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

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2018

 

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 Number 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

(Address including zip code of principal executive offices)

 

(781) 652-4500

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes   x   No   ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions 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 ¨ Smaller reporting company ¨
    Emerging growth company ¨

 

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

 

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

 

As of November 7, 2018, there were 56,679,505 shares of Common Stock of the issuer outstanding.

 

 

 

 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Quarterly Report on Form 10-Q

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION 3
     
Item 1. Unaudited Condensed Consolidated Financial Statements 3
     
  Condensed Consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017 3
     
  Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017 (unaudited) 4
     
  Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2018 (unaudited) 5
     
  Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017 (unaudited) 6
     
  Notes to Unaudited Condensed Consolidated Financial Statements 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 37
     
Item 3. Quantitative and Qualitative Disclosures About Market Risks 48
     
Item 4. Controls and Procedures 48
     
PART II. OTHER INFORMATION 49
     
Item 1. Legal Proceedings 49
     
Item 1A. Risk Factors 49
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 69
     
Item 3. Defaults Upon Senior Securities 69
     
Item 4. Mine Safety Disclosures 69
     
Item 5. Other Information 69
     
Item 6. Exhibits 69
     
  Signatures 71

 

 

 

  

PARTI. FINANCIAL INFORMATION
Item1. Unaudited Condensed Consolidated Financial Statements

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

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

 

   September 30,
2018
  

December 31,
2017

 
    (Unaudited)      
ASSETS          
Current assets          
Cash and cash equivalents  $95,867   $113,915 
Accounts receivable   5,431    7,758 
Short-term investments (certificates of deposit)   22,538    36,002 
Cash deposits with clearing organizations   336    1,041 
Receivables from broker-dealers and clearing organizations   11,884    7,395 
Forgivable loans receivable   1,610    1,616 
Securities owned, at fair value   6,675    1,985 
Inventory   674    171 
Other receivables - related party   414    618 
Prepaid expenses and other current assets   14,089    12,680 
Total current assets   159,518    183,181 
           
Property and equipment, net   14,642    9,513 
Restricted cash   17,358    17,387 
Long-term investments, at fair value       1,390 
Intangible assets   13,935    15,223 
Goodwill   18,645    18,645 
Other assets   821    611 
Total assets  $224,919   $245,950 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities          
Accounts payable and accrued expenses  $37,345   $36,127 
Accounts payable and accrued expenses - related party   153    222 
Accrued commissions and payroll payable   11,974    10,065 
Deferred clearing and marketing credits   629    786 
Securities sold, not yet purchased, at fair value   24    151 
Warrants issued - National       5,597 
Interest payable   613    887 
Interest payable - related party   94    97 
Notes payable, short-term (net of debt discount of $447 and $973 at September 30, 2018 and December 31, 2017, respectively)   9,054    8,528 
Subsidiary convertible note, short-term, at fair value   10,657    4,700 
Deferred revenue   155     
Derivative warrant liability       87 
Other current liabilities   77    181 
Total current liabilities   70,775    67,428 
           
Notes payable, long-term (net of debt discount of $445 and $62 at September 30, 2018 and December 31, 2017, respectively)   64,546    43,222 
Subsidiary convertible note, long-term, at fair value       10,059 
Other long-term liabilities   4,961    4,739 
Total liabilities   140,282    125,448 
           
Stockholders’ equity          
Preferred stock, $0.001 par value, 15,000,000 authorized, 5,000,000 designated Series A shares, 1,000,000 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively; liquidation value of $25.00 per share   1    1 
Common stock, $0.001 par value, 100,000,000 shares authorized, 56,183,480 and 50,991,285 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively   56    51 
Common stock issuable, 347,684 and 158,015 shares as of September 30, 2018 and December 31, 2017, respectively   495    500 
Additional paid-in-capital   408,615    364,148 
Accumulated deficit   (371,394)   (312,127)
Total stockholders’ equity attributed to the Company   37,773    52,573 
           
Non-controlling interests   46,864    67,929 
Total stockholders’ equity   84,637    120,502 
Total liabilities and stockholders’ equity  $224,919   $245,950 

 

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

 

3

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

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

(Unaudited)

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
   2018   2017   2018   2017 
Revenue                    
Fortress                    
Product revenue, net  $5,168   $2,170   $17,366   $8,309 
Revenue - from a related party   5    350    525    1,393 
Net Fortress revenue   5,173    2,520    17,891    9,702 
                     
National                    
Commissions   28,397    24,881    85,422    73,380 
Net dealer inventory gains   482    1,789    5,601    6,666 
Investment banking   19,271    8,942    43,012    26,595 
Investment advisory   5,281    3,605    15,811    10,480 
Interest and dividends   771    674    2,003    2,065 
Transfer fees and clearing services   1,606    1,649    5,680    5,834 
Tax preparation and accounting   2,444    2,527    6,835    6,527 
Other   268    299    697    1,016 
Total National revenue   58,520    44,366    165,061    132,563 
Net revenue   63,693    46,886    182,952    142,265 
                     
Operating expenses                    
Fortress                    
Cost of goods sold - product revenue   1,406    505    4,546    1,852 
Research and development   16,082    15,890    58,528    34,683 
Research and development - licenses acquired   3,706    300    3,804    3,394 
General and administrative   12,184    15,104    38,788    36,490 
Total Fortress operating expenses   33,378    31,799    105,666    76,419 
                     
National                    
Commissions, compensation and fees   48,556    39,963    141,462    118,983 
Clearing fees   451    470    1,772    1,826 
Communications   856    690    2,429    2,094 
Occupancy   738    972    2,834    2,916 
Licenses and registration   861    391    2,028    1,223 
Professional fees   1,076    1,082    3,047    3,336 
Interest   26    5    30    13 
Underwriting costs   43        230     
Depreciation and amortization   871    507    2,587    1,513 
Other administrative expenses   1,726    3,610    5,839    7,315 
Total National operating expenses   55,204    47,690    162,258    139,219 
Total operating expenses   88,582    79,489    267,924    215,638 
Loss from operations   (24,889)   (32,603)   (84,972)   (73,373)
                     
Other income (expenses)                    
Interest income   269    204    841    530 
Interest expense and financing fee   (2,228)   (3,220)   (6,455)   (5,298)
Change in fair value of derivative liabilities   -    (639)   (7,931)   5,155 
Change in fair value of subsidiary convertible note   (84)   (74)   26    (359)
Change in fair value of investments   (565)   270    (1,390)   (241)
Other expenses   (146)   (245)   (258)   (232)
Total other expenses   (2,754)   (3,704)   (15,167)   (445)
Loss before income taxes   (27,643)   (36,307)   (100,139)   (73,818)
Income tax expense   944        2,382     
Net loss   (28,587)   (36,307)   (102,521)   (73,818)
Less: net loss attributable to non-controlling interests   (11,949)   (9,191)   (43,254)   (17,355)
Net loss attributable to common stockholders  $(16,638)  $(27,116)  $(59,267)  $(56,463)
                     
Basic and diluted net loss per common share  $(0.37)  $(0.67)  $(1.36)  $(1.39)
                     
Weighted average common shares outstanding-basic and diluted   44,818,186    40,724,115    43,578,763    40,547,364 

 

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

 

4

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Stockholders’ Equity

($ in thousands)

(Unaudited)

 

   Series A Preferred
Stock
   Common Stock  

Common

Shares

  

Additional

Paid-In

   Accumulated   Non-
Controlling
   Total
Stockholders’
 
   Shares   Amount   Shares   Amount   Issuable   Capital   Deficit   Interests   Equity 
Balance at December 31, 2017   1,000,000   $1    50,991,285   $51   $500   $364,148   $(312,127)  $67,929   $120,502 
Stock-based compensation expense                       13,648            13,648 
Issuance of restricted stock           1,809,421    2        (2)           - 
Issuance of common stock under ESPP           43,707            128            128 
Issuance of subsidiaries’ common shares for license expenses                       229            229 
Issuance of NHLD’s common shares for tax withholding                       (82)           (82)
Subsidiary’s public offering, net                       22,668            22,668 
Subsidiary’s ATM offering, net                       7,726            7,726 
Exercise of subsidiary’s warrants for cash                       186            186 
Issuance of common stock for at-the-market offering           2,668,756    3        6,956            6,959 
At-the-market offering cost                       (240)           (240)
Contribution of capital for 2017 bonuses                       1,000            1,000 
Common shares issuable 2017 Subordinated Note Financing interest expense                   495    -            495 
Common shares issued for 2017 Subordinated Note Financing interest expense           436,281        (500)   1,478            978 
Common shares issued for Opus interest expense           234,030            574            574 
Preferred A dividends declared and paid                       (1,758)           (1,758)
Offering cost and financing fee paid to NHLD                       1,297            1,297 
Acquisition of business - NHLD                       (767)           (767)
Warrant liability reclassification - NHLD                       13,615            13,615 
Non-controlling interest in subsidiaries                       (22,189)       22,189     
Net loss attributable to non-controlling interest                               (43,254)   (43,254)
Net loss attributable to common stockholders                           (59,267)       (59,267)
Balance at September 30, 2018   1,000,000   $1    56,183,480   $56   $495   $408,615   $(371,394)  $46,864   $84,637 

 

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

 

5

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

($ in thousands)

(Unaudited)

 

   For the Nine Months Ended September 30, 
   2018   2017 
Cash Flows from Operating Activities:          
Net Loss  $(102,521)  $(73,818)
Reconciliation of net loss to net cash used in operating activities:          
Depreciation expense   1,379    819 
Amortization expense of intangible asset   2,100    1,235 
Amortization of debt discount   624    1,316 
Amortization of product revenue license fee   433    401 
Amortization of forgivable loans to registered representatives   474    520 
Amortization of deferred clearing credit   (157)   (157)
Stock-based compensation expense   13,658    12,048 
Recovery of doubtful accounts   18    (274)
Common shares issuable for 2017 Subordinated Note financing interest expense   495    353 
Common shares issued for 2017 Subordinated Note financing interest expense   978    189 
Common shares issued for Opus interest expense   574     
Change in fair value of investments   1,390    241 
Change in fair value of derivative liabilities   7,931    (5,155)
Change in fair value of subsidiary convertible note   (26)   359 
Loss on write off of investment       250 
Research and development-licenses acquired, expense   3,804    3,394 
Non-cash research and development expense       50 
Change in fair value of subsidiaries’ assets and liabilities   18    1,341 
Increase (decrease) in cash and cash equivalents resulting from changes in operating assets and liabilities:          
Accounts receivable   2,327    (3,752)
Receivables from broker-dealers and clearing organizations   (4,489)   (4,925)
Forgivable loans receivable   (468)   (77)
Securities owned, at fair value   (4,690)   762 
Inventory   (503)   (115)
Other receivables - related party   204    1,152 
Prepaid expenses and other current assets   (562)   (1,426)
Other assets   200    - 
Accounts payable and accrued expenses   (980)   4,195 
Accounts payable and accrued expense - related party   (19)   84 
Securities sold, but not yet purchased, at fair value   (127)   (298)
Deferred Revenue   155    680 
Interest payable   (274)   22 
Interest payable - related party   (3)   430 
Other long-term liabilities   222    (288)
Net cash used in operating activities   (77,835)   (60,444)
           
Cash Flows from Investing Activities:          
Purchase of research and development licenses   (1,075)   (965)
Purchase of property and equipment   (6,828)   (999)
Purchase of short-term investment (certificates of deposit)   (47,538)   (44,088)
Redemption of short-term investment (certificates of deposit)   61,002     
Security deposits collected   (344)    
Security deposits refund       42 
Acquisition of business - National   (187)   (19)
Acquisition of intangible assets - National   (45)    
Collection on notes receivable   69    28 
Net cash provided by (used in) investing activities   5,054    (46,001)

 

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

 

6

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Continued)

($ in thousands)

(Unaudited)

 

   For the Nine Months Ended September 30, 
   2018   2017 
Cash Flows from Financing Activities:          
Inter-company costs related to the issuance of Series A preferred stock   1,297     
Payment of Preferred A dividends   (1,758)    
Proceeds from at-the-market offering   6,959     
Payment of costs related to at-the-market offering   (240)    
Proceeds from subsidiaries' offering   23,011    104,034 
Payment of costs related to subsidiaries’ offering   (343)   (9,389)
Proceeds from subsidiaries’ at-the-market offering   7,980     
Payment of costs related to subsidiaries’ at-the-market offering   (234)    
Proceeds from exercise of subsidiary’s warrants   186     
Proceeds from 2017 Subordinated Note Financing       28,355 
Payment of debt issuance costs associated with 2017 Subordinated Note Financing   (404)   (1,081)
Payment of debt issuance costs associated with NSC Note       (3,608)
Proceeds from exercise of stock options       27 
Proceeds from issuance of common stock under ESPP   128    42 
Repurchase of NHLD common stock for tax withholding   (82)    
Proceeds from 2018 Venture notes   21,707     
Payment of debt issuance costs associated with 2018 Venture notes   (132)    
Proceeds from subsidiaries' Convertible Note       9,914 
Payment of debt issuance costs associated with subsidiaries' Convertible Note       (1,071)
Payment of subsidiaries’ Convertible Note   (4,076)   - 
Proceeds from Opus Credit Facility   -    2,500 
Net cash provided by financing activities   53,999    129,723 
           
Net (decrease) increase in cash and cash equivalents, cash deposits with clearing organizations and restricted cash   (18,782)   23,278 
           
Cash and cash equivalents, cash deposits with clearing organizations and restricted cash at beginning of period   132,343    105,184 
Cash and cash equivalents, cash deposits with clearing organizations and restricted cash at end of period  $113,561   $128,462 
           
Supplemental disclosure of cash flow information:          
Fortress          
Cash paid for interest  $3,767   $345 
Cash paid for interest – related party  $281   $ 
           
NHLD          
Cash paid for interest  $13   $11 
Cash paid for income taxes  $1,569   $1,004 
           
Supplemental disclosure of non-cash financing and investing activities:          
Fortress          
Issuance of restricted stock  $2   $2 
Issuance of warrants by subsidiary in conjunction with NSC debt  $   $750 
Issuance of warrants in connection with 2017 Subordinated Note Financing  $   $1,784 
Debt discount related to Opus Credit Facility  $   $201 
Unpaid debt offering cost  $   $42 
Common shares issuable for license acquired  $   $1,682 
Conversion of subsidiaries notes payable  $   $314 
Common shares issued for 2017 Subordinated Note Financing interest expense  $500   $ 
Unpaid fixed assets  $125   $- 
Unpaid subsidiary’s ATM offering cost  $20   $- 
Unpaid intangible assets – Fortress Companies  $1,200   $- 
           
NHLD          
Fixed assets (acquired but not paid)  $537   $665 
Business acquisition  $187   $19 
Reclassification of warrant liability from debt to equity  $13,615   $- 

 

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

 

7

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1.Organization and Description of Business

 

Fortress Biotech, Inc. (“Fortress” or the “Company”) is a biopharmaceutical company dedicated to acquiring, developing and commercializing novel pharmaceutical and biotechnology products. Fortress develops and commercializes products both within Fortress and through certain of its subsidiary companies, also referred to as the “Fortress Companies.” Additionally, the Company maintains a controlling interest in National Holdings Corporation, a diversified independent brokerage company (together with its subsidiaries, referred to as “NHLD” or “National”). One of National’s subsidiaries, National Securities Corporation (“NSC”), is an independent broker-dealer offering retail and institutional advisory, investment, insurance and tax planning services. From time to time, NSC provides services to the Company and its affiliates. In addition to its internal development programs, the Company leverages its biopharmaceutical business expertise and drug development capabilities and provides funding and management services to help the Fortress Companies achieve their goals. The Company and the Fortress Companies may seek licenses, acquisitions, partnerships, joint ventures and/or public and private financings to accelerate and provide additional funding to support their research and development programs.

