Toggle SGML Header (+)


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

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2019

 

OR

 

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

 

For the transition period from       to      

 

Commission File Number 001-35366

 

FORTRESS BIOTECH, INC.

(Exact name of registrant as specified in its charter)

 

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

 

2 Gansevoort Street, 9th Floor

New York, New York 10014

(Address including zip code of principal executive offices)

 

(781) 652-4500

(Registrant’s telephone number, including area code)

 

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

 

Title of Class  Trading Symbol(s)  Exchange Name
Common Stock  FBIO  Nasdaq Capital Market
9.375% Series A Cumulative Redeemable Perpetual Preferred Stock  FBIOP  Nasdaq Capital Market

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   x   No   ¨

 

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

 

Large accelerated filer ¨   Accelerated filer x
Non-accelerated filer ¨   Smaller reporting company 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 registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   ¨   No   x

 

Class of Stock   Outstanding Shares as of November 8, 2019
Common Stock, $0.001 par value   70,780,103
9.375% Series A Cumulative Redeemable Perpetual Preferred Stock, $0.001 par value   1,039,292

 

 

 

 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Quarterly Report on Form 10-Q

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION 1
Item 1. Unaudited Condensed Financial Statements 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 36
Item 3. Quantitative and Qualitative Disclosures About Market Risks 48
Item 4. Controls and Procedures 48
     
PART II. OTHER INFORMATION 49
Item 1. Legal Proceedings 49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 73
Item 3. Defaults Upon Senior Securities 73
Item 4. Mine Safety Disclosures 73
Item 5. Other Information 73
Item 6. Exhibits 73
     
SIGNATURES   74

 

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Unaudited Condensed Financial Statements

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets


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

 

   September 30,   December 31, 
   2019   2018 
   (Unaudited)     
ASSETS          
Current assets          
Cash and cash equivalents  $134,945   $65,508 
Accounts receivable (net of allowance of $250 and $0 at September 30, 2019 and December 31, 2018, respectively)   5,137    5,498 
Short-term investments (certificates of deposit)   5,000    17,604 
Inventory   941    678 
Other receivables - related party   1,243    2,095 
Prepaid expenses and other current assets   4,117    6,735 
Restricted cash, current   14,929    - 
Current assets held for sale   -    13,089 
Total current assets   166,312    111,207 
           
Property and equipment, net   12,152    12,019 
Operating lease right-of-use asset, net   21,876    - 
Restricted cash   1,145    16,074 
Long-term investment, at fair value   11,193    - 
Intangible asset, net   7,731    1,417 
Other assets   1,179    276 
Total assets  $221,588   $140,993 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities          
Accounts payable and accrued expenses  $28,512   $34,067 
Accounts payable and accrued expenses - related party   -    149 
Interest payable   1,039    1,232 
Interest payable - related party   89    97 
Notes payable, short-term - related party (net of debt discount of $0 and $336 at September 30, 2019 and December 31, 2018, respectively)   15,472    9,164 
Partner company convertible note, short-term, at fair value   -    9,914 
Operating lease liabilities - short-term   1,741    - 
Derivative warrant liability   -    991 
Total current liabilities   46,853    55,614 
           
Notes payable, long-term (net of debt discount of $5,728 and $4,567 at September 30, 2019 and December 31, 2018, respectively)   68,542    60,425 
Operating lease liabilities - long-term   24,168    - 
Other long-term liabilities   7,025    5,211 
Total liabilities   146,588    121,250 
           
Commitments and contingencies          
           
Stockholders' equity          
Preferred stock, $.001 par value, 15,000,000 authorized, 5,000,000 designated Series A shares, 1,026,111 and 1,000,000 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively; liquidation value of $25.00 per share   1    1 
Common stock, $.001 par value, 100,000,000 shares authorized, 70,335,534 and 57,845,447 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively   70    58 
Common stock issuable, 307,486 and 744,322 shares as of September 30, 2019 and December 31, 2018, respectively   500    659 
Additional paid-in-capital   445,966    397,408 
Accumulated deficit   (420,742)   (396,274)
Total stockholders' equity attributed to the Company   25,795    1,852 
           
Non-controlling interests   49,205    17,891 
Total stockholders' equity   75,000    19,743 
Total liabilities and stockholders' equity  $221,588   $140,993 

 

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

 

 1 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

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

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2019   2018   2019   2018 
Revenue                    
Product revenue, net  $9,492   $5,168   $23,816   $17,366 
Revenue - from a related party   280    5    1,683    525 
Net revenue   9,772    5,173    25,499    17,891 
                     
Operating expenses                    
Cost of goods sold - product revenue   2,702    1,406    6,972    4,546 
Research and development   14,571    16,082    56,355    58,528 
Research and development – licenses acquired   700    3,706    1,350    3,804 
General and administrative   14,339    12,184    41,260    38,788 
Total operating expenses   32,312    33,378    105,937    105,666 
Loss from operations   (22,540)   (28,205)   (80,438)   (87,775)
                     
Other income (expenses)                    
Interest income   738    269    1,955    841 
Interest expense and financing fee   (3,168)   (2,657)   (8,743)   (7,650)
Change in fair value of derivative liability   -    12    -    114 
Change in fair value of subsidiary convertible note   -    (84)   -    26 
Change in fair value of investments   -    (565)   -    (1,390)
Other loss   -    -    -    (333)
Gain on deconsolidation of Caelum   -    -    18,521    - 
Total other income (expenses)   (2,430)   (3,025)   11,733    (8,392)
Loss from continuing operations   (24,970)   (31,230)   (68,705)   (96,167)
                     
Discontinued operations:                    
Income (loss) from discontinued operations, net of tax   -    2,643    -    (6,354)
Total income (loss) from discontinued operations   -    2,643    -    (6,354)
Net loss   (24,970)   (28,587)   (68,705)   (102,521)
                     
Less: net loss attributable to non-controlling interests   12,208    11,949    44,237    43,254 
Net loss attributable to common stockholders  $(12,762)  $(16,638)  $(24,468)  $(59,267)
                     
Loss from continuing operations per common share - basic and diluted  $(0.44)  $(0.70)  $(1.29)  $(2.21)
Income (loss) from discontinued operations per common share - basic and diluted  $-   $0.06   $-   $(0.15)
Net loss per common share attributable to common stockholders - basic and diluted  $(0.22)  $(0.37)  $(0.46)  $(1.36)
                     
Weighted average common shares outstanding - basic and diluted   56,856,821    44,818,186    53,060,565    43,578,763 

 

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

 

 2 

 

 

 FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Stockholders’ Equity

($ in thousands)
(Unaudited)

 

Three Months Ended September 30, 2019

 

   Series A Preferred Stock   Common Stock   Common
Shares
   Additional
Paid-In
   Accumulated   Non-Controlling   Total
Stockholders'
 
   Shares   Amount   Shares   Amount   Issuable   Capital   Deficit   Interests   Equity 
Balance at June 30, 2019   1,000,000   $1    68,138,203   $68   $490   $439,295   $(407,980)  $57,946   $89,820 
Stock-based compensation expense   -    -    -    -    -    3,741    -    -    3,741 
Issuance of restricted stock   -    -    177,292    -    -    -    -    -    - 
Issuance of common stock for at-the-market offering, net   -    -    1,213,643    1    -    1,930    -    -    1,931 
Issuance of preferred A for at-the-market offering, net   26,111    -    -    -    -    523    -    -    523 
Preferred A dividends declared and paid   -    -    -    -    -    (601)   -    -    (601)
Partner company’s offering, net   -    -    -    -    -    52    -    -    52 
Partner company’s at-the-market offering, net   -    -    -    -    -    3,341    -    -    3,341 
Common shares issuable for 2017 Subordinated Note Financing interest expense   -    -    -    -    500    -    -    -    500 
Common shares issued for 2017 Subordinated Note Financing interest expense   -    -    317,804    1    (490)   489    -    -    - 
Common shares issued for Opus interest expense   -    -    91,767    -    -    165    -    -    165 
Common shares issued for Opus debt   -    -    396,825    -    -    500    -    -    500 
Non-controlling interest in subsidiaries   -    -    -    -    -    (3,467)   -    3,467    - 
Write off of Partner company note receivable   -    -    -    -    -    (2)   -    -    (2)
Net loss attributable to non-controlling interest   -    -    -    -    -    -    -    (12,208)   (12,208)
Net loss attributable to common stockholders   -    -    -    -    -    -    (12,762)   -    (12,762)
Balance at September 30, 2019   1,026,111   $1    70,335,534   $70   $500   $445,966   $(420,742)  $49,205   $75,000 

 

Nine Months Ended September 30, 2019

 

   Series A Preferred Stock   Common Stock   Common
 Shares
   Additional
Paid-In
   Accumulated   Non-Controlling   Total
Stockholders'
 
   Shares   Amount   Shares   Amount   Issuable   Capital   Deficit   Interests   Equity 
Balance at December 31, 2018   1,000,000   $1    57,845,447   $58   $659   $397,408   $(396,274)  $17,891   $19,743 
Stock-based compensation expense   -    -    -    -    -    10,423    -    -    10,423 
Issuance of restricted stock   -    -    1,842,034    2    -    (2)   -    -    - 
Issuance of common stock under ESPP   -    -    54,221    -    -    60    -    -    60 
Issuance of subsidiaries' common shares for license expenses   -    -    -    -    (164)   164    -    -    - 
Issuance of common stock for at-the-market offering, net   -    -    8,604,469    9    -    15,789    -    -    15,798 
Issuance of Series A preferred stock for at-the-market offering, net   26,111    -    -    -    -    523    -    -    523 
Preferred A dividends declared and paid   -    -    -    -    -    (1,773)   -    -    (1,773)
Partner company’s offering, net   -    -    -    -    -    61,036    -    -    61,036 
Partner company’s at-the-market offering, net   -    -    -    -    -    29,680    -    -    29,680 
Issuance of partner company warrants in conjunction with Horizon Notes   -    -    -    -    -    888    -    -    888 
Common shares issuable for 2017 Subordinated Note Financing interest expense   -    -    -    -    500    -    -    -    500 
Common shares issued for 2017 Subordinated Note Financing interest expense   -    -    1,330,450    1    (495)   1,468    -    -    974 
Common shares issuable for Opus interest expense   -    -    -    -    281    -    -    -    281 
Common shares issued for Opus interest expense   -    -    262,088    -    (281)   506    -    -    225 
Common shares issued for Opus debt   -    -    396,825    -    -    500    -    -    500 
Non-controlling interest in subsidiaries   -    -    -    -    -    (70,702)   -    70,702    - 
Write off of Partner company note receivable   -    -    -    -    -    (2)   -    -    (2)
Deconsolidation of Caelum non-controlling interest   -    -    -    -    -    -    -    4,849    4,849 
Net loss attributable to non-controlling interest   -    -    -    -    -    -    -    (44,237)   (44,237)
Net loss attributable to common stockholders   -    -    -    -    -    -    (24,468)   -    (24,468)
Balance at September 30, 2019   1,026,111   $1    70,335,534   $70   $500   $445,966   $(420,742)  $49,205   $75,000 

 

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

 

 3 

 

 

 FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Stockholders’ Equity

($ in thousands)
(Unaudited)

 

Three Months Ended September 30, 2018

 

   Series A Preferred Stock   Common Stock   Common  
Shares
   Additional
Paid-In
   Accumulated   Non-Controlling   Total
Stockholders'
 
   Shares   Amount   Shares   Amount   Issuable   Capital   Deficit   Interests   Equity 
Balance at June 30, 2018   1,000,000   $1    53,987,074   $54   $776   $397,858   $(354,756)  $52,332   $96,265 
Stock-based compensation expense   -    -    -    -    -    4,096    -    -    4,096 
Issuance of restricted stock   -    -    251,147    -    -    -    -    -    - 
Issuance of subsidiaries' common shares for license expenses   -    -    -    -    -    206    -    -    206 
Subsidiary's offering cost   -    -    -    -    -    11    -    -    11 
Subsidiary's ATM offering, net   -    -    -    -    -    7,726    -    -    7,726 
Issuance of common stock for at-the-market offering   -    -    1,537,921    2    -    2,887    -    -    2,889 
At-the-market offering cost   -    -    -    -    -    (99)   -    -    (99)
Contribution of capital for 2017 bonuses   -    -    -    -    -    1,000    -    -    1,000 
Common shares issued for Opus interest expense   -    -    234,030    -    (287)   574    -    -    287 
Common shares issuable for 2017 Subordinated Note Financing interest expense   -    -    -    -    495    -    -    -    495 
Common shares issued for2017 Subordinated Note Financing interest expense   -    -    173,308    -    (489)   489    -    -    - 
Preferred A dividends declared and paid   -    -    -    -    -    (586)   -    -    (586)
Disposal of NHLD   -    -    -    -    -    934    -    -    934 
Non-controlling interest in subsidiaries   -    -    -    -    -    (6,481)   -    6,481    - 
Net loss attributable to non-controlling interest   -    -    -    -    -    -    -    (11,949)   (11,949)
Net loss attributable to common stockholders   -    -    -    -    -    -    (16,638)   -    (16,638)
Balance at September 30, 2018   1,000,000   $1    56,183,480   $56   $495   $408,615   $(371,394)  $46,864   $84,637 

