15. Stockholders’ Equity

 

Common Stock

 

 

The terms, rights, preference and privileges of the Common Stock are as follows:

 

Voting Rights

 

Each holder of Common Stock is entitled to one vote per share of Common Stock held on all matters submitted to a vote of the stockholders, including the election of directors. The Company’s certificate of incorporation and bylaws do not provide for cumulative voting rights.

 

Dividends

 

Subject to preferences that may be applicable to any then outstanding preferred stock, the holders of the Company’s outstanding shares of Common Stock are entitled to receive dividends, if any, as may be declared from time to time by the Company’s Board of Directors out of legally available funds.

 

Liquidation

 

In the event of the Company’s liquidation, dissolution or winding up, holders of Common Stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all of the Company’s debts and other liabilities, subject to the satisfaction of any liquidation preference granted to the holders of any outstanding shares of Preferred Stock.

 

Rights and Preference

 

Holders of the Company’s Common Stock have no preemptive, conversion or subscription rights, and there is no redemption or sinking fund provisions applicable to our Common Stock. The rights, preferences and privileges of the holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of the Company’s preferred stock that are or may be issued.

 

Fully Paid and Nonassessable

 

All of the Company’s outstanding shares of Common Stock are fully paid and nonassessable.

On October 26, 2017, the Company designated 5,000,000 shares of preferred stock as Series A Preferred Stock. On December 15, 2017, the Company issued $25.0 million (or 1,000,000 shares) of Series A Preferred Stock through B. Riley FBR, as lead manager and joint bookrunner of the placement, and NSC and H.C. Wainwright & Co. as joint bookrunners.  NSC is a subsidiary of National Holdings Corporation.

 

 

Dividends on Series A Preferred Stock accrue daily and will be cumulative from, and including, the date of original issue and shall be payable quarterly every March 31, June 30, September 30, and December 31, at the rate of 9.375% per annum of its liquidation preference, which is equivalent to $2.34375 per annum per share. The first dividend on Series A Preferred Stock sold in the offering was payable on December 31, 2017 (in the amount of $0.299479 per share) to the holders of record of the Series A Preferred Stock at the close of business on December 15, 2017. The Company recorded approximately $0.3 million of dividends in Additional Paid in Capital on the Consolidated Balance Sheets as of December 31, 2017.

 

 

The Series A Preferred Stock has no maturity date, and the Company is not required to redeem the Series A Preferred Stock. Accordingly, the Series A Preferred Stock will remain outstanding indefinitely unless the Company decides to redeem it pursuant to its optional redemption right or its special optional redemption right in connection with a Change of Control (as defined below), or under the circumstances set forth below under “Limited Conversion Rights Upon a Change of Control” and elect to convert such Series A Preferred Stock. The Company is not required to set aside funds to redeem the Series A Preferred Stock.

 

The Series A Preferred Stock may be redeemed in whole or in part (at the Company’s option) any time on or after December 15, 2022, upon not less than 30 days nor more than 60 days’ written notice by mail prior to the date fixed for redemption thereof, for cash at a redemption price equal to $25.00 per share, plus any accumulated and unpaid dividends to, but not including, the redemption date.  

 

Upon the occurrence a Change of Control (as defined below), the Company may redeem the shares of Series A Preferred Stock, at its option, in whole or in part, within one hundred twenty (120) days of any such Change of Control, for cash at $25.00 per share, plus accumulated and unpaid dividends (whether or not declared) to, but excluding, the redemption date. If, prior to the Change of Control conversion date, the Company has provided notice of its election to redeem some or all of the shares of Series A Preferred Stock (whether pursuant to the Company’s optional redemption right described above under “Optional Redemption” or this special optional redemption right), the holders of shares of Series A Preferred Stock will not have the Change of Control conversion right with respect to the shares of Series A Preferred Stock called for redemption. If the Company elects to redeem any shares of the Series A Preferred Stock as described in this paragraph, the Company may use any available cash to pay the redemption price.

 

A “Change of Control” is deemed to occur when, after the original issuance of the Series A Preferred Stock, the following have occurred and are continuing:

 

 

 

Conversion, Exchange and Preemptive Rights

 

Except as described below under “Limited Conversion Rights upon a Change of Control,” the Series A Preferred Stock is not subject to preemptive rights or convertible into or exchangeable for any other securities or property at the option of the holder.