 

As of September 30, 2018, in addition to National, the Company has several consolidated Fortress Companies, some of which contain product licenses, 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”), Tamid Bio, Inc. (“Tamid”) and JG Pharma, Inc., a subsidiary of JMC. The Company also has operational subsidiaries CB Securities Corporation (“CB Securities”), Immune Limited and FBIO Acquisition, Inc. (the acquisition vehicle the Company used to obtain National) and acquisition companies for which the Company is actively seeking product candidate licenses, including Coronado SO Co. (“Coronado SO”), Escala Therapeutics, Inc. (“Escala”), GeneXion Oncology, Inc. (“GeneXion”), Fortress Biotech China, Inc. (“Fortress China”), FBIO Acquisition Corp. IV and FBIO Acquisition Corps. VI - XIV.

 

Liquidity and Capital Resources

 

Since inception, the Company’s operations have been financed primarily through the sale of equity and debt securities and the proceeds from the exercise of warrants and stock options. The Company has incurred losses from operations and negative cash flows from operating activities since inception and expects to continue to incur substantial losses for the next several years as it continues to develop and seek regulatory approvals for its and its subsidiaries’ existing and new product candidates. The Company’s current cash and cash equivalents are sufficient to fund operations for at least the next 12 months. However, the Company will need to raise additional funding through strategic relationships, public or private equity or debt financings, grants or other arrangements to develop and seek regulatory approvals for the Company’s and its subsidiaries’ existing and new product candidates, fund operating losses, and, if deemed appropriate, establish or secure through third parties manufacturing for the Company’s potential products, sales and marketing capabilities. If such funding is not available or not available on terms acceptable to the Company, the Company’s current development plan and plans for expansion of its general and administrative infrastructure will be curtailed. The Company also has the ability, subject to limitations imposed by Rule 144 of the Securities Act of 1933 and other applicable laws and regulations, to raise money from the sale of common stock of the public companies in which it has ownership positions.

 

2.Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments necessary for the fair statement of the balances and results for the periods presented. Certain information and footnote disclosures normally included in the Company’s annual financial statements prepared in accordance with GAAP have been condensed or omitted. These condensed consolidated financial statement results are not necessarily indicative of results to be expected for the full fiscal year or any future period.

 

The unaudited condensed consolidated financial statements and related disclosures have been prepared with the presumption that users of the unaudited condensed consolidated financial statements have read or have access to the audited financial statements for the preceding fiscal year for each of the Companies, Avenue, Checkpoint, Mustang and National. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Form 10-K, which was filed with the United States Securities and Exchange Commission (“SEC”) on March 16, 2018, from which the Company derived the balance sheet data at December 31, 2017, as well as National’s Form 10-K and 10-K/A filed with the SEC on December 22, 2017 and January 17, 2018, respectively and their Form 10-Q, filed with the SEC on August 14, 2018, Checkpoint’s Form 10-K filed with the SEC on March 16, 2018, Mustang’s Form 10-K, filed with the SEC on March 29, 2018, and Avenue’s Form 10-K, filed with the SEC on March 1, 2018.

 

8

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The Company’s unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries: Avenue, Aevitas, Caelum, CB Securities, Cellvation, Coronado SO, Checkpoint, Cyprium, Escala, GeneXion, Helocyte, Immune Limited, JMC, Mustang, NHLD, Tamid, Fortress China, FBIO Acquisition Corp. IV, FBIO Acquisition Corps. VI - XIV, and JG Pharma, Inc., a subsidiary of JMC. All intercompany balances and transactions have been eliminated.

 

The National assets acquired, and liabilities assumed, and revenues and expenses are reported on a one quarter lag. Therefore, the National assets acquired, and liabilities assumed included in these condensed consolidated financial statements as of September 30, 2018 are actually the assets and liabilities as of June 30, 2018 and the revenues and expenses included in these condensed consolidated financial statements for the quarter ending September 30, 2018 are actually the revenues and expenses for the quarter ending June 30, 2018.

 

The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of expenses during the reporting period.

 

Use of Estimates

 

The Company’s unaudited condensed consolidated financial statements include certain amounts that are based on management’s best estimates and judgments. The Company’s significant estimates include, but are not limited to, useful lives assigned to long-lived and intangible assets, fair value measurements, stock-based compensation, common stock issued to acquire licenses, investments, accrued expenses, derivative warrant liabilities, revenue with customers, provisions for income taxes and contingencies. Due to the uncertainty inherent in such estimates, actual results may differ from these estimates.

 

Significant Accounting Policies

 

There have been no material changes to the Company’s significant accounting policies previously disclosed in the Company’s Form 10-K filed with the SEC on March 16, 2018, with the exception of revenue recognition.

 

Recently Adopted Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09) as modified by ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, and ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.” The impact of adoption on January 1, 2018 is primarily related to National’s investment banking expenses of $0.1 million that were deferred as of September 30, 2017 (National’s financials are included in the Company’s financials at a three-month lag) under the previously existing accounting guidance, which would have been expensed in prior periods under the new revenue standard. Since the impact was immaterial, the Company elected not to record this amount in retained earnings as of January 1, 2018. The adoption of this standard did not have a material impact on the Company’s revenue. Accordingly, the new revenue standard will be applied prospectively in the Company’s financial statements from January 1, 2018 forward and reported financial information for historical comparable periods will not be revised and will continue to be reported under the accounting standards in effect during those historical periods. Further, the adoption of ASU 2014-09 did not have a material impact on net Fortress revenue.

 

The new revenue guidance does not apply to revenue associated with financial instruments, including National’s warrants and securities that are accounted for under other U.S. GAAP, and as a result, did not have an impact on the elements of the Company’s Condensed Consolidated Statements of Operations most closely associated with financial instruments. The new revenue standard primarily impacts the following of the revenue recognition and presentation accounting policies:

 

·Investment Banking Revenues. Advisory fees from mergers and acquisitions engagements are recognized at the point in time when the related transaction is completed, as the performance obligation is to successfully broker a specific transaction.

 

9

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

·Investment Banking Advisory Expenses. Historically, expenses associated with investment banking advisory assignments were deferred until reimbursed by the client, the related fee revenue is recognized, or the engagement is otherwise concluded. Under the new revenue standard, expenses are deferred only to the extent they are explicitly reimbursable by the client and the related revenue is recognized when all performance obligations are met. All other investment banking advisory related expenses are expensed as incurred.

 

·Investment Banking Underwriting and Advisory Expenses. Expenses have historically been recorded net of client reimbursements and/or netted against revenues. Under the new revenue standard, all investment banking expenses will be recognized within their respective expense category on the consolidated income statement and any expense reimbursements will be recognized as investment banking revenues (i.e., expenses are no longer recorded net of client reimbursements and are not netted against revenues).

 

The new revenue standard requires enhanced disclosures, which are included in Note 21 to the Company’s condensed consolidated financial statements for the three and nine months ended September 30, 2018.

 

Contract Assets

 

Contract assets represent the Company’s right to consideration in exchange for goods or services that the Company has transferred to a customer, excluding unconditional rights to consideration that are presented as receivables.

 

Contract Liabilities

 

Contract liabilities represent the Company’s obligation to deliver products or provide data to customers in the future for which cash has already been received.

 

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, to a change to the terms or conditions of a share-based payment award. The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company adopted ASU No. 2017-09 as of January 1, 2018. The adoption of this update did not impact the Company’s condensed consolidated financial statements and related disclosures.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company adopted ASU No. 2016-15 as of January 1, 2018. The adoption of this update did not impact the Company’s condensed consolidated financial statements and related disclosures.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities. ASU No. 2016-01 requires several targeted changes including that equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) be measured at fair value with changes in fair value recognized in net income. The new guidance also changes certain disclosure requirements and other aspects of current U.S. GAAP. Amendments are to be applied as a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. ASU 2016-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company adopted ASU No. 2016-01 as of January 1, 2018. The adoption of this update did not impact the Company’s condensed consolidated financial statements and related disclosures.

 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) and subsequent amendments to the initial guidance: ASU 2017-13, ASU 2018-10 and ASU 2018-11 (collectively, Topic 842). Topic 842 requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. Topic 842 is effective for the Company in our first quarter of fiscal 2019, and earlier adoption is permitted. The Company is currently evaluating the impact of the pending adoption of Topic 842 on its consolidated financial statements. The Company currently expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon our adoption of Topic 842, which will increase the total assets and the total liabilities that the Company will report relative to such amounts prior to adoption.

 

10

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires that expected credit losses relating to financial assets are measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. ASU 2016-13 limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases. The new standard will be effective on January 1, 2020 and may be adopted earlier. The Company is currently evaluating the impact, if any, that ASU 2016-13 will have on its condensed consolidated financial statements and related disclosures.

 

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

 

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The changes take effect for public companies for fiscal years starting after Dec. 15, 2018, including interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company is currently evaluating the impact of adopting this standard on its condensed consolidated financial statements and related disclosures but does not expect it to have a material impact.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with the movement amongst or hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of the update. The Company does not expect the adoption of this guidance to have a material impact on its financial statements.

 

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule was effective on November 5, 2018. The Company is evaluating the impact of this guidance on its condensed consolidated financial statements.

 

3.National Holdings Corporation Acquisition - Intangible Assets

 

Intangible assets consist of trademark and customer lists acquired in the offer under the purchase method of accounting and are recorded at fair value net of accumulated amortization since the purchase date. Software license is recorded at cost. Amortization is calculated using the straight-line and accelerated methods over the following estimated useful lives:

 

   Useful life
Trademark  10 years
Customer lists  6 years
Software license  3 years

 

11

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The carrying amount related to acquired intangible assets as of September 30, 2018 are as follows ($ in thousands):

 

Intangible assets at December 31, 2017  $14,340 
Addition   45 
Amortization expense   (2,100)
Intangible assets at September 30, 2018  $12,285 

 

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

 

   Trademark   Customer
List
   Software
License
   Total 
Three Months Ended December 31, 2018  $76   $630   $4   $710 
Year Ended December 31, 2019   300    2,500    15    2,815 
Year Ended December 31, 2020   301    2,506    15    2,822 
Year Ended December 31, 2021   300    2,500    5    2,805 
Year Ended December 31, 2022   300    1,726        2,026 
Thereafter   1,107            1,107 
Total  $2,384   $9,862   $39   $12,285 

 

The Company reviews its finite-lived intangible assets for impairment when events or changes in circumstances indicate that the carrying amount of a finite-lived intangible asset may not be recoverable. Recoverability of a finite-lived intangible asset is measured by a comparison of its carrying amount to the undiscounted future cash flows expected to be generated by the asset. If the asset is considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. There were no indicators of impairment during the nine months ended September 30, 2018.

 

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

 

At June 30, 2018 and September 30, 2017, National’s receivables of $11.9 million and $7.4 million, respectively, from broker-dealers and clearing organizations represent net amounts due for commissions and fees associated with National’s retail brokerage business as well as asset-based fee revenue associated with National’s Investment advisory business. National also has other receivables at June 30, 2018 and September 30, 2017 of $5.3 million and $5.2 million, respectively, which principally represent trailing commissions, tax and accounting fees and investment banking fees, net of an allowance for uncollectable accounts of $0.6 million, and $0.5 million, respectively, and are included in prepaid expenses and other current assets on the Company’s Condensed Consolidated Balance Sheet.

 

5.Forgivable Loans Receivable

 

From time to time, National’s operating subsidiaries may make loans, evidenced by promissory notes, primarily to newly recruited independent financial advisors as an incentive for their affiliation. The loans receivable balance is comprised of unsecured non-interest-bearing and interest-bearing loans (weighted average interest rate of 4%). These loans have various schedules for repayment or forgiveness based on production or retention requirements being met and mature at various dates through 2023. Forgiveness of loans amounted to $0.5 million and $0.5 million for the nine months ended June 30, 2018 and 2017, respectively, and the related compensation was included in commissions, compensation and fees in the condensed consolidated statements of operations. In the event the advisor’s affiliation with the subsidiary terminates, the advisor is required to repay the unamortized balance of any loans payable.

 

National provides an allowance for doubtful accounts on the notes based on historical collection experience and continually evaluates the receivables for collectability and possible write-offs where a loss is deemed probable. As of June 30, 2018 and September 30, 2017, no allowance for doubtful accounts was required.

 

There were no unamortized forgivable loans outstanding at June 30, 2018 and September 30, 2017 attributable to registered representatives who ended their affiliation with National’s subsidiaries prior to the fulfillment of their obligation.

 

12

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

6.Property and Equipment

 

Fortress’s property and equipment, exclusive of National’s property and equipment, consisted of the following ($ in thousands):

 

   Estimated Useful
Lives (in years)
   September 30,
2018
   December 31,
2017
 
Computer equipment   3   $648   $543 
Furniture and fixtures   5    1,128    1,009 
Machinery and equipment   5    3,128    143 
Leasehold improvements   5 - 15    9,236    5,351 
Construction in process (1)   N/A    33    1,241 
Total property and equipment        14,173    8,287 
Less: accumulated depreciation        (2,063)   (1,171)
Property and equipment, net       $12,110   $7,116 

 

(1) Relates to the Mustang cell processing facility.

 

Fortress's depreciation expense for the three months ended September 30, 2018 and 2017, was approximately $0.4 million and $0.2 million, respectively, and was recorded in research and development, manufacturing and general and administrative expense in the Condensed Consolidated Statements of Operations. Fortress’s depreciation expense for the nine months ended September 30, 2018 and 2017, was approximately $0.9 million and $0.5 million, respectively, and was recorded in research and development, manufacturing and general and administrative expense in the Condensed Consolidated Statements of Operations.

 

National’s property and equipment as of June 30, 2018 and September 30, 2017 consisted of the following ($ in thousands):

 

   Estimated Useful
Lives (in years)
  June 30,
2018
   September 30,
2017
 
Equipment  5  $1,854   $1,306 
Furniture and fixtures  5   323    284 
Leasehold improvements  Lesser of useful life or term   1,041    1,006 
Capital Leases (primarily composed of computer equipment)  5   276    276 
Total property and equipment      3,494    2,872 
Less: accumulated depreciation      (962)   (475)
Property and equipment, net     $2,532   $2,397 

 

National's depreciation expense for the three months ended June 30, 2018 and 2017, was approximately $0.2 million and $0.1 million respectively and was recorded in National general and administrative expense in the Condensed Consolidated Statements of Operations. National’s depreciation expense for the nine months ended June 30, 2018 and 2017, was approximately $0.5 million and $0.3 million, respectively, and was recorded in National general and administrative expense in the Condensed Consolidated Statements of Operations.

 

7.Fair Value Measurements

 

Certain of the Company’s financial instruments are not measured at fair value on a recurring basis but are recorded at amounts that approximate their fair value due to their liquid or short-term nature, such as accounts payable, accrued expenses and other current liabilities.

 

Origo Acquisition Corporation

 

On August 10, 2018, Origo Acquisition Corporation (“Origo”) entered into a Termination and Mutual Release between Origo and Hightimes Holding Corp. (“HTH”), HTHC Merger Sub, Inc. (“Merger Sub”) and Jose Aldeanueva, pursuant the terms of the Merger Agreement, dated July 24, 2017, as amended, effectively terminating the possibility of a business combination. Additionally, on August 10, 2018 the officers and directors of Origo notified shareholders of their intention to dissolve and liquidate in accordance with the Memorandum and Articles of Association of Origo. In accordance with the liquidation, Origo redeemed all of its outstanding ordinary shares that were included in the units issued in its initial public offering (the “Public Shares”), at a per-share redemption price of approximately $11.00. The redemption was completed on August 15, 2018.

 

The Company’s investment in Origo was not eligible for the redemption and as such as of September 30, 2018, the Company wrote off its investment in Origo and recorded a decrease in fair-value of investment of $1.4 million for the nine months ended September 30, 2018. In addition to its investment in Origo, the Company also provided Origo with a working capital note of $0.3 million, the balance of which was written off in the quarter ended June 30, 2018.