 

Nine Months Ended September 30, 2018

 

   Series A Preferred Stock   Common Stock   Common
Shares
   Additional
Paid-In
   Accumulated   Non-Controlling   Total
Stockholders'
 
   Shares   Amount   Shares   Amount   Issuable   Capital   Deficit   Interests   Equity 
Balance at December 31, 2017   1,000,000   $1    50,991,285   $51   $500   $364,148   $(312,127)  $67,929   $120,502 
Stock-based compensation expense   -    -    -    -    -    12,043    -    -    12,043 
Issuance of restricted stock   -    -    1,809,421    2    -    (2)   -    -    - 
Issuance of common stock under ESPP   -    -    43,707    -    -    128    -    -    128 
Issuance of subsidiaries' common shares for license expenses   -    -    -    -    -    229    -    -    229 
Subsidiary's offering, net   -    -    -    -    -    22,668    -    -    22,668 
Subsidiary's ATM offering, net   -    -    -    -    -    7,726    -    -    7,726 
Exercise of subsidiary's warrants for cash   -    -    -    -    -    181    -    -    181 
Issuance of common stock for at-the-market offering   -    -    2,668,756    3    -    6,956    -    -    6,959 
At-the-market offering cost   -    -    -    -    -    (240)   -    -    (240)
Contribution of capital for 2017 bonuses   -    -    -    -    -    1,000    -    -    1,000 
Common shares issued for Opus interest expense   -    -    234,030    -    -    574    -    -    574 
Common shares issuable for 2017 Subordinated Note Financing  interest expense   -    -    -    -    495    -    -    -    495 
Common shares issued for 2017 Subordinated Note Financing  interest expense   -    -    436,281    -    (500)   1,478    -    -    978 
Preferred A dividends declared and paid   -    -    -    -    -    (1,758)   -    -    (1,758)
2017 Preferred A offering cost adjustment   -    -    -    -    -    1,297    -    -    1,297 
Disposal of NHLD   -    -    -    -    -    14,376    -    -    14,376 
Non-controlling interest in subsidiaries   -    -    -    -    -    (22,189)   -    22,189    - 
Net loss attributable to non-controlling interest   -    -    -    -    -    -    -    (43,254)   (43,254)
Net loss attributable to common stockholders   -    -    -    -    -    -    (59,267)   -    (59,267)
Balance at September 30, 2018   1,000,000   $1    56,183,480   $56   $495   $408,615   $(371,394)  $46,864   $84,637 

 

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

 

 4 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

($ in thousands)
(Unaudited)

 

   Nine Months Ended
September 30,
 
   2019   2018 
Cash Flows from Operating Activities:          
Net loss  $(68,705)  $(102,521)
Net loss on discontinued operations   -    (6,354)
Loss from continuing operations   (68,705)   (96,167)
Reconciliation of net loss to net cash used in operating activities:          
Depreciation expense   1,414    892 
Bad debt expense   250    - 
Amortization of debt discount   2,459    1,819 
Amortization of product revenue license fee   820    433 
Amortization of operating lease right-of-use assets   1,150    - 
Stock-based compensation expense   10,423    12,053 
Common shares issuable for 2017 Subordinated Note Financing interest expense   500    495 
Common shares issued for 2017 Subordinated Note Financing interest expense   974    978 
Common shares issuable for Opus interest expense   281    - 
Common shares issued for Opus interest expense   225    574 
Change in fair value of investments   -    1,390 
Change in fair value of derivative liability   -    (114)
Change in fair value of partner company convertible note   -    (26)
Gain on deconsolidation of Caelum   (18,521)   - 
Research and development-licenses acquired, expense   1,350    3,804 
Increase (decrease) in cash and cash equivalents resulting from changes in operating assets and liabilities:          
Accounts receivable   111    2,327 
Inventory   (263)   (503)
Other receivables - related party   852    204 
Prepaid expenses and other current assets   1,812    (1,428)
Other assets   (903)   200 
Current assets held for sale   -    (9,451)
Noncurrent assets held for sale   -    1,274 
Current liabilities held for sale   -    12,561 
Accounts payable and accrued expenses   (3,841)   (407)
Accounts payable and accrued expenses - related party   (149)   (19)
Interest payable   5    (274)
Interest payable - related party   (8)   (3)
Lease liabilities   (940)   - 
Other long-term liabilities   795    222 
Net cash used in continuing operating activities   (69,909)   (69,166)
Net cash used in discontinued operating activities   -    (7,522)
Net cash used in operating activities   (69,909)   (76,688)

 

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

 

 5 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Continued)

($ in thousands)
(Unaudited)

 

   Nine Months Ended
September 30,
 
   2019   2018 
Cash Flows from Investing Activities:          
Purchase of research and development licenses   (850)   (1,075)
Purchase of property and equipment   (1,455)   (6,743)
Purchase of intangible asset   (2,400)   - 
Purchase of short-term investment (certificates of deposit)   (5,000)   (47,538)
Redemption of short-term investment (certificates of deposit)   17,604    61,002 
Security deposits paid   -    (344)
Deconsolidation of Caelum   (1,201)   - 
Net cash provided by continuing investing activities   6,698    5,302 
Net cash provided by discontinued investing activities   13,089    - 
Net cash provided by investing activities   19,787    5,302 
           
Cash Flows from Financing Activities:          
Payment of Preferred A dividends   (1,773)   (1,758)
Inter-company costs related to the issuance of Series A preferred stock   -    1,297 
Proceeds from issuance of common stock under ESPP   60    128 
Proceeds from issuance of common stock for at-the-market offering   16,099    6,959 
Payment of cost related to issuance of common stock for at-the-market offering   (301)   (240)
Proceeds from issuance of Series A preferred stock for at-the-market offering   539    - 
Payment of cost related to issuance of Series A preferred stock for at-the-market offering   (16)   - 
Proceeds from partner company's sale of stock   66,623    23,011 
Payment of costs related to partner company's sale of stock   (4,754)   (343)
Proceeds from partner company's at-the-market offering   30,419    7,980 
Payment of costs related to partner company's at-the-market offering   (739)   (234)
Proceeds from exercise of partner company's warrants   -    181 
Payment of debt issuance costs associated with 2017 Subordinated Note Financing   (79)   (404)
Proceeds from 2018 Venture Notes   -    21,707 
Payment of debt issuance costs associated with 2018 Venture Notes   (126)   (1,868)
Proceeds from partner company's Horizon Notes   15,000    - 
Payment of debt issuance costs associated with partner company's Horizon Notes   (1,393)   - 
Payment of partner company's Convertible Notes   -    (4,076)
Net cash provided by financing activities   119,559    52,340 
           
Net increase (decrease) in cash and cash equivalents and restricted cash   69,437    (19,046)
Cash and cash equivalents and restricted cash at beginning of period   81,582    110,958 
Cash and cash equivalents and restricted cash at end of period  $151,019   $91,912 

 

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

 

 6 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Continued)

($ in thousands)
(Unaudited)

 

   Nine Months Ended
September 30,
 
   2019   2018 
Supplemental disclosure of cash flow information:          
Cash paid for interest  $3,976   $3,767 
Cash paid for interest - related party  $342   $281 
           
Supplemental disclosure of non-cash financing and investing activities:          
Settlement of restricted stock units into common stock  $2   $2 
Unpaid partner company’s at-the-market offering cost  $-   $20 
Common shares issuable for license acquired  $164   $- 
Issuance of partner company warrants in conjunction with Horizon Notes  $888   $- 
Common shares issued for 2017 Subordinated Note Financing interest expense  $-   $500 
Common shares issued for Opus debt, a related party  $500   $- 
Unpaid fixed assets  $288   $125 
Partner company's previous paid offering cost  $833   $- 
Partner company's unpaid intangible assets  $4,734   $1,200 

 

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

 

 7 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1. Organization and Description of Business

 

Fortress Biotech, Inc. (“Fortress” or the “Company”) is a biopharmaceutical company dedicated to acquiring, developing and commercializing 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. Fortress through its partner companies has 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, Fred Hutchinson Cancer Research Center, St. Jude Children’s Research Hospital, Dana-Farber Cancer Institute, Nationwide Children’s Hospital, and the University of Pennsylvania.

 

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).

 

As of September 30, 2019, several of the Fortress partner companies maintain 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”).  

 

Liquidity and Capital Resources

 

Since inception, the Company’s operations have been financed primarily through the sale of equity and debt securities and 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.

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

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

  

The unaudited condensed consolidated financial statements and related disclosures have been prepared with the presumption that users of the unaudited condensed consolidated financial statements have read or have access to the audited financial statements for the preceding fiscal year for each of the companies: Avenue, Checkpoint and Mustang. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Form 10-K, which was filed with the United States Securities and Exchange Commission (“SEC”) on March 18, 2019, from which the Company derived the balance sheet data at December 31, 2018, as well as Checkpoint’s Form 10-K, filed with the SEC on March 18, 2019, Mustang’s Form 10-K, filed with the SEC on March 18, 2019, and Avenue’s Form 10-K, filed with the SEC on March 12, 2019.

 

 8 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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

 

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

 

Use of Estimates

 

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

 

Discontinued Operations

 

At December 31, 2018, the Company determined that its National Holdings Corporation (“National”) segment met the discontinued operations criteria set forth in Accounting Standards Codification (ASC) Subtopic 205-20-45, Presentation of Financial Statements. As such, the National segment results have been classified as discontinued operations in the accompanying Condensed Consolidated financial statements. See Note 3 for more information relating to the Company’s discontinued operations.

 

Significant Accounting Policies

 

There have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2018 Annual Report other than the adoption of the Financial Accounting Standards Board (FASB) Accounting Standard Updates (ASU) ASU 2016-02, Leases, and 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.

 

Leases

 

Effective January 1, 2019, the Company accounts for its leases under ASC 842, Leases. Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases and are recorded on the condensed consolidated balance sheet as both a right-of-use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right-of-use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right-of-use asset result in straight-line rent expense over the lease term. For finance leases, interest on the lease liability and the amortization of the right-of-use asset results in front-loaded expense over the lease term. Variable lease expenses are recorded when incurred.

 

In calculating the right-of-use asset and lease liability, the Company elects to combine lease and non-lease components. The Company continues to account for leases in the prior period financial statements under ASC Topic 840.

 

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, prior to the adoption of ASU 2018-07 on January 1, 2019, the Company remeasured 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 were recognized as compensation expense in the period of change. Subsequent to the adoption of ASU 2018-07, the Company recognizes non-employees compensation costs over the requisite service period based on a measurement of fair value for each stock award.

 

 9 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model or independent appraisals, 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.

 

Recently Adopted Accounting Pronouncements

 

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 became effective on November 5, 2018. The Company included the required presentation of changes in stockholders’ equity in this Form 10-Q.

 

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. As a result of the adoption of ASU 2018-07, the grant date fair value of non-employee awards will be fixed as of December 31, 2018, rather than the prior methodology that recognized a variable cost based on the fair value of such shares as of their vesting dates. The Company recorded non-employees’ awards as of January 1, 2019 prospectively. The Company’s implementation of this standard as of January 1, 2019 did not have a material impact on its condensed consolidated financial statements.

 

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 adoption of this ASU on January 1, 2019 did not have a material impact on its condensed consolidated financial statements.

