The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
Notes to Condensed Consolidated
Financial Statements
(Unaudited)
1. Organization and Description of Business
Fortress Biotech, Inc. (“Fortress”
or the “Company”) is a biopharmaceutical company dedicated to acquiring, developing and commercializing novel pharmaceutical
and biotechnology products. Fortress develops and commercializes products both within Fortress and through certain of its subsidiary
companies, also referred to as the “Fortress Companies.” Additionally, the Company has a controlling interest in National
Holdings Corporation, a diversified independent brokerage company (together with its subsidiaries, referred to as “NHLD”
or “National”). In addition to its internal development programs, the Company leverages its biopharmaceutical business
expertise and drug development capabilities and provides funding and management services to help the Fortress Companies achieve
their goals. The Company and the Fortress Companies may seek licenses, acquisitions, partnerships, joint ventures and/or public
and private financings (including financings facilitated by NHLD) to accelerate and provide additional funding to support their
research and development programs and the commercialization of biopharmaceutical products.
As of September 30, 2017, in addition to NHLD,
the Company has several consolidated Fortress Companies, some of which contain product licenses, including Avenue Therapeutics,
Inc. (“Avenue”), Aevitas Therapeutics, Inc (“Aevitas”), Cellvation, Inc. (“Cellvation”), Journey
Medical Corporation (“Journey or “JMC”), Coronado SO Co. (“Coronado SO”), Checkpoint Therapeutics,
Inc. (“Checkpoint”), Mustang Bio, Inc. (“Mustang”), Helocyte, Inc. (“Helocyte”), Escala Therapeutics,
Inc. (“Escala”), CB Securities Corporation (which holds investments classified as cash and cash equivalents), Caelum
Biosciences, Inc. (“Caelum”) and Cyprium Therapeutics, Inc. (“Cyprium”). In addition to the foregoing companies,
Fortress also maintains ownership positions in subsidiaries with minimal activity, including Innmune Limited.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of
Consolidation
The accompanying unaudited interim condensed
consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United
States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.
In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments, which
include only normal recurring adjustments necessary for the fair statement of the balances and results for the periods presented.
Certain information and footnote disclosures normally included in the Company’s annual financial statements prepared in accordance
with GAAP have been condensed or omitted. These condensed consolidated financial statement results are not necessarily indicative
of results to be expected for the full fiscal year or any future period.
The unaudited condensed consolidated financial
statements and related disclosures have been prepared with the presumption that users of the unaudited condensed consolidated financial
statements have read or have access to the audited consolidated financial statements for the preceding fiscal year for each of
the Company, Avenue, Checkpoint, Mustang and National. Accordingly, these unaudited condensed consolidated financial statements
should be read in conjunction with the Company’s Form 10-K, which was filed with the United States Securities and Exchange
Commission (“SEC”) on March 16, 2017, from which the Company derived the balance sheet data at December 31, 2016,
as well as National’s Form 10-K, filed with SEC on December 29, 2016 and their Form 10-Q, filed with the SEC on August 14,
2017, Checkpoint’s Forms 10-K and 10-K/A, filed with the SEC on March 17, 2017 and March 21, 2017, respectively, Mustang’s
Form 10-K, filed with the SEC on March 31, 2017, and Avenue’s Form 10-12G/A, filed with the SEC on March 27, 2017.
The Company’s unaudited condensed consolidated
financial statements include the accounts of the Company and its subsidiaries: NHLD, Innmune Limited, Coronado SO, Cyprium, Escala,
JMC, CB Securities Corporation, Avenue, Checkpoint, Mustang, Helocyte, Cellvation, Caelum and Aevitas. All intercompany balances
and transactions have been eliminated.
The National assets acquired and liabilities
assumed and revenues and expenses are reported on a one quarter lag. Therefore, the National assets acquired and liabilities assumed
included in these consolidated financial statements as of September 30, 2017 are actually the assets and liabilities as of June
30, 2017 and the revenues and expenses included in these consolidated financial statements for the quarter ending September 30,
2017 are actually the revenues and expenses for the quarter ending June 30, 2017.
The preparation of the Company’s unaudited
condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited
condensed consolidated financial statements and the reported amounts of expenses during the reporting period.
Use of Estimates
The Company’s unaudited condensed consolidated
financial statements include certain amounts that are based on management’s best estimates and judgments. The Company’s
significant estimates include, but are not limited to, useful lives assigned to long-lived and intangible assets, fair value measurements,
stock-based compensation, common stock issued to acquire licenses, investments, accrued expenses, derivative warrant liabilities,
provisions for income taxes and contingencies. Due to the uncertainty inherent in such estimates, actual results may differ from
these estimates.
Significant Accounting Policies
There have been no material changes to the
Company’s significant accounting policies previously disclosed in the Company’s Form 10-K filed with the SEC on March
16, 2017, with the exception of the policies listed below.
Cash and Cash Equivalents
The Company considers all short-term investments
with an original maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents at September
30, 2017 and at December 31, 2016 consisted of cash, money market funds and certificates of deposit in institutions in the United
States. Balances at certain institutions have exceeded Federal Deposit Insurance Corporation insured limits and U.S. government
agency securities.
Short-term Investments – Held to Maturity
The company classifies its certificates of
deposit as cash and cash equivalents or held to maturity in accordance with the Financial Accounting Standards Board ("FASB")
Accounting Standards Codification (“ASC”) 320,
Investments – Debt and Equity Securities
. The Company considers
all short-term investments with an original maturity in excess of three months when purchased to be short-term investments. Short-term
investments consist of short-term FDIC insured certificates of deposit with a maturity of more than three months and less than
twelve months, carried at amortized cost using the effective interest method. The cost of the Company’s certificates of deposit
approximated fair value. The Company reassesses the appropriateness of the classification of its investments at the end of each
reporting period.
At September 30, 2017, the Company
had approximately $60.1 million in certificates of deposit with no more than $250,000 at any individual institution. The
Company classified $16.0 million as cash and cash equivalents and classified $44.1 million as short-term investments
(certificates of deposits) held-to-maturity as of September 30, 2017. There were no short-term investments as of December 31,
2016. This classification was based upon management’s determination that it has the positive intent and ability to hold
the securities until their maturity dates, as its investments mature within one year and the underlying cash invested in
these securities is not required for current operations.
Recently Adopted Accounting Pronouncements
In March 2016, the FASB issued Accounting Standards
Update ("ASU") 2016-09,
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting
. Under ASU 2016-09, companies will no longer record excess tax benefits and certain tax deficiencies in additional
paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense
or benefit in the income statement and the APIC pools will be eliminated. In addition, ASU 2016-09 eliminates the requirement that
excess tax benefits be realized before companies can recognize them. ASU 2016-09 also requires companies to present excess tax
benefits as an operating activity on the statement of cash flows rather than as a financing activity. Furthermore, ASU 2016-09
will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability
classification for shares used to satisfy the employer’s statutory income tax withholding obligation. An employer with a
statutory income tax withholding obligation will now be allowed to withhold shares with a fair value up to the amount of taxes
owed using the maximum statutory tax rate in the employee’s applicable jurisdiction(s). ASU 2016-09 requires companies to
classify the cash paid to a tax authority when shares are withheld to satisfy their statutory income tax withholding obligation
as a financing activity on the statement of cash flows. Under current GAAP, it was not specified how these cash flows should be
classified. In addition, companies will now have to elect whether to account for forfeitures on share-based payments by (1) recognizing
forfeitures of awards as they occur or (2) estimating the number of awards expected to be forfeited and adjusting the estimate
when it is likely to change, as is currently required. The Company adopted ASU 2016-09 on January 1, 2017. The adoption did not
have a material impact on its condensed consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment
. ASU 2017-04 removes Step
2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the
amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.
This standard will be effective for the Company beginning in the first quarter of fiscal year 2021 and is required to be applied
prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January
1, 2017. The Company adopted ASU 2017-04 on January 1, 2017. The adoption did not have a material impact on the Company’s
condensed consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
. The amendments in this update clarify the definition
of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted
for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including
acquisitions, disposals, goodwill, and consolidation. The guidance is effective for fiscal periods beginning after December 15,
2017, including interim periods within those periods. The Company adopted ASU 2017-01 on January 1, 2017. The adoption did not
have a material impact on the Company’s condensed consolidated financial statements and related disclosures.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts
with Customers (Topic 606)
, which requires entities to recognize revenue in a way that depicts the transfer of promised goods
or services to customers in an amount that reflects the consideration the entities expect to receive in exchange for those goods
or services. The new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and
cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from
costs incurred to obtain or fulfill a contract. The FASB subsequently issued ASU No. 2016-10,
Revenue from Contracts with Customers
(Topic 606): Identifying Performance Obligations and Licensing
to address issues arising from implementation of the new revenue
recognition standard. ASU 2014-09 and ASU 2016-10 are effective for interim and annual periods beginning January 1, 2018,
and may be adopted earlier, but not before January 1, 2017. The revenue standard is required to be adopted by taking either a
full retrospective or a modified retrospective approach. The Company is continuing to assess the impact of the new guidance on
its accounting policies and procedures and is evaluating the new requirements as applied to existing revenue contracts. The Company
will adopt Topic 606 in the first quarter of 2018 using the modified retrospective method which consists of applying and recognizing
the cumulative effect of Topic 606 at the date of initial application and providing certain additional disclosures. The Company
is in the process of reviewing variable consideration, potential disclosures, and our transition adjustments to complete our evaluation
of the impact on our consolidated financial statements prior to the end of 2017. In addition, the Company continues to monitor
additional changes, modifications, clarifications or interpretations undertaken by the FASB or others, which may impact our current
conclusions.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities
. ASU
No. 2016-01 requires several targeted changes including that equity investments (except those accounted for under the equity method
of accounting, or those that result in consolidation of the investee) be measured at fair value with changes in fair value recognized
in net income. The new guidance also changes certain disclosure requirements and other aspects of current U.S. GAAP. Amendments
are to be applied as a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. ASU
2016-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption
is not permitted with the exception of certain targeted provisions. The Company is currently evaluating the impact, if any, of
adoption of ASU 2016-01 on its condensed consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842).
ASU 2016-02 requires an entity to recognize right-of-use assets and lease liabilities on its balance
sheet and disclose key information about leasing arrangements. Lessees and lessors are required to disclose qualitative and quantitative
information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty
of cash flows arising from leases. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning
after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact, if any, of adoption
of ASU 2016-02 on its condensed consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
. ASU 2016-13 requires
that expected credit losses relating to financial assets are measured on an amortized cost basis and available-for-sale debt securities
be recorded through an allowance for credit losses. ASU 2016-13 limits the amount of credit losses to be recognized for available-for-sale
debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized
credit losses if fair value increases. The new standard will be effective on January 1, 2020 and may be adopted earlier. The Company
is currently evaluating the impact, if any, that ASU 2016-13 will have on its condensed consolidated financial statements and related
disclosures.
In August 2016, the FASB issued ASU 2016-15,
Statement
of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,
which addresses eight specific cash
flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are
presented and classified in the statement of cash flows. The standard is effective for fiscal years beginning after December 15,
2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period.
The Company is currently evaluating the impact, if any, of this new pronouncement on its condensed consolidated statements of cash
flows and related disclosures. In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230):
Restricted Cash
. The new guidance requires that the reconciliation of the beginning-of-period and end-of-period amounts shown
in the statement of cash flows include restricted cash and restricted cash equivalents. If restricted cash is presented separately
from cash and cash equivalents on the balance sheet, companies will be required to reconcile the amounts presented on the statement
of cash flows to the amounts on the balance sheet. Companies will also need to disclose information about the nature of the restrictions.
The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The
Company is currently evaluating the impact, if any, of this new pronouncement on its condensed consolidated statements of cash
flows and related disclosures.
In May 2017, the FASB issued ASU 2017-09,
Compensation-Stock
Compensation (Topic 718): Scope of Modification Accounting
. ASU 2017-09 provides clarity and reduces both (1) diversity in
practice and (2) cost and complexity when applying the guidance in Topic 718, to a change to the terms or conditions of a share-based
payment award. The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date.
This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company
is currently assessing the potential impact of adopting ASU 2017-09 on its condensed consolidated financial statements and related
disclosures.
In July 2017, the FASB issued ASU 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815):
I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily
Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with
a Scope Exception
. Part I of this update addresses the complexity of accounting for certain financial instruments with down
round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the
strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and
complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features
that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty
of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB
Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about
mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests.
The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2018. The Company is currently assessing the potential impact of adopting
ASU 2017-11 on its condensed consolidated financial statements and related disclosures.
3. National Holdings Corporation Acquisition
– Intangible Assets
On September 9, 2016, the Company, purchased
approximately 56.6% of National's common stock, par value $0.02 per share at the purchase price of $3.25 per share in cash.
In connection with the purchase, the Company
recognized $18.6 million of goodwill and does not expect goodwill to be deductible for tax purposes.
Intangible assets consist of trademark and
customer lists acquired in the offer under the purchase method of accounting and are recorded at fair value net of accumulated
amortization since the purchase date. Amortization is calculated using the straight-line and accelerated methods over the following
estimated useful lives:
|
|
Useful life
|
Trademark
|
|
10 years
|
Customer lists
|
|
10 years
|
The carrying amount related to acquired intangible
assets as of September 30, 2017 are as follows ($ in thousands):
Intangible assets at December 31, 2016
|
|
$
|
15,991
|
|
Amortization expense
|
|
|
(1,235
|
)
|
Intangible assets at September 30, 2017
|
|
$
|
14,756
|
|
The future amortization of these intangible assets is as follows
($ in thousands):
|
|
Total
|
|
Three Months Ended December 31, 2017
|
|
$
|
415
|
|
Year Ended December 31, 2018
|
|
|
1,649
|
|
Year Ended December 31, 2019
|
|
|
1,649
|
|
Year Ended December 31, 2020
|
|
|
1,654
|
|
Year Ended December 31, 2021
|
|
|
1,649
|
|
Thereafter
|
|
|
7,740
|
|
Total
|
|
$
|
14,756
|
|
The Company reviews its finite-lived intangible
assets for impairment when events or changes in circumstances indicate that the carrying amount of a finite-lived intangible asset
may not be recoverable. Recoverability of a finite-lived intangible asset is measured by a comparison of its carrying amount to
the undiscounted future cash flows expected to be generated by the asset. If the asset is considered to be impaired, the impairment
recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. There were
no indicators of impairment during the nine months ended September 30, 2017.
4. Broker-Dealers
and Clearing Organizations, Other Receivables and Prepaid Expenses and Other Current Liabilities
At June 30, 2017, National’s receivables
of $2.8 million from broker-dealers and clearing organizations represent net amounts due for commissions and fees associated with
National’s retail brokerage business as well as asset based fee revenue associated with National’s asset management
advisory business. National also has other receivables at June 30, 2017 of $6.0 million, which principally represent trailing
commissions, tax and accounting fees and investment banking fees and are net of an allowance for uncollectable accounts of $0.5
million and are included in prepaid expenses and other current assets in the Company's Condensed Consolidated Balance Sheet.
