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

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

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

 

For the Fiscal Year Ended December 31, 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 No. 001-35366

 

FORTRESS BIOTECH, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware   20-5157386

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

     
2 Gansevoort Street, 9th Floor    
New York, New York 10014   10014
(Address of Principal Executive Offices)   (Zip Code)

 

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

 

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

 

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

Common Stock, par value $0.001 per share

9.375% Series A Cumulative Redeemable Perpetual Preferred
Stock

 

NASDAQ Capital Market

 

NASDAQ Capital Market

 

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

 

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

 

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

 

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

 

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

 

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

 

Large accelerated filer     ¨ Accelerated filer     x
Non-accelerated filer     ¨ Smaller reporting company     x
  Emerging growth company     ¨

 

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

 

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

 

The aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter: $94,124,331 based upon the closing sale price of our common stock of $2.98 on that date. Common stock held by each officer and director and by each person known to own in excess of 5% of outstanding shares of our common stock has been excluded in that such persons may be deemed to be affiliates. The determination of affiliate status in not necessarily a conclusive determination for other purposes.

 

As of March 14, 2019, there were 61,302,251 shares of the registrant’s common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive proxy statement for its 2019 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. 

 

 

 

 

 

 

FORTRESS BIOTECH, INC.

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

 

    Page
     
PART I   1
Item 1. Business. 1
Item 1B. Unresolved Staff Comments 39
Item 2. Properties 39
Item 3. Legal Proceedings 39
Item 4. Mine Safety Disclosures 40
     
PART II   40
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 40
Item 6. Selected Consolidated Financial Data 40
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 40
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 48
Item 8. Financial Statements and Supplementary Data. 48
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 48
Item 9A. Controls and Procedures. 48
Item 9B. Other Information 49
     
PART III   49
Item 10. Directors, Executive Officers and Corporate Governance 49
Item 11. Executive Compensation 49
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 49
Item 13. Certain Relationships and Related Transactions, and Director Independence 50
Item 14. Principal Accounting Fees and Services 50
     
PART IV   51
Item 15. Exhibits, Financial Statement Schedules. 51
Item 16. Form 10-K Summary. 55

 

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CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

 

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

 

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

 

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

 

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PART I

 

Item 1. Business.

 

Overview

 

Fortress Biotech, Inc. (“Fortress” or the “Company”) is a biopharmaceutical company dedicated to acquiring, developing and commercializing pharmaceutical and biotechnology products and product candidates, which we do at the Fortress level, at our majority-owned and majority-controlled subsidiaries and joint ventures, and at entities we founded and in which we maintain significant minority ownership positions. Fortress has a talented and experienced business development team, comprising scientists, doctors and finance professionals, who identify and evaluate promising products and product candidates for potential acquisition by new or existing partner companies. We have executed such arrangements in collaboration with some of the world’s foremost universities, research institutes and pharmaceutical companies, including City of Hope National Medical Center, St. Jude Children’s Research Hospital and University College London.

 

Following the exclusive license or other acquisition of the intellectual property underpinning a product or product candidate, Fortress leverages its business, scientific, regulatory, legal and finance expertise to help our partners achieve their goals. Our partner companies then assess a broad range of strategic arrangements to accelerate and provide additional funding to support research and development, including joint ventures, partnerships, out-licensings, and public and private financings.

 

Our business approach is designed for maximum flexibility, allowing us to pursue a broad array of new biopharmaceutical 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 from which to select what we deem the most advantageous corporate or financial structure for each drug candidate. We seek to acquire, develop and commercialize drugs, drug candidates, technologies and operating subsidiaries with high growth potential, both at the Fortress level and via our partner companies. We believe that focusing on the identification, acquisition and early-stage development of product candidates while benefitting from our partners’ development and commercialization expertise will reduce our internal expenses and allow us to have a larger number of product candidates progress to later stages of drug development.

 

As of the end of 2018, several of our partner companies possess 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”).

 

As used throughout this filing, the words “we”, “us” and “our” may refer to Fortress individually or together with our affiliates and partners, as dictated by context.

 

Product Candidates and Other Intellectual Property

 

Marketed Dermatology Products

 

Through our partner company Journey we market seven dermatology products:

 

Targadox: Targadox (doxycycline hyclate tablets) is a tetracycline-class antimicrobial indicated as adjunctive therapy for severe acne.

 

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Exelderm®: Exelderm® is an antifungal cream or solution that helps relieve the symptoms of common skin infections such as ringworm and jock itch. Exelderm® cream can also help relieve the symptoms of athlete’s foot. Since launch in October 2018, Exelderm® prescriptions have grown by 290% (October 2018 – December 2018).

 

Ceracade®: Ceracade® is a steroid-free, ceramide-dominant formulation used to treat dry skin conditions and to manage and relieve the burning and itching associated with various types of dermatitis and radiation dermatitis.

 

Luxamend®: Luxamend® is a water-based emulsion formulated for the dressing and management of superficial wounds, minor abrasions, dermal ulcers, donor sites, first- and second-degree burns, including sunburns, and radiation dermatitis.

 

Ala-Scalp®: Ala-Scalp® is a topical hydrocortisone lotion indicated for the relief of the inflammatory and pruritic manifestations of corticosteroid-responsive dermatoses. Ala-Scalp® is sold under a co-promote agreement with Crown Labs.

 

Ala-Quin®: Ala-Quin® is a broad-spectrum antibacterial and antifungal cream. Ala-Quin® is sold under a co-promote agreement with Crown Labs.

 

Triderm: Triderm™ is topical corticosteroid cream indicated for the he relief of the inflammatory and pruritic manifestations of corticosteroid-responsive dermatoses. Tridermis sold under a co-promote agreement with Crown Labs.

 

MB-107 (XSCID)

 

Our partner company Mustang also collaborates with St. Jude Children’s Research Hospital (“St. Jude”) in the development of a first-in-class ex vivo lentiviral gene therapy for the treatment of X-linked severe combined immunodeficiency (“XSCID”). On August 2, 2018, Mustang entered into an exclusive worldwide license agreement with St. Jude for the development of a first-in-class ex vivo lentiviral gene therapy for the treatment of XSCID. Mustang paid an upfront fee of $1.0 million, in August 2018 in consideration for the exclusive license. Additional payments are due to St. Jude upon the achievement of five development and commercialization milestones. XSCID is the most common form of severe immune deficiency. The acquisition of this license expands our pipeline into gene-therapy, allowing us to leverage existing synergies for Mustang’s Worcester, Massachusetts cell-processing facility.

 

CAEL-101 (AL Amyloidosis)

 

Our partner company Caelum, in collaboration with Alexion Pharmaceuticals, Inc., is working to develop a novel antibody (“mAb 11-1F4”), CAEL-101, for the treatment of amyloid light chain (“AL”) amyloidosis. CAEL-101 is a first-in-class monoclonal antibody (“mAb”) designed to improve organ function by reducing or eliminating amyloid deposits in the tissues and organs of patients with AL amyloidosis. The antibody is designed to bind to insoluble light chain amyloid protein, including both kappa and lambda subtypes. In a Phase 1a/1b study, CAEL-101 demonstrated improved organ function, including cardiac and renal function, in 27 patients with relapsed and refractory AL amyloidosis who had previously not had an organ response to standard of care therapy. This data supports CAEL-101’s potential to be a well-tolerated therapy that promotes amyloid resolution. CAEL-101 has received Orphan Drug Designation from the U.S. Food and Drug Administration as a therapy for patients with AL amyloidosis, and as a radio-imaging agent in AL amyloidosis.

 

Hematologic Malignancies

 

Our partner company Mustang collaborates with the City of Hope National Medical Center (“COH”) and Fred Hutchinson Cancer Research Center (“Fred Hutch”) in the development of proprietary chimeric antigen receptor (“CAR”) engineered T-cell (“CAR T”) therapies. CAR T uses the patient’s own T-cells to engage and destroy specific tumors. The process involves selecting specific T-cell subtypes, genetically engineering them to express chimeric antigen T-cell receptors and placing them back in the patient where they recognize and destroy cancer cells. We believe that harnessing the body’s own immune system to treat cancer is the next generation of cancer care that may prove curative across tumor types that have proved resistant to standard pharmacological and biological treatments.

 

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MB-102 (CD123 CAR T Program for AML)

 

CD123 is a subunit of the heterodimeric interleukin-3-receptor (“IL-3R”) which is widely expressed on human hematologic malignancies including acute myeloid leukemia (“AML”). In addition, CD123 can be found on the surface of B cell acute lymphoblastic leukemia (“B-ALL”), hairy cell leukemia, blastic plasmacytoid dendritic cell neoplasm (“BPDCN”), chronic myeloid leukemia (“CML”) and Hodgkin’s lymphoma.

   

Our partner Mustang is currently investigating CD123 as a target for adoptive cellular immunotherapy in AML and BPDCN since high CD123 expression is associated with enhanced AML blast proliferation, increased resistance of blasts to apoptosis, and poor clinical prognosis. CD123 is overexpressed in the vast majority of cases of AML and in essentially all cases of BPDCN. MB-102 is currently in development at our partner company Mustang.

  

MB-106 (CD20 CAR T Program for B cell non-Hodgkin lymphoma)

 

CD20 is a B-cell lineage-specific phosphoprotein that is expressed in high, homogeneous density on the surface of more than 95% of B-cell non-Hodgkin lymphoma (“NHL”). CD20 is stable on the cell surface with minimal shedding or internalization upon binding antibody and is present at only nanomolar levels as soluble antigen. It is well established as an effective immunotherapy target, with extensive studies demonstrating improved tumor responses and survival of B-NHL patients treated with rituximab and other anti-CD20 antibodies.

 

More than 70,000 new cases of NHL are diagnosed each year in the United States, and more than 19,000 patients die of this group of diseases annually. Most forms of NHL including follicular lymphoma, mantle cell lymphoma, marginal zone lymphoma, lymphoplasmacytic lymphoma, and small lymphocytic lymphoma, which account collectively for ~45% of all cases of NHL are incurable with available therapies, except for allogenic hematopoietic stem cell transplant (“allo-SCT”). However, many NHL patients are not suitable candidates for allo-SCT, and this treatment is also limited by significant rates of morbidity and mortality due to graft versus host disease. Innovative new treatments are therefore urgently needed.

 

Fred Hutch has an open IND for a Phase 1 clinical study to assess the anti-tumor activity and safety of administering CAR T cells; as of December 31, 2018, five patients have been treated. This IND was submitted on February 24, 2017, with Fred Hutch as the sponsor. The trial will also assess the T cell persistence and determine the potential immunogenicity of the cells, and Mustang together with Fred Hutch will determine a recommended Phase 2 dose. MB-106 is currently in development at our partner company Mustang.

 

MB-104 (CS1 CAR T for Multiple Myeloma and Light Chain Amyloidosis)

 

CS1 (also known as CD319, CRACC and SLAMF7) was identified as an NK cell receptor regulating immune functions. It is also expressed on B cells, T cells, dendritic cells, NK-T cells, and monocytes. CS1 is overexpressed in multiple myeloma (“MM”) and light chain amyloidosis (“AL”), which makes it a good target for immunotherapy. A humanized anti-CS1 antibody, elotuzumab (EmplicitiÔ), has shown promising results in clinical studies. Despite great advances in treatment, MM remains an incurable malignancy of plasma cells. AL is a protein deposition disorder that is a result of a plasma cell dysplasia, similar to MM. Immunotherapy is an attractive approach for AL because of the low burden of disease. Our academic partners at COH have developed a novel second generation CS1-specific CAR T cell therapy. In pre-clinical studies, they have demonstrated efficacy of these CAR T cells, both in vitro and in vivo, within the context of clinically relevant models of MM and AL. COH will be evaluating the safety of this CS1-specific CAR T cell therapy in a Phase 1/2 trial that is scheduled to commence in the first half of 2019.

 

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Solid Tumors

 

MB-101 (IL13Ra2 CAR T Cell Program for Glioblastoma)

 

Glioblastoma multiforme (“GBM”) is the most common brain and central nervous system (“CNS”) cancer, accounting for for 45.2% of malignant primary brain and CNS tumors, 54% of all gliomas, and 16% of all primary brain and CNS tumors. There are an estimated 12,390 new glioblastoma cases predicted in 2017 in the US. Malignant brain tumors are the most common cause of cancer-related deaths in adolescents and young adults aged 15-39 and the most common cancer occurring among 15-19 year-olds in the US. While GBM is a rare disease (2-3 cases per 100,000 persons per year in the US and EU), it is quite lethal, with five-year survival rates historically under 10%. Standard of care therapy consists of maximal surgical resection, radiation and chemotherapy with temozolomide, which, while rarely curative, is shown to extend median overall survival from 4.5 to 15 months. GBM remains difficult to treat due to the inherent resistance of the tumor to conventional therapies.

 

Immunotherapy approaches targeting brain tumors offer promise over conventional treatments. IL13Ra2 is an attractive target for CAR T therapy, as it has limited expression in normal tissue but is over-expressed on the surface of greater than 50% of GBMs. CAR T cells are designed to express membrane-tethered IL-13 receptor ligand mutated at a single site (glutamic acid at position 13 to a tyrosine; E13Y) with high affinity for IL13Rα2 and reduced binding to IL13Ra1 in order to reduce healthy tissue targeting (Kahlon KS et al. Cancer Research. 2004;64:9160-9166).

 

Our partner Mustang is currently developing an optimized CAR T product incorporating enhancements in CAR T design and T cell engineering to improve antitumor potency and T cell persistence. The next step is to continue to enroll patients in this Phase 1 study to determine the maximum tolerated dose and a recommended Phase 2 dose. Additionally, in this Phase 1 study, Mustang is exploring optimal modes of delivery for CAR T cells for the treatment of GBM and optimal T cell selection. MB-101 is currently in development at our partner company Mustang.

 

MB-103 (HER2 CAR T for GBM & Metastatic Breast Cancer to Brain)

 

HER2/neu (often shortened to “HER2”) is a growth-promoting protein on the outside of all breast cells. Breast cancer cells with higher than normal levels of HER2 are called HER2-positive (“HER2+”). These cancers tend to grow and spread faster than other breast cancers. Breast cancer is the most commonly diagnosed cancer in women, with over 40,000 women in the United States expected to die from advanced metastatic disease in 2018. Approximately 20% to 25% of breast cancers overexpress HER2, which is an established therapeutic target of both monoclonal antibodies (“mAbs”) and receptor tyrosine kinase inhibitors. With the advent of effective mAbs directed against HER2, the median overall survival of patients with metastatic HER2+ breast cancer has improved. However, management of metastatic disease in the brain and/or CNS observed in up to 50% of HER2+ breast cancer patients, continues to be a clinical challenge in large part due to the inability of mAbs to sufficiently cross the blood-brain barrier. Although small-molecule inhibitors of HER2 exist and have been clinically approved, their single-agent efficacy in the context of metastatic disease to the brain has been limited. While HER2-targeted therapy in combination with conventional agents has shown some promise for the treatment of patients with metastatic breast cancer, control of brain metastases remains a significant unmet clinical need, as most patients survive less than two years following CNS involvement.

 

CAR-based T-cell immunotherapy is being actively investigated for the treatment of solid tumors, including HER2+ cancers. Mustang’s academic partners at COH have developed a second-generation HER2-specific CAR T-cell for the treatment of breast cancer that has metastasized to the brain. COH’s preclinical data demonstrate effective targeting of breast cancer brain metastases with intraventricular delivery of HER2-BB CAR T cells. COH will be evaluating the safety of this HER2-specific CAR T cell therapy in two phase 1/2 Trials that commenced in Q4 2018. MB-103 is currently in development at our partner company Mustang.

 

MB-105 (PSCA CAR T for Prostate & Pancreatic Cancers)

 

PSCA is a glycosylphosphatidylinositol-anchored cell membrane glycoprotein. In addition to being highly expressed in the prostate it is also expressed in the bladder, placenta, colon, kidney, and stomach. Prostate cancer may be amenable to T cell-based immunotherapy since several tumor antigens, including prostate stem-cell antigen (PSCA), are widely over-expressed in metastatic disease. Mustang’s academic partners at COH have developed a second-generation PSCA specific CAR T cell therapy that has demonstrated robust in vitro and in vivo anti-tumor activity in patient-derived, clinically relevant, bone-metastatic prostate cancer xenograft models. COH will be evaluating safety of this PSCA-specific CAR T cell therapy in a Phase 1/2 Trial that is scheduled to commence in the second half of 2019. MB-105 is currently in development at our partner company Mustang.

 

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Intravenous (IV) Tramadol

 

Our partner company Avenue, in collaboration with InvaGen Pharmaceuticals, Inc., is developing intravenous (IV) Tramadol, for the treatment of moderate to moderately severe post-operative pain. IV Tramadol may fill a gap in the acute pain market between IV acetaminophen/NSAIDs and IV conventional narcotics. Avenue is currently evaluating IV Tramadol in a pivotal Phase 3 program for the management of postoperative pain with positive data from its first pivotal Phase 3 study announced in May 2018. The second pivotal Phase 3 trial was initiated in the fourth quarter of 2018, and Avenue expects to announce topline data in mid-2019.

 

CK-101 (EGFR mutation-positive NSCLC)

 

Our partner company Checkpoint is currently evaluating a lead small-molecule, targeted anti-cancer agent, CK-101, in a Phase 1/2 clinical trial for the treatment of patients with EGFR mutation-positive non-small cell lung cancer (NSCLC). In September 2018, Checkpoint announced preliminary interim safety and efficacy data from its 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 with a new softgel capsule formulation to maximize therapeutic effect, following which a Phase 3 trial is planned to initiate in 2019 in treatment-naïve EGFR mutation-positive NSCLC patients.

 

CK-301

 

Checkpoint is also currently evaluating its lead antibody product candidate, CK-301, an anti-PD-L1 antibody licensed from the Dana-Farber Cancer Institute, in a Phase 1 clinical trial in checkpoint therapy-naïve patients with selected recurrent or metastatic cancers, including ongoing cohorts intended to support one or more Biologies License Application (“BLA”) submissions.

 

CUTX-101

 

Our partner company Cyprium is currently developing CUTX-101, a copper histidinate injection for the treatment of Menkes disease. Menkes disease is a rare X-linked pediatric disease caused by gene mutations of copper transporter ATP7A, which affects approximately one in 100,000 newborns per year. Biochemically, Menkes patients may have low levels of copper in their blood and brains, as well as abnormal levels of catecholamine, but definitive diagnosis is typically made by sequencing of the ATP7A gene. There is no current FDA-approved treatment for Menkes disease and its variants. CUTX-101, along with an AAV-ATP7A gene therapy that is also being developed by Cyprium, was granted orphan drug designation by the U.S. Food and Drug Administration (“FDA”). CUTX-101 was also granted Fast Track Designation by the FDA for classic Menkes disease in patients who have not demonstrated significant clinical progression.

 

In January 2019, Cyprium received notification from the U.S. FDA that the sponsorship of the Investigational New Drug (“IND”) Application for CUTX-101 was transferred to Cyprium.

 

Triplex

 

Through our partner company Helocyte we are developing Triplex, a first-in-class and potentially best-in-class universal recombinant Modified Vaccinia Ankara viral vector vaccine engineered to induce a robust and durable virus-specific T cell response to three immuno-dominant proteins [UL83 (pp65), UL123 (IE1), UL122 (IE2)] linked to cytomegalovirus (CMV) complications in the transplant setting. In a Phase 1 study, Triplex was found to be safe, well-tolerated and highly immunogenic when administered to healthy volunteers at multiple dose levels (ClinicalTrials.gov Identifier: NCT01941056). In a recently-completed Phase 2 trial, Triplex was observed to be safe, well-tolerated, highly immunogenic and efficacious in reducing CMV events in allogeneic stem cell transplant recipients (ClinicalTrials.gov Identifier: NCT02506933). Triplex is currently the subject of multiple other ongoing and planned studies, one involving vaccination of the stem cell transplant donor (followed by vaccination of the recipient) in higher risk patients - potentially introducing CMV immunity sooner and positioning Triplex ahead of prophylactic antivirals in the standard of care. Helocyte secured an exclusive, worldwide license to Triplex from City of Hope National Medical Center in Duarte, California in April of 2015.