 

13

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Securities Owned

 

National

 

The fair value of National’s warrants, representing the cumulative value of warrants received in publicly traded companies that are not related parties, in which NSC as placement agent received warrants as the placement agent. National calculated the fair value of the warrants using a Black Scholes model. A summary of the weighted averages (in aggregate) of significant unobservable inputs (Level 3 inputs) used in measuring National’s warrants that are categorized within Level 3 of the fair value hierarchy as of June 30, 2018 is as follows:

 

   June 30, 2018
Risk-free interest rate  1.93% – 2.73%
Expected dividend yield  –%
Expected term in years  0.14 – 4.83
Remaining volatility  49.7% – 381.0%
Strike price  $0.01 – $10.00

 

($ in thousands) 

Fair Value of

Derivative

Warrants

 
Beginning balance at September 30, 2017  $202 
Trading revenue gain   392 
Ending balance at June 30, 2018  $594 

 

Warrant Liabilities

 

Helocyte

 

The fair value of Helocyte’s warrant liability, which was issued in connection with Helocyte’s convertible note (see Note 11), as of September 30, 2018 approximated $0, as the probability of the conversion of the underlying notes approximated $0. The table below provides a summary:

  

($ in thousands) 

Fair Value of

Derivative

Warrant

Liability

 
Beginning balance at January 1, 2018  $87 
Change in fair value of derivative liabilities   (87)
Ending balance at September 30, 2018  $ 

 

Notes at Fair Value

 

Helocyte

 

Helocyte’s convertible note is measured at fair value using the Monte Carlo simulation valuation methodology. A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring Helocyte’s convertible debt that is categorized within Level 3 of the fair value hierarchy as of September 30, 2018, the fair value approximated cost, as the convertible note approaches maturity, is as follows:

 

($ in thousands) 

Helocyte

Convertible

Note, at Fair

value

 
Beginning balance at January 1, 2018  $4,700 
Payment of convertible notes   (4,076)
Change in fair value of convertible notes   (291)
Ending balance at September 30, 2018  $333 

 

14

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Caelum

 

Caelum’s convertible debt, which is guaranteed by the Company, is measured at fair value using the Monte Carlo simulation valuation methodology. A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring Caelum’s convertible debt that is categorized within Level 3 of the fair value hierarchy as of September 30, 2018 is as follows:

 

    September 30, 2018  
Risk-free interest rate     2.195%- 2.560 %
Expected dividend yield     %
Expected term in years     0.29 – 0.95  
Expected volatility     67.0 %

 

($ in thousands)   Caelum
Convertible
Note, at fair
value
 
Beginning balance at January 1, 2018   $ 10,059  
Change in fair value of convertible notes     265  
Ending balance at September 30, 2018   $ 10,324  

 

The following tables classify the fair value hierarchy of Fortress's financial instruments, exclusive of National's financial instruments, measured at fair value as of September 30, 2018 and December 31, 2017:

 

   Fair Value Measurement as of September 30, 2018 
($ in thousands)  Level 1   Level 2   Level 3   Total 
Liabilities                
Helocyte Convertible Note, at fair value  $   $   $333   $333 
Caelum Convertible Note, at fair value           10,324    10,324 
Total  $   $   $10,657   $10,657 

 

   Fair Value Measurement as of December 31, 2017 
($ in thousands)  Level 1   Level 2   Level 3   Total 
Assets                
Long-term investments, at fair value  $   $   $1,390   $1,390 
Total  $   $   $1,390   $1,390 
                     
Liabilities                    
Warrant liabilities  $   $   $87   $87 
Caelum Convertible Note, at fair value           10,059    10,059 
Helocyte Convertible Note, at fair value           4,700    4,700 
Total  $   $   $14,846   $14,846 

 

15

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following table shows the fair values hierarchy of National's financial instruments measured at fair value on a recurring basis on the Condensed Consolidated Balance Sheets as of June 30, 2018 and September 30, 2017:

 

   Fair Value Measurement as of June 30, 2018 
   Level 1   Level 2   Level 3   Total 
Assets - National                    
Securities owned, at fair value                    
Corporate stocks  $101   $   $   $101 
Municipal bonds       530        530 
Restricted stock       1,912        1,912 
Warrants           4,132    4,132 
Total  $101   $2,442   $4,132   $6,675 
                     
Liabilities – National                     
Securities sold, but not yet purchased at fair value:                    
Corporate stocks  $18   $   $   $18 
Corporate debt        6        6 
Contingent consideration   -        768    768 
Total  $18   $6   $768   $792 

 

   Fair Value Measurement as of September 30, 2017 
   Level 1   Level 2   Level 3   Total 
Assets - National                    
Securities owned, at fair value                    
Corporate stocks  $116   $   $   $116 
Municipal bonds       1,239        1,239 
Restricted stock       82        82 
Warrants           548    548 
Total  $116   $1,321   $548   $1,985 
                     
Liabilities - National                    
Securities sold, but not yet purchased at fair value                    
Municipal bonds  $   $151   $   $151 
Contingent consideration           311    311 
Warrants issued - National           5,597    5,597 
Total  $   $151   $5,908   $6,059 

 

Warrants issued - National

 

On March 15, 2018, National, together with Computershare Inc., a Delaware corporation (“Computershare”), and its wholly-owned subsidiary, Computershare Trust Company, N.A., a federally chartered trust company (and together with Computershare, the “Warrant Agent”) agreed to amend and restate the terms of the form of warrant agreement dated December 13, 2016 (the “Original Agreement”). The Amended and Restated Warrant Agreement (the “Amended Agreement”) explicitly provides that National shall not be required to pay cash if it cannot issue registered shares of Common Stock upon exercise of a Warrant and as such meeting the criteria for equity classification.

 

Accordingly, at March 15, 2018, the date of the amendment, the fair value of the warrants issued by National (represents 44% of the warrants issued to non-Fortress shareholders) was $13.6 million. Such valuation (using level 3 inputs) was determined by use of the Black-Scholes option pricing model using the following assumptions:

 

   March 15, 2018 
Dividend yield   %
Expected volatility   59.23%
Risk-free interest rate   2.42%
Life (in years)   3.49%

 

The following table shows the fair value of the warrant liability on the Condensed Consolidated Balance Sheets as of June 30, 2018 and September 30, 2017:

 

($ in thousands)  

National’s

Warrants

 
Beginning balance at September 30, 2017   $ 5,597  
Change in fair value of derivative liability     8,018  
Ending balance at March 15, 2018     13,615  
Reclassification of warrant to equity     (13,615 )
Ending balance at June 30, 2018   $  

 

16

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

National listed the warrants on the Nasdaq Capital Market under the symbol “NHLDW” in February 2017.

 

The table below provides a roll-forward of the changes in fair value of Level 3 financial instruments for the nine months ended September 30, 2018:

 

($ in thousands)  

Investment in

Origo

   

Helocyte
Convertible

Note, at fair

value

    Caelum
Convertible
Note, at fair
value
    Warrants
issued and
issuable
    Warrant
liabilities
    Total  
Balance at December 31, 2017   $ 1,390     $ 4,700     $ 10,059     $ 5,597     $ 87     $ 21,833  
Payment of convertible note           (4,076 )                       (4,076 )
Reclassification of warrant liability from debt to equity                       (13,615 )           (13,615 )
Change in fair value of investments     (1,390 )                             (1,390 )
Change in fair value of convertible notes           (291 )     265                   (26 )
Change in fair value of derivative liabilities                       8,018       (87 )     7,931  
Balance at September 30, 2018   $     $ 333     $ 10,324     $     $     $ 10,657  

 

For the nine months ended September 30, 2018, no transfers occurred between Level 1, Level 2 and Level 3 instruments.

 

8.Licenses Acquired

 

In accordance with ASC 730-10-25-1, Research and Development, costs incurred in obtaining technology licenses are charged to research and development expense if the technology licensed has not reached technological feasibility and has no alternative future use. The licenses purchased by the Company and its’ subsidiaries require substantial completion of research and development, regulatory and marketing approval efforts in order to reach technological feasibility. As such, for the three and nine months ended September 30, 2018 and 2017, the purchase price of licenses acquired was classified as research and development-licenses acquired in the Condensed Consolidated Statements of Operations, as reflected in the table below:

 

   For the Three Months Ended September 30,   For the Nine Months Ended September 30, 
($ in thousands)  2018   2017   2018   2017 
Fortress  $   $   $   $300 
                     
Fortress Companies:                    
Checkpoint   1,000        1,000    400 
Helocyte   1,500        1,521     
Mustang   1,000    300    1,075    2,375 
Cellvation           1     
Caelum   201        201    219 
Cyprium               100 
Aevitas   5        6     
Total  $3,706   $300   $3,804   $3,394 

 

Checkpoint

 

The table below provides a summary of Checkpoint’s expense related to its licenses, for the three and nine months ended September 30, 2018 and 2017 by license as recorded in the Condensed Consolidated Statements of Operations:

 

   For the Three Months Ended September 30,   For the Nine Months Ended September 30, 
($ in thousands)  2018   2017   2018   2017 
Dana Farber License CK-301  $1,000   $   $1,000   $ 
Jubilant Biosys License CK-103               400 
Total Licenses Acquired Expense  $1,000   $   $1,000   $400 

 

For the three and nine months ended September 30, 2018, Checkpoint recorded a $1.0 million milestone in connection with their license agreement with Dana-Farber, in connection with the achievement of dosing the 12th patient in the Phase 1 trial for CK-301.

 

17

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

See Note 21 for revenue recognized in connection with the Jubilant license under a sublicense agreement with TGTX, a related party.

 

Helocyte

 

In connection with Helocyte’s amended and restated license agreement for Triplex with COH, during the fourth quarter of 2018 Helocyte expects to achieve a development milestone. The milestone relates to completion of the Phase 2 clinical trial which Helocyte deems to be probable, due to the completion of the follow-up period for the last patient dosed in the trial. For the three and nine months ended September 30, 2018 and 2017, respectively, Helocyte recorded expense of $1.5 million and nil, and $1.5 million and nil, respectively, in connection with this license.

 

Mustang

 

On August 2, 2018, Mustang entered into an exclusive worldwide license agreement with St. Jude Children’s Research Hospital (“St. Jude”) for the development of a first-in-class ex vivo lentiviral gene therapy for the treatment of X-linked severe combined immunodeficiency (“X-SCID”), also known as bubble boy disease. The therapy is currently being evaluated in a Phase 1/2 multicenter trial in infants under the age of two. This study is the world’s first lentiviral gene therapy trial for infants with X-SCID. Mustang paid an upfront fee of $1.0 million in August 2018 under the license in addition to an annual maintenance fee of $0.1 million (beginning in 2019). St. Jude is also eligible to receive milestone payments totaling up to $13.5 million, upon and subject to the achievement of five development and commercialization milestones. Royalty payments in the mid-single digits are due on net sales of licensed products. Mustang is obligated to pay to St. Jude a percentage of certain revenues received in connection with a sublicense that is in the mid-teens, regardless of when such sublicense is executed.

 

The table below provides a summary of Mustang’s expense related to its licenses, for the three and nine months ended September 30, 2018 and 2017 by license as recorded in the Condensed Consolidated Statements of Operations:

 

   For the Three Months Ended September 30,   For the Nine Months Ended September 30, 
($ in thousands)  2018   2017   2018   2017 
City of Hope (COH) IL-13 License  $   $   $   $250 
COH IV/ICV License               125 
COH HER2 License               600 
COH CS-1 License               600 
COH License for PSCA               300 
UCLA License for PSCA               200 
Fred Hutch CD20       300        300 
X-SCID License – St. Jude’s   1,000        1,000     
Manufacturing License           75     
Total licenses acquired expense  $1,000   $300   $1,075   $2,375 

 

Caelum

 

For the three and nine months ended September 30, 2018 and 2017, respectively, Caelum recorded expense of approximately $0.2 and nil, and $0.2 and $0.2 million in connection with its license for CAEL-101 from Columbia University.

 

Cyprium

 

For the three and nine months ended September 30, 2018 and 2017, respectively, Cyprium recorded no expense in 2018 and nil and $0.1 million in 2017, in connection with its license for CUTX-101 (copper histidinate injection) from the Eunice Kennedy Shriver National Institute of Child Health and Human Development (“NICHD”).

 

18

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

9.Sponsored Research and Clinical Trial Agreements

 

Aevitas

 

On January 25, 2018, Aevitas entered into a Sponsored Research Agreement with the University of Massachusetts (“UMass SRA”) for certain continued research and development activities related to the development of adeno-associated virus (“AAV”) gene therapies in complement-mediated diseases. The total amount to be funded by Aevitas under the UMass SRA is $0.8 million. Pursuant to the terms of the UMass SRA, Aevitas paid $0.8 million which was due upon execution. For the three and nine months ended September 30, 2018, Aevitas recorded expense of approximately $0.2 million and $0.6 million in connection with the UMass SRA. The expense was recorded in research and development expenses in the Company’s Condensed Consolidated Statements of Operations. No expense related to this Agreement was recorded in 2017.

 

On July 24, 2018, Aevitas entered into a Sponsored Research Agreement with the Trustees of the University of Pennsylvania (“UPenn SRA”) for certain continued research and development activities related to the development of AAV gene therapies in complement-mediated diseases. The total amount to be funded by Aevitas under the UPenn SRA is $2.0 million. Pursuant to the terms of the UPenn SRA, Aevitas paid $0.3 million which was due upon execution. For the three and nine months ended September 30, 2018, Aevitas recorded expense of approximately $0.3 million and $0.3 million in connection with the UPenn SRA. The expense was recorded in research and development expenses in the Company’s Condensed Consolidated Statements of Operations. No expense related to this Agreement was recorded in 2017.

 

Caelum

 

On March 12, 2018, Caelum entered into a Sponsored Research Agreement with Columbia University to conduct preclinical research in connection with CAEL-101. The total cost of the study approximates $0.1 million. For the three and nine months ended September 30, 2018, Caelum recorded expense of approximately $27,000 and $0.1 million, respectively in connection with the agreement. The expense was recorded in research and development expense in the Company’s Condensed Consolidated Statements of Operations.

 

Cellvation

 

For the three and nine months ended September 30, 2018 and 2017, respectively, Cellvation recorded expense of $0.1 million and $0.2 million and $0.1 million and nil, respectively in connection with its sponsored research arrangement with the University of Texas. The expense was recorded in research and development expense in the Company’s Condensed Consolidated Statements of Operations.

 

Checkpoint

 

In connection with its license agreement with NeuPharma, Inc. (“NeuPharma”), Checkpoint entered into a Sponsored Research Agreement with NeuPharma for certain research and development activities and subsequently entered into an agreement with TGTX, a related party, to assume all costs associated with this Sponsored Research Agreement, including all amounts previously paid by the Company. For the three and nine months ended September 30, 2018 and 2017, approximately nil and approximately $0.1 million and $31,000 and $0.5 million, respectively, was recognized in research and development revenue in connection with the Sponsored Research Agreement in the Company’s Condensed Consolidated Statements of Operations.

 

Helocyte

 

The table below provides a summary of Helocyte’s expense related to its clinical research arrangements, for the three and nine months ended September 30, 2018 and 2017, by agreement as recorded in the Condensed Consolidated Statements of Operations:

 

   For the Three Months Ended September 30,   For the Nine Months Ended September 30, 
($ in thousands)  2018   2017   2018   2017 
COH Triplex clinical research and support  $   $1,300   $   $2,335 
COH PepVax clinical research and support       327        561 
COH Pentamer clinical research and support   113    12    317    24 
Total licenses acquired expense  $113   $1,639   $317   $2,920 

 

19

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

During the first quarter of 2018, Helocyte elected to discontinue the further development of its HLA-restricted, single-antigen PepVax program and as such will cease to incur costs associated with this program.

