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, 2015

Stockholders' Equity Note [Abstract]

Stockholders’ Equity

12. Stockholders’ Equity

Stock-based Compensation

As of September 30, 2015, the Company had four equity compensation plans: the Fortress Biotech, Inc. 2007 Stock Incentive Plan, the Fortress Biotech, Inc. 2013 Stock Incentive Plan, the Fortress Biotech, Inc. 2012 Employee Stock Purchase Plan and the Fortress Biotech. Inc. Long Term Incentive Plan (“LTIP”).

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, 2015 and 2014:

	For the three months ended				For the nine months ended
	September 30,				September 30,
($ in thousands)	2015		2014		2015		2014
Employee awards	$	3,296	$	1,460	$	6,284	$	4,035
Executive awards of Fortress Companies' stock		2,229		-		2,229		-
Non-employee awards		10		24		24		47
Fortress Companies (1)		2,966		-		3,359		-
Total stock-based compensation expense	$	8,501	$	1,484	$	11,896	$	4,082

(1)

Includes for Avenue $37,600 for compensation expense on stock grants, Coronado SO approximately $178,500 for a stock grant made in connection with a license acquired, Checkpoint approximately $0.6 million for a stock grant made in connection with a license acquired and $2.1 million for compensation expense, Mustang approximately $147,000 for a stock grant made in connection with the license acquired, and JMC $279,500 for compensation expenses for the nine months ended September 30, 2015.

For the three months ended September 30, 2015, $4.3 million of stock-based compensation expense was included in research and development expenses, of which $3.7 million relates to grants made to employees and consultants and $0.6 million relates to the acquisition of research and development licenses-acquired, and $4.2 million of stock-based compensation expense was included in general and administrative expenses, of which $0.5 million relates to the modification of a stock grant to a former member of the Board of Directors and $2.2 million relates to warrants of Fortress Companies’ common stock granted to the Company’s Chief Executive Officer and Executive Vice Chairman. For the three months ended September 30, 2014, $0.3 million was included in research and development expenses and $1.2 million was included in general and administrative expenses on the unaudited condensed consolidated statements of operations.

For the nine months ended September 30, 2015 and 2014, $5.2 million of stock-based compensation expenses was included in research and development expenses of which $4.3 million relates to grants made to employees and consultants and $0.9 million relates to the acquisition of research and development licenses-acquired and $6.7 million was included in general and administrative expenses, and $0.9 million was included in research and development expenses and $3.1 million was included in general and administrative expenses, respectively, on the unaudited condensed consolidated statements of operations.

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

							Weighted average
			Weighted average		Total weighted average		remaining contractual
($ in thousands)	Number of shares		exercise price		intrinsic value		life (years)
Options vested and expected to vest at December 31, 2014		2,164,365	$	4.69	$	-		7.38
Options granted		-		-		-
Options exercised		(100,000)		2.15		45
Options cancelled		(285,000)		7.57		1,417
Options vested and expected to vest at September 30, 2015		1,779,365	$	4.37	$	-		6.57
Options vested and exercisable		1,632,698	$	4.40	$	-		6.45

As of September 30, 2015, the Company had unrecognized stock-based compensation expense related to unvested option of $0.1 million with a weighted average vesting period of 0.20 years.

George Avgerinos Grant

On July 15, 2015, George Avgerinos, Senior Vice President, Biologics Operations, was granted 1.0 million restricted stock units which vest 10% immediately and an additional 10% per year over four years commencing the later of trading availability, under the Company’s Insider Trading Policy, or July 15, 2015. The remaining 50% vests in accordance with the achievement of performance goals. As a condition of this grant, Mr. Avgerinos’ option grant dated June 2013 for 200,000 shares was surrendered. On the date of modification the incremental value of the new award of $3.3 million plus the unamortized expense of the old award of $0.4 million yielded a value of $3.7 million to be amortized over the life of the restricted stock units. For the three months ended September 30, 2015, 300,000 restricted stock units vested resulting in a charge of $1.4 million on the unaudited condensed consolidated statements of operations.

Acceleration of David Barrett Grants

On July 15, 2015, the Board of Directors voted to accelerate the vesting of 133,000 restricted shares of Fortress common stock granted to David Barrett for his service on the Board through July 15, 2015. In connection with this acceleration, Fortress recorded a charge of approximately $0.4 million during the three months ended September 30, 2015 on the unaudited condensed consolidated statements of operations.

Restricted Stock Unit Grant to Dov Klein

On July 15, 2015, Dov Klein joined the Board of Directors of Fortress. In connection therewith Fortress granted Mr. Klein 50,000 restricted stock units, which vest 25% per year over the next four years. At the grant date, Mr. Klein elected to defer 40,000 restricted stock units. The deferral of restricted stock units does not have any impact on the condensed consolidated financial statements.

The following table summarizes Fortress’ restricted stock and restricted stock unit award activity, excluding activity related to Fortress Companies:

			Weighted average grant
	Number of shares		price
Unvested balance at December 31, 2014		8,287,384	$	2.33
Restricted stock granted		200,000		3.04
Restricted stock vested		(816,449)		2.69
Restricted stock units granted		1,412,000		3.58
Restricted stock units vested		(335,000)		3.56
Unvested balance at September 30, 2015		8,747,935	$	2.53

As of September 30, 2015, the Company had unrecognized stock-based compensation expense related to restricted stock and restricted stock unit awards of $10.1 million and $3.2 million, respectively, which is expected to be recognized over the remaining weighted-average vesting period of 1.95 years and 1.4 years, respectively.

