Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Statements in the following discussion and throughout this report that are not historical in nature are “forward-looking statements.” You can identify forward-looking statements by the use of words such as “expect,” “anticipate,” “estimate,” “may,” “will,” “should,” “intend,” “believe,” and similar expressions. Although we believe the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risk and we can give no assurances that our expectations will prove to be correct. Actual results could differ from those described in this report because of numerous factors, many of which are beyond our control. These factors include, without limitation, those described under Item 1A “Risk Factors.” We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect actual outcomes. Please see “Forward-Looking Statements” at the beginning of this Form 10-K.
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information appearing elsewhere in this Form 10-K. We undertake no obligation to update any forward-looking statements in the discussion of our financial condition and results of operations to reflect events or circumstances after the date of this report or to reflect actual outcomes
We are a biopharmaceutical company dedicated to acquiring, developing and commercializing pharmaceutical and biotechnology products and product candidates, which we do at the Fortress level, at our majority-owned and majority-controlled subsidiaries and joint ventures, and at entities we founded and in which we maintain significant minority ownership positions. Fortress has a talented and experienced business development team, comprising scientists, doctors and finance professionals, who identify and evaluate promising products and product candidates for potential acquisition by new or existing partner companies. Through our partner companies, we have executed arrangements with some of the world’s foremost universities, research institutes and pharmaceutical companies, including City of Hope National Medical Center, Fred Hutchinson Cancer Research Center, St. Jude Children’s Research Hospital, Dana-Farber Cancer Institute, Nationwide Children’s Hospital, Cincinnati Children’s Hospital Medical Center, Columbia University, the University of Pennsylvania, and AstraZeneca plc.
Following the exclusive license or other acquisition of the intellectual property underpinning a product or product candidate, we leverage our business, scientific, regulatory, legal and finance expertise to help our partners achieve their goals. Our partner companies then assess a broad range of strategic arrangements to accelerate and provide additional funding to support research and development, including joint ventures, partnerships, out-licensings, and public and private financings; to date, three partner companies are publicly-traded, and two have consummated strategic partnerships with industry leaders Alexion Pharmaceuticals, Inc. and InvaGen Pharmaceuticals, Inc. (a subsidiary of Cipla Limited).
Recent Events
Marketed Dermatology Products
● In 2020, our marketed products generated net revenue of $44.5 million, compared to net revenue of $34.9 million in 2019.
● We currently have 42 sales representatives dedicated to the dermatology product portfolio.
● Our dermatology products are marketed by our partner company, Journey Medical Corporation (“Journey” or “JMC”).
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Late Stage Product Candidates
Intravenous (IV) Tramadol
● On November 12, 2018, Avenue entered into a Stock Purchase and Merger Agreement (the “Avenue SPMA”) with InvaGen Pharmaceuticals Inc. (“InvaGen”), Madison Pharmaceuticals Inc. (the “Merger Sub”), and us under which Avenue would be sold to InvaGen in a two-stage transaction. The first stage of the strategic transaction between InvaGen and Avenue closed in February 2019. InvaGen acquired approximately 5.8 million shares of Avenue’s common stock at $6.00 per share for total gross consideration of $35.0 million, representing a 33.3% stake in Avenue’s capital stock on a fully diluted basis. At the second stage closing, InvaGen will acquire the remaining shares of Avenue’s common stock, pursuant to a reverse triangular merger with Avenue remaining as the surviving entity. The second stage closing is subject to the satisfaction of certain closing conditions, including conditions pertaining to the FDA approval, labeling, scheduling and the absence of any Risk Evaluation and Mitigation Strategy or similar restrictions in effect with respect to IV Tramadol, as well as the expiration of any waiting period applicable to the acquisition under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR”).
● In October 2020, InvaGen communicated to Avenue that it believes a Material Adverse Effect (as defined in the Avenue SPMA) has occurred due to the impact of the COVID-19 pandemic on potential commercialization and projected sales of IV Tramadol, which means it is possible InvaGen could attempt to avoid its obligation to consummate the second stage closing under the Avenue SPMA, terminate the Avenue SPMA, and/or pursue monetary claims against Avenue and/or Fortress. Avenue disagrees with InvaGen’s assertion that a Material Adverse Effect has occurred and has advised InvaGen of this position.
● In February 2020, the U.S. Food and Drug Administration (“FDA”) accepted the submission of Avenue’s’ New Drug Application (“NDA”) for IV Tramadol for review and assigned a Prescription Drug User Fee Act (“PDUFA”) date of October 10, 2020. In October 2020, Avenue announced that it had received a Complete Response Letter (“CRL”) from the FDA regarding Avenue’s NDA for IV Tramadol. The FDA held a Type A meeting with Avenue in November 2020 to discuss the issues outlined in the CRL. On February 12, 2021 Avenue resubmitted its NDA to the FDA for IV Tramadol. The NDA resubmission followed the receipt of the official minutes from Avenue’s Type A meeting with the FDA. The NDA resubmission included revised language relating to the proposed product label and a report relating to terminal sterilization validation. On February 26, 2021, Avenue received an acknowledgement letter from the FDA that Avenue’s resubmission of its NDA is a complete, class 1 response to the CRL, and a PDUFA goal date was set for April 12, 2021.