  

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 by recording a right of use asset of $23.0 million, a lease liability of $26.8 million and eliminated deferred rent of approximately $3.8 million; there was no effect on opening retained earnings, and the Company continues to account for leases in the prior period financial statements under ASC Topic 840. In adopting the new standard, the Company elected to apply the practical expedients regarding the identification of leases, lease classification, indirect costs, and the combination of lease and non-lease components.

 

 10 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Recently Issued Accounting Pronouncements

 

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

 

In August 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 condensed consolidated financial statements.

 

3. Discontinued Operations

 

The following is a summary of revenue and expenses of National for the three and nine months ended September 30, 2018. The Company had no activity related to National in 2019.

  

   Three Months Ended   Nine Months Ended 
($ in thousands)  September 30, 2018   September 30, 2018 
Revenue  $58,520   $165,061 
           
Operating expenses          
Commissions, compensation and fees   48,556    141,462 
Clearing fees   451    1,772 
Communications   856    2,429 
Occupancy   738    2,834 
Licenses and registration   861    2,028 
Professional fees   1,076    3,047 
Interest   26    30 
Underwriting costs   43    230 
Depreciation and amortization   871    2,587 
Other administrative expenses   1,726    5,839 
Total operating expenses   55,204    162,258 
Loss from operations   3,316    2,803 
           
Other income (expenses)          
Interest income   -    6 
Interest expense and financing fees   429    1,195 
Change in fair value of derivative liabilities   (12)   (8,045)
Other income   (146)   69 
Total other income (expenses)   271    (6,775)
Income (loss) from discontinued operations before income taxes   3,587    (3,972)
           
Income tax expense   944    2,382 
Income (loss) from discontinued operations   2,643    (6,354)
           
Gain from disposal of National   -    - 
Total income (loss) from discontinued operations, net of tax  $2,643   $(6,354)

 

 11 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

During the nine months ended September 30, 2019, the Company received $13.1 million or $3.25 per share, for its remaining ownership of National, as such as of September 30, 2019, the Company had no asset available for sale on its condensed consolidated balance sheets. In connection with this sale, the Company classified the assets and liabilities related to National, included on its condensed consolidated balance sheet as of December 31, 2018, as held for sale as presented in the table below:

 

    December 31,  
($ in thousands)   2018  
ASSETS        
Current assets        
Current assets held for sale   $ 13,089  
Total current assets held for sale     13,089  
         
Total assets held for sale   $ 13,089  

 

The table below depicts the cash flows from the transaction for the nine months ended September 30, 2019 and 2018, respectively:

 

    Nine Months Ended September 30,  
($ in thousands)   2019     2018  
Operating activities                
Effect of elimination entry with discontinued operations presentation   $ -     $ (1,168 )
Net loss on discontinued operations     -       (6,354 )
Total cash used in discontinued operating activities   $ -     $ (7,522 )
                 
Investing activities                
Proceeds from sale of National   $ 13,089     $ -  
Total cash provided by discontinued investing activities   $ 13,089     $ -  

 

4. Collaboration and Stock Purchase Agreements

 

Caelum

 

Agreement with Alexion

 

In January 2019, Caelum, a subsidiary of the Company, entered into a Development, Option and Stock Purchase Agreement (the “DOSPA”) and related documents by and among Caelum, Alexion Therapeutics, Inc. (“Alexion”), the Company and Caelum security holders parties thereto (including Fortress, the “Sellers”). Under the terms of the agreement, Alexion purchased a 19.9% minority equity interest in Caelum for $30 million. Additionally, Alexion has agreed to make potential payments to Caelum upon the achievement of certain developmental milestones, in exchange for which Alexion obtained a contingent exclusive option to acquire the remaining equity in Caelum for pre-negotiated economics.

 

The Company deconsolidated its holdings in Caelum immediately prior to the execution of the DOSPA. Following the DOSPA execution, the Company owns approximately 40% of the issued and outstanding capital stock of Caelum. The following table provides a summary of the assets and liabilities of Caelum impacted by the deconsolidation:

 

   January 
($ in thousands)  2019 
ASSETS     
Current assets     
Cash and cash equivalents  $1,201 
Prepaid expenses and other current assets   6 
Total current assets  $1,207 
      
LIABILITIES     
Current liabilities     
Accounts payable and accrued expenses  $2,246 
Interest payable   198 
Interest payable - related party   106 
Note payable - related party   929 
Note payable   9,914 
Warrant liability   991 
Total current liabilities   14,384 
Net liability impacted by deconsolidation  $13,177 

 

 12 

 

  

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

In connection with this transaction the Company recorded a gain resulting from the deconsolidation of Caelum on its condensed consolidated financial statements for the nine months ended September 30, 2019:

 

($ in thousands)  Gain on
deconsolidation
of Caelum
 
Fair value of Caelum  $11,193 
Net liabilities deconsolidated   13,177 
Non-controlling interest share   (4,849)
Write off of MSA fees due Fortress   (1,000)
Gain on deconsolidation of Caelum  $18,521 

  

Avenue

 

Agreement with InvaGen

 

On November 12, 2018, the Company’s partner company Avenue entered into a Stock Purchase and Merger Agreement (“SPMA”) with InvaGen Pharmaceuticals Inc. (“InvaGen”) and Madison Pharmaceuticals Inc., a newly-formed, wholly-owned subsidiary of InvaGen. Pursuant to the SPMA, and following approval by Avenue’s stockholders on February 8, 2019, InvaGen purchased a number of shares of Avenue common stock representing 33.3% of Avenue’s fully-diluted capital stock for net proceeds to Avenue of $31.5 million (after deducting fees and other offering-related costs).

 

Upon the achievement of certain closing conditions (including most notably U.S. Food and Drug Administration approval for IV Tramadol, Avenue’s product candidate), InvaGen will be obligated to acquire Avenue via reverse subsidiary merger (the “Merger Transaction”). Under the Merger Transaction, InvaGen will pay $180 million (subject to certain potential reductions) to the holders of Avenue’s capital stock (other than InvaGen itself).

 

Subject to the terms and conditions described in the SPMA, InvaGen may also provide interim financing to Avenue in an amount of up to $7.0 million during the time period between February 8, 2019 and the Merger Transaction. Any amounts drawn on the interim financing will be deducted from the aggregate consideration payable to Company stockholders by virtue of the Merger Transaction.

 

Prior to the closing of the Merger Transaction, Avenue will enter into a Contingent Value Rights Agreement (the “CVR Agreement”) with a trust company as rights, pursuant to which holders of common shares of Avenue, other than InvaGen (each, a “Holder”), will be entitled to receive on Contingent Value Right (“CVR”) for each share held immediately prior to the Merger Transaction.

 

Each CVR represents the right of its holder to receive a contingent cash payment pursuant to the CVR Agreement upon the achievement of certain milestones. If, during the period commencing on the day following the closing of the Merger Transaction until December 31, 2028, IV Tramadol generates at least $325 million or more in Net Sales (as defined in the CVR Agreement) in a calendar year, each Holder shall be entitled to receive their pro rata share of (i) if the product generated less than $400 million in Net Sales during such calendar year, 10% of Gross Profit (as defined in the CVR Agreement), (ii) if the product generated between $400 million and $500 million in Net Sales during such calendar year, 12.5% of Gross Profit, or (iii) if the product generated more than $500 million in Net Sales during such calendar year, 15% of Gross Profit. Additionally, at any time beginning on January 1, 2029 that IV Tramadol has generated at least $1.5 billion in aggregate Net Sales, then with respect to each calendar year in which IV Tramadol generates $100 million or more in Net Sales, each Holder shall be entitled to receive their pro rata share of an amount equal to 20% of the Gross Profit generated by IV Tramadol. These additional payments will terminate on the earlier of December 31, 2036 and the date (which may be extended by up to 6 months) that any person has received approval from the FDA for an Abbreviated New Drug Application or an FDA AP-rated 505(b)(2) NDA using IV Tramadol.

  

 13 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

5. Property and Equipment

 

Fortress’ property and equipment consisted of the following:

 

   Useful Life   September 30,   December 31, 
($ in thousands)  (Years)   2019   2018 
       (Unaudited)     
Computer equipment   3   $648   $648 
Furniture and fixtures   5    1,153    1,128 
Machinery & equipment   5    3,960    3,143 
Leasehold improvements   5-15    9,358    9,271 
Construction in progress (1)   N/A    1,011    393 
Total property and equipment        16,130    14,583 
Less: Accumulated depreciation        (3,978)   (2,564)
Property and equipment, net       $12,152   $12,019 

 

Note 1: Relates to the Mustang cell processing facility.

 

Fortress' depreciation expense for the three months ended September 30, 2019 and 2018, was approximately $0.5 million and $0.4 million, respectively, and was recorded in both research and development expense and general and administrative expense in the Condensed Consolidated Statements of Operations.

 

Fortress' depreciation expense for the nine months ended September 30, 2019 and 2018, was approximately $1.4 million and $0.9 million, respectively, and was recorded in both research and development expense and general and administrative expense in the Condensed Consolidated Statements of Operations.

 

6. 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.

 

Fair Value of Caelum

 

The Company valued its investment in Caelum in accordance with ASC Topic 820, Fair Value Measurements and Disclosures, and estimated the fair value to be $11.2 million based on a per share value of $1.549. The following inputs were utilized to derive the value: risk free rate of return of 2.24%, volatility of 70% and a discount for lack of marketability of 27.9%.

 

In connection with the DOSPA Caelum’s convertible notes automatically converted into common shares of Caelum and the warrant liability payable to the placement agent in connection with the placement of the convertible notes was also issued.

 

Caelum Warrant Liability

 

The Caelum warrant liability and convertible notes did not exist as of September 30, 2019. A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring Caelum’s warrant liability that are categorized within Level 3 of the fair value hierarchy as of December 31, 2018 is as follows:

 

    December 31, 2018  
Risk-free interest rate       2.905% – 2.909 %
Expected dividend yield     %
Expected term in years       3.84 – 3.96  
Expected volatility     70 %

  

 14 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

($ in thousands)  Fair Value of
Derivative
Warrant
Liability
 
Beginning balance at January 1, 2019  $991 
Issuance of warrant due to conversion of note   (991)
Ending balance at September 30, 2019  $ 

 

Caelum Convertible Notes

 

A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring Caelum’s convertible notes that are categorized within Level 3 of the fair value hierarchy as of December 31, 2018 is as follows:

 

   December 31,
2018
 
Risk-free interest rate   2.302%
Expected dividend yield   %
Expected term in years   0.32 
Expected volatility   67%

 

($ in thousands)  Caelum
Convertible
Notes, at fair
value
 
Beginning balance at January 1, 2019  $9,914 
Conversion of the convertible notes   (9,914)
Ending balance at September 30, 2019  $ 

 

The following tables classify into the fair value hierarchy of Fortress’ financial instruments, measured at fair value as of September 30, 2019 and December 31, 2018:

 

    Fair Value Measurement as of September 30, 2019  
($ in thousands)   Level 1     Level 2     Level 3     Total  
Assets                                
Fair value of investment in Caelum   $     $     $ 11,193     $ 11,193  
Total   $     $     $ 11,193     $ 11,193  

 

    Fair Value Measurement as of December 31, 2018  
($ in thousands)   Level 1     Level 2     Level 3     Total  
Liabilities                        
Caelum warrant liability   $     $     $ 991     $ 991  
Caelum convertible notes, at fair value                 9,914       9,914  
Total   $     $     $ 10,905     $ 10,905  

 

 15 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The table below provides a roll-forward of the changes in fair value of Level 3 financial instruments as of September 30, 2019:

 

($ in thousands)   Investment
in
Caelum
    Caelum
Convertible
Note
    Warrant
Liabilities
    Total  
Balance at December 31, 2018   $ -     $ 9,914     $ 991     $ 10,905  
Conversion of convertible notes     -       (9,914 )     -       (9,914 )
Issuance of warrant     -       -       (991 )     (991 )
Fair value of investment     11,193       -       -       11,193  
Balance at September 30, 2019   $ 11,193     $ -     $ -     $ 11,193  

 

As of September 30, 2019, no transfers occurred between Level 1, Level 2 and Level 3 instruments.

