are recorded at fair value, which approximated $4.7 million at December 31, 2017. On January 1, 2018 the first $1.0 million tranche matured and was paid.

 

In March, 2017, the Company entered into Note Purchase Agreements with NAM Biotech Fund II, LLC aad NAM Special Situations Fund I QP, LLC, both of which are accredited investors, for subordinated promissory notes (“2017 Subordinated Note Financing”), which bear interest at 8% per annum. At December 31, 2017, $28.4 million of debt was outstanding under the 2017 Subordinated Note Financing.

 

In July, 2017, Caelum offered convertible promissory notes to accredited investors through NSC, raising a total of $9.9 million as of December 31, 2017. The notes accrue interest at a rate of 8% per annum.

 

In October 2015, we entered into a 5-year lease for approximately 6,100 square feet of office space in Waltham, MA at an average annual rent of approximately $0.2 million. We took occupancy of this space in January 2016.

 

In July 2017, Journey extended its lease for one year for 2,295 square feet of office space in Scottsdale, AZ, at an annual rate of approximately $55,000. Journey took occupancy of this space in November 2014.

 

In October, 2014, we entered into a 15-year lease for office space at 2 Gansevoort Street New York, NY 10014, at an average annual rent of $2.7 million. We took possession of this space in December 2015, which constitutes our principal executive office. Also, on October 3, 2014, we entered into Desk Space Agreements with each of OPPM and TGTX, to occupy 10% and 45%, respectively, of the New York, NY office space that requires them to pay their share of the average annual rent of $0.3 million and $1.1 million, respectively. These initial rent allocations will be adjusted periodically for each party based upon actual percentage of the office space occupied. Additionally, we have reserved the right to execute additional desk space agreements with other third parties and those arrangements will also affect the cost of the lease actually borne by us. The lease was executed to further our business strategy, which includes forming additional subsidiaries and/or affiliate companies. Mr. Weiss is Executive Chairman, Chief Executive Officer, President and a stockholder of TGTX. The lease is subject to early termination by us, or in circumstances including events of default, the landlord, and includes a five-year extension option in our favor.

 

In October, 2017, Mustang entered into a lease through November 2026, subject to additional extensions at Mustang’s option, for 27,043 sf at 377 Plantation Street in Worcester, MA (the “Facility”) through November 2026, subject to additional extensions at Mustang’s option. Base rent, net of abatements of $0.6 million over the lease term, totals approximately $3.6 million, on a triple-net basis. Mustang plans to make improvements to the facility of approximately $3.5 million. The Facility is expected to be operational for the production of personalized CAR T therapies in 2018.

 

Off-Balance Sheet Arrangements

 

We do not have any financings or other relationships with unconsolidated entities or other persons.

 

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Recently Issued Accounting Pronouncements

 

See Note 2 of Notes to the Consolidated Financial Statements for a discussion of recent accounting standards and pronouncements.

 

Item 7A.Quantitative and Qualitative Disclosures About Market Risk.

 

Fortress

 

We are exposed to market risk related to changes in interest rates. As of December 31, 2017, and 2016, we had no marketable securities, exclusive of National. As of December 31, 2015, we had no marketable securities. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because we typically invest in short-term securities. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our portfolio.

 

The IDB Note bears interest at a rate per annum of 2.25%. This rate is set at a margin of 1.50% over the rate earned on the cash pledging this loan. To the extent the interest payable on the pledge account increases, we would pay higher interest on the outstanding debt.

 

National

 

National’s primary market risk arises from the fact that it engages in proprietary trading and makes dealer markets in equity securities. Accordingly, the Company may be required to maintain certain amounts of inventories in order to facilitate customer order flow. National may incur losses as a result of price movements in these inventories due to changes in interest rates, foreign exchange rates, equity prices and other political factors. National is not subject to direct market risk due to changes in foreign exchange rates. However, National is subject to market risk as a result of changes in interest rates and equity prices, which are affected by global economic conditions. National manages its exposure to market risk by limiting its net long or short positions. Trading and inventory accounts are monitored daily by management and National has instituted position limits.