● In connection with the resubmission of Avenue’s NDA, InvaGen communicated to Avenue that it believes the proposed label for IV Tramadol under certain circumstances would constitute a Material Adverse Effect on the purported basis that the proposed label for IV Tramadol would make the product commercially unviable, and in addition that the indiciation that the FDA approves may fail to satisfy a condition precedent to InvaGen’s obligation to consummate the second stage closing of the Avenue SPMA. Avenue has notified InvaGen that it disagrees with InvaGen’s assertions. Nevertheless, InvaGen may seek to avoid its obligation to consummate the second stage closing under the Avenue SPMA, terminate the Avenue SPMA, and/or pursue monetary claims against Avenue and/or Fortress.
● Over the past several months, Avenue has communicated with InvaGen relating to InvaGen’s assertions. Nevertheless, InvaGen has communicated to Avenue its desire to consider all options on the proposed merger, including the option to not consummate the merger. This indicates that InvaGen may attempt to avoid its obligations under the Avenue SPMA to consummate the merger, terminate the Avenue SPMA, and/or pursue monetary claims against Avenue and/or Fortress. As a result, the possible timing and likelihood of the completion of the merger are uncertain, and, accordingly, there can be no assurance that such transaction will be completed on the expected terms, anticipated schedule, or at all. During the pendency of any dispute regarding these matters, Avenue may be, and so long as the Avenue SPMA remains in place Avenue will be, prohibited from engaging in a change-of-control transaction, selling its rights to IV Tramadol or effecting an equity or debt financing, in each case without the prior written consent of InvaGen.
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● If Avenue does not receive FDA approval for IV Tramadol by April 30, 2021, InvaGen will have the right to terminate the Avenue SPMA and will have no further obligations to consummate the second stage closing under the Avenue SPMA. In the event that InvaGen does not exercise its right to terminate the Avenue SPMA, certain restrictions relating to financings and strategic alternatives could exist through October 31, 2021, the time at which Avenue can terminate the Avenue SPMA. Regardless of whether the Avenue SPMA is terminated, InvaGen will retain certain rights pursuant to the Stockholder’s Agreement between Avenue and InvaGen. These rights exist as long as InvaGen maintains at least 75% of the Avenue common shares acquired in the first stage closing. The following are some of the actions that shall not be taken by Avenue without the prior written consent of InvaGen:
•
increase in authorized shares of Avenue’s capital stock;
•
any agreement or transaction that would adversely treat the holders of Avenue’s common shares as compared to the holders of Avenue’s Class A Preferred Shares;
•
issuance of any shares of Avenue’s capital stock or any securities convertible into, or other rights to acquire, shares of Avenue’s capital stock (including options, warrants or bonds), except for issuances to Avenue’s officers for services performed;
•
any transfer or license of any asset for less than fair market value, as determined by a recognized independent valuation firm agreed upon by Avenue and Invagen; or
•
entry into any transaction or agreement with any affiliate of Avenue’s (including the Company or its Affiliates).
CUTX-101 (Copper Histidinate injection for Menkes Disease)
● In January 2020, our partner company Cyprium Therapeutics, Inc. (“Cyprium”) announced that the FDA granted Rare Pediatric Disease Designation to Copper Histidinate, also referred to as CUTX-101, for the treatment of Menkes disease.
● In July 2020, the European Medicines Agency issued a positive opinion on the application for Orphan Drug Designation for CUTX-101. EMA Orphan Drug Designation provides companies with certain benefits and incentives, including clinical protocol assistance, differentiated evaluation procedures for Health Technology Assessments in certain countries, access to a centralized marketing authorization procedure valid in all EU member states, reduced regulatory fees and 10 years of market exclusivity. The FDA previously granted Orphan Drug and Fast Track Designations to CUTX-101 for the treatment of Menkes disease.
● In August 2020, Cyprium reported positive topline clinical efficacy results for CUTX-101. The study demonstrated statistically significant improvement in the primary endpoint of overall survival in Menkes disease patients who received early treatment with CUTX-101, compared to an untreated historical control, with a nearly 80% reduction in the risk of death (Hazard Ratio = 0.21, p<0.0001). Median survival for the early treatment cohort was 14.8 years (177.1 months) compared to 1.3 years (15.9 months) for the untreated historical control cohort.
● In December 2020, the FDA granted Breakthrough Therapy Designation to CUTX-101. Breakthrough Therapy Designation is intended to expedite the development and review of drugs for serious or life-threatening conditions. The criteria for Breakthrough Therapy Designation require preliminary clinical evidence that demonstrates the drug may have substantial improvement on at least one clinically significant endpoint over available therapy. A Breakthrough Therapy Designation conveys all of the fast-track program features, more intensive FDA guidance on an efficient drug development program, an organizational commitment involving senior managers and eligibility for rolling review and priority review.
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CAEL-101 (mAB for AL Amyloidosis)
● In March 2020, Caelum Biosciences, Inc. (“Caelum”) began dosing patients in its Phase 2 dose selection clinical trial of CAEL-101, a light chain fibril-reactive monoclonal antibody for the treatment of AL amyloidosis. Subsequently upon completed dosing, the Phase 2 study met its primary objective, supporting the initiation of two parallel Phase 3 studies that will enroll approximately 370 AL amyloidosis patients.