 

7. Licenses Acquired

 

In accordance with ASC 730-10-25-1, Research and Development, costs incurred in obtaining technology licenses are charged to research and development expense if the technology licensed has not reached technological feasibility and has no alternative future use. The licenses purchased by Fortress, Aevitas, Avenue, Cellvation, Checkpoint, Cyprium, Helocyte, Mustang and Tamid require substantial completion of research and development, and regulatory and marketing approval efforts in order to reach technological feasibility. As such, for the three and nine months ended September 30, 2019 and 2018, the purchase price of licenses acquired was classified as research and development-licenses acquired in the Condensed Consolidated Statements of Operations as reflected in the table below:

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
($ in thousands)   2019     2018     2019     2018  
Fortress Companies:                                
Helocyte   $ -     $ 1,500     $ -     $ 1,521  
Checkpoint     -       1,000       -       1,000  
Caelum     -       201       -       201  
Mustang     700       1,000       1,350       1,075  
Aevitas     -       5       -       6  
Cellvation     -       -       -       1  
Total   $ 700     $ 3,706     $ 1,350     $ 3,804  

 

Checkpoint

 

The table below provides a summary of Checkpoint’s expense related to its licenses, for the three and nine months ended September 30, 2019 and 2018 by license as recorded in the Condensed Consolidated Statements of Operations:

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
($ in thousands)   2019     2018     2019     2018  
Dana Farber License CK-301   $ -     $ 1,000     $ -     $ 1,000  
Total   $ -     $ 1,000     $ -     $ 1,000  

 

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

 

Helocyte

 

For the three and nine months ended September 30, 2019 and 2018, Helocyte recorded expense of nil and $1.5 million, respectively in connection with Helocyte’s amended and restated license agreement for Triplex with City of Hope (“COH”). The expense in 2018 relates to the achievement of a probable milestone.

 

 16 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Mustang

 

License with Calimmune

 

On August 23, 2019, Mustang entered into a Non-Exclusive License Agreement with Calimmune, Inc. (“Calimmune License”) for the rights to the cellbank to be used in the manufacture of the XSCID vector that was separately licensed from St. Jude Children’s Research Hospital, Inc. (“St. Jude”) in August 2018 (the “Mustang XSCID License”). Pursuant to the term of the Calimmune License Mustang paid an upfront fee of $0.2 million. Three additional development milestones are due, upon achievement totaling $1.0 million. Royalty payments in the low-single digits are due on net sales of licensed products. Upon the execution of the Calimmune License Mustang recorded research and development expense of $0.2 million in the condensed consolidated statement of operations for the three and nine months ended September 30, 2019.

 

License with Nationwide

 

In February 2019, Mustang announced that it partnered and entered into an exclusive worldwide license agreement with Nationwide Children’s Hospital (“Nationwide”) to develop the C134 oncolytic virus (MB-108) for the treatment of glioblastoma multiforme (“GBM”). Mustang intends to combine MB-108 with MB-101 (IL13Rα2-specific CAR) to potentially enhance efficacy in treating GBM. Mustang paid $0.2 million in consideration for the license for exclusive, worldwide rights to develop and commercialize products that incorporate data, know-how and/or C134 virus that were developed at Nationwide. Additional payments are due to Nationwide upon achievement of development and commercialization milestones totaling $152.8 million. Royalty payments in the low-single digits are due on net sales of licensed products.

 

License with University of California

 

On March 17, 2017, Mustang entered into an exclusive license agreement with the Regents of the University of California (“UCLA License”) to acquire intellectual property rights in patent applications related to the engineered anti-prostate stem cell antigen antibodies for cancer targeting and detection. In September 2019, COH commenced its Phase 1 clinical trial resulting in the achievement of a development milestone resulting in Mustang recording an expense of $0.3 million in the condensed consolidated statement of operations for the three and nine months ended September 30, 2019.

 

Licenses with City of Hope

 

PSCA License

 

On May 31, 2017, Mustang entered into an exclusive license a prostate stem cell antigen (PSCA) chimeric antigen receptor (“CAR”) T technology or MB-105 with COH, for the treatment of prostate cancer. In September 2019, the first patient in a Phase 1 clinical trial in treating patients with prostate stem cell antigen positive (PSCA+) castration resistant prostate cancer was dosed with MB-105, and Mustang recorded an expense of $0.2 million marking the achievement of this milestone in the condensed consolidated statement of operations for the three and nine months ended September 30, 2019.

 

CD123 License

 

In February 2017, Mustang entered into an Amended and Restated License Agreement with COH for the development of CD123 or MB-102, (“CD123 License”). In March 2019, COH dosed the 12th patient in its Phase 1 trial treating patients with relapsed/refractory Acute Myeloid Leukemia (“AML”) and recorded expense of nil and $0.3 million in the condensed consolidated statement of operations for the three and nine months ended September 30, 2019, respectively.

 

CS1 License

 

In February 2017, Mustang entered into an exclusive license agreement with the COH for the use of CS1-specific CAR T or MB-104. In May 2019 Mustang expensed a non-refundable milestone payment of $0.2 million upon the first patient dosed in a Phase 1 clinical study of CS1 treating patients with relapsed or treatment-resistant multiple myeloma. For the three and nine months ended September 30, 2019, Mustang recorded nil and $0.2 million in the condensed consolidated statement of operations related to the CS1 milestone payment.

 

For the three and nine months ended September 30, 2019 and 2018, Mustang recorded the following expenses in research and development for licenses acquired on the condensed consolidated statement of operations:

 

    For the three months ended
September 30,
    For the nine months ended
September 30,
 
($ in thousands)   2019     2018     2019     2018  
City of Hope                                
CD123   $ -     $ -     $ 250     $ -  
CSI     -       -       200       -  
Manufacturing     -       -       -       75  
PSCA     200       -       200       -  
Calimmune     200       -       200       -  
UCLA     300       -       300       -  
St. Jude - X-SCID     -       1,000       -       1,000  
Nationwide Children's Hospital - C134     -       -       200       -  
Total   $ 700     $ 1,000     $ 1,350     $ 1,075  

 

 17 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

8. Sponsored Research and Clinical Trial Agreements

 

Aevitas

 

Duke SRA

 

On September 1, 2019, Aevitas entered into a Sponsored Research Arrangement (“SRA”) with Duke University School of Medicine (“Duke”) for the purpose of conducting a study to identify a dose range for AAV8 vectors in Dry Age-related Macular Degeneration (“Dry AMD”).  The cost of the SRA is approximately $0.1 million.  The study is expected to be completed in four months.  For the three and nine months ended September 30, 2019, Aevitas recorded approximately $17,000 in research and development expense on the condensed consolidated statement of operations.  No expense related to this SRA was recorded in 2018.

  

UMass/UPenn SRA

 

In 2018, Aevitas entered into a Sponsored Research Agreement (“SRA”) with the University of Massachusetts (“UMass SRA”) for certain continued research and development activities related to the development of adeno-associated virus (“AAV”) gene therapies in complement-mediated diseases and with the Trustees of the University of Pennsylvania (“UPenn SRA”) for certain continued research and development activities related to the development of AAV gene therapies in complement-mediated diseases.

 

For the three and nine months ended September 30, 2019 and 2018, Aevitas recorded the following expense in research and development for sponsored research and clinical trial agreements:

 

    For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
($ in thousands)   2019     2018     2019     2018  
UMass - AAV   $     $ 188     $     $ 564  
UPenn - AAV     255       250       755       250  
Duke - AAV     17       -       17       -  
Total   $ 272     $ 438     $ 772     $ 814  

 

Cellvation

 

For the three and nine months ended September 30, 2019 and 2018, respectively, Cellvation recorded expense of nil million and $0.1 million and $0.1 million and $0.2 million, respectively in connection with its sponsored research arrangement with the University of Texas. The expense was recorded in research and development expense in the Condensed Consolidated Statements of Operations.

 

 18 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Mustang

 

For the three and nine months ended September 30, 2019 and 2018, Mustang recorded the following expense in research and development for sponsored research and clinical trial agreements:

  

    For the three months ended
September 30,
    For the nine months ended
September 30,
 
($ in thousands)   2019     2018     2019     2018  
City of Hope   $ 500     $ 500     $ 1,500     $ 1,500  
City of Hope - CD123     269       123       1,028       387  
City of Hope - IL13Rα2     244       346       811       849  
City of Hope - Manufacturing     114       114       343       344  
Fred Hutch - CD20     49       255       690       938  
BIDMC - CRISPR     -       69       69       69  
Total   $ 1,176     $ 1,407     $ 4,441     $ 4,087  

 

9. Intangibles, net

 

On July 22, 2019 Journey purchased Ximino®, a minocycline hydrochloride used to treat acne from a third party. Pursuant to the terms and conditions of the Asset Purchase Agreement (“APA”), total consideration for the APA is $9.4 million, comprised of an upfront payment of $2.4 million payable within 60 days after execution on September 22, 2019. The remaining four payments of $7.0 million are due in consecutive years commencing on the second anniversary of execution of the APA. In addition, Journey is obligated to pay royalties in the mid, single digits based on net sales of Ximino, subject to specified reductions.

 

The Company, in accordance with ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, determined the purchase of Ximino did not constitute the purchase of a business, and therefore recorded the purchase price of Ximino as an asset, to be amortized over the life of the product, which is deemed to be seven years. In addition, the Company determined pursuant to ASC 450, Contingencies, that royalty payments in connection with the APA will be recorded when they become payable with a corresponding charge to cost of goods sold.

  

In accordance with the terms of the APA Journey will incur interest expense in the event of payment default. As such per ASC 835-30 Interest-Imputed Interest, Journey recorded an initial discount for imputed interest of $2.3 million. As of September 30, 2019, Journey recorded an intangible asset related to this transaction of $7.1 million which was recorded on the condensed consolidated balance sheet of Fortress.

 

The table below provides a summary of the Journey intangible assets as of September 30, 2019 and December 31, 2018, respectively:

 

   Estimated Useful  September 30,   December 31, 
($ in thousands)  Lives (Years)  2019   2018 
      (Unaudited)     
Intangible assets – asset purchases  3 to 7  $9,934   $2,800 
Total      9,934    2,800 
Accumulated amortization      (2,203)   (1,383)
Net intangible assets     $7,731   $1,417 

 

The table below provides a summary for the nine months ended September 30, 2019, of JMC recognized expense related to its product licenses, which was recorded in costs of goods sold on the Condensed Consolidated Statement of Operations:

 

($ in thousands)  Intangible
Assets
 
Beginning balance at January 1, 2019  $1,417 
Additions:     
Purchase of Ximino(1)   7,134 
Amortization expense   (820)
Ending balance at September 30, 2019  $7,731 

 

Note 1: Includes four payments of $7.0 million due in consecutive years commencing on the second anniversary of the execution of the APA. Such payments were discounted by $2.3 million as a result of the long-term nature of such payments.

 

 19 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The future amortization of these intangible assets is as follows:

 

($ in thousands)  Exelderm®   Ximino®   Total Amortization 
For the three-months ending December 31, 2019  $100   $255   $355 
Year Ended December 31, 2020   400    1,019    1,419 
Year Ended December 31, 2021   267    1,019    1,286 
Year Ended December 31, 2022   -    1,019    1,019 
Year Ended December 31, 2023   -    1,019    1,019 
Thereafter   -    2,633    2,633 
Total  $767   $6,964   $7,731 

 

10. Debt and Interest

 

Debt

 

Total debt consists of the following as of September 30, 2019 and December 31, 2018:

 

    September 30,     December 31,            
($ in thousands)   2019     2018     Interest rate     Maturity
  (Unaudited)                      
IDB Note(4)   $ 14,929     $ 14,929       2.25 %   Aug - 2020
2017 Subordinated Note Financing     3,254       3,254       8.00 %(3)   March - 2021
2017 Subordinated Note Financing     13,893       13,893       8.00 %(3)   May - 2021
2017 Subordinated Note Financing     1,820       1,820       8.00 %(3)   June - 2021
2017 Subordinated Note Financing     3,018       3,018       8.00 %(3)   August - 2021
2017 Subordinated Note Financing     6,371       6,371       8.00 %(3)   September - 2021
2018 Venture Notes     6,517       6,517       8.00 %   August - 2021
2018 Venture Notes     15,190       15,190       8.00 %   September - 2021
Opus Credit Facility(1)     9,000       9,500       12.00 %   September - 2021
Mustang Horizon Notes(2)     15,750       -       9.00 %   October - 2022
Caelum Convertible Note, at fair value     -       1,000       8.00 %   January - 2019
Caelum Convertible Note, at fair value     -       6,800       8.00 %   February - 2019
Caelum Convertible Note, at fair value     -       2,114       8.00 %   March - 2019
Total notes payable     89,742       84,406              
Less: Discount on notes payable     5,728       4,903              
Total notes payable   $ 84,014     $ 79,503              

 

Note 1: Classified as short-term on the Company’s Consolidated Balance Sheet as of December 31, 2018.