 

Credit risk represents the amount of accounting loss National could incur if counterparties to its proprietary transactions fail to perform and the value of any collateral proves inadequate. Although credit risk relating to various financing activities is reduced by the industry practice of obtaining and maintaining collateral, National maintains more stringent requirements to further reduce its exposure. National monitors its exposure to counterparty risk on a daily basis by using credit exposure information and monitoring collateral values. National maintains a credit committee, which reviews margin requirements for large or concentrated accounts and sets higher requirements or requires a reduction of either the level of margin debt or investment in high-risk securities or, in some cases, requiring the transfer of the account to another broker-dealer.

 

National monitors its market and credit risks daily through internal control procedures designed to identify and evaluate the various risks to which National is exposed. There can be no assurance, however, that National’s risk management procedures and internal controls will prevent losses from occurring as a result of such risks.

 

The following tables shows the fair values of National’s securities owned and securities sold, but not yet purchased as of September 30, 2017 and 2016 ($ in thousands):

 

September 30, 2017  Securities
owned
   Securities
sold, but
not yet
purchased
 
Corporate stocks  $116   $- 
Municipal bonds   1,239    151 
Restricted stock   82    - 
Warrants   548    - 
Total  $1,985   $151 

 

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September 30, 2016  Securities
owned
   Securities
sold, but
not yet
purchased
 
Corporate stocks  $101   $298 
Municipal bonds   2,111    - 
Restricted stock   145    - 
Total  $2,357   $298 

 

Item 8.Financial Statements and Supplementary Data.

 

The information required by this Item is set forth in the consolidated financial statements and notes thereto beginning at page F-1 of this Annual Report on Form 10-K.

 

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9A.Controls and Procedures.

 

Disclosure Controls and Procedures

 

Controls and Procedures

 

Disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) are designed only to provide reasonable assurance that they will meet their objectives. 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 December 31, 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.

 

Internal Control over Financial Reporting

 

Management’s Report on Internal Control over Financial Reporting.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting refers to the process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:

 

(1)pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

 

(2)provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and

 

(3)provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of our assets that could have a material effect on the financial statements.

 

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Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

 

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making the assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013).

 

Based on the results of this assessment, management (including our Chief Executive Officer and our Chief Financial Officer) has concluded that, as of December 31, 2017, our internal control over financial reporting was effective.

 

Attestation Report of Registered Public Accounting Firm

 

The effectiveness of our internal controls over financial reporting as of December 31, 2017 has been audited by our independent registered accounting firm, BDO USA, LLP, as stated in their attestation report, which is included on page F-3 herein.

 

Changes in Internal Controls over Financial Reporting.

 

There were no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B.Other Information

 

None.

 

PART III

 

Item 10.Directors, Executive Officers and Corporate Governance

 

The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2018 Annual Meeting of Stockholders.

 

Item 11.Executive Compensation

 

The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2018 Annual Meeting of Stockholders.

 

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2018 Annual Meeting of Stockholders.

 

Item 13.Certain Relationships and Related Transactions, and Director Independence

 

The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2018 Annual Meeting of Stockholders.

 

Item 14.Principal Accounting Fees and Services

 

The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2018 Annual Meeting of Stockholders.

 

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PART IV

 

Item 15.Exhibits, Financial Statement Schedules.

 

(a) Financial Statements.

 

The following financial statements are filed as part of this report:

 

Reports of Independent Registered Public Accounting Firms F-2
   
Consolidated Balance Sheets F-5
   
Consolidated Statements of Operations F-6
   
Consolidated Statements of Changes in Stockholders’ Equity F-7
   
Consolidated Statements of Cash Flows F-8
   
Notes to the Consolidated Financial Statements F-10 - F-77

 

(b) Exhibits.