● In September 2020, Caelum announced the initiation of two Phase 3 studies of CAEL-101 for AL amyloidosis. Both Phase 3 studies are actively enrolling patients.
● CAEL-101 is currently in development at Caelum Biosciences, Inc., a company founded by Fortress, in collaboration with Alexion Pharmaceuticals, Inc.
● In December 2020, AstraZeneca (“AZ”) announced its intention to acquire Alexion, with the acquisition expected to close by the third quarter of 2021, as the acquisition is subject to approval by both AZ and Alexion shareholders, as well as certain regulatory approvals, share listing approvals, and other customary closing conditions. The acquisition of Alexion by AZ triggers the Change of Control clause in the Amended and Restated Development, Option and Stock Purchase Agreement entered into by and among Caelum, Alexion, the Company, and Caelum security holders, such that Alexion’s purchase option expires on the date that is six months after the closing of any Change of Control.
MB-107 and MB-207 (Ex vivo Lentiviral Therapies for X-linked Severe Combined Immunodeficiency (XSCID))
● In April 2020, our partner company Mustang Bio, Inc. (“Mustang”) announced that the European Medicines Agency (“EMA”) granted Advanced Therapy Medicinal Product (“ATMP”) classification to MB-107, a lentiviral gene therapy for the treatment of X-linked severe combined immunodeficiency (“XSCID”), also known as bubble boy disease.
● In May 2020, Mustang submitted an Investigational New Drug (“IND”) application with the FDA to initiate a registrational multi-center Phase 2 clinical trial of MB-107 in newly diagnosed infants with XSCID who are under the age of two. In response, the FDA identified CMC hold issues that Mustang satisfactorily addressed in a December 2020 submission to the Agency, and the CMC hold was removed in January 2021. The trial is expected to enroll 10 patients who, together with 15 patients enrolled in the current multicenter trial led by St. Jude Children’s Research Hospital, will be compared with 25 matched historical control patients who have undergone hematopoietic stem cell transplant (“HSCT”). The primary efficacy endpoint will be event-free survival. Mustang is targeting topline data from the trial in the second half of 2022.
● Mustang further expects to file an IND in the second quarter of 2021 for a registrational multi-center Phase 2 clinical trial of its lentiviral gene therapy in previously transplanted XSCID patients. This product is designated MB-207. Mustang anticipates enrolling 20 patients and is targeting topline data for this trial in the first half of 2023.
● In August 2020, Mustang announced that the FDA granted Rare Pediatric Disease Designations to MB-107, a lentiviral gene therapy for the treatment of XSCID in newly diagnosed infants, and MB-207 .
● In September 2020, Mustang announced that the FDA granted Orphan Drug Designations to MB-107 for the treatment of XSCID in newly diagnosed infants and to MB-207.
● In October 2020, Mustang in-licensed LentiBOOST™ technology from SIRION Biotech GmbH for the development of MB-207.
● In November 2020, Mustang signed an agreement with Minaris Regenerative Medicine GmbH to enable technology transfer and GMP clinical manufacturing of the MB-107 lentiviral gene therapy program in Europe.
● Also in November 2020, Mustang announced that the European Commission issued a positive opinion on its application for Orphan Drug Designation for the MB-107 lentiviral gene therapy for the treatment of XSCID.
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Cosibelimab (Anti-PD-L1 mAb for mCSCC and NSCLC)
● In January 2020, our partner company Checkpoint Therapeutics, Inc. (“Checkpoint”) announced confirmation of the registration path for cosibelimab in metastatic cutaneous squamous cell carcinoma (“mCSCC”) and the FDA feedback supports the plan to submit a Biologics license application (“BLA”) based on data from ongoing Phase 1 trial.
● In April 2020, Checkpoint announced the issuance of a composition of matter patent for cosibelimab by the USPTO providing protection through at least May 2038.
● In September 2020, positive interim results from the registration-enabling trial of cosibelimab in mCSCC were presented at the European Society for Medical Oncology Virtual Congress 2020. The e-poster presentation provided updated interim efficacy and safety results in mCSCC patients from the ongoing multicenter Phase 1 clinical trial. A 51.4% objective response rate and 13.5% complete response rate were observed. Median duration of response had not been reached yet, with 84.2% of responses ongoing and the longest response duration was 24 months (ongoing) at the time of analysis. Cosibelimab appeared to be safe and well-tolerated with a potentially favorable safety profile as compared to currently available anti-PD-1 therapies. Grade ≥3 treatment-related adverse events occurred in only 6 patients (5.3%). Checkpoint expects to report full topline results from the pivotal trial in the second half of 2021.
● In November 2020, Checkpoint announced the expansion of a long-term manufacturing partnership for cosibelimab with Samsung Biologics. Building upon an existing contract manufacturing agreement entered into in 2017, Samsung Biologics will provide additional commercial-scale drug substance manufacturing for cosibelimab.