Note 2: Interest rate is 9.0% plus one-month LIBOR Rate in excess of 2.5%.

Note 3: As a result of a one-year maturity date extension, the interest rate of 9% takes effect in year 4 of the note.

Note 4: Classified as short-term on the Company’s Consolidated Balance Sheet as of September 30, 2019.

 

2017 Subordinated Note Financing

 

On August 6, 2019, the Company provided notice to NAM Biotech Fund II, LLC (“NAMBF”) and NAM Special Situations Fund I QP, LLC (“NAMSS”) of extension by one year of the maturity dates under the 2017 Subordinated Note Financing totaling $28.4 million, of which $12.3 million in the aggregate pertains to NAMBF and $16.1 million in the aggregate pertains to NAMSS.

 

On August 6, 2019, the Company provided notice to NSC Biotech Opportunities Fund, LLC (“NSCBOF”) and NSC Biotech Opportunities QP Fund, LLC (“NSCBOQPF”) of extension by six months of the maturity dates of the 2018 Venture Notes totaling $21.7 million of which $5.1 million in the aggregate pertains to NSCBOF and $16.6 million in the aggregate pertains to NSCBOQPF.

 

Opus Credit Facility

 

On July 18, 2019, Fortress issued 396,825 common shares of Fortress at $1.26 per share to Dr. Rosenwald. The shares were issued as a prepayment by Fortress of $500,000 of debt owed to Dr. Rosenwald that was held in the name of Opus Point Healthcare Innovations Fund, LP (“Opus”), an investment fund co-owned by Dr. Rosenwald. The prepayment was made in the form of Fortress common stock, measured at the closing price on July 18, 2019, under that certain Amended & Restated Credit Facility Agreement, dated as of March 12, 2018, by and between Fortress and Opus (the “Opus Credit Agreement”).

 

 20 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

  

On August 6, 2019, the Company and Opus executed an amendment to the Opus Credit Agreement, extending the maturity date of amounts owing thereunder by one year.

 

Mustang Horizon Notes

 

On March 29, 2019, Mustang entered into a $20.0 million venture debt financing agreement (the “Loan Agreement”) with Horizon Technology Finance Corporation (“Horizon”), the proceeds of which will provide Mustang with additional working capital to continue development of its gene and cell therapies. In accordance with the Loan Agreement, $15.0 million of the $20.0 million loan was funded on the Closing Date, with the remaining $5.0 million fundable upon Mustang achieving certain predetermined milestones.

 

 Each advance under the Horizon Loan Agreement will mature 42 months from the first day of the month following the funding of the advance. The first three advances will mature on October 1, 2022 (the “Loan Maturity Date”). Each advance accrues interest at a per annum rate of interest equal to 9.00% plus the amount by which the one-month LIBOR Rate, as reported in the Wall Street Journal, exceeds 2.5%. The Loan Agreement provides for interest-only payments commencing May 1, 2019 through and including October 1, 2020. The interest-only period may be extended to April 1, 2021 if Mustang satisfies the Interest Only Extension Milestone (as defined in the Loan Agreement). Thereafter, commencing May 1, 2021, amortization payments will be payable monthly in eighteen installments of principal and interest. At its option, upon ten business days’ prior written notice to Horizon, Mustang may prepay all or any portion greater than or equal to $500,000 of each of the outstanding advances by paying the entire principal balance (or portion thereof) and all accrued and unpaid interest, subject to a prepayment charge of 4.0% of the then outstanding principal balance of each advance if such advance is prepaid on or before the Loan Amortization Date (as defined in the Loan Agreement), 3% if such advance is prepaid after the Loan Amortization Date applicable to such Loan, but on or prior to twelve months following the Loan Amortization Date, and 2% thereafter. In addition, a final payment equal to $0.3 million for each advance (i.e., $0.8 million in aggregate with respect to the initial $15.0 million) is due on the maturity date or other date of payment in full. Amounts outstanding during an event of default shall be payable on demand and shall accrue interest at an additional rate of 5.0% per annum of the past due amount outstanding.

 

Each advance of the loan is secured by a lien on substantially all of the assets of Mustang, other than Intellectual Property and Excluded Collateral (in each case as defined in the Loan Agreement), and contains customary covenants and representations, including a liquidity covenant, financial reporting covenant and limitations on dividends, indebtedness, collateral, investments, distributions, transfers, mergers or acquisitions, taxes, corporate changes, deposit accounts, and subsidiaries.

 

The events of default under the Loan Agreement include, among other things, without limitation, and subject to customary grace periods, (1) Mustang’s failure to make any payments of principal or interest under the Loan Agreement, promissory notes or other loan documents, (2) Mustang’s breach or default in the performance of any covenant under the Loan Agreement, (3) the occurrence of a material adverse change, (4) Mustang making a false or misleading representation or warranty in any material respect, (5) Mustang’s insolvency or bankruptcy, (6) certain attachments or judgments on the Mustang’s assets, (7) the occurrence of any material default under certain agreements or obligations of Mustang involving indebtedness in excess of $0.3 million or (8) failing to maintain minimum monthly cash balances which range from approximately $8.0 million to $13.0 million over the term of the loan ($9.4 million as of September 30, 2019). If an event of default occurs, Horizon is entitled to take enforcement action, including acceleration of amounts due under the Loan Agreement.

 

The Loan Agreement also contains warrant coverage of 5% of the total amount of the facility. Four warrants (the “Warrants”) were issued by Mustang to Horizon to purchase a combined 288,184 shares of Mustang’s common stock with an exercise price of $3.47 and a fair value of $0.9 million. The Warrant is exercisable for ten years from the date of issuance. Horizon may exercise the Warrant either by (a) cash or check or (b) through a net issuance conversion. The shares of Mustang’s common stock will, upon request by Horizon, be registered and freely tradeable following a period of six months after issuance.

 

Mustang paid Horizon an initial commitment fee of $0.2 million and reimbursed Horizon for $30,000 of legal fees in connection with the Loan Agreement. Mustang incurred approximately $1.2 million of legal and other direct costs incurred in connection with the Loan Agreement.

 

All fees, warrants, and costs paid to Horizon and all direct costs incurred by Mustang are recognized as a debt discount to the funded loans and are amortized to interest expense using the effective interest method over the term of the Loan Agreement. 

 

 21 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Interest Expense 

 

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

 

   Three Months Ended September 30, 
   2019   2018 
($ in thousands)  Interest   Fees (1)   Total   Interest   Fees (1)   Total 
IDB Note  $86   $-   $86   $85   $-   $85 
2017 Subordinated Note Financing   1,072    326    1,398    1,060    331    1,391 
Opus Credit Facility   275    104    379    288    105    393 
2018 Venture Notes   438    166    604    438    136    574 
LOC Fees   14    -    14    7    -    7 
Helocyte Convertible Note   -    -    -    6    -    6 
Caelum Convertible Note   -    -    -    198    -    198 
Mustang Horizon Notes   345    234    579    -    -    - 
Ximino Note   -    108    108    -    -    - 
Other   -    -    -    3    -    3 
Total Interest Expense and Financing Fee  $2,230   $938   $3,168   $2,085   $572   $2,657 

 

Note 1: Amortization of fees

 

    Nine Months Ended September 30,  
    2019     2018  
($ in thousands)   Interest     Fees (1)     Total     Interest     Fees (1)     Total  
IDB Note   $ 254     $ -     $ 254     $ 254     $ -     $ 254  
2017 Subordinated Note Financing     3,148       1,081       4,229       3,157       1,013       4,170  
Opus Credit Facility     840       336       1,176       853       525       1,378  
2018 Venture Notes     1,299       468       1,767       923       281       1,204  
LOC Fees     45       -       45       23       -       23  
Helocyte Convertible Note     -       -       -       93       -       93  
Caelum Convertible Note     -       -       -       589       -       589  
Mustang Horizon Notes     698       466       1,164       -       -       -  
Ximino Note     -       108       108       -       -       -  
Other     -       -       -       (61 )     -       (61 )
Total Interest Expense and Financing Fee   $ 6,284     $ 2,459     $ 8,743     $ 5,831     $ 1,819     $ 7,650  

 

Note 1: Amortization of fees

 

 22 

 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

 

11. Leases

 

On October 3, 2014, the Company 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. The Company took possession of this space, which serves as its 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, the Company 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 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, the Company has 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, the Company 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. The Company 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. 

 

The terms of the lease also require that Mustang post an initial security deposit of $0.8 million, in the form of $0.5 million letter of credit and $0.3 million in cash, which increased to $1.3 million ($1.0 million letter of credit, $0.3 million in cash) on November 1, 2019. After the fifth lease year, the letter of credit obligation is subject to reduction.

 

The Facility began operations for the production of personalized CAR T and gene therapies in 2018.

 

The Company leases copiers under agreements classified as operating leases that expire on various dates through 2021.

 

Most of the Company’s lease liabilities result from the lease of its New York City, NY office, which expires in 2031 and Mustang’s Worcester, MA cell processing facility lease, which expires in 2026. Such leases do not require any contingent rental payments, impose any financial restrictions, or contain any residual value guarantees.  Certain of the Company’s leases include renewal options and escalation clauses; renewal options have not been included in the calculation of the lease liabilities and right of use assets as the Company is not reasonably certain to exercise the options.  The Company does not act as a lessor or have any leases classified as financing leases. At September 30, 2019, the Company had operating lease liabilities of $25.9 million and right of use assets of $21.9 million, which were included in the condensed consolidated balance sheet.

 

During the three and nine months ended September 30, 2019, the Company recorded $0.8 million and $2.4 million, respectively, as lease expense to current period operations.

 

($ in thousands)  Three Months
Ended
September 30,
2019
   Nine Months
Ended
September 30,
2019
 
Lease cost          
Operating lease cost  $798   $2,397 
Shared lease costs   (479)   (1,408)
Variable lease cost   160    575 
Total lease cost  $479   $1,564 

 

 23 

 

 

The following tables summarize quantitative information about the Company’s operating leases, under the adoption of Topic 842:

 

($ in thousands)  Nine Months
Ended
September 30,
 
Operating cash flows from operating leases  $(2,185)
Weighted-average remaining lease term – operating leases   6.4 
Weighted-average discount rate – operating leases   6.2%

 

($ in thousands)  Future Lease
Liability
 
Three months ended December 31, 2019  $776 
Year Ended December 31, 2020   2,966 
Year Ended December 31, 2021   3,114 
Year Ended December 31, 2022   3,084 
Year Ended December 31, 2023   3,137 
Other   23,463 
Total   36,540 
Less: present value discount   (10,631)
Operating lease liabilities  $25,909 

 

At December 31, 2018, the total future minimum lease payments under all leases were:

 

($ in thousands)    
2019  $3,070 
2020   3,289 
2021   3,084 
2022   3,084 
2023   3,137 
Beyond   23,466 
Total minimum lease payments  $39,130 

 

 24 

 

 

12. Accrued Liabilities and other Long-Term Liabilities

 

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

 

   September 30,   December 31, 
($ in thousands)  2019   2018 
  (Unaudited)     
Accrued expenses:          
Professional fees  $1,577   $1,434 
Salaries, bonuses and related benefits   5,863    5,843 
Research and development   3,285    3,805 
Research and development - manufacturing   919    826 
Research and development - clinical supplies   159    160 
Research and development - license maintenance fees   689    519 
Research and development - milestones   500    200 
Dr. Falk Pharma milestone   -    300 
Accrued royalties payable   1,833    1,108 
Accrued coupon expense   1,994    838 
Other   2,586    1,327 
Total accrued expenses  $19,405   $16,360 
           
Other long-term liabilities:          
Deferred rent and long-term lease abandonment charge(1)  $2,183   $5,211 
Long-term note payable (2)   4,842    - 
Total other long-term liabilities  $7,025   $5,211 

 

Note 1: As of September 30, 2019, balance consists of deferred charges related to build-out of the New York facility, and as of December 31, 2018, balance consists of deferred rent and deferred build out charges.