 

Mustang

 

The table below provides a summary of Mustang’s expense related to its sponsored research and clinical trial agreements, for the three and nine months ended September 30, 2018 and 2017, by license as recorded in the Condensed Consolidated Statements of Operations:

 

   For the Three Months Ended September 30,   For the Nine Months Ended September 30, 
($ in thousands)  2018   2017   2018   2017 
COH CAR T  $500   $500   $1,500   $1,500 
COH - CD123   123    642    387    1,237 
COH - IL13Rα2   346    194    849    1,204 
City of Hope - Manufacturing   114    -    344    - 
Fred Hutch – CD20   255    88    938    88 
BIDMC – CRISPR   69        69     
Total  $1,407   $1,424   $4,087   $4,029 

 

Tamid

 

On November 30, 2017, in connection with its three separate license agreements with UNC, Tamid entered into a Sponsored Research Agreement with UNC (“UNC SRA”) for certain continued research and development activities related to Nanodysferlin for treatment of Dysferlinopathy, and AAV-HLA-G for corneal transplant rejection. Total amount to be funded by Tamid under the UNC SRA is $2.3 million over a term of three years. Pursuant to the terms of the UNC SRA, Tamid paid $0.8 million which was due upon execution. For the three and nine months ended September 30, 2018, Tamid recorded expense of $0.2 million and $0.6 million, respectively in connection with the UNC SRA. The expense was recorded in research and development expenses in the Company’s Condensed Consolidated Statements of Operations.

 

10.Intangibles, net

 

Journey

 

On August 31, 2018, Journey entered into an agreement with a third party to acquire the exclusive rights to Exelderm®, an antifungal ointment. As of September 30, 2018, Journey recorded this acquisition as an intangible asset and will recognize expense over the expected life of Exelderm® of 3 years.

 

For the three months ended September 30, 2018 and 2017, Journey recognized amortization expense of approximately $0.2 million and $0.1 million, respectively, which was recorded in costs of goods sold in the Company’s Condensed Consolidated Statements of Operations. For the nine months ended September 30, 2018 and 2017, Journey recognized amortization expense of approximately $0.4 million and $0.4 million, respectively, which was recorded in costs of goods sold in the Company’s Condensed Consolidated Statements of Operations.

 

   Estimated Useful
Lives (in years)
   Cost 
Ceracade®   3   $300 
Luxamend®   3    50 
Targadox®   3    1,250 
Exelderm®   3    1,200 
Total       $2,800 

 

The carrying amount related to acquired intangible assets as of September 30, 2018 are as follows ($ in thousands):

 

Intangible assets at December 31, 2017  $883 
Addition   1,200 
Amortization expense   (433)
Intangible assets at September 30, 2018  $1,650 

 

20

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

11.Debt and Interest

 

Debt

 

2018 Venture Notes

 

During the period ended March 31, 2018, the Company closed a private placement of promissory notes for an aggregate of $21.7 million (the “2018 Venture Notes”) through National Securities Corporation (“NSC”), a wholly-owned subsidiary of National and a related party by virtue of the Company’s ownership of National. The Company intends to use the proceeds from the 2018 Venture Notes to acquire and license medical technologies and products through existing or recently formed Company subsidiaries. The Company may also use the proceeds to finance its subsidiaries. The notes mature 36 months from issuance, provided that during the first 24 months the Company may extend the maturity date by six months. No principal amount will be due for the first 24 months (or the first 30 months if the maturity date is extended). Thereafter, the note will be repaid at the rate of 1/12 of the principal amount per month for a period of 12 months. Interest on the note is 8% payable quarterly during the first 24 months (or the first 30 months if the note is extended) and monthly during the last 12 months.

 

NSC acted as the sole placement agent for the 2018 Venture Notes. The Company paid NSC a fee of $1.7 million during the three months ended March 31, 2018 in connection with its placement of the 2018 Venture Notes. At September 30, 2018, the fee, which was recorded as debt discount and is being amortized over the life of the 2018 Venture Notes, was eliminated in consolidation.

 

The 2018 Venture Notes allows the Company to transfer a portion of the proceeds from the 2018 Venture Notes to a Fortress subsidiary upon the completion by such subsidiary of an initial public offering in which it raises sufficient equity capital so that it has cash equal to five times the amount of the portion of the proceeds of the 2018 Venture Notes so transferred (the “SubCo Funding Threshold”). At the time of transfer the Company’s obligation under the NSC Note will be reduced by the amount transferred.

 

During the nine months ended September 30, 2018, the Company has transferred $1.8 million to Aevitas, $1.1 million to Tamid, $1.0 Million to Cyprium and $1.2 million to Cellvation. Notwithstanding such transfers, the Company continues to hold such debt balances as liabilities on its own balance sheet on a consolidated basis, until such time as the SubCo Funding Threshold is met with respect to a particular subsidiary.

 

In connection with this transfer NSC will receive warrants to purchase each such subsidiary’s stock equal to 25% of that subsidiary’s proceeds of the 2018 Venture Notes divided by the lowest price at which the subsidiary sells its equity in its first third party equity financing. The warrants issued will have a term of 10 years and an exercise price equal to the par value of the Fortress subsidiary’s common stock. The value of the warrants, if any, is eliminated in consolidation. As of September 30, 2018, the warrants were contingently issuable as neither an initial public offering nor a third-party financing had occurred.

 

Opus Credit Facility Agreement Maturity Date Extension

 

On March 12, 2018, the Company and Opus Point Healthcare Innovation Healthcare Fund (“OPHIF”) amended and restated the Opus Credit Facility (the “A&R Opus Credit Facility”). The A&R Opus Credit Facility extended the maturity date of the notes issued under the Opus Credit Facility from September 14, 2018 by one year to September 14, 2019. The A&R Opus Credit Facility also permits the Company to make portions of interest and principal repayments in the form of shares of the Company’s common stock and/or in common stock of the Company’s publicly-traded subsidiaries, subject to certain conditions. Fortress retains the ability to prepay the Notes at any time without penalty. The notes payable under the A&R Opus Credit Facility continue to bear interest at 12% per annum.

 

21

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Total debt consists of the following as of September 30, 2018 and December 31, 2017:

 

($ in thousands) 

September 30,

2018

  

December 31,

2017

   Interest Rate   Maturity
IDB Note  $14,929   $14,929    2.25%  August - 2020
2017 Subordinated Note Financing   3,254    3,254    8.00%  March - 2020
2017 Subordinated Note Financing   13,893    13,893    8.00%  May - 2020
2017 Subordinated Note Financing   1,820    1,820    8.00%  June - 2020
2017 Subordinated Note Financing   3,018    3,018    8.00%  August - 2020
2017 Subordinated Note Financing   6,371    6,371    8.00%  September - 2020
2018 Venture Notes   6,517    -    8.00%  February - 2021
2018 Venture Notes   15,190    -    8.00%  March - 2021
Opus Credit Facility1   9,500    9,500    12.00%  September - 2019
Helocyte Convertible Note, at fair value2   -    1,000    8.00%  December - 2017
Helocyte Convertible Note, at fair value1, 2   300    2,194    8.00%  September - 2018
Helocyte Convertible Note, at fair value2   -    1,062    8.00%  April - 2018
Helocyte Convertible Note, at fair value1,2   23    444    8.00%  November - 2018
Helocyte Convertible Note, at fair value1   10    -    8.00%  October - 2018
Caelum Convertible Note, at fair value1   1,044    1,017    8.00%  January - 2019
Caelum Convertible Note, at fair value1   7,082    6,900    8.00%  February - 2019
Caelum Convertible Note, at fair value1   2,198    2,142    8.00%  March - 2019
Total notes payable   85,149    67,544         
Less: Discount on notes payable   892    1,035         
Total notes payable  $84,257   $66,509         

 

(1)Classified as short-term on the Company’s Condensed Consolidated Balance Sheet as of September 30, 2018.
(2)Classified as short-term on the Company’s Condensed Consolidated Balance Sheet as of December 31, 2017.

 

Interest Expense

 

The following table shows the details of interest expense for all debt arrangements during the periods presented. Interest expense includes contractual interest and amortization of the debt discount and amortization of fees represents fees associated with loan transaction costs, amortized over the life of the loan:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
($ in thousands)  2018   2017   2018   2017 
IDB Note                    
Interest  $85   $85   $254   $254 
Total IDB Note   85    85    254    254 
                     
NSC Debt                    
Interest   -    (8)   -    147 
Amortization of fees   -    127    -    200 
Total NSC Debt   -    119    -    347 
                     
2017 Subordinated Note Financing                    
Interest   1,060    755    3,157    1,161 
Amortization of fees   28    208    79    383 
Total 2017 Subordinated Note Financing   1,088    963    3,236    1,544 
                     
Opus Credit Facility                    
Interest   288    287    853    798 
Amortization of fees   105    282    525    733 
Total Opus Note   393    569    1,378    1,531 
                     
2018 Venture Notes                    
Interest   438    -    923    - 
Amortization of fees   10    -    20    - 
Total 2018 Venture Notes   448    -    943    - 
                     
LOC Fees                    
Interest   7    7    23    22 
Total LOC   7    7    23    22 
                     
Helocyte Convertible Note                    
Interest   6    64    93    175 
Financing fee   -    -    -    1 
Total Helocyte Convertible Note   6    64    93    176 
                     
Avenue Convertible Note                    
Interest   -    -    -    5 
Financing fee   -    -    -    3 
Total Avenue Convertible Note   -    -    -    8 
                     
Caelum Convertible Note                    
Interest   198    68    589    68 
Financing fee   -    1,317    -    1,317 
Total Caelum Convertible Note   198    1,385    589    1,385 
                     
Falk CSR                    
Interest   -    26    (64)   26 
Total Falk CSR   -    26    (64)   26 
                     
Other                    
Interest   3    2    3    5 
Total D&O Insurance   3    2    3    5 
                     
Total Interest Expense and Financing Fee  $2,228   $3,220   $6,455   $5,298 

 

22

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

12.Accrued Expenses and Other Long-Term Liabilities

 

Accrued expenses and other long-term liabilities, excluding National, consisted of the following:

 

  

September 30,

2018

  

December 31,

2017

 
Accrued Expenses:          
Professional fees  $1,471   $1,625 
Salaries, bonuses and related benefits   4,349    5,279 
Accrued expenses - related party   50    95 
Research and development   3,036    1,873 
Milestones related to license agreement   2,500    800 
Manufacturing   1,411    1,188 
Clinical supplies   2,619    85 
License maintenance fees   454    100 
Dr. Falk Pharma milestone (See Note 16)   1,300    3,059 
Accrued royalties payable   1,045    1,411 
Deferred coupon funding   1,490    1,087 
Other   644    1,030 
Total accrued expenses  $20,369   $17,632 
           
Other long-term liabilities:          
Deferred rent and long-term lease abandonment charge   4,961    4,739 
Total other long-term liabilities  $4,961   $4,739 

 

 National’s accounts payable and other accrued expenses as of June 30, 2018 and September 31, 2017, consisted of the following:

 

    June 30, 2018     September 30, 2017  
Legal   $ 1,018     $ 877  
Audit     258       176  
Telecommunications     207       205  
Data Services     547       464  
Regulatory     372       540  
Settlements     487       2,403  
Deferred rent     679       497  
Other     3,135       3,242  
Total   $ 6,703     $ 8,404  

 

23

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

13. Non-Controlling Interests

 

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

 

   As of September 30, 2018 
   NCI Equity Share  

Net gain/(loss) attributable

to non-controlling interests

  

Non-controlling interests

in consolidated entities

  

Non-

controlling

ownership

 
Aevitas  $(456)  $(397)  $(853)   37.0%
Avenue2   13,043    (11,232)   1,811    64.8%
Caelum   (2,387)   (1,841)   (4,228)   37.0%
Cellvation   (447)   (137)   (584)   21.7%
Checkpoint1   30,837    (15,601)   15,236    69.2%
Coronado SO   (290)   -    (290)   13.0%
Cyprium   (197)   (68)   (265)   10.8%
Helocyte   (3,285)   (464)   (3,749)   19.8%
JMC   (456)   197    (259)   6.3%
Mustang2   38,147    (11,174)   26,973    60.0%
National Holdings   15,805    (2,345)   13,460    43.7%
Tamid   (196)   (192)   (388)   24.0%
Total  $90,118   $(43,254)  $46,864      

 

   As of December 31, 2017 
   NCI Equity Share  

Net gain/(loss) attributable

to non-controlling interests

  

Non-controlling interests

in consolidated entities

  

Non-

controlling

ownership

 
Aevitas  $(126)  $(168)  $(294)   35.4%
Avenue2   17,454    (4,646)   12,808    66.1%
Caelum   (815)   (1,262)   (2,077)   34.7%
Cellvation   (259)   (96)   (355)   21.5%
Checkpoint1   21,635    (12,314)   9,321    62.0%
Coronado SO   (236)   (54)   (290)   13.0%
Cyprium   (143)   (15)   (158)   11.1%
Helocyte   (1,907)   (1,193)   (3,100)   20.0%
JMC   (469)   7    (462)   6.3%
Mustang2   48,740    (11,911)   36,829    61.6%
National Holdings   17,021    (1,216)   15,805    43.4%
Tamid   (6)   (92)   (98)   24.0%
Total  $100,889   $(32,960)  $67,929      

 

(1) Checkpoint is consolidated with Fortress’ operations because Fortress maintains voting control through its ownership of Checkpoint’s Class A Common Shares which provide super-majority voting rights.

 

(2) Avenue and Mustang are consolidated with Fortress’ operations because Fortress maintains voting control through its ownership of Preferred Class A Shares which provide super-majority voting rights.

  

14. Net Loss per Common Share

 

Basic net loss per share is calculated by dividing net loss by the weighted-average number of shares of common stock outstanding for the period, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing net loss by the weighted-average number of common stock and common stock equivalents outstanding for the period.

 

The Company’s common stock equivalents, including unvested restricted stock, options, and warrants have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted average common stock outstanding used to calculate both basic and diluted net loss per share is the same.

 

24

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following shares of potentially dilutive securities have been excluded from the computations of diluted weighted average shares outstanding, as the effect of including such securities would be anti-dilutive at the end of the nine months ended September 30, 2018 and 2017:

 

   Nine Months Ended September 30, 
   2018   2017 
Warrants to purchase Common Stock   890,892    678,072 
Opus warrants to purchase Common Stock   1,880,000    206,593 
Options to purchase Common Stock   1,085,502    1,095,905 
Convertible Preferred Stock   1,000,000    - 
Unvested Restricted Stock   11,014,596    9,848,505 
Unvested Restricted Stock Units   1,796,134    1,234,555 
Total   17,667,124    13,063,630 

 

15. Stockholders’ Equity

 

Stock-based Compensation

 

The following table summarizes the stock-based compensation expense from stock option, employee stock purchase programs and restricted Common Stock awards and warrants for the three and nine months ended September 30, 2018 and 2017:

 

   For the Three Months Ended September 30,   For the Nine Months Ended September 30, 
($ in thousands)  2018   2017   2018   2017 
Employee Awards  $1,012   $1,104   $3,075   $3,528 
Executive awards of Fortress Companies’ stock   446    546    1,408    1,642 
Non-employee awards   24    24    70    60 
Fortress Companies:                    
Avenue   371    246    1,043    269 
Checkpoint   1,128    910    2,336    4,271 
Mustang   922    834    3,888    1,231 
Caelum   152    427    92    427 
Other   51    93    141    308 
National   929    129    1,605    312 
Total stock-based compensation  $5,035   $4,313   $13,658   $12,048 

  

For the three months ended September 30, 2018 and 2017, approximately $1.8 million and $1.6 million, respectively, of stock-based compensation expense was included in research and development expenses in connection with equity grants made to employees and consultants and approximately $3.2 million and $2.7 million, respectively, was included in general and administrative expenses in connection with grants made to employees, members of the board of directors and consultants.

