Fortress Biotech, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Stockholders' Equity

Stockholders' Equity

12 Months Ended

Dec. 31, 2015

Stockholders' Equity Note [Abstract]

Stockholders’ Equity

12. Stockholders' Equity

Common Stock

The Company’s Certificate of Incorporation, as amended, authorizes the Company to issue 15,000,000 shares of $0.001 par value Preferred Stock (none of which is outstanding at December 31, 2015 and 2014) and 100,000,000 shares of $0.001 par value 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.

November 2014 Share Issuance

On November 6, 2014, the Company issued an aggregate of 2,175,000 shares of its Common Stock to its Chairman, President and Chief Executive Officer, its Executive Vice Chairman, Strategic Development, a member of its Board of Directors, and an investor unaffiliated with the Company. The Company’s Board of Directors and Audit Committee approved the private placement which is exempt from registration under the Securities Act of 1933, as amended pursuant to Section 4(a)(2) thereof. The shares of Company Common Stock were sold at $1.61 per share, the closing price on November 6, 2014, and resulted in aggregate cash proceeds to the Company of approximately $3.5 million.

Stock-Based Compensation

As of December 31, 2015, the Company had four equity compensation plans: the Fortress Biotech, Inc. 2007 Stock Incentive Plan (the “2007 Plan”), the Fortress Biotech, Inc. 2013 Stock Incentive Plan, as amended (the “2013 Plan”), the Fortress Biotech, Inc. 2012 Employee Stock Purchase Plan (the “ESPP”) and the Fortress Biotech, Inc. Long Term Incentive Plan (“LTIP”). In 2007, the Company’s Board of Directors adopted and stockholders approved the 2007 Plan authorizing the Company to grant up to 6,000,000 shares of Common Stock to eligible employees, directors, and consultants in the form of restricted stock, stock options and other types of grants. In 2015, the Company’s Board of Directors and stockholders approved an increase of 7,700,000 shares for the 2013 Plan bringing the total number of shares approved under this plan to 10,000,000. In 2013, the Company’s Board of Directors adopted and stockholders approved the 2013 Plan authorizing the Company to grant up to 2,300,000 shares of Common Stock to eligible employees, directors and consultants in the form of stock options, stock appreciation rights, restricted stock awards, and restricted stock unit awards

The purpose of the Company’s 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. An aggregate of 8,660,280 were granted under both the 2007 and 2013 plans, net of cancellations, and 7,339,720 shares were available for issuance as of December 31, 2015.

Incentive and nonstatutory 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:

	•	Risk-Free Interest Rate: The risk-free interest rate is based on the yields of United States Treasury securities with maturities similar to the expected term of the options for each option group.
	•	Volatility: As the Company has a limited trading history for its Common Stock, the expected stock price volatility for its Common Stock was estimated by incorporating two years of the Company’s historical volatility and the average historical price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock option grants. Industry peers consist of several public companies in the biopharmaceutical industry similar in size, stage of life cycle and financial leverage. The Company’s historical volatility is weighted with that of the peer group and that combined historical volatility is weighted 80% with a 20% weighting of the Company’s implied volatility, which is obtained from traded options of the Company’s stock. The Company intends to continue to consistently apply this process using the same or similar public companies until it has sufficient historical information regarding the volatility of its Common Stock that is consistent with the expected life of the options. Should circumstances change such that the identified companies are no longer similar to the Company, more suitable companies whose share prices are publicly available would be utilized in the calculation.
	•	Expected Term: Due to the limited exercise history of the Company’s stock options, the Company determined the expected term based on the Simplified Method under SAB 107 and the expected term for non-employees is the remaining contractual life for both options and warrants.
	•	Expected Dividend Rate: The Company has not paid and does not anticipate paying any cash dividends in the near future.

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. There were no stock options issued during the years ended December 31, 2015 and 2014.

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, 2015, 2014 and 2013 (dollars in thousands):

	For the Years Ended December 31,
($ in thousands)	2015		2014		2013
Employee awards	$	8,130	$	5,492	$	4,867
Executive awards of Fortress Companies' stock		2,228		-		-
Non-employee awards		33		54		897
Non-employee warrants		-		-		138
Fortress Companies (1)		3,900		-		-
Total stock-based compensation expense	$	14,291	$	5,546	$	5,902

(1)

Consists of approximately $50,400 of Avenue's compensation expenses, approximately $3.3 million of Checkpoint's compensation expense, and approximately $597,000 of JMC's compensation expenses on stock grants for the year ended December 31, 2015.