5. Forgivable Loans Receivable
From time to time, National's operating subsidiaries
may make loans, evidenced by promissory notes, primarily to newly recruited independent financial advisors as an incentive for
their affiliation. The notes receivable balance is comprised of unsecured non-interest-bearing and interest-bearing loans (interest
ranging up to 9%). These notes have various schedules for repayment or forgiveness based on production or retention requirements
being met and mature at various dates through 2021. Amortization of loan forgiveness was included in commissions, compensation
and fees in the statement of operations. In the event the advisor’s affiliation with the subsidiary terminates, the advisor
is required to repay the unamortized balance of the note.
National provides an allowance for doubtful
accounts on the notes based on historical collection experience and continually evaluates the receivables for collectability and
possible write-offs where a loss is deemed probable. As of June 30, 2017, no allowance for doubtful accounts was required.
There were no unamortized forgivable loans
outstanding at June 30, 2017 attributable to registered representatives who ended their affiliation with National’s subsidiaries
prior to the fulfillment of their obligation.
6. Property and Equipment
Fortress's property and equipment, exclusive
of National's property and equipment, consisted of the following ($ in thousands):
|
|
Estimated Useful
|
|
September 30,
|
|
|
December 31,
|
|
|
|
Lives (in years)
|
|
2017
|
|
|
2016
|
|
Computer equipment
|
|
3
|
|
$
|
523
|
|
|
$
|
440
|
|
Furniture and fixtures
|
|
5
|
|
|
1,002
|
|
|
|
821
|
|
Leasehold improvements
|
|
Various
|
|
|
5,351
|
|
|
|
5,396
|
|
Construction in process
(1)
|
|
N/A
|
|
|
139
|
|
|
|
-
|
|
Total property and equipment
|
|
|
|
|
7,015
|
|
|
|
6,657
|
|
Less: accumulated depreciation
|
|
|
|
|
(986
|
)
|
|
|
(445
|
)
|
Property and equipment, net
|
|
|
|
$
|
6,029
|
|
|
$
|
6,212
|
|
|
(1)
|
In connection with Mustang’s manufacturing facility, Mustang incurred $0.1 million related
to the design of the facility as of September 30, 2017.
|
Fortress's depreciation expense for the three
months ended September 30, 2017 and 2016, was approximately $0.2 million and $0.2 million, respectively, and was recorded in both
research and development expense and general and administrative expense in the Condensed Consolidated Statements of Operations.
Fortress's depreciation expense for the nine months ended September 30, 2017 and 2016, was approximately $0.5 million and $0.2
million, respectively, and was recorded in both research and development expense and general and administrative expense in the
Condensed Consolidated Statements of Operations.
National's property and equipment as of June 30, 2017 consisted
of the following ($ in thousands):
|
|
Estimated Useful
|
|
June 30,
|
|
|
|
Lives (in years)
|
|
2017
|
|
Equipment
|
|
5
|
|
$
|
1,305
|
|
Furniture and fixtures
|
|
5
|
|
|
240
|
|
Leasehold improvements
|
|
Lesser of useful life or term of lease
|
|
|
685
|
|
Capital leases (primarily composed of computer equipment)
|
|
5
|
|
|
276
|
|
Total property and equipment
|
|
|
|
|
2,506
|
|
Less: accumulated depreciation
|
|
|
|
|
(314
|
)
|
Property and equipment, net
|
|
|
|
$
|
2,192
|
|
7. Fair Value Measurements
Certain of the Company’s financial instruments
are not measured at fair value on a recurring basis but are recorded at amounts that approximate their fair value due to their
liquid or short-term nature, such as accounts payable, accrued expenses and other current liabilities.
Laser Device for Treatment of Migraine Headache
On March 17, 2014, the Company invested
$0.3 million for a 35% ownership position in a third-party company developing a laser device to treat migraine headaches. The
Company elected the fair value option for recording this investment. In conjunction with this investment, the Company
received 13,409,962 Class A Preferred Units in the third-party company, representing 83% of the total 16,091,954 Class A
Preferred Units. In August 2017, a clinical trial utilizing this device concluded that there was no strong statistical data
demonstrating that the device provided relief from migraine headaches. Accordingly, the third-party company ceased operations
and the Company wrote off its investment of $0.3 million. The fair value of this investment was nil as of September 30, 2017
and $0.3 million as of December 31, 2016.
Origo Acquisition Corporation (formerly
CB Pharma Acquisition Corporation)
On December 19, 2016, Origo Acquisition Corporation
(“Origo”) entered into a merger agreement (“Origo Merger Agreement”) with Aina Le’a Inc. (“Aina
Le’a”), a residential and commercial real estate developer in Hawaii. On February 17, 2017, Origo sent a termination
letter, as supplemented on February 22, 2017, to Aina Le’a terminating the Origo Merger Agreement. On March 10,
2017, Origo’s shareholders approved an amendment to Origo’s organizational documents extending the date by which Origo
must consummate a merger to September 12, 2017. On September 11, 2017, Origo’s shareholders approved a second amendment to
the Articles of Association and extended the date by which to consummate a business combination to March 12, 2018.
On July 24, 2017, Origo entered into a Merger
Agreement with High Times Holding Corp. (“HTH”), which was later amended on September 27, 2017 (“Amended Merger
Agreement”). Pursuant to the terms of the Amended Merger Agreement, the Merger Sub will merge with and into HTH, with HTH
continuing as the surviving entity (the “Merger”) and all holders of HTH equity securities and warrants, options and
rights to acquire or securities that convert into HTH equity securities (collectively, “HTH Securities”) will convert
into Origo common shares and, with respect to options, options to acquire Origo common shares.
The Merger Agreement also provides that, immediately
prior to the Effective Time, Origo will reincorporate under the laws of the State of Nevada, whether by reincorporation, statutory
conversion or otherwise.
As of September 30, 2017, the Company valued its investment in Origo,
a publicly traded company, utilizing the following assumptions: probability of a successful business combination of 31.4%, and
no dividend rate, which yielded an instrument value upon business combination of $10.61 per ordinary share for the private placement
shares. The rights and warrants were valued utilizing a binomial-lattice model at a value of $0.33 for each right and $0.31 for
each warrant. Based upon the valuation, the Company recorded a decrease in fair-value of investment of $0.2 million for the nine
months ended September 30, 2017. At September 30, 2017, the fair value of the Company’s investment in Origo was, $0.9 million.
The Company’s working capital note with Origo of $0.3 million can be converted to stock upon a successful business combination.
Contingently Issuable Warrant
Pursuant to the Company’s promissory
note with NSC of March 2015, as amended in July 2015 (the “NSC Note”), (see Note 11), if the Company transfers any
proceeds from the NSC Note to a Fortress Company, such Fortress Company will issue to NSC Biotech Venture Fund I LLC a new promissory
note on identical terms as the NSC Note and NSC Biotech Venture Fund I LLC will also receive a warrant to purchase a number of
shares of such Fortress Company’s stock equal to 25% of the outstanding Fortress Company note divided by the lowest price
for which the Fortress Company sells its equity in its first third party financing. The warrants issued will have a term of 10
years and an exercise price equal to the par value of the Fortress Company’s common stock and are accounted for in accordance
with ASC 815,
Derivatives and Hedging.
Avenue classified the fair value of the contingently
issuable warrants granted in connection with the transfer from Fortress of $3.0 million to Avenue under the NSC Note as a derivative
liability as there was a potential that Avenue would not have a sufficient number of authorized common shares available to settle
these instruments.
On June 26, 2017, Avenue closed on an Initial
Public Offering (“IPO”) raising gross proceeds of $38.0 million and issuing 6.3 million common shares at $6.00 per
share. As such, pursuant to the terms of Avenue’s $3.0 million NSC Note, Avenue issued to National a warrant to purchase
125,000 of its common shares at par. The issuance of the warrant relates to the completion of Avenue’s IPO in which Avenue’s
raised gross proceeds from a third-party party exceeding five times the value of the debt. Upon the issuance of the warrant by
Avenue, the Company was removed as the guarantor on the note.
($ in thousands)
|
|
Avenue’s
Contingently
Issuable
Warrants
|
|
Beginning balance at January 1, 2017
|
|
$
|
302
|
|
Conversion into common shares
|
|
|
(750
|
)
|
Change in fair value
|
|
|
448
|
|
Ending balance at September 30, 2017
|
|
$
|
-
|
|
Avenue Warrant Liabilities
On December 30, 2016, Avenue held a closing
of the sale of convertible promissory notes. In the closing, WestPark Capital, Inc., the placement agent (“WestPark”),
received a warrant (the “WestPark Warrant”) to purchase the number of shares of Avenue’s common stock equal to
$10,000 divided by the price per share at which any note sold to investors first converts into Avenue’s common stock. The
WestPark Warrant has a ten-year term. Avenue’s WestPark Warrant liability was measured at fair value using a Monte Carlo
simulation valuation methodology.
Additionally, on June 26, 2017, in connection
with Avenue’s IPO, Avenue issued 2,488 warrants to purchase common shares of Avenue at $4.02, a 33% discount to the IPO price
of $6.00 to Westpark Capital in connection with their role as placement agent for Avenue’s 2016 Convertible Notes, which
automatically converted to common shares of Avenue upon completion of the IPO.
($ in thousands)
|
|
Avenue’s
Warrant
Liability
|
|
Beginning balance at January 1, 2017
|
|
$
|
12
|
|
Conversion into common shares
|
|
|
(15
|
)
|
Change in fair value
|
|
|
3
|
|
Ending balance at September 30, 2017
|
|
$
|
-
|
|
Helocyte Warrant Liabilities
The fair value of Helocyte’s warrant
liability, which was issued in connection with Helocyte’s convertible note (see Note 11), was measured using a Monte Carlo
simulation valuation methodology. A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs)
used in measuring Helocyte’s warrant liabilities that are categorized within Level 3 of the fair value hierarchy as of September
30, 2017 is as follows:
|
|
September 30,
2017
|
|
Risk-free interest rate
|
|
|
1.733% – 1.795
|
%
|
Expected dividend yield
|
|
|
-
|
%
|
Expected term in years
|
|
|
3.75 – 4.17
|
|
Expected volatility
|
|
|
70.0
|
%
|
Strike price
|
|
$
|
0.44
|
|
($ in thousands)
|
|
Fair Value of
Derivative
Warrant
Liability
|
|
Beginning balance at January 1, 2017
|
|
$
|
167
|
|
Change in fair value of derivative liabilities
|
|
|
(79
|
)
|
Ending balance at September 30, 2017
|
|
$
|
88
|
|
Caelum Warrant Liabilities
The fair value of Caelum's warrant liability,
which was issued in connection with Caelum’s convertible note (see Note 11), was measured using a Monte Carlo simulation
valuation methodology. A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in
measuring Caelum’s warrant liabilities that are categorized within Level 3 of the fair value hierarchy as of September 30,
2017 is as follows:
|
|
September 30,
2017
|
|
Risk-free interest rate
|
|
|
1.895% – 1.914
|
%
|
Expected dividend yield
|
|
|
-
|
%
|
Expected term in years
|
|
|
4.84 – 4.96
|
|
Expected volatility
|
|
|
70.0
|
%
|
Strike price
|
|
$
|
1.43
|
|
($ in thousands)
|
|
Fair Value of
Derivative
Warrant
Liability
|
|
Beginning balance at January 1, 2017
|
|
$
|
-
|
|
Change in fair value of derivative liabilities
|
|
|
225
|
|
Ending balance at September 30, 2017
|
|
$
|
225
|
|
Helocyte Convertible Notes at Fair Value
Helocyte’s convertible note is measured
at fair value using the Monte Carlo simulation valuation methodology. A summary of the weighted average (in aggregate) significant
unobservable inputs (Level 3 inputs) used in measuring Helocyte’s convertible debt that is categorized within Level 3 of
the fair value hierarchy as of September 30, 2017 is as follows:
|
|
September 30,
2017
|
|
Risk-free interest rate
|
|
|
1.199%– 1.336
|
%
|
Expected dividend yield
|
|
|
-
|
%
|
Expected term in years
|
|
|
0.50 – 1.16
|
|
Expected volatility
|
|
|
59.5
|
%
|
($ in thousands)
|
|
Helocyte
Convertible
Note, at fair
value
|
|
Beginning balance at January 1, 2017
|
|
$
|
4,487
|
|
Change in fair value of convertible notes
|
|
|
246
|
|
Ending balance at September 30, 2017
|
|
$
|
4,733
|
|
Caelum Convertible Notes at Fair Value
Caelum’s convertible debt is measured
at fair value using the Monte Carlo simulation valuation methodology. A summary of the weighted average (in aggregate) significant
unobservable inputs (Level 3 inputs) used in measuring Caelum’s convertible debt that is categorized within Level 3 of the
fair value hierarchy as of September 30, 2017 is as follows:
|
|
September 30,
2017
|
|
Risk-free interest rate
|
|
|
1.246%– 1.463
|
%
|
Expected dividend yield
|
|
|
-
|
%
|
Expected term in years
|
|
|
0.71 – 1.95
|
|
Expected volatility
|
|
|
70.0
|
%
|
($ in thousands)
|
|
Caelum
Convertible
Note, at fair
value
|
|
Beginning balance at January 1, 2017
|
|
$
|
-
|
|
Additions
|
|
|
9,914
|
|
Change in fair value of convertible notes
|
|
|
14
|
|
Ending balance at September 30, 2017
|
|
$
|
9,928
|
|
Avenue Convertible Notes at Fair Value
On June 26, 2017, upon completion of Avenue’s
IPO, Avenue’s convertible debt automatically converted into approximately 49,749 common shares of Avenue, at $4.02, a 33%
discount to the IPO price, pursuant to the terms of the Convertible Note. As of September 30, 2017, Avenue’s obligation to
its note holders was satisfied.
($ in thousands)
|
|
Avenue
Convertible
Note, at fair
value
|
|
Beginning balance at January 1, 2017
|
|
$
|
200
|
|
Conversion into common shares
|
|
|
(299
|
)
|
Change in fair value of convertible notes
|
|
|
99
|
|
Ending balance at September 30, 2017
|
|
$
|
-
|
|
The following tables classify the fair value
hierarchy of Fortress's financial instruments, exclusive of National's financial instruments, measured at fair value as of September
30, 2017 and December 31, 2016:
|
|
Fair Value Measurement as of September 30, 2017
|
|
($ in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments, at fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
923
|
|
|
$
|
923
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
923
|
|
|
$
|
923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
313
|
|
|
$
|
313
|
|
Caelum Convertible Note, at fair value
|
|
|
-
|
|
|
|
-
|
|
|
|
9,928
|
|
|
|
9,928
|
|
Helocyte Convertible Note, at fair value
|
|
|
-
|
|
|
|
-
|
|
|
|
4,733
|
|
|
|
4,733
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
14,974
|
|
|
$
|
14,974
|
|
|
|
Fair Value Measurement as of December 31, 2016
|
|
($ in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments, at fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,414
|
|
|
$
|
1,414
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,414
|
|
|
$
|
1,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingently Issuable Warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
302
|
|
|
$
|
302
|
|
Warrant liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
179
|
|
|
|
179
|
|
Helocyte Convertible Note, at fair value
|
|
|
-
|
|
|
|
-
|
|
|
|
4,487
|
|
|
|
4,487
|
|
Avenue Convertible Note, at fair value
|
|
|
-
|
|
|
|
-
|
|
|
|
200
|
|
|
|
200
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,168
|
|
|
$
|
5,168
|
|
The following table shows the fair values hierarchy
of National's financial instruments measured at fair value on a recurring basis on the Condensed Consolidated Balance Sheets as
of June 30, 2017:
|
|
Fair Value Measurement as of June 30, 2017
|
|
($ in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities owned, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate stocks
|
|
$
|
70
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
70
|
|
Municipal bonds
|
|
|
816
|
|
|
|
517
|
|
|
|
-
|
|
|
|
1,333
|
|
Restricted stock
|
|
|
-
|
|
|
|
192
|
|
|
|
-
|
|
|
|
192
|
|
Total
|
|
$
|
886
|
|
|
$
|
709
|
|
|
$
|
-
|
|
|
$
|
1,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold, but not yet purchased at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
637
|
|
|
$
|
637
|
|
Warrants - National
|
|
|
-
|
|
|
|
|
|
|
|
8,832
|
|
|
|
8,832
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,469
|
|
|
$
|
9,469
|
|
Warrants issuable - National
In accordance with the Company’s Merger
Agreement with National, since less than 80% of National's issued and outstanding shares of common stock were tendered, National
remains a publicly-traded company and National's stockholders post-tender offer received from National a five-year warrant per
held share to purchase an additional share of National's common stock at $3.25 as a dividend to all holders of National's common
stock.