 

For the nine months ended September 30, 2018 and 2017, approximately $4.9 million and $4.8 million, respectively, of stock-based compensation expense was included in research and development expenses in connection with equity grants made to employees and consultants and approximately $8.7 million and $7.2 million, respectively, was included in general and administrative expenses in connection with grants made to employees, members of the board of directors and consultants.

 

Stock Options

 

The following table summarizes Fortress stock option activities excluding activity related to Fortress Companies:

 

  

Number of

Shares

  

Weighted

average exercise

price

  

Total weighted

average intrinsic

value

  

Weighted average

remaining

contractual life

(years)

 
Options vested and expected to vest at December 31, 2017   1,110,501   $3.78   $1,351,080    3.95 
Exercised   -    -    -    - 
Options vested and expected to vest at September 30, 2018   1,110,501   $3.78   $87,132    3.21 
Options vested and exercisable   1,085,501   $3.75   $87,132    3.18 

 

As of September 30, 2018, Fortress had no unrecognized stock-based compensation expense related to options.

 

25

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Restricted Stock and Restricted Stock Units

 

The following table summarizes Fortress restricted stock awards and restricted stock unit awards activities, excluding activities related to Fortress Companies:

 

   Number of Shares  

Weighted average

grant price

 
Unvested balance at December 31, 2017   11,874,034   $2.63 
Restricted stock granted   1,392,856    3.99 
Restricted stock vested   (213,333)   2.76 
Restricted stock units granted   430,000    4.03 
Restricted stock units forfeited   (426,978)   4.05 
Restricted stock units vested   (516,732)   3.56 
Unvested balance at September 30, 2018   12,539,847   $2.74 

 

As of September 30, 2018, and 2017, the Company had unrecognized stock-based compensation expense related to restricted stock and restricted stock unit awards of approximately $9.8 million and $1.7 million, respectively, which is expected to be recognized over the remaining weighted-average vesting period of 3.6 years and 2.0 years, respectively.

 

Warrants

 

The following table summarizes Fortress warrant activities, excluding activities related to Fortress Companies:

 

  

Number of

Shares

  

Weighted

average exercise

price

  

Total weighted

average intrinsic

value

  

Weighted average

remaining

contractual life

(years)

 
Outstanding as of December 31, 2017   2,774,189   $3.30   $2,204,530    4.47 
Forfeited   (20,000)   5.72    -    - 
Outstanding as of September 30, 2018   2,754,189   $3.28   $13,800    3.75 
Exercisable as of September 30, 2018   849,189   $3.92   $13,800    3.39 

 

Employee Stock Purchase Plan

 

Eligible employees can purchase the Company’s Common Stock at the end of a predetermined offering period at 85% of the lower of the fair market value at the beginning or end of the offering period. The ESPP is compensatory and results in stock-based compensation expense.

 

As of September 30, 2018, 289,359 shares have been purchased and 710,641 shares are available for future sale under the Company’s ESPP. Share-based compensation expense recorded was approximately $52,000 and $52,000, respectively, for the three months ended September 30, 2018 and 2017, and was approximately $0.1 million and $0.1 million, respectively, for the nine months ended September 30, 2018 and 2017.

 

Capital Raises

 

Fortress

 

At the Market Offering

 

Pursuant to the terms of the Company’s Amended and Restated At Market Issuance Sales Agreement, or Sales Agreement, with B. Riley FBR, Inc. (“B. Riley,” f/k/a MLV & Co. LLC, and FBR Capital Markets & Co.) (the “ATM”), for the nine month period ended September 30, 2018, the Company issued 2,668,756 shares of common stock at an average price of $2.61 per share for gross proceeds of $7.0 million. In connection with these sales, the Company paid aggregate fees of approximately $0.2 million.

 

26

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Fortress Companies

 

Checkpoint Therapeutics, Inc.

 

Checkpoint At the Market Offering

 

In November 2017, Checkpoint filed a shelf registration statement on Form S-3 (the "Checkpoint S-3"), which was declared effective in December 2017. Under the Checkpoint S-3, Checkpoint may sell up to a total of $100 million of its securities. In connection with the Checkpoint S-3, Checkpoint entered into an At-the-Market Issuance Sales Agreement (the "Checkpoint ATM") with Cantor Fitzgerald & Co., Ladenburg Thalmann & Co. Inc. and H.C. Wainwright & Co., LLC (each an "Agent" and collectively, the "Agents"), relating to the sale of shares of common stock. Under the Checkpoint ATM, Checkpoint pays the Agents a commission rate of up to 3.0% of the gross proceeds from the sale of any shares of common stock.

 

During the three and nine months ended September 30, 2018, Checkpoint sold a total of 1,841,774 shares of its common stock under the Checkpoint ATM for aggregate total gross proceeds of approximately $8.0 million at an average selling price of $4.33 per share, resulting in net proceeds of approximately $7.7 million after deducting commissions and other transactions costs.

 

Checkpoint Public Offering of Common Stock

 

On March 12, 2018, Checkpoint closed an underwritten public offering in which it sold 5,290,000 shares of its common stock at a price of $4.35 per share for gross proceeds of approximately $23.0 million. Total net proceeds from this offering were approximately $20.8 million, net of underwriting discounts and estimated offering expenses of approximately $2.2 million. The shares were sold under the Checkpoint S-3.

 

Approximately $69.0 million of the shelf remains available for sale under the Checkpoint S-3, following the offerings noted above. Checkpoint may offer the securities under the Checkpoint S-3 from time to time in response to market conditions or other circumstances if it believes such a plan of financing is in the best interests of its stockholders.

 

16. Commitments and Contingencies

 

Indemnification

 

In accordance with its certificate of incorporation, bylaws and indemnification agreements, the Company has indemnification obligations to its officers and directors for certain events or occurrences, subject to certain limits, while they are serving at the Company’s request in such capacity. There have been no claims to date, and the Company has director and officer insurance to address such claims. Pursuant to agreements with clinical trial sites, the Company provides indemnification to such sites in certain conditions.

 

Legal Proceedings - Fortress

 

In the ordinary course of business, the Company and its subsidiaries may be subject to both insured and uninsured litigation. Suits and claims may be brought against the Company by customers, suppliers, partners and/or third parties (including tort claims for personal injury arising from clinical trials of the Company’s product candidates and property damage) alleging deficiencies in performance, breach of contract, etc., and seeking resulting alleged damages.

 

Dr. Falk Pharma, GmbH v. Fortress Biotech, Inc. (Frankfurt am Main Regional Court, Ref. No. 3-06 0 28/16). Dr. Falk Pharma, GmbH (“Dr. Falk Pharma”) and Fortress were 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 arose between Dr. Falk Pharma and Fortress with respect to their relative rights and obligations under the Collaboration Agreement; specifically, Dr. Falk Pharma contended that it had fulfilled its contractual obligations to Fortress and is entitled to the final milestone payment due under the Collaboration Agreement - EUR 2.5 million. Fortress contended 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 contended that Dr. Falk Pharma failed to deliver such a Clinical Study Report. Dr. Falk Pharma filed a lawsuit against Fortress in the above-referenced Court in Frankfurt, Germany to recover the EUR 2.5 million plus interest and attorneys’ fees, and Fortress filed an answer to the complaint, denying that it had any liability to Dr. Falk Pharma. On July 27, 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 the initial response of Dr. Falk Pharma to the appeal was filed on February 16, 2018. At an appellate hearing in the Higher Regional Court on June 12, 2018, the court issued an oral ruling upholding the lower court’s judgment and indicating that an impending written, enforceable judgment would do the same. On July 12, 2018, the Higher Regional Court approved and recorded terms of settlement between Fortress and Dr. Falk Pharma pursuant to which Fortress will pay $3.3 million to Dr. Falk Pharma over the course of a year, and approximately $37,000 to the court in mandated administrative fees. In accordance with the settlement, the Company paid Dr. Falk Pharma $2.0 million and the court mandated administrative fees of $39,500 during the three months ended September 30, 2018.

 

27

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Litigation and Regulatory Matters - National

 

National is a defendant or respondent in various pending and threatened arbitrations, administrative proceedings and lawsuits seeking compensatory damages. Several cases have no stated alleged damages. Claim amounts are infrequently indicative of the actual amounts National will be liable for, if any. Further, National has a history of collecting amounts awarded in these types of matters from its brokers that are still affiliated, as well as from those that are no longer affiliated. Many of these claimants also seek, in addition to compensatory damages, punitive or treble damages, and all seek interest, costs and fees. These matters arise in the normal course of business. National intends to vigorously defend itself in these actions, and the ultimate outcome of these matters cannot be determined at this time.

 

Liabilities for potential losses from complaints, legal actions, government investigations and proceedings are established where National believes that it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. In making these decisions, management bases its judgments on its knowledge of the situations, consultations with legal counsel and its historical experience in resolving similar matters. In many lawsuits, arbitrations and regulatory proceedings, it is not possible to determine whether a liability has been incurred or to estimate the amount of that liability until the matter is close to resolution. However, accruals are reviewed regularly and are adjusted to reflect National’s estimates of the impact of developments, rulings, advice of counsel and any other information pertinent to a particular matter. Because of the inherent difficulty in predicting the ultimate outcome of legal and regulatory actions, management cannot predict with certainty the eventual loss or range of loss related to such matters. At June 30, 2018 and September 30, 2017, National accrued approximately $0.5 million and $2.4 million, respectively. These amounts are included in accounts payable and accrued expenses in the condensed consolidated statements of financial condition. Amounts charged to operations for settlements and potential losses during the three months ended June 30, 2018 and 2017 were $(0.1) million and $2.3 million, respectively, and during the nine months ended June 30, 2018 and 2017, National charged $0.6 million and $3.3 million, respectively, to operations, which is included in other administrative expenses. National has included in "Professional fees" litigation and FINRA related expenses of $0.4 million and $0.4 million for the three months ended June 30, 2018 and 2017, respectively, and $0.7 million and $1.2 million for the nine months ended June 30, 2018 and 2017, respectively.

 

17. Related Party Transactions

 

Other Related Parties

 

The Company’s Chairman, President and Chief Executive Officer, individually and through certain trusts over which he has voting and dispositive control, beneficially owned approximately 13.2% of the Company’s issued and outstanding Common Stock as of September 30, 2018. The Company’s Executive Vice Chairman, Strategic Development owns approximately 15.3% of the Company’s issued and outstanding Common Stock at September 30, 2018.

 

For their service in 2017, the Company’s CEO and Executive Vice Chairman received bonuses of $500,000 each, paid in cash during the quarter ended June 30, 2018. The bonus recipients waived their right to a cash bonus from the Company. The Company treated this transaction as a capital contribution, which is reflected on the Condensed Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2018.

 

National Holdings Corporation

 

The Company maintains a controlling interest in National Holdings Corporation, a diversified independent brokerage company.  One of National’s subsidiaries, National Securities Corporation, is an independent broker-dealer offering retail and institutional advisory, investment, insurance and tax planning services. From time to time, NSC provides services to the Company and its affiliates.

 

Shared Services Agreement with TGTX

 

TGTX and the Company entered into an arrangement to share the cost of certain research and development employees. The Company’s Executive Vice Chairman, Strategic Development, is Executive Chairman and Interim Chief Executive Officer of TGTX. Under the terms of the Agreement, TGTX will reimburse the Company for the salary and benefit costs associated with these employees based upon actual hours worked on TGTX related projects. For the three months ended September 30, 2018 and 2017, the Company invoiced TGTX $0.2 million and $0.2 million, respectively. For the nine months ended September 30, 2018 and 2017, the Company invoiced TGTX $1.2 million and $0.8 million, respectively. At September 30, 2018, the amount receivable from TGTX related to this arrangement approximated $0.1 million.

 

28

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Desk Space Agreements with TGTX and OPPM

 

In connection with the Company’s Desk Space Agreements with TGTX and Opus Point Partners Management, LLC (“OPPM”), as of September 30, 2018, the Company had paid $1.8 million in rent under the Desk Space Agreements, and invoiced OPPM and TGTX approximately $162,000 and $0.7 million, respectively, for their prorated share of the rent base. In addition, for the nine months ended September 30, 2018, the Company had incurred approximately $96,000 in connection with the build out of the space and recorded a receivable of $43,000 due from TGTX and $10,000 due from OPPM. At September 30, 2018, the amount due from TGTX approximated a credit of $48,000 and the amount due from OPPM approximated $162,000.

 

Opus Credit Facility

 

On March 12, 2018, the Company and OPHIF amended and restated the Opus Credit Facility (the “A&R Opus Credit Facility”). The A&R Opus Credit Facility extends the maturity date of the notes issued under the Opus Credit Facility from September 14, 2018 by one year to September 14, 2019. The A&R Opus Credit Facility also permits the Company to make portions of interest and principal repayments in the form of shares of the Company’s common stock and/or in common stock of the Company’s publicly-traded subsidiaries, subject to certain conditions. Fortress retains the ability to prepay the Notes at any time without penalty. The notes payable under the A&R Opus Credit Facility continue to bear interest at 12% per annum (see Note 11). For the nine months ended September 30, 2018 and 2017, the Company paid $0.3 million and $0.8 million, respectively. The Q2 interest payment due May 31, 2018 was paid in 86,289 shares of Company stock. The Q3 interest payment due August 31, 2018 was paid in 147,741 shares of Company stock.

 

Checkpoint Public Offering of Common Stock

 

NSC, a subsidiary of National (of which the Company owns 56.3%), served as the sole book running manager in connection with Checkpoint’s 2018 equity offering, which closed on March 12, 2018. As the Sole Book Running Manager, NSC received a fee of approximately $1.8 million, or 8% on the gross proceeds raised of $23.0 million. The fees were eliminated in consolidation.

 

Mustang Option on Collaboration Agreement with TGTX

 

On February 2, 2018, Mustang entered into an Option Agreement the (“TGTX Mustang Option”) with TG Therapeutics, Inc. (“TGTX”), a related party, whereby TGTX was granted the option to enter into a global collaboration on the joint development and commercialization of product candidates pertaining to Mustang’s CD20 license agreement with the Fred Hutchinson Cancer Research Center. In consideration of the TGTX Mustang Option, TGTX is required to pay an option fee of $50,000, which was recorded by Mustang as Collaboration Revenue Related Party in the Condensed Consolidated Statement of Operations. The TGTX Option expired on August 1, 2018 without action. Mr. Weiss, the Company’s Executive Vice Chairman, Strategic Development, serves as the Chief Executive Officer of TGTX.

 

2018 Venture Notes

 

For the nine-month period ended September 30, 2018, the Company raised approximately $21.7 million in promissory notes. National Securities Corporation (“NSC”), a wholly-owned subsidiary of National, and a related party as a result of the Company’s ownership of National, acted as the sole placement agent for the 2018 Venture Notes. The Company paid NSC a fee of $1.7 million during the nine months ended September 30, 2018, in connection with the 2018 Venture Notes. At September 30, 2018, the fee, which was recorded as debt discount on the Company’s Condensed Consolidated Balance Sheet and will be amortized over the life of the 2018 Venture Notes, was eliminated in consolidation.

 

Founders Agreement

 

The Company has entered into Founders Agreements and, in some cases, Exchange Agreements, with certain of its subsidiaries as described in the Company’s Form 10-K for the year ended December 31, 2017, filed with the SEC on March 16, 2018. The following table summarizes, by subsidiary, the effective date of the Founders Agreements and PIK dividend or equity fee payable to the Company in accordance with the terms of the Founders Agreements, Exchange Agreements and the subsidiaries’ certificates of incorporation.