For the years ended December 31, 2015, 2014 and 2013, $5.8 million, $1.1 million and $3.0 million was included in research and development expenses, and $8.5 million, $4.4 million and $2.9 million was included in general and administrative expenses, respectively.

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, 2014		2,164,365	$	4.69	$	-		7.38
Options granted		-		-		-		-
Options exercised		(100,000)		2.15		64,000		-
Options cancelled		(285,000)		7.57		42,200		-
Options vested and expected to vest at December 31, 2015		1,779,365	$	4.37	$	666,396		6.32
Options vested and exercisable		1,067,168	$	3.69	$	633,046		5.85

As of December 31, 2015, the Company had unrecognized stock-based compensation expense related to all unvested stock options of $0.1 million, which is expected to be recognized over the remaining weighted-average vesting period of 0.1 years.

During the years ended December 31, 2015 and 2014, exercises of stock options resulted in total proceeds of approximately $0.2 million and $0.6 million, respectively.

Restricted Stock

Stock-based compensation expense from restricted stock awards and restricted stock units for the years ended December 31, 2015, 2014, 2013 was $6.9 million, $4.0 million and $66,000, respectively.

During 2014, the Company granted 4,343,692 restricted shares of its Common Stock to executives, employees and directors of the Company. The fair value of the restricted stock awards issued during 2014 of $11.6 million was estimated on the grant date using the Company’s stock price on the date of grant. The 2014 restricted stock awards vest upon both the passage of time as well as meeting certain performance criteria. Restricted stock awards are expensed under the straight line method over the vesting period.

Senior Vice President (“SVP”) Grant

On July 15, 2015, the Company’s SVP, 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 certain performance goals. As a condition of this grant, the SVP surrendered his option grant dated June 2013 for 200,000 shares. 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 year ended December 31, 2015, 300,000 restricted stock units vested resulting in a charge of $1.9 million on the Consolidated Statements of Operations.

Acceleration of Grants to Former Director

On July 15, 2015, the Board of Directors accelerated the vesting of 133,000 restricted shares of Fortress common stock granted to a former member of the Board of Directors 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 2015 on the Consolidated Statements of Operations.

Restricted Stock Unit Grant to a Current Director

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

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, 2014		8,287,384	$	2.33
Restricted stock granted		200,000		3.04
Restricted stock vested		(816,449)		2.69
Restricted stock units granted		1,422,000		3.57
Restricted stock units cancelled		(10,000)		3.04
Restricted stock units vested		(325,000)		3.56
Unvested balance at December 31, 2015		8,757,935	$	2.47

As of December 31, 2015, the Company had unrecognized stock-based compensation expense related to all unvested restricted stock awards of $5.0 million, which is expected to be recognized over the remaining weighted-average vesting period of 1.7 years. The unrecognized stock-based compensation expense related to all unvested restricted stock units was $1.6 million, which is expected to be recognized over the remaining weighted-average vesting period of 1.3 years.

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 year ended December 31, 2015, certain non-employee directors elected to defer 290,000 restricted stock awards under this plan.

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.

On May 31, 2013, the Company issued 21,505 shares of Common Stock under the ESPP. The shares were issued at $3.88 per share, which represents 85% of the closing price of $4.56 of the Common Stock on December 3, 2012. On December 1, 2013, the Company issued 6,065 shares of Common Stock under the ESPP. The shares were issued at $1.39 per share, which represents 85% of the closing price of $1.64 of the Common Stock on November 29, 2013.

On June 2, 2014, the Company issued 7,139 shares of Common Stock under the ESPP. The shares were issued at $1.45 per share, which represents 85% of the closing price of $1.71 of the Common Stock on June 2, 2014. On December 1, 2014, the Company issued 6,841 shares of Common Stock under the ESPP. The shares were issued at $1.80 per share, which represents 85% of the closing price of $2.12 of the Common Stock on December 1, 2014.

On June 1, 2015, the Company issued 14,681 shares of Common Stock under the ESPP. The shares were issued at $1.80 per share, which represents 85% of the closing price of $2.12 of the Common Stock on December 1, 2014. On December 1, 2015, the Company issued 13,317 shares of Common Stock under the ESPP. The shares were issued at $2.41 per share, which represents 85% of the closing price of $2.84 of the Common Stock on June 1, 2015.

As of December 31, 2015, 91,192 shares have been purchased and 108,808 shares are available for future sale under the Company’s ESPP. The Company recognized share-based compensation expense of $27,000, $25,000 and $46,000 for the years ended December 31, 2015, 2014 and 2013, respectively.