 

        Incorporated by Reference
        (Unless Otherwise Indicated)
Exhibit                    
Number   Exhibit Title   Form   File   Exhibit   Filing Date
2.1   Agreement and Plan of Merger, by and among Fortress Biotech, Inc., FBIO Acquisition, Inc. and National Holdings Corporation, dated April 27, 2016.   8-K     2.1   April 28, 2016
                     
2.2   Amendment No. 1 to Agreement and Plan of Merger by and among Fortress Biotech, Inc., FBIO Acquisition, Inc. and National Holdings Corporation, dated August 12, 2016.   8-K     2.1   August 12, 2016
                     
3.1   Amended and Restated Certificate of Incorporation of the Registrant.   10-12G   000-54463   3.1   July 15, 2011
                     
3.2   First Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Registrant.   10-12G   000-54463   3.2   July 15, 2011
                     
3.3   Certificate of Designation, Preferences and Rights of the Series B Preferred Stock.   10-12G   000-54463   3.3   July 15, 2011
                     
3.4   Certificate of Designation, Preferences and Rights of the Series C Preferred Stock.   10-12G   000-54463   3.4   July 15, 2011
                     
3.5   Second Amended and Restated Bylaws of the Registrant.   8-K     3.7   October 31, 2013

 

 54 

 

 

        Incorporated by Reference
        (Unless Otherwise Indicated)
Exhibit                    
Number   Exhibit Title   Form   File   Exhibit   Filing Date
                     
3.6   Second Certificate of Amendment of Amended and Restated Certificate of Incorporation, as amended.   10-K     3.8   March 14, 2014
                     
3.7   Third Certificate of Amendment of Amended and Restated Certificate of Incorporation, as amended   8-K     3.9   April 27, 2015
                     
4.1   Form of Common Stock Certificate.   10-12G   000-54463   4.1   July 15, 2011
                     
4.2   Form of Series A Preferred Stock Certificate.   10-12G   000-54463   4.2   July 15, 2011
                     
4.3   Form of Series B Preferred Stock Certificate.   10-12G   000-54463   4.3   July 15, 2011
                     
4.4   Form of Series C Preferred Stock Certificate.   10-12G   000-54463   4.4   July 15, 2011
                     
4.5   Form of Warrant for the purchase of shares of Common Stock issued by the Registrant in connection with the 2009 bridge financing.   10-12G   000-54463   4.6   July 15, 2011
                     
4.6   Form of Warrant for the purchase of shares of Common Stock issued by the Registrant in connection with the Series A financing.   10-12G   000-54463   4.7   July 15, 2011
                     
4.7   Form of Series C Convertible Preferred Stock Purchase Warrant issued by the Registrant in connection with the 2011 Series C financing.   10-12G   000-54463   4.8   July 15, 2011
                     
4.8   Form of Consultant/Agent Warrant to Purchase Common Stock.   10-12G   000-54463   4.10   July 15, 2011
                     
4.9   Warrant to purchase Common Stock issued by the Registrant in connection with the 2012 secured loan facility with Hercules Technology Growth Capital, Inc.   8-K     4.10   August 29, 2012
                     
4.10   Certificate of Designations of Rights and Preferences 9.375% Series A Perpetual Preferred Stock 8-K   001-35366   3.1   November 7, 2017
                     
4.11   Certificate of Elimination of Series B Preferred Stock   8-K   001-35366   3.2   November 7, 2017
                     
4.12   Certificate of Elimination of Series C Preferred Stock   8-K   001-35366   3.3   November 7, 2017
                     
10.1   Coronado Biosciences, Inc. 2007 Stock Incentive Plan.#   10-12G   000-54463   10.8   July 15, 2011
                     
10.2   Form of Stock Option Award Agreement.#   10-12G   000-54463   10.9   July 15, 2011
                     
10.3   Consulting Agreement, entered into as of September 21, 2010, by and between the Registrant and Eric Rowinsky, M.D.#   10-12G   000-54463   10.24   July 15, 2011
                     
10.4   Form of Indemnification Agreement by and between the Registrant and its officers and directors.   10-12G/A   000-54463   10.25   August 23, 2011

 

 55 

 

 

        Incorporated by Reference
        (Unless Otherwise Indicated)
Exhibit                    
Number   Exhibit Title   Form   File   Exhibit   Filing Date
                     