 

29

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Fortress Company  Effective Date (1) 

PIK Dividend as a % of

fully diluted outstanding

capitalization

   Class of Stock Issued
Helocyte  March 20, 2015   2.5%  Common Stock
Avenue  February 17, 2015   2.5%  Common Stock
Mustang  March 13, 2015   2.5%  Common Stock
Checkpoint  March 17, 2015   0.0%(2)  Common Stock
Cellvation  October 31, 2016   2.5%  Common Stock
Caelum  January 1, 2017   2.5%  Common Stock
Cyprium  March 13, 2017   2.5%  Common Stock
Aevitas  July 28, 2017   2.5%  Common Stock
Tamid  November 30, 2017 (3)   2.5%  Common Stock

 

(1) Represents the effective date of each subsidiary’s Founders Agreement. Each PIK dividend and equity fee is payable on the annual anniversary of the effective date of the original Founders Agreement.

 

(2) Instead of a PIK dividend, Checkpoint pays the Company an annual equity fee in shares of Checkpoint’s common stock equal to 2.5% of Checkpoint’s fully diluted outstanding capitalization.

 

(3) Represents the Trigger Date.

 

Management Services Agreements

 

The Company has entered in Management Services Agreements (the “MSAs”) with certain of its subsidiaries as described in the Company’s Form 10-K for the year ended December 31, 2017, filed with the SEC on March 16, 2018. The following table summarizes, by subsidiary, the effective date of the MSA and the annual consulting fee payable by the subsidiary to the Company in quarterly installments:

  

Fortress Company  Effective Date  Annual MSA Fee (Income)/Expense 
Helocyte  March 20, 2015  $500 
Avenue  February 17, 2015   500 
Mustang  March 13, 2015   500 
Checkpoint  March 17, 2015   500 
Cellvation  October 31, 2016   500 
Caelum  January 1, 2017   500 
Cyprium  March 13, 2017   500 
Aevitas  July 28, 2017   500 
Tamid  November 30, 2017   500 
Fortress      (4,500)
Consolidated (Income)/Expense     $- 

 

National

 

On June 12, 2018, Michael S. Weiss, the Company’s Executive Vice Chairman, Strategic Development, resigned from his position on the National board of directors. As of September 30, 2018, the Company owns approximately 56.3% of National.

 

Additionally, the Company’s Chairman, President and Chief Executive Officer and the Company’s Executive Vice Chairman, Strategic Development are both Co-Portfolio Managers and Partners of OPPM, which owns approximately 4.2% of National. In the normal course, National has occasionally provided the Company and the Company’s subsidiaries with placement agent services in connection with third party raises. These fees are eliminated in consolidation.

 

18. Net Capital Requirements of Broker-Dealer Subsidiaries

 

NSC is subject to the SEC’s Uniform Net Capital Rule (Rule 15c3-1) (the “Rule”), which, among other things, requires the maintenance of minimum net capital. At June 30, 2018, National Securities had net capital of $11.3 million which was $10.3 million in excess of its required net capital of $1.0 million. 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.

 

Advances, dividend payments and other equity withdrawals from the Company’s broker-dealer subsidiaries are restricted by the regulations of the SEC, and other regulatory agencies. These regulatory restrictions may limit the amounts that a subsidiary may dividend or advance to the Company.

 

30

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

19. Off Balance Sheet Risk and Concentrations of Credit Risk

 

National is engaged in trading and providing a broad range of securities brokerage and investment services to a diverse group of retail and institutional clientele, as well as corporate finance and investment banking services to corporations and businesses. Counterparties to National’s business activities include broker-dealers and clearing organizations, banks and other financial institutions. National uses clearing brokers to process transactions and maintain customer accounts for National on a fee basis. National permits the clearing firms to extend credit to its clientele secured by cash and securities in the client’s account. National’s exposure to credit risk associated with the non-performance by its customers and counterparties in fulfilling their contractual obligations can be directly impacted by volatile or illiquid trading markets, which may impair the ability of customers and counterparties to satisfy their obligations to National. National has agreed to indemnify the clearing brokers for losses they incur while extending credit to National’s clients. It is National’s policy to review, as necessary, the credit standing of its customers and counterparties. Amounts due from customers that are considered uncollectible by the clearing broker are charged back to National by the clearing broker when such amounts become determinable. Upon notification of a charge back, such amounts, in total or in part, are then either (i) collected from the customers, (ii) charged to the broker initiating the transaction and/or (iii) charged to operations, based on the particular facts and circumstances.

 

National maintains cash in bank deposits, which, at times, may exceed federally insured limits. National has not experienced and does not expect to experience losses on such accounts.

 

A short sale involves the sale of a security that is not owned in the expectation of purchasing the same security (or a security exchangeable) at a later date at a lower price. A short sale involves the risk of a theoretically unlimited increase in the market price of the security that would result in a theoretically unlimited loss.

 

20. Segment Information

 

The Company operates in three operating and reportable segments, Dermatology Product Sales, Pharmaceutical and Biotechnology Product Development and National. The accounting policies of the Company’s segments are the same as those described in Note 2. The following tables summarize, for the periods indicated, operating results by reportable segment:

 

Cost of goods sold is directly related to product sales only. Revenues derived from co-promote revenue had no cost of goods sold.

 

($ in thousands)

Three Months Ended September 30, 2018

 

Dermatology

Products

Sales

  

Pharmaceutical

and

Biotechnology

Product

Development

   National   Consolidated 
Net Revenue  $5,168   $5   $58,520   $63,693 
Direct cost of goods   (1,406)       -    (1,406)
Sales and marketing costs   (2,754)           (2,754)
Research and development       (19,788)       (19,788)
General and administrative   (505)   (8,925)       (9,430)
National expenses           (55,204)   (55,204)
Segment income (loss) from operations  $503   $(28,708)  $3,316   $(24,889)
Segment assets  $10,765   $157,781   $56,373   $224,919 

 

   Dermatology  

Pharmaceutical

and

Biotechnology

         
($ in thousands)  Products   Product         
Three Months Ended September 30, 2017  Sales   Development   National   Consolidated 
Net Revenue  $2,170   $350   $44,366   $46,886 
Direct cost of goods   (505)           (505)
Sales and marketing costs   (2,786)           (2,786)
Research and development       (16,190)       (16,190)
General and administrative   (349)   (11,969)       (12,318)
National Expenses           (47,690)   (47,690)
Segment loss from operations  $(1,470)  $(27,809)  $(3,324)  $(32,603)
Segment assets  $7,362   $160,038   $77,691   $245,091 

 

31

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

($ in thousands)

Nine Months Ended September 30, 2018

 

Dermatology

Products

Sales

  

Pharmaceutical

and

Biotechnology

Product

Development

   National   Consolidated 
Net Revenue  $17,366    525   $165,061   $182,952 
Direct cost of goods   (4,546)           (4,546)
Sales and marketing costs   (8,443)           (8,443)
Research and development       (62,332)       (62,332)
General and administrative   (1,270)   (29,075)       (30,345)
National expenses           (162,258)   (162,258)
Segment income (loss) from operations  $3,107   $(90,882)  $2,803   $(84,972)
Segment assets  $10,765   $157,781   $56,373   $224,919 

 

   Dermatology  

Pharmaceutical

and

Biotechnology

         
($ in thousands)  Products   Product         
Nine Months Ended September 30, 2017  Sales   Development   National   Consolidated 
Net Revenue  $8,309   $1,393   $132,563   $142,265 
Direct cost of goods   (1,852)           (1,852)
Sales and marketing costs   (7,663)           (7,663)
Research and development       (38,077)       (38,077)
General and administrative   (961)   (27,866)       (28,827)
National Expenses           (139,219)   (139,219)
Segment loss from operations  $(2,167)  $(64,550)  $(6,656)  $(73,373)
Segment assets  $7,362   $160,038   $77,691   $245,091 

 

21. Revenues from Contracts and Significant Customers

 

Fortress

 

On January 1, 2018, the Company adopted Topic 606 applying the modified retrospective method to all contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 were presented under Topic 606, while prior period amounts were not adjusted and reported under the accounting standards in effect for the prior periods.

 

Impact to Journey Medical Product Sales

 

Topic 606 does not generally change the practice under which the Company recognizes product revenue from sales of Targadox®, Luxamend® and Ceracade®. The Company’s performance obligation to deliver products is satisfied at the point in time that the goods are delivered to the customer, which is when the customer obtains title to and has the risks and rewards of ownership of the products.

 

The Company’s contracts include variable consideration in the form of refunds for rights of return, price protection, and consideration payable to the customer. As such, for the three months ended September 30, 2018 and 2017, the Company recorded a return reserve of $0.5 million and $0.3 million, respectively. The Company estimates variable consideration using a percentage of sales approach. Under this method, the transaction price is constrained for the potential future returns and consideration payable to the customer because it is not probable that a significant reversal in the amount of cumulative revenue recognized will not occur.

 

Because the Company’s agreements for sales of product to its distributors can be cancelled early, prior to the termination date, they are deemed to have an expected duration of one year or less, and as such, the Company has elected the practical expedient in ASC 606-10-50-14(a) to not disclose information about its remaining performance obligations.

 

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FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Checkpoint

 

Impact to Checkpoint’s Collaboration and License Agreement Revenues

 

Collaboration Agreement with TGTX related to Dana-Farber License

 

In connection with Checkpoint’s license agreement with Dana-Farber, Checkpoint entered into a collaboration agreement with TGTX, a related party, to develop and commercialize the anti-PD-Ll and anti-GITR antibody research programs in the field of hematological malignancies, while the Company retains the right to develop and commercialize these antibodies in the field of solid tumors. Michael Weiss, Chairman of the Board of Directors of Checkpoint and Fortress’ Executive Vice Chairman, Strategic Development, is also the Executive Chairman, President and Chief Executive Officer and a stockholder of TGTX. Under the terms of the collaboration agreement, TGTX paid Checkpoint $0.5 million, representing an upfront licensing fee, and the Checkpoint is eligible to receive substantive potential milestone payments up to an aggregate of approximately $21.5 million for each product upon TGTX’s successful achievement of certain clinical development, regulatory and first commercial sale milestones. This is comprised of up to approximately $7.0 million upon TGTX’s successful completion of clinical development milestones, and up to approximately $14.5 million upon first commercial sales in specified territories. In addition, Checkpoint is eligible to receive up to an aggregate of $60.0 million upon TGTX’s successful achievement of certain sales milestones based on aggregate net sales, in addition to royalty payments based on a tiered high single digit percentage of net sales. Following the second anniversary of the effective date of the agreement, Checkpoint receives an annual license maintenance fee, which is creditable against milestone payments or royalties due to Checkpoint. For the three months ended September 30, 2018 and 2017, the Company recognized approximately nil and $46,000, respectively, in revenue from Checkpoint’s collaboration agreement with TGTX in the Condensed Consolidated Statements of Operations. For the nine months ended September 30, 2018 and 2017, the Company recognized approximately $44,000 and $84,000, respectively, in revenue from Checkpoint’s collaboration agreement with TGTX in the Condensed Consolidated Statements of Operations.

 

Sublicense Agreement with TGTX related to Jubilant License

 

In connection with Checkpoint’s license agreement with Jubilant, Checkpoint entered into a sublicense agreement with TGTX, a related party, to develop and commercialize the compounds licensed in the field of hematological malignancies, while the Company retains the right to develop and commercialize these compounds in the field of solid tumors. Michael Weiss, Chairman of the Board of Directors of Checkpoint and Fortress’ Executive Vice Chairman, Strategic Development, is also the Executive Chairman, President and Chief Executive Officer and a stockholder of TGTX. Under the terms of the Sublicense Agreement, TGTX paid Checkpoint $1.0 million, representing an upfront licensing fee, and Checkpoint is eligible to receive substantive potential milestone payments up to an aggregate of approximately $87.2 million upon TGTX’s successful achievement of clinical development and regulatory milestones. This is comprised of up to approximately $25.5 million upon TGTX’s successful completion of three clinical development milestones for two licensed products, and up to approximately $61.7 million upon the achievement of five regulatory approvals and first commercial sales in specified territories for two licensed products. In addition, Checkpoint is eligible to receive potential milestone payments up to an aggregate of $89.0 million upon TGTX’s successful achievement of certain sales milestones based on aggregate net sales by TGTX, for two licensed products, in addition to royalty payments based on a mid-single digit percentage of net sales by TGTX. TGTX also pays Checkpoint 50% of IND enabling costs and patent expenses. For the three months ended September 30, 2018 and 2017, Checkpoint recognized approximately $5,000 and $0.2 million, respectively, in revenue related to the sublicense agreement in the condensed consolidated statements of operations. For the nine months ended September 30, 2018 and 2017, Checkpoint recognized approximately $0.4 million and $0.8 million, respectively, in revenue related to the sublicense agreement in the condensed consolidated statements of operations.

 

Sponsored Research Collaboration with NeuPharma, Inc. and TGTX

 

In connection with Checkpoint’s license agreement with NeuPharma, Inc. (“NeuPharma”) Checkpoint entered into a Sponsored Research Agreement with NeuPharma for certain research and development activities. Effective January 11, 2016, TGTX agreed to assume all costs associated with this Sponsored Research Agreement and paid Checkpoint for all amounts previously paid. This assumption of costs by TGTX survives any termination or expiration of the option agreement. For the three months ended September 30, 2018 and 2017, Checkpoint recognized approximately nil and $0.1 million, respectively, in revenue in connection with the Sponsored Research Agreement in the Condensed Statements of Operations. For the nine months ended September 30, 2018 and 2017, the Company recognized approximately $31,000 and $0.5 million, respectively, in revenue in connection with the Sponsored Research Agreement in the condensed consolidated statements of operations.

 

The collaborations described above with TGTX each contain a single material performance obligation under Topic 606, which is the granting of a license that is functional intellectual property. Checkpoint’s performance obligation is satisfied at the point in time when the customer has the ability to use and benefit from the right to use the intellectual property.

 

The milestone payments are based on successful achievement of clinical development, regulatory, and sales milestones. Because these payments are contingent on the occurrence of a future event, they represent variable consideration and are constrained and included in the transaction price only when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. The sales based royalty payments are recognized as revenue when the subsequent sales occur. Checkpoint also receives variable consideration for certain research and development and patent maintenance related activities that are dependent upon Checkpoint’s actual expenditures under the collaborations and are constrained and included in the transaction price only when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Revenue is recognized approximately when the amounts become due because it relates to an already satisfied performance obligation. For the nine months ended September 30, 2018, Checkpoint did not receive any milestone or royalty payments.

 

33

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Disaggregation of Total Revenues

 

The Company has four marketed products, Targadox®, Exelderm®, Luxamend® and Ceracade®. Substantially all of the Company’s product revenues are recorded in the U.S. Substantially all of the Company’s collaboration revenues are from its collaboration with TGTX. Revenues by product and collaborator are summarized as follows (in thousands):

 

  

Three months ended

September 30, 2018

  

Nine months ended

September 30, 2018

 
Targadox®  $4,322   $16,183 
Other branded revenue   846    1,183 
Total product revenues   5,168    17,366 
TGTX   5    525 
Total Revenue  $5,173   $17,891 

  

Contract Balances and Performance Obligations

 

The Company recognized collaboration and license agreement revenues of $5,000 and $0.5 million during the three and nine months ended September 30, 2018, respectively, that were included in the deferred revenue balance as of January 1, 2018.

 

Significant Customers

 

For the three months ended September 30, 2018, one of the Company’s Dermatology Products customers accounted for more than 10.0% of its total gross product revenue in the amount of $10.9 million. For the three months ended September 30, 2017, two of the Company’s Dermatology Products customers each accounted for more than 10.0% of its total gross revenue in the amount of $3.0 million and $1.7 million. The revenue from these customers is captured in the product revenue, net line item within the Condensed Consolidated Statement of Operations.