● Also in November 2020, updated results from the previously untreated high PD-L1 expressing patients with advanced non-small cell lung cancer (“NSCLC”) cohort of the Phase 1 clinical trial of cosibelimab were announced at the Society for Immunotherapy of Cancer 35 th Anniversary Annual Meeting. A 44% objection response rate and 10.3 month median progression-free survival were observed. Cosibelimab appeared to be safe and well-tolerated with a potentially favorable safety profile as compared to currently available anti-PD-1 therapies. Grade ≥3 treatment-related adverse events occurred in only 6 patients (4.9%).
CK-101 (EGFR inhibitor for EGFR mutation-positive NSCLC)
● In November 2020, NeuPharma, Inc. commenced a Phase 3 clinical trial in China evaluating CK-101 in treatment-naïve locally advanced or metastatic NSCLC patients whose tumors have EGFR exon 19 deletion mutations. We intend to meet with the FDA to discuss the adequacy of the ongoing Phase 3 trial in China.
Early Stage Product Candidates
MB-102 (CD123-targeted CAR T cell therapy)
● In October 2020, Mustang announced that the first patient was dosed in a Mustang-sponsored, open-label, multicenter Phase 1/2 clinical trial to evaluate the safety and efficacy of MB-102 ( CD123-targeted CAR T cell therapy) in patients with relapsed or refractory blastic plasmacytoid dendritic cell neoplasm (“BPDCN”).
MB-101 (IL13Rα2-targeted CAR T cell therapy)
● In December 2020, Mustang announced that a Phase 1 single-center, two-arm clinical trial was initiated to establish the safety and feasibility of administering MB-101 to patients with leptomeningeal brain tumors (e.g., glioblastoma, ependymoma or medulloblastoma).
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MB-105 (PSCA-targeted CAR T cell therapy)
● In October 2020, Mustang announced that initial Phase 1 data on MB-105, a prostate stem cell antigen (“PSCA”) -targeted CAR T administered systemically to patients with PSCA-positive metastatic castration-resistant prostate cancer (“mCRPC”), were presented by City of Hope at the virtual 27 th Annual Prostate Cancer Foundation Scientific Retreat. A 73-year-old male patient with PSCA-positive mCRPC was treated with MB-105 and lymphodepletion (a standard CAR T pre-conditioning regimen) after failing eight prior therapies. On day 28 of the patient’s treatment, MB-105 demonstrated a 94% reduction in prostate-specific antigen, near complete reduction of measurable soft tissue metastasis by computerized tomography, and improvement in bone metastases by magnetic resonance imaging.
MB-106 (CD20-targeted CAR T cell therapy)
● In February 2020, Mustang announced that the first subject treated with the optimized MB-106 (CD20-targeted, autologous CAR T cell therapy) manufacturing process, developed in collaboration between Mustang and the Fred Hutchinson Cancer Research Center, achieved a complete response at the lowest starting dose in an ongoing Phase 1/2 clinical trial. The trial is evaluating the safety and efficacy of MB-106 in subjects with relapsed or refractory B-cell non-Hodgkin lymphomas and chronic lymphocytic leukemia.
● In December 2020, Mustang announced positive interim Phase 1/2 data on MB-106 for patients with relapsed or refractory B-cell non-Hodgkin lymphomas, which were presented at the 62nd American Society of Hematology (ASH) Annual Meeting. Data presented showed a favorable safety profile and clinical activity, with an 89% overall response rate and 44% complete response rate in patients treated with the modified cell manufacturing process.
MB-108 (HSV-1 Oncolytic Virus C134)
● In October 2020, the Phase 1 trial of MB-108 was put on hold due to toxicity at the highest dose level. The University of Alabama at Birmingham, the clinical trial site for the Phase 1 trial, expects FDA clearance in the first half of 2021 in order to resume enrolling patients at a lower dose level.
ONCOlogues (proprietary platform technology using PNA oligonucleotides)
● In May 2020, Oncogenuity entered into an exclusive worldwide licensing agreement with Columbia University to develop novel oligonucleotides for the treatment of genetically driven cancers. The proprietary platform produces oligomers, known as “ONCOlogues,” which are capable of binding gene sequences 1,000 times more effectively than complementary native DNA.
● ONCOlogues invade a DNA double helix and displace native mutated strands. This may prevent the mRNA that antisense binds to from ever being created. It is active higher upstream than traditional antisense approaches, as well as potentially more potent and broader in its utility.
● In addition, Oncugenuity is exploring the potential of the platform to treat novel coronaviruses, such as COVID-19.
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General Corporate
● In February 2020, we closed an underwritten public offering of our 9.375% Series A Cumulative Redeemable Perpetual Preferred Stock for gross proceeds of $14.4 million.
● In May 2020, we closed an additional underwritten public offering of our 9.375% Series A Cumulative Redeemable Perpetual Preferred Stock for gross proceeds of $11.5 million.
● In June 2020, we announced the Company had been added to the Russell 3000 index.
● Also in June 2020, Mustang completed an underwritten public offering in which it sold its’ common stock for gross proceeds of approximately $37.2 million.
● In August 2020, we closed an additional underwritten public offering of our 9.375% Series A Cumulative Redeemable Perpetual Preferred Stock for gross proceeds of $13.2 million and announced a $60 million loan agreement with funds managed by Oaktree Capital Management to refinance existing indebtedness.