 

Note 2: As of September 30, 2019, Journey recorded a note payable, net of an imputed interest discount of $2.3 million, of $4.7 million in connection with its acquisition of Ximino, see Note 9. The imputed interest discount was calculating utilizing an 11.96% effective interest rate based upon a non-investment grade “CCC” rate over a five-year period. Amortization of interest discount was $0.1 million for the nine months ended September 30, 2019.

 

 25 

 

 

13. Non-Controlling Interests

 

Non-controlling interests in consolidated entities are as follows:

 

   As of September 30, 2019 
($ in thousands)  NCI equity
share
   Net loss
attributable to
non-
controlling
interests
   Non-
controlling
interests in
consolidated
entities
   Non-
controlling
ownership
 
Aevitas  $(1,160)  $(491)  $(1,651)   35.8%
Avenue (2)   24,114    (14,869)   9,245    77.3%
Cellvation   (726)   (129)   (855)   21.1%
Checkpoint (1)   14,907    (10,525)   4,382    69.9%
Coronado SO   (290)   -    (290)   13.0%
Cyprium   (306)   (106)   (412)   10.6%
Helocyte   (4,229)   (181)   (4,410)   19.3%
JMC   (216)   197    (19)   6.9%
Mustang (2)   61,899    (18,053)   43,846    70.2%
Tamid   (551)   (80)   (631)   23.4%
Total  $93,442   $(44,237)  $49,205      

 

   As of December 31, 2018 
($ in thousands)  NCI equity
share
   Net loss
attributable to
non-
controlling
interests
   Non-
controlling
interests in
consolidated
entities
   Non-
controlling
ownership
 
Aevitas  $(474)  $(606)  $(1,080)   36.1%
Avenue (2)   13,326    (13,735)   (409)   64.8%
Caelum (3)   (2,436)   (2,413)   (4,849)   36.8%
Cellvation   (457)   (185)   (642)   21.1%
Checkpoint (1)   31,648    (23,470)   8,178    69.3%
Coronado SO   (290)   -    (290)   13.0%
Cyprium   (210)   (62)   (272)   10.8%
Helocyte   (3,372)   (684)   (4,056)   19.8%
JMC   (475)   245    (230)   6.9%
Mustang (2)   38,631    (16,628)   22,003    60.5%
Tamid   (211)   (251)   (462)   23.4%
Total  $75,680   $(57,789)  $17,891      

 

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

 

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

 

Note 3: Effective January 30, 2019, Caelum ceased to be a controlled Fortress entity and as such is no longer consolidated.

 

 26 

 

 

14. Net Loss per Common Share

 

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

 

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

 

The following shares of potentially dilutive securities have been excluded from the computations of diluted weighted average shares outstanding, as the effect of including such securities would be anti-dilutive at the end of the nine months ended September 30, 2019 and 2018:

 

   Nine Months Ended
September 30,
 
   2019   2018 
Warrants to purchase Common Stock   865,364    890,892 
Opus warrants to purchase Common Stock   1,880,000    1,880,000 
Options to purchase Common Stock   1,169,293    1,085,502 
Convertible preferred stock   1,002,087    1,000,000 
Unvested Restricted Stock   12,622,881    11,014,596 
Unvested Restricted Stock Units   791,610    1,796,134 
Total   18,331,235    17,667,124 

 

15. Stockholders’ Equity

 

Stock-based Compensation

 

The following table summarizes the stock-based compensation expense from stock option, employee stock purchase programs and restricted Common Stock awards and warrants for the three and nine months ended September 30, 2019 and 2018:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
($ in thousands)  2019   2018   2019   2018 
Employee awards  $936   $1,012   $2,791   $3,075 
Executive awards of Fortress Companies' stock   358    446    1,065    1,408 
Non-employee awards   15    24    84    70 
Warrants   97    -    97    - 
Fortress Companies:                    
Avenue   298    371    1,585    1,043 
Checkpoint   833    1,128    2,444    2,336 
Mustang   1,120    903    2,174    3,869 
Other   84    222    183    252 
Total stock-based compensation expense  $3,741   $4,106   $10,423   $12,053 

 

For the three months ended September 30, 2019 and 2018, approximately $1.2 million and $1.8 million, respectively, of stock-based compensation expense was included in research and development expenses in connection with equity grants made to employees and consultants and approximately $2.5 million and $2.3 million, respectively, was included in general and administrative expenses in connection with grants made to employees, members of the board of directors and consultants.

 

For the nine months ended September 30, 2019 and 2018, approximately $2.6 million and $4.9 million, respectively, of stock-based compensation expense was included in research and development expenses in connection with equity grants made to employees and consultants and approximately $7.8 million and $7.1 million, respectively, was included in general and administrative expenses in connection with grants made to employees, members of the board of directors and consultants.

 

 27 

 

 

Stock Options

 

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

 

   Number of
shares
   Weighted
average
exercise price
   Total
weighted
average
intrinsic value
   Weighted
average
remaining
contractual
life (years)
 
Options vested and expected to vest at December 31, 2018   1,285,501   $3.75   $-    2.93 
Granted   125,000    1.18    28,750      
Options vested and expected to vest at September 30, 2019   1,410,501   $4.30   $43,903    2.58 
Options vested and exercisable   1,285,501   $4.60   $15,153    2.41 

 

As of September 30, 2019, Fortress had no unrecognized stock-based compensation expense related to options.

 

Restricted Stock and Restricted Stock Units

 

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

 

   Number of
shares
   Weighted
average grant
price
 
Unvested balance at December 31, 2018   12,645,982   $2.72 
Restricted stock granted   1,516,408    0.86 
Restricted stock vested   (220,000)   3.16 
Restricted stock units granted   40,000    1.63 
Restricted stock units forfeited   (244,272)   4.45 
Restricted stock units vested   (250,209)   3.59 
Unvested balance at September 30, 2019   13,487,909   $2.46 

 

As of September 30, 2019, the Company had unrecognized stock-based compensation expense related to restricted stock and restricted stock unit awards of approximately $12.7 million and $1.8 million, respectively, which is expected to be recognized over the remaining weighted-average vesting period of 5.0 years and 2.0 years, respectively.

 

Warrants

 

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

 

   Number of
shares
   Weighted
average
exercise price
   Total
weighted
average
intrinsic value
   Weighted
average
remaining
contractual
life
(years)
 
Outstanding as of December 31, 2018   2,754,189   $3.28   $7,800    3.49 
Granted   60,000    1.92    -      
Forfeited   (73,009)   5.65    -      
Outstanding as of September 30, 2019   2,741,180   $3.19   $2,400    2.98 
Exercisable as of September 30, 2019   776,180   $3.76   $2,400    2.62 

 

 28 

 

 

Employee Stock Purchase Plan

 

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

 

As of September 30, 2019, 410,728 shares have been purchased and 589,272 shares are available for future sale under the Company’s ESPP. Share-based compensation expense recorded was approximately $18,000 and $52,000, respectively for the three months ended September 30, 2019 and 2018, and was approximately $0.1 million and $0.1 million, respectively, for the nine months ended September 30, 2019 and 2018.

 

Capital Raises

 

2016 Common Stock At-the-Market Offering

 

On August 17, 2016, the Company entered into an Amended and Restated At Market Issuance Sales Agreement (the “2016 Common ATM”), with B. Riley FBR, Inc. (“B. Riley,” f/k/a MLV & Co. LLC and FBR Capital Markets & Co.) as selling agents, governing potential sales of the Company’s common stock. For the three and nine months ended September 30, 2019, the Company issued approximately 0.6 million and 8.0 million shares of common stock at an average price of $1.48 and $1.88 per share for gross proceeds of $0.9 million and $15.1 million, respectively. Under the 2016 Common ATM, the Company pays the agents a commission rate of up to 3.0% of the gross proceeds from the sale of any shares of common stock, and in connection with these sales, with respect to the nine months ended September 30, 2019, the Company paid aggregate fees of approximately $0.3 million. The 2016 Common ATM expired on August 17, 2019.

 

The above-mentioned shares of common stock were sold under the Company’s shelf registration statement on Form S-3 originally filed on August 8, 2016 and declared effective December 1, 2016 (the “2016 Shelf”). The 2016 Shelf expires on December 1, 2019, and approximately $5.1 million of securities remain available for sale under the 2016 Shelf at September 30, 2019.

 

2018 9.375% Series A Cumulative Redeemable Perpetual Preferred Stock At Market Offering

 

On April 5, 2018, the Company entered into an At Market Sales Agreement (the “2018 Preferred ATM”), with B. Riley, National Securities Corporation, LifeSci Capital LLC, Maxim Group LLC and Noble Capital Markets, Inc. as selling agents, governing the issuance of the Company’s 9.375% Series A Cumulative Redeemable Perpetual Preferred Stock (“Perpetual Preferred Stock”). For the three and nine months ended September 30, 2019, the Company issued approximately 26,000 shares of Perpetual Preferred Stock for gross proceeds $0.5 million at an average selling price of $20.66. No shares of Perpetual Preferred Stock were issued in 2018. Under the 2018 Preferred ATM, the Company pays the agents a commission rate of up to 7.0% of the gross proceeds from the sale of any shares of Perpetual Preferred Stock, and in connection with these sales, with respect to the nine months ended September 30, 2019, the Company paid aggregate fees of approximately $16,000.

 

The above-mentioned shares of Perpetual Preferred Stock were sold under the 2016 Shelf. The 2016 Shelf expires on December 1, 2019, and approximately $5.1 million of securities remain available for sale under the 2016 Shelf at September 30, 2019.

 

2019 Common Stock At-the-Market Offering

 

On June 28, 2019, the Company entered into an At Market Issuance Sales Agreement (“2019 Common ATM”), with Cantor Fitzgerald & Co., Oppenheimer & Co., Inc., H.C. Wainwright & Co. Inc., Jones Trading Institutional Services LLC and B. Riley, as selling agents, governing potential sales of the Company’s common stock. For the three and nine months ended September 30, 2019, the Company issued approximately 0.6 million shares of common stock for gross proceeds of $1.0 million at an average selling price of $1.79. Under the 2019 Common ATM, the Company pays the agents a commission rate of up to 3.0% of the gross proceeds from the sale of any shares of common stock, and in connection with these sales, with respect to the nine months ended September 30, 2019, the Company paid aggregate fees of approximately $32,000.

 

The above-mentioned shares of common stock were sold under the Company’s shelf registration statement on Form S-3 originally filed on July 6, 2018 and declared effective July 23, 2019 (the “2019 Shelf”). Approximately $48.9 million of securities remain available for sale under the 2019 Shelf at September 30, 2019.

  

 29 

 

 

Checkpoint Therapeutics, Inc.

 

Checkpoint At-the-Market Offering

 

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

 

During the three and nine months ended September 30, 2019, Checkpoint sold a total of 1.1 million and 2.2 million of its common stock, respectively, under the Checkpoint ATM for aggregate total gross proceeds of approximately $3.4 million and $7.9 million at an average selling price of $3.00 and $3.54 per share, respectively. Pursuant to the Founders Agreement, Checkpoint issued 28,555 and 55,750 shares of common stock to Fortress during the three and nine months ended September 30, 2019, respectively, for the ATM offering noted above. During the three and nine months ended September 30, 2018, Checkpoint sold a total of 1,841,774 shares of its common stock under the Checkpoint ATM for aggregate total gross proceeds of approximately $8.0 million at an average selling price of $4.33 per share, resulting in net proceeds of approximately $7.7 million after deducting commissions and other transactions costs. Pursuant to the Founders Agreement, Checkpoint issued 178,292 shares of common stock to Fortress during the three and nine months ended September 30, 2018, respectively. 

 

Approximately $ 61.1 million of the shelf remains available for sale under the Checkpoint S-3, following the offerings noted above. Checkpoint may offer the securities under the Checkpoint S-3 from time to time in response to market conditions or other circumstances if it believes such a plan of financing is in the best interests of its stockholders.

 

Mustang Bio, Inc.

 

Mustang At-the-Market Offering

 

On July 13, 2018, Mustang filed a shelf registration statement No. 333-226175 on Form S-3, as amended on July 20, 2018 (the "2018 Mustang S-3"), which was declared effective in August 2018. Under the 2018 Mustang S-3, Mustang may sell up to a total of $75.0 million of its securities. In connection with the 2018 Mustang S-3, Mustang entered into an At-the-Market Issuance Sales Agreement (the "Mustang ATM") with B. Riley FBR, Inc., Cantor Fitzgerald & Co., National Securities Corporation, and Oppenheimer & Co. Inc. (each an "Agent" and collectively, the "Agents"), relating to the sale of shares of common stock. Under the Mustang ATM, Mustang pays the Agents a commission rate of up to 3.0% of the gross proceeds from the sale of any shares of common stock.