 

Other Product Candidates

 

ConVax

 

We and our partner Helocyte are also developing ConVax, a universal recombinant Modified Vaccinia Ankara viral vector vaccine designed to induce robust and durable humoral and cellular immune responses to cytomegalovirus (CMV).

 

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CEVA-101

 

Through our partner company Cellvation we are working to develop CEVA-101, a cellular product comprised of autologous Bone Marrow-derived Mononuclear Cells (“BMMNCs”) currently being developed for the treatment of severe traumatic brain injury (TBI) in adults and children.

 

CEVA-D and CEVA-102

 

Also in partnership with Cellvation, we are developing CEVA-D, a novel bioreactor device that enhances the anti-inflammatory potency of bone marrow-derived cells without genetic manipulation, using wall shear stress (WSS) to suppress tumor necrosis factor-a (“TNF-a”) production by activated immune cells. CEVA-102 is the first cell product produced by CEVA-D, which we plan to develop for the treatment of severe traumatic brain injury (“TBI”) in adults and children.

 

TAMID-001

 

Through our majority-owned partner Tamid we are developing Tamid-001, an adeno-associated virus (AAV) gene therapy that targets the ocular manifestations of Mucopolysaccharidosis type I (MPS I), a rare and progressively debilitating disorder which is caused by the accumulation of glycosaminoglycans (GAGs) in multiple organs.

 

AVTS-001

 

Through our majority-owned partner Aevitas we are developing AVTS-001, an AAV gene therapy that restores lasting production of regulatory proteins, potentially providing a curative treatment for diseases with high unmet need.

 

CNDO-109

 

We continue to develop CNDO-109, a lysate that activates donor Natural Killer (NK) cells. We are also working with our partner company Mustang to genetically engineer CNDO-109-activated NK cells to express a CD123 chimeric antigen receptor construct as a potential combination therapy to treat AML.

 

Methazalomide

 

We are developing, in collaboration with Effcon Laboratories, Inc., an extended release formulation of methazalomide. Effcon leads the development efforts in connection therewith under our supervision and direction. We expect to initiate a pivotal and food effects study in 2019.

 

Intellectual Property Generally

 

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

 

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

 

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Competition

 

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

 

The only pharmaceutical area in which we sell marketed products is dermatology, and the dermatological product competitive landscape is highly fragmented, with a large number of mid-size and smaller companies competing in both the prescription sector and the OTC and cosmeceutical sectors. The market for our dermatological products is very competitive, both across product categories and geographies. In addition to larger diversified pharmaceutical and medical device companies, we face competition from mid-size and smaller, regional and entrepreneurial companies with fewer products in niche areas or regions. The oral acne antibiotic market, in which Targadox competes, is divided into two categories: minocycline and doxycycline. Targadox competes in the doxycycline category, primarily against Mayne Pharma’s Doryx® brand. Also, Almirall recently introduced SEYSARA™, a tetracycline-class drug indicated for the treatment of inflammatory lesions of non-nodular moderate to severe acne vulgaris in patients 9 years of age and older. Exelderm®, a broad spectrum anti-fungal with two formulations, competes against Sebela Pharma’s Naftin® and Ortho Dermatologics Luzu®.

 

Our competitors are pursuing the development and/or acquisition of pharmaceuticals, medical devices and OTC products that target the same diseases and conditions that we are targeting in biotechnology, biopharmaceutical, dermatological and other therapeutic areas. If competitors introduce new products, delivery systems or processes with therapeutic or cost advantages, our products can be subject to progressive price reductions or decreased volume of sales, or both. Most new products that we introduce must compete with other products already on the market or products that are later developed by competitors. The principal methods of competition for our products include quality, efficacy, market acceptance, price, and marketing and promotional efforts, patient access programs and product insurance coverage reimbursement.

 

Government Regulation and Product Approval

 

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

 

United States Pharmaceutical Product Development Process

 

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

 

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

 

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

 

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

 

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

  

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

 

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

 

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

 

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

 

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

 

United States Review and Approval Processes

 

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

 

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

 

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Post-Approval Requirements

 

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

 

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

 

Orphan Drugs

 

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

 

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

 

Pediatric Information

 

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

 

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

 

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Other Healthcare Laws and Compliance Requirements

 

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

 

Pharmaceutical Coverage, Pricing and Reimbursement

 

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

 

International Regulation

 

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

 

Employees

 

As of December 31, 2018, we had 88 full-time employees at Fortress and our partner companies.

 

Executive Officers of Fortress

 

The following table sets forth certain information about our executive officers as of December 31, 2018.

 

Name   Age   Position
Lindsay A. Rosenwald, M.D.   63   Chairman of the Board of Directors, President and Chief Executive Officer
Robyn M. Hunter   57   Chief Financial Officer
George Avgerinos, Ph.D.   65   Senior Vice President, Biologics Operations
Michael S. Weiss   52   Executive Vice Chairman Strategic Development

 

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

 

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

 

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

 

Michael S. Weiss has served as our Executive Vice Chairman, Strategic Development since February 2014. He has served as Executive Vice Chairman, Strategic Development of Fortress Biotech since February 2014. He currently serves as a member of the board of directors of several of our partner companies, including: Aevitas Therapeutics, Inc., Cellvation, Inc., Checkpoint Therapeutics, Inc. (Nasdaq: CKPT), Cyprium Therapeutics, Inc., Helocyte, Inc., Mustang Bio, Inc. (Nasdaq: MBIO) and Tamid Bio, Inc. Mr. Weiss is currently the Executive Chairman of Mustang Bio, Inc. (where he served as interim CEO from March 2015 to April 2017) and the Chairman of the Board of Directors of Checkpoint Therapeutics, Inc. (where he served as interim CEO from August 2015 to October 2015). From March 2015 until February 2019, Mr. Weiss served on the board of Avenue Therapeutics, Inc. (Nasdaq: ATXI). Mr. Weiss also served as the Chairman of the Board of Directors of National Holdings Corporation (Nasdaq: NHLD) from September 2016 to June 2018. Since December 2011, Mr. Weiss has served in multiple capacities at TG Therapeutics, Inc., a related party, and is currently its Executive Chairman, Chief Executive Officer and President. He is a co-founder of, and has been a managing partner and principal of, Opus Point Partners Management, LLC since 2008. In 1999, Mr. Weiss founded Access Oncology, which was later acquired by Keryx Biopharmaceuticals (Nasdaq: KERX) in 2004. Following the merger, Mr. Weiss remained as CEO of Keryx. He began his professional career as a lawyer with Cravath, Swaine & Moore LLP. Mr. Weiss earned his B.S. in Finance from The University of Albany and his J.D. from Columbia Law School.

 

Available Information

 

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

 

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Item 1A. Risk factors

 

Investing in our Common Stock, Series A Preferred Stock or any other type of equity or debt securities (together our “Securities”) involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this Annual Report on Form 10-K including the consolidated financial statements and the related notes, as well as the risks, uncertainties and other information set forth in the reports and other materials filed or furnished by our partners and affiliates Checkpoint, Mustang, and Avenue with the SEC, before deciding to invest in our Securities. If any of the following risks or the risks included in the public filings of Checkpoint, Mustang or Avenue were to materialize, our business, financial condition, results of operations, and future growth prospects could be materially and adversely affected. In that event, the market price of our Securities could decline, and you could lose part of or all of your investment in our Securities. In addition, you should be aware that the below stated risks should be read as being applicable to our partners and affiliates such that, if any of the negative outcomes associated with any such risk is experienced by one of our partners or affiliates, the value of Fortress’ holdings in such partner or affiliate (if any) may decline.

 

Risks Related to our Growth Strategy

 

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

 

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

 

·risk of entering new markets in which we have little to no experience;
·diversion of financial and managerial resources from existing operations;
·successfully negotiating a proposed acquisition or investment timely and at a price or on terms and conditions favorable to us;
·the impact of regulatory reviews on a proposed acquisition or investment;
·the outcome of any legal proceedings that may be instituted with respect to the proposed acquisitions or investment;
·with respect to an acquisition, difficulties in integrating operations, technologies, services and personnel; and
·potential inability to maintain relationships with customers of the companies we may acquire or invest in.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

If we enter into R&D collaborations during the early phases of drug development, success will, in part, depend on the performance of research collaborators. We may not directly control the amount or timing of resources devoted by research collaborators to activities related to product candidates. Research collaborators may not commit sufficient resources to our R&D programs. If any research collaborator fails to commit sufficient resources, the preclinical or clinical development programs related to the collaboration could be delayed or terminated. Also, collaborators may pursue existing or other development-stage products or alternative technologies in preference to those being developed in collaboration with us. Finally, if we fail to make required milestone or royalty payments to collaborators or to observe other obligations in agreements with them, the collaborators may have the right to terminate or stop performance of those agreements.

 

Establishing strategic collaborations is difficult and time-consuming. Our discussions with potential collaborators may not lead to the establishment of collaborations on favorable terms, if at all. Potential collaborators may reject collaborations based upon their assessment of our financial, regulatory or intellectual property positions. In addition, there has been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators. Even if we successfully establish new collaborations, these relationships may never result in the successful development or commercialization of product candidates or the generation of sales revenue. To the extent that we enter into collaborative arrangements, the related product revenues that might follow are likely to be lower than if we directly marketed and sold products. Such collaborators may also consider alternative product candidates or technologies for similar indications that may be available to collaborate on, and such collaborations could be more attractive than the one with us for any future product candidate.

 

Management of our relationships with collaborators will require:

 

·significant time and effort from our management team;
·coordination of our marketing and R&D programs with the respective marketing and R&D priorities of our collaborators; and
·effective allocation of our resources to multiple projects.

 

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

 

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

 

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

 

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

 

We may not be able to hire or retain key officers or employees needed to implement our business strategy and develop products and businesses.

 

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

 

We currently depend heavily upon the efforts and abilities of our management team and the management teams of our partners. The loss or unavailability of the services of any of these individuals could have a material adverse effect on our business, prospects, financial condition and results. In addition, we have not obtained, do not own, are not the beneficiary of key-person life insurance for any of our key personnel. We only maintain a limited amount of directors’ and officers’ liability insurance coverage. There can be no assurance that this coverage will be sufficient to cover the costs of the events that may occur, in which case, there could be a substantial impact on our ability to continue operations.

 

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

 

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

 

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

 

Certain of our officers and directors serve in similar roles at our partners, affiliates, related parties and/or other entities with which we transact business or in which we hold significant minority ownership positions; ongoing and future relationships and transactions between these parties could result in conflicts of interest.

 

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

 

Risks Related to Our Biopharmaceutical Business and Industry

 

We are an early-stage company with limited operating history on which stockholders can base an investment decision, and we rely heavily on third parties for the development and manufacturing of their products and product candidates.

 

We are primarily an early-stage biopharmaceutical company and certain of our partners and affiliates, on whose successes we largely rely, are also early-stage biopharmaceutical companies with limited operating histories. To date, we have engaged primarily in acquisition, evaluative and R&D activities and have not generated any revenues from product sales (except through Journey Medical Corporation). We have incurred significant net losses since our inception. As of December 31, 2018, we had an accumulated deficit of approximately $396.3 million. We may need to rely on third parties for activities critical to the product candidate development process, including but not necessarily limited to:

 

·identifying and evaluating product candidates;
·negotiating, drafting and entering into licensing and other arrangements with product development partners; and
·continuing to undertake pre-clinical development and designing and executing clinical trials.

 

We have also not demonstrated the ability to perform the functions necessary for the successful commercialization of any of our pre-commercial product candidates, should any of them be approved for marketing. If we were to have any such product candidates approved, the successful commercialization of such products would require us to perform or contract with third parties for performance of a variety of critical functions, including, but not necessarily limited to:

 

·advising and participating in regulatory approval processes;
·formulating and manufacturing products for clinical development programs and commercial sale; and
·conducting sales and marketing activities.

 

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

 

If we are unable to establish or maintain sales and marketing capabilities or fail to enter into agreements with third parties to market, distribute and sell products that may be successfully developed, we may not be able to effectively market and sell products and generate product revenue.

 

We do not currently have the infrastructure for the sales, marketing and distribution of any of our product candidates (except for that which exists through Journey Medical Corporation), and we must build and maintain such infrastructures or make arrangements with third parties to perform these functions in order to commercialize any products that we may successfully develop. The establishment and development of a sales force, either by us or certain of our partners, or the establishment of a contract sales force to market any products for which we may receive marketing approval, is expensive and time-consuming and could delay any such product launch or compromise the successful commercialization of such products. If we are unable to establish and maintain sales and marketing capabilities or any other non-technical capabilities necessary to commercialize any products that may be successfully developed, we will need to contract with third parties to market and sell such products. We may not be able to establish arrangements with third parties on commercially reasonable terms, or at all.

 

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

 

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

 

·the efficacy and safety as demonstrated in clinical trials;
·the timing of market introduction of such product candidate as well as competitive products;
·the clinical indications for which the product is approved;
·acceptance by physicians, major operators of hospitals and clinics and patients of the product as a safe and effective treatment;
·the potential and perceived advantages of product candidates over alternative treatments;
·the safety of product candidates seen in a broader patient group, including its use outside the approved indication;
·the cost of treatment in relation to alternative treatments;
·the availability of adequate reimbursement and pricing by third parties and government authorities;
·changes in regulatory requirements by government authorities for our product candidates;
·relative convenience and ease of administration;
·the prevalence and severity of side effects and adverse events;
·the effectiveness of our sales and marketing efforts; and
·unfavorable publicity relating to the product.

 

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

 

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Reimbursement may be limited or unavailable in certain market segments for our product candidates, which could make it difficult for us to sell our products profitably.

 

We intend to seek approval to market our future products in both the United States and in countries and territories outside the United States. If we obtain approval in one or more foreign countries, we will be subject to rules and regulations in those countries relating to such products. In some foreign countries, particularly in the European Union, the pricing of prescription pharmaceuticals and biologics is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product candidate. In addition, market acceptance and sales of our product candidates will depend significantly on the availability of adequate coverage and reimbursement from third-party payors for any of our product candidates and may be affected by existing and future healthcare reform measures.

 

Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which pharmaceuticals they will pay for and establish reimbursement levels. Reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a product is:

 

·a covered benefit under its health plan;
·safe, effective and medically necessary;
·appropriate for the specific patient;
·cost-effective; and
·experimental or investigational.

 

Obtaining coverage and reimbursement approval for a product from a government or other third-party payor is a time consuming and costly process that could require that we provide supporting scientific, clinical and cost-effectiveness data for the use of our products to the payor. We may not be able to provide data sufficient to gain acceptance with respect to coverage and reimbursement. If reimbursement of our future products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability. Additionally, while we may seek approval of our products in combination with each other, there can be no guarantee that we will obtain coverage and reimbursement for any of our products together, or that such reimbursement will incentivize the use of our products in combination with each other as opposed to in combination with other agents which may be priced more favorably to the medical community.

 

In both the United States and certain foreign countries, there have been a number of legislative and regulatory changes to the healthcare system that could impact our ability to sell our products profitably. In particular, the Medicare Modernization Act of 2003 revised the payment methodology for many products reimbursed by Medicare, resulting in lower rates of reimbursement for many types of drugs, and added a prescription drug benefit to the Medicare program that involves commercial plans negotiating drug prices for their members. Since 2003, there have been a number of other legislative and regulatory changes to the coverage and reimbursement landscape for pharmaceuticals.

 

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, collectively, the “ACA,” was enacted in 2010 and made significant changes to the United States’ healthcare system. The ACA and any revisions or replacements of that Act, any substitute legislation, and other changes in the law or regulatory framework could have a material adverse effect on our business.

 

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

 

·an annual, nondeductible fee on any entity that manufactures, or imports specified branded prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government healthcare programs;
·an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1% and 13.0% of the average manufacturer price for branded and generic drugs, respectively;
·expansion of healthcare fraud and abuse laws, including the federal False Claims Act and the federal Anti-Kickback Statute, new government investigative powers and enhanced penalties for non-compliance;
·a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for a manufacturer’s outpatient drugs to be covered under Medicare Part D;

 

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·extension of a manufacturer’s Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations;
·expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals and by adding new mandatory eligibility categories for certain individuals with income at or below 138% of the federal poverty level, thereby potentially increasing a manufacturer’s Medicaid rebate liability;
·expansion of the entities eligible for discounts under the 340B Drug Pricing Program;
·the new requirements under the federal Open Payments program and its implementing regulations;
·a new requirement to annually report drug samples that manufacturers and distributors provide to physicians;
·a new regulatory pathway for the approval of biosimilar biological products, all of which will impact existing government healthcare programs and will result in the development of new programs; and
·a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.

 

The Supreme Court upheld the ACA in the main challenge to the constitutionality of the law in 2012. Specifically, the Supreme Court held that the individual mandate and corresponding penalty was constitutional because it would be considered a tax by the federal government. The Supreme Court also upheld federal subsidies for purchasers of insurance through federally facilitated exchanges in a decision released in June 2015.

 

President Trump ran for office on a platform that supported the repeal of the ACA, and one of his first actions after his inauguration was to sign an Executive Order instructing federal agencies to waive or delay requirements of the ACA that impose economic or regulatory burdens on states, families, the health-care industry and others. Modifications to or repeal of all or certain provisions of the ACA have been attempted in Congress as a result of the outcome of the recent presidential and congressional elections, consistent with statements made by the incoming administration and members of Congress during the presidential and congressional campaigns and following the election.

 

In January 2017, Congress voted to adopt a budget resolution for fiscal year 2017, or the Budget Resolution, that authorizes the implementation of legislation that would repeal portions of the ACA. The Budget Resolution is not a law. However, it is widely viewed as the first step toward the passage of legislation that would repeal certain aspects of the ACA. In March 2017, following the passage of the budget resolution for fiscal year 2017, the United States House of Representatives passed legislation known as the American Health Care Act of 2017, which, if enacted, would amend or repeal significant portions of the ACA. Attempts in the Senate in 2017 to pass ACA repeal legislation, including the Better Care Reconciliation Act of 2017, so far have been unsuccessful. At the end of 2017, Congress passed the Tax Cuts and Jobs Act, which repealed the penalty for individuals who fail to maintain minimum essential health coverage as required by the ACA. Following this legislation, Texas and 19 other states filed a lawsuit alleging that the ACA is unconstitutional as the individual mandate was repealed, undermining the legal basis for the Supreme Court’s prior decision. On December 14, 2018, Texas federal district court judge Reed O’Connor issued a ruling declaring that the ACA in it is entirety is unconstitutional. While this decision has no immediate legal effect on the ACA and its provisions, this lawsuit is ongoing and the outcome through the appeals process may have a significant impact on our business.

 

Most recently, the Bipartisan Budget Act of 2018, the “BBA,” which set government spending levels for Fiscal Years 2018 and 2019, revised certain provisions of the ACA. Specifically, beginning in 2019, the BBA increased manufacturer point-of-sale discounts off negotiated prices of applicable brand drugs in the Medicare Part D coverage gap from 50% to 70%, ultimately increasing the liability for brand drug manufacturers. Further, this mandatory manufacturer discount applies to biosimilars beginning in 2019.

 

The Trump Administration has also taken several regulatory steps to redirect ACA implementation. The Department of Health and Human Services (“HHS”) finalized Medicare fee-for-service hospital payment reductions for Part B drugs acquired through the 340B Drug Pricing Program. HHS also has signaled its intent to pursue reimbursement policy changes for Medicare Part B drugs as a whole that likely would reduce hospital and physician reimbursement for these drugs.

 

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HHS has made numerous other proposals aimed at lowering drug prices for Medicare beneficiaries and increasing price transparency. These proposals include giving Medicare Advantage and Part D plans flexibility in the availability of drugs in “protected classes,” more transparency in the cost of drugs, including the beneficiary’s financial liability, and less costly alternatives and permitting the use of step therapy as a means of prior authorization. HHS has also proposed requiring pharmaceutical manufacturers disclose the prices of certain drugs in direct-to-consumer television advertisements.

 

HHS also has taken steps to increase the availability of cheaper health insurance options, typically with fewer benefits and less generous coverage. The Administration has also signaled its intention to address drug prices and to increase competition, including by increasing the availability of biosimilars and generic drugs. As these are regulatory actions, a new administration could undo or modify these efforts.