Warrants

As of September 30, 2015 and December 31, 2014, the Company had vested warrants to purchase 685,061 shares of Fortress common stock with a weighted average exercise price of $6.65 per share. All stock-based expense in connection with these warrants has been recognized.

Deferred Compensation Plan

On March 12, 2015, the Company’s Compensation Committee approved the Deferred Compensation Plan allowing all non-employee directors the opportunity to defer all or a portion of their fees or compensation, including restricted stock and restricted stock units. During the nine months ended September 30, 2015, certain non-employee directors elected to defer 290,000 restricted stock awards under this plan.

Employee Stock Purchase Plan

As of September 30, 2015, 77,875 shares have been purchased and 122,125 shares are available for future sale under the Company’s Employee Stock Purchase Plan (“ESPP”). The Company recognized share-based compensation expense related to the ESPP of approximately $12,600 and $4,200 for the three months ended September 30, 2015 and 2014, respectively, and approximately $27,500 and $19,900 for the nine months ended September 30, 2015 and 2014, respectively.

Long-Term Incentive Program

At the Company’s annual stockholders meeting held on July 15, 2015, the stockholders approved the Fortress Biotech, Inc. Long-Term Incentive Plan (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 newly formed 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.

In connection with the approval of the LTIP on July 15, 2015, the following grants of 500,000 warrants each were made to Dr. Rosenwald and Mr. Weiss for their services to the Company:

Fortress Stock	Warrant Shares		Risk Free Rate			Volatilty			Life		Exercise price		Fair Value
Mustang		1,000,000		2.36	%		106.11	%		20	$	0.147	$	135
Checkpoint		1,000,000		2.36	%		106.11	%		20	$	0.129	$	118
Avenue		1,000,000		2.36	%		106.11	%		20	$	0.146	$	134
CNDO SO		1,000,000		2.36	%		106.11	%		20	$	1.190	$	1,092
Helocyte		1,000,000		2.36	%		106.11	%		20	$	0.097	$	89
JMC		1,000,000		2.36	%		106.11	%		20	$	0.650	$	596
Escala		1,000,000		2.36	%		106.11	%		20	$	0.071	$	65

The exercise price, which approximates the fair value, was determined by the Company utilizing a discounted cash flow model to determine the weighted market value of invested capital, discounted by a lack of marketability of 44.8%, weighted average cost of capital of 30%, and net of debt utilized.

Fortress Companies

Checkpoint Therapeutics, Inc.

In March 2015, Checkpoint issued a restricted stock grant to Dr. Marasco for services in connection with its Scientific Advisory Board. Dr. Marasco was issued a grant for 1.5 million shares of Checkpoint common stock, which vest 25% on the first anniversary of the grant date and monthly thereafter for 48 months. The Company valued the restricted stock as of September 30, 2015 utilizing a market approach, based upon a third party financing. Such valuation resulted in a value of $4.39 per share utilizing a volatility of 83%, a risk free rate of return of 1.54% and a term of five years. For both the three and nine months ended September 30, 2015, Checkpoint recorded expense of $2.1 million in connection with this grant.

Avenue Therapeutics, Inc.

During the nine months ended September 30, 2015, Avenue granted 150,000 shares of its common stock to two consultants in exchange for services provided and 1.0 million shares to its acting Chief Executive Officer, Dr. Lu, who is also Chief Financial Officer of Fortress, for services provided. The stock price was determined utilizing a discounted cash flow model to determine the weighted market value of invested capital, discounted by a lack of marketability of 44.8%, weighted average cost of capital of 30%, and net of debt utilized, resulting in a value of $0.146 per share. Grants issued to the consultants were fully vested. The grant issued to Dr. Lu vests 50% in four annual equal tranches of 12.5%, with the remaining 50% vesting upon the achievement of certain performance goals. In connection with these grants for the three and nine months ended September 30, 2015, approximately $15,000 and $37,600, respectively, was recorded in expense on the unaudited condensed consolidated statements of operations.

As of September 30, 2015 Avenue had unrecognized stock-based compensation expense of $64,570 with a remaining weighted average vesting period of 1.67 years.

Journey Medical Corporation

On July 28, 2015, JMC granted 1,950,000 restricted stock units to its key employees. The stock price was determined utilizing a discounted cash flow model to determine the weighted market value of invested capital, discounted by a lack of marketability of 44.5%, weighted average cost of capital of 30%, and net of debt utilized, resulting in a value of $0.65 per share.

	RSU Grant		Vesting Term		Vested		Unvested		Fair Value per Share
President (1)		1,500,000		4		250,000		1,250,000	$	0.650
Sales Operations Staff		450,000		4		-		450,000	$	0.650
		1,950,000				250,000		1,700,000

(1)

Vesting is performance based.

Expense for both the three and nine months ended September 30, 2015 of approximately $279,000 was recorded in general and administrative expense on the unaudited condensed consolidated statements of operations.

As of September 30, 2015, JMC had unrecognized stock-based compensation expense of $0.5 million related to these grants with a remaining weighted average vesting period of 1.07 years.

Capital Raise

On September 30, 2015, a subsidiary of Fortress closed the first tranche of a confidential private placement offering raising approximately $12.6 million. Expenses associated with this tranche approximated $1.5 million.