Warrants

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

	Number of shares		Weighted average exercise price		Total weighted average intrinsic value		Weighted average remaining contractual life (years)
Outstanding as of December 31, 2014		685,061	$	6.65	$	90,950.00		1.53
Granted		-		-		-		-
Exercised		-		-		-		-
Cancelled		(115,226)		8.33		-		-
Outstanding as of December 31, 2015		569,835	$	6.31	$	120,700		1.84
Exercisable as of December 31, 2015		569,835	$	6.31	$	120,700		1.84

All stock-based expense in connection with these warrants has been recognized.

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.

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	%		10	$	0.147	$	135
Checkpoint		1,000,000		2.36	%		106.11	%		10	$	0.129	$	118
Avenue		1,000,000		2.36	%		106.11	%		10	$	0.146	$	134
CNDO SO		1,000,000		2.36	%		106.11	%		10	$	1.190	$	1,091
Helocyte		1,000,000		2.36	%		106.11	%		10	$	0.097	$	89
JMC		1,000,000		2.36	%		106.11	%		10	$	0.650	$	596
Escala		1,000,000		2.36	%		106.11	%		10	$	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.

Checkpoint has a long term incentive plan. 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 utilizing a discounted cash flow model to determine the weighted market value of invested capital, discounted by a lack of marketability of 44.8% and a weighted average cost of capital of 30%, resulting in a value of $0.065 per share on grant date. At December 31, 2015, the Company re-measured this non-employee restricted stock 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 1.5% and a term of five years. For the year ended 2015, in connection with this grant, Checkpoint re-measured this non-employee grant and recorded expense of $3.0 million, based upon a fair value of $4.39 in research and development expenses on the Consolidated Statements of Operations.

On August 31, 2015, Checkpoint granted warrants for 100,000 shares of common stock to a Fortress employee for consulting services. Checkpoint valued the warrants of Checkpoint stock utilizing a discounted cash flow model to determine the weighted market value of invested capital, discounted by a lack of marketability of 44.1% and a weighted average cost of capital of 30%, resulting in a value of $0.129 per warrant. The warrants are immediately vested, and are exercisable at $0.129 per share. The Company recorded stock-based compensation expense of approximately $13,000 related to this warrant, which is included in research and development expenses on the Consolidated Statements of Operations.

On October 13, 2015, pursuant to the employment agreement, Checkpoint granted its President and Chief Executive Officer of Checkpoint, 1,000,000 shares of restricted stock under Checkpoint’s 2015 Incentive Plan. One-third of the shares will vest in four equal annual installments beginning on October 13, 2016. The shares were valued utilizing market income and cost valuation approaches. This yielded a price per share of $4.39 utilizing a risk free rate of return of 1.5 % and expected volatility of 83%. One-third of the shares will vest in three equal annual installments based on Checkpoint’s achievement of fully-diluted market capitalizations of $250 million, $500 million and $750 million, respectively. Checkpoint estimated the date of achievement and implied values per common share utilizing Monte Carlo model, which yielded implied values per restricted share of $4.26, $3.89 and $3.64, and the achievement dates of November 28, 2017, March 3, 2019 and November 2, 2019. The final third vests upon the achievement of certain milestones. For the year ended December 31, 2015, the Company recorded stock-based compensation expense of approximately $265,000 related to this stock grant, which is included in general and administrative expenses on the Consolidated Statements of Operations.

Avenue Therapeutics, Inc.

Avenue has a long term incentive program. During 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 to be 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 year ended December 31, 2015, the Company recorded approximately $29,000 as general and administrative expenses and $21,000 as research and development expenses on the Consolidated Statements of Operations.

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.

On October 19, 2015, JMC repurchased 1,250,000 shares of one employee’s unvested restricted awards and replaced the shares with an option grant. On the date of modification, the fair value of the new awards was less than the old awards. Accordingly, the Company will continue to amortize the unamortized expense of the old award of $0.8 million.

	RSU Grant		Vesting Term		Vested		Forfeited		Unvested		Fair Value per Share
President		1,500,000		4		250,000		(1,250,000)		-	$	0.650
Sales Operations Staff		450,000		4		116,666		-		333,334	$	0.650
		1,950,000				366,666		(1,250,000)		333,334

Expense for the year ended December 31, 2015 of approximately $597,000 was recorded in general and administrative expense on the Consolidated Statements of Operations.

Capital Raise

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.