Fortress Biotech, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Stockholders' Equity

Stockholders' Equity

9 Months Ended

Sep. 30, 2017

Stockholders' Equity Note [Abstract]

Stockholders’ Equity

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						Nine Months Ended
	September 30,						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:

							Weighted average
					Total weighted		remaining
			Weighted average		average intrinsic		contractual life
	Number of shares		exercise price		value		(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):

			Weighted average
	Number of shares		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:

							Weighted average
					Total weighted		remaining
			Weighted average		average intrinsic		contractual life
	Number of shares		exercise price		value		(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:

					Weighted
					Average
					Remaining
			Weighted		Contractual
			Average		Life (in
	Stock Options		Exercise Price		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.