As National does not have the ability to settle
the warrants with unregistered shares and maintenance of an effective registration statement may be considered outside of the Company’s
control, net cash settlement of the warrants is assumed. The fair value of the 5.4 million National warrants represents 43.4% of
the warrants issued to non-Fortress shareholders. These are being classified as a liability in the condensed consolidated statement
of financial condition at September 30, 2017. Such valuation (using Level 3 inputs) was determined by use of the Black-Scholes
option pricing model using the following assumptions:
|
|
June 30,
2017
|
|
Dividend yield
|
|
|
-
|
%
|
Expected volatility
|
|
|
91
|
%
|
Risk-free interest rate
|
|
|
1.890
|
%
|
Life (in years)
|
|
|
4.20
|
|
($ in thousands)
|
|
National’s
Warrants
|
|
Beginning balance at December 31, 2016
|
|
$
|
14,359
|
|
Change in fair value of derivative liability
|
|
|
(5,527
|
)
|
Ending balance at June 30, 2017
|
|
$
|
8,832
|
|
National listed the warrants on the Nasdaq
Capital Market under the symbol “NHLDW” in February 2017.
The table below provides a roll-forward of
the changes in fair value of Level 3 financial instruments for the nine months ended September 30, 2017:
|
|
|
|
|
|
|
|
Convertible Note, at fair value
|
|
|
Contingently
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Investment in
Origo
|
|
|
Investment in
laser device
|
|
|
Helocyte
|
|
|
Avenue
|
|
|
Caelum
|
|
|
Issuable
Warrants
|
|
|
Warrant
liabilities
|
|
|
Total
|
|
Balance at December 31, 2016
|
|
$
|
1,164
|
|
|
$
|
250
|
|
|
$
|
4,487
|
|
|
$
|
200
|
|
|
$
|
-
|
|
|
$
|
14,661
|
|
|
$
|
179
|
|
|
$
|
20,941
|
|
Additions during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,914
|
|
|
|
-
|
|
|
|
225
|
|
|
|
10,139
|
|
Conversion into common shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(299
|
)
|
|
|
-
|
|
|
|
(750
|
)
|
|
|
(15
|
)
|
|
|
(1,064
|
)
|
Issuance of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,190
|
)
|
|
|
8,190
|
|
|
|
-
|
|
Loss on write off investment
|
|
|
-
|
|
|
|
(250
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(250
|
)
|
Change in fair value of investments
|
|
|
(241
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(241
|
)
|
Change in fair value of convertible notes
|
|
|
-
|
|
|
|
-
|
|
|
|
246
|
|
|
|
99
|
|
|
|
14
|
|
|
|
-
|
|
|
|
-
|
|
|
|
359
|
|
Change in fair value of derivative liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,079
|
)
|
|
|
(76
|
)
|
|
|
(5,155
|
)
|
Balance at September 30, 2017
|
|
$
|
923
|
|
|
$
|
-
|
|
|
$
|
4,733
|
|
|
$
|
-
|
|
|
$
|
9,928
|
|
|
$
|
642
|
|
|
$
|
8,503
|
|
|
$
|
24,729
|
|
For the nine months ended September 30, 2017,
no transfers occurred between Level 1, Level 2 and Level 3 instruments.
8. Licenses Acquired
In accordance with ASC 730-10-25-1,
Research
and Development
, costs incurred in obtaining technology licenses are charged to research and development expense if the
technology licensed has not reached technological feasibility and has no alternative future use. The licenses purchased by
the Company and Mustang, Checkpoint, Helocyte, Caelum and Cyprium require substantial completion of research and
development, regulatory and marketing approval efforts in order to reach technological feasibility. As such, for the three
and nine months ended September 30, 2017 and 2016, respectively, the purchase price of licenses acquired was classified as
research and development-licenses acquired in the Condensed Consolidated Statements of Operations, as reflected in the
table below:
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
($ in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Fortress
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
300
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fortress Companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checkpoint
|
|
|
-
|
|
|
|
1,000
|
|
|
|
400
|
|
|
|
3,060
|
|
Helocyte
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
83
|
|
Mustang
|
|
|
300
|
|
|
|
-
|
|
|
|
2,375
|
|
|
|
-
|
|
Caelum
|
|
|
-
|
|
|
|
-
|
|
|
|
219
|
|
|
|
-
|
|
Cyprium
|
|
|
-
|
|
|
|
-
|
|
|
|
100
|
|
|
|
-
|
|
Total
|
|
$
|
300
|
|
|
$
|
1,000
|
|
|
$
|
3,394
|
|
|
$
|
3,143
|
|
Fortress
Effcon Laboratories, Inc.
In September 2016, the Company entered into
a development and license agreement with Effcon Laboratories, Inc. (“Effcon”) for the development of extended release
formulation of Methozolamide. Pursuant to the Agreement, Fortress paid an upfront fee of $0.2 million in December 2016. Additional
payments are due for the achievement of five development milestones totaling $2.3 million and royalty payments in the mid-single
digits are due on net sales of licensed products. Additionally, the Company agreed to fund a development budget of up to $1.6 million.
During the three and nine months ended September 30, 2017, the Company recorded expense of nil and $0.3 million, respectively which
was recorded on the Condensed Consolidated Statement of Operations in research and development – licenses acquired
Checkpoint
Jubilant Biosys Limited
In May 2016, Checkpoint entered into a license
agreement with Jubilant Biosys Limited (“Jubilant”), whereby Checkpoint obtained an exclusive, worldwide license (the
“Jubilant License”) to Jubilant’s family of patents covering compounds that inhibit BRD4, a member of the BET
domain for cancer treatment, including CK-103. For the nine months ended September 30, 2017, Checkpoint expensed a non-refundable
milestone payment of $0.4 million associated with the successful completion of toxicology studies under the terms of the Jubilant
License. For the nine months ended September 30, 2016, Checkpoint paid an upfront fee of $2.0 million, included in research and
development-licenses acquired in the Condensed Consolidated Statements of Operations.
In connection with the Jubilant License, Checkpoint
entered into a sublicense agreement with TG Therapeutics, Inc. (“TGTX”), a related party, to develop and commercialize
the compounds licensed in the field of hematological malignancies, with Checkpoint retaining the right to develop and commercialize
these compounds in the field of solid tumors. Michael Weiss, Chairman of the Board of Directors of Checkpoint and the Company’s
Executive Vice Chairman, Strategic Development, is also the Executive Chairman, President and Chief Executive Officer and a stockholder
of TGTX. For the three months ended September 30, 2017 and 2016, Checkpoint recognized $0.2 million and $0.3 million, respectively,
and for the nine months ended September 30, 2017 and 2016, Checkpoint recognized $0.8 million and $1.3 million, respectively, in
revenue related to the sublicense agreement in the Condensed Consolidated Statements of Operations.
Dana-Farber Cancer Institute
In connection with its license agreement with
Dana-Farber, Checkpoint entered into a collaboration agreement with TGTX, a related party, to develop and commercialize the anti-PD-L1
and anti-GITR antibody research programs in the field of hematological malignancies, while Checkpoint retains the right to develop
and commercialize these antibodies in the field of solid tumors. Michael Weiss, Chairman of the Board of Directors of Checkpoint
and Fortress’s Executive Vice Chairman, Strategic Development, is also the Executive Chairman, President and Chief Executive
Officer and a stockholder of TGTX. For the three months ended September 30, 2017 and 2016, approximately $46,000 and nil, respectively,
was recognized in revenue from the collaboration agreement with TGTX in the Condensed Consolidated Statements of Operations. For
the nine months ended September 30, 2017 and 2016, approximately $84,000 and $20,000, respectively, was recognized in revenue from
the collaboration agreement with TGTX in the Condensed Consolidated Statements of Operations.
Mustang
License Agreement with the City of Hope
In March 2015, Mustang entered into an exclusive
license agreement with City of Hope (“COH”) to acquire intellectual property rights pertaining to chimeric antigen
receptor T cells, CAR-T (the “Original License”). On February 17, 2017, Mustang and COH amended and restated the Original License
by entering into three separate exclusive license agreements, one relating to CD123 (the “CD123 License”), one relating
to IL13Rα2 (the “IL13Rα2 License”) and one relating to the spacer technology (the “Spacer License”).
The total potential consideration payable to COH by Mustang under the new license agreements, in equity or cash, did not, in the
aggregate, change materially from the Original License.
CD123 License
Pursuant to the CD123 License, Mustang and
COH acknowledge that an upfront fee was paid under the Original License. In addition, an annual maintenance fee will continue to
apply. COH is eligible to receive up to approximately $14.5 million in milestone payments upon and subject to the achievement of
certain milestones. Royalty payments in the mid-single digits are due on net sales of licensed products. Mustang is obligated to
pay COH a percentage of certain revenues received in connection with a sublicense in the mid-teens to mid-thirties, depending on
the timing of the sublicense in the development of any product. In addition, equity grants made under the Original License were
acknowledged, and the anti-dilution provisions of the Original License were carried forward.
IL13Rα2 License
Pursuant to the IL13Rα2 License, Mustang
and COH acknowledge that an upfront fee was paid under the Original License. In addition, an annual maintenance fee will continue
to apply. COH is eligible to receive up to approximately $14.5 million in milestone payments upon and subject to the achievement
of certain milestones. Royalty payments in the mid-single digits are due on net sales of licensed products. Mustang is obligated
to pay COH a percentage of certain revenues received in connection with a sublicense in the mid-teens to mid-thirties, depending
on the timing of the sublicense in the development of any product. In addition, equity grants made under the Original License were
acknowledged, and the anti-dilution provisions of the Original License were carried forward. During the nine months ended September
30, 2017, Mustang recorded an expense of $0.3 million in connection with the achievement of certain milestones pursuant to the
IL13Rα2 License.
Spacer License
Pursuant to the Spacer License, Mustang and
COH acknowledge that an upfront fee was paid under the Original License. In addition, an annual maintenance fee will continue to
apply. No royalties are due if the Spacer technology is used in conjunction with a CD123 CAR or an IL13Rα2 CAR, and royalty
payments in the low single digits are due on net sales of licensed products if the Spacer technology is used in conjunction with
other intellectual property. Mustang is obligated to pay COH a percentage (in the mid-thirties) of certain revenues received in
connection with a sublicense. In addition, equity grants made under the Original License were acknowledged, and the anti-dilution
provisions of the Original License were carried forward.
IV/ICV Agreement
On February 17, 2017, Mustang entered into
an exclusive license agreement (the “IV/ICV Agreement”) with COH to acquire intellectual property rights in patent
applications related to the intraventricular and intracerebroventricular methods of delivering T cells that express CARs. Pursuant
to the IV/ICV Agreement, Mustang paid COH an upfront fee of $0.1 million in March 2017. COH is eligible to receive up to approximately
$0.1 million in milestone payments upon the achievement of a certain milestone as well as an annual maintenance fee. Royalty payments
in the low-single digits are due on net sales of licensed products and services.
HER2 Technology License
On May 31, 2017, Mustang entered into an exclusive
license agreement with the COH for the use of human epidermal growth factor receptor 2 (HER2) CAR T technology (HER2 Technology),
which will initially be applied in the treatment of glioblastoma multiforme. Pursuant to the Agreement, Mustang paid an upfront
fee of $0.6 million and will owe an annual maintenance fee of $50,000 (beginning in 2019). Additional payments of up to $14.9 million
are due upon and subject to the achievement of ten development milestones, and royalty payments in the mid-single digits are due
on net sales of licensed products.
CS1 Technology License
On May 31, 2017, Mustang entered into an exclusive
license agreement with the COH for the use of CS1 specific CAR T technology (CS1 Technology) to be directed against multiple myeloma.
Pursuant to the Agreement, Mustang paid an upfront fee of $0.6 million on July 3, 2017 and will owe an annual maintenance fee of
$50,000 (beginning in 2019). Additional payments of up to $14.9 million are due upon and subject to the achievement of ten development
milestones, and royalty payments in the mid-single digits are due on net sales of licensed products.
PSCA Technology License
On May 31, 2017, Mustang entered into an exclusive
license agreement with the COH for the use of prostate stem cell antigen (PSCA) CAR T technology (PSCA Technology) to be used in
the treatment of prostate cancer. Pursuant to the Agreement, Mustang paid an upfront fee of $0.3 million on July 3, 2017 and will
owe an annual maintenance fee of $50,000 (beginning in 2019). Additional payments of up to $14.9 million are due upon and subject
to the achievement of ten development milestones, and royalty payments in the mid-single digits are due on net sales of licensed
products.
License with University of California
On March 17, 2017, Mustang entered
into an exclusive license agreement with the Regents of the University of California (“UCLA License”) to
acquire intellectual property rights in patent applications related to the engineered anti-prostate stem cell antigen
antibodies for cancer targeting and detection. Pursuant to the UCLA Agreement, Mustang paid UCLA an upfront fee of $0.2
million on April 25, 2017. Annual maintenance fees also apply; additional payments are due upon achievement of certain
development milestones totaling $14.3 million, and royalty payments in the mid-single digits are due on net sales of licensed
products.
Fred Hutchinson Cancer Research Center License
On July 3, 2017, Mustang entered into an exclusive,
worldwide licensing agreement with Fred Hutchinson Cancer Research Center (“Fred Hutch”) for the use of a CAR T therapy
related to autologous T cells engineered to express a CD20-specific chimeric antigen receptor (“CD 20 Technology License”).
Pursuant to the CD 20 Technology License, Mustang paid Fred Hutch an upfront fee of $0.3 million and will owe an annual maintenance
fee of $50,000 on each anniversary of the license until the achievement by Mustang of regulatory approval of a licensed product
using CD20 Technology. Additional payments are due for the achievement of certain development milestones totaling $39.1 million
and royalty payments in the mid-single digits are due on net sales of licensed products.