● In September 2020, we closed a private offering of Cyprium’s 9.375% Series A Cumulative Redeemable Perpetual Preferred Stock for gross proceeds of $8.0 million.
● Also in September 2020, Checkpoint completed an underwritten public offering in which it sold its’ common stock for gross proceeds of approximately $20.5 million.
Critical Accounting Policies and Use of Estimates
See Note 2 to the Consolidated Financial Statements.
Results of Operations
General
For the year ended December 31, 2020 we generated $45.6 million of net revenue $44.5 million relates to the sale of Journey branded and generic products and $1.1 million of revenue is in connection with Checkpoint’s collaborative agreements with TGTX, a related party. At December 31, 2020, we had an accumulated deficit of $482.8 million primarily as a result of research and development expenses, purchases of in-process research and development and selling, general and administrative expenses. While we may in the future generate revenue from a variety of sources, including license fees, milestone payments, research and development payments in connection with strategic partnerships and/or product sales, our current non-marketed product candidates are at various stages of development and may never be successfully developed or commercialized. Accordingly, we expect to continue to incur substantial losses from operations for the foreseeable future and there can be no assurance that we will ever generate significant revenues.
We had $14.6 million of costs of goods sold in connection with the sale of JMC branded and generic products for the year ended December 31, 2020.
Research and Development Expenses
Research and development costs primarily consist of personnel related expenses, including salaries, benefits, travel, and other related expenses, stock-based compensation, payments made to third parties for licenses and milestones, costs related to in-licensed products and technology, payments made to third party contract research organizations for preclinical and clinical studies, investigative sites for clinical trials, consultants, the cost of acquiring and manufacturing clinical trial materials, costs associated with regulatory filings and patents, laboratory costs and other supplies.
Also included in research and development is the total purchase price for licenses acquired during the period.
For the years ended December 31, 2020 and 2019, research and development expenses were approximately $61.3 million and $75.2 million, respectively. Additionally, during the years ended December 31, 2020 and 2019, we expensed approximately $2.8 million and $6.1 million, respectively, in costs related to the acquisition of licenses.
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The table below provides a summary of research and development costs associated with the development of our licenses by entity, for the years ended December 31, 2020 and 2019:
Year Ended
December 31,
% of total
($ in thousands)
2020
2019
2020
2019
Research & Development
Fortress
$
1,725
$
2,653
3
%
4
%
Partner Companies:
Avenue
2,866
22,194
5
%
29
%
Checkpoint
11,734
16,815
19
%
22
%
Mustang
36,987
29,792
60
%
40
%
Other 1
7,963
3,782
13
%
5
%
Total Research & Development Expense
$
61,275
$
75,236
100
%
100
%
Note 1: Includes the following partner companies: Aevitas, Baergic, Cellvation, Cyprium, Helocyte, Oncogenuity and Tamid Bio, Inc. (a Fortress partner company that has since discontinued operations) (“Tamid”).
Noncash, stock-based compensation expense included in research and development for the years ended December 31, 2020 and 2019, was $3.2 million and $2.8 million, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist principally of personnel related costs, costs required to support the marketing and sales of our commercialized products, professional fees for legal, consulting, audit and tax services, rent and other general operating expenses not otherwise included in research and development expenses. For the years ended December 31, 2020 and 2019, selling, general and administrative expenses were $61.2 million and $55.6 million, respectively. Stock based compensation expense included in selling, general and administrative expenses in 2020 and 2019 was $10.3 million and $10.4 million, respectively.
The table below provides a summary by entity of selling, general and administrative expenses for the years ended December 31, 2020 and 2019, respectively:
Year Ended
December 31,
% of Total
($ in thousands)
2020
2019
2020
2019
Selling, General & Administrative
Fortress
$
21,350
$
18,320
35
%
33
%
Partner Companies:
Avenue
2,347
3,071
4
%
6
%
Checkpoint
6,517
5,996
11
%
11
%
JMC 1
22,100
19,421
36
%
35
%
Mustang
6,810
7,658
11
%
14
%
Other 2
2,042
1,124
3
%
1
%
Total Selling, General & Administrative Expense
$
61,166
$
55,590
100
%
100
%
Note 1: Includes sales force costs for the year ended December 31, 2020 and 2019 of $10.4 million and $10.7 million, respectively.
Note 2: Includes the following partner companies: Aevitas, Baergic, Cellvation, Cyprium, Helocyte, Oncogenuity and Tamid.