 

For the nine months ended September 30, 2018, two of the Company’s Dermatology Products customers each accounted for more than 10.0% of its total gross product revenue in the amount of $22.5 million and $7.3 million. For the nine months ended September 30, 2017, two of the Company’s Dermatology Products customers each accounted for more than 10.0% of its total gross revenue in the amount of $6.7 million and $6.0 million. The revenue from these customers is captured in the product revenue, net line item within the Condensed Consolidated Statement of Operations.

 

At September 30, 2018, two of the Company’s Dermatology Products customers each accounted for more than 10.0% of its total accounts receivable balance in the amount of $9.0 million and $1.4 million, respectively.

 

At September 30, 2017, two of the Company’s Dermatology Products customers each accounted for more than 10.0% of its total accounts receivable balance in the amount of $1.7 million and $1.5 million, respectively.

 

Net Revenue from Pharmaceutical and Biotechnology Product Development represents collaboration revenue from TGTX in connection with Checkpoint and Mustang, which is classified as related party revenue.

 

National Revenue Recognition with Customers

 

National recognizes revenue from contracts with customers when, or as, National satisfies its performance obligations by transferring the promised goods or services to the customers. A good or service is transferred to a customer when, or as, the customer obtains control of that good or service. A performance obligation may be satisfied over time or at a point in time. Revenue from a performance obligation satisfied over time is recognized by measuring progress in satisfying the performance obligation in a manner that depicts the transfer of the goods or services to the customer. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time that National determines the customer obtains control over the promised good or service. The amount of revenue recognized reflects the consideration National expects to be entitled to in exchange for those promised goods or services (i.e., the “transaction price”). In determining the transaction price, National considers multiple factors, including the effects of variable consideration. Variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are resolved. In determining when to include variable consideration in the transaction price, the Company considers the range of possible outcomes, the predictive value of past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of influence, such as market volatility or the judgment and actions of third parties.

 

34

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following provides detailed information on the recognition of National’s revenues from contracts with customers:

 

Commissions and Other Fees. National earns commission revenue based on the execution of transactions for clients primarily in equity and equity-related products. Trade execution, when provided together, represent a single performance obligation as the services are not separately identifiable in the context of the contract. Commission revenues are recognized at a point in time on trade-date. Commission revenues are generally paid on settlement date and National records a receivable between trade-date and payment on settlement date.

 

Investment Banking. National provides clients with a full range of investment banking services. Investment banking services include underwriting and placement agent services in both the equity and debt, including private equity placements, initial public offerings, follow-on offerings and equity-linked convertible securities transactions and private debt. Underwriting and placement agent revenues are recognized at a point in time on trade-date, as the client obtains the control and benefit of the investment banking offering at that point. Costs associated with investment banking transactions are deferred until the related revenue is recognized or the engagement is otherwise concluded and are recorded on a gross basis within Underwriting costs in the Condensed Consolidated Statements of Operations as National is acting as a principal in the arrangement. Any expenses reimbursed by National’s clients are recognized as investment banking revenues.

 

National’s revenues from advisory services primarily consist of fees generated in connection with mergers and acquisition and advisory transactions. Advisory fees from mergers and acquisitions engagements are recognized at a point in time when the related transaction is completed, as the performance obligation is to successfully execute a specific transaction. Fees received prior to the completion of the transaction are deferred within other liabilities on the Condensed Consolidated Balance Sheets. A significant portion of the fees National receives for advisory services are considered variable as they are contingent upon a future event and are excluded from the transaction price until the uncertainty associated with the variable consideration is subsequently resolved, which is expected to occur upon achievement of the specified milestone. Payment for advisory services is generally due promptly upon completion of a specified milestone or, for retainer fees, periodically over the course of the engagement. National recognizes a receivable between the date of completion of the milestone and payment by the customer. Expenses associated with investment banking advisory engagements are deferred only to the extent they are explicitly reimbursable by the client and the related revenue is recognized at a point in time. All other investment banking advisory related costs are expensed as incurred. All investment banking advisory expenses are recognized within their respective expense category on the Condensed Consolidated Statements of Operations and any expenses reimbursed by the clients are recognized as Investment banking revenues.

 

Asset Management Fees. National receives management and performance fees in connection with investment advisory services provided to various funds and accounts, which are satisfied over time and measured using a time elapsed measure of progress as the customer receives the benefits of the services evenly throughout the term of the contract. Management and performance fees are considered variable as they are subject to fluctuation (e.g., changes in assets under management, market performance) and/ or are contingent on a future event during the measurement period (e.g., meeting a specified benchmark) and are recognized only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is resolved. Management fees are generally based on month-end assets under management or an agreed upon notional amount and are included in the transaction price at the end of each month when the assets under management or notional amount is known. Performance fees are received when the return on assets under management for a specified performance period exceed certain benchmark returns, “high-water marks” or other performance targets. The performance period related to performance fees is annual, semiannual or at the recognition of a liquidation event. Accordingly, performance fee revenue will generally be recognized only at the end of the performance period to the extent that the benchmark return has been met.

 

Disaggregation of Revenue

 

The following presents National’s revenues from contracts with customers disaggregated by major business activity for the three months ended September 30, 2018:

 

($ in thousands) 

For the Three

Months Ended

September 30, 2018

  

For the Nine

Months Ended

September 30, 2018

 
Revenues from customer contracts:          
Commissions  $28,397   $85,422 
Investment banking:          
Underwriting   2,534   12,127 
Private placement   13,567    26,866 
Advisory   4,915    7,062 
Other       156 
Sub-total National revenue from contracts with customers   49,413    131,633 
Other National revenue   9,107    33,428 
Total National revenue  $58,520   $165,061 

 

35

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Information on Remaining Performance Obligations and Revenue Recognized from Past Performance

 

National does not disclose information about remaining performance obligations pertaining to contracts that have an original expected duration of one year or less. The transaction price allocated to remaining unsatisfied or partially unsatisfied performance obligations with an original expected duration exceeding one year was not material at June 30, 2018. Investment banking advisory fees that are contingent upon completion of a specific milestone are also excluded as the fees are considered variable and not included in the transaction price at June 30, 2018.

 

Contract Balances

 

The timing of National’s revenue recognition may differ from the timing of payment by customers. National records a receivable when revenue is recognized prior to payment and the Company has an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, National records deferred revenue until the performance obligations are satisfied.

 

Contract Costs

 

Incremental contract costs are expensed when incurred when the amortization period of the asset that would have been recognized is one year or less; otherwise, incremental contract costs are recognized as an asset and amortized over time as services are provided to a customer.

 

22. Income taxes

 

The Company and its subsidiaries are subject to US federal and state income taxes. Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of Management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized.

 

The Company files a consolidated income tax return with subsidiaries for which the Company has an 80% or greater ownership interest. Subsidiaries for which the Company does not have an 80% or more ownership are not included in the Company’s consolidated income tax group and file their own separate income tax return. As a result, certain corporate entities included in these financial statements are not able to combine or offset their taxable income or losses with other entities’ tax attributes.

 

Income tax expense for the nine months ended September 30, 2018 and 2017 is based on the estimated annual effective tax rate. The Company has recorded $0.9 million and $2.4 million income tax expense to reflect National’s estimated current income tax expense for the three and nine months ended September 30, 2018. No income tax expense was recorded in 2017.

 

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

 

Forward-Looking Statements

 

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this Form 10-Q. Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expect,” “anticipate,” “intend,” “believe,” “may,” “plan”, “seek” or similar language. All forward-looking statements included in this document are based on information available to us on the date hereof and we assume no obligation to update any such forward-looking statements. Our business and financial performance are subject to substantial risks and uncertainties. Actual results could differ materially, from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the information set forth under the heading “Risk Factors” herein and in our Annual Report on Form 10-K for the year ended December 31, 2017.

 

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 September 30, 2018, 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 have operational subsidiaries CB Securities Corporation, Immune Limited and FBIO Acquisition, Inc. (the acquisition vehicle we used to obtain National) and acquisition companies for which we are actively seeking product candidate licenses, including Coronado SO Co., Escala Therapeutics, Inc., GeneXion Oncology, Inc., Fortress Biotech China, Inc., FBIO Acquisition Corp. IV and FBIO Acquisition Corps. VI - XIV.

 

Checkpoint

 

In September 2018, Checkpoint announced preliminary interim safety and efficacy data from an ongoing Phase 1/2 clinical trial of CK-101. The data were presented in an oral presentation at the International Association for the Study of Lung Cancer (IASLC) 19th World Conference on Lung Cancer in Toronto. Enrollment in the trial is ongoing to identify the optimal dose to maximize therapeutic effect, following which a Phase 3 trial is planned to initiate in 2019 in treatment-naïve epidermal growth factor receptor (EGFR) mutation-positive non-small cell lung cancer (NSCLC) patients.

 

37

 

 

Cyprium

 

On July 2, 2018, Cyprium announced that it had been granted Fast Track Designation by the U.S. Food and Drug Administration (“FDA”) for its Copper Histidinate, also referred to as CUTX-101, for patients diagnosed with classic Menkes disease who have not demonstrated significant clinical progression. The FDA's Fast Track program facilitates the development of drugs intended to treat serious conditions and that have the potential to address unmet medical needs.

 

On September 12, 2018 Cyprium announced the publication of preclinical data for CUTX-101 (“Copper Histidinate”). The preclinical trial was conducted by the National Institute of Child Health and Human Development (“NICHD”) laboratory of Stephen G. Kaler, M.D., and evaluated low-, intermediate- and high-dose recombinant adeno-associated virus (“AAV”) serotype 9 (rAAV9)-ATP7A delivered to the cerebrospinal fluid (CSF) in combination with subcutaneous CUTX-101 in a mottled- brindled (mo-br) mouse model that closely mimics the biochemical and clinical phenotypes of Menkes disease. The rAAV9 construct carried the genetic instructions for a compact, reduced-size (rs) version of the Menkes copper transporter, ATP7A. Mutant mice that received high-dose CSF- directed rAAV9-rsATP7A in combination with CUTX-101 demonstrated improved long-term survival (53%) compared to mice that did not receive treatment (0%) or were administered either treatment by itself (0%, 0%). This synergistic treatment effect represents the most successful rescue to date of the mo-br mouse model. In addition, mutant mice treated with the high-dose CSF-directed rAAV9-rsATP7A in combination with CUTX-101 showed higher brain copper levels, normalized brain neurochemicals, improvement of brain mitochondrial abnormalities, and normal growth and neurobehavioral outcomes

 

Mustang

 

On October 15, 2018 Mustang appointed Martina A. Sersch, M.D., Ph.D., as Chief Medical Officer. Dr. Sersch will oversee the clinical development of Mustang’s pipeline in CAR T technologies and gene therapies. 

 

On August 12, 2018 Mustang entered into an exclusive license worldwide agreement with St. Jude Children’s Research Hospital (“St. Jude”) for a clinical-stage lentiviral gene therapy for the treatment of X-linked severe combined immunodeficiency (“X-SCID”), also known as bubble boy disease. X-SCID is the most common form of severe immune deficiency, affecting approximately one in 50,000 to 100,000 newborns worldwide. The acquisition of this license by Mustang expands their pipeline into gene-therapy, allowing them to utilize the leverage existing synergies for their Worcester Massachusetts cell-processing facility.

 

Reportable Business Segments

 

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

 

Results of Operations

 

General

 

For the nine months ended September 30, 2018, we generated $183.0 million of net revenue, of which $165.1 million of revenue relates to National, $0.5 million of revenue is in connection with Checkpoint and Mustang’s collaborative agreements with TG Therapeutics, Inc. (“TGTX”) and $17.4 million of revenue relates primarily to the sale of Journey branded and generic products compared to $142.3 million of net revenue, of which $132.6 million related to National, $1.4 million of revenue related to Checkpoint’s collaboration agreements with TGTX and $8.3 million related to the sale of Journey branded products for the nine months ended September 30, 2017. At September 30, 2018, we had an accumulated deficit of $371.4 million. While we may in the future generate revenue from a variety of sources, including license fees, milestone payments, research and development payments in connection with strategic partnerships and/or product sales, our and our subsidiaries’ current product candidates are at an early stage of development and may never be successfully developed or commercialized. Accordingly, we expect to continue to incur substantial losses from operations for the foreseeable future, and there can be no assurance that we will ever generate significant revenues.

 

For the nine months ended September 30, 2018, we had $4.5 million of costs of goods sold in connection with the sale of Journey branded and generic products, compared to $1.9 million for the nine months ended September 30, 2017.

 

Research and Development Expenses

 

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

 

38

 

 

For the three months ended September 30, 2018 and 2017, research and development expenses were approximately $16.1 million and $15.9 million, respectively. Additionally, during the three months ended September 30, 2018 and 2017, we expensed approximately $3.7 million and $0.3 million, respectively, in costs related to the acquisition of licenses. Noncash, stock-based compensation expense included in research and development for the three months ended September 30, 2018 and 2017, was $1.8 million and $1.6 million, respectively.

 

Research and development costs associated with the development of our licenses, net of noncash stock-based compensation expenses, for the three months ended September 30, 2018 and 2017, by entity, are as follows:

 

   Three Months Ended September 30,   % of total 
($ in thousands)  2018   2017   2018   2017 
Research & Development                    
  Fortress  $771   $1,418    5%   10%
Subsidiaries:                    
Avenue   1,547    1,860    11%   13%
Checkpoint   6,143    4,446    43%   31%
Mustang   4,532    1,785    32%   12%
Other1   1,267    4,781    9%   34%
Total R&D  $14,260   $14,290    100%   100%

 

Note 1- Includes the following subsidiaries: Aevitas, Caelum, Cellvation, Cyprium, Escala, Helocyte and Tamid

 

Noncash stock-based compensation expense for the three months ended September 30, 2018 and 2017, by entity is as follows:

 

   Three Months Ended September 30,   % of total 
($ in thousands)  2018   2017   2018   2017 
Research & Development                    
Noncash stock-based compensation                    
  Fortress  $235   $288    13%   18%
Subsidiaries:                    
Avenue   127    78    7%   5%
Checkpoint   642    446    35%   28%
Mustang   722    340    40%   21%
Other1   96    448    5%   28%
Total noncash stock-based comp. – R&D  $1,822   $1,600    100%   100%

 

Note 1- Includes the following subsidiaries: Aevitas, Caelum, Cellvation, Cyprium, Escala, Helocyte and Tamid

 

Research and development costs associated with the development of our licenses, net of noncash stock-based compensation expenses for the nine months ended September 30, 2018 and 2017, by entity are as follows:

 

   Nine Months Ended September 30,   % of total 
($ in thousands)  2018   2017   2018   2017 
Research & Development                    
  Fortress  $4,702   $4,579    9%   15%
Subsidiaries:                    
Avenue   14,280    2,303    27%   8%
Checkpoint   18,115    10,779    34%   36%
Mustang   10,226    4,796    19%   16%
Other1   6,265    7,398    11%   25%
Total R&D  $53,588   $29,855    100%   100%

 

Note 1- Includes the following subsidiaries: Aevitas, Caelum, Cellvation, Cyprium, Escala, Helocyte and Tamid

 

39

 

 

Noncash stock-based compensation expense for the nine months ended September 30, 2018 and 2017, by entity was as follows:

 

   Nine Months Ended September 30,   % of total 
($ in thousands)  2018   2017   2018   2017 
Research & Development                    
Noncash stock-based compensation                    
  Fortress  $878   $1,020    18%   21%
Subsidiaries:                    
Avenue   363    90    7%   2%
Checkpoint   930    2,799    19%   58%
Mustang   2,752    404    56%   8%
Other1   17    515    -%   11%
Total noncash stock-based comp – R&D  $4,940   $4,828    100%   100%

 

Note 1- Includes the following subsidiaries: Aevitas, Caelum, Cellvation, Cyprium, Escala, Helocyte and Tamid

 

Additionally, during the three and nine months ended September 30, 2018 and 2017, we expensed approximately $3.7 million and $3.8 million and $0.3 million and $3.4 million, respectively, in costs related to the acquisition of licenses.