 

There likely will continue to be legislative and regulatory proposals at the federal and state levels directed at broadening the availability of healthcare and containing or lowering the cost of healthcare products and services. We cannot predict the initiatives that may be adopted in the future. The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare may adversely affect:

 

·the demand for any products for which we may obtain regulatory approval;
·our ability to set a price that we believe is fair for our products;
·our ability to generate revenues and achieve or maintain profitability;
·the level of taxes that we are required to pay; and
·the availability of capital.

 

In addition, governments may impose price controls, which may adversely affect our future profitability.

 

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

 

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

 

·the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under federal and state healthcare programs, such as Medicare and Medicaid;
·federal civil and criminal false claims laws and civil monetary penalty laws, including the federal False Claims Act, which impose criminal and civil penalties, including civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, including the Medicare and Medicaid programs, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government; the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;

 

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·HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their respective implementing regulations, which impose obligations on covered healthcare providers, health plans, and healthcare clearinghouses, as well as their business associates that create, receive, maintain or transmit individually identifiable health information for or on behalf of a covered entity, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;
·the federal Open Payments program, which requires manufacturers of certain drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program, with specific exceptions, to report annually to the Centers for Medicare & Medicaid Services, or CMS, information related to “payments or other transfers of value” made to “covered recipients,” which include physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors, and teaching hospitals) and applicable manufacturers. Applicable group purchasing organizations also are required to report annually to CMS the ownership and investment interests held by the physicians and their immediate family members. The SUPPORT for Patients and Communities Act added to the definition of covered recipient practitioners including physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists and certified nurse-midwives effective in 2022. Data collection began on August 1, 2013 with requirements for manufacturers to submit reports to CMS by March 31, 2014 and 90 days after the end each subsequent calendar year. Disclosure of such information was made by CMS on a publicly available website beginning in September 2014; and
·analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers; state and foreign laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers; state and foreign laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state and foreign laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

 

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

 

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

 

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

 

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Most of our product candidates are at early stages of development and may not be successfully developed or commercialized.

 

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

 

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

 

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

 

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

 

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

 

·the scope of rights granted under such license agreements and other interpretation-related issues;
·the extent to which our technologies and processes infringe on intellectual property of the licensor that is not subject to such license agreements;
·the scope and interpretation of the representations and warranties made to us by our licensors, including those pertaining to the licensors’ right title and interest in the licensed technology and the licensors’ right to grant the licenses contemplated by such agreements;
·the sublicensing of patent and other rights under our license agreements and/or collaborative development relationships, and the rights and obligations associated with such sublicensing, including whether or not a given transaction constitutes a sublicense under such license agreement;
·the diligence and development obligations under license agreements (which may include specific diligence milestones) and what activities or achievements satisfy those diligence obligations;
·whether or not the milestones associated with certain milestone payment obligations have been achieved or satisfied;
·the applicability or scope of indemnification claims or obligations under such license agreements;

 

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·the permissibility and advisability of, and strategy regarding, the pursuit of potential third-party infringers of the intellectual property that is the subject of such license agreements;
·the calculation of royalty, milestone, sublicense revenue and other payment obligations under such license agreements;
·the extent to which rights, if any, are retained by licensors under such license agreements;
·whether or not a material breach has occurred under such license agreements and the extent to which such breach, if deemed to have occurred, is or can be cured within applicable cure periods, if any;
·disputes regarding patent filing and prosecution decisions, as well as payment obligations regarding past and ongoing patent expenses;
·intellectual property rights resulting from the joint creation or use of intellectual property (including improvements made to licensed intellectual property) by our and our partners’ licensors and us and our partners; and
·the priority of invention of patented technology.

 

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

 

Product candidates that we advance into clinical trials may not receive regulatory approval.

 

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

 

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

 

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

 

The clinical development, manufacturing, labeling, storage, record-keeping, advertising, promotion, import, export, marketing and distribution of any product candidate, including our product candidates, is subject to extensive regulation by the FDA in the United States and by comparable health authorities in foreign markets. In the United States, we are not permitted to market a product candidate until such product candidate’s Biologics License Application (“BLA”) or New Drug Application (“NDA”) is approved by the FDA. The process of obtaining approval is expensive, often takes many years, and can vary substantially based upon the type, complexity and novelty of the products involved. In addition to significant clinical testing requirements, our ability to obtain marketing approval for product candidates depends on obtaining the final results of required non-clinical testing, including characterization of the manufactured components of our product candidates and validation of our manufacturing processes. The FDA may determine that our product manufacturing processes, testing procedures or facilities are insufficient to justify approval. Approval policies or regulations may change, and the FDA has substantial discretion in the pharmaceutical approval process, including the ability to delay, limit or deny approval of a product candidate for many reasons. Despite the time and expense invested in the clinical development of product candidates, regulatory approval is never guaranteed.

 

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

 

·the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials;
·our inability to demonstrate to the satisfaction of the FDA that a product candidate is safe and effective for an indication;
·the FDA may not accept clinical data from trials conducted by individual investigators or in countries where the standard of care is potentially different from that of the United States;
·the results of clinical trials may not meet the level of statistical significance required by the FDA for approval;
·the FDA may disagree with the interpretation of data from preclinical studies or clinical trials;
·the FDA may not approve the manufacturing processes or facilities or those of third-party manufacturers with which we or our respective collaborators currently contract for clinical supplies and plan to contract for commercial supplies; or
·the approval policies or regulations of the FDA may significantly change in a manner rendering the clinical data insufficient for approval or the product characteristics or benefit-risk profile unfavorable for approval.

 

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

 

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

 

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

 

We have not completed testing for any of our product candidates for the indications for which we intend to seek product approval in humans, and we currently do not know the extent of the adverse events, if any, that will be observed in patients who receive any of our product candidates. If any of our product candidates causes unacceptable adverse events in clinical trials, we may not be able to obtain regulatory approval or commercialize such products, or, if such product candidates are approved for marketing, future adverse events could cause us to withdraw such products from the market.

 

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

 

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

 

·obtaining regulatory clearance/approval to commence a clinical trial;
·identifying, recruiting and training suitable clinical investigators;
·reaching agreements on acceptable terms with prospective clinical research organizations (“CROs”) and trial sites, the terms of which can be subject to extensive negotiation, may be subject to modification from time to time and may vary significantly among different CROs and trial sites;
·obtaining sufficient quantities of a product candidate for use in clinical trials;
·obtaining Institutional Review Board (“IRB”) or ethics committee approval to conduct a clinical trial at a prospective site;
·identifying, recruiting and enrolling patients to participate in a clinical trial; or
·retaining (or replacing) patients who have initiated a clinical trial but who may withdraw due to adverse events from the therapy, insufficient efficacy, fatigue with the clinical trial process, personal issues, or other reasons.

 

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

 

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

 

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

 

·failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;
·inspection of the clinical trial operations or clinical trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;
·stopping rules contained in the protocol;
·unforeseen safety issues or any determination that the clinical trial presents unacceptable health risks; and
·lack of adequate funding to continue the clinical trial.

 

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

 

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

 

We may not be able to obtain the labeling claims necessary or desirable for the promotion of our product candidates if approved. We may also be required to undertake post-marketing clinical trials. If the results of such post-marketing studies are not satisfactory or if adverse events or other safety issues arise after approval, the FDA or a comparable regulatory authority in another jurisdiction may withdraw marketing authorization or may condition continued marketing on commitments from us that may be expensive and/or time consuming to complete. In addition, if we or others identify adverse side effects after any of our products are on the market, or if manufacturing problems occur, regulatory approval may be withdrawn and reformulation of our products, additional clinical trials, changes in labeling of our products and additional marketing applications may be required. Any reformulation or labeling changes may limit the marketability of such products if approved.

 

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

 

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

 

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

 

We do not expect to have the resources or capacity to commercially manufacture our products internally, if approved, and would likely continue to be heavily dependent upon third-party manufacturers. Our dependence on third parties to manufacture and supply clinical trial materials, as well as our planned dependence on third party manufacturers for any products that may be approved, may adversely affect our abilities to develop and commercialize products in a timely or cost-effective manner, or at all.

 

We rely on third parties to conduct clinical trials. If these third parties do not meet agreed-upon deadlines or otherwise conduct the trials as required, our clinical development programs could be delayed or unsuccessful, and we may not be able to obtain regulatory approval for or commercialize our product candidates when expected or at all.

 

We do not have the ability to conduct all aspects of our preclinical testing or clinical trials ourselves. We intend to, and do, use CROs to conduct planned clinical trials and will, and do, rely upon such CROs, as well as medical institutions, clinical investigators and consultants, to conduct our trials in accordance with specified clinical protocols. These CROs, investigators, and other third parties will and do play a significant role in the conduct of our trials and the subsequent collection and analysis of data from the clinical trials.

 

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

 

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We rely on clinical and pre-clinical data and results obtained by third parties that could ultimately prove to be inaccurate or unreliable.

 

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

 

If our competitors develop treatments for any of the target indications for which our product candidates are being developed and those competitor products are approved more quickly, marketed more successfully or demonstrated to be more effective, the commercial opportunity with respect to that product candidate will be reduced or eliminated.

 

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

 

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

 

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

 

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

 

We, and/or third parties on our behalf, may use hazardous materials, including chemicals and biological agents and compounds that could be dangerous to human health and safety or the environment. Our operations may also produce hazardous waste products. Federal, state and local laws and regulations govern the use, generation, manufacture, storage, handling and disposal of these materials and wastes. Compliance with applicable environmental laws and regulations may be expensive, and current or future environmental laws and regulations may impair our product development efforts. In addition, we cannot entirely eliminate the risk of accidental injury or contamination from these materials or wastes. We do not carry specific biological or hazardous waste insurance coverage, and our property and casualty and general liability insurance policies specifically exclude coverage for damages and fines arising from biological or hazardous waste exposure or contamination. Accordingly, in the event of contamination or injury, we could be held liable for damages or penalized with fines in an amount exceeding our respective resources, and clinical trials or regulatory approvals could be suspended.

 

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Although we maintain workers’ compensation insurance to cover costs and expenses incurred due to injuries to our employees resulting from the use of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted in connection with the storage or disposal of biological or hazardous materials.

 

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

 

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

 

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

 

·patent applications may not result in any patents being issued, or the scope of issued patents may not extend to competitive product candidates and their formulations and uses developed or produced by others;
·our competitors, many of which have substantially greater resources than us or our partners, and many of which have made significant investments in competing technologies, may seek, or may already have obtained, patents that may limit or interfere with our abilities to make, use, and sell potential product candidates, file new patent applications, or may affect any pending patent applications that we may have;
·there may be significant pressure on the U.S. government and other international governmental bodies to limit the scope of patent protection both inside and outside the United States for disease treatments that prove successful as a matter of public policy regarding worldwide health concerns; and
·countries other than the United States may have patent laws less favorable to patentees than those upheld by U.S. courts, allowing foreign competitors a better opportunity to create, develop and market competing products.

 

In addition, patents that may be issued or in-licensed may be challenged, invalidated, modified, revoked, circumvented, found to be unenforceable, or otherwise may not provide any competitive advantage. Moreover, we may be subject to a third-party pre-issuance submission of prior art to the PTO, or become involved in opposition, derivation, reexamination, inter partes review, post-grant review or interference proceedings challenging our patent rights or the patent rights of others. The costs of these proceedings could be substantial, and it is possible that our efforts to establish priority of invention would be unsuccessful, resulting in a material adverse effect on our US patent positions. An adverse determination in any such submission, patent office trial, proceeding or litigation could reduce the scope of, render unenforceable, or invalidate, our patent rights, allow third parties to commercialize our technologies or products and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights. In addition, if the breadth or strength of protection provided by our patents and patent applications is threatened, it could dissuade companies from collaborating with us to license, develop or commercialize current or future product candidates. Third parties are often responsible for maintaining patent protection for our product candidates, at our and their expense. If that party fails to appropriately prosecute and maintain patent protection for a product candidate, our abilities to develop and commercialize products may be adversely affected, and we may not be able to prevent competitors from making, using and selling competing products. Such a failure to properly protect intellectual property rights relating to any of our product candidates could have a material adverse effect on our financial condition and results of operations.

 

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

 

We and our licensors also rely on trade secrets and proprietary know-how to protect product candidates. Although we have taken steps to protect our and their trade secrets and unpatented know-how, including entering into confidentiality and non-use agreements with third parties, and proprietary information and invention assignment agreements with employees, consultants and advisers, third parties may still come upon this same or similar information independently. Despite these efforts, any of these parties may also breach the agreements and may unintentionally or willfully disclose our or our licensors’ proprietary information, including our trade secrets, and we may not be able to identify such breaches or obtain adequate remedies. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. Moreover, if any of our or our licensor’ trade secrets were to be lawfully obtained or independently developed by a competitor, we and our licensors would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with us. If any of our or our licensors’ trade secrets were to be disclosed to or independently developed by a competitor, our competitive positions would be harmed.

 

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

 

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

 

Our success also depends on our ability, and the abilities of any of our respective current or future collaborators, to develop, manufacture, market and sell product candidates without infringing the proprietary rights of third parties. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are developing products, some of which may be directed at claims that overlap with the subject matter of our or our licensors’ intellectual property. Because patent applications can take many years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that our product candidates or proprietary technologies may infringe. Similarly, there may be issued patents relevant to our product candidates of which we or our licensors are not aware. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the US and other jurisdictions are typically not published until 18 months after a first filing, or in some cases not at all. Therefore, we cannot know with certainty whether we/such licensors were the first to make the inventions claimed in patents or pending patent applications that we own or licensed, or that we and our licensors were the first to file for patent protection of such inventions. In the event that a third party has also filed a US patent application relating to our product candidates or a similar invention, depending upon the priority dates claimed by the competing parties, we may have to participate in interference proceedings declared by the PTO to determine priority of invention in the US. The costs of these proceedings could be substantial, and it is possible that our efforts to establish priority of invention would be unsuccessful, resulting in a material adverse effect on our U.S. patent position. As a result, the issuance, scope, validity, enforceability and commercial value of our or any of our licensors’ patent rights are highly uncertain.

 

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

 

·obtain additional licenses, which may not be available on commercially reasonable terms, if at all;
·abandon an infringing product candidate or redesign products or processes to avoid infringement;
·pay substantial damages, including the possibility of treble damages and attorneys’ fees, if a court decides that the product or proprietary technology at issue infringes on or violates the third party’s rights;
·pay substantial royalties, fees and/or grant cross-licenses to product candidates; and/or
·defend litigation or administrative proceedings which may be costly regardless of outcome, and which could result in a substantial diversion of financial and management resources.

 

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

 

Competitors may infringe our or our licensors’ patents. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. Any claims we assert against accused infringers could provoke these parties to assert counterclaims against us alleging invalidity of our or our licensors’ patents or that we infringe their patents; or provoke those parties to petition the PTO to institute inter partes review against the asserted patents, which may lead to a finding that all or some of the claims of the patent are invalid. In addition, in a patent infringement proceeding, a court may decide that a patent of ours or our licensor’s is invalid or unenforceable, in whole or in part, construe the patent’s claims narrowly or refuse to stop the other party from using the technology at issue on the grounds that our or our licensors’ patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated, found to be unenforceable, or interpreted narrowly and could likewise put pending patent applications at risk of not issuing. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation.

 

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

 

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

 

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

 

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

 

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·restrictions on product manufacturing, distribution or use;
·restrictions on the labeling or marketing of a product;
·requirements to conduct post-marketing studies or clinical trials;
·warning letters;
·withdrawal of the products from the market;
·refusal to approve pending applications or supplements to approved applications that we submit;
·recalls;
·fines;
·suspension or withdrawal of marketing or regulatory approvals;
·refusal to permit the import or export of products;
·product seizure or detentions;
·injunctions or the imposition of civil or criminal penalties; and
·adverse publicity.

 

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

 

We rely on information technology, and any internet or internal computer system failures, inadequacies, interruptions or compromises of our systems or the security of confidential information could damage our reputation and harm our business.

 

Although a significant portion of our business is conducted using traditional methods of contact and communications such as face-to-face meetings, our business is increasingly dependent on critical, complex and interdependent information technology systems, including internet-based systems, to support business processes as well as internal and external communications. We could experience system failures and degradations in the future. We also rely on space and office-sharing arrangements that impose additional burdens on our ability to maintain the security of confidential information. We cannot assure you that we will be able to prevent an extended and/or material system failure or the unintentional disclosure of confidential information if any of the following or similar events occurs:

 

·human error;
·subsystem, component, or software failure;
·a power or telecommunications failure;
·hacker attacks, cyber-attacks, software viruses, security breaches, unauthorized access or intentional acts of vandalism; or
·terrorist acts or war.

 

If any of the foregoing events were to occur, our business operations could be disrupted in ways that would require the incurrence of substantial expenditures to remedy. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data and applications, or inappropriate/unauthorized disclosure of confidential or proprietary information (including trade secrets), we could incur liability and our business and financial condition could be harmed.

 

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The occurrence of a catastrophic disaster could damage our facilities beyond insurance limits or we could lose key data which could cause us to curtail or cease operations.

 

We are vulnerable to damage and/or loss of vital data from natural disasters, such as earthquakes, tornadoes, power loss, fire, floods and similar events, as well as from accidental loss or destruction. If any disaster were to occur, our ability to operate our business could be seriously impaired. We have property, liability and business interruption insurance which may not be adequate to cover losses resulting from disasters or other similar significant business interruptions, and we do not plan to purchase additional insurance to cover such losses due to the cost of obtaining such coverage. Any significant losses that are not recoverable under our insurance policies could seriously impair our business, financial condition and prospects.

 

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

 

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

 

Changes in funding for the FDA and other government agencies could hinder their ability to hire and retain key leadership and other personnel, or otherwise prevent new products and services from being developed or commercialized in a timely manner, which could negatively impact our business or the business of our partners.

 

The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels, ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory, and policy changes. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.

 

Disruptions at the FDA and other agencies may also slow the time necessary for new drugs to be reviewed and/or approved by necessary government agencies, which would adversely affect our business or the business of our partners. For example, over the last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business. If the timing of FDA’s review and approval of new products is delayed, the timing of our or our partners’ development process may be delayed which would result in delayed milestone revenues and materially harm our operations of business.

 

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

 

We are an early-stage company with a history of operating losses that is expected to continue, and we are unable to predict the extent of future losses, whether we will generate significant or any revenues or whether we will achieve or sustain profitability. We have also historically financed our growth and operations in part through the assumption of debt; should an event of default occur under any applicable loan documents, our business would be materially adversely affected.

 

We are an early-stage company and our prospects must be considered in light of the uncertainties, risks, expenses and difficulties frequently encountered by companies in their early stages of operations. We continue to generate operating losses in all periods including losses from continuing operations of approximately $130.8 million and $97.5 million for the years ended December 31, 2018 and 2017, respectively. At December 31, 2018, we had an accumulated deficit of approximately $396.3 million. We expect to make substantial expenditures and incur increasing operating costs and interest expense in the future, and our accumulated deficit will increase significantly as we expand development and clinical trial activities for our product candidates and finance investments in certain of our existing and new partners and affiliates in accordance with our growth strategy. Our losses have had, and are expected to continue to have, an adverse impact on our working capital, total assets and stockholders’ equity. Because of the risks and uncertainties associated with product development, we are unable to predict the extent of any future losses, whether we will ever generate significant or any revenues or if we will ever achieve or sustain profitability.

 

At December 31, 2018, the total amount of debt outstanding was $79.5 million. If we default on our obligations, the holders of our debt may declare the outstanding amounts immediately payable together with accrued interest. If an event of default occurs, we may not be able to cure it within any applicable cure period, if at all. If the maturity of our indebtedness is accelerated, we may not have sufficient funds available for repayment or we may not have the ability to borrow or obtain sufficient funds to replace the accelerated indebtedness on terms acceptable to us, or at all. In addition, current or future debt obligations may limit our ability to finance future operations or satisfy capital needs or to engage in, expand or pursue our business activities. Such restrictive covenants may also prevent us from engaging in activities that could be beneficial to our business and our stockholders unless we repay the outstanding debt, which may not be desirable or possible.