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Comparison of Years Ended December 31, 2020 and 2019
Year Ended December 31,
Change
($ in thousands)
2020
2019
$
%
Revenue
Product revenue, net
$
44,531
$
34,921
$
9,610
28
%
Revenue – related party
1,068
1,708
(640)
(37)
%
Net revenue
45,599
36,629
8,970
24
%
Operating expenses
Cost of goods sold – product revenue
14,594
10,532
4,062
39
%
Research and development
61,275
75,236
(13,961)
(19)
%
Research and development – licenses acquired
2,834
6,090
(3,256)
(53)
%
Selling, general and administrative
61,166
55,590
5,576
10
%
Total operating expenses
139,869
147,448
(7,579)
(5)
%
Loss from operations
(94,270)
(110,819)
16,549
(15)
%
Other income (expense)
Interest income
1,518
2,559
(1,041)
(41)
%
Interest expense and financing fee
(15,326)
(11,849)
(3,477)
29
%
Change in fair value of derivative liability
(1,189)
(27)
(1,162)
4304
%
Change in fair value of investment
6,418
—
6,418
100
%
Gain on deconsolidation of Caelum
—
18,476
(18,476)
(100)
%
Total other (expense) income
(8,579)
9,159
(17,738)
(194)
%
Income before income tax expense
(102,849)
(101,660)
(1,189)
1
Income tax expense
136
—
136
100
Net loss
(102,985)
(101,660)
(1,325)
1
%
Less: net loss attributable to non-controlling interest
56,459
61,700
(5,241)
(8)
%
Net loss attributable to common stockholders
$
(46,526)
$
(39,960)
$
(6,566)
16
%
For the year ended December 31, 2020, $1.1 million of revenue – related party was in connection with Checkpoint’s collaborative agreements with TGTX. The net increase in revenue of $9.0 million or 24% is due to the expansion of Journey’s marketed products, as well as overall sales growth, which resulted in a product revenue increase of $9.6 million offset by a decrease in revenue from a related party of $0.6 million.
Cost of goods sold increased by $4.1 million or 39% due to the growth in Journey’s product sales.
Research and development expenses decreased $14.0 million, or 19%, from the year ended December 31, 2019 to the year ended December 31, 2020. The following table shows research and development spending for Fortress and each partner company:
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Year Ended December 31,
Change
($ in thousands)
2020
2019
$
%
Research & Development
Stock-based compensation
Fortress
$
808
$
605
$
203
34
%
Partner Companies:
Avenue
274
616
(342)
(56)
%
Checkpoint
617
707
(90)
(13)
%
Mustang
1,437
874
563
64
%
Other 1
36
9
27
300
%
Sub-total stock-based compensation expense
3,172
2,811
361
13
%
Other Research & Development
Fortress
917
2,048
(1,131)
(55)
%
Partner Companies:
Avenue
2,592
21,578
(18,986)
(88)
%
Checkpoint
11,117
16,108
(4,991)
(31)
%
Mustang
35,550
28,918
6,632
23
%
Other 1
7,927
3,773
4,154
110
%
Total Research & Development Expense
$
61,275
$
75,236
$
(13,961)
(19)
%
Note 1: Includes the following partner company: Aevitas, Baergic, Cellvation, Cyprium, Helocyte, Oncogenuity and Tamid.
The increase in stock-based compensation at both Fortress and Mustang is due to new equity grants to key employees and consultants in 2020, while the decrease in both Avenue and Checkpoint’s stock-based compensation is due to the effect of fully vested equity grants to key employees and consultants.
The decrease in Fortress research and development spending is due to the lower research and development headcount in 2020 as compared to 2019. Avenue’s decrease in research and development spending is attributable to the decrease in clinical trial costs associated with the completion of both the abdominoplasty study and the safety study in the first half of 2019 as well as the costs associated with an NDA submission in December 2019. Checkpoint’s decrease in research and development spending is attributable to the decreased manufacturing costs for cosibelimab and clinical trial expense for CK-101. Mustang’s increase in research and development spending is attributable to increased headcount, lentiviral manufacturing costs and sponsored research for several programs, including XSCID. The increase in “Other” is attributable to costs incurred by Cyprium as it prepares to file its rolling NDA submission for CUTX-101 in 2021 and Oncogenuity for its sponsored research costs related to the continued development of novel oligonucleotides for the treatment of genetically driven diseases.
Selling, general and administrative expenses increased $5.6 million, or 10%, from the year ended December 31, 2019 to the year ended December 31, 2020. The following table shows selling, general and administrative spending for Fortress and by each partner company:
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Year Ended December 31,
Change
($ in thousands)
2020
2019
$
%
Selling, General & Administrative
Stock-based compensation
Fortress
$
5,976
$
4,707
$
1,269
27
%
Partner Companies:
Avenue
436
1,223
(787)
(64)
%
Checkpoint
2,163
2,414
(251)
(10)
%
Mustang
1,550
1,790
(240)
(13)
%
Other 2
154
243
(89)
(37)
%
Sub-total stock-based compensation expense
10,279
10,377
(98)
(1)
%
Other Selling, General & Administrative
Fortress
15,374
13,613
1,761
13
%
Partner Companies:
Avenue
1,911
1,848
63
3
%
Checkpoint
4,354
3,582
772
22
%
JMC 1
22,100
19,420
2,680
14
%
Mustang
5,260
5,868
(608)
(10)
%
Other 2
1,888
882
1,006
114
%
Total Selling, General & Administrative Expense
$
61,166
$
55,590
$
5,576
10
%
Note 1: Includes sales force costs for the year ended December 31, 2020 and 2019 of $10.4 million and $10.7 million, respectively.
Note 2: Includes the following partner companies: Aevitas, Baergic, Cellvation, Cyprium, Helocyte, Oncogenuity and Tamid.