 

We anticipate research and development expenses will increase in future periods, reflecting continued and increasing product development costs.

 

General and Administrative Expenses

 

General and administrative expenses consist principally of personnel-related costs, professional fees for legal, consulting, audit and tax services, rent and other general operating expenses not otherwise included in research and development expenses. For the three months ended September 30, 2018 and 2017, general and administrative expenses were approximately $12.2 million and $15.1 million, respectively. Noncash stock-based compensation expense included in general and administrative expenses for the three months ended September 30, 2018 and 2017, was $2.3 million and $2.6 million, respectively.

 

Included in the remaining $9.9 million and $12.5 million figures for the three months ended September 30, 2018 and 2017, respectively are the following subsidiary level expenses:

 

   Three Months Ended September 30,   % of total 
($ in thousands)  2018   2017   2018   2017 
General & Administrative                    
  Fortress  $3,530   $3,264    36%   26%
Subsidiaries:                    
Avenue   564    608    6%   5%
Checkpoint   823    819    8%   6%
Journey1   3,211    3,073    32%   25%
Mustang   1,078    4,039    11%   32%
Other2   694    718    7%   6%
Total G&A  $9,900   $12,521    100%   100%

 

Note 1- Includes cost of outsourced sales force

Note 2- Includes the following subsidiaries: Aevitas, Caelum, Cellvation, Cyprium, Escala, Helocyte and Tamid

 

Noncash stock-based compensation expense included in general and administrative expense for the three months ended September 30, 2018 and 2017, by entity is as follows:

 

   Three Months Ended September 30,   % of total 
($ in thousands)  2018   2017   2018   2017 
General & Administrative                    
Noncash stock-based compensation                    
  Fortress  $1,246   $1,385    55%   54%
Subsidiaries:                    
Avenue   244    167    11%   6%
Checkpoint   486    463    21%   18%
Mustang   200    493    9%   19%
Other1   108    75    4%   3%
Total noncash stock-based comp. – G&A  $2,284   $2,583    100%   100%

 

Note 1- Includes the following subsidiaries: Aevitas, Caelum, Cellvation, Cyprium, Helocyte, Journey and Tamid

 

40

 

 

For the nine months ended September 30, 2018 and 2017, general and administrative expenses were approximately $38.8 million and $36.5 million, respectively. Noncash stock-based compensation expense included in general and administrative expenses for the nine months ended September 30, 2018 and 2017, was $7.1 million and $6.9 million, respectively.

 

Included in the remaining $31.7 million and $29.6 million figures for the nine months ended September 30, 2018 and 2017, respectively are the following subsidiary level expenses:

 

   Nine Months Ended September 30,   % of total 
($ in thousands)  2018   2017   2018   2017 
General & Administrative                    
  Fortress  $11,599   $9,788    37%   33%
Subsidiaries:                    
Avenue   2,016    1,192    6%   4%
Checkpoint   2,682    2,404    8%   8%
Journey1   9,613    8,443    30%   29%
Mustang   3,809    6,046    12%   20%
Other2   1,955    1,709    7%   6%
Total G&A  $31,674   $29,582    100%   100%

 

Note 1- Includes cost of outsourced sales force
Note 2- Includes the following subsidiaries: Aevitas, Caelum, Cellvation, Cyprium, Escala, Helocyte and Tamid

 

Noncash stock-based compensation expense included in general and administrative expense for the nine months ended September 30, 2018 and 2017, by entity is as follows:

 

   Nine Months Ended September 30,   % of total 
($ in thousands)  2018   2017   2018   2017 
General & Administrative                    
Noncash stock-based compensation                    
  Fortress  $3,674   $4,209    52%   61%
Subsidiaries:                    
Avenue   679    179    10%   3%
Checkpoint   1,406    1,473    20%   21%
Mustang   1,137    826    16%   12%
Other1   218    221    2%   3%
Total noncash stock-based comp. – G&A  $7,114   $6,908    100%   100%

 

Note 1- Includes the following subsidiaries: Aevitas, Caelum, Cellvation, Cyprium, Helocyte, Journey and Tamid

 

Operating expenses related to National for the three months ended September 30, 2018 and 2017 were $55.2 million and $47.7 million, respectively, of which $48.6 million and $40.0 million, respectively, related to commissions, compensation and fees.

 

Operating expenses related to National for the nine months ended September 30, 2018 and 2017 were $162.3 million and $139.2 million, respectively, of which $141.5 million and $119.0 million, respectively, related to commissions, compensation and fees.

 

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.

 

41

 

 

Comparison of three months ended September 30, 2018 and 2017 

For the Three Months

Ended September 30,

   Change 
($ in thousands, except per share amounts)  2018   2017   $   % 
Revenue                    
Fortress                    
Product revenue, net  $5,168   $2,170   $2,998    138%
Revenue - from a related party   5    350    (345)   -99%
Net Fortress revenue   5,173    2,520    2,653    105%
                     
National                    
Commissions   28,397    24,881    3,516    14%
Net dealer inventory gains   482    1,789    (1,307)   -73%
Investment banking   19,271    8,942    10,329    116%
Investment advisory   5,281    3,605    1,676    46%
Interest and dividends   771    674    97    14%
Transfer fees and clearing services   1,606    1,649    (43)   -3%
Tax preparation and accounting   2,444    2,527    (83)   -3%
Other   268    299    (31)   -10%
Total National revenue   58,520    44,366    14,154    32%
Net revenue   63,693    46,886    16,807    36%
                     
Operating expenses                    
Fortress                    
Cost of goods sold - product revenue   1,406    505    901    178%
Research and development   16,082    15,890    192    1%
Research and development - licenses acquired   3,706    300    3,406    1135%
General and administrative   12,184    15,104    (2,920)   -19%
Total Fortress operating expenses   33,378    31,799    1,579    5%
                     
National                    
Commissions, compensation and fees   48,556    39,963    8,593    22%
Clearing fees   451    470    (19)   -4%
Communications   856    690    166    24%
Occupancy   738    972    (234)   -24%
Licenses and registration   861    391    470    120%
Professional fees   1,076    1,082    (6)   -1%
Interest   26    5    21    420%
Underwriting costs   43    -    43    100%
Depreciation and amortization   871    507    364    72%
Other administrative expenses   1,726    3,610    (1,884)   -52%
Total National operating expenses   55,204    47,690    7,514    16%
Total operating expenses   88,582    79,489    9,093    11%
Loss from operations   (24,889)   (32,603)   7,714    -24%
                     
Other income (expenses)                    
Interest income   269    204    65    32%
Interest expenses   (2,228)   (3,220)   992    -31%
Change in fair value of derivative liabilities   -    (639)   639    -100%
Change in fair value of subsidiary convertible note   (84)   (74)   (10)   14%
Change in fair value of investments   (565)   270    (835)   -309%
Other expenses   (146)   (245)   99    -40%
Total other expenses   (2,754)   (3,704)   950    -26%
Loss before income taxes   (27,643)   (36,307)   8,664    -24%
                     
Income tax expense   944    -    944    100%
Net loss   (28,587)   (36,307)   7,720    -21%
                     
Less: net loss attributable to non-controlling interest   (11,949)   9,191    (2,758)   30%
Net loss attributable to common stockholders  $(16,638)  $(27,116)  $10,478    -39%

 

Net revenues increased $16.8 million or 36% from the three months ended September 30, 2017 to the three months ended September 30, 2018. The increase in net revenue is related to an increase in product revenue of $3.0 million associated with Journey’s branded and generic products, offset by a decrease of $0.3 million in collaboration revenue between Checkpoint and TGTX, and Mustang and TGTX. National’s revenue increased by $14.2 million or 32%, of which $3.5 million is commissions, the increase is due to retail commissions increasing due to increased headcount and continuing strong equity markets. Investment banking revenue increased $10.3 million due to higher investor demand for and quality execution of product offerings from a diverse group of issuer clients.

 

Cost of goods sold increased by $0.9 million or 178% from the three months ended September 30, 2017 to the three months ended September 30, 2018 due to the increase in Journey branded and generic product revenue in the 2018 quarter as compared to the 2017 quarter.

 

42

 

 

Research and development expenses increased $0.2 million or 1% from the three months ended September 30, 2017 to the three months ended September 30, 2018. The following table shows the change in research and development spending for Fortress and by subsidiary:

 

   Three Months Ended September 30,   change 
($ in thousands)  2018   2017   $   % 
Research & Development                    
Noncash stock-based compensation                    
  Fortress  $235   $288    (53)   -18%
Subsidiaries:                    
Avenue   127    78    49    63%
Checkpoint   642    446    196    44%
Mustang   722    340    382    112%
Other1   96    448    (352)   -79%
Sub-total noncash stock-based comp.   1,822    1,600    222    14%
R&D Costs                    
  Fortress   771    1,418    (647)   -46%
Subsidiaries:                    
Avenue   1,547    1,860    (313)   -17%
Checkpoint   6,143    4,446    1,697    38%
Mustang   4,532    1,785    2,747    154%
Other1   1,267    4,781    (3,514)   -74%
Total R&D  $16,082   $15,890   $192    1%

 

Note 1- Includes the following subsidiaries: Aevitas, Caelum, Cellvation, Cyprium, Escala, Helocyte and Tamid

 

The increase in stock-based compensation across Avenue, Checkpoint and Mustang is attributable to new grants made to new hires, while the decrease in the “Other” category is due to the vesting of a grant made to a consultant at Caelum. The decrease in stock-based compensation for the three months ended September 30, 2018 for Fortress is due to the transfer of employees from Fortress to TGTX, a related-party, and the resulting forfeiture of equity grants held in Fortress by those employees.

 

The decrease in Fortress R&D spending is due to the lower R&D headcount subsequent to the transfer of Fortress R&D employees to TGTX, a related party, in the quarter ended September 30, 2018. Checkpoint’s increase in R&D spending is attributable to the commencement of clinical trials for CK-101 & CK-301, and increased manufacturing costs. Mustang’s increase in R&D spending is attributable to the fitting out of the cell processing facility, as well as increased headcount. The decrease in “Other” is attributable to costs incurred by Caelum for the start-up of CMC activities, and Helocyte for the start-up of sponsored research activities not replicated in 2018.

 

During the three months ended September 30, 2018, we made expenditures in connection with our research and development licenses of $3.7 million, compared with $0.3 million in expenditures related to licenses acquired during the three months ended September 30, 2017. The $3.4 million increase quarter over quarter is attributable to $1.0 million milestone payment recognized by Checkpoint for CK-301, $1.5 million milestone recognized by Helocyte for the Triplex license, $1.0 million recognized by Mustang for the X-SCID license, and $0.2 million recognized by Caelum for additional shares issued to Columbia under the terms of their license agreement, offset by expense of $0.3 million related to the Mustang license for CD20 recognized during the three months ended September 30, 2017.

 

General and administrative expenses decreased $2.9 million or 19% from the three months ended September 30, 2017 to the three months ended September 30, 2018 due to the settlement of a lawsuit by Mustang in the quarter ended September 30, 3017 for $2.2 million. The following table shows the change in general and administrative spending for Fortress and by subsidiary:

 

   Three Months Ended September 30,   Change 
($ in thousands)  2018   2017   $   % 
General & Administrative                    
Noncash stock-based compensation                    
Fortress  $1,246   $1,385   $(139)   -10%
Subsidiaries:                    
Avenue   244    167    77    46%
Checkpoint   486    463    23    5%
Mustang   200    493    (293)   -59%
Other2   108    75    33    100%
Sub-total noncash stock-based comp.   2,284    2,583    (299)   -12%
G&A Costs                    
Fortress   3,530    3,264    266    8%
Subsidiaries:                    
Avenue   564    608    (44)   -7%
Checkpoint   823    819    4    -%
JMC1   3,211    3,073    138    4%
Mustang   1,078    4,039    (2,961)   -73%
Other2   694    718    (24)   -3%
Total G&A  $12,184   $15,104   $(2,920)   -19%

 

Note 1- Includes costs of outsourced sales force

Note 2- Includes the following subsidiaries: Aevitas, Caelum, Cellvation, Cyprium, Escala, Helocyte and Tamid

 

For the three months ended September 30, 2018, the decrease in general and administrative expenses of $2.9 million or 19% is primarily attributable to the settlement of the Tang litigation in the quarter ended September 30, 2017 which resulted in expense recognition of $3.2 million, offset by an increase in expenses as a result of Mustang’s build-out of their general and administrative infrastructure, which includes headcount.

 

43

 

 

National’s operating expenses increased by $7.5 million or 16% for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017. Commissions, compensation, and fees increased $8.6 million or 22%; commissions, compensation, and fees include expenses based on commission revenue earned, net dealer inventory gains and investment banking revenues, as well as compensation to our non-broker employees. The increase in commissions revenue was primarily responsible for the increase in this expense category.

 

Total other expense decreased $1.0 million, or 26% from the three months ended September 30, 2017 to the three months ended September 30, 2018. The decrease is primarily related to the decrease in interest expense and financing fees of $1.0 million or 31%. The decrease is primarily related to $1.3 million of financing fees incurred by Caelum for the quarter ended September 30, 2017 related to the placement of $9.9 million in convertible notes, offset by the increase in interest expense incurred on those notes.

 

  

For the Nine Months

Ended September 30,

   Change 
($ in thousands, except per share amounts)  2018   2017   $   % 
Revenue                    
Fortress                    
Product revenue, net  $17,366   $8,309   $9,057    109%
Revenue - from a related party   525    1,393    (868)   -62%
Net Fortress revenue   17,891    9,702    8,189    84%
                     
National                    
Commissions   85,422    73,380    12,042    16%
Net dealer inventory gains   5,601    6,666    (1,065)   -16%
Investment banking   43,012    26,595    16,417    62%
Investment advisory   15,811    10,480    5,331    51%
Interest and dividends   2,003    2,065    (62)   -3%
Transfer fees and clearing services   5,680    5,834    (154)   -3%
Tax preparation and accounting   6,835    6,527    308    5%
Other   697    1,016    (319)   -31%
Total National revenue   165,061    132,563    32,498    25%
Net revenue   182,952    142,265    40,687    29%
                     
Operating expenses                    
Fortress                    
Cost of goods sold - product revenue   4,546    1,852    2,694    145%
Research and development   58,528    34,683    23,845    69%
Research and development - licenses acquired   3,804    3,394    410    12%
General and administrative   38,788    36,490    2,298    6%
Total Fortress operating expenses   105,666    76,419    29,247    38%
                     
National                    
Commissions, compensation and fees   141,462    118,983    22,479    19%
Clearing fees   1,772    1,826    (54)   -3%
Communications   2,429    2,094    335    16%
Occupancy   2,834    2,916    (82)   -3%
Licenses and registration   2,028    1,223    805    66%
Professional fees   3,047    3,336    (289)   -9%
Interest   30    13    17    131%
Underwriting costs   230    -    230    100%
Depreciation and amortization   2,587    1,513    1,074    71%
Other administrative expenses   5,839    7,315    (1,476)   -20%
Total National operating expenses   162,258    139,219    23,039    17%
Total operating expenses   267,924    215,638    52,286    24%
Loss from operations   (84,972)   (73,373)   (11,599)   16%
                     
Other income (expenses)                    
Interest income   841    530    311    59%
Interest expenses   (6,455)   (5,298)   (1,157)   22%
Change in fair value of derivative liabilities   (7,931)   5,155    (13,086)   -254%
Change in fair value of subsidiary convertible note   26    (359)   385    -107%
Change in fair value of investments   (1,390)   (241)   (1,149)   477%
Other expenses   (258)   (232)   (26)   11%
Total other expenses   (15,167)   (445)   (14,722)   3308%
Loss before income taxes   (100,139)   (73,818)   (26,321)   36%
                     
Income tax expense   2,382    -    2,382    100%
Net loss   (102,521)   (73,818)   (28,703)   39%
                     
Less: net loss attributable to non-controlling interest