 

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To service our debt securities, which includes series of preferred stock, we will be required to generate a significant amount of cash. Our ability to generate cash depends on a number of factors, some of which are beyond our control, and any failure to meet our debt obligations would have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common stock and/or debt securities to decline.

 

Prevailing economic conditions and financial, business and other factors, many of which are beyond our control, may affect our ability to make payments on our debt. If we do not generate sufficient cash flow to satisfy our debt obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital. Alternatively, as we have done in the past, we may also elect to refinance certain of our debt, for example, to extend maturities. Our ability to restructure or refinance our debt will depend on the capital markets and our financial condition at such time. If we are unable to access the capital markets, whether because of the condition of those capital markets or our own financial condition or reputation within such capital markets, we may be unable to refinance our debt. In addition, any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. Our inability to generate sufficient cash flow to satisfy our debt obligations or to refinance our obligations on commercially reasonable terms, or at all, could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common stock and/or debt securities to decline.

 

Repayment of our indebtedness is dependent in part on the generation of cash flow by Journey and its ability to make such cash available to us, by dividend, debt repayment or otherwise. Journey may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness. Each of our subsidiaries, including Journey, is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries.

 

Our ability to continue to reduce our indebtedness will depend upon factors including our future operating performance, our ability to access the capital markets to refinance existing debt and prevailing economic conditions and financial, business and other factors, many of which are beyond our control. We can provide no assurance of the amount by which we will reduce our debt, if at all. In addition, servicing our debt will result in a reduction in the amount of our cash flow available for other purposes, including operating costs and capital expenditures that could improve our competitive position and results of operations.

 

We have in the past acted, do currently act, and are likely to continue in the future to act as guarantor and/or indemnitor of the obligations, actions or inactions of certain of our subsidiaries and affiliated companies; depending on the terms of such arrangements, we may be contractually obligated to pay substantial amounts to third parties based on the actions or inactions of our subsidiaries and/or affiliates.

 

We have in the past acted, do currently act, and are likely to continue in the future to act as guarantor of the debt obligations of several of our subsidiaries and/or affiliates, including Aevitas, Cellvation, Cyprium and Tamid. Depending on the terms of such guaranty arrangements, we may be contractually obligated to pay substantial amounts to third parties lenders based on the actions or inactions of such subsidiaries and/or affiliates, which would result in a reduction of the amount of our cash available for other purposes and may have a material adverse effect on the price of our Securities.

 

We also have in the past acted, do currently act, and are likely to continue in the future to act as indemnitor of potential losses that may be experienced by one or more of our affiliated companies and/or their partners or investors. In particular, under that certain Indemnification Agreement, dated as of November 12, 2018 (the “Indemnification Agreement”), we indemnify InvaGen Pharmaceuticals Inc. (“InvaGen”) and its affiliates for any losses they may sustain in connection with inaccuracies that may appear in the representations and warranties that our partner company Avenue made to InvaGen in that certain Stock Purchase and Merger Agreement, dated as of November 12, 2018 (the “Avenue SPMA”). The maximum amount of indemnification we may have to provide under the Indemnification Agreement is $35 million, and such obligation terminates upon the consummation of the Merger Transaction (as defined in the Avenue SPMA). In the event of payment by us of any such indemnification amount, we would be able to recoup such amounts (other than our pro rata share of the indemnification as a shareholder in Avenue) from the Merger Transaction proceeds, but if the Merger Transaction never occurs, we would have no means of recouping such previously-paid indemnification amounts. If we become obligated to pay all or a portion of such indemnification amounts (regardless of whether or not we are partially reimbursed out of the proceeds of the Merger Transaction), our business and the market value of our common stock and/or debt securities may be materially adversely impacted.

  

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We have in the past and are likely in the future to undergo collaborations and/or divestitures with respect to certain of our assets and subsidiaries, some of which may be material and/or transformative, which could adversely affect our business, prospects and opportunities for growth.

 

We have in the past completed a number of partnerships and/or contingent sales of our assets and subsidiaries, including an equity investment and contingent sale between Avenue and InvaGen and an equity investment and option transaction between Caelum and Alexion Pharmaceuticals, Inc. Each of these transactions has been time-consuming and has diverted management’s attention. As a result of these contingent sales (and other similar transactions we may in the future complete), we may experience a reduction in the size or scope of our business, our market share in particular markets, our opportunities with respect to certain markets, products or therapeutic categories or our ability to compete in certain markets and therapeutic categories. For example, in connection with execution of the Avenue SPMA, we signed a Restrictive Covenant Agreement, which prohibits us from, directly or indirectly, engaging in the business of hospital administered pain management anywhere in the world other than Canada, Central America or South America for a period of five years after the earlier of the termination of the Avenue SPMA or consummation of the Merger Transaction (as defined in the SPMA).

 

In addition, in connection with any such transaction that involves a (contingent or non-contingent) sale of one of our assets or subsidiaries, we may surrender our ability to realize long-term value from such asset or subsidiary, in the form of foregone royalties, milestone payments, sublicensing revenue or otherwise, in exchange for upfront and/or other payments. In the event, for instance, that a product candidate underpinning any such asset or subsidiary is granted FDA approval for commercialization following the execution of documentation governing the sale by us of such asset or subsidiary, the transferee of such asset or subsidiary may realize tremendous value from commercializing such product, which we would have realized for ourselves had we not executed such sale transaction and been able to achieve applicable approvals independently.

 

Should we seek to enter into collaborations or divestitures with respect to other assets or subsidiaries, we may be unable to consummate such arrangements on satisfactory or commercially reasonable terms within our anticipated timelines. In addition, our ability to identify, enter into and/or consummate collaborations and/or divestitures may be limited by competition we face from other companies in pursuing similar transactions in the biotechnology and pharmaceutical industries. Any collaboration or divestiture we pursue, whether we are able to complete it or not, may be complex, time consuming and expensive, may divert the management’s attention, have a negative impact on our customer relationships, cause us to incur costs associated with maintaining the business of the targeted collaboration or divestiture during the transaction process and also to incur costs of closing and disposing the affected business or transferring the operations of the business to other facilities. In addition, if such transactions are not completed for any reason, the market price of our common stock may reflect a market assumption that such transactions will occur, and a failure to complete such transactions could result in a negative perception by the market of us generally and a decline in the market price of our common stock.

 

As a result of these factors, any collaboration or divestiture (whether or not completed) could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares and/or debt securities to decline.

  

Changes in funding for the FDA and other government agencies could hinder their ability to hire and retain key leadership and other personnel, or otherwise prevent new products and services from being developed or commercialized in a timely manner, which could negatively impact our business or the business of our partners.

 

The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels, ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory, and policy changes. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.

 

Disruptions at the FDA and other agencies may also slow the time necessary for new drugs to be reviewed and/or approved by necessary government agencies, which would adversely affect our business or the business of our partners. For example, over the last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business. If the timing of FDA’s review and approval of new products is delayed, the timing of our or our partners’ development process may be delayed which would result in delayed milestone revenues and materially harm our operations of business.

 

The occurrence of a catastrophic disaster could damage our facilities beyond insurance limits or we could lose key data which could cause us to curtail or cease operations.

 

We are vulnerable to damage and/or loss of vital data from natural disasters, such as earthquakes, tornadoes, power loss, fire, floods and similar events, as well as from accidental loss or destruction. If any disaster were to occur, our ability to operate our business could be seriously impaired. We have property, liability and business interruption insurance which may not be adequate to cover losses resulting from disasters or other similar significant business interruptions, and we do not plan to purchase additional insurance to cover such losses due to the cost of obtaining such coverage. Any significant losses that are not recoverable under our insurance policies could seriously impair our business, financial condition and prospects.

 

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

 

Our operations have consumed substantial amounts of cash since inception. During the years ended December 31, 2018 and 2017 we incurred R&D expenses of approximately $83.3 million and $48.3 million, respectively. We expect to continue to spend significant amounts on our growth strategy. We believe that our current cash and cash equivalents will enable us to continue to fund operations in the normal course of business for at least the next 12 months. Until such time, if ever, as we can generate a sufficient amount of product revenue and achieve profitability, we expect to seek to finance potential cash needs. Our ability to obtain additional funding when needed, changes to our operating plans, our existing and anticipated working capital needs, the acceleration or modification of our planned R&D activities, expenditures, acquisitions and growth strategy, increased expenses or other events may affect our need for additional capital in the future and require us to seek additional funding sooner or on different terms than anticipated. In addition, if we are unable to raise additional capital when needed, we might have to delay, curtail or eliminate one or more of our R&D programs and commercialization efforts and potentially change our growth strategy.

 

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

 

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

 

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

 

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

 

Future revenue based on sales of our dermatology products, especially Targadox and Exelderm®, may be lower than expected or lower than in previous periods.

 

The vast majority of our operating income for the foreseeable future is expected to come from the sale of dermatology products through our partner company Journey Medical Corporation. Any setback that may occur with respect to such products, in particular Targadox and Exelderm®, could significantly impair our operating results and/or reduce our revenue and the market prices of our Securities. Setbacks for such products could include, but are not necessarily limited to problems with shipping, distribution, demand, manufacturing, product safety, marketing, government regulation or reimbursement, licenses and approvals, intellectual property rights, competition with existing or new products, physician or patient acceptance of the products, as well as higher than expected total rebates, returns or rebates. These products also are or may become subject to third party generic competition.

 

Risks Associated with our Capital Stock

 

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

 

At December 31, 2018, Lindsay A. Rosenwald, M.D. our Chairman, President and Chief Executive Officer, beneficially owned 13.1% of our issued and outstanding capital stock, including 98,164 Series A Preferred Shares. At December 31, 2018, Michael S. Weiss, our Executive Vice Chairman, Strategic Development, beneficially owned 15.2% of our issued and outstanding capital stock. By virtue of their holdings and membership on our Board of Directors, Dr. Rosenwald and Mr. Weiss may individually influence our management and our affairs and may make it difficult for us to consummate corporate transactions such as mergers, consolidations or the sale of all or substantially all of our assets that may be favorable from our standpoint or that of our other stockholders.

 

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

 

The stock prices of our Securities may experience substantial volatility as a result of a number of factors, including, but not necessarily limited to:

 

·announcements we make regarding our current product candidates, acquisition of potential new product candidates and companies and/or in-licensing through multiple partners/affiliates;
·sales or potential sales of substantial amounts of our Common Stock;

 

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·issuance of debt or other Securities;
·our delay or failure in initiating or completing pre-clinical or clinical trials or unsatisfactory results of any of these trials;
·announcements about us or about our competitors, including clinical trial results, regulatory approvals or new product introductions;
·developments concerning our licensors and/or product manufacturers;
·litigation and other developments relating to our patents or other proprietary rights or those of our competitors;
·conditions in the pharmaceutical or biotechnology industries;
·governmental regulation and legislation;
·unstable regional political and economic conditions, such as those caused by the U.S. presidential administration change;
·variations in our anticipated or actual operating results; and
·change in securities analysts’ estimates of our performance, or our failure to meet analysts’ expectations.

 

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

 

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

 

Almost all of the 57.8 million outstanding shares of our Common Stock, inclusive of outstanding equity awards, as of December 31, 2018 are available for sale in the public market, either pursuant to Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”), or an effective registration statement. In addition, pursuant to our current shelf registration statement on Form S-3, from time to time we may issue and sell shares of our Common Stock having an aggregate offering price of up to $16.5 million as of December 31, 2018. Any sale of a substantial number of shares of our Common Stock could cause a drop in the trading price of our Common Stock on the Nasdaq Stock Market.

 

We have never paid and currently do not intend to pay cash dividends in the near future, except for the dividend we pay on our Preferred A shares. As a result, capital appreciation, if any, will be your sole source of gain.

 

We have never paid cash dividends on any of our or their common stock, or made stock dividends, except for the dividend we pay on our Preferred A shares, and we currently intend to retain future earnings, if any, to fund the development and growth of our businesses, and retain our stock positions. In addition, the terms of existing and future debt agreements may preclude us from paying cash of stock dividends. Equally, each of our affiliates and partners is governed by its own board of directors with individual governance and decision-making regimes and mandates to oversee such entities in accordance with their respective fiduciary duties. As a result, we alone cannot determine the acts that could maximize value to you of such affiliates/partners in which we maintain ownership positions, such as declaring cash or stock dividends. As a result, capital appreciation, if any, of our Common Stock will be your sole source of gain for the foreseeable future.

 

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

 

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

 

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·the inability of stockholders to call special meetings; and

 

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

 

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

 

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

 

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Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

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

 

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

 

Journey

 

In June 2017, Journey extended its lease for 2,295 square feet of office space in Scottsdale, AZ by one year, at an average annual rent of approximately $55,000. Journey originally took occupancy of this space in November 2014. In August 2018, Journey amended their lease and entered into a new-two year extension for 3,681 square feet of office space in the same location in Scottsdale, AZ at an annual rate of approximately $94,000. The term of this amended lease commenced on December 1, 2018 and will expire on November 30, 2020.

 

Mustang

 

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

 

The Facility initiated cell processing operations for both personalized CAR T and gene therapies in late 2018.

 

Item 1. Legal Proceedings

 

Fortress Biotech, Inc.

 

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 paid $3.3 million to Dr. Falk Pharma during the calendar year of 2018, and approximately $39,500 to the court in mandated administrative fees. An additional $300,000 is due during calendar year 2019.

 

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Item 4. Mine Safety Disclosures

 

Not applicable.

 

PART II

 

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

 

Market Information for Common Stock

 

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

 

   2018   2017 
   High   Low   High   Low 
First quarter  $5.35   $3.42   $3.91   $2.25 
Second quarter  $5.10   $2.92   $4.98   $3.15 
Third quarter  $3.13   $1.44   $4.89   $3.83 
Fourth quarter  $1.53   $0.57   $4.84   $3.26 

Holders of Record

 

As of March 14, 2019, there were approximately 557 holders of record of our Common Stock. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.

 

Dividends

 

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

 

Equity Compensation Plans

 

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

 

Item 6. Selected Consolidated Financial Data

 

Not applicable.

 

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

 

Statements in the following discussion and throughout this report that are not historical in nature are “forward-looking statements.” You can identify forward-looking statements by the use of words such as “expect,” “anticipate,” “estimate,” “may,” “will,” “should,” “intend,” “believe,” and similar expressions. Although we believe the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risk and we can give no assurances that our expectations will prove to be correct. Actual results could differ from those described in this report because of numerous factors, many of which are beyond our control. These factors include, without limitation, those described under Item 1A “Risk Factors.” We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect actual outcomes. Please see “Forward-Looking Statements” at the beginning of this Form 10-K.  

 

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The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes thereto and other financial information appearing elsewhere in this Form 10-K. We undertake no obligation to update any forward-looking statements in the discussion of our financial condition and results of operations to reflect events or circumstances after the date of this report or to reflect actual outcomes

 

We are a biopharmaceutical company dedicated to acquiring, developing and commercializing pharmaceutical and biotechnology products and product candidates, which we do at the Fortress level, at our majority-owned and majority-controlled subsidiaries and joint ventures, and at entities we founded and in which we maintain significant minority ownership positions. Fortress has a talented and experienced business development team, comprising scientists, doctors and finance professionals, who identify and evaluate promising products and product candidates for potential acquisition by new or existing partner companies. We have executed such arrangements in collaboration with some of the world’s foremost universities, research institutes and pharmaceutical companies, including City of Hope National Medical Center, St. Jude Children’s Research Hospital and University College London.

 

Following the exclusive license or other acquisition of the intellectual property underpinning a product or product candidate, we leverage our business, scientific, regulatory, legal and finance expertise to help our partners achieve their goals. Our partner companies then assess a broad range of strategic arrangements to accelerate and provide additional funding to support research and development, including joint ventures, partnerships, out-licensings, and public and private financings.

 

2018 Activity

 

Marketed Dermatology Products

 

In 2018, through our partner company Journey, our seven marketed products generated net revenue of $23.4 million and $3.8 million in net income.

 

In the fourth quarter of 2018, Journey launched Exelderm®, a cream and solution for fungal infections. Also, in 2018, Journey signed a co-promotion agreement with Crown Laboratories to promote Triderm®, a topical corticosteroid indicated for the relief of the inflammatory and pruritic manifestations of corticosteroid-responsive dermatoses; Ala-quin®, a cream for mixed infections; and Ala-scalp®, a hydrocortisone lotion for corticosteroid-responsive dermatoses. We anticipate launching at least one or two new prescription drugs in 2019. Our partner company Journey markets our dermatology products.

 

IV Tramadol

 

In May 2018, our partner company Avenue announced that the first pivotal Phase 3 trial of IV tramadol achieved the primary endpoint of a statistically significant improvement in Sum of Pain Intensity Difference over 48 hours compared to placebo in patients with moderate to moderately severe postoperative pain following bunionectomy surgery. In addition, the trial met its key secondary endpoints and demonstrated a clear dose response.

 

In November 2018, Avenue announced definitive agreements regarding an equity subscription and contingent acquisition by InvaGen, a subsidiary of Cipla Limited, a leading pharmaceutical company. The first stage of the transaction closed in February 2019, and InvaGen acquired 5,833,333 shares of Avenue Therapeutics’ common stock at $6.00 per share for total gross consideration of $35.0 million, representing a 33.3% stake in Avenue’s capital stock on a fully diluted basis.

 

In December 2018, Avenue announced that the first patient has been dosed in a pivotal Phase 3 clinical trial of IV tramadol for the management of moderate to moderately severe pain in patients following abdominoplasty surgery. Topline data is expected to be available in mid-2019.

 

CAEL-101

 

In January 2019, Caelum signed a collaboration agreement with Alexion Pharmaceuticals, Inc. (“Alexion”) to advance the development of CAEL-101. Under the terms of the agreement, Alexion acquired a minority equity interest in Caelum and an exclusive option to acquire the remaining equity in the company based on Phase 2 data for pre-negotiated economics. Alexion will make payments to Caelum totaling $60 million, including the purchase price for the equity and milestone-dependent development funding payments. The collaboration also provides for potential additional payments of up to $500 million, including the upfront, regulatory and commercial milestone payments, in the event Alexion exercises the acquisition option.

 

In March 2018, a new analysis of data from the Phase 1b trial of CAEL-101 (mAb 11-1F4), a light chain fibril-reactive monoclonal antibody (“mAb”) 11-1F4, for the treatment of relapsed or refractory amyloid light chain (“AL”) amyloidosis was presented at the 16th International Symposium on Amyloidosis. The data demonstrated a correlation between a sustained decrease in N-terminal pro-brain natriuretic peptide (NT-proBNP) levels and an improvement in global longitudinal strain (“GLS”) following CAEL-101 treatment in patients with cardiac AL amyloidosis.

 

In June 2018, Caelum announced a complete analysis of cardiac data from a Phase 1b trial of CAEL-101 (mAb 11-1F4) for the treatment of relapsed or refractory AL amyloidosis demonstrating CAEL-101’s potential to improve myocardial function as assessed by GLS and generate a sustained decrease in N-terminal pro-brain natriuretic peptide levels in AL amyloidosis patients experiencing cardiac involvement. Columbia University presented the data at the American Society of Echocardiography’s 29th Annual Scientific Sessions.

 

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In December 2018, Caelum announced additional GLS data from the Phase 1b study of CAEL-101 in patients with cardiac AL amyloidosis, which further confirmed CAEL-101’s efficiency improving GLS and NT-proBNP. Caelum also announced imaging data from a preclinical study that demonstrate the potential of using radiolabeled CAEL-101 for real-time imaging of human amyloidosis in vivo. The data were presented during two oral sessions at the 60th American Society of Hematology (“ASH”) Annual Meeting.

 

Triplex

 

The multicenter Phase 2 study of Triplex for cytomegalovirus (“CMV”) control in allogeneic stem cell transplant recipients has concluded, and its primary endpoint was met. The full dataset has been accepted for oral presentation at the 45th Annual Meeting of the European Society for Blood and Marrow Transplantation (“EBMT”) being held in Frankfurt, Germany March 24-27, 2019. Our partner company Helocyte is developing this program in collaboration with COH.