Caelum
License Agreement with Columbia University
In January 2017, Caelum entered into an exclusive
license agreement with Columbia University (“Columbia”) to secure worldwide license rights to CAEL-101 (11-1F4), a
chimeric fibril-reactive monoclonal antibody (mAb) being evaluated in a Phase 1a/1b study for the treatment of amyloid light chain
(“AL”) amyloidosis. This transaction was accounted for as an asset acquisition pursuant to ASU 2017-01,
Business
Combinations (Topic 805): Clarifying the Definition of a Business,
as the majority of the fair value of the assets acquired
was concentrated in a group of similar assets, and the acquired assets did not have outputs or employees
.
Caelum made an
upfront payment of $0.2 million to Columbia upon execution of the exclusive license and also granted Columbia 1,050,000 shares
of Common Stock, representing 10% ownership of Caelum, as of such date valued at $29,000 or $0.028 per share. Total consideration
is included in research and development licenses acquired on the Condensed Consolidated Statements of Operations. Under the terms
of the agreement, Columbia is eligible to receive additional milestone payments of up to $5.5 million upon the achievement of certain
development milestones, in addition to royalty payments for sales of the product. CAEL-101 is a novel antibody being developed
for patients with AL Amyloidosis, a rare systemic disorder caused by an abnormality of plasma cells in the bone marrow.
Cyprium
License Agreement with the
Eunice Kennedy
Shriver
National Institute of Child Health and Human Development
In March 2017, Cyprium and the
Eunice Kennedy
Shriver
National Institute of Child Health and Human Development (“NICHD”), part of the National Institutes of
Health (“NIH”), entered into a Cooperative Research and Development Agreement to advance the clinical development of
Phase 3 candidate CUTX-101 (copper histidinate injection) for the treatment of Menkes disease. Cyprium and NICHD also entered into
a worldwide, exclusive license agreement to develop and commercialize AAV-based ATP7A gene therapy for use in combination with
CUTX-101 for the treatment of Menkes disease and related copper transport disorders. This transaction was accounted for as an asset
acquisition pursuant to ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business,
as
the majority of the fair value of the assets acquired was concentrated in a group of similar assets, and the acquired assets did
not have outputs or employees
.
Cyprium made an upfront payment of $0.1 million to NICHD upon execution of the exclusive
license, which has been included in research and development-licenses acquired in the Condensed Consolidated Statements
of Operations.
9. Sponsored Research Agreements
Checkpoint
NeuPharma, Inc. Sponsored Research Agreement
In connection with its license agreement with
NeuPharma, Inc. (“NeuPharma”), Checkpoint entered into a Sponsored Research Agreement with NeuPharma for certain research
and development activities. Effective January 11, 2016, TGTX, a related party, agreed to assume all costs associated with this
Sponsored Research Agreement and paid Checkpoint for all amounts previously paid by the Company. For the three months ended
September 30, 2017 and 2016, approximately $0.1 million and $0.2 million, respectively, was recognized in revenue in connection
with the Sponsored Research Agreement in the Condensed Consolidated Statements of Operations. For the nine months ended September
30, 2017 and 2016, approximately $0.5 million and $0.7 million, respectively, was recognized in revenue in connection with the
Sponsored Research Agreement in the Condensed Consolidated Statements of Operations.
Helocyte
PepVax and Triplex Clinical Research and Support Agreements
In March 2016, Helocyte entered into an Investigator-Initiated
Clinical Research Support Agreement, as amended, with the COH, to support a Phase 2 clinical study of its PepVax immunotherapy
for CMV control in allogeneic stem cell transplant recipients (“PepVax Research Agreement”). The Phase 2 study is additionally
supported by grants from the National Institutes of Health/National Cancer Institute.
In February 2016, Helocyte entered into an
Investigator-Initiated Clinical Research Support Agreement, as amended, with the COH, to support a Phase 2 clinical study of its
Triplex immunotherapy for CMV control in allogeneic stem cell transplant recipients (“Triplex Research Agreement”).
For the three months ended September 30, 2017
and 2016, Helocyte incurred expenses of $1.3 million and $0.4 million, related to the Triplex Research Agreement and $0.5 million
and $0.5 million related to their PepVax Research Agreement. For the nine months ended September 30, 2017 and 2016, Helocyte incurred
expenses of $2.3 million and $1.4 million, related to the Triplex Research Agreement and $0.7 million and $1.5 million related
to their PepVax Research Agreement. The Company recorded such expenses under research and development in the Company’s Condensed
Consolidated Statements of Operations.
Pentamer Sponsored Research Agreement
On May 1, 2017, Helocyte and COH entered in
a Sponsored Research Agreement for preclinical studies in connection with the development of Pentatmer. In June 2017, Helocyte
made an upfront payment of $1.5 million to fund the development plan, the payment was recorded as a prepayment on the Condensed
Consolidated Balance Sheets. For the three and nine months ended September 30, 2017, Helocyte recorded approximately $12,000 and
$24,000, respectively in research and development expenses in the Company’s Condensed Consolidated Statements of Operations.
No such expense was incurred in 2016.
Mustang
In connection with Mustang’s license
with COH for the development of CAR-T, Mustang entered into a Sponsored Research Agreement in which Mustang will fund continued
research in the amount of $2.0 million per year, payable in four equal annual installments, until 2020. For the three months ended
September 30, 2017 and 2016, Mustang incurred expenses of $0.5 million and $0.5 million, respectively.
For the nine
months ended September 30, 2017 and 2016, Mustang incurred expenses of $1.5 million and $1.5 million, respectively. The Company
recorded such expenses under research and development in the Company’s Condensed Consolidated Statements of Operations.
CD 123 Clinical Research Support Agreement
On February 17, 2017, Mustang entered into
a Clinical Research Support Agreement for CD123. Pursuant to the terms of this agreement Mustang made an upfront payment of approximately
$20,000 and will contribute an additional $0.1 million per patient in connection with the on-going investigator initiated study.
Further, Mustang agreed to fund approximately $0.2 million over three years pertaining to the clinical development of CD123. For
the three and nine months ended September 30, 2017 Mustang recorded approximately $0.6 million and $1.2 million, respectively,
in research and development expenses in the Company’s Condensed Consolidated Statements of Operations.
IL13Rα2 Clinical Research Support
Agreement
Also on February 17, 2017, Mustang entered
into a Clinical Research Support Agreement for IL13Rα2 (“IL13Rα2 CRA”). Pursuant to the terms of this agreement
Mustang made an upfront payment of approximately $9,300 and will contribute an additional $0.1 million per patient in connection
with the on-going investigator initiated study. Further, Mustang agreed to fund approximately $0.2 million over three years pertaining
to the clinical development of IL13Rα2. For the three and nine months ended September 30, 2017, Mustang recorded approximately
$0.2 million and $1.2 million, respectively, in research and development expenses under the IL13Rα2 CRA in the Company’s
Condensed Consolidated Statements of Operations.
CD20 Clinical Trial Agreement
Also, on July 3, 2017, in conjunction with
the CD20 Technology License from Fred Hutch, Mustang entered into an investigator-initiated clinical trial agreement (“CD20
CTA”) to provide partial funding for a Phase 1/2 clinical trial at Fred Hutch evaluating the safety and efficacy of the CD20
Technology in patients with relapsed or refractory B-cell non-Hodgkin lymphomas. In connection with the CD20 CTA, Mustang agreed
to fund up to $5.3 million of costs associated with the clinical trial, which commenced during the fourth quarter of 2017. For
the three and nine months ended September 30, 2017 Mustang recorded $88,000 of expense in connection with this agreement. Further Mustang made an upfront payment of $0.4 million recorded on the condensed balance
sheets as of September 30, 2017, as a prepaid expense, in connection with a startup fee related to the study.
10. Intangibles, net
Journey
Pursuant to the terms of Journey’s license
agreements for its branded products, Journey made upfront payments totaling $1.6 million. With the commencement of sales of these
products, Journey began amortization of these costs over their respective three year estimated useful life. For the three months
ended September 30, 2017 and 2016, Journey recognized expense of approximately $0.1 million and $29,000, respectively, which was
recorded in costs of goods sold in the Company’s Condensed Consolidated Statements of Operations. For the nine months ended
September 30, 2017 and 2016, Journey recognized expense of approximately $0.4 million and $50,000, respectively, which was recorded
in costs of goods sold in the Company’s Condensed Consolidated Statements of Operations.
11. Debt and Interest
Debt
Total debt consists of the following as of
September 30, 2017 and December 31, 2016:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
|
|
($ in thousands)
|
|
2017
|
|
|
2016
|
|
|
Interest rate
|
|
|
Maturity
|
IDB Note
|
|
$
|
14,929
|
|
|
$
|
14,929
|
|
|
|
2.25
|
%
|
|
Feb - 2018
|
NSC Note
|
|
|
-
|
|
|
|
3,608
|
|
|
|
8.00
|
%
|
|
Sep - 2018
|
2017 Subordinated Note Financing
|
|
|
3,254
|
|
|
|
-
|
|
|
|
8.00
|
%
|
|
March - 2020
|
2017 Subordinated Note Financing
|
|
|
13,893
|
|
|
|
-
|
|
|
|
8.00
|
%
|
|
May - 2020
|
2017 Subordinated Note Financing
|
|
|
1,820
|
|
|
|
-
|
|
|
|
8.00
|
%
|
|
June - 2020
|
2017 Subordinated Note Financing
|
|
|
3,017
|
|
|
|
-
|
|
|
|
8.00
|
%
|
|
August - 2020
|
2017 Subordinated Note Financing
|
|
|
6,371
|
|
|
|
-
|
|
|
|
8.00
|
%
|
|
September - 2020
|
Opus Credit Facility
|
|
|
9,500
|
|
|
|
7,000
|
|
|
|
12.00
|
%
|
|
Sep - 2018
|
Helocyte Convertible Note, at fair value
|
|
|
1,084
|
|
|
|
1,031
|
|
|
|
5.00% - 8.00
|
%
|
|
December 2017
|
Helocyte Convertible Note, at fair value
|
|
|
2,164
|
|
|
|
2,051
|
|
|
|
5.00% - 8.00
|
%
|
|
March - 2018
|
Helocyte Convertible Note, at fair value
|
|
|
1,049
|
|
|
|
991
|
|
|
|
5.00% - 8.00
|
%
|
|
April - 2018
|
Helocyte Convertible Note, at fair value
|
|
|
436
|
|
|
|
414
|
|
|
|
5.00% - 8.00
|
%
|
|
May - 2018
|
Avenue Convertible Note, at fair value
|
|
|
-
|
|
|
|
200
|
|
|
|
5.00% - 8.00
|
%
|
|
June - 2018
|
Caelum Convertible Note, at fair value
|
|
|
1,004
|
|
|
|
-
|
|
|
|
8.00
|
%
|
|
January - 2019
|
Caelum Convertible Note, at fair value
|
|
|
6,810
|
|
|
|
-
|
|
|
|
8.00
|
%
|
|
February -2019
|
Caelum Convertible Note, at fair value
|
|
|
2,114
|
|
|
|
-
|
|
|
|
8.00
|
%
|
|
June - 2019
|
Total notes payable
|
|
|
67,445
|
|
|
|
30,224
|
|
|
|
|
|
|
|
Less: Discount on notes payable
|
|
|
3,827
|
|
|
|
2,009
|
|
|
|
|
|
|
|
Total notes payable
|
|
$
|
63,618
|
|
|
$
|
28,215
|
|
|
|
|
|
|
|
IDB Note
On February 13, 2014, the Company executed
a secured promissory note in favor of Israel Discount Bank of New York (“IDB”) in the amount of $15.0 million (the
“IDB Note”). As of September 30, 2017, the Company had $14.9 million outstanding under the IDB Note, secured by a $15.0
million pledge account. On September 18, 2017, the maturity on the IDB Note was extended to August 1, 2020.
NSC Note
On July 5, 2017, the Company repaid it NSC
Note in the amount of $3.6 million.
2017 Subordinated Note Financing
On March 31, 2017, the Company entered into
Note Purchase Agreements (the “Purchase Agreements”) with NAM Biotech Fund II, LLC I (“NAM Biotech Fund”)
and NAM Special Situations Fund I QP, LLC (“NAM Special Situations Fund”), both of which are accredited investors,
and sold subordinated promissory notes (the “Notes”) of the Company (the “2017 Subordinated Note Financing”)
in the aggregate principal amount of $3.25 million. The Notes bear interest at the rate of 8% per annum; additionally, the Notes
accrue paid-in-kind interest at the rate of 7% per annum, which will be paid quarterly in shares of the Company’s common
stock and/or shares of common stock of one of the Company’s subsidiaries that are publicly traded, in accordance with the
terms of the Notes. Each Note is due on the third anniversary of its issuance, provided that the Company may extend the maturity
date for two one-year periods in its sole discretion. The 2017 Subordinated Note Financing is for a maximum of $40.0 million (which
the Company may, in its sole discretion, increase to $50.0 million).
National Securities Corporation (“NSC”),
a subsidiary of National and a related party, (see Note 17), pursuant to a Placement Agency Agreement entered into between the
Company, NAM Biotech Fund and NSC (the “NAM Placement Agency Agreement”) and a Placement Agency Agreement entered into
between the Company, NAM Special Situations Fund and NSC (together with the NAM Placement Agency Agreement, the “Placement
Agency Agreements”) acts as placement agent in the 2017 Subordinated Note Financing. Pursuant to the terms of the Placement
Agency Agreements, NSC receives (in addition to reimbursement of certain expenses) an aggregate cash fee equal to 10% of the aggregate
sales price of the Notes sold in the 2017 Subordinated Note Financing to NAM Biotech Fund and NAM Special Situations Fund. The
Placement Agent also receives warrants equal to 10% of the aggregate principal amount of the Notes sold in the 2017 Subordinated
Note Financing divided by the closing share price of the Company’s common stock on the date of closing (the “Placement
Agent Warrants”). The Placement Agent Warrants are exercisable immediately at such closing share price for a period of five
years. The Placement Agent will have a right of first offer for a period of 12 months for any proposed issuance of the Company’s
capital stock in a private financing, subject to certain exceptions, and will also have the right to participate as an investor
in subsequent financings.
On March 31, 2017, held its first closing of
the 2017 Subordinated Note Financing and received a gross proceeds of $3.2 million. NSC received a cash fee of approximately $0.3
million and warrant to purchase 87,946 shares of the Company’s common stock at an exercise price of per share $3.70.
On May 1, 2017, the Company held a second closing
of the 2017 Subordinated Note Financing and received gross proceeds of $8.6 million, before expenses. NSC received a placement
agent fee of approximately $0.9 million in the second closing and warrants to purchase 234,438 shares of the Company’s common
stock at an exercise price of $3.65 per share.
On May 31, 2017, the Company held a third closing
of the 2017 Subordinated Note Financing and received gross proceeds of $5.3 million, before expenses. NSC received a placement
agent fee of approximately $0.5 million in the third closing and warrants to purchase 147,806 shares of the Company’s common
stock at an exercise price of $3.61 per share.
On June 30, 2017, the Company held a fourth
closing of the 2017 Subordinated Note Financing and received gross proceeds of $1.8 million, before expenses. NSC received a placement
agent fee of approximately $0.2 million in the fourth closing and warrants to purchase 38,315 shares of the Company’s common
stock at an exercise price of $4.75 per share.