 

During the three months and nine months ended September 30, 2019, Mustang issued approximately 3.5 million shares of common stock at an average price of $6.42 per share for gross proceeds of $22.5 million. In connection with these sales, Mustang paid aggregate fees of approximately $0.5 million, for net proceeds of approximately $22.0 million. No sales were made under the Mustang ATM in 2018.

 

Mustang Public Offering of Common Stock

 

On April 30, 2019, Mustang announced the pricing of an underwritten public offering, whereby it sold 6,875,000 shares of its common stock, (plus a 30-day option to purchase up to an additional 1,031,250 shares of common stock, which was exercised in May 2019) at a price of $4.00 per share for gross proceeds of approximately $31.6 million, before deducting underwriting discounts and commissions and offering expenses. The shares were sold under the 2018 Mustang S-3. Mustang paid aggregate fees of approximately $2.1 million and received approximately $29.5 million of net proceeds.

 

On August 16, 2019, Mustang filed a shelf registration statement No. 333-233350 on Form S-3 (the “2019 Mustang S-3”), which was declared effective on September 30, 2019. Under the 2019 Mustang S-3, Mustang may sell up to a total of $75.0 million of its securities. As of September 30, 2019, no sales were made under Mustang’s 2019 S-3 and approximately $20.9 million of the 2018 Mustang S-3 remains available for sale.

 

16. Commitments and Contingencies

 

Indemnification

 

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

 

 30 

 

 

Legal Proceedings

 

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

 

17. Related Party Transactions

 

Other Related Parties

 

The Company’s Chairman, President and Chief Executive Officer, individually and through certain trusts over which he has voting and dispositive control, beneficially owned approximately 11.7% of the Company’s issued and outstanding Common Stock as of September 30, 2019. The Company’s Executive Vice Chairman, Strategic Development owns approximately 13.4% of the Company’s issued and outstanding Common Stock at September 30, 2019.

 

Shared Services Agreement with TGTX

 

TGTX and the Company entered into an arrangement to share the cost of certain research and development employees. The Company’s Executive Vice Chairman, Strategic Development, is Executive Chairman and Interim Chief Executive Officer of TGTX. Under the terms of the Agreement, TGTX will reimburse the Company for the salary and benefit costs associated with these employees based upon actual hours worked on TGTX related projects. For the three months ended September 30, 2019 and 2018, the Company invoiced TGTX $0.1 million and $0.2 million, respectively. For the nine months ended September 30, 2019 and 2018, the Company invoiced TGTX $0.3 million and $1.2 million, respectively. At September 30, 2019, the amount receivable from TGTX related to this arrangement approximated $0.1 million.

 

Desk Space Agreements with TGTX and OPPM

 

In connection with the Company’s Desk Space Agreements with TGTX and Opus Point Partners Management, LLC (“OPPM”), for the three months ended September 30, 2019, the Company had paid $0.7 million in rent under the Desk Space Agreements, and invoiced TGTX and OPPM approximately $0.4 million and $24,000, respectively, for their prorated share of the rent base. At September 30, 2019, the amount due related to this arrangement from TGTX approximated $0.2 million and the amount due from OPPM approximated $0.4 million.

 

Opus Credit Facility

 

On March 12, 2018, the Company and OPHIF amended and restated the Opus Credit Facility (the “A&R Opus Credit Facility”). The A&R Opus Credit Facility extends the maturity date of the notes issued under the Opus Credit Facility from September 14, 2018 by one year to September 14, 2019. On August 6, 2019, the Company and Opus executed a second amendment to the Opus Credit Agreement, extending the maturity date of amounts owing thereunder by one year, to September 12, 2020.

 

The A&R Opus Credit Facility also permits the Company to make portions of interest and principal repayments in the form of shares of the Company’s common stock and/or in common stock of the Company’s publicly-traded subsidiaries, subject to certain conditions. Fortress retains the ability to prepay the Notes at any time without penalty.

 

On July 18, 2019, the Company prepaid $500,000 of debt owed under the A&R Opus Credit Facility by issuing 396,825 shares of Fortress common stock at $1.26 per share (the closing price on July 18, 2019) to Dr. Rosenwald.

 

The notes payable under the A&R Opus Credit Facility continue to bear interest at 12% per annum. For the nine months ended September 30, 2019 and 2018, the Company paid $0.3 million and $0.3 million, respectively.

 

Founders Agreements

 

The Company has entered into Founders Agreements and, in some cases, Exchange Agreements with certain of its subsidiaries as described in the Company’s Form 10-K for the year ended December 31, 2018, filed with the SEC on March 18, 2019. The following table summarizes, by subsidiary, the effective date of the Founders Agreements and PIK dividend or equity fee payable to the Company in accordance with the terms of the Founders Agreements, Exchange Agreements and the subsidiaries’ certificates of incorporation.

 

 31 

 

 

Fortress Partner Company  Effective Date (1)  PIK Dividend as
a % of fully
diluted
outstanding
capitalization
   Class of Stock
Issued
Helocyte  March 20, 2015   2.5%  Common Stock
Avenue  February 17, 2015   0.0%(2)  Common Stock
Mustang  March 13, 2015   2.5%  Common Stock

 

Fortress Partner Company  Effective Date (1)  PIK Dividend as
a % of fully
diluted
outstanding
capitalization
   Class of Stock
Issued
Checkpoint  March 17, 2015   0.0%(3)  Common Stock
Cellvation  October 31, 2016   2.5%  Common Stock
Caelum  January 1, 2017   0.0%(4)  Common Stock
Cyprium  March 13, 2017   2.5%  Common Stock
Aevitas  July 28, 2017   2.5%  Common Stock
Tamid  November 30, 2017 (5)   2.5%  Common Stock

 

Note 1: Represents the effective date of each subsidiary’s Founders Agreement. Each PIK dividend and equity fee is payable on the annual anniversary of the effective date of the original Founders Agreement or has since been amended to January 1 of each calendar year.

 

Note 2: Concurrently with the execution and delivery of the Stock Purchase and Merger Agreement (“SPMA”) entered into between Avenue, the Company and InvaGen Pharmaceuticals Inc. (“InvaGen”) (together, the “SPMA Parties”), the SPMA Parties entered into a waiver agreement (the “Waiver Agreement”), pursuant to which the Company irrevocably waived its right to receive the annual dividend of Avenue’s common shares under the terms of the Class A preferred stock and any fees, payments, reimbursements or other distributions under the management services agreement between the Company and Avenue and the Founders Agreement, for the period from the effective date of the Waiver Agreement to the termination of InvaGen’s rights under the SPMA. Pursuant to the Waiver Agreement, immediately prior to the closing of the Merger Transaction contemplated under the SPMA, the Company will convert all of its preferred shares into common shares pursuant to the terms of the certificate of incorporation of Avenue, as amended from time to time.

 

Note 3: Instead of a PIK dividend, Checkpoint pays the Company an annual equity fee in shares of Checkpoint’s common stock equal to 2.5% of Checkpoint’s fully diluted outstanding capitalization.

 

Note 4: Effective January 31, 2019 the Caelum Founders Agreement and MSA with Fortress were terminated in conjunction with the execution of a Development Option and Share Purchase Agreement (“DOSPA”) between Caelum and Alexion Therapeutics, Inc. (See Note 4).

 

Note 5: Represents the Trigger Date, the date that the Fortress partner company first acquires, whether by license or otherwise, ownership rights in a product.

 

Management Services Agreements

 

The Company has entered in Management Services Agreements (the “MSAs”) with certain of its subsidiaries as described in the Company’s Form 10-K for the year ended December 31, 2018, filed with the SEC on March 18, 2019. The following table summarizes, by subsidiary, the effective date of the MSA and the annual consulting fee payable by the subsidiary to the Company in quarterly installments:

 

 32 

 

 

Fortress partner company  Effective Date  Annual MSA Fee
(Income)/Expense
 
Helocyte  March 20, 2015  $500 
Avenue (1)  February 17, 2015   - 
Mustang  March 13, 2015   500 
Checkpoint  March 17, 2015   500 
Cellvation  October 31, 2016   500 
Caelum(2)  January 1, 2017   - 
Cyprium  March 13, 2017   500 
Aevitas  July 28, 2017   500 
Tamid  November 30, 2017   500 
Fortress      (3,500)
Consolidated (Income)/Expense     $- 

 

Note 1: Concurrently with the execution and delivery of the SPMA entered into between, Avenue, the Company and InvaGen Pharmaceuticals Inc. (“InvaGen”) (together, the “SPMA Parties”), the SPMA Parties entered into a waiver agreement (the “Waiver Agreement”), pursuant to which the Company irrevocably waived its right to receive the annual dividend of Avenue’s common shares under the terms of the Class A preferred stock and any fees, payments, reimbursements or other distributions under the management services agreement between the Company and Avenue and the Founders Agreement, for the period from the effective date of the Waiver Agreement to the termination of InvaGen’s rights under the SPMA. Pursuant to the Waiver Agreement, immediately prior to the closing of the Merger Transaction contemplated under the SPMA, the Company will convert all of its preferred shares into common shares pursuant to the terms of the certificate of incorporation of Avenue, as amended from time to time. (See Note 4).

 

Note 2: Effective January 31, 2019 the Caelum Founders Agreement and MSA with Fortress were terminated in conjunction with the execution of a DOSPA between Caelum and Alexion Therapeutics, Inc. and $1.0 million of fees accrued under the MSA were written off (See Note 4).

 

18. Segment Information

 

The Company operates in two reportable segments, Dermatology Product Sales and Pharmaceutical and Biotechnology Product Development. The accounting policies of the Company’s segments are the same as those described in Note 2. Prior to the sale of National the Company operated in three segments, one of which included National, see Note 3. The following tables summarize, for the periods indicated, operating results, from continuing operations by reportable segment:

 

      Pharmaceutical
and
     
   Dermatology   Biotechnology     
Three Months Ended September 30, 2019  Products
Sales
   Product
Development
   Consolidated 
Net Revenue  $9,492   $280   $9,772 
Direct cost of goods   (2,702)   -    (2,702)
Sales and marketing costs   (4,370)   -    (4,370)
Research and development(1)   -    (15,271)   (15,271)
General and administrative   (669)   (9,300)   (9,969)
Segment income (loss) from operations  $1,751   $(24,291)  $(22,540)
Segment assets  $18,697   $202,891   $221,588 

 

 33 

 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Three Months Ended September 30, 2018  Dermatology
Products
Sales
   Pharmaceutical and
Biotechnology
Product Development
   Consolidated 
Net Revenue  $5,168   $5   $5,173 
Direct cost of goods   (1,406)   -   $(1,406)
Sales and marketing costs   (2,754)   -   $(2,754)
Research and development(1)   -    (19,788)  $(19,788)
General and administrative   (505)   (8,925)  $(9,430)
Segment income (loss) from operations  $503   $(28,708)  $(28,205)
Segment assets  $10,765   $157,781   $168,546 
Assets held for sale             56,373 
Total consolidated            $224,919 

 

Nine Months Ended September 30, 2019  Dermatology
Products
Sales
   Pharmaceutical and
Biotechnology
Product Development
   Consolidated 
Net Revenue  $23,816   $1,683   $25,499 
Direct cost of goods   (6,972)   -    (6,972)
Sales and marketing costs   (12,064)   -    (12,064)
Research and development(1)   -    (57,705)   (57,705)
General and administrative   (1,808)   (27,388)   (29,196)
Segment income (loss) from operations  $2,972   $(83,410)  $(80,438)
Segment assets  $18,697   $202,891   $221,588 

 

Nine Months Ended September 30, 2018  Dermatology
Products
Sales
   Pharmaceutical and
Biotechnology
Product Development
   Consolidated 
Net Revenue  $17,366   $525   $17,891 
Direct cost of goods   (4,546)   -   $(4,546)
Sales and marketing costs   (8,443)   -   $(8,443)
Research and development(1)   -    (62,332)  $(62,332)
General and administrative   (1,270)   (29,075)  $(30,345)
Segment income (loss) from operations  $3,107   $(90,882)  $(87,775)
Segment assets  $10,765   $157,781   $168,546 
Assets held for sale             56,373 
Total consolidated            $224,919 

 

Note 1: Research and development includes the cost of licenses acquired.