 

MB-107 (XSCID Gene Therapy)

 

In August 2018, our partner company Mustang announced that it entered into an exclusive worldwide license agreement with St. Jude Children’s Research Hospital (“St. Jude”) for the development of a potentially first-in-class ex vivo lentiviral gene therapy for the treatment of X-linked severe combined immunodeficiency (XSCID), 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 XSCID. The therapy is also being investigated in patients over the age of two in a second Phase 1/2 trial at the National Institutes of Health (“NIH”). Mustang believes these may be registration trials. Mustang is currently developing XSCID in collaboration with St Jude.

 

CK-301 (anti-PD-L1 antibody)

 

In March 2018, our partner company Checkpoint completed the dose escalation portion of the ongoing Phase 1 trial of CK-301, a fully human anti-PD-L1 antibody, in selected recurrent or metastatic cancers, and initiated the first dose expansion cohort, which is evaluating an 800 mg dose of CK-301 administered every two weeks.

 

In January 2019, Checkpoint announced that the ongoing multi-center clinical trial of anti-PD-L1 antibody CK-301 was expanded to enroll patients in three endometrial and colorectal cohorts intended to support requests for accelerated approval and Biologics License Application (“BLA”) submissions to the FDA. The ongoing trial is also enrolling cohorts of patients with NSCLC and cutaneous squamous cell carcinoma.

 

CK-101 (third-generation EGFR inhibitor)

 

In September 2018, Checkpoint announced interim safety and efficacy data from our Phase 1/2 clinical trial of CK-101, a third-generation EGFR tyrosine kinase inhibitor (“TKI”) being evaluated in advanced NSCLC. 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. CK-101 was well tolerated across multiple dose groups and safe. Durable anti-tumor activity was observed, particularly in treatment-naïve EGFR mutation-positive NSCLC patients.

 

CUTX-101 and AAV-based gene therapy

 

In July 2018, our partner company Cyprium announced that the FDA granted Fast Track Designation to CUTX-101 (“Copper Histidinate”), a product candidate for patients diagnosed with classic Menkes disease who have not demonstrated significant clinical progression. CUTX-101 is currently in a Phase 3 clinical trial.

 

In September 2018, Cyprium announced the publication of preclinical data on adeno-associated virus (AAV)-based gene therapy combined with subcutaneous CUTX-101 for Menkes disease in Molecular Therapy: Methods & Clinical Development.

 

In January 2019, Cyprium received notification from the U.S. FDA that the sponsorship of the Investigational New Drug (“IND”) application for CUTX-101 was transferred to Cyprium.

 

MB-102 (CD123 CAR T)

 

In July 2018, our partner company Mustang Bio, Inc. completed a pre-Investigational New Drug (“pre-IND”) meeting with the U.S. Food and Drug Administration (“FDA”) for MB-102 (“CD123 CAR T”). Based on the meeting, Mustang expects to initiate a Phase 1/2 trial of MB-102 in acute myeloid leukemia (“AML”), blastic plasmacytoid dendritic cell neoplasm (“BPDCN”) and high-risk myelodysplastic syndrome in the first half of 2019.

 

In November 2018, Mustang announced that additional safety and efficacy Phase 1 data evaluating MB-102 (CD123 CAR) in relapsed or refractory AML and BPDCN were presented in an oral session at the American Association for Cancer Research (“AACR”) Special Conference on Tumor Immunology and Immunotherapy.

 

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In December 2018, the FDA granted Orphan Drug Designation to MB-102 (CD123 CAR T) for the treatment of BPDCN, a rare and incurable blood cancer with a median survival of less than 18 months and no standard of care.

 

MB-101 (IL13Rα2-specific CAR T)

 

In May 2018, Mustang announced the publication of preclinical data in JCI Insight demonstrating that glioblastoma-targeted CD4+ CAR T cells mediate superior antitumor activity over CD8+ CAR T cells. The data, published by research partner City of Hope, will be applied in the ongoing Phase 1 trial of IL13Rα2-specific CAR T MB-101 in glioblastoma.

 

Oncolytic Virus (C134)

 

In February 2019, Mustang announced that they partnered and entered into an exclusive worldwide license agreement with Nationwide Children’s Hospital to develop an oncolytic virus (C134) for the treatment of glioblastoma multiforme (“GBM”). Mustang intends to combine the oncolytic virus with MB-101 (IL13Rα2-specific CAR) to potentially enhance efficacy in treating GBM.

 

MB-103 (HER2-specific CAR T)

 

In October 2018, Mustang announced that a first-of-its-kind Phase 1 clinical trial evaluating the safety and effectiveness of intraventricular delivery of CAR T cells to the brains of patients with HER2-positive breast cancer with brain metastases was initiated at City of Hope. City of Hope dosed the first patient in December 2018. In addition, Mustang announced that City of Hope dosed the first patient in a Phase 1 clinical trial of HER2-specific CAR T cells in treating recurrent or refractory grade III-IV glioma. The trial is evaluating the side effects and best dose of HER2-specific CAR T cells in treating patients with grade III-IV glioma that has come back or does not respond to treatment.

 

CK-103 (BET Inhibitor)

 

In April 2018, preclinical data was presented on Checkpoint’s BET inhibitor, CK-103, at the AACR Annual Meeting. CK-103 demonstrated combinatorial effects in an in vivo model with anti-PD-1 antibodies, which may support the development of CK-103 as an anti-cancer agent alone and in combination with CK-301.

 

CNDO-109

 

In June 2018, data from a Phase 1 trial evaluating CNDO-109-activated allogeneic natural killer (“NK”) cells in AML patients were published in the journal Biology of Blood and Marrow Transplantation. The data demonstrated that CNDO-109-activated NK cells are safe, well tolerated and may be capable of extending complete remissions in high-risk AML patients.

 

AAV Gene Therapy

 

In January 2018, our partner company Aevitas entered into a sponsored research agreement with the laboratory of Guangping Gao, Ph.D., at the University of Massachusetts Medical School to evaluate construct optimization for our AAV gene therapy treatment for complement-mediated diseases, including dry age-related macular degeneration, paroxysmal nocturnal hemoglobinuria and atypical hemolytic uremic syndrome.

 

In August 2018, Aevitas announced that it entered into a sponsored research agreement with the laboratory of Wenchao Song, Ph.D., at the University of Pennsylvania to evaluate our AAV gene therapy technology in the university’s proprietary animal models of complement-mediated diseases.

 

2018 Venture Notes

 

In the quarter ended March 2018, we 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, at the time a related party by virtue of our ownership of National. We intend to use the proceeds from the 2018 Venture Notes to acquire and license medical technologies and products through existing or recently formed partner companies.

 

NSC acted as the sole placement agent for the 2018 Venture Notes. We paid NSC a fee of $1.7 million during the year ended December 31, 2018 in connection with its placement of the 2018 Venture Notes.

 

Sale of National

 

In November 2018, we entered into an agreement to sell our 56.1% majority stake in National Holdings Corporation, to NHC Holdings, LLC, a wholly-owned subsidiary of B. Riley Financial, Inc. Under the terms of the agreement, we sold approximately 3.0 million of our shares in National, in an initial closing on November 16, 2018 at $3.25 per share for proceeds of $9.8 million. We sold our remaining 4.0 million shares at the same per-share price in February 2019 for proceeds of $13.1 million. The aggregate purchase price totaled approximately $22.9 million for our 56.1% stake and following the second closing we no longer owned shares in National.

 

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Critical Accounting Policies and Use of Estimates

 

See Note 2 to the Consolidated Financial Statements.

 

Results of Operations

 

General

 

For the year ended December 31, 2018 we generated $26.9 million of net revenue; $23.4 million of revenue relates primarily to the sale of Journey branded and generic products and $3.5 million of revenue is in connection with Checkpoint’s collaborative agreements with TGTX, a related party. At December 31, 2018, we had an accumulated deficit of $396.3 million primarily as a result of research and development expenses, purchases of in-process research and development and general and administrative expenses. While we may in the future generate revenue from a variety of sources, including license fees, milestone payments, research and development payments in connection with strategic partnerships and/or product sales, our current product candidates are at an early stage of development and may never be successfully developed or commercialized. Accordingly, we expect to continue to incur substantial losses from operations for the foreseeable future and there can be no assurance that we will ever generate significant revenues.

 

We had $6.1 million of costs of goods sold in connection with the sale of JMC branded and generic products for the year ended December 31, 2018.

 

Research and Development Expenses

 

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

 

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

 

For the year ended December 31, 2018 and 2017, research and development expenses were approximately $83.3 million and $48.3 million, respectively. Additionally, during the year ended December 31, 2018 and 2017, we expensed approximately $4.1 million and $4.2 million, respectively, in costs related to the acquisition of licenses.

 

The table below provides a summary of research and development costs associated with the development of our licenses by entity, excluding noncash stock-based compensation expenses, for the years ended December 31, 2018 and 2017:

 

   Year Ended December 31,   % of total 
($ in thousands)  2018   2017   2018   2017 
Research & Development                    
Fortress  $5,472   $6,403    7%   14%
Partner companies:                    
Avenue   16,710    6,246    21%   14%
Checkpoint   30,562    14,954    39%   34%
Mustang   17,425    7,002    22%   16%
Other1   7,852    9,685    11%   22%
Total Research & Development  $78,021   $44,290    100%   100%

 

Note 1: Includes the following partner companies: Aevitas, Caelum, Cellvation, Cyprium, Helocyte and Tamid

 

Noncash, stock-based compensation expense included in research and development for the year ended December 31, 2018 and 2017, was $5.3 million and $4.0 million, respectively.

 

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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 years ended December 31, 2018 and 2017, general and administrative expenses were $53.4 million and $50.9 million, respectively. Stock based compensation expense included in general and administrative expenses in 2018 and 2017 was $9.7 million and $9.4 million, respectively.

 

The table below provides a summary by entity of general and administrative expenses excluding non-cash stock compensation expenses for the years ended December 31, 2018 and 2017, respectively:

 

   Year Ended December 31,   % of Total 
($ in thousands)  2018   2017   2018   2017 
General & Administrative                    
Fortress  $15,370   $14,034    35%   34%
Partner companies:                    
Avenue   3,137    2,018    7%   5%
Checkpoint   3,626    3,232    8%   8%
JMC1   13,417    11,550    31%   28%
Mustang   4,978    8,603    11%   21%
Other2   3,143    2,089    8%   4%
Total General &Administrative  $43,671   $41,526    100%   100%

 

Note 1: Includes cost of outsourced sales force

Note 2: Includes the following partner companies: Aevitas, Caelum, Cellvation, Cyprium, Escala, Helocyte and Tamid

 

Comparison of Years Ended December 31, 2018 and 2017

 

   For the Years Ended December 31,   Change 
($ in thousands, except per share amounts)  2018   2017   $   % 
Revenue                    
Product revenue, net  $23,376   $15,520   $7,856    51%
Revenue - from a related party   3,506    1,725    1,781    103%
Net revenue   26,882    17,245    9,637    56%
                     
Operating expenses                    
Cost of goods sold - product revenue   6,125    3,658    2,467    67%
Research and development   83,333    48,322    35,011    72%
Research and development - licenses acquired   4,050    4,164    (114)   -3%
General and administrative   53,371    50,897    2,474    5%
Total operating expenses   146,879    107,041    39,838    37%
Loss from operations   (119,997)   (89,796)   (30,201)   34%
                     
Other income (expenses)                    
Interest income   1,104    819    285    35%
Interest expense and financing fee   (10,340)   (7,687)   (2,653)   35%
Change in fair value of derivative liabilities   (682)   (368)   (314)   85%
Change in fair value of Partner convertible note   437    (457)   894    -196%
Change in fair value of investments   (1,390)   226    (1,616)   -715%
Other income (loss)   68    (250)   318    -127%
Total other expenses   (10,803)   (7,717)   (3,086)   40%
Loss from continuing operations   (130,800)   (97,513)   (33,287)   34%
                     
Discontinued operations:                    
Gain from disposal of National   2,333    -    2,333    100%
Loss from discontinued operations, net of tax   (13,469)   (2,323)   (11,146)   480%
Total loss from discontinued operations   (11,136)   (2,323)   (8,813)   379%
Net loss   (141,936)   (99,836)   (42,100)   42%
                     
Less: net loss attributable to non-controlling interest   (57,789)   (32,960)   (24,829)   75%
Net loss attributable to common stockholders  $(84,147)  $(66,876)  $(17,271)   26%

 

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For the year ended December 31, 2018, $3.5 million of revenue was in connection with Checkpoint’s collaborative agreements with TGTX, and $23.4 million of revenue related primarily to the sale of Journey branded and generic products. The net increase in revenue of $9.6 million or 56% is due to the growth in sales of Journey’s products of $7.9 million and an increase in revenue from a related party of $1.8 million.

 

Cost of goods sold increased by $2.5 million or 67% due to the growth in Journey’s product sales.  

 

Research and development expenses increased $35.0 million, or 72%, from the year ended December 31, 2017 to the year ended December 31, 2018. The following table shows the change in research and development spending for Fortress and by partner company:

 

   Year Ended December 31,   Change 
($ in thousands)  2018   2017   $   % 
Research & Development                    
Stock-based compensation                    
Fortress  $1,068   $1,258   $(190)   -15%
Partner company:                    
Avenue   596    203    393    194%
Checkpoint   95    1,181    (1,086)   -92%
Mustang   3,429    691    2,738    396%
Other1   124    699    (575)   -82%
Sub-total stock-based compensation   5,312    4,032    1,280    32%
Other research & development                    
Fortress   5,472    6,403    (931)   -42%
Partner company:                    
Avenue   16,710    6,246    10,464    168%
Checkpoint   30,562    14,954    15,608    104%
Mustang   17,425    7,002    10,423    149%
Other1   7,852    9,685    (1,833)   -19%
Total Research & Development  $83,333   $48,322   $35,011    72%

 

Note 1: Includes the following partner company: Aevitas, Caelum, Cellvation, Cyprium, Escala, Helocyte and Tamid

 

The increase in stock-based compensation for Avenue and Mustang is attributable to new grants made to new hires, while the decrease in Fortress, Checkpoint, and the “Other” category is due to overall vesting of grants as well as the decrease in value attributed to marking to market grants held by non-employees.

 

The decrease in Fortress research and development spending is due to the lower research and development headcount subsequent to the transfer of Fortress research and development employees to TGTX, a related party, in the quarter ended September 30, 2018. Checkpoint’s increase in research and development spending is attributable to the increased manufacturing costs and clinical trial expense for CK-101 and CK-301. Mustang’s increase in research and development 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 product development activities, and Helocyte for the start-up of sponsored research activities not replicated in 2018.

 

General and administrative expenses increased $2.5 million, or 5%, from the year ended December 31, 2017 to the year ended December 31, 2018. The following table shows the change in general and administrative spending for Fortress and by partner company:

 

   Year Ended December 31,   Change 
($ in thousands)  2018   2017   $   % 
General & Administrative                    
Stock-based compensation                    
Fortress  $4,966   $5,431   $(465)   -9%
Partner company:                    
Avenue   940    400    540    135%
Checkpoint   1,900    1,937    (37)   -2%
Mustang   1,531    1,322    209    16%
Other2   363    281    82    29%
Sub-total stock-based compensation   9,700    9,371    329    4%
Other general and administrative                    
Fortress   15,370    14,034    1,336    10%
Partner company:                    
Avenue   3,137    2,018    1,119    55%
Checkpoint   3,626    3,232    394    12%
JMC1   13,417    11,550    1,867    16%
Mustang   4,978    8,603    (3,625)   -42%
Other2   3,143    2,089    1,054    50%
Total General &Administrative  $53,371   $50,897   $2,474    5%

 

Note 1: Includes cost of outsourced sales force

Note 2: Includes the following partner companies: Aevitas, Caelum, Cellvation, Cyprium, Escala, Helocyte and Tamid

 

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For the year ended December 31, 2018, the increase in general and administrative expenses of $2.5 million or 5% is primarily attributable to Fortress and Avenue’s increase in public company costs, investor relations and a legal settlement accrual as well as an increase in JMC’s sales and marketing costs, offset by a decrease in legal costs at Mustang for non-recurring expenses related to the Tang litigation.

 

Total other expense increased $3.1 million, or 40%, from $7.7 million for the year ended December 31, 2017 to $10.8 million for the year ended December 31, 2018, primarily due to an increase of $2.7 million in interest expense and financing fees, $1.6 million decrease in the fair value of investments, offset by $0.9 million decrease in the fair value of Caelum’s convertible notes as they were written down to face value due to the probability of conversion in the first quarter of 2019, as well as an increase of $0.3 million in interest income.

 

Non-controlling interests increased $24.8 million, or 75%, from the year ended December 31, 2017 to the year ended December 31, 2018. This increase reflects the partner companies.

  

Operating Activities

 

Net cash used in operating activities increased $17.5 million from the year ended December 31, 2017 to the year ended December 31, 2018. The increase was primarily due to the increase of $33.3 million in net loss from continuing operations, offset by an increase in the fair value of investments of $1.6 million, an increase in stock-based compensation expense of $1.6 million and an increase of $9.6 million in changes in operating assets and liabilities, and a change in cash provided by discontinued operations of $2.4 million.

 

Investing Activities

 

Net cash provided by investing activities increased $59.0 million from the year ended December 31, 2017 to the year ended December 31, 2018. The increase is primarily due to a $50.9 million increase in the redemption of certificates of deposit, as well as a decrease in the purchase of short-term investments of $3.5 million, a decrease of $2.3 million in funds used to purchase research and development licenses, offset by an increase of $6.5 million in the purchase of property and equipment as the build-out of the cell processing facility in Worcester, Massachusetts by Mustang continues, as well. Net cash provided by discontinued investing activities amounted to $9.8 million for the year ended December 31, 2018.

 

Financing Activities

 

Net cash provided by financing activities was $50.6 million for the year ended December 31, 2018, compared to $150.4 million of net cash provided by financing activities for the year ended December 31, 2017. During the year ended December 31, 2018, net proceeds from partner companies’ offerings were $22.7 million, net proceeds from the 2018 Venture Notes were $19.8 million, net proceeds from at-the-market offering was $7.0 million and net proceeds from subsidiaries’ at-the-market offering was $7.7 million. This was offset by $4.4 million used to pay subsidiaries’ Convertible Notes and $2.3 million paid in Preferred A dividends.

 

Liquidity and Capital Resources

 

We fund our operations through cash on hand, the sale of debt and third-party financings. At December 31, 2018, we had cash, cash equivalents and restricted cash of $81.6 million of which $36.3 million relates to Fortress, $22.0 million relates to Checkpoint, $17.0 million relates to Mustang, $2.7 million relates to Avenue, $1.2 million relates to Caelum, $1.7 million relates to Journey and $0.7 million relates to the remaining partner companies combined. Restricted cash of $16.1 million is comprised of: $14.9 million collateralizing the IDB Note, $0.6 million of which is securing a letter of credit used as a security deposit for the New York, NY lease that became effective on October 3, 2014, $0.5 million secures the Worcester, Massachusetts lease signed by Mustang that became effective on October 27, 2017, and $0.1 million securing the Waltham, Massachusetts lease signed by Fortress that became effective in October 2015.

 

In 2018 the Company closed a private placement of promissory notes for an aggregate of $21.7 million (the “2018 Venture Notes”) through NSC, the proceeds of which will be used to acquire and license medical technologies and products through existing or recently formed partner companies, as well as financing its existing partner companies.

 

Pursuant to the terms of an Amended and Restated At Market Issuance Sales Agreement with MLV & Co. LLC, and FBR Capital Markets & Co., (“ATM”), for the year ended December 31, 2018, the Company issued 2,914,410 shares of common stock at an average price of $2.50 per share for gross proceeds of $7.3 million. No shares were issued under the ATM in 2017. In 2018 Checkpoint sold a total of 1,841,774 shares of common stock in connection with an S-3 declared effective in December 2017; Checkpoint had 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, relating to the sale of shares of common stock. The Checkpoint ATM raised aggregate total gross proceeds of approximately $8.0 million at an average selling price of $4.33 per share. Additionally, in March 2018 Checkpoint completed an underwritten public offering, whereby 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. In 2018, we also raised $0.2 million from the issuance of our common shares in connection with our ESPP.