On August 31, 2017, the Company held a fifth
closing of the 2017 Subordinated Note Financing and received gross proceeds of $3.0 million, before expenses. NSC received a placement
agent fee of approximately $0.3 million in the fifth closing and warrants to purchase 63,526 shares of the Company’s common
stock at an exercise price of $4.75 per share.
On September 30, 2017, the Company held a sixth
closing of the 2017 Subordinated Note Financing and received gross proceeds of $6.4 million, before expenses. NSC received a placement
agent fee of approximately $0.6 million in the sixth closing and warrants to purchase 144,149 shares of the Company’s common
stock at an exercise price of $4.42 per share.
Caelum Convertible Notes
On July 31, 2017 Caelum through National Securities
Corporation (“NSC” or “Placement Agent”), a subsidiary of National offered up to $10 million, convertible
promissory notes (the “Caelum Convertible Notes”) to accredited investors (as defined under the U.S. Federal securities
laws). Under the terms of the offering the Placement Agent received a 10% selling commission, payable by Caelum and deducted from
the gross proceeds (see Note 17).
For the three months ended September
30, 2017, Caelum raised $9.9 million in the offering, in three separate closings and paid a placement fee equal to 10% of the proceeds
of the sale or $0.9 million. Additionally NSC received warrants to purchase a number of shares the Caelum’s Common Stock
equal to 10% of the aggregate amount of shares underlying the Notes with a per share exercise price equal to 110% of the per share
conversion price of the Notes; provided, however, that if no Note converts, the exercise price will be $75 million dollars divided
by the total number of fully-diluted shares of Common Stock outstanding immediately prior to exercise of the warrant, giving effect
to the assumed conversion of all options, warrants, and convertible securities of the Company
.
The notes convert upon a qualified financing in which Caelum raises
gross proceeds of at least $10 million as follows: the lesser of (a) a discount to the price per common share being paid in the
Sale of the Company equal to 20% or (b) a conversion price per share based on a pre-sale valuation of $75,000,000 divided by the
number of common shares outstanding at that time assuming the hypothetical conversion or exercise of any convertible securities,
options, warrants and other rights to acquire common shares of the Company. The Company elected the fair value option to account
for this note.
Opus Credit Facility
As of September 30, 2017, the Company had $9.5
million outstanding under the Opus Credit Facility (see Note 17), net of a debt discount related to the allocated value of the
warrants associated with the Opus Credit Facility of $1.3 million. The commitment period for the Opus Credit Facility expired on
September 1, 2017.
Interest Expense
The following table shows the details of interest
expense for all debt arrangements during the periods presented. Interest expense includes contractual interest and amortization
of the debt discount and amortization of fees represents fees associated with loan transaction costs, amortized over the life of
the loan:
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
($ in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
IDB Note
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
85
|
|
|
$
|
84
|
|
|
$
|
254
|
|
|
$
|
243
|
|
Amortization of fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
Total IDB Note
|
|
|
85
|
|
|
|
84
|
|
|
|
254
|
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NSC Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
(8
|
)
|
|
|
145
|
|
|
|
147
|
|
|
|
456
|
|
Amortization of fees
|
|
|
127
|
|
|
|
135
|
|
|
|
200
|
|
|
|
557
|
|
Total NSC Debt
|
|
|
119
|
|
|
|
280
|
|
|
|
347
|
|
|
|
1,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Subordinated Note
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
755
|
|
|
|
-
|
|
|
|
1,161
|
|
|
|
-
|
|
Amortization of fees
|
|
|
208
|
|
|
|
-
|
|
|
|
383
|
|
|
|
-
|
|
Total 2017 Subordinated Note
|
|
|
963
|
|
|
|
-
|
|
|
|
1,544
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opus Credit Facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
287
|
|
|
|
26
|
|
|
|
798
|
|
|
|
26
|
|
Amortization of fees
|
|
|
282
|
|
|
|
28
|
|
|
|
733
|
|
|
|
28
|
|
Total Opus Note
|
|
|
569
|
|
|
|
54
|
|
|
|
1,531
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOC Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
7
|
|
|
|
3
|
|
|
|
22
|
|
|
|
10
|
|
Total LOC
|
|
|
7
|
|
|
|
3
|
|
|
|
22
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Helocyte Convertible Note
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
64
|
|
|
|
26
|
|
|
|
175
|
|
|
|
26
|
|
Financing fee
|
|
|
-
|
|
|
|
242
|
|
|
|
1
|
|
|
|
491
|
|
Total Helocyte Convertible Note
|
|
|
64
|
|
|
|
268
|
|
|
|
176
|
|
|
|
517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avenue Convertible Note
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
Financing fee
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
Total Avenue Convertible Note
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Caelum Convertible Note
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
68
|
|
|
|
-
|
|
|
|
68
|
|
|
|
-
|
|
Financing fee
|
|
|
1,317
|
|
|
|
-
|
|
|
|
1,317
|
|
|
|
-
|
|
Total Caelum Convertible Note
|
|
|
1,385
|
|
|
|
-
|
|
|
|
1,385
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Falk CSR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
26
|
|
|
|
-
|
|
|
|
26
|
|
|
|
-
|
|
Total Falk CSR
|
|
|
26
|
|
|
|
-
|
|
|
|
26
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D&O Insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
2
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
Total D&O Insurance
|
|
|
2
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
Total Interest Expense and Financing Fee
|
|
$
|
3,220
|
|
|
$
|
689
|
|
|
$
|
5,298
|
|
|
$
|
1,838
|
|
12. Accrued Expenses and Other Long-Term Liabilities
Accrued expenses and other long-term liabilities,
excluding National, consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
($ in thousands)
|
|
2017
|
|
|
2016
|
|
Accrued expenses:
|
|
|
|
|
|
|
|
|
Professional fees
|
|
$
|
1,297
|
|
|
$
|
1,253
|
|
Salaries, bonuses and related benefits
|
|
|
4,178
|
|
|
|
2,846
|
|
Accrued Severance
|
|
|
-
|
|
|
|
53
|
|
Accrued Legal Settlement (1)
|
|
|
2,212
|
|
|
|
-
|
|
Ovamed manufacturing rights - short term component
|
|
|
-
|
|
|
|
900
|
|
Research and development
|
|
|
3,311
|
|
|
|
394
|
|
Dr. Falk Pharma milestone
|
|
|
2,950
|
|
|
|
2,634
|
|
Other
|
|
|
2,703
|
|
|
|
2,002
|
|
Total accrued expenses
|
|
$
|
16,651
|
|
|
$
|
10,082
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities:
|
|
|
|
|
|
|
|
|
Deferred rent and long-term lease abandonment charge
|
|
|
4,736
|
|
|
|
5,014
|
|
Total other long-term liabilities
|
|
$
|
4,736
|
|
|
$
|
5,014
|
|
|
(1)
|
In connection with a legal settlement (see Note 16), the Company is required to deliver 200,000 Mustang common shares, held
by the Company, to the Plaintiff. At September 30, 2017, the Company recorded, this settlement as an accrued, since in accordance
with ASC 450 –
Contingencies,
the transfer of the consideration was probable. As such the Company recorded an accrued
expense of $2.0 million representing the value of the shares transferred.
|
National's accounts payable and other accrued
expenses as of June 30, 2017, consisted of the following:
|
|
June 30,
|
|
|
|
2017
|
|
Legal
|
|
$
|
836
|
|
Audit
|
|
|
148
|
|
Telecommunications
|
|
|
196
|
|
Data Services
|
|
|
450
|
|
Regulatory
|
|
|
661
|
|
Settlements
|
|
|
2,633
|
|
Deferred rent
|
|
|
177
|
|
Contingent consideration payable
|
|
|
636
|
|
Income taxes payable
|
|
|
927
|
|
Other
|
|
|
1,844
|
|
Total
|
|
$
|
8,508
|
|
13. Non-Controlling Interests
Non-controlling interests in consolidated entities,
as recorded on the Condensed Consolidated Balance Sheets are as follows:
|
|
As
of September 30, 2017
|
|
($ in
thousands)
|
|
Avenue
|
|
|
Coronado
SO
|
|
|
Mustang
|
|
|
Checkpoint
|
|
|
JMC
|
|
|
Helocyte
|
|
|
Cellvation
|
|
|
Caelum
|
|
|
Aevitas
|
|
|
National
|
|
|
Total
|
|
NCI equity share
|
|
$
|
17,306
|
|
|
$
|
(236
|
)
|
|
$
|
47,840
|
|
|
$
|
22,368
|
|
|
$
|
(535
|
)
|
|
$
|
(1,848
|
)
|
|
$
|
(239
|
)
|
|
$
|
7
|
|
|
$
|
(9
|
)
|
|
$
|
17,022
|
|
|
$
|
101,676
|
|
Net
loss attributed to non-controlling interests
|
|
|
(1,329
|
)
|
|
|
(22
|
)
|
|
|
(8,268
|
)
|
|
|
(10,144
|
)
|
|
|
(150
|
)
|
|
|
(975
|
)
|
|
|
(60
|
)
|
|
|
(1,086
|
)
|
|
|
(166
|
)
|
|
|
4,845
|
|
|
|
(17,355
|
)
|
Non-controlling
interests in consolidated entities
|
|
$
|
15,977
|
|
|
$
|
(258
|
)
|
|
$
|
39,572
|
|
|
$
|
12,224
|
|
|
$
|
(685
|
)
|
|
$
|
(2,823
|
)
|
|
$
|
(299
|
)
|
|
$
|
(1,079
|
)
|
|
$
|
(175
|
)
|
|
$
|
21,867
|
|
|
$
|
84,321
|
|
|
|
As
of December 31, 2016
|
|
($ in thousands)
|
|
Avenue
|
|
|
Coronado
SO
|
|
|
Mustang
|
|
|
Checkpoint
|
|
|
JMC
|
|
|
Helocyte
|
|
|
Cellvation
|
|
|
National
|
|
|
Total
|
|
NCI equity share
|
|
$
|
(494
|
)
|
|
$
|
(217
|
)
|
|
$
|
12,376
|
|
|
$
|
32,160
|
|
|
$
|
(192
|
)
|
|
$
|
(612
|
)
|
|
$
|
4
|
|
|
$
|
17,643
|
|
|
$
|
60,668
|
|
Net loss attributed to non-controlling interests
|
|
|
(349
|
)
|
|
|
(19
|
)
|
|
|
(1,805
|
)
|
|
|
(11,733
|
)
|
|
|
(355
|
)
|
|
|
(1,155
|
)
|
|
|
(158
|
)
|
|
|
(621
|
)
|
|
|
(16,195
|
)
|
Non-controlling interests in consolidated
entities
|
|
$
|
(843
|
)
|
|
$
|
(236
|
)
|
|
$
|
10,571
|
|
|
$
|
20,427
|
|
|
$
|
(547
|
)
|
|
$
|
(1,767
|
)
|
|
$
|
(154
|
)
|
|
$
|
17,022
|
|
|
$
|
44,473
|
|
The components of non-controlling interests
in loss of consolidated entities, as recorded on the Condensed Consolidated Statement of Operations are as follows:
|
|
For the
three months ended September 30, 2017
|
|
($ in thousands)
|
|
Avenue (2)
|
|
|
Coronado
SO
|
|
|
Mustang
(2)
|
|
|
Checkpoint
(1)
|
|
|
JMC
|
|
|
Helocyte
|
|
|
Cellvation
|
|
|
Caelum
|
|
|
Aevitas
|
|
|
National
|
|
|
Total
|
|
Non-controlling
interests in loss of consolidated entities
|
|
$
|
(1,015
|
)
|
|
$
|
(15
|
)
|
|
$
|
(3,241
|
)
|
|
$
|
(3,437
|
)
|
|
$
|
(103
|
)
|
|
$
|
(376
|
)
|
|
$
|
24
|
|
|
$
|
(835
|
)
|
|
$
|
(166
|
)
|
|
$
|
(27
|
)
|
|
$
|
(9,191
|
)
|
Non-controlling ownership
|
|
|
66.1
|
%
|
|
|
13.0
|
%
|
|
|
60.8
|
%
|
|
|
61.9
|
%
|
|
|
6.9
|
%
|
|
|
20.0
|
%
|
|
|
22.0
|
%
|
|
|
25.2
|
%
|
|
|
25.3
|
%
|
|
|
43.4
|
%
|
|
|
|
|
|
|
For
the nine months ended September 30, 2017
|
|
($ in thousands)
|
|
Avenue
|
|
|
Coronado
SO
|
|
|
Mustang
|
|
|
Checkpoint
(1)
|
|
|
JMC
|
|
|
Helocyte
|
|
|
Cellvation
|
|
|
Caelum
|
|
|
Aevitas
|
|
|
National
|
|
|
Total
|
|
Non-controlling
interests in loss of consolidated entities
|
|
$
|
(1,329
|
)
|
|
$
|
(22
|
)
|
|
$
|
(8,268
|
)
|
|
$
|
(10,144
|
)
|
|
$
|
(150
|
)
|
|
$
|
(975
|
)
|
|
$
|
(60
|
)
|
|
$
|
(1,086
|
)
|
|
$
|
(166
|
)
|
|
$
|
4,845
|
|
|
$
|
(16,011
|
)
|
Non-controlling ownership
|
|
|
28.9
|
%
|
|
|
13.0
|
%
|
|
|
58.7
|
%
|
|
|
61.9
|
%
|
|
|
6.9
|
%
|
|
|
20.0
|
%
|
|
|
22.0
|
%
|
|
|
25.2
|
%
|
|
|
25.3
|
%
|
|
|
43.4
|
%
|
|
|
|
|
|
|
For
the three months ended September 30, 2016
|
|
($ in
thousands)
|
|
Avenue
|
|
|
Coronado
SO
|
|
|
Mustang
|
|
|
Checkpoint
|
|
|
JMC
|
|
|
Helocyte
|
|
|
Total
|
|
Non-controlling
interests in loss of consolidated entities
|
|
$
|
(47
|
)
|
|
$
|
(4
|
)
|
|
$
|
(204
|
)
|
|
$
|
(3,254
|
)
|
|
$
|
(104
|
)
|
|
$
|
(362
|
)
|
|
$
|
(3,975
|
)
|
Non-controlling ownership
(3)
|
|
|
10.5
|
%
|
|
|
13.0
|
%
|
|
|
23.9
|
%
|
|
|
62.7
|
%
|
|
|
8.1
|
%
|
|
|
20.6
|
%
|
|
|
|
|
|
|
For
the nine months ended September 30, 2016
|
|
($ in thousands)
|
|
Avenue
|
|
|
Coronado
SO
|
|
|
Mustang
|
|
|
Checkpoint
|
|
|
JMC
|
|
|
Helocyte
|
|
|
Total
|
|
Non-controlling
interests in loss of consolidated entities
|
|
$
|
(231
|
)
|
|
$
|
(14
|
)
|
|
$
|
(363
|
)
|
|
$
|
(10,767
|
)
|
|
$
|
(333
|
)
|
|
$
|
(616
|
)
|
|
$
|
(12,324
|
)
|
Non-controlling ownership
(3)
|
|
|
10.5
|
%
|
|
|
13.0
|
%
|
|
|
10.0
|
%
|
|
|
63.5
|
%(1)
|
|
|
8.1
|
%
|
|
|
20.6
|
%
|
|
|
|
|
(1)
|
- Checkpoint is consolidated with Fortress’s operations because Fortress maintains voting control through its ownership of Checkpoint’s Class A common shares which provide for super-majority voting rights.
|
|
|
(2)
|
- Mustang and Avenue are consolidated with Fortress’s operations because Fortress maintains voting control through its ownership of Mustang’s and Avenue’s Class A preferred shares which provide super-majority voting rights.
|
|
|
(3)
|
- Represents a weighted average of ownership during the periods presented.
|
14. Net Loss per Common Share
Basic net loss per share is calculated by dividing
net loss by the weighted-average number of shares of common stock outstanding for the period, without consideration for common
stock equivalents. Diluted net loss per share is computed by dividing net loss by the weighted-average number of common stock and
common stock equivalents outstanding for the period.