 

Upon the occurrence of a Change of Control, each holder of shares of Series A Preferred Stock will have the right (unless, prior to the Change of Control Conversion Date, the Company has provided or provides irrevocable notice of its election to redeem the Series A Preferred Stock as described above under “Optional Redemption,” or “Special Optional Redemption”) to convert some or all of the shares of Series A Preferred Stock held by such holder on the Change of Control Conversion Date, into the Common Stock Conversion Consideration, which is equal to the lesser of:

 

 

 

In the case of a Change of Control pursuant to which the Company’s common stock will be converted into cash, securities or other property or assets, a holder of Series A Preferred Stock will receive upon conversion of such Series A Preferred Stock the kind and amount of Alternative Form Consideration which such holder would have owned or been entitled to receive upon the Change of Control had such holder held a number of shares of the Company’s common stock equal to the Common Stock Conversion Consideration immediately prior to the effective time of the Change of Control.

 

Notwithstanding the foregoing, the holders of shares of Series A Preferred Stock will not have the Change of Control Conversion Right if the acquiror has shares listed or quoted on the NYSE, the NYSE American LLC or Nasdaq Stock Market or listed or quoted on an exchange or quotation system that is a successor to the NYSE, the NYSE American LLC or Nasdaq Stock Market, and the Series A Preferred Stock becomes convertible into or exchangeable for such acquiror’s listed shares upon a subsequent Change of Control of the acquiror.

 

In the event the Company liquidates, dissolves or is wound up, holders of the Series A Preferred Stock will have the right to receive $25.00 per share, plus any accumulated and unpaid dividends to, but not including, the date of payment, before any payment is made to the holders of the Company’s common stock.

 

The Series A Preferred Stock will rank, with respect to rights to the payment of dividends and the distribution of assets upon the Company’s liquidation, dissolution or winding up, (1) senior to all classes or series of the Company’s common stock and to all other equity securities issued by the Company other than equity securities referred to in clauses (2) and (3); (2) on a par with all equity securities issued by the Company with terms specifically providing that those equity securities rank on a par with the Series A Preferred Stock with respect to rights to the payment of dividends and the distribution of assets upon the Company’s liquidation, dissolution or winding up; (3) junior to all equity securities issued by the Company with terms specifically providing that those equity securities rank senior to the Series A Preferred Stock with respect to rights to the payment of dividends and the distribution of assets upon the Company liquidation, dissolution or winding up; and (4) junior to all of the Company’s existing and future indebtedness.

 

As of December 31, 2017 and 2016, 1,000,000 and nil shares, respectively, of Series A Preferred Stock were issued and outstanding. 

 

Stock-Based Compensation including National

 

Fortress Companies have their own equity compensation plan under which shares are granted to eligible employees, directors and consultants in the form of restricted stock, stock options, and other types of grants of stock of the respective Fortress Company. The table below provides a summary of those plans as of December 31, 2017:

 

Fortress Company		Stock Plan		Shares Authorized			Shares available at December 31, 2017
Avenue		Avenue Therapeutics, Inc. 2015 Stock Plan			2,000,000			1,115,000
Caelum		Caelum Biosciences Inc. 2017 Incentive Plan			2,000,000			125,002
Cellvation		Cellvation Inc. 2016 Incentive Plan			2,000,000			300,000
Checkpoint		Checkpoint Therapeutics, Inc. Amended and Restated 2015 Stock Plan			5,000,000			2,961,697
Cyprium		Cyprium Therapeutics, Inc. 2017 Stock Plan			2,000,000			2,000,000
Helocyte		DiaVax Biosciences, Inc. 2015 Incentive Plan			2,000,000			341,667
Journey		Journey Medical Corporation 2015 Stock Plan			3,000,000			614,792
Mustang		Mustang Bio, Inc. 2016 Incentive Plan			2,000,000			444,325
Tamid		FBIO Acquisition Corp. V 2017 Incentive Plan			2,000,000			1,600,000

 

The purpose of the Company’s and the Fortress Companies’ equity compensation plans is to provide for equity awards as part of an overall compensation package of performance-based rewards to attract and retain qualified personnel. Such awards include, without limitation, options, stock appreciation rights, sales or bonuses of restricted stock, restricted stock units or dividend equivalent rights, and an award may consist of one such security or benefit, or two or more of them in any combination or alternative. Vesting of awards may be based upon the passage of time, the occurrence of one or more events, or the satisfaction of performance criteria or other conditions.