 

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In 2017, Avenue completed an IPO of its common stock, issuing 6,325,000 shares inclusive of 825,000 shares subject to an underwriter over-allotment at $6.00 per share, resulting in gross proceeds of approximately $38.0 million. Also in 2017, Mustang raised gross proceeds of $56.0 million, before expenses, in a private placement of shares and warrants for which OPN Capital Markets was the placement agent. Further, in November 2017, we received gross proceeds of $25.0 million related to the issuance of shares of 9.375% Series A Cumulative Redeemable Perpetual Preferred stock in a private placement, and also during 2017, we raised $0.2 million from the issuance of our common shares in connection with our ESPP.

 

We will require additional financing to fully develop and prepare regulatory filings and obtain regulatory approvals for our existing and new product candidates, fund operating losses, and, if deemed appropriate, establish or secure through third parties manufacturing for our potential products, and sales and marketing capabilities. We have funded our operations to date primarily through the sale of equity and debt securities. We believe that our current cash and cash equivalents is sufficient to fund operations for at least the next twelve months. Our failure to raise capital as and when needed would have a material adverse impact on our financial condition and our ability to pursue our business strategies. We may seek funds through equity or debt financings, collaborative or other arrangements with corporate sources, sale of partner companies such as National, the exercise of purchase options for Avenue and Caelum, or through other sources of financing.

  

Off-Balance Sheet Arrangements

 

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

 

Recently Issued Accounting Pronouncements

 

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

 

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

 

Not applicable.

 

Item 8. Financial Statements and Supplementary Data.

 

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

 

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

 

None.

 

Item 9A. Controls and Procedures.

 

Disclosure Controls and Procedures

 

Controls and Procedures

 

Disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) are designed only to provide reasonable assurance that they will meet their objectives. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness, as of December 31, 2018, of the design and operation of our disclosure controls and procedures, as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

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Internal Control over Financial Reporting

 

Management’s Report on Internal Control over Financial Reporting

 

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

 

(1)pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
(2)provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and
(3)provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of our assets that could have a material effect on the financial statements.

 

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

 

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. In making the assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013).

 

Based on the results of this assessment, management (including our Chief Executive Officer and our Chief Financial Officer) has concluded that, as of December 31, 2018, our internal control over financial reporting was effective.

 

Attestation Report of Registered Public Accounting Firm

 

The effectiveness of our internal controls over financial reporting as of December 31, 2018 has been audited by our independent registered accounting firm, BDO USA, LLP, as stated in their attestation report, which is included on page F-3 herein.

 

Changes in Internal Controls over Financial Reporting.

 

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

 

Item 9B. Other Information

 

None.

 

PART II

 

Item 10. Directors, Executive Officers and Corporate Governance

 

The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2019 Annual Meeting of Stockholders.

 

Item 11. Executive Compensation

 

The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2019 Annual Meeting of Stockholders.

 

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

 

The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2019 Annual Meeting of Stockholders.

 

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

 

The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2019 Annual Meeting of Stockholders.

 

Item 14. Principal Accounting Fees and Services

 

The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2019 Annual Meeting of Stockholders.

 

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PART IV

 

Item 15. Exhibits, Financial Statement Schedules.

 

(a) Financial Statements.

 

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

 

Reports of Independent Registered Public Accounting Firms F-2
   
Consolidated Balance Sheets F-4
   
Consolidated Statements of Operations F-5
   
Consolidated Statements of Changes in Stockholders’ Equity F-6
   
Consolidated Statements of Cash Flows F-7
   
Notes to the Consolidated Financial Statements F-9 - F-61

 

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(b) Exhibits.

 

      Incorporated by Reference
      (Unless Otherwise Indicated)
Exhibit               
Number  Exhibit Title  Form  File  Exhibit  Filing Date
3.1  Amended and Restated Certificate of Incorporation of the Registrant.  10-12G  000-54463  3.1  July 15, 2011
                
3.2  First Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Registrant.  10-12G  000-54463  3.2  July 15, 2011
                
3.3  Second Amended and Restated Bylaws of the Registrant.  8-K  -  3.7  October 31, 2013
                
3.4  Second Certificate of Amendment of Amended and Restated Certificate of Incorporation, as amended.  10-K  -  3.8  March 14, 2014
                
3.5  Third Certificate of Amendment of Amended and Restated Certificate of Incorporation, as amended  8-K  -  3.9  April 27, 2015
                
4.1  Form of Common Stock Certificate.  10-12G  000-54463  4.1  July 15, 2011
                
4.2  Certificate of Designation of Rights and Preferences 9.375% Series A Perpetual Preferred Stock.  8-K  001-35366  3.1  November 7, 2017
                
10.1  Coronado Biosciences, Inc. 2007 Stock Incentive Plan. #  10-12G  000-54463  10.8  July 15, 2011
                
10.2  Form of Stock Option Award Agreement. #  10-12G  000-54463  10.9  July 15, 2011
                
10.3  Amended and Restated Consulting Agreement, entered into as of January 1, 2019, by and between the Registrant and Eric Rowinsky.*       
                
10.4  Form of Indemnification Agreement by and between the Registrant and its officers and directors.  10-12G/A  000-54463  10.25  August 23, 2011
                
10.5  Coronado Biosciences, Inc. 2012 Employee Stock Purchase Plan. #  DEF 14A      July 13, 2012
                
10.6  Promissory Note issued by Registrant to Israel Discount Bank of New York, dated February 13, 2014.  8-K    10.53  February 18, 2014
                
10.7  Assignment and Pledge of Money Market Account date February 13, 2014 in favor of Israel Discount Bank of New York.  8-K    10.54  February 18, 2014
                
10.8  Restricted Stock Issuance Agreement, dated as of February 2, 2014, by and between the Registrant and Michael S. Weiss.#  8-K/A    10.55  February 26, 2014
                
10.9  Restricted Stock Issuance Agreement, dated as of December 19, 2013, by and between the Registrant and Michael S. Weiss.#  10-K    10.57  March 14, 2014
                
10.10  Restricted Stock Issuance Agreement, dated as of December 19, 2013, by and between the Registrant and Lindsay A. Rosenwald, M.D.#  10-K    10.58  March 14, 2014
                
10.11  Form of Coronado Biosciences, Inc. 2013 Stock Incentive Plan Award Agreement (2013 Stock Incentive Plan). #  S-8  333-194588  10.60  March 14, 2014

 

 52 

 

 

10.12  Form of Subscription Agreement  8-K    10.61  November 10, 2014
                
10.13  Note Purchase Agreement, dated February 27, 2015, by and between the Registrant and NSC Biotech Venture Fund.  8-K    10.62  March 5, 2015
                
10.14  Form of Subco Securities Purchase Agreement.  8-K    10.64  March 5, 2015
                
10.15  Form of Subco Warrant.  8-K    10.65  March 5, 2015
                
10.16  Form of Subco Promissory Note.  8-K    10.66  March 5, 2015
                
10.17  Coronado Biosciences, Inc. Deferred Compensation Plan for Directors, dated March 12, 2015. #  8-K    10.67  March 18, 2015
                
10.18  Fortress Biotech, Inc. 2013 Stock Incentive Plan, as amended. #  DEF 14A      June 4, 2015
                
10.19  Fortress Biotech, Inc. Long-Term Incentive Plan. #  DEF 14A      June 4, 2015
                
10.20  Restricted Stock Unit Award Agreement between Fortress Biotech, Inc. and George Avgerinos effective July 15, 2015.#  8-K    10.70  July 17, 2015
                
10.21  Amended and Restated Promissory Note issued by the Registrant to NSC Biotech Venture Fund I LLC, dated July 29, 2015.  8-K    10.71  August 4, 2015
                
10.22  Form of Support and Voting Agreement by and among Fortress Biotech, Inc., FBIO Acquisition, Inc., and certain officers and directors (and certain of their affiliates) of National Holdings Corporation.  8-K    10.28  April 28, 2016
                
10.23  Stockholder Rights Agreement by and between National Holdings Corporation and FBIO Acquisition, Inc., dated April 27, 2016.  8-K    10.29  April 28, 2016
                
10.24  Form of Voting Agreement by and among Fortress Biotech, Inc., FBIO Acquisition, Inc., and certain officers and directors (and certain of their affiliates) of National Holdings Corporation.  8-K    10.30  April 28, 2016
                
10.25  Amended and Restated At Market Issuance Sales Agreement, dated August 27, 2016, between the registrant, MLV & Co., LLC and FBR Capital Markets & Co.  8-K    10.32  August 17, 2016
                
10.26  Form of Fortress Biotech, Inc. Convertible Second Promissory Note.  10-Q    10.34  November 9, 2016
                
10.27  Form of Common Stock Purchase Warrant.  10-Q    10.35  November 9, 2016
                
10.28  Pledge and Security Agreement dated as of September 14, 2016 made by Fortress Biotech, Inc. and FBIO Acquisition, Inc. in favor of Opus Point Healthcare Innovations Fund, LP.  10-Q    10.36  November 9, 2016
                
10.29  Placement Agency Agreement dated March 25, 2017, between Fortress Biotech, Inc., NAM Biotech Fund II, LLC- Series I and National Securities Corporation.  10-Q    10.33  May 10, 2017
                
10.30  Placement Agency Agreement dated March 25, 2017, between Fortress Biotech, Inc., NAM Special Situations Fund I QP, LLC – FBIO Series I and National Securities Corporation.  10-Q    10.34  May 10, 2017
                
10.31  Form of Common Stock Purchase Warrant in favor of National Securities Corporation.  10-Q    10.35  May 10, 2017
                
10.32  Form of Note Purchase Agreement between Fortress Biotech, Inc., NAM Biotech Fund II, LLC – Series I and NAM Special Situations Fund I QP, LLC – FBIO Series I.  10-Q    10.36  May 10, 2017

 

 53 

 

 

10.33  Form of Promissory Note issued by Fortress Biotech, Inc. to NAM Biotech Fund II, LLC – Series I and NAM Special Situations Fund I QP, LLC – FBIO Series I.  10-Q    10.37  May 10, 2017
                
10.34  Fortress Biotech, Inc. 2012 Employee Stock Purchase Plan, as amended.  8-K    10.38  June 12, 2017
                
10.35  Fortress Biotech, Inc. Amended and Restated Long-Term Incentive Plan.  8-K    10.39  June 12, 2017
                
10.36  Amended and Restated Credit Facility Agreement dated as of March 12, 2018, by and among Fortress Biotech, Inc. and Opus Healthcare Innovations Fund, LP.*  10-K    10.39  March 16, 2018
                
10.37   At Market Issuance Sales Agreement, among the Company and B. Riley FBR, Inc., National Securities Corporation, LifeSci Capital LLC, Maxim Group LLC and Noble Capital Markets, Inc. dated April 5, 2018.   8-K   000-54463   1.1   April 5, 2018
                     
10.38   Stock Purchase and Merger Agreement, dated as of November 12, 2018, by and between Avenue Therapeutics, Inc., InvaGen Pharmaceuticals Inc. and Madison Pharmaceuticals Inc.   8-K   000-54463   10.1   November 16, 2018
                     
10.39   Stockholders Agreement, dated as of November 12, 2018, by and between Fortress Biotech, Inc., Avenue Therapeutics, Inc., Dr. Lucy Lu, M.D. and InvaGen Pharmaceuticals Inc.   8-K   000-54463   10.2   November 16, 2018
                     
10.40   Credit Agreement, dated as of November 12, 2018, by and between Avenue Therapeutics, Inc. and InvaGen Pharmaceuticals Inc.   8-K   000-54463   10.3   November 16, 2018
                     
10.41   Guaranty, dated as of November 12, 2018, by and between Fortress Biotech, Inc. and InvaGen Pharmaceuticals Inc.   8-K   000-54463   10.4   November 16, 2018
                     
10.42   Voting and Support Agreement, dated as of November 12, 2018, by and between Fortress Biotech, Inc., Avenue Therapeutics, Inc., Dr. Lucy Lu, M.D. and InvaGen Pharmaceuticals Inc.   8-K   000-54463   10.5   November 16, 2018
                     
10.43   Waiver Agreement, dated as of November 12, 2018, by and between Fortress Biotech, Inc., Avenue Therapeutics, Inc. and InvaGen Pharmaceuticals Inc.   8-K   000-54463   10.6   November 16, 2018
                     
10.44   Restrictive Covenant Agreement, dated as of November 12, 2018, by and between Fortress Biotech, Inc. and InvaGen Pharmaceuticals Inc.   8-K   000-54463   10.7   November 16, 2018
                     
10.45   Indemnification Agreement, dated as of November 12, 2018, by and between Fortress Biotech, Inc. and InvaGen Pharmaceuticals Inc.   8-K   000-54463   10.8   November 16, 2018
                     
10.46   Stock Purchase Agreement by and among FBIO Acquisition, Inc., Fortress Biotech, Inc., and NHC Holdings, LLC, dated November 14, 2018.   8-K   000-54463   10.1   November 20, 2018
                     
10.47   Development, Option and Stock Purchase Agreement by and among Caelum Biosciences, Inc., Alexion Pharmaceuticals, Inc., Fortress Biotech, Inc., and the several shareholders of Caelum Biosciences, Inc., dated January 30, 2019.*   8-K   000-54463     January 31, 2019
                
14.1  Code of Ethics of Registrant applicable to Directors, Officers and Employees.  S-1  333-177041  14.1  September 28, 2011
                
21.1  Subsidiaries of the Registrant.        Filed herewith

 

 54 

 

 

23.1  Consent Independent Registered Public Accounting Firm.        Filed herewith
                
24.1  Power of Attorney (included on the signature page of this Form 10-K)        Filed herewith
                
31.1  Certification of Chairman, President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.        Filed herewith
                
31.2  Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.        Filed herewith
                
32.1  Certification of Chairman, President and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.        Filed herewith
                
32.2  Certification of the Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.        Filed herewith
                
101.INS  XBRL Instance Document.        Filed herewith
                
101.SCH  XBRL Taxonomy Extension Schema Document.        Filed herewith
                
101.CAL  XBRL Taxonomy Extension Calculation Linkbase Document.        Filed herewith
                
101.DEF  XBRL Taxonomy Extension Definition Linkbase Document.        Filed herewith
                
101.LAB  XBRL Taxonomy Extension Label Linkbase Document.        Filed herewith
                
101.PRE  XBRL Taxonomy Extension Presentation Linkbase Document.        Filed herewith

 

# Management contract or compensatory plan.

 

*Filed herewith

 

Item 16. Form 10-K Summary

 

None.

 

 55 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

 

CONSOLIDATED FINANCIAL STATEMENTS

 

Index to Consolidated Financial Statements

 

Reports of Independent Registered Public Accounting Firm F-2
   
Consolidated Balance Sheets F-4
   
Consolidated Statements of Operations F-5
   
Consolidated Statements of Changes in Stockholders’ Equity F-6
   
Consolidated Statements of Cash Flows F-7
   
Notes to the Consolidated Financial Statements F-9 – F-61

 

 F-1 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Report of Independent Registered Public Accounting Firm

 

Shareholders and Board of Directors

Fortress Biotech, Inc. and subsidiaries

New York, New York

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of Fortress Biotech, Inc. and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2018 and 2017, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 18, 2019 expressed an unqualified opinion thereon.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

We have served as the Company's auditor since 2016.

 

/s/ BDO USA, LLP

 

Boston, Massachusetts

March 18, 2019

  

 F-2 

 

 

Report of Independent Registered Public Accounting Firm

 

Shareholders and Board of Directors

Fortress Biotech, Inc. and subsidiaries

New York, New York

 

Opinion on Internal Control over Financial Reporting

 

We have audited Fortress Biotech, Inc. and subsidiaries (the “Company’s”) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company and subsidiaries as of December 31, 2018 and 2017, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2018, and the related notes and our report dated March 18, 2019 expressed an unqualified opinion thereon.

 

Basis for Opinion

 

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and Limitations of Internal Control over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ BDO USA, LLP

 

Boston, Massachusetts

March 18, 2019

 

 F-3 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

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

 

   December 31, 
   2018   2017 
ASSETS          
Current assets          
Cash and cash equivalents  $65,508   $94,952 
Accounts receivable   5,498    7,758 
Short-term investments (certificates of deposit)   17,604    36,002 
Inventory   678    171 
Other receivables - related party   2,095    618 
Prepaid expenses and other current assets   6,735    5,732 
  Current assets held for sale   13,089    37,948 
Total current assets   111,207    183,181 
           
Property and equipment, net   12,019    7,116 
Restricted cash   16,074    16,006 
Long-term investments, at fair value   -    1,390 
Intangible asset   1,417    883 
Other assets   276    258 
Noncurrent assets held for sale   -    37,116 
Total assets  $140,993   $245,950 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities          
Accounts payable and accrued expenses  $34,067   $27,412 
Accounts payable and accrued expenses - related party   149    222 
Interest payable   1,232    315 
Interest payable - related party   97    669 
Notes payable, short-term - related party (net of debt discount of $336 and $973 at December 31, 2018 and December 31, 2017, respectively)   9,164    8,528 
Partner company convertible note, short-term, at fair value   9,914    4,700 
Derivative warrant liability   991    309 
  Current liabilities held for sale   -    29,283 
Total current liabilities   55,614    71,438 
           
Notes payable, long-term (net of debt discount of $4,567 and $4,072 at December 31, 2018 and December 31, 2017, respectively)   60,425    39,212 
Partner company convertible note, long-term, at fair value   -    10,059 
Other long-term liabilities   5,211    4,739 
Total liabilities   121,250    125,448 
           
Commitments and contingencies          
           
Stockholders' equity          
Preferred stock, $.001 par value, 15,000,000 authorized, 5,000,000 designated Series A shares, 1,000,000 shares issued and outstanding as of December 31, 2018 and December 31, 2017; liquidation value of $25.00 per share   1    1 
Common stock, $.001 par value, 100,000,000 shares authorized, 57,845,447 and 50,991,285 shares issued and outstanding as of December 31, 2018 and December 31, 2017, respectively   58    51 
Common stock issuable, 744,322 and 158,015 shares as of December 31, 2018 and December 31, 2017, respectively   659    500 
Additional paid-in-capital   397,408    364,148 
Accumulated deficit   (396,274)   (312,127)
Total stockholders' equity attributed to the Company   1,852    52,573 
           
Non-controlling interests   17,891    67,929 
Total stockholders' equity   19,743    120,502 
Total liabilities and stockholders' equity  $140,993   $245,950 

 

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

 

 F-4 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

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

 

   For the Years Ended December 31, 
   2018   2017 
Revenue          
Product revenue, net  $23,376   $15,520 
Revenue – from a related party   3,506    1,725 
Net revenue   26,882    17,245 
           
Operating expenses          
Cost of goods sold – product revenue   6,125    3,658 
Research and development   83,333    48,322 
Research and development – licenses acquired   4,050    4,164 
General and administrative   53,371    50,897 
Total operating expenses   146,879    107,041 
Loss from operations   (119,997)   (89,796)
           
Other income (expenses)          
Interest income   1,104    819 
Interest expense and financing fee   (10,340)   (7,687)
Change in fair value of derivative liabilities   (682)   (368)
Change in fair value of subsidiary convertible note   437    (457)
Change in fair value of investments   (1,390)   226 
Other income (loss)   68    (250)
Total other expenses   (10,803)   (7,717)
Loss from continuing operations   (130,800)   (97,513)
Discontinued operations:          
Gain from disposal of National   2,333    - 
Loss from discontinued operations, net of tax   (13,469)   (2,323)
Total loss from discontinued operations   (11,136)   (2,323)
Net loss   (141,936)   (99,836)
           
Less: net loss attributable to non-controlling interests   57,789    32,960 
Net loss attributable to common stockholders  $(84,147)  $(66,876)
           
Loss from continuing operations per common share – basic and diluted  $(3.01)  $(2.34)
Loss from discontinued operations per common share – basic and diluted  $(0.26)  $(0.06)
Net loss per common share attributable to common stockholders – basic and diluted  $(1.94)  $(1.61)
           
Weighted average common shares outstanding – basic and diluted   43,461,978    41,658,733 

 

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

 

 F-5 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

($ in thousands except for share amounts)

 