For the year ended December 31, 2020, the increase in selling, general and administrative expenses of $5.6 million or 10% is primarily attributable to increased headcount-related costs for Fortress and Checkpoint as well as an increase in JMC’s sales and marketing costs due to the increased product portfolio and costs related to the launch of Ximino, an oral acne treatment. Mustang’s decrease is due to less legal costs and less professional fees related to strategic marketing. The increase in “Other” is driven by the increase in professional fees incurred by Cyprium and Oncogenuity.
Total other income (expense) changed $17.7 million, or 194%, from income of $9.2 million for the year ended December 31, 2019 to expense of $8.6 million for the year ended December 31, 2020, primarily due to the $18.5 million gain on the deconsolidation of Caelum recognized in 2019 and an increase of $3.5 million in interest expense and financing fees due to the new credit facility transaction with Oaktree Fund Administration, LLC.
Net loss attributable to non-controlling interests decreased $5.2 million, or 8%, from the year ended December 31, 2019 to the year ended December 31, 2020. This decrease reflects the partner companies’ share of net loss.
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Liquidity and Capital Resources
Components of cash flows from publicly-traded partner companies are comprised of:
For the Year Ended December 31, 2020
($ in thousands)
Fortress 1
Avenue
Checkpoint
Mustang
Total
Statement of cash flows data:
Total cash (used in)/provided by:
Operating activities
$
(25,199)
$
(4,613)
$
(16,551)
$
(37,319)
$
(83,682)
Investing activities
(1,752)
(1,000)
—
(4,412)
(7,164)
Financing activities
63,042
—
31,246
78,122
172,410
Net increase (decrease) in cash and cash equivalents and restricted cash
$
36,091
$
(5,613)
$
14,695
$
36,391
$
81,564
For the Year Ended December 31, 2019
($ in thousands)
Fortress 1
Avenue
Checkpoint
Mustang
Total
Statement of cash flows data:
Total cash (used in)/provided by:
Operating activities
$
(13,748)
$
(26,259)
$
(21,373)
$
(33,581)
$
(94,961)
Investing activities
6,188
—
—
13,909
20,097
Financing activities
23,810
32,333
25,455
65,116
146,714
Net increase in cash and cash equivalents and restricted cash
$
16,250
$
6,074
$
4,082
$
45,444
$
71,850
Note 1: Includes Fortress and non-public subsidiaries.
Operating Activities
Net cash used in operating activities decreased $11.3 million from the year ended December 31, 2019 to the year ended December 31, 2020. The decrease is primarily due to the decrease in gain from the deconsolidation of Caelum of $18.5 million recognized in 2019, offset by the increase in the fair value of investments of $6.4 million as well as the increase in net loss of $1.3 million for the year ended December 31, 2020.
Investing Activities
Net cash provided by investing activities for the year ended December 31, 2019 of $20.1 million decreased $27.3 million to net cash used in investing activities of $7.2 million for the year ended December 31, 2020. The change is primarily due to cash provided by discontinued investing activities of $13.1 million received in 2019 related to the sale of National, as well as the redemption of $22.6 million of certificates of deposit in 2019, offset by the purchase of $5.0 million of certificates of deposit, also in 2019. Cash used to purchase intangible assets decreased in 2020 by $1.2 million, cash used to purchase property and equipment and research and development licenses also decreased for the year ended December 31, 2020, by $0.4 million and $0.6 million, respectively.
Financing Activities
Net cash provided by financing activities was $172.4 million for the year ended December 31, 2020, compared to $146.7 million of net cash provided by financing activities for the year ended December 31, 2019, an increase of $25.7 million. The increase is primarily due to an increase of $33.0 million in net proceeds from the issuance of Series A preferred stock, $26.8 million increase in proceeds from the Company’s at-the-market offering, $42.0 million increase in partner companys’ at-the-market offering, and the $60 million gross proceeds from the Oaktree Note. Offsetting these financing activities was the decrease in proceeds from partner companies’ sale of stock of $28.5 million, payment of partner company’s Horizon Notes of $15.8 million, and repayment of $28.4 million of 2017 Subordinated Note Financing, $21.7 million of 2018 Venture Notes, $9.0 million of 2019 Notes, and $14.9 million for the payoff of the IDB Note.
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We fund our operations through cash on hand, the sale of debt and third-party financings. At December 31, 2020, we had cash and cash equivalents of $233.4 million of which $78.8 million relates to Fortress, $40.8 million relates to Checkpoint, $97.8 million relates to Mustang, $3.1 million relates to Avenue, and $12.9 million relates to the remaining partner companies. Restricted cash of $1.6 million is comprised of: $0.6 million secures a letter of credit used as a security deposit for the New York, NY lease that became effective on October 3, 2014, $1.0 million secures the Worcester, Massachusetts lease signed by Mustang that became effective on October 27, 2017, and $0.1 million securing the Waltham, Massachusetts lease signed by Fortress that became effective in October 2015.
On June 28, 2019, Fortress entered into an At Market Issuance Sales Agreement (“2019 Common ATM”), with Cantor Fitzgerald & Co., Oppenheimer & Co., Inc., H.C. Wainwright & Co. Inc., Jones Trading Institutional Services LLC and B. Riley, as selling agents, governing potential sales of the Company’s common stock. For the year ended December 31, 2020, the Company issued approximately 17.4 million shares of common stock for gross proceeds of $47.5 million at an average selling price of $2.73. Under the 2019 Common ATM, the Company pays the agents a commission rate of up to 3.0% of the gross proceeds from the sale of any shares of common stock, and in connection with these sales, with respect to the year ended December 31, 2020, Fortress paid aggregate fees of approximately $1.4 million.