The Company’s common stock equivalents,
including unvested restricted stock, options, and warrants have been excluded from the computation of diluted net loss per share
as the effect would be to reduce the net loss per share. Therefore, the weighted average common stock outstanding used to calculate
both basic and diluted net loss per share is the same.
The following shares of potentially dilutive
securities have been excluded from the computations of diluted weighted average shares outstanding, as the effect of including
such securities would be anti-dilutive at the end of the nine months ended September 30, 2017 and 2016:
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Warrants to purchase Common Stock
|
|
|
678,072
|
|
|
|
480,559
|
|
Opus warrants to purchase Common Stock
|
|
|
206,593
|
|
|
|
1,700,000
|
|
Options to purchase Common Stock
|
|
|
1,095,905
|
|
|
|
1,769,426
|
|
Unvested Restricted Stock
|
|
|
9,848,505
|
|
|
|
8,763,797
|
|
Unvested Restricted Stock Units
|
|
|
1,234,555
|
|
|
|
1,054,091
|
|
Total
|
|
|
13,063,630
|
|
|
|
13,767,873
|
|
15. Stockholders’ Equity
Stock-based Compensation excluding National
As of September 30, 2017, the Company had four
equity compensation plans: the Fortress Biotech, Inc. 2007 Stock Incentive Plan, the Fortress Biotech, Inc. 2013 Stock Incentive
Plan, as amended, the Fortress Biotech, Inc. 2012 Employee Stock Purchase Plan and the Fortress Biotech, Inc. Long Term Incentive
Plan.
The following table summarizes the stock-based
compensation expense from stock option awards, restricted common stock awards, employee stock purchase programs and warrants granted
by Fortress for the three and nine months ended September 30, 2017 and 2016:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
($ in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Employee awards
|
|
$
|
1,650
|
|
|
$
|
1,937
|
|
|
$
|
5,170
|
|
|
$
|
5,490
|
|
Non-employee awards
|
|
|
24
|
|
|
|
3
|
|
|
|
60
|
|
|
|
9
|
|
Fortress Companies
|
|
|
2,510
|
(1)
|
|
|
963
|
(2)
|
|
|
6,506
|
(3)
|
|
|
3,293
|
(4)
|
Total stock-based compensation expense
|
|
$
|
4,183
|
|
|
$
|
2,903
|
|
|
$
|
11,736
|
|
|
$
|
8,792
|
|
|
(1)
|
Consists of approximately $0.2 million of Avenue's compensation expenses, approximately $0.9 million of Checkpoint's compensation
expense, approximately $0.8 million of Mustang’s compensation expense, approximately $0.4 million of Caelum’s compensation
expense, approximately $62,000 of JMC's compensation expenses, approximately $27,000 of Helocyte's compensation expenses and approximately
$5,000 of Cellvation's compensation expenses on stock and option grants for the three months ended September 30, 2017.
|
|
(2)
|
Consists of approximately $5,000 of Avenue's compensation expenses, approximately $0.8 million of Checkpoint's compensation
expense, approximately $130,000 of JMC's compensation expenses and approximately $67,000 of Helocyte's compensation expenses on
stock grants for the three months ended September 30, 2016.
|
|
(3)
|
Consists of approximately $0.3 million of Avenue's compensation expenses, approximately $4.3 million of Checkpoint's compensation
expense, approximately $1.2 million of Mustang’s compensation expense, approximately $0.4 million of Caelum’s compensation
expense, approximately $0.2 million of JMC's compensation expenses, approximately $0.1 million of Helocyte's compensation expenses
and approximately $19,000 of Cellvation's compensation expenses on stock and option grants for the nine months ended September
30, 2017.
|
|
(4)
|
Consists of approximately $23,000 of Avenue's compensation expenses, approximately $2.7 million
of Checkpoint's compensation expense, approximately $458,000 of JMC's compensation expenses and approximately $160,000 of Helocyte's
compensation expenses on stock grants for the nine months ended September 30, 2016.
|
For the three months ended September 30, 2017
and 2016, approximately $1.6 million and $0.9 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 $2.6 million and
$2.0 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, 2017
and 2016, approximately $4.8 million and $3.4 million, respectively, of stock based compensation expense was included in research
and development expenses in connection with equity grants made to employees and consultants and approximately $6.9 million and
$5.4 million, respectively, was included in general and administrative expenses in connection with grants made to employees, members
of the board of directors and consultants.
The following table summarizes Fortress stock option activities
excluding activity related to Fortress Companies:
|
|
Number of shares
|
|
|
Weighted average
exercise price
|
|
|
Total weighted
average intrinsic
value
|
|
|
Weighted average
remaining
contractual life
(years)
|
|
Options vested and expected to vest at December 31, 2016
|
|
|
1,130,501
|
|
|
$
|
3.73
|
|
|
$
|
602,451
|
|
|
|
4.93
|
|
Exercised
|
|
|
(20,000
|
)
|
|
|
1.37
|
|
|
|
61,000
|
|
|
|
-
|
|
Options vested and expected to vest at September 30, 2017
|
|
|
1,100,501
|
|
|
$
|
3.78
|
|
|
$
|
1,620,046
|
|
|
|
4.21
|
|
Options vested and exercisable
|
|
|
1,085,501
|
|
|
$
|
3.75
|
|
|
$
|
1,620,046
|
|
|
|
4.18
|
|
As of September 30, 2017, Fortress had no unrecognized
stock-based compensation expense related to options.
The following table summarizes Fortress’s
restricted stock and restricted stock unit award activity, excluding activity related to Fortress Companies (which is discussed
below):
|
|
Number of shares
|
|
|
Weighted average
grant price
|
|
Unvested balance at December 31, 2016
|
|
|
10,094,095
|
|
|
$
|
2.49
|
|
Restricted stock granted
|
|
|
1,325,396
|
|
|
|
2.70
|
|
Restricted stock vested
|
|
|
(213,333
|
)
|
|
|
2.75
|
|
Restricted stock units granted
|
|
|
930,000
|
|
|
|
4.31
|
|
Restricted stock units forfeited
|
|
|
(15,000
|
)
|
|
|
2.98
|
|
Restricted stock units vested
|
|
|
(214,625
|
)
|
|
|
3.44
|
|
Unvested balance at September 30, 2017
|
|
|
11,906,533
|
|
|
$
|
2.63
|
|
As of September 30, 2017, the Company had unrecognized stock-based
compensation expense related to restricted stock and restricted stock unit awards of approximately $1.7 million and $5.6 million,
respectively, which is expected to be recognized over the remaining weighted-average vesting period of 2.0 years and 2.2 years,
respectively. As of September 30, 2016, the Company had unrecognized stock-based compensation expense related to restricted stock
and restricted stock unit awards of approximately $5.6 million and $1.2 million, respectively.
Employee Stock Purchase Plan
Eligible employees can purchase the Company’s
Common Stock at the end of a predetermined offering period at 85% of the lower of the fair market value at the beginning or end
of the offering period. The ESPP is compensatory and results in stock-based compensation expense.
As of September 30, 2017, 199,995 shares have been purchased and
205,000 shares are available for future sale under the Company’s ESPP. Share-based compensation expense recorded was approximately
$52,000 and $35,000, respectively for the three months ended September 30, 2017 and 2016 and was approximately $0.1 million and
$91,000, respectively, for the nine months ended September 30, 2017 and 2016. The Company issued approximately 22,000 shares under
the ESPP for approximately $41,900 during the nine months ended September 30, 2017.
Warrants
The following table summarizes Fortress warrant activities, excluding
activities related to Fortress Companies:
|
|
Number of shares
|
|
|
Weighted average
exercise price
|
|
|
Total weighted
average intrinsic
value
|
|
|
Weighted average
remaining
contractual life
(years)
|
|
Outstanding as of December 31, 2016
|
|
|
2,263,453
|
|
|
$
|
3.62
|
|
|
$
|
79,800
|
|
|
|
4.74
|
|
Granted
|
|
|
816,180
|
|
|
|
1.33
|
|
|
|
329,954
|
|
|
|
4.87
|
|
Forfeited
|
|
|
(230,444
|
)
|
|
|
8.39
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding as of September 30, 2017
|
|
|
2,849,189
|
|
|
$
|
2.57
|
|
|
$
|
3,358,161
|
|
|
|
4.69
|
|
Exercisable as of September 30, 2017
|
|
|
869,189
|
|
|
$
|
3.96
|
|
|
$
|
546,561
|
|
|
|
4.30
|
|
Long-Term Incentive Program (“LTIP”)
On January 1, 2017 and 2016, the Compensation
Committee granted 552,698 and 510,434 shares each to Lindsay Rosenwald and Michael Weiss, respectively. These equity grants, made
in accordance with the LTIP, represent 1% of total outstanding shares of the Company as of the dates of such grants and were granted
in recognition of their performance in 2016 and 2015. The shares are subject to repurchase by the Company until both of the following
conditions are met: (i) the Company’s market capitalization increases by a minimum of $100.0 million, and (ii) the employee
is either in the service of the Company as an employee or as a Board member (or both) on the tenth anniversary of the LTIP, or
the eligible employee has had an involuntary separation from service (as defined in the LTIP). The Company’s repurchase option
on such shares will also lapse upon the occurrence of a corporate transaction (as defined in the LTIP) if the eligible employee
is in service on the date of the corporate transaction. The fair value of each grant on the grant date was approximately $1.5 million
for the 2017 grant and $1.4 million for the 2016 grant. For the three months ended September 30, 2017 and 2016, the Company recorded
approximately $0.2 million and $75,000, and approximately $0.5 million and $0.2 million, for the nine months ended September 30,
2017 and 2016, respectively, related to these grants in general and administrative expenses on the Condensed Consolidated Statements
of Operations. These grants are expensed by the Company over the remaining life of the LTIP which expires in July 2025.
Additionally, in connection with the LTIP Lindsay
Rosenwald and Michael Weiss receive 5% of the outstanding shares of Fortress Companies upon formation. During the nine months ended
September 30, 2017, LTIP grants from Aevitas, Caleum and Cyprium were made. For the three months ended September 30, 2017 and 2016,
the Company recorded approximately $52,000 and nil, respectively for the nine months ended September
30, 2017 and 2016, respectively, related to these grants in general and administrative expenses on the Condensed Consolidated Statements
of Operations. These grants are expensed by the Company at the time of the grant.
Fortress Companies
Checkpoint Therapeutics, Inc.
Checkpoint has a long-term incentive plan under
which it has issued grants to both employees and non-employees. For the three months ended September 30, 2017 and 2016, Checkpoint
re-measured its non-employee and research and development employee grants and recorded expense of approximately $0.4 million and
$0.4 million, respectively, and $2.8 million and $1.6 million, respectively, for the nine months ended September 30, 2017 and 2016,
in research and development expenses on the Condensed Consolidated Statements of Operations.
Certain Checkpoint employees and directors
also have been awarded restricted stock under Checkpoint’s 2015 Incentive Plan. Checkpoint recorded stock-based compensation
expense of $0.5 million and $0.3 million, respectively, for the three months ended September 30, 2017 and 2016 and $1.5 million
and $1.0 million, respectively, for the nine months ended September 30, 2017 and 2016, in general and administrative expenses on
the Condensed Consolidated Statements of Operations.
Avenue Therapeutics, Inc.
In connection with stock grants made to both
employees and non-employees, Avenue for the three months ended September 30, 2017 and 2016, recorded approximately $0.2 million
and $3,000, respectively, as general and administrative expenses and approximately $78,000 and $3,000, respectively, as research
and development expenses on the Condensed Consolidated Statements of Operations. For the nine months ended September 30, 2017 and
2016, Avenue recorded approximately $0.2 million and $12,000, respectively, as general and administrative expenses and approximately
$90,000 and $12,000, respectively, as research and development expenses on the Condensed Consolidated Statements of Operations.
Journey Medical Corporation
During the nine months ended September 30,
2017, JMC granted option awards to numerous sales employees exercisable for 395,000 shares of Journey common stock pursuant to
its equity award plan.
The fair value of stock options granted was
determined on the grant date using assumptions for risk free interest rate, the expected term, expected volatility, and expected
dividend yield. The stock price was determined utilizing a discounted cash flow model to determine the weighted market value of
invested capital. JMC does not expect to pay dividends in the foreseeable future. As a result, the expected dividend yield is 0%.
The expected term for stock options granted with service conditions represents the average period the stock options are expected
to remain outstanding and is based on the expected term calculated using the approach prescribed by the SEC's Staff Accounting
Bulletin No. 110 for “plain vanilla” options. JMC obtained the risk-free interest rate from publicly available data
published by the Federal Reserve. The volatility rate was computed based on a comparison of average volatility rates of similar
companies. The fair value of options granted in 2017 was estimated using the following assumptions:
|
|
September 30,
2017
|
|
Risk-free interest rate
|
|
|
1.88% - 2.22
|
%
|
Expected dividend yield
|
|
|
-
|
%
|
Expected term in years
|
|
|
5.0 – 7.0
|
|
Expected volatility
|
|
|
107
|
%
|
During the three and nine months ended September 30, 2017, stock-based
compensation associated with the amortization of stock option expenses was approximately 8,000 and $29,000, respectively. JMC also
recorded approximately $95,000 and $25,000 related to the restricted stock during such periods.
Mustang
The employment agreement grants Dr. Litchman
an option to purchase 1,041,675 shares of Mustang common stock (the “Option”). The Option has an exercise price per
share equal to the fair market value of a share of Mustangs’ common stock $5.73 on the date of the grant of the stock option,
subject to the conditions and vesting schedule set forth in his Employment Agreement.
On April 7, 2017, Mustang granted 200,000 options
to two employees of Fortress, who provide services to Mustang in connection with its research and development. These options have
an exercise price of $5.73, representing the fair market value of a share of Mustangs’ common stock on the date of the grant
of the stock option.
Both grants have the following vesting schedule:
50% of the options vest over-time with 25% vesting over 12 months of continued service, with the remaining 25% vesting in 12 equal
installments thereafter, subject to continued employment. The remaining 50% vest and become exercisable upon the occurrence of
the following milestones being achieved: (i) 25% of the grant vest upon the dosing of the first patient in the first Phase 2 clinical
trial of any Mustang product candidate, (ii) 25% of the grant vest upon the dosing of the first patient in the first Phase 2 clinical
trial of a second Mustang product candidate, (iii) 25% of the grant vest upon Mustangs’ achievement of a fully-diluted market
capitalization of $500,000,000 and (iv) 25% of the grant vest upon Mustangs’ achievement of a fully-diluted market capitalization
of $1,000,000,000.