   Series A Preferred Stock   Common Stock   Shares   Paid-In   Accumulated   Non-Controlling   Total Stockholders' 
   Shares   Amount   Shares   Amount   Issuable   Capital   Deficit   Interests   Equity 
Balance at December 31, 2016   -   $-    48,932,023   $49   $-   $283,697   $(245,251)  $44,473   $82,968 
Exercise of options for cash   -    -    20,000    -    -    27    -    -    27 
Stock-based compensation expense   -    -    -    -    -    13,403    -    -    13,403 
Issuance of restricted stock   -    -    1,796,270    2    -    (2)   -    -    - 
Issuance of Series A preferred stock for cash, net   1,000,000    1    -    -    -    22,195    -    -    22,196 
Issuance of partner companies’ common shares for license expenses   -    -    -    -    -    1,727    -    -    1,727 
Issuance of partner companies’ common shares for research and development expenses   -    -    -    -    -    50    -    -    50 
Issuance of partner companies’ common shares for settlement   -    -    -    -    -    2,062    -    -    2,062 
Issuance of common stock under ESPP   -    -    67,733    -    -    191    -    -    191 
Issuance of common stock for research and development expenses   -    -    43,292    -    -    200    -    -    200 
Disposal of National   -    -    -    -    -    391    -    -    391 
Partner companies’ offering, net   -    -    -    -    -    95,116    -    -    95,116 
Debt discount related to Opus Credit Facility   -    -    -    -    -    201    -    -    201 
Issuance of warrants by partner companies’ in conjunction with NSC debt   -    -    -    -    -    750    -    -    750 
Conversion of subsidiary's notes payable   -    -    -    -    -    314    -    -    314 
Common shares issuable for 2017 Subordinated Note Financing  interest expense   -    -    -    -    500    -    -    -    500 
Common shares issued for 2017 Subordinated Note Financing interest expense   -    -    131,967    -    -    541    -    -    541 
Preferred A dividends declared and paid   -    -    -    -    -    (299)   -    -    (299)
Non-controlling interest in partner companies’   -    -    -    -    -    (56,416)   -    56,416    - 
Net loss attributable to non-controlling interest   -    -    -    -    -    -    -    (32,960)   (32,960)
Net loss attributable to common stockholders   -    -    -    -    -    -    (66,876)   -    (66,876)
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   -    -    -    -    -    15,012    -    -    15,012 
Settlement of restricted stock units into common stock   -    -    2,601,701    3    -    (3)   -    -    - 
Issuance of common stock under ESPP   -    -    110,856    -    -    198    -    -    198 
Issuance of subsidiaries' common shares for license expenses   -    -    -    -    164    112    -    -    276 
Partner company’s offering, net   -    -    -    -    -    22,668    -    -    22,668 
Partner company’s at-the-market offering, net   -    -    -    -    -    7,747    -    -    7,747 
Exercise of partner company’s warrants for cash   -    -    -    -    -    181    -    -    181 
Issuance of common stock for at-the-market offering, net   -    -    2,914,410    3    -    7,014    -    -    7,017 
Contribution of capital for 2017 bonuses   -    -    -    -    -    1,000    -    -    1,000 
Common shares issuable for 2017 Subordinated Note Financing interest expense   -    -    -    -    495    -    -    -    495 
Common shares issued for 2017 Subordinated Note Financing interest expense   -    -    783,965    1    (500)   1,971    -    -    1,472 
Common shares issued for Opus interest expense   -    -    443,230    -    -    859    -    -    859 
Preferred A dividends declared and paid   -    -    -    -    -    (2,344)   -    -    (2,344)
2017 Preferred A offering cost adjustment   -    -    -    -    -    154    -    -    154 
Disposal of National   -    -    -    -    -    2,247    -    (15,805)   (13,558)
Non-controlling interest in subsidiaries   -    -    -    -    -    (23,556)   -    23,556    - 
Net loss attributable to non-controlling interest   -    -    -    -    -    -    -    (57,789)   (57,789)
Net loss attributable to common stockholders   -    -    -    -    -    -    (84,147)   -    (84,147)
Balance at December 31, 2018   1,000,000   $1    57,845,447   $58   $659   $397,408   $(396,274)  $17,891   $19,743 

 

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

 

 F-6 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows 

($ in thousands)

 

   For the Years Ended December 31, 
   2018   2017 
Cash Flows from Operating Activities:          
Net loss  $(141,936)  $(99,836)
Less: Net loss on discontinued operations   (13,469)   (2,323)
      Gain from disposal of National   2,333    - 
Loss from continuing operations   (130,800)   (97,513)
Reconciliation of net loss to net cash used in operating activities:          
Depreciation expense   1,393    726 
Amortization of debt discount   2,419    3,141 
Amortization of product revenue license fee   666    534 
Stock-based compensation expense   15,012    13,403 
Issuance of common stock for research and development expenses   -    200 
Issuance of common stock for research and development-licenses acquired expense   276    - 
Issuance of subsidiaries' common shares for research and development expenses   -    50 
Common shares issued for Opus interest expense   859    - 
Change in fair value of investments   1,390    (226)
Change in fair value of derivative liabilities   682    368 
Change in fair value of subsidiary convertible note   (437)   457 
Loss on write off of investment   -    250 
Research and development-licenses acquired, expense   3,774    4,164 
Change in fair value of subsidiaries' assets and liabilities   -    104 
Common shares issuable for interest expense   495    500 
Common shares issued for interest expense   1,472    541 
Increase (decrease) in cash and cash equivalents resulting from changes in operating assets and liabilities:          
Accounts receivable   2,260    (5,928)
Inventory   (507)   32 
Other receivables – related party   (1,477)   1,172 
Prepaid expenses and other current assets   (3)   (4,011)
Other assets   (17)   - 
Accounts payable and accrued expenses   4,686    10,651 
Accounts payable and accrued expenses – related party   (23)   172 
Interest payable   917    176 
Interest payable – related party   (572)   602 
Current assets held for sale   -    3,189 
Noncurrent assets held for sale   -    (620)
Current liabilities held for sale   -    (9,008)
Other long-term liabilities   472    (284)
Net cash used in continuing operating activities   (97,063)   (77,158)
Net cash used in discontinued operating activities   (1,785)   (4,147)
Net cash used in operating activities   (98,848)   (81,305)

 

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

 

 F-7 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows - Continued

($ in thousands)

 

Cash Flows from Investing Activities:          
Purchase of research and development licenses   (1,074)   (3,365)
Purchase of property and equipment   (7,082)   (648)
Purchase of short-term investment (certificates of deposit)   (52,604)   (56,091)
Redemption of short-term investment (certificates of deposit)   71,002    20,089 
Security deposits paid   (1)   (251)
Security deposits refund   -    42 
Acquisition of intangible assets - Journey   (1,200)   - 
Net cash provided by (used in) continuing investing activities   9,041    (40,224)
Net cash provided by discontinued investing activities   9,783    - 
Net cash provided by (used in) investing activities   18,824    (40,224)
           
Cash Flows from Financing Activities:          
Proceeds from issuance of Series A preferred stock   154    25,000 
Payment of costs related to the issuance of Series A preferred stock   -    (2,804)
Payment of Preferred A dividends   (2,344)   (299)
Proceeds from at-the-market offering   7,274    - 
Payment of cost related to at-the-market offering   (257)   - 
Proceeds from partner company’s public offering   23,011    95,117 
Payment of costs related partner company’s public offering   (343)   - 
Proceeds from partner company’s at-the-market offering   7,981    - 
Payment of costs related to partner company’s at-the-market offering   (234)   - 
Proceeds from exercise of partner companies’ warrants   181    - 
Proceeds from exercise of stock options   -    27 
Proceeds from issuance of common stock under ESPP   198    191 
Proceeds from 2017 Subordinated Note Financing   -    28,355 
Payment of debt issuance costs associated with 2017 Subordinated Note Financing   -    (81)
Proceeds from Opus Credit Facility   -    2,500 
Proceeds from 2018 Venture Notes   21,707    - 
Payment of debt issue costs associated with 2018 Venture Notes   (1,868)   - 
Payment of NSC Note   -    (3,608)
Payment of debt issue costs   (404)   - 
Proceeds from partner company’s Convertible Note   -    9,914 
Payment of debt issuance costs associated with partner companies’ Convertible Note   -    (104)
Payment of partner companies’ Convertible Note   (4,408)   - 
Net cash provided by continuing financing activities   50,648    154,208 
Net cash used in discontinued financing activities   -    (3,827)
Net cash provided by financing activities   50,648    150,381 
           
Net decrease in cash and cash equivalents and restricted cash   (29,376)   28,852 
Cash and cash equivalents and restricted cash at beginning of period   110,958    82,106 
Cash and cash equivalents and restricted cash at end of period  $81,582   $110,958 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest  $4,448   $207 
Cash paid for interest - related party  $281   $571 
           
Supplemental disclosure of non-cash financing and investing activities:          
Settlement of restricted stock units into common stock  $3   $2 
Issuance of warrants by partner companies’ in conjunction with NSC debt  $-   $750 
Issuance of partner companies’' common shares for settlement  $-   $2,062 
Debt discount related to Opus Credit Facility  $-   $201 
Unpaid debt offering cost  $-   $58 
Conversion of partner company’s notes payable  $-   $314 
Common shares issuable for license acquired  $-   $1,682 
Common shares issued for 2017 Subordinated Note Financing interest expense  $500   $- 
Receivables of contribution of capital for 2017 bonuses  $1,000   $- 
Unpaid fixed assets  $196   $982 
Unpaid research and development licenses acquired  $2,700   $755 

  

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

 

 F-8 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

1. Organization and Description of Business

 

Fortress Biotech, Inc. (“Fortress” or the “Company”) is a biopharmaceutical company dedicated to acquiring, developing and commercializing pharmaceutical and biotechnology products and product candidates, which the Company does at the Fortress level, at its majority-owned and majority-controlled subsidiaries and joint ventures, and at entities the Company founded and in which it maintains significant minority ownership positions. Fortress has a talented and experienced business development team, comprising scientists, doctors and finance professionals, who identify and evaluate promising products and product candidates for potential acquisition by new or existing partner companies. The Fortress Companies have executed such arrangements in partnership with some of the world’s foremost universities, research institutes and pharmaceutical companies, including City of Hope National Medical Center, St. Jude Children’s Research Hospital and University College London.

 

Following the exclusive license or other acquisition of the intellectual property underpinning a product or product candidate, Fortress leverages its business, scientific, regulatory, legal and finance expertise to help the partners achieve their goals. Partner companies then assess a broad range of strategic arrangements to accelerate and provide additional funding to support research and development, including joint ventures, partnerships, out-licensings, and public and private financings; to date, three partner companies are publicly-traded, and two have consummated strategic partnerships with industry leaders Alexion Pharmaceuticals, Inc. and InvaGen Pharmaceuticals, Inc. (a subsidiary of Cipla Limited), respectively.

 

As of December 31, 2018, several of the partner companies 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”). The Company also maintains exclusive ownership positions in operational subsidiaries CB Securities Corporation, Innmune Limited and FBIO Acquisition, Inc. and majority ownership positions in acquisition companies for which the Company is actively seeking product candidate licenses, including Coronado SO Co., Escala Therapeutics, Inc., GeneXion Oncology, Inc., FBIO Acquisition Corp. IV, FBIO Acquisition Corps. VI – XIV and Fortress Biotech, China, Inc.

 

Liquidity and Capital Resources

 

Since inception, the Company’s operations have been financed primarily through the sale of equity and debt securities, from the sale of companies, 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 fully develop and prepare regulatory filings and obtain regulatory approvals for its 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, sale of a partner company, grants or other arrangements to fully develop and prepare regulatory filings and obtain regulatory approvals for the existing and new product candidates, fund operating losses, and, if deemed appropriate, establish or secure through third parties manufacturing for the 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.

 

National Holdings Corporation

 

During 2016, the Company purchased 56.6% of National Holdings Corporation, a diversified independent brokerage company (together with its subsidiaries, herein referred to as “NHLD” or “National”) through wholly-owned subsidiary FBIO Acquisition, Inc. (“FBIO Acquisition”). The Company paid total consideration of $22.9 million or approximately 7.0 million shares at $3.25 per share in connection with this transaction. On November 14, 2018, the Company announced that it had reached an agreement with NHC Holdings, LLC (“NHC”) to sell all of its shares of National, representing 56.1% of the total outstanding shares of NHLD for $3.25 per share or total consideration of $22.9 million. Pursuant to the terms of the agreement with NHC the sale of the shares was subject to two closings. The first closing occurred on November 14, 2018 in which the Company sold approximately 3.0 million of its shares in NHLD and received $9.8 million in proceeds. The second closing occurred on February 11, 2019 upon the receipt of FINRA approval of the sale in which the Company received $13.1 million in proceeds for the sale of its remaining 4.0 million shares of NHLD to NHC and two other minority holders and received. At December 31, 2018, the Company’s holding in National approximated 32.1% and was recorded on the consolidated balance sheets at fair value as a component of current assets held for sale.

 

 F-9 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

The Company’s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The Company’s consolidated financial statements include the accounts of the Company and the accounts of the Company’s subsidiaries, listed above. All intercompany balances and transactions have been eliminated.

  

The accompanying consolidated financial statements include the accounts of the Company’s subsidiaries. For consolidated entities where the Company owns less than 100% of the subsidiary, the Company records net loss attributable to non-controlling interests in its consolidated statements of operations equal to the percentage of the economic or ownership interest retained in such entities by the respective non-controlling parties. The Company also consolidates subsidiaries in which it owns less than 50% of the subsidiary but maintains voting control.

 

Use of Estimates

 

The Company’s 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 assets, fair value of stock options and warrants, stock-based compensation, common stock issued to acquire licenses, investments, accrued expenses, provisions for income taxes and contingencies. Due to the uncertainty inherent in such estimates, actual results may differ from these estimates.

 

Discontinued Operations

 

At December 31, 2018, the Company determined that its National segment met the discontinued operations criteria set forth in Accounting Standards Codification (ASC) Subtopic 205-20-45, Presentation of Financial Statements, for the twelve months ended December 30, 2018 and 2017. As such, the National segment results have been classified as discontinued operations in the accompanying Consolidated Balance Sheets and Consolidated Statements of Operations. See Note 3 for more information relating to the Company’s discontinued operations.

 

Fair Value Measurement

 

The Company follows accounting guidance on fair value measurements for financial assets and liabilities measured at fair value on a recurring basis. Under the accounting guidance, fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.

 

The accounting guidance requires fair value measurements be classified and disclosed in one of the following three categories:

 

  Level 1: Quoted prices in active markets for identical assets or liabilities.
  Level 2: Observable inputs other than Level 1 prices for similar assets or liabilities that are directly or indirectly observable in the marketplace.
  Level 3: Unobservable inputs which are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.

 

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.

 

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.

 

Segment Reporting

 

The Company operates in two operating and reportable segments, Dermatology Product Sales and Pharmaceutical and Biotechnology Product Development. The Company evaluates the performance of each segment based on operating profit or loss. There is no inter-segment allocation of interest expense and income taxes.  

 

 F-10 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

Cash and Cash Equivalents

 

The Company considers highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents at December 31, 2018 and at December 31, 2017 consisted of cash and certificates of deposit in institutions in the United States. Balances at certain institutions have exceeded Federal Deposit Insurance Corporation insured limits and U.S. government agency securities.

  

Short-term Investments

 

The Company classifies its certificates of deposit as cash and cash equivalents or held to maturity in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification (“ASC”) 320, Investments - Debt and Equity Securities. The Company considers all short-term investments with an original maturity in excess of three months when purchased to be short-term investments. Short-term investments consist of short-term FDIC insured certificates of deposit with a maturity of more than three months and less than twelve months, carried at amortized cost using the effective interest method. The cost of the Company’s certificates of deposit approximated fair value. The Company reassesses the appropriateness of the classification of its investments at the end of each reporting period.

 

At December 31, 2018, the Company had approximately $27.6 million in certificates of deposit. The Company classified $10.0 million as cash and cash equivalents and classified $17.6 million as short-term investments (certificates of deposits) held-to-maturity as of December 31, 2018. At December 31, 2017, the Company had approximately $50.0 million in certificates of deposit. The Company classified $14.0 million as cash and cash equivalents and classified $36.0 million as short-term investments (certificates of deposits) held-to-maturity as of December 31, 2017. This classification was based upon management’s determination that it has the positive intent and ability to hold the securities until their maturity dates, as its investments mature within one year and the underlying cash invested in these securities is not required for current operations.

 

Property and Equipment

 

Computer equipment, furniture & fixtures and machinery & equipment are recorded at cost and depreciated using the straight-line method over the estimated useful life of each asset. Leasehold improvements are amortized over the shorter of the estimated useful lives or the term of the respective leases.

 

Impairment of Long-Lived Assets

 

The Company reviews long-lived assets, including property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset over its fair value, determined based on discounted cash flows.

 

Restricted Cash

 

The Company records cash held in trust or pledged to secure certain debt obligations as restricted cash. As of December 31, 2018, and 2017, the Company has $16.1 million and $16.0 million, respectively, of restricted cash collateralizing a note payable of $14.9 million in 2018 and 2017, and certain pledges to secure a letter of credit in connection with certain office leases of $1.2 million and $1.1 million in 2018 and 2017, respectively.

 

The following table provides a reconciliation of cash, cash equivalents, and restricted cash from the consolidated balance sheets to the consolidated statements of cash flows for the years ended December 31, 2018, and 2017 ($ in thousands).

 

   December 31, 
   2018   2017 
Cash and cash equivalents  $65,508   $94,952 
Restricted cash   16,074    16,006 
Total cash and cash equivalents and restricted cash  $81,582   $110,958 

 

 F-11 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

Inventories

 

Inventories comprise finished goods, which are valued at the lower of cost or market, on a first-in, first-out basis. The Company evaluates the carrying value of inventories on a regular basis, taking into account anticipated future sales compared with quantities on hand, and the remaining shelf life of goods on hand.

 

Accounts Receivable

 

Accounts receivable consists of amounts due to the Company for product sales from JMC. The Company’s accounts receivable reflects discounts for estimated early payment and for product estimated returns. Accounts receivable are stated at amounts due from customers, net of an allowance for doubtful accounts. Accounts that are outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due and the customer’s current ability to pay its obligation to the Company. The Company writes off accounts receivable when they become uncollectible. The allowance for product estimated returns were $3.1 million and $1.3 million at December 31, 2018 and December 31, 2017, respectively. The Company recorded expense related to returns reserve of $2.4 million and $1.2 million for the years ended December 31, 2018 and 2017, respectively.

 

Current Investments at Fair Value

 

The Company elects the fair value option, instead of the equity method, for its current investment in National at fair value (see Note 3). The decision to elect the fair value option, which is irrevocable once elected, is determined on an instrument by instrument basis and applied to an entire instrument. The net gains or losses, if any, on an investment for which the fair value option has been elected are recognized as a change in fair value of investments on the Consolidated Statements of Operations.

  

Fair Value Option

 

As permitted under the FASB, ASC 825, Financial Instruments, (“ASC 825”), the Company has elected the fair value option to account for the Helocyte and Caelum convertible notes. In accordance with ASC 825, the Company records these convertible notes at fair value with changes in fair value recorded in the Consolidated Statement of Operations. As a result of applying the fair value option, direct costs and fees related to the Helocyte and Caelum convertible notes were recognized in earnings as incurred and were not deferred. During 2018, the Helocyte convertible notes matured and the Company repaid the principal amount due of approximately $4.4 million.

 

Accounting for Warrants at Fair Value

 

The Company classifies as liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the Company) or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).

 

The fair value of warrants that include price protection reset provision features are deemed to be “down-round protection” and, therefore, do not meet the scope exception for treatment as a derivative under ASC 815, Derivatives and Hedging , since “down-round protection” is not an input into the calculation of the fair value of warrants and cannot be considered “indexed to the Company’s own stock” which is a requirement for the scope exception as outlined under ASC 815. The accounting treatment of derivative financial instruments requires that the Company record the warrants at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.

 

The Company assessed the classification of warrants issued, in connection with convertible note financing for Helocyte in 2016 and Caelum’s convertible note financing in 2017 (the “Helocyte and Caelum Warrants”), and determined that the Helocyte, and Caelum Warrants met the criteria for liability classification. Accordingly, the Company classified the Helocyte and Caelum Warrants as a liability at their fair value and adjusts the instruments to fair value at each balance sheet date until the warrants are exercised or expired. Any change in the fair value of the Helocyte, and Caelum Warrants is recognized as “change in the fair value of derivative liabilities” in the Consolidated Statements of Operations.