 

Incentive and non statutory stock options are granted pursuant to option agreements adopted by the plan administrator. Options generally have 10-year contractual terms and vest in three equal annual installments commencing on the grant date.

 

The Company estimates the fair value of stock option grants using a Black-Scholes option pricing model. In applying this model, the Company uses the following assumptions: 

 

 

The fair value of each option award was estimated on the grant date using the Black-Scholes option-pricing model and expensed under the straight line method. Journey and Mustang issued stock options during the years ended December 31, 2017, 2016 and 2015.

The fair value for non-employee stock based awards are marked-to-market on each valuation date until vested using the Black-Scholes pricing model.

 

The following table summarizes the stock-based compensation expense from stock option, employee stock purchase programs and restricted Common Stock awards and warrants for the years ended December 31, 2017, 2016 and 2015:

 

		For the Years Ended December 31,
($ in thousands)		2017			2016			2015
Employee awards		$	6,606		$	7,386		$	8,130
Executive awards of Fortress Companies’ stock			-			-			2,228
Non-employee awards			83			33			33
Fortress Companies:
Avenue			604			28			51
Caelum			595			-			-
Cellvation			31			7			-
Checkpoint			3,118			3,867			3,252
Helocyte			128			250			-
JMC			224			515			597
Mustang			2,013			-			-
Tamid			1			-			-
National			602			42			-
Total stock-based compensation expense		$	14,005		$	12,128		$	14,291

 

 

Options

 

The following table summarizes Fortress stock option 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)
Options vested and expected to vest at December 31, 2015			1,779,365		$	4.37		$	666,396			6.32
Forfeited			(648,864)			0.51			-			-
Options vested and expected to vest at December 31, 2016			1,130,501			3.73			602,451			4.93
Exercised			(20,000)			1.37			52,400			-
Exercisable as of December 31, 2016			1,110,501		$	3.78		$	1,351,080			3.95
Options vested and expected to vest at December 31, 2017			1,085,501		$	3.75		$	1,351,080			3.93

 

During the years ended December 31, 2017, 2016 and 2015, exercises of stock options resulted in total proceeds of approximately $27,000, nil and $0.2 million, respectively.

 

 

Restricted Stock

 

 

Senior Vice President (“SVP”) Grant

 

 

Acceleration of Grants to Former Director

 

Restricted Stock Unit Grant to a Current Director

 

 

 

 

In December 2017, the Company modified the vesting schedule on the 1.9 million share grant made to its Chief Executive Officer and Executive Chair, Strategic Development in December 2013, and the 3.9 million share inducement grant made to its Executive Chair, Strategic Development in February 2014. These grants had been previously modified in February 2016, when the vesting on the first tranche of the grants was extended by 12 months. The impact of the 2016 modification was $0.4 million, which was amortized over the remaining life of the award. The impact of the 2017 modification, which extends the vesting to December 2022, was $2.5 million, which will be amortized over the remaining life of the award.

 

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

 

		Number of shares			Weighted average grant price
Unvested balance at December 31, 2015			8,757,935		$	2.47
Restricted stock granted			1,240,868			2.77
Restricted stock cancelled			(33,333)			2.69
Restricted stock vested			(173,333)			2.73
Restricted stock units granted			641,000			2.93
Restricted stock units cancelled			(111,750)			3.58
Restricted stock units vested			(227,292)			3.56
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			1,128,750			4.17
Restricted stock units forfeited			(15,000)			2.98
Restricted stock units vested			(445,874)			3.50
Unvested balance at December 31, 2017			11,874,034		$	2.63

 

 

Deferred Compensation Plan

 

 

Employee Stock Purchase Plan

 

 

 

 

 

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, 2015			569,835		$	6.31		$	120,700			1.84
Granted			1,880,000			3.00			-			5.65
Expired			(161,382)			6.30			-			-
Exercised (*)			(25,000)			1.37			33,250			-
Outstanding as of December 31, 2016			2,263,453		$	3.62		$	79,800			4.74
Granted			816,180			3.84			260,380			4.87
Forfeited			(305,444)			7.07			-			-
Outstanding as of December 31, 2017			2,774,189		$	3.30		$	2,204,530			4.47
Exercisable as of December 31, 2017			869,189		$	3.96		$	318,580			4.05

(*) – cashless

 

All stock-based expense in connection with these warrants has been recognized prior to January 1, 2017.