The fair value of stock options granted was
determined on the grant date using assumptions for risk free interest rate, the expected term, expected volatility, expected dividend
yield, and a stock price of $5.73. Mustang does not expect to pay dividends in the foreseeable future. As a result, the expected
dividend yield is 0%. The value associated with the market award vesting was determined utilizing a Monte Carlo simulation valuation
methodology and the following assumptions:
|
|
September 30,
2017
|
|
Risk-free interest rate
|
|
|
1.81% –
2.38
|
%
|
Expected dividend yield
|
|
|
-
|
%
|
Expected term in years
|
|
|
5.5 – 10.0
|
|
Expected volatility
|
|
|
77.3
|
%
|
The following table summarizes stock option activities for the nine
months ended September 30, 2017:
|
|
Stock Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (in
years)
|
|
Nonvested at December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Options granted
|
|
|
1,241,675
|
|
|
$
|
5.73
|
|
|
|
9.56
|
|
Options outstanding
|
|
|
1,241,675
|
|
|
|
5.73
|
|
|
|
9.56
|
|
Options vested and exercisable at September 30, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
As of September 30, 2017, Mustang had unrecognized
stock-based compensation expense related to options of $2.3 million with a weighted average vesting period of 1.61 years.
During the three and nine months ended September
30, 2017, stock-based compensation associated with the amortization of stock option expense was approximately $0.7 million and
$1.1 million, respectively. There was no expense in the same period in 2016.
Certain Mustang employees and directors also
have been awarded restricted stock and restricted stock units in 2017. Mustang recorded stock-based compensation expense of $0.2
million and $0.2 million for the three and nine months ended September 30, 2017, respectively. There was no expense in the same
period in 2016.
Helocyte, Inc.
For the three months ended September 30, 2017
and 2016, Helocyte re-measured its non-employee grants and recorded expense of approximately $20,000 and $50,000, respectively,
in research and development expenses on the Condensed Consolidated Statements of Operations.
For the three months ended September 30, 2017
and 2016, Helocyte recorded approximately $7,000 and $17,000, respectively, as general and administrative expenses on the Condensed
Consolidated Statements of Operations. In connection with this grant, for the three and nine months ended September 30, 2016, the
Company recorded approximately $17,000 and $42,000, respectively, as general and administrative expenses on the Condensed Consolidated
Statements of Operations.
For the nine months ended September 30, 2017
and 2016, Helocyte re-measured its non-employee grants and recorded expense of approximately $82,000 and $0.1 million, respectively,
in research and development expenses on the Condensed Consolidated Statements of Operations.
For the nine months ended September 30, 2017
and 2016, Helocyte recorded approximately $25,000 and $42,000, respectively, as general and administrative expenses on the Condensed
Consolidated Statements of Operations.
Cellvation, Inc.
For the three and nine months ended September
30, 2017, Cellvation recorded expenses for non-employee grants of approximately $2,000 and $7,000, respectively, in research and
development expenses on the Condensed Consolidated Statements of Operations. There was no expense during the same period in 2016.
For the three and nine months ended September
30, 2017, Cellvation recorded approximately $3,000 and $11,000, respectively, in connection with a grant made to its Chief Executive
Officer, as general and administrative expenses on the Condensed Consolidated Statements of Operations. There was no expense during
the same periods in 2016.
Capital Raises
Avenue
On June 26, 2017, Avenue completed an initial
public offering (“IPO”) of its common stock, which resulted in the issuance of 6,325,000 shares of its common stock,
inclusive of 825,000 shares which were subject to an underwriter over-allotment. The shares were issued at $6.00 per share, resulting
in net proceeds of approximately $34.2 million after deducting underwriting discounts and other offering costs. Immediately preceding
the IPO, Avenue effected a 3-For-1 reverse stock split.
In conjunction with the closing of the IPO,
Avenue issued warrants in connection with its NSC Debt and its Convertible Notes.
Mustang
In September 2016, Mustang entered into a Placement
Agent Agreement with NSC relating to Mustang’s offering of shares of common stock in a private placement. Pursuant to the
Placement Agent Agreement, Mustang agreed to pay NSC a cash fee of 10.0% of the gross proceeds from the offering and grant NSC
a warrant exercisable for shares of Mustang common stock equal to 10% of the aggregate number of shares of common stock sold in
the offering (the “Placement Agent Warrants”). In addition, Mustang and the investors entered into a unit purchase
agreement (the “Unit Purchase Agreement”). Each unit consisting of 10,000 shares of Mustang’s common stock, and
Warrants exercisable for 2,500 shares of common stock at an exercise price of $8.50 per share. The purchase price was $65,000 per
Unit. The warrants have a five-year term and are only exercisable for cash.
On January 31, 2017, Mustang held a sixth closing
of its private placement for gross proceeds of $55.5 million, before expenses. Mustang issued 8,536,774 unregistered shares of
common stock and 2,134,193 warrants in connection with this closing. NSC received a placement agent fee of $5.5 million or approximately
10% of the gross proceeds. In addition, NSC received 853,677 warrants or approximately 10% of the shares issued.
On March 31, 2017, Mustang closed an additional
private placement with substantially similar terms as the offering described above resulting in gross proceeds of $0.4 million,
before expenses. Mustang issued 64,000 unregistered shares of common stock and 16,000 warrants in connection with this transaction.
NSC received a placement agent fee of approximately $42,000 or approximately 10% of the gross proceeds. In addition, NSC received
6,400 warrants or approximately 10% of the shares issued.
On August 3, 2017, Mustang closed the final
round of financing totaling gross proceeds of $65,000. Mustang issued 10,000 unregistered shares of common stock and 2,500 warrants
in connection with this transaction. In addition, NSC received 1,000 warrants or approximately 10% of the shares issued.
Pursuant to the Founders Agreement (see Note
17), Mustang issued 215,269 shares to Fortress in 2017, representing 2.5% of the aggregate number of shares of common stock issued
in the offerings noted above. For the three months ended September 30, 2017, Mustang recorded expenses of approximately $1.2 million,
related to this issuance (based upon the fair value of common shares on the date of issuance), which is included in general and
administrative expenses in Mustang’s Statements of Operations.
As of September 30, 2017, the Company determined
that the warrants still did not meet the definition of a derivative and continued to qualify for equity recognition.
16. Commitments and Contingencies
Indemnification
In accordance with its certificate of incorporation,
bylaws and indemnification agreements, the Company has indemnification obligations to its officers and directors for certain events
or occurrences, subject to certain limits, while they are serving at the Company’s request in such capacity. There have been
no claims to date, and the Company has director and officer insurance to address such claims. Pursuant to agreements with clinical
trial sites, the Company provides indemnification to such sites in certain conditions.
Legal Proceedings - Fortress
In the ordinary course of business, the
Company and its subsidiaries may be subject to both insured and uninsured litigation. Suits and claims may be brought against the
Company by customers, suppliers, partners and/or third parties (including tort claims for personal injury arising from clinical
trials of the Company’s product candidates and property damage) alleging deficiencies in performance, breach of contract,
etc., and seeking resulting alleged damages.
On January 15, 2016, Dr. Winson Tang (“Plaintiff”)
filed a Complaint against the Company in the Superior Court of the State of California, County of Los Angeles.
Winson
Tang v. Lindsay Rosenwald et al.,
Case No. BC607346. As amended, the Complaint alleged a breach of contract by the
Company and two of its officers, Dr. Rosenwald and Mr. Weiss, and two claims against other Defendants. On November 3, 2017,
Plaintiff and Defendants entered into a Settlement Agreement.
In connection with settlement, above, the
Company is required to deliver 200,000 Mustang common shares, which it holds, to the Plaintiff. At September 30, 2017,
the Company recorded this transaction as a capital contribution to Mustang and a corresponding expense of approximately $2.0 based
upon the closing share price of Mustang shares on the date of settlement was also recorded. In addition to the share issuance,
Mustang paid, in November 2017, a $0.2 million cash settlement to the plaintiff, such amount was accrued as of September 30, 2017.
The expense for the settlement was recorded in general and administrative expenses on the Condensed Consolidated Statements of
Operations at September 30, 2017.
Litigation and Regulatory Matters - National
National and its subsidiaries are defendants
or respondents in various pending and threatened arbitrations, administrative proceedings and lawsuits seeking compensatory damages.
Several cases have no stated alleged damages. Claim amounts are infrequently indicative of the actual amounts National will be
liable for, if any. Further, National has a history of collecting amounts awarded in these types of matters from its registered
representatives that are still affiliated, as well as from those that are no longer affiliated. Many of these claimants also seek,
in addition to compensatory damages, punitive or treble damages, and all seek interest, costs and fees. These matters arise in
the normal course of business. National intends to vigorously defend itself in these actions, and the ultimate outcome of these
matters cannot be determined at this time.
Liabilities for potential losses from complaints,
legal actions, government investigations and proceedings are established where National believes that it is probable that a liability
has been incurred and the amount of loss can be reasonably estimated. In making these decisions, management bases its judgments
on its knowledge of the situations, consultations with legal counsel and its historical experience in resolving similar matters.
In many lawsuits, arbitrations and regulatory proceedings, it is not possible to determine whether a liability has been incurred
or to estimate the amount of that liability until the matter is close to resolution. However, accruals are reviewed regularly and
are adjusted to reflect National’s estimates of the impact of developments, rulings, advice of counsel and any other information
pertinent to a particular matter. Because of the inherent difficulty in predicting the ultimate outcome of legal and regulatory
actions, management cannot predict with certainty the eventual loss or range of loss related to such matters.
17. Related Party Transactions
Shared Services Agreement with TGTX
TGTX and the Company entered into an arrangement
to share the cost of certain research and development employees. The Company’s Executive Vice Chairman, Strategic Development,
is Executive Chairman and Interim Chief Executive Officer of TGTX. Under the terms of the Agreement, TGTX will reimburse the Company
for the salary and benefit costs associated with these employees based upon actual hours worked on TGTX related projects. For the
three months ended September 30, 2017 and 2016, the Company invoiced TGTX $0.2 million and $0.3 million, respectively. For the
nine months ended September 30, 2017 and 2016, the Company invoiced TGTX $0.8 million and $0.6 million, respectively. At September
30, 2017, the amount receivable from TGTX 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”), as of September 30, 2017, the Company
had paid $1.8 million in rent under the Desk Space Agreements, and invoiced OPPM and TGTX approximately $0.1 million and $0.6 million,
respectively, for their prorated share of the rent base. In addition, for the nine months ended September 30, 2017, the Company
had incurred $0.3 million in connection with the build out of the space and recorded a receivable of $0.1 million due from TGTX
and $28,000 due from OPPM. At September 30, 2017, the amount due from TGTX approximated $56,000 and the amount due from OPPM approximated
$0.1 million.
Opus Credit Facility
In September 2016, the Company and Opus Point
Health Innovations Fund (“OPHIF”) entered into a Credit Facility Agreement (the “Opus Credit Facility”).
Fortress’s Chairman, President and Chief Executive Officer (Lindsay A. Rosenwald) and Fortress’s Executive Vice President,
Strategic Development (Michael Weiss), are Co-Portfolio Managers and Partners of OPPM, an affiliate of OPHIF. As such, all of the
disinterested directors of Fortress’s board of directors approved the terms of the Opus Credit Facility and related agreements
(see Note 11). For the three and nine months ended September 30, 2017 and 2016, we paid $0.3 million and $0.8 million, and $nil
and $nil, respectively.
2017 Subordinated Note Financing
On March 17, 2017, the Company and NSC, a subsidiary
of National (of which the Company owns 56.6% and Michael Weiss serves as Chairman of the Board of Directors), entered into placement
agency agreements with NAM Biotech Fund and NAM Special Situation Fund in connection with the sale of subordinated promissory notes
(see Note 11). Pursuant to the terms of the agreements, NSC will receive a placement agent fee in cash of 10% of the debt raised
and warrants equal to 10% of the aggregate principal amount of debt raised divided by the closing share price of the Company’s
common stock on the date of closing.
For the three and nine months ended September
30, 2017, NSC earned a placement agent fee of $0.9 million and $2.8 million, respectively, and a Placement Agent Warrant to purchase
716,180 shares of the Company’s common stock, all of which are outstanding, with exercise prices ranging from $3.61 to $4.75.
Caelum Convertible Notes
On July 31, 2017
Caelum through NSC, a subsidiary of National offered up to $10 million, convertible promissory notes to accredited investors (as
defined under the U.S. Federal securities laws). Caelum raised $9.9 million in the offering, in three separate closings and paid
a placement fee equal to NSC of 10% of the proceeds of the sale or $0.9 million. Additionally NSC received warrants to purchase
a number of shares the Caelum’s Common Stock equal to 10% of the aggregate amount of shares underlying the Notes with a per
share exercise price equal to 110% of the per share conversion price of the Notes; provided, however, that if no Note converts,
the exercise price will be $75 million dollars divided by the total number of fully-diluted shares of Common Stock outstanding
immediately prior to exercise of the warrant, giving effect to the assumed conversion of all options, warrants, and convertible
securities of the Company
.
Avenue IPO
On June 26, 2017, Avenue completed an IPO in
which NSC acted as co-manager and earned fees and commissions of approximately $2.3 million that were deducted from the proceeds.
Founders Agreements
The Company has entered into Founders Agreements
and, in some cases, Exchange Agreements with certain of its subsidiaries as described in the Company’s Form 10-K for the
year ended December 31, 2016, filed with the SEC on March 16, 2017. The following table summarizes, by subsidiary, the effective
date of the Founders Agreements and PIK dividend or equity fee payable to the Company in accordance with the terms of the Founders
Agreements, Exchange Agreements and the subsidiaries’ certificates of incorporation.
Fortress Company
|
|
Effective Date
(1)
|
|
PIK Dividend as
a % of fully
diluted
outstanding
capitalization
|
|
|
Class of Stock
Issued
|
Helocyte
|
|
March 20, 2015
|
|
|
2.5
|
%
|
|
Common Stock
|
Avenue
|
|
February 17, 2015
|
|
|
2.5
|
%
|
|
Common Stock
|
Mustang
|
|
March 13, 2015
|
|
|
2.5
|
%
|
|
Common Stock
|
Checkpoint
|
|
March 17, 2015
|
|
|
0.0
|
%(2)
|
|
Common Stock
|
Cellvation
|
|
October 31, 2016
|
|
|
2.5
|
%
|
|
Common Stock
|
Caelum
|
|
January 1, 2017
|
|
|
2.5
|
%
|
|
Common Stock
|
Cyprium
|
|
March 13, 2017
|
|
|
2.5
|
%
|
|
Common Stock
|
Aevitas
|
|
July 28, 2017
|
|
|
2.5
|
%
|
|
Common Stock
|
(1) - Represents the effective date of each
subsidiary’s Founders Agreement. Each PIK dividend and equity fee is payable on the annual anniversary of the effective date
of the original Founders Agreement.
(2) - Instead of a PIK dividend, Checkpoint
pays the Company an annual equity fee in shares of Checkpoint’s common stock equal to 2.5% of Checkpoint’s fully
diluted outstanding capitalization.