 

 F-12 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

Opus Credit Facility, with Detachable Warrants

 

The Company accounts for the Opus Credit Facility with detachable warrants in accordance with ASC 470, Debt. The Company assessed the classification of its common stock purchase warrants as of the date of the transaction and determined that such instruments meet the criteria for equity classification. The warrants are reported on the Consolidated Balance Sheets as a component of additional paid in capital within stockholders’ equity.

 

The Company recorded the related issue costs and value ascribed to the warrants as a debt discount of the Opus Credit Facility. The discount is amortized utilizing the effective interest method over the term of the Opus Credit Facility. The unamortized discount, if any, upon repayment of the Opus Credit Facility will be expensed to interest expense. In accordance with ASC Subtopic 470-20, the Company determined the weighted average effective interest rate of the debt was approximately 17% at December 31, 2018. The Company has also evaluated the Opus Credit Facility and warrants in accordance with the provisions of ASC 815, Derivatives and Hedging, including consideration of embedded derivatives requiring bifurcation.

 

Issuance of Debt and Equity

 

The Company issues complex financial instruments which include both equity and debt features. The Company analyzes each instrument under ASC 480, Distinguishing Liabilities from Equity, ASC 815, Derivatives and Hedging and, ASC 470, Debt, in order to establish whether such instruments include any embedded derivatives.

 

Long-Lived Assets

 

Long-lived assets, primarily fixed assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. The Company will perform a periodic assessment of assets for impairment in the absence of such information or indicators. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company would recognize an impairment loss only if it’s carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and estimated fair value. As of December 31, 2018 and 2017 there were no indicators of impairment.

 

Research and Development

 

Research and development costs are expensed as incurred. Advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. Upfront and milestone payments due to third parties that perform research and development services on the Company’s behalf will be expensed as services are rendered or when the milestone is achieved.

 

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, and costs associated with regulatory filings, laboratory costs and other supplies.

 

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 commercial feasibility and has no alternative future use. Such licenses purchased by the Company require substantial completion of research and development, regulatory and marketing approval efforts in order to reach commercial feasibility and has no alternative future use. Accordingly, the total purchase price for the licenses acquired during the period was reflected as research and development - licenses acquired on the Consolidated Statements of Operations for the year ended December 31, 2018 and 2017.

 

Contingencies

 

The Company records accruals for contingencies and legal proceedings expected to be incurred in connection with a loss contingency when it is probable that a liability has been incurred and the amount can be reasonably estimated.

 

If a loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.

 

Stock-Based Compensation

 

The Company expenses stock-based compensation to employees over the requisite service period based on the estimated grant-date fair value of the awards and forfeiture rates. For stock-based compensation awards to non-employees, the Company remeasures the fair value of the non-employee awards at each reporting period prior to vesting and finally at the vesting date of the award. Changes in the estimated fair value of these non-employee awards are recognized as compensation expense in the period of change.

 

 F-13 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model or 409A valuations, as applicable. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment.

 

Income Taxes

 

The Company records income taxes using the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax effects attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards. The Company establishes a valuation allowance if management believes it is more likely than not that the deferred tax assets will not be recovered based on an evaluation of objective verifiable evidence. For tax positions that are more likely than not of being sustained upon audit, the Company recognizes the largest amount of the benefit that is greater than 50% likely of being realized. For tax positions that are not more likely than not of being sustained upon audit, the Company does not recognize any portion of the benefit. 

 

On December 22, 2017, “H.R.1”, formerly known as the “Tax Cuts and Jobs Act”, was signed into law. Among other items, H.R.1 reduces the federal corporate tax rate to 21% from the existing maximum rate of 35%, effective January 1, 2018. As a result, the Company has concluded that this will cause the Company’s net deferred tax asset to be revalued at the new lower tax rate. Accordingly, the Company has reduced the value of the deferred tax asset before valuation allowance.

  

Non-Controlling Interests

 

Non-controlling interests in consolidated entities represent the component of equity in consolidated entities held by third parties. Any change in ownership of a subsidiary while the controlling financial interest is retained is accounted for as an equity transaction between the controlling and non-controlling interests.

 

Comprehensive Loss

 

The Company’s comprehensive loss is equal to its net loss for all periods presented.

 

Reclassifications

 

Certain prior period amounts may have been reclassified to conform to the current year presentation. 

 

Recently Adopted Accounting Pronouncements

 

In May 2017, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The new standard was effective on January 1, 2018; however, early adoption is permitted. The Company adopted ASU No. 2017-09 as of January 1, 2018. The adoption of this update did not impact the Company’s financial statements.

  

In January 2017, the FASB issued an ASU 2017-01, “Business Combinations (Topic 805) Clarifying the Definition of a Business”. The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company adopted ASU 2017-01 on January 1, 2018. The adoption of this update did not impact the Company’s financial statements.

   

In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations” (“ASU 2016-08”). The purpose of ASU 2016-08 is to clarify the implementation of guidance on principal versus agent considerations. The amendments in ASU 2016-08 are effective for interim and annual reporting periods beginning after December 15, 2017. The Company adopted the new standard effective January 1, 2018, using the modified retrospective approach applied to all of its contracts. The adoption of this update did not have a material impact on the Company’s financial statements.

 

 F-14 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

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 December 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 adopted ASU No. 2018-07 as of January 1, 2019. The adoption of this update did not have a material impact on the Company’s financial statements.

 

In November 2018, the FASB issued ASU No. 2018-18, “Collaboration Arrangements: Clarifying the Interaction between Topic 808 and Topic 606”. The issuance of ASC 606 raised questions about the interaction between the guidance on collaborative arrangements and revenue recognition. ASU 2018-18 addresses this uncertainty by (1) clarifying that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606 when the collaboration arrangement participant is a customer, (2) adding unit of account guidance to assess whether the collaboration arrangement or a part of the arrangement is with a customer and (3) precluding a company from presenting transactions with collaboration arrangement participants that are not directly related to sales to third parties together with revenue from contracts with customers. The new standard is effective on January 1, 2020 with early adoption permitted. The Company elected to adopt ASU 2018-18 in December 2018. The adoption of this update did not have a material impact on the Company’s financial statements.

 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations by, among other provisions, recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous GAAP. For public companies, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption is permitted.  In transition, entities may also elect a package of practical expedients that must be applied in its entirety to all leases commencing before the adoption date, unless the lease is modified, and permits entities to not reassess (a) the existence of a lease, (b) lease classification or (c) determination of initial direct costs, as of the adoption date, which effectively allows entities to carryforward accounting conclusions under previous U.S. GAAP.   In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides entities an optional transition method to apply the guidance under Topic 842 as of the adoption date, rather than as of the earliest period presented.  The Company adopted Topic 842 on January 1, 2019, using the optional transition method to apply the new guidance as of January 1, 2019, rather than as of the earliest period presented, and elected the package of practical expedients described above.  The Company is still finalizing its analysis but expects to recognize additional operating liabilities from approximately $27.5 million to $24.9 million, with corresponding Right of Use (ROU) assets of approximately $24.6 million to $22 million as of January 1, 2019 based on the present value of the remaining lease payments.

 

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 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 does not expect the adoption of this guidance to have a material impact on its financial statements.

 

 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.

 

 F-15 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to the Consolidated 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 is effective on November 5, 2018. The Company does not expect the adoption of this guidance to have a material impact on its financial statements and anticipates its first presentation of changes in stockholders’ equity will be included in its Form 10-Q for the quarter ended March 31, 2019.

 

3. Discontinued Operations

 

As of December 31, 2018, the Company recorded its investment in National at fair value of $13.1 million or $3.25 per share. This holding is reported on the Company’s Consolidated Balance Sheets as current assets held for sale on December 31, 2018. Pursuant to the NHC Agreement the Company also recorded a net gain of $2.3 million related to the transactions which is included in discontinued operations in the consolidated statement of operations for the twelve months ended December 31, 2018.

 

The following is a summary of revenue and expenses of National for the years ended December 31, 2018 and 2017:

 

   December 31, 
($ in thousands)  2018   2017 
Revenue  $210,980   $170,339 
           
Operating expenses          
Commissions, compensation and fees   182,127    155,187 
Clearing fees   2,400    2,343 
Communications   3,260    2,767 
Occupancy   3,755    4,286 
Licenses and registration   2,735    1,726 
Professional fees   4,306    4,531 
Interest   97    14 
Depreciation and amortization   1,551    2,089 
Other administrative expenses   8,165    8,808 
Total operating expenses   208,396    181,751 
Gain (loss) from operations   2,584    (11,412)
           
Other income (expenses)          
Change in fair value of derivative liabilities   -    304 
Interest expense and financing fees   -    1,827 
Change in fair value of warrants   (13,018)   8,455 
Other income   153    16 
Total other (expenses) income   (12,865)   10,602 
Loss from discontinued operations before income taxes   (10,281)   (810)
           
Income tax expense   3,188    1,513 
Loss from discontinued operations   (13,469)   (2,323)
           
Gain from disposal of National   2,333    - 
Total loss from discontinued operations, net of tax  $(11,136)  $(2,323)

 

 F-16 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

In connection with this sale, the Company classified the assets and liabilities related to NHLD, included on its consolidated balance sheet as of December 31, 2018 and December 31, 2017, as held for sale as presented in the table below:

 

   December 31, 
($ in thousands)  2018   2017 
ASSETS          
Current assets          
Cash and cash equivalents  $-   $18,963 
Cash deposits with clearing organizations   -    1,041 
Receivables from broker-dealers and clearing organizations   -    7,395 
Forgivable loans receivable   -    1,616 
Securities owned, at fair value   -    1,985 
Current assets held for sale   13,089    - 
Prepaid expenses and other current assets   -    6,948 
Total current assets held for sale   13,089    37,948 
           
Property and equipment, net   -    2,397 
Restricted cash   -    1,381 
Goodwill   -    18,645 
Intangible assets   -    14,340 
Other assets   -    353 
Total non-current assets held for sale   -    37,116 
Total assets held for sale  $13,089   $75,064 

 

Liability classified as held for sale:        
   December 31, 
($ in thousands)  2018   2017 
Current liabilities          
Accounts payable and accrued expenses  $-   $8,404 
Accrued commissions and payroll payable   -    10,065 
Contingent consideration payable   -    311 
Deferred clearing and marketing credits   -    786 
Securities sold, not yet purchased at fair value   -    151 
Warrants issued in 2017 and issuable in 2016   -    5,597 
Other current liabilities   -    3,969 
Total current liabilities held for sale   -    29,283 
Total liabilities held for sale  $-   $29,283 

 

The table below depicts the cash flows from the transaction for the twelve months ended December 31, 2018 and 2017, respectively:

 

   December 31, 
($ in thousands)  2018   2017 
Operating activities          
Effect of elimination entry with discontinued operations presentation  $(1,785)  $(4,147)
Total cash used in discontinued operating activities  $(1,785)  $(4,147)
           
Investing activities          
Proceeds from sale of National  $9,783   $- 
Total cash provided by discontinued investing activities  $9,783   $- 
           
Financing activities          
Payment of debt issuance costs associated with 2017 Subordinated Note Financing  $-   $(2,836)
Payment of debt issuance costs associated with partner company’s Convertible Note   -    (991)
Total cash used in discontinued financing activities  $-   $(3,827)

 

 F-17 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

4. Property and Equipment 

 

Fortress’ property and equipment consisted of the following:

 

      December 31, 
($ in thousands)  Useful Life (Years)  2018   2017 
Computer equipment  3  $648   $543 
Furniture and fixtures  5   1,128    1,009 
Machinery & equipment  5   3,143    143 
Leasehold improvements  5-15   9,271    5,351 
Construction in progress 1  N/A   393    1,241 
Total property and equipment      14,583    8,287 
Less: Accumulated depreciation      (2,564)   (1,171)
Property and equipment, net     $12,019   $7,116 

 

Note 1: Relates to the Mustang cell processing facility.

 

Depreciation expenses of Fortress’ property and equipment for the years ended December 31, 2018 and 2017 was $1.4 million and $0.7 million, respectively, and was recorded in research and development, manufacturing and general and administrative expense in the Consolidated Statements of Operations.

 

5. 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 (formerly CB Pharma Acquisition Corporation)

  

On June 10, 2016, CB Pharma Acquisition Corp (“CB Pharma”) held an extraordinary general meeting of shareholders (the “Meeting”). At the Meeting, the shareholders approved each of the following items: (i) an amendment to the CB Pharma’s Amended and Restated Memorandum and Articles of Association (the “Charter”) to extend the date by which CB Pharma has to consummate a business combination from June 12, 2016 to December 12, 2016 (the “Extension”), (ii) an amendment to the Charter to allow the holders of the CB Pharma’s ordinary shares issued in the their initial public offering to elect to convert their shares into their pro rata portion of the funds held in trust, if the Extension is approved, and (iii) the change of CB Pharma’s name from “CB Pharma Acquisition Corp.” to “Origo Acquisition Corporation” (“Origo”). In connection with the Meeting, the Company transferred 1,050,000 of its CB Pharma ordinary shares to Origo. The Company retained ownership of 265,000 Origo shares.

 

As of December 31, 2017, the Company valued its investment in Origo, a publicly traded company, utilizing the following assumptions: probability of a successful business combination of 46.53%, and no dividend rate, which yielded an underlying value of $10.65 per ordinary share for the private placement shares. The rights and warrants were valued utilizing a binomial-lattice model utilizing a risk-free rate of return of 1.28% and a strike price of $11.50 per share arriving at a value of $1.06 for each right and $1.07 for each warrant as of December 31, 2017. Time to expected business combination/ liquidation was 0.05 at December 31, 2017. At December 31, 2017, the fair value of the Company’s investment in Origo was $1.4 million, respectively. The Company also had a working capital note with Origo of $0.3 million.

 

On August 10, 2018, 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. Since the Company’s investment in Origo, was not eligible for the redemption, the Company wrote off its investment in Origo and recorded a decrease in fair-value of investment of $1.4 million for the year ended December 31, 2018. The Company’s working capital note of $0.3 million, was also written off in the year ended December 31, 2018.

 

Contingently Issuable Warrant 

 

Pursuant to the terms of the 2018 Venture Notes (see Note 9), if a partner company receives proceeds from the 2018 Venture Notes, such partner company will issue a note to the fund and the fund will receive a warrant to purchase a number of shares of the partner company ’s stock equal to 25% of the outstanding partner company note divided by the lowest price for which the partner company sells its equity in its first third party financing. The warrants issued will have a term of 10 years and an exercise price equal to the par value of the partner company’s common stock and are accounted for in accordance with ASC 815, Derivatives and Hedging. For the twelve months ended December 31, 2018, Aevitas, Cellvation and Cyprium received funds from the 2018 Venture Notes. The Company evaluated whether or not a third party financing was probable at December 31, 2018 for each of the entities and determined that it was not, as such the Company did not record any value associated with the contingently issued warrants. The Company did not have any borrowings under this note in 2017.

 

 F-18 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

Warrant Liabilities

 

Helocyte

 

The fair value of Helocyte’s warrant liability, which was issued in connection with Helocyte’s convertible note, as of December 31, 2018 and 2017, approximated nil and $87,000, respectively. During 2018 the notes matured and were paid off (see Note 9) and as such the warrant was not issued.. A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring Helocyte’s warrant liabilities that are categorized within Level 3 of the fair value hierarchy as of December 31, 2017 are as follows:

 

   December 31 
   2018   2017 
Risk-free interest rate   NA    2.04% - 2.08%
Expected dividend yield   NA    -%
Expected term in years   NA    3.50 – 3.92 
Expected volatility   NA    70%

 

($ in thousands)  Fair Value of
Derivative
Warrant
Liability
 
Beginning balance at January 1, 2017  $167 
Change in fair value of derivative liabilities   (80)
Ending balance at December 31, 2017  $87 
Change in fair value of derivative liabilities   (87)
Ending balance at December 31, 2018  $ 

 

Caelum

 

The fair value of Caelum's warrant liability, which was issued in connection with Caelum’s convertible note, was written up to the full value of the liability at December 31, 2018 due to the conversion of the notes in January 2019 (see Note 21). The fair value at December 31, 2018 and 2017 was measured using a Monte Carlo simulation valuation methodology. A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring Caelum’s warrant liabilities that are categorized within Level 3 of the fair value hierarchy as of December 31, 2018 and 2017 are as follows:

 

   December 31 
   2018   2017 
Risk-free interest rate   2.905% -2.909%   2.154% - 2.168%
Expected dividend yield   %   %
Expected term in years   3.84 – 3.96    4.58 - 4.71 
Expected volatility   70%   70%

 

($ in thousands)  Fair Value of
Derivative
Warrant
Liability
 
Beginning balance at January 1, 2017  $- 
Additions   225 
Change in fair value of derivative liabilities   (3)
Ending balance at December 31, 2017  $222 
Change in fair value of derivative liabilities   769 
Ending balance at December 31, 2018  $991 

 

 F-19 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

Convertible Notes at Fair Value

 

Helocyte

 

For the year ended December 31, 2017, Helocyte’s convertible debt was 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 the convertible debt that is categorized within Level 3 of the fair value hierarchy is presented in the following table. For the year ended December 31, 2018 the note was not valued as it matured and was paid off. For the year ended December 31, 2017 the following input were utilized to derive the note’s fair value:

 

   December 31 
   2018   2017 
Risk-free interest rate   NA    1.53% - 1.72%
Expected dividend yield   NA    - 
Expected term in years   NA    0.50 - 0.911 
Expected volatility   NA    52.4%

 

($ in thousands)  Helocyte
Convertible
Note, at fair
value
 
Beginning balance at January 1, 2017  $4,487 
Change in fair value of convertible notes   213 
Ending balance at December 31, 2017  $4,700 
Payment of convertible note   (4,408)
Change in fair value of convertible notes   (292)
Ending balance at December 31, 2018  $ 

 

Caelum

 

Caelum’s convertible debt is measured at fair value using the Monte Carlo simulation valuation methodology. A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring Caelum’s convertible debt that is categorized within Level 3. As of December 31, 2018, conversion of the Caelum Convertible Note was probable and as such the fair value approximated cost. For the years ended December 31, 2018 and 2017 the following input were utilized to derive the note’s fair value:

 

   December 31 
   2018   2017 
Risk-free interest rate   2.302%   1.506%- 1.851%
Expected dividend yield   %   -%
Expected term in years   0.32    0.46 – 1.70 
Expected volatility   67%   70.0%

 

($ in thousands)  Caelum
Convertible
Note, at fair
value
 
Beginning balance at January 1, 2017  $ 
Additions  $9,914 
Change in fair value of convertible notes   145 
Ending balance at December 31, 2017  $10,059 
Change in fair value of convertible notes   (145)
Ending balance at December 31, 2018  $9,914 

 

 F-20 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

 

The following tables classify into the fair value hierarchy of Fortress’ financial instruments, measured at fair value on a recurring basis on the Consolidated Balance Sheets as of December 31, 2018 and 2017:

 

   Fair Value Measurement as of December 31, 2018 
($ in thousands)  Level 1   Level 2   Level 3   Total 
Liabilities                    
Warrant liabilities  $   $   $991   $991 
Helocyte Convertible Note, at fair value                
Caelum Convertible Note, at fair value           9,914    9,914 
Total  $   $   $10,905   $10,905 

 

   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  $   $   $309   $309 
Caelum Convertible Note, at fair value           10,059    10,059 
Helocyte Convertible Note, at fair value           4,700    4,700 
Total  $   $   $15,068   $15,068 

 

The table below provides a roll forward of the changes in fair value of Level 3 financial instruments for the years ended December 31, 2018 and 2017:

 

   Investment   Convertible Notes at fair value   Warrants 1   Warrant     
($ in thousands)  in Origo   Helocyte   Caelum   National   liabilities   Total 
Balance at December 31, 2017  $1,390   $4,700   $10,059   $5,597   $87   $21,833 
Payment of convertible note       (4,408)               (4,408)
Disposal of National               (5,597)   222    (5,375)
Change in fair value of investments   (1,390)                   (1,390)
Change in fair value of convertible notes       (292)   (145)