 

Long-Term Incentive Program (“LTIP”)

 

On July 15, 2015, the stockholders approved the LTIP for the Company’s Chairman, President and Chief Executive Officer, Dr. Rosenwald, and Executive Vice Chairman, Strategic Development, Mr. Weiss. The LTIP consists of a program to grant equity interests in the Company and in the Company’s subsidiaries, and a performance-based bonus program that is designed to result in performance-based compensation that is deductible without limit under Section 162(m) of the Internal Revenue Code of 1986, as amended.

 

 

2015		Warrant Shares			Risk Free Rate			Volatility			Life			Exercise price			Fair Value
Mustang			1,000,000			2.36	%		106.11	%		10		$	0.147		$	135,000
Checkpoint			1,000,000			2.36	%		106.11	%		10		$	0.129		$	118,000
Avenue			1,000,000			2.36	%		106.11	%		10		$	0.146		$	134,000
CNDO SO			1,000,000			2.36	%		106.11	%		10		$	1.190		$	1,091,000
Helocyte			1,000,000			2.36	%		106.11	%		10		$	0.097		$	89,000
JMC			1,000,000			2.36	%		106.11	%		10		$	0.650		$	596,000
Escala			1,000,000			2.36	%		106.11	%		10		$	0.071		$	65,000
2016
Cellvation			1,000,000			2.86	%		70	%		9		$	0.024		$	18,000

 

 

Beginning in 2017, the LTIP equity interest grants were made in the form of stock. During the year ended December 31, 2017, Mr. Weiss and Dr. Rosenwald received, for their services to the Company, stock awards of 500,000 shares representing 5% of the ownership in the following entities:

 

					Risk Free						Discount for Lack of			Exercise
2017		Stock Shares			Rate			Volatility			Marketability			price			Fair Value
Aevitas			1,000,000			1.92			79.8	%		42.6	%	$	0.020		$	20,000
Caelum			1,000,000			1.93			70.0	%		49.5	%	$	0.028		$	28,000
Cyprium			1,000,000			1.92			84.3	%		44.2	%	$	0.004		$	4,000
Acquisition Corp. III			1,000,000			1.92			83.9	%		44.0	%	$	0.007		$	7,000
Acquisition Corp. IV			1,000,000			1.92			83.9	%		44.0	%	$	0.007		$	7,000
Tamid			1,000,000			1.92			83.9	%		44.0	%	$	0.007		$	7,000
Acquisition Corp. VI			1,000,000			1.92			83.9	%		44.0	%	$	0.007		$	7,000
Acquisition Corp. VII			1,000,000			1.92			83.9	%		44.0	%	$	0.007		$	7,000
Acquisition Corp. VIII			1,000,000			1.92			83.9	%		44.0	%	$	0.007		$	7,000

 

For the year ended December 31, 2017, the Company recorded expense of approximately $0.1 million related to these grants in general and administrative expenses on the Consolidated Statements of Operations. These grants are expensed by the Company at the time of the grant, as they are immediately vested.

 

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 year ended December 31, 2017 and 2016, the Company recorded expense of approximately $0.6 million and $0.3 million, respectively. No expense was recorded in 2015.

Capital Raise

 

Checkpoint Therapeutics, Inc.

 

On September 18, 2015, Checkpoint entered into a placement agency agreement with National Securities Corporation (the “Placement Agent”) relating to Checkpoint’s offering, issuance and sale (the “Offering”) to select institutional investors (the “Investors”) of units consisting of 10,000 shares of Checkpoint’s common stock, $0.0001 par value per share (the “Common Stock”), and warrants (the “Warrants”) exercisable for 2,500 shares of common stock at an exercise price of $7.00 per share, for a purchase price of $50,000 per unit. Pursuant to the agreement, Checkpoint agreed to pay the Placement Agent a cash fee of 10.0% of the gross proceeds from the Offering and granted a warrant exercisable for shares of Checkpoint’s common stock equal to 10% of the aggregate number of shares of Checkpoint’s common stock sold in the Offering (the “Placement Agent Warrants”). In addition, Checkpoint and the Investors entered into a unit purchase agreement (the “Unit Purchase Agreement”) relating to the sale of the Checkpoint’s common stock and the warrants in five separate closings during the third and fourth quarter of 2015. In the aggregate, in 2015, Checkpoint closed on gross proceeds of $57.8 million, before commissions and expenses. Net proceeds from this offering were approximately $51.5 million. The financing involved the sale of Units, each consisting of 10,000 shares of common stock and a warrant exercisable for 2,500 shares of common stock at an exercise price of $7.00 per share, for a purchase price of $50,000 per Unit. The warrants have a five-year term and are only exercisable for cash. Checkpoint expects to use the net proceeds primarily for general corporate purposes, which may include financing Checkpoint’s growth, developing new or existing product candidates, and funding capital expenditures, acquisitions and investments.