Pursuant to the Founders’ Agreement,
Caelum, in connection with each Convertible Note Closing during the three months ended September 30, 2017, issued to Fortress approximately
218,000 shares of its common stock representing the 2.5% fee or approximately $0.2 million.
On June 26, 2017, pursuant to the Founders’
Agreement, Avenue, in connection with its IPO, issued to Fortress approximately 158,000 shares of its common stock representing
the 2.5% fee.
Management Services Agreements
The Company has entered in Management Services
Agreements (the “MSAs”) with certain of its subsidiaries as described in the Company’s Form 10-K for the year
ended December 31, 2016, filed with the SEC on March 16, 2017. The following table summarizes, by subsidiary, the effective date
of the MSA and the annual consulting fee payable by the subsidiary to the Company in quarterly installments:
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Fortress Company
|
|
Effective Date
|
|
R&D
|
|
|
G&A
|
|
|
Annual MSA Fee
(Income)/Expense
|
|
Helocyte
|
|
March 20, 2015
|
|
$
|
250
|
|
|
$
|
250
|
|
|
$
|
500
|
|
Avenue
|
|
February 17, 2015
|
|
|
250
|
|
|
|
250
|
|
|
|
500
|
|
Mustang
|
|
March 13, 2015
|
|
|
250
|
|
|
|
250
|
|
|
|
500
|
|
Checkpoint
|
|
March 17, 2015
|
|
|
250
|
|
|
|
250
|
|
|
|
500
|
|
Cellvation
|
|
October 31, 2016
|
|
|
250
|
|
|
|
250
|
|
|
|
500
|
|
Caelum
|
|
January 1, 2017
|
|
|
250
|
|
|
|
250
|
|
|
|
500
|
|
Cyprium
|
|
March 13, 2017
|
|
|
250
|
|
|
|
250
|
|
|
|
500
|
|
Aevitas
|
|
July 28, 2017
|
|
|
250
|
|
|
|
250
|
|
|
|
500
|
|
Fortress
|
|
|
|
|
(2,000
|
)
|
|
|
(2,000
|
)
|
|
|
(4,000
|
)
|
Consolidated (Income)/Expense
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Chord Advisors, LLC
In May 2015, the Company entered into a full-service
consulting agreement with Chord Advisors, LLC (“Chord”) to provide advisory accounting services. Under the terms of
the agreement, the Company pays Chord $10,000 per month to provide technical accounting and financial reporting support. Either
party upon 30-days written notice can terminate the agreement. Mr. Horin, Managing Partner of Chord, serves as Interim Chief Financial
Officer to Avenue, Caelum, Helocyte and Mustang. Pursuant to the agreements with Helocyte, Mustang and Caelum, Chord provides back
office accounting support and accounting policy and financial reporting services, including the services of Mr. Horin. Chord receives
up to $5,000 per month from Caelum and Helocyte, and up to $7,500 per month from Mustang. Checkpoint and Avenue are billed at a
blended hourly rate, for services incurred. For the three and nine months ended September 30, 2017, Checkpoint incurred approximately
$15,000 and $52,000, and Avenue incurred approximately $17,000 and $58,000 respectively, in hourly fees.
National
As of September 30, 2017, the Company owns
approximately 56.6% of National. The Company’s Executive Vice Chairman, Strategic Development is the Chairman of the Board
of National.
Additionally, the Company’s Chairman,
President and Chief Executive Officer and the Company’s Executive Vice Chairman, Strategic Development are both Co-Portfolio
Managers and Partners of OPPM which owns approximately 4.6% of National. In the normal course, National provides the Company and
the Company’s subsidiaries with placement agent services in connection with third party raises.
18. Net Capital Requirements of Broker-Dealer Subsidiaries
NSC is subject to the SEC's Uniform Net Capital
Rule (Rule 15c3-1) (the "Rule"), which, among other things, requires the maintenance of minimum net capital. At June
30, 2017, National Securities had net capital of $10.5 which was $10.2 in excess of its required net capital of $250,000. National
Securities is exempt from the provisions of the SEC's Rule 15c3-3 since it is an introducing broker-dealer that clears all transactions
on a fully disclosed basis and promptly transmits all customer funds and securities to clearing brokers.
vFinance Investments, Inc. (vFinance Investments)
is also subject to the Rule, which, among other things, requires the maintenance of minimum net capital and requires that the ratio
of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1. At June 30, 2017, vFinance Investments had
net capital of $1.5 million which was $0.5 million in excess of its required net capital of $1,000,000. vFinance Investments' ratio
of aggregate indebtedness to net capital was 0.8 to 1. vFinance Investments is exempt from the provisions of the SEC's Rule 15c3-3
since it is an introducing broker-dealer that clears all transactions on a fully disclosed basis and promptly transmits all customer
funds and securities to clearing brokers.
Advances, dividend payments and other equity
withdrawals from the Company's broker-dealer subsidiaries are restricted by the regulations of the SEC, and other regulatory agencies.
These regulatory restrictions may limit the amounts that a subsidiary may dividend or advance to the Company.
19. Off Balance Sheet Risk and Concentrations of Credit Risk
National is engaged in trading and providing
a broad range of securities brokerage and investment services to a diverse group of retail and institutional clientele, as well
as corporate finance and investment banking services to corporations and businesses. Counterparties to National’s business
activities include broker-dealers and clearing organizations, banks and other financial institutions. National uses clearing brokers
to process transactions and maintain customer accounts for National on a fee basis. National permits the clearing firms to extend
credit to its clientele secured by cash and securities in the client’s account. National’s exposure to credit risk
associated with the non-performance by its customers and counterparties in fulfilling their contractual obligations can be directly
impacted by volatile or illiquid trading markets, which may impair the ability of customers and counterparties to satisfy their
obligations to National. National has agreed to indemnify the clearing brokers for losses they incur while extending credit to
National’s clients. It is National’s policy to review, as necessary, the credit standing of its customers and counterparties.
Amounts due from customers that are considered uncollectible by the clearing broker are charged back to National by the clearing
broker when such amounts become determinable. Upon notification of a charge back, such amounts, in total or in part, are then either
(i) collected from the customers, (ii) charged to the broker initiating the transaction and/or (iii) charged to operations, based
on the particular facts and circumstances.
National maintains cash in bank deposits, which,
at times, may exceed federally insured limits. National has not experienced and does not expect to experience losses on such accounts.
A short sale involves the sale of a security
that is not owned in the expectation of purchasing the same security (or a security exchangeable) at a later date at a lower price.
A short sale involves the risk of a theoretically unlimited increase in the market price of the security that would result in a
theoretically unlimited loss.
20. Segment Information
The Company operates in three reportable segments,
Dermatology Product Sales, Pharmaceutical and Biotechnology Product Development and National. The accounting policies of the Company’s
segments are the same as those described in Note 2. The following tables summarize, for the periods indicated, operating results
by reportable segment:
Cost of goods sold is directly related to product sales only. Revenues
derived from co-promote revenue had no cost of goods sold.
|
|
Dermatology
|
|
|
Pharmaceutical
and
Biotechnology
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Products
|
|
|
Product
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
Sales
|
|
|
Development
|
|
|
National
|
|
|
Consolidated
|
|
Net Revenue
|
|
$
|
2,170
|
|
|
$
|
350
|
|
|
$
|
44,366
|
|
|
$
|
46,886
|
|
Direct cost of goods
|
|
|
(505
|
)
|
|
|
-
|
|
|
|
|
|
|
|
(505
|
)
|
Sales and marketing costs
|
|
|
(2,786
|
)
|
|
|
-
|
|
|
|
|
|
|
|
(2,786
|
)
|
Research and development
|
|
|
|
|
|
|
(16,190
|
)
|
|
|
|
|
|
|
(16,190
|
)
|
General and administrative
|
|
|
(349
|
)
|
|
|
(11,969
|
)
|
|
|
|
|
|
|
(12,318
|
)
|
National Expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
(47,690
|
)
|
|
|
(47,690
|
)
|
Segment loss from operations
|
|
$
|
(1,470
|
)
|
|
$
|
(27,809
|
)
|
|
$
|
(3,324
|
)
|
|
$
|
(32,603
|
)
|
Segment assets
|
|
$
|
7,362
|
|
|
$
|
160,038
|
|
|
$
|
77,691
|
|
|
$
|
245,091
|
|
|
|
|
|
|
Pharmaceutical
and
|
|
|
|
|
|
|
|
|
|
Dermatology
|
|
|
Biotechnology
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Products
|
|
|
Product
|
|
|
|
|
|
|
|
Three Months Ended September
30, 2016
|
|
Sales
|
|
|
Development
|
|
|
National
|
|
|
Consolidated
|
|
Net Revenue
|
|
$
|
429
|
|
|
$
|
546
|
|
|
$
|
-
|
|
|
$
|
975
|
|
Direct cost of goods
|
|
|
(41
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(41
|
)
|
Sales and marketing costs
|
|
|
(1,244
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,244
|
)
|
Research and development
|
|
|
-
|
|
|
|
(8,316
|
)
|
|
|
-
|
|
|
|
(8,316
|
)
|
General and administrative
|
|
|
(422
|
)
|
|
|
(7,198
|
)
|
|
|
-
|
|
|
|
(7,620
|
)
|
Segment loss from operations
|
|
$
|
(1,278
|
)
|
|
$
|
(14,968
|
)
|
|
$
|
-
|
|
|
$
|
(16,246
|
)
|
Segment assets
|
|
$
|
2,657
|
|
|
$
|
103,225
|
|
|
$
|
39,539
|
|
|
$
|
145,421
|
|
|
|
Dermatology
|
|
|
Pharmaceutical
and
Biotechnology
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Products
|
|
|
Product
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
Sales
|
|
|
Development
|
|
|
National
|
|
|
Consolidated
|
|
Net Revenue
|
|
$
|
8,309
|
|
|
$
|
1,393
|
|
|
$
|
132,563
|
|
|
$
|
142,265
|
|
Direct cost of goods
|
|
|
(1,852
|
)
|
|
|
-
|
|
|
|
|
|
|
|
(1,852
|
)
|
Sales and marketing costs
|
|
|
(7,663
|
)
|
|
|
-
|
|
|
|
|
|
|
|
(7,663
|
)
|
Research and development
|
|
|
|
|
|
|
(38,077
|
)
|
|
|
|
|
|
|
(38,077
|
)
|
General and administrative
|
|
|
(961
|
)
|
|
|
(27,866
|
)
|
|
|
|
|
|
|
(28,827
|
)
|
National Expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
(139,219
|
)
|
|
|
(139,219
|
)
|
Segment loss from operations
|
|
$
|
(2,167
|
)
|
|
$
|
(64,550
|
)
|
|
$
|
(6,656
|
)
|
|
$
|
(73,373
|
)
|
Segment assets
|
|
$
|
7,362
|
|
|
$
|
160,038
|
|
|
$
|
77,691
|
|
|
$
|
245,091
|
|
|
|
|
|
|
Pharmaceutical
and
|
|
|
|
|
|
|
|
|
|
Dermatology
|
|
|
Biotechnology
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Products
|
|
|
Product
|
|
|
|
|
|
|
|
Nine Months Ended September
30, 2016
|
|
Sales
|
|
|
Development
|
|
|
National
|
|
|
Consolidated
|
|
Net Revenue
|
|
$
|
1,793
|
|
|
$
|
2,072
|
|
|
$
|
-
|
|
|
$
|
3,865
|
|
Direct cost of goods
|
|
|
(365
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(365
|
)
|
Sales and marketing costs
|
|
|
(4,212
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,212
|
)
|
Research and development
|
|
|
-
|
|
|
|
(24,559
|
)
|
|
|
-
|
|
|
|
(24,559
|
)
|
General and administrative
|
|
|
(1,338
|
)
|
|
|
(19,864
|
)
|
|
|
-
|
|
|
|
(21,202
|
)
|
Segment loss from operations
|
|
$
|
(4,122
|
)
|
|
$
|
(42,351
|
)
|
|
$
|
-
|
|
|
$
|
(46,473
|
)
|
Segment assets
|
|
$
|
2,657
|
|
|
$
|
103,225
|
|
|
$
|
39,539
|
|
|
$
|
145,421
|
|
Significant Customers
For the three months ended September 30, 2017,
two of the Company’s customers each accounted for more than 10.0% of its total gross product revenue in the amount of $3.0
million and $1.7 million, respectively. The revenue from these customers is captured in the product revenue, net line item within
the Condensed Consolidated Statements of Operations. For the nine months ended September 30, 2017, two of the Company’s customers
each accounted for more than 10.0% of its total gross revenue in the amount of $6.7 million and $6.0 million, respectively. The
revenue from these customers is captured in the product revenue, net line item within the Condensed Consolidated Statements of
Operations.
For the three months ended September 30, 2016, two of the Company’s
customers accounted for more than 10.0% of its total product revenue in the amount of $0.2 million and $43,000, respectively. The
revenue from these customers is captured in the product revenue, net line item within the Condensed Consolidated Statement of Operations.
For the nine months ended September 30, 2016, three of its customers accounted for more than 10.0% of its total revenue in the
amount of $0.8 million, $0.3 million, and $0.3 million, respectively.
At September 30, 2017, two of the Company’s
customers each accounted for more than 10.0% of its total accounts receivable balance in the amount of $1.7 million and $1.5 million,
respectively.
At December 31, 2016, two of the Company’s
customers each accounted for more than 10.0% of its total accounts receivable balance in the amount of $1.1 million and $0.5 million,
respectively.
Net Revenue from Pharmaceutical and Biotechnology
Product Development represents collaboration revenue from TGTX in connection with Checkpoint, which is classified as related party
revenue.
21. Subsequent Events
Mustang Manufacturing Facility
On October 27, 2017, Mustang entered into a lease agreement with
WCS - 377 Plantation Street, Inc., a Massachusetts nonprofit corporation ("Landlord"). Pursuant to the terms of the lease
agreement, Mustang agreed to lease 27,043 sf from the Landlord for the facility through November 2026, subject to additional extensions
at Mustang’s option. Base rent, net of abatements of $0.6 million, over the lease term totals approximately $3.6 million,
on a triple-net basis. Mustang plans to make improvements to the facility of approximately $3.5 million.
The 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 shall increase to
$1.3 million ($1.0 million letter of credit, $0.3 million in cash) when the space is fully occupied by Mustang. After the fifth
lease year, the letter of credit obligation is subject to reduction.
The facility is expected to be operational for the production of
personalized CAR T therapies in 2018.
Fortress
Perpetual Preferred
Offering
On November 6, 2017, the Company
priced an underwritten public offering of one million shares of our 9.375% Series A Cumulative Redeemable Perpetual Preferred
Stock (“Series A Perpetual Preferred Stock”) at a price of $25.00 per share, with expected gross proceeds to us of $25
million. In addition, the Company granted the underwriters a 30-day option to purchase up to 150,000 additional shares at the
public offering price, less underwriting discounts and commissions. The offering is expected to close on November 14, 2017, subject
to customary closing conditions. The Series A Perpetual Preferred Stock received an “A-” investment-grade rating from
Egan-Jones Rating Co., an independent, unaffiliated rating agency.