10.5   Employment Agreement, made and entered into on February 21, 2012, by and between the Registrant and Lucy Lu, M.D.#   8-K     10.35   February 23, 2012
                     
10.6   Coronado Biosciences, Inc. 2012 Employee Stock Purchase Plan.#   DEF 14A       July 13, 2012
                     
10.7   Promissory Note issued by Registrant to Israel Discount Bank of New York, dated February 13, 2014.   8-K     10.53   February 18, 2014
                     
10.8   Assignment and Pledge of Money Market Account dated February 13, 2014 in favor of Israel Discount Bank of New York.   8-K     10.54   February 18, 2014
                     
10.9   Restricted Stock Issuance Agreement, dated as of February 20, 2014, by and between the Registrant and Michael S. Weiss#   8-K/A     10.55   February 26, 2014
                     
10.10   Shareholders’ Agreement, dated as of February 20, 2014, by and among certain shareholders of the Registrant named therein.   8-K/A     10.56   February 26, 2014
                     
10.11   Restricted Stock Issuance Agreement, dated as of December 19, 2013, by and between the Registrant and Michael S. Weiss#   10-K     10.57   March 14, 2014
                     
10.12   Restricted Stock Issuance Agreement, dated as of December 19, 2013, by and between the Registrant and Lindsay A. Rosenwald, M.D.#   10-K     10.58   March 14, 2014
                     
10.13   Form of Coronado Biosciences, Inc. 2013 Stock Incentive Plan Award Agreement (2013 Stock Incentive Plan).#   S-8   333-194588   10.60   March 14, 2014
                     
10.14   Form of Subscription Agreement.   8-K     10.61   November 10, 2014
                     
10.15   Note Purchase Agreement, dated February 27, 2015, by and between the Registrant and NSC Biotech Venture Fund I LLC.   8-K     10.62   March 5, 2015
                     
10.16   Form of SubCo Securities Purchase Agreement.   8-K     10.64   March 5, 2015
                     
10.17   Form of SubCo Warrant.   8-K     10.65   March 5, 2015
                     
10.18   Form of SubCo Promissory Note.   8-K     10.66   March 5, 2015
                     
10.19   Coronado Biosciences, Inc. Deferred Compensation Plan for Directors, dated March 12, 2015.#   8-K     10.67   March 18, 2015

 

 56 

 

 

        Incorporated by Reference
        (Unless Otherwise Indicated)
Exhibit                    
Number   Exhibit Title   Form   File   Exhibit   Filing Date
                     
10.20   Fortress Biotech, Inc. 2013 Stock Incentive Plan, as amended.#   DEF 14A       June 4, 2015
                     
10.21   Fortress Biotech, Inc. Long-Term Incentive Plan.#   DEF 14A       June 4, 2015
                     
10.22   Restricted Stock Unit Award Agreement between Fortress Biotech, Inc. and George Avgerinos effective July 15, 2015.#   8-K     10.70   July 17, 2015
                     
10.23   Amended and Restated Promissory Note issued by the Registrant to NSC Biotech Venture Fund I LLC, dated July 29, 2015.   8-K     10.71   August 4, 2015
                     
10.24   Form of Support and Voting Agreement by and among Fortress Biotech, Inc., FBIO Acquisition, Inc., and certain officers and directors (and certain of their affiliates) of National Holdings Corporation.   8-K     10.28   April 28, 2016
                     
10.25   Stockholder Rights Agreement by and between National Holdings Corporation and FBIO Acquisition, Inc., dated April 27, 2016.   8-K     10.29   April 28, 2016
                     
10.26   Form of Voting Agreement by and among Fortress Biotech, Inc., FBIO Acquisition, Inc., and certain officers and directors (and certain of their affiliates) of National Holdings Corporation.   8-K     10.30   April 28, 2016
                     
10.27   Amendment No. 2 to At Market Issuance Sales Agreement, dated April 28, 2016, between Fortress Biotech, Inc. and MLV & Co. LLC.   8-K     10.31   May 4, 2016
     </