 

Following this capital raise, the Company’s ownership in Checkpoint decreased to 37.7%. Since the Company’s ownership of Checkpoint is through Class A Common Shares, which have super-majority voting rights, the Company maintains voting control, thereby consolidating Checkpoint.

  

On February 23, 2016, Checkpoint closed on gross proceeds of $0.6 million, in a private placement of shares and warrants to Opus Point Healthcare Fund GP, LLC, a fund managed by OPPM, a related party. The financing involved the sale of units, each consisting of 10,000 shares of common stock and a warrant exercisable for 3,500 shares of common stock at an exercise price of $7.00 per share, for a total price of $45,000 per unit. The warrants have a five-year term and are only exercisable for cash. Checkpoint issued 126,640 unregistered shares of common stock and 44,324 warrants in connection with this transaction. Due to the absence of a placement agent in this transaction, the net proceeds to, and warrants issued by, Checkpoint were consistent with terms of the December 2015 third-party financing, which included the payment of fees and issuance of warrants to a placement agent.

 

Mustang Bio, Inc.

 

In third and fourth quarter of 2016, Mustang closed on gross proceeds of $39.1 million, before expenses, in a private placement of shares and warrants for which OPN Capital Markets was the placement agent and received a fee of $3.9 million (recorded as contra-equity) or 10% of the gross proceeds. The financing involved the sale of units, each consisting of 10,000 shares of common stock and a warrant exercisable for 2,500 shares of common stock at an exercise price of $8.50 per share, for a total price of $65,000 per unit. The warrants have a five-year term and are only exercisable for cash. Mustang issued 6.0 million unregistered shares of common stock, excluding founder shares, and 1.5 million warrants in connection with this transaction. In addition, the placement agent received 601,486 warrants or 10% of the shares issued.

 

In 2017, Mustang raised gross proceeds of $56.0 million, before expenses. Mustang issued 8,610,774 unregistered shares of common stock and 2,152,693 warrants in connection with this closing. NSC received a placement agent fee of $5.6 million or approximately 10% of the gross proceeds. In addition, NSC received 861,077 warrants or approximately 10% of the shares issued.

 

As of December 31, 2017, the Company determined that the warrants still did not meet the definition of a derivative and continued to qualify for equity recognition.

 

At Market Offerings

 

In May 2016, the Company issued 150,556 shares at an average price of $2.89 per share for gross proceeds of $0.4 million under its then existing at the market facility. Fees totaled $79,000.

 

On August 17, 2016, the Company entered into an Amended and Restated At Market Issuance Sales Agreement, or Sales Agreement, with MLV & Co. LLC, or MLV, and FBR Capital Markets & Co., or FBR. On August 18, 2016, the Company filed a Registration Statement on Form S-3, which became effective on December 1, 2016 and permits the Company to issue and sell shares of its common stock having an aggregate offering price of up to $53.0 million from time to time through MLV and FBR, as sales agents under the Sales Agreement. The Sales Agreement terminates on August 17, 2019.

 

Perpetual Preferred Offering

 

In November 2017, the Company raised gross proceeds of $25.0 million in an underwritten public offering of one million shares of 9.375% Series A Cumulative Redeemable Perpetual Preferred Stock (“Series A Preferred Stock”) at a price of $25.00 per share. Net proceeds totaled approximately $22.2 million in the Series A Preferred Stock offering after the payment of underwriter fees of approximately $2.7 million, of which $2.1 million was paid to NSC, one of several bookrunners for the offering and $0.1 million of other fees.