On February 14, 2020, the Company announced the closing of an underwritten public offering, whereby it sold 625,000 shares of its 9.375% Series A Cumulative Redeemable Perpetual Preferred Stock (Nasdaq: FBIOP) (the "Preferred Stock"), (plus a 45-day option to purchase up to an additional 93,750 shares, which was exercised in February 2020) at a price of $20.00 per share for gross proceeds of approximately $14.4 million, before deducting underwriting discounts and commissions and offering expenses of approximately $1.3 million.
On May 29, 2020, the Company closed on an underwritten public offering whereby it sold 555,556 shares of its Preferred Stock, (plus a 45-day option to purchase up to an additional 83,333 shares, which was exercised in May 2020) at a price of $18.00 per share for gross proceeds of approximately $11.5 million, before deducting underwriting discounts and commissions and offering expenses of approximately $1.1 million.
On August 26, 2020, the Company closed on an underwritten public offering whereby it sold 666,666 shares of its Preferred Stock, (plus a 45-day option to purchase up to an additional 66,666 shares, which was exercised in August 2020) at a price of $18.00 per share for gross proceeds of approximately $13.2 million, before deducting underwriting discounts and commissions and offering expenses of approximately $1.1 million.
During the year ended December 31, 2020, Checkpoint sold a total of 5,104,234 shares of common stock under an At-the-Market Issuance Sales Agreement for aggregate total gross proceeds of approximately $12.8 million at an average selling price of $2.50 per share, resulting in net proceeds of approximately $12.4 million after deducting commissions and other transaction costs.
In September 2020, Checkpoint completed an underwritten public offering in which it sold 7,321,429 shares of its common stock at a price of $2.80 per share for gross proceeds of approximately $20.5 million. Total net proceeds from the offering were approximately $18.9 million, net of underwriting discounts and offering expenses of approximately $1.6 million. The shares were sold under the Checkpoint 2017 S-3.
From January 1, 2021 through March 5, 2021 Checkpoint issued approximately 3.2 million shares of common stock for gross proceeds of $12.3 million at an average selling price of $3.88 under the Checkpoint ATM.
During the year ended December 31, 2020, Mustang issued approximately 17.6 million shares of common stock at an average price of $3.40 per share for gross proceeds of $59.8 million under the Mustang ATM. In connection with these sales, Mustang paid aggregate fees of approximately $1.1 million for net proceeds of approximately $58.7 million.
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On June 11, 2020, Mustang entered into an underwriting agreement (the “Mustang Underwriting Agreement”) with Cantor Fitzgerald & Co., as representative of the underwriters named therein (each, an “Underwriter” and collectively with Cantor Fitzgerald & Co., the “Underwriters”). In connection with the Mustang Underwriting Agreement, Mustang issued 10,769,231 shares of common stock (plus a 30-day option to purchase up to an additional 1,615,384 shares of common stock, of which 686,373 were exercised) at a price of $3.25 per share for gross proceeds of approximately $37.2 million, before deducting underwriting discounts and commissions and offering expenses. In connection with the public offering, Mustang paid aggregate fees of approximately $2.4 million for net proceeds of approximately $34.8 million. The shares were sold under our S-3 registrations filed with the Securities and Exchange Commission.
From January 1, 2021 through March 18, 2021 Mustang issued approximately 10.6 million shares of common stock for gross proceeds of $44.9 million at an average selling price of $4.24 under the Mustang ATM.
In 2020, Fortress raised $0.3 million from the issuance of common shares in connection with the ESPP, compared to $0.1 million raised from the issuance of common shares in connection with the ESPP in 2019 .
We will require additional financing to fully develop and prepare regulatory filings and obtain regulatory approvals for our existing and new product candidates, fund operating losses, and, if deemed appropriate, establish or secure through third parties manufacturing for our potential products, and sales and marketing capabilities. We have funded our operations to date primarily through the sale of equity and debt securities. We believe that our current cash and cash equivalents is sufficient to fund operations for at least the next twelve months. Our failure to raise capital as and when needed would have a material adverse impact on our financial condition and our ability to pursue our business strategies. We may seek funds through equity or debt financings, joint venture or similar development collaborations, the sale of partner companies (such as the stock purchase of Caelum by Alexion that would result from option exercise or the contingent merger of Avenue with InvaGen), royalty financings, or through other sources of financing.
In addition to the foregoing, based on the Company’s current assessment, the Company does not expect any material impact on its long-term development timeline and its liquidity due to the worldwide spread of the COVID-19 virus. However, the Company is continuing to assess the effect on its operations by monitoring the spread of COVID-19 and the actions implemented to combat the virus throughout the world.
Off-Balance Sheet Arrangements
We do not have any financings or other relationships with unconsolidated entities or other persons.
Recently Issued Accounting Pronouncements
See Note 2 of Notes to the Consolidated Financial Statements for a discussion of recent accounting standards and pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item is set forth in the consolidated financial statements and notes thereto beginning at page F-1 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.