 

 34 

 

 

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

19. Revenues from Contracts and Significant Customers

 

Disaggregation of Total Revenues

 

The Company’s portfolio of marketed products, with the majority of sales from Targadox®, Ximino® and Exelderm®. Substantially all of the Company’s product revenues are recorded in the U.S. Substantially all of the Company’s collaboration revenues are from its collaboration with TGTX. Revenues by product and collaborator are summarized as follows:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
($ in thousands)  2019   2018   2019   2018 
Targadox®  $6,608   $4,322   $19,538   $16,183 
Ximino®   2,194    -    2,194    - 
Exelderm®   668    625    1,712    626 
Other branded revenue   22    221    372    557 
Total product revenues   9,492    5,168    23,816    17,366 
TGTX   280    5    1,683    525 
Total Revenue  $9,772   $5,173   $25,499   $17,891 

 

Significant Customers

 

Commencing in the second quarter of 2018, the majority of our dermatology products are sold under a third-party logistics (“3PL”) Title Model, and as such, one customer consistently accounts for a significant portion of gross product revenue and AR.  Under a 3PL Title Model, the company sells product to a 3PL, who in turn, manages distribution and collections. 

 

For the three and nine months ended September 30, 2019, gross product revenue under the 3PL Title Model accounted for approximately 60.0% and 76.0%, respectively.

 

For the three months ended September 30, 2018, one of the Company’s Dermatology Products customers each accounted for more than 10.0% of its total gross product revenue in the amount of $10.9 million.

 

For the nine months ended September 30, 2018, two of the Company’s Dermatology Products customers each accounted for more than 10.0% of its total gross product revenue in the amount of $22.5 million and $7.3 million, respectively.

 

At September 30, 2019, two of the Company’s Dermatology Products customers accounted for more than 10.0% of its total accounts receivable balance in the amounts of $3.5 million and $2.8 million.

 

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

 

20. Incomes taxes

 

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

 

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

 

Income tax expense for the nine months ended September 30, 2019 and 2018 is based on the estimated annual effective tax rate.

 

 35 

 

 

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

 

Forward-Looking Statements

 

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this Form 10-Q. Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expect,” “anticipate,” “intend,” “believe,” “may,” “plan”, “seek” or similar language. All forward-looking statements included in this document are based on information available to us on the date hereof and we assume no obligation to update any such forward-looking statements. Our business and financial performance are subject to substantial risks and uncertainties. Actual results could differ materially, from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the information set forth under the heading “Risk Factors” herein and in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Overview

 

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. We have 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, Fred Hutchinson Cancer Research Center, St. Jude Children’s Research Hospital, Dana-Farber Cancer Institute, Nationwide Children’s Hospital, and the University of Pennsylvania.

 

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).

 

Recent Events

 

Marketed Dermatology Products

 

During the three and nine months ended September 30, 2019, through our partner company Journey Medical Corporation (“Journey” or “JMC”), our marketed products generated net revenue of $9.5 million and $23.8 million, respectively.

 

IV Tramadol

 

IV Tramadol is currently in development with our partner company, Avenue Therapeutics, Inc. (“Avenue”). Avenue plans to submit a new drug application, or an NDA, for IV Tramadol to treat moderate to moderately severe postoperative pain pursuant to Section 505(b)(2) of the Federal Food, Drug and Cosmetic Act (FDCA) by the end of 2019.

 

MB-101 (IL13Rα2 CAR T)

 

In October 2019, our partner company Mustang Bio, Inc. (“Mustang”) announced that City of Hope (“COH”) had received grant awards totaling $4.1 million for a clinical trial of MB-101 in combination with nivolumab (commercial name: Opdivo®) and ipilimumab (commercial name: Yervoy®) in patients with recurrent malignant glioma. Additional information on the trial can be found on www.CinicalTrials.gov using identifier NCT04003649.

 

 36 

 

 

MB-105 (PSCA CAR T)

 

In September 2019, Mustang announced that COH opened and has initiated patient treatments in a Phase 1 clinical trial of MB-105, a prostate stem cell antigen (“PSCA”) chimeric antigen receptor (“CAR”) engineered T cell (“CAR T”) technology for the treatment of prostate cancer. Additional information on the Phase 1 trial can be found on www.CinicalTrials.gov using identifier NCT03873805.

 

MB-103 (HER2 CAR T)

 

In August 2019, Mustang announced that COH had received a $9.3 million grant from the California Institute for Regenerative Medicine (“CIRM”) to fund an ongoing Phase 1 trial of MB-103 for the treatment of HER2-positive breast cancer with brain metastases. COH patents covering the HER2 CAR were licensed to Mustang in 2017. Additional information on the Phase 1 trial can be found on www.CinicalTrials.gov using identifier NCT03696030.

 

MB-107 (XSCID gene therapy)

 

In August 2019, Mustang, together with St. Jude, announced that MB-107 was granted Regenerative Medicine Advanced Therapy (“RMAT”) designation by the U.S. Food and Drug Administration (“FDA”). Under the RMAT designation, the FDA will help facilitate the program’s expedited development and review and provide guidance on generating the evidence needed to support the approval of MB-107 for XSCID.

 

Also announced in August 2019 was the license agreement with Calimmune, Inc. (“Calimmune License”) for the CytegrityTM stable producer cell line developed and used by St. Jude CytegrityTM cell line will be used to produce the viral vector for MB-107.

 

MB-108 (Oncolytic Virus C134)

 

In October 2019, Mustang announced that the first participant was dosed in a Phase 1 clinical trial to determine the safety and efficacy of MB-108, an attenuated herpes simplex virus type 1, in recurrent glioblastoma multiforme. Additional information on the Phase 1 trial can be found on www.CinicalTrials.gov using identifier NCT03657576.

 

MB-102 (CD123 CAR T)

 

In July 2019, Mustang announced that the FDA had granted Orphan Drug Designation to MB-102 for the treatment of acute myeloid leukemia.

 

In August 2019, Mustang announced that the FDA had approved its Investigational New Drug (“IND”) application to initiate a multi-center Phase 1/2 clinical trial of MB-102 in acute myeloid leukemia (“AML”), blastic plasmacytoid dendritic cell neoplasm (“BPDCN”) and high-risk myelodysplastic syndrome (“MDS”).

 

Cosibelimab (formerly CK-301, an anti-PD-L1 antibody)

 

In September 2019, our partner company, Checkpoint Therapeutics, Inc. (“Checkpoint”), announced updated interim results from its ongoing multicenter Phase 1 clinical trial of Cosibelimab. The data were presented in a poster presentation at the European Society for Medical Oncology (ESMO) Congress 2019 in Barcelona, Spain. Checkpoint continues to enroll cutaneous squamous cell carcinoma (“CSCC”) patients to support an initial BLA submission for Cosibelimab based on this ongoing clinical trial. Additional information on the Phase 1 trial can be found on www.CinicalTrials.gov using identifier NCT03212404.

 

In July 2019, Checkpoint was added to the Russell 2000® Index.

 

Reportable Business Segments

 

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

 

 37 

 

 

Results of Operations

 

General

 

For the three and nine months ended September 30, 2019, we generated $9.8 million and $25.5 million, respectively, of net revenue, of which $0.3 million and $1.7 million, respectively, of revenue relates to Checkpoint’s collaborative agreements with TG Therapeutics Inc. (“TGTX”) and $9.5 million and $23.8 million, respectively, of revenue relates primarily to the sale of Journey branded products. At September 30, 2019, we had an accumulated deficit of $420.7 million. While we may in the future generate revenue from a variety of sources, including license fees, milestone payments, research and development payments in connection with strategic partnerships and/or product sales, our and our subsidiaries’ current product candidates are at an early stage of development and may never be successfully developed or commercialized. Accordingly, we expect to continue to incur substantial losses from operations for the foreseeable future, and there can be no assurance that we will ever generate significant revenues.

 

For the three and nine months ended September 30, 2019, we had $2.7 million and $7.0 million, respectively, of costs of goods sold in connection with the sale of Journey’s marketed products, compared to $1.4 million and $4.5 million, respectively, for the three and nine months ended September 30, 2018. The increase can be attributed to the increase in sales as well as the expansion of the branded product portfolio.

 

Research and Development Expenses

 

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

 

For the three months ended September 30, 2019 and 2018, research and development expenses were approximately $14.6 million and $16.1 million, respectively. Additionally, during the three months ended September 30, 2019 and 2018, we expensed approximately $0.7 million and $3.7 million, respectively, in costs related to the acquisition of licenses. Noncash, stock-based compensation expense included in research and development for the three months ended September 30, 2019 and 2018, was $1.2 million and $1.8 million, respectively.

 

Research and development costs associated with the development of our licenses, exclusive of noncash stock-based compensation expenses (“SBC”), for the three months ended September 30, 2019 and 2018, by entity, are as follows:

 

   Three Months Ended September 30,   % of total 
($ in thousands)  2019   2018   2019   2018 
Research & Development                    
Fortress  $549   $771    4%   5%
Partner Companies:                    
Avenue   1,566    1,547    12%   11%
Checkpoint   3,715    6,143    28%   43%
Mustang   6,516    4,532    49%   32%
Other(1)   1,014    1,267    7%   9%
Research & Development exclusive of SBC  $13,360   $14,260    100%   100%

 

Note 1: Includes the following partner companies: Aevitas, Caelum (2018 only), Cellvation, Cyprium, Helocyte and Tamid

 

Noncash stock-based compensation expense recorded in research and development for the three months ended September 30, 2019 and 2018, by entity is as follows:

 

   Three Months Ended September 30,   % of total 
($ in thousands)  2019   2018   2019   2018 
Research & Development                    
Noncash stock-based compensation                    
Fortress  $158   $235    13%   13%
Partner Companies:                    
Avenue   140    127    12%   7%
Checkpoint   179    642    15%   35%
Mustang   731    702    60%   39%
Other(1)   3    116    -    6%
Total stock-based compensation in Research & Development  $1,211   $1,822    100%   100%

 

Note 1: Includes the following partner companies: Aevitas, Caelum (2018 only), Cellvation, Cyprium, Helocyte and Tamid

 

 38 

 

 

Research and development costs associated with the development of our licenses, exclusive of noncash stock-based compensation expenses, for the nine months ended September 30, 2019 and 2018, by entity, are as follows:

 

   Nine Months Ended September 30,   % of total 
($ in thousands)  2019   2018   2019   2018 
Research & Development                    
Fortress  $1,454   $4,702    3%   9%
Partner Companies:                    
Avenue   17,834    14,280    33%   27%
Checkpoint   12,036    18,115    22%   34%
Mustang   19,789    10,226    37%   19%
Other(1)   2,607    6,265    5%   11%
Research & Development exclusive of SBC  $53,720   $53,588    100%   100%

 

Note 1: Includes the following subsidiaries: Aevitas, Caelum (2018 only), Cellvation, Cyprium, Helocyte and Tamid

 

Noncash stock-based compensation expense for the nine months ended September 30, 2019 and 2018, by entity is as follows:

 

   Nine Months Ended September 30,   % of total 
($ in thousands)  2019   2018   2019   2018 
Research & Development                    
Noncash stock-based compensation                    
Fortress  $447   $878    18%   18%
Partner Companies:                    
Avenue   505    363    19%   7%
Checkpoint   559    930    21%   19%
Mustang   1,116    2,732    42%   55%
Other(1)   8    37    -    1%
Total stock-based compensation in Research & Development   $2,635   $4,940    100%   100%

 

Note 1: Includes the following subsidiaries: Aevitas, Caelum (2018 only), Cellvation, Cyprium, Helocyte and Tamid

 

General and Administrative Expenses

 

General and administrative expenses consist principally of sales and marketing costs, personnel-related costs, professional fees for legal, consulting, audit and tax services, rent and other general operating expenses not otherwise included in research and development expenses. For the three months ended September 30, 2019 and 2018, general and administrative expenses were approximately $14.3 million and $12.2 million, respectively. Noncash, stock-based compensation expense included in general and administrative expenses for the three months September 30, 2019 and 2018, was $2.5 million and $2.3 million, respectively.

 

 39 

 

 

Included in the remaining $11.8 million and $9.9 million figures for the three months ended September 30, 2019 and 2018, respectively are the following partner company expenses: