Item 9A. Controls and Procedures
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
Controls and Procedures
Disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) are designed only to provide reasonable assurance that they will meet their objectives. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness, as of December 31, 2021, of the design and operation of our disclosure controls and procedures, as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting refers to the process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
(1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of our assets that could have a material effect on the financial statements.
Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
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Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2021. In making the assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013) . Based on the results of this assessment, management (including our Chief Executive Officer and our Chief Financial Officer) has concluded that, as of December 31, 2021, our internal control over financial reporting was effective.
Changes in Internal Controls over Financial Reporting.
In September 2021, a partner company email account was compromised by a third-party impersonator and payments intended for a vendor, approximating $9.5 million, were fraudulently re-directed into an individual bank account controlled by this third-party impersonator. The impersonator had taken a number of steps to deceive our employees and reduce the likelihood of detection. As a result of the foregoing, we identified a material weakness due to our internal controls having not been adequately designed to prevent or timely detect unauthorized cash disbursements.
Given the identification of the material weakness during September 2021, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2021, our disclosure controls and procedures were not effective at the reasonable assurance level. In light of the above incident, our management took immediate action to remediate the material weakness, including enhancing and formalizing cash disbursement controls to prevent and timely detect unauthorized cash disbursements and significantly enhancing our information technology infrastructure and security measures. Subsequent to the breach, management has remediated our controls and as of December 31, and we believe this material weakness has been remediated.
Except for the remediation efforts described above taken to address the material weakness, there were no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2022 Annual Meeting of Stockholders.
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2022 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2022 Annual Meeting of Stockholders.
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Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2022 Annual Meeting of Stockholders.
Item 14. Principal Accounting Fees and Services
The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2022 Annual Meeting of Stockholders.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Financial Statements.
The following financial statements are filed as part of this report:
Reports of Independent Registered Public Accounting Firms (KPMG LLP, Short Hills, NJ; PCAOB No.: 185)
F-2
Reports of Independent Registered Public Accounting Firms (BDO USA, Boston, MA; PCAOB No.: 243)
F-4
Consolidated Balance Sheets
F-5
Consolidated Statements of Operations
F-6
Consolidated Statements of Changes in Stockholders’ Equity
F-7
Consolidated Statements of Cash Flows
F-8
Notes to the Consolidated Financial Statements
F-11 – F-56
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(b) Exhibits.
Exhibit
Number
Exhibit Title
3.1
Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of the Registrant’s Form 10 (file No. 000-54463) filed with the SEC on July 15, 2011).
3.2
First Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.2 of the Registrant’s Form 10 (file No. 000-54463) filed with SEC on July 15, 2011) .
3.3
Second Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.7 of the Registrant’s Current Report on Form 8-K (file No. 001-35366) filed with the SEC on October 31, 2013.
3.4
Second Certificate of Amendment of Amended and Restated Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.8 of the Registrant’s Annual Report on Form 10-K (file No. 001-35366) filed with the SEC on March 14, 2014) .
3.5
Third Certificate of Amendment of Amended and Restated Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.9 of the Registrant’s Current Report on Form 8-K (file No. 001-35366) filed with the SEC on April 27, 2015) .
3.6
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Fortress Biotech, Inc (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K (file No. 001-35366) filed with the SEC on June 19, 2020).
3.7
Certificate of Amendment to the Certificate of Designations of Rights and Preferences of the Fortress Biotech, Inc. 9.375% Series A Cumulative Redeemable Perpetual Preferred Stock under the Amended and Restated Certificate of Incorporation of Fortress Biotech, Inc (incorporated by reference to Exhibit 3.2 of the Registrant’s Current Report on Form 8-K (file No. 001-35366) filed with the SEC on June 19, 2020).
3.8
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Fortress Biotech, Inc. dated June 23, 2021, incorporated herein by reference to the Form 8-K filed on June 23, 2021 (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K (file No. 001-35366) filed with the SEC on June 23, 2020) .
4.1
Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the Registrant’s Form 10 (file No. 000-54463) filed with the SEC on July 15, 2011) .
4.2
Certificate of Designation of Rights and Preferences 9.375% Series A Cumulative Redeemable Perpetual Preferred Stock (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K (file No. 001-35366) filed with the SEC on November 7, 2017) .
4.3
Description of Securities of Fortress Biotech, Inc (incorporated by reference to Exhibit 4.3 of the Registrant’s Annual Report on Form 10-K (file No. 001-35366) filed with the SEC on March 31, 2021).
10.2
Form of Stock Option Award Agreement (incorporated by reference to Exhibit 10.9 of the Registrant’s Form 10 (file No. 001-54463) filed with the SEC on July 15, 2011). #
10.3
Amended and Restated Consulting Agreement, entered into as of January 1, 2019, by and between the Registrant and Eric Rowinsky (incorporated by reference to Exhibit 10.3 of the Registrant’s Annual Report on Form 10-K (file No. 001-35366) filed with the SEC on March 18, 2019). #
10.4
Form of Indemnification Agreement by and between the Registrant and its officers and directors (incorporated by reference to Exhibit 10.25 of the Registrant’s Form 10 (file No. 000-54463) filed with the SEC on August 24, 2011).
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Exhibit
Number
Exhibit Title
10.5
Fortress Biotech, Inc. 2012 Employee Stock Purchase Plan (incorporated by reference to Annex A of the Registrant’s Schedule 14A (file No. 001-35366) filed with the SEC on July 13, 2012). #
10.6
Restricted Stock Issuance Agreement, dated as of February 2, 2014, by and between the Registrant and Michael S. Weiss (incorporated by reference to Exhibit 10.55 of the Registrant’s Current Report on Form 8-K (file No. 001-35366) filed with the SEC on February 26, 2014). #
10.7
Restricted Stock Issuance Agreement, dated as of December 19, 2013, by and between the Registrant and Michael S. Weiss (incorporated by reference to Exhibit 10.57 of the Registrant’s Annual Report on Form 10-K (file No. 001-35366) filed with the SEC on March 14, 2014).
10.8
Restricted Stock Issuance Agreement, dated as of December 19, 2013, by and between the Registrant and Lindsay A. Rosenwald, M.D (incorporated by reference to Exhibit 10.58 of the Registrant’s Annual Report on Form 10-K (file No. 001-35366) filed with the SEC on March 14, 2014).#
10.9
Form of Coronado Biosciences, Inc. 2013 Stock Incentive Plan Award Agreement (2013 Stock Incentive Plan) (incorporated by reference to Exhibit 10.60 of the Registrant’s Form S-8 (file No. 333-194588) filed with the SEC on March 14, 2014). #
10.10
Coronado Biosciences, Inc. Deferred Compensation Plan for Directors, dated March 12, 2015 (incorporated by reference to Exhibit 10.67 of the Registrant’s Current Report on Form 8-K (file No. 001-35366) filed with the SEC on March 18, 2015). #
10.11
Fortress Biotech, Inc. 2013 Stock Incentive Plan, as amended (incorporated by reference to Appendix A of the Registrant’s Schedule 14-A (file No. 001-35366) filed with the SEC on June 4, 2015). #
10.12
Restricted Stock Unit Award Agreement between Fortress Biotech, Inc. and George Avgerinos effective July 15, 2015 (incorporated by reference to Exhibit 10.70 of the Registrant’s Current Report on Form 8-K (file No. 001-35366) filed with the SEC on July 17, 2015).#
10.13
Form of Common Stock Purchase Warrant in favor of National Securities Corporation (incorporated by reference to Exhibit 10.35 of the Registrant’s Quarterly Report on Form 10-Q (file No. 001-35366) filed with the SEC on May 10, 2017) .
10.14
Fortress Biotech, Inc. 2012 Employee Stock Purchase Plan, as amended (incorporated by reference to Exhibit 10.38 of the Registrant’s Current Report on Form 8-K (file No. 001-35366) filed with the SEC on June 12, 2017) .
10.15
Fortress Biotech, Inc. Amended and Restated Long-Term Incentive Plan (incorporated by reference to Exhibit 10.39 of the Registrant’s Current Report on Form 8-K (file No. 001-35366) filed with the SEC on June 12, 2017) .
10.16
Stock Purchase and Merger Agreement, dated as of November 12, 2018, by and between Avenue Therapeutics, Inc., InvaGen Pharmaceuticals Inc. and Madison Pharmaceuticals Inc (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (file No. 001-35366) filed with the SEC on November 16, 2018).
10.17
Stockholders Agreement, dated as of November 12, 2018, by and between Fortress Biotech, Inc., Avenue Therapeutics, Inc., Dr. Lucy Lu, M.D. and InvaGen Pharmaceuticals Inc (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K (file No. 001-35366) filed with the SEC on November 16, 2018).
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Exhibit
Number
Exhibit Title
10.18
Credit Agreement, dated as of November 12, 2018, by and between Avenue Therapeutics, Inc. and InvaGen Pharmaceuticals Inc (incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K (file No. 001-35366) filed with the SEC on November 16, 2018).
10.19
Guaranty, dated as of November 12, 2018, by and between Fortress Biotech, Inc. and InvaGen Pharmaceuticals Inc (incorporated by reference to Exhibit 10.4 of the Registrant’s Current Report on Form 8-K (file No. 001-35366) filed with the SEC on November 16, 2018).
10.20
Voting and Support Agreement, dated as of November 12, 2018, by and between Fortress Biotech, Inc., Avenue Therapeutics, Inc., Dr. Lucy Lu, M.D. and InvaGen Pharmaceuticals Inc (incorporated by reference to Exhibit 10.5 of the Registrant’s Current Report on Form 8-K (file No. 001-35366) filed with the SEC on November 16, 2018).
10.21
Waiver Agreement, dated as of November 12, 2018, by and between Fortress Biotech, Inc., Avenue Therapeutics, Inc. and InvaGen Pharmaceuticals Inc (incorporated by reference to Exhibit 10.6 of the Registrant’s Current Report on Form 8-K (file No. 001-35366) filed with the SEC on November 16, 2018).
10.22
Restrictive Covenant Agreement, dated as of November 12, 2018, by and between Fortress Biotech, Inc. and InvaGen Pharmaceuticals Inc (incorporated by reference to Exhibit 10.7 of the Registrant’s Current Report on Form 8-K (file No. 001-35366) filed with the SEC on November 16, 2018).
10.23
Indemnification Agreement, dated as of November 12, 2018, by and between Fortress Biotech, Inc. and InvaGen Pharmaceuticals Inc (incorporated by reference to Exhibit 10.8 of the Registrant’s Current Report on Form 8-K (file No. 001-35366) filed with the SEC on November 16, 2018).
10.24
Development, Option and Stock Purchase Agreement by and among Caelum Biosciences, Inc., Alexion Pharmaceuticals, Inc., Fortress Biotech, Inc., and the several shareholders of Caelum Biosciences, Inc., dated January 30, 2019 (incorporated by reference to the Registrant’s Current Report on Form 8-K (file No. 001-35366) filed with the SEC on January 31, 2019) .*
10.25
Amendment to the Fortress Biotech, Inc. 2013 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (file No. 001-35366) filed with the SEC on June 19, 2020) .#
10.26
Credit Agreement entered into by and among Fortress Biotech, Inc. the lenders from time to time party thereto, and Oaktree Fund administration, LLC on August 27, 2020 (incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q (file No. 001-35366) filed with the SEC on November 9, 2020) .
16.1
Letter from BDO USA, LLP to the Securities and Exchange Commission dated September 22, 2021, incorporated by reference to the Form 8-K filed on September 24, 2021 (incorporated by reference to Exhibit 16.1 of the Registrant’s Current Report on Form 8-K (file No. 001-35366) filed with the SEC on September 24, 2021).
21.1
Subsidiaries of the Registrant. *
23.1
Consent Independent Registered Accounting Firm (KPMG LLP, Short Hills, NJ). *
23.2
Consent Independent Registered Accounting Firm ( BDO USA, LLP, Boston MA). *
24.1
Power of Attorney (included on the signature page of this Form 10-K).
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Exhibit
Number
Exhibit Title
31.1
Certification of Chairman, President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
31.2
Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
32.1
Certification of Chairman, President and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
32.2
Certification of the Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
101.INS
Inline XBRL Instance Document.*
101.SCH
Inline XBRL Taxonomy Extension Schema Document.*
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.*
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.*
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.*
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.*
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).*
# Management contract or compensatory plan.
* Filed herewith
Item 16. Form 10-K Summary
None.
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FORTRESS BIOTECH, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firms ( KPMG LLP , Short Hills, NJ ; PCAOB No.: 185 )
F-2
Reports of Independent Registered Public Accounting Firms (BDO USA LLP, Boston, MA; PCAOB No.: 243)
F-4
Consolidated Balance Sheets
F-5
Consolidated Statements of Operations
F-6
Consolidated Statements of Changes in Stockholders’ Equity
F-7
Consolidated Statements of Cash Flows
F-8
Notes to the Consolidated Financial Statements
F-11 – F-56
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors
Fortress Biotech, Inc.:
1 Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Fortress Biotech, Inc. and subsidiaries (the Company) as of December 31, 2021, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the year ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
F-2
Table of Contents
Evaluation of accrued coupon liability
As discussed in Note 2 and Note 11 of the consolidated financial statements, the Company accrues for coupons on products for certain qualified commercially-insured parties. At December 31, 2021, the Company recorded $10.6 million in accrued coupon and rebates, which included the accrued coupon liability. The Company estimates the amount of its expected coupon redemptions for product that is still in the distribution channel and records the estimate as a reduction of revenue in the period the related product revenue is recognized. The Company’s accrued coupon liability is primarily based on historical company coupon redemption costs, cost per coupon claims, and estimates of product remaining in the distribution channel.
We identified the evaluation of the accrued coupon liability as a critical audit matter. There was a high degree of auditor judgment required in the evaluation of certain assumptions used in the determination of the accrued coupon liability, including the estimation of product in the distribution channel, coupon redemption costs, and the cost per coupon claims.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design of certain internal controls over the Company’s accrued coupon process, including a control over the assumptions. We performed a risk assessment procedure to assess the sensitivity of changes in the estimate of distribution channel inventory on the accrued coupon liability. We tested the sales data and coupon redemption data used by management to calculate coupon redemption costs and cost of coupon claims by comparing the data to historical information. We also recalculated the coupon costs and the cost per coupon claim. We developed an expectation of the coupon accrual liability based on an independent estimate of the product in the distribution channel and we compared our expectation to the Company’s coupon accrual liability.
We have served as the Company’s auditor since 2021.
Short Hills, New Jersey
March 28, 2022
F-3
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Fortress Biotech, Inc. and subsidiaries
New York, New York
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Fortress Biotech, Inc. and subsidiaries (the “Company”) as of December 31, 2020, the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020, and the results of its operations and its cash flows for the year ended December 31, 2020 , in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ BDO USA, LLP
Boston, Massachusetts
March 31, 2021
We have served as the Company’s auditor from 2016 to 2021.
F-4
Table of Contents
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
($ in thousands except for share and per share amounts)
December 31,
December 31,
2021
2020
ASSETS
Current assets
Cash and cash equivalents
$
305,744
$
233,351
Accounts receivable, net
23,112
23,928
Inventory
9,862
1,404
Other receivables - related party
678
744
Prepaid expenses and other current assets
7,066
6,723
Total current assets
346,462
266,150
Property and equipment, net
15,066
11,923
Operating lease right-of-use asset, net
19,005
20,487
Restricted cash
2,220
1,645
Long-term investment, at fair value
—
17,566
Intangible asset, net
12,552
14,629
Other assets
1,198
1,013
Total assets
$
396,503
$
333,413
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued expenses
$
90,660
$
45,389
Deferred revenue
2,611
—
Income taxes payable
345
—
Operating lease liabilities, short-term
2,104
1,849
Partner company line of credit
812
—
Partner company installment payments - licenses, short-term (net of imputed interest of $ 490 and $ 778 as of December 31, 2021 and December 31, 2020, respectively)
4,510
4,522
Total current liabilities
101,042
51,760
Notes payable, long-term (net of debt discount of $ 7,063 and $ 8,323 as of December 31, 2021 and December 31, 2020, respectively)
42,937
51,677
Operating lease liabilities, long-term
20,987
22,891
Partner company installment payments - licenses, long-term (net of imputed interest of $ 373 and $ 863 as of December 31, 2021 and December 31, 2020, respectively)
3,627
8,137
Other long-term liabilities
2,033
1,949
Total liabilities
170,626
136,414
Commitments and contingencies (Note 16)
Stockholders’ equity
Cumulative redeemable perpetual preferred stock, $ .001 par value, 15,000,000 authorized, 5,000,000 designated Series A shares, 3,427,138 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively, liquidation value of $ 25.00 per share
3
3
Common stock, $ .001 par value, 170,000,000 shares authorized, 101,435,505 shares issued and outstanding as of December 31, 2021; 150,000,000 shares authorized, 94,877,492 shares issued and outstanding as of December 31, 2020, respectively
101
95
Additional paid-in-capital
656,033
583,000
Accumulated deficit
( 547,463 )
( 482,760 )
Total stockholders' equity attributed to the Company
108,674
100,338
Non-controlling interests
117,203
96,661
Total stockholders' equity
225,877
196,999
Total liabilities and stockholders' equity
$
396,503
$
333,413
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
($ in thousands except for share and per share amounts)
Year Ended December 31,
2021
2020
Revenue
Product revenue, net
$
63,134
$
44,531
Collaboration revenue
5,389
—
Revenue - related party
268
1,068
Net revenue
68,791
45,599
Operating expenses
Cost of goods sold - product revenue
32,084
14,594
Research and development
113,240
61,275
Research and development - licenses acquired
15,625
2,834
Selling, general and administrative
86,843
61,166
Wire transfer fraud loss
9,540
—
Total operating expenses
257,332
139,869
Loss from operations
( 188,541 )
( 94,270 )
Other income (expense)
Interest income
649
1,518
Interest expense and financing fee
( 15,308 )
( 15,326 )
Change in fair value of investments
39,294
6,418
Change in fair value of derivative liability
( 447 )
( 1,189 )
Total other income (expense)
24,188
( 8,579 )
Loss before income tax expense
( 164,353 )
( 102,849 )
Income tax expense
473
136
Net loss
( 164,826 )
( 102,985 )
Net loss attributable to non-controlling interests
100,123
56,459
Net loss attributable to common stockholders
$
( 64,703 )
$
( 46,526 )
Net loss per common share - basic and diluted
$
( 2.02 )
$
( 1.43 )
Net loss per common share attributable to non - controlling interests - basic and diluted
$
( 1.23 )
$
( 0.78 )
Net loss per common share attributable to common stockholders - basic and diluted
$
( 0.79 )
$
( 0.65 )
Weighted average common shares outstanding - basic and diluted
81,700,220
72,005,181
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
($ in thousands except for share amounts)
Common
Additional
Total
Series A Preferred Stock
Common Stock
Shares
Treasury
Paid-In
Accumulated
Non-Controlling
Stockholders'
Shares
Shares
Amount
Issuable
Stock
Capital
Deficit
Interests
Equity
Balance at December 31, 2019
1,341,167
$
1
74,027,425
$
74
$
500
$
—
$
461,874
$
( 436,234 )
$
46,317
$
72,532
Stock-based compensation expense
—
—
—
—
—
—
13,451
—
—
13,451
Issuance of common stock related to equity plans
—
—
2,335,808
2
—
—
16
—
—
18
Issuance of common stock under ESPP
—
—
122,786
—
—
—
253
—
—
253
Issuance of common stock for at-the-market offering, net
—
—
17,409,257
18
—
—
45,809
—
—
45,827
Payment of Series A perpetual preferred stock dividends
—
—
—
—
—
—
( 6,515 )
—
—
( 6,515 )
Repurchase of Series A preferred stock, net
( 5,000 )
—
—
—
—
( 70 )
( 2 )
—
—
( 72 )
Retirement of Series A preferred stock
—
—
—
—
—
70
( 70 )
—
—
—
Issuance of Series A preferred stock for cash, net
2,090,971
2
—
—
—
—
35,541
—
—
35,543
Partner company’s offering, net
—
—
—
—
—
—
53,749
—
—
53,749
Partner companies' at-the-market offering, net
—
—
—
—
—
—
70,988
—
—
70,988
Partner company’s preferred stock offering, net
—
—
—
—
—
—
7,074
—
—
7,074
Issuance of common stock under partner company’s ESPP
—
—
—
—
—
—
349
—
—
349
Partner company’s dividends declared and paid
—
—
—
—
—
—
( 237 )
—
—
( 237 )
Partner company’s exercise of warrants for cash
—
—
—
—
—
—
13
—
—
13
Partner company’s exercise of options for cash
—
—
—
—
—
—
13
—
—
13
Reclass partner company's warrants from liability to equity
—
—
—
—
—
—
1,216
—
—
1,216
Issuance of partner company’s common shares for research and development expenses
—
—
—
—
—
—
46
—
—
46
Common shares issued for 2017 Subordinated Note Financing interest expense
—
—
982,216
1
( 500 )
—
1,816
—
—
1,317
Issuance of warrants in conjunction with Oaktree Note
—
—
—
—
—
—
4,419
—
—
4,419
Non-controlling interest in partner companies
—
—
—
—
—
—
( 106,803 )
—
106,803
—
Net loss attributable to non-controlling interest
—
—
—
—
—
—
—
—
( 56,459 )
( 56,459 )
Net loss attributable to common stockholders
—
—
—
—
—
—
—
( 46,526 )
—
( 46,526 )
Balance at December 31, 2020
3,427,138
$
3
94,877,492
$
95
$
—
`
$
—
`
$
583,000
$
( 482,760 )
$
96,661
$
196,999
Stock-based compensation expense
—
—
—
—
—
—
19,486
—
—
19,486
Issuance of common stock related to equity plans
—
—
3,119,324
3
—
—
( 3 )
—
—
—
Issuance of common stock under ESPP
—
—
117,428
—
—
—
278
—
—
278
Issuance of common stock for at-the-market offering, net
—
—
3,067,446
3
—
—
9,082
—
—
9,085
Payment of Series A perpetual preferred stock dividends
—
—
—
—
—
—
( 8,031 )
—
—
( 8,031 )
Partner company’s offering, net
—
—
—
—
—
—
34,996
—
—
34,996
Partner companies' at-the-market offering, net
—
—
—
—
—
—
110,887
—
—
110,887
Partner company’s exercise of options for cash
—
—
—
—
—
—
7
—
—
7
Issuance of common stock under partner company’s ESPP
—
—
—
—
—
—
309
—
—
309
Partner company’s dividends declared and paid
—
—
—
—
—
—
( 749 )
—
—
( 749 )
Issuance of partner company’s common shares for research and development expenses
—
—
—
—
—
—
176
—
—
176
Common shares issued for dividend on partner company's convertible preferred shares
—
—
253,815
—
—
—
820
—
—
820
Conversion of partner company convertible preferred shares
—
—
—
—
—
—
21,812
—
—
21,812
Conversion of partner company derivative warrant liabilities
—
—
—
—
—
—
4,628
—
—
4,628
Non-controlling interest in subsidiaries
—
—
—
—
—
—
( 120,665 )
—
120,665
—
Net loss attributable to non-controlling interest
—
—
—
—
—
—
—
—
( 100,123 )
( 100,123 )
Net loss attributable to common stockholders
—
—
—
—
—
—
—
( 64,703 )
—
( 64,703 )
Balance at December 31, 2021
3,427,138
$
3
101,435,505
$
101
$
—
$
—
$
656,033
$
( 547,463 )
$
117,203
$
225,877
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Table of Contents
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
($ in thousands)
Year Ended December 31,
2021
2020
Cash Flows from Operating Activities:
Net loss
$
( 164,826 )
$
( 102,985 )
Reconciliation of net loss to net cash used in operating activities:
Depreciation expense
2,628
2,280
Bad debt expense
48
49
Amortization of debt discount
3,914
5,622
Accretion of partner company convertible preferred shares
2,845
—
Non-cash interest
781
697
Prepayment penalty of Oaktree Note
450
—
Amortization of product revenue license fee
2,474
1,420
Amortization of operating lease right-of-use assets
1,689
1,625
Stock-based compensation expense
19,486
13,451
Issuance of common stock for service
—
18
Issuance of partner company’s common shares for research and development expenses
176
46
Common shares issued for dividend on partner company's convertible preferred shares
820
—
Common shares issued for 2017 Subordinated Note Financing interest expense
—
1,317
Change in fair value of investment in Caelum
( 39,294 )
( 6,418 )
Change in fair value of partner company derivative liability
447
1,189
Research and development-licenses acquired, expense
15,449
2,788
Increase (decrease) in cash and cash equivalents resulting from changes in operating assets and liabilities:
Accounts receivable
768
( 10,438 )
Inventory
( 8,458 )
( 547 )
Other receivables - related party
66
121
Prepaid expenses and other current assets
( 309 )
( 2,590 )
Other assets
( 185 )
145
Accounts payable and accrued expenses
43,307
11,101
Interest payable
—
( 1,042 )
Interest payable - related party
—
( 92 )
Deferred revenue
2,611
—
Income taxes payable
345
136
Lease liabilities
( 1,856 )
( 1,388 )
Other long-term liabilities
84
( 187 )
Net cash used in operating activities
( 116,540 )
( 83,682 )
Cash Flows from Investing Activities:
Purchase of research and development licenses
( 11,380 )
( 4,038 )
Purchase of property and equipment
( 4,566 )
( 1,926 )
Purchase of intangible asset
( 400 )
( 1,200 )
Proceeds from sale of Caelum
56,860
—
Net cash provided by (used in) investing activities
40,514
( 7,164 )
The accompanying notes are an integral part of these consolidated financial statements.
F-8
Table of Contents
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
($ in thousands)
Year Ended December 31,
2021
2020
Cash Flows from Financing Activities:
Payment of Series A perpetual preferred stock dividends
$
( 8,031 )
$
( 6,515 )
Purchase of treasury stock
—
( 70 )
Payment of costs related to purchase of treasury stock
—
( 2 )
Proceeds from issuance of Series A perpetual preferred stock
—
39,075
Payment of costs related to issuance of Series A perpetual preferred stock
—
( 3,535 )
Proceeds from issuance of common stock for at-the-market offering, net
9,085
45,851
Proceeds from issuance of common stock under ESPP
278
253
Proceeds from partner companies' ESPP
309
349
Partner company’s dividends declared and paid
( 749 )
( 237 )
Proceeds from partner companies' sale of stock, net
35,367
53,680
Proceeds from partner companies' at-the-market offering, net
110,803
71,072
Proceeds from partner company's preferred stock offering
—
8,000
Payment of costs related to partner company's preferred stock offering
( 13 )
( 913 )
Proceeds from exercise of partner companies’ equity grants
7
26
Payment of debt issuance costs associated with 2017 Subordinated Note Financing
—
( 93 )
Payment of debt issuance costs associated with 2018 Venture Notes
—
( 58 )
Proceeds from Oaktree Note
—
60,000
Payment of debt issuance costs associated with Oaktree Note
( 95 )
( 4,302 )
Repayment of Oaktree Note
( 10,450 )
—
Repayment of 2017 Subordinated Note Financing
—
( 28,356 )
Repayment of 2018 Venture Notes
—
( 21,707 )
Repayment of 2019 Notes
—
( 9,000 )
Repayment of partner company's Horizon Notes
—
( 15,750 )
Repayment of IDB Note
—
( 14,858 )
Repayment of partner company installment payments - licenses
( 5,300 )
( 500 )
Proceeds from partner company convertible preferred shares, net
16,971
—
Proceeds from partner's company line of credit
7,000
—
Repayment of partner's company line of credit
( 6,188 )
—
Net cash provided by financing activities
148,994
172,410
Net increase in cash and cash equivalents and restricted cash
72,968
81,564
Cash and cash equivalents and restricted cash at beginning of period
234,996
153,432
Cash and cash equivalents and restricted cash at end of period
$
307,964
$
234,996
Supplemental disclosure of cash flow information:
Cash paid for interest
$
6,918
$
8,204
Cash paid for interest - related party
$
—
$
617
Cash paid for tax
$
993
$
—
The accompanying notes are an integral part of these consolidated financial statements.
F-9
Table of Contents
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
($ in thousands)
Year Ended December 31,
2021
2020
Supplemental disclosure of non-cash financing and investing activities:
Settlement of restricted stock units into common stock
$
3
$
2
Issuance of warrants in conjunction with Oaktree Note
$
—
$
4,419
Common shares issued from 2017 Subordinated Note Financing interest expense
$
—
$
500
Unpaid fixed assets
$
1,270
$
31
Conversion of partner company convertible preferred shares
$
21,812
$
—
Conversion of partner company derivative warrant liabilities
$
4,628
$
—
Partner company's unpaid intangible assets
$
—
$
7,472
Reclass partner company's warrants from liability to equity
$
—
$
1,216
Unpaid partner company’s at-the-market offering cost
$
—
$
84
Unpaid partner company’s preferred stock offering cost
$
—
$
13
Unpaid partner company’s debt offering cost
$
214
$
—
Unpaid partner company’s offering cost
$
371
$
—
Partner company derivative warrant liability associated with partner company convertible preferred shares
$
362
$
—
Unpaid debt offering cost
$
—
$
13
Unpaid at-the-market offering cost
$
—
$
30
Retirement of Series A perpetual preferred stock
$
—
$
70
Unpaid research and development licenses acquired
$
250
$
—
Lease liabilities arising from obtaining right-of-use assets
$
207
$
—
The accompanying notes are an integral part of these consolidated financial statements.
F-10
Table of Contents
FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
1. Organization and Description of Business
Fortress Biotech, Inc. (“Fortress” or the “Company”) is a biopharmaceutical company dedicated to acquiring, developing and commercializing pharmaceutical and biotechnology products and product candidates, which the Company does at the Fortress level, at its majority-owned and majority-controlled subsidiaries and joint ventures, and at entities the Company founded and in which it maintains 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. Fortress through its partner companies has executed such arrangements in partnership 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, Mayo Foundation for Medical Education and Research, AstraZeneca plc and Dr. Reddy’s Laboratories, Ltd.
Following the exclusive license or other acquisition of the intellectual property underpinning a product or product candidate, Fortress leverages its business, scientific, regulatory, legal and finance expertise to help the partners achieve their goals. 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, four partner companies are publicly-traded, and three have consummated strategic partnerships with industry leaders Alexion Pharmaceuticals, Inc. and InvaGen Pharmaceuticals, Inc. (a subsidiary of Cipla Limited) and Sentynl Therapeutics, Inc. (“Sentynl”). On October 6, 2021, AstraZeneca plc (“AstraZeneca”) (acquiror of Alexion) purchased 100 % of our partner company Caelum Biosciences, Inc. (“Caelum”) for approximately $ 150 million upfront and up to $ 350 million in contingent regulatory and sales milestone payments.
Several of our partner companies possess licenses to product candidate intellectual property, including Aevitas Therapeutics, Inc. (“Aevitas”), Baergic Bio, Inc. (“Baergic”), Caelum, Cellvation, Inc. (“Cellvation”), Checkpoint Therapeutics, Inc. (“Checkpoint”), Cyprium Therapeutics, Inc. (“Cyprium”), Helocyte, Inc. (“Helocyte”), Journey Medical Corporation (“Journey” or “JMC”), Mustang Bio, Inc. (“Mustang”) Oncogenuity, Inc. ("Oncogenuity"), and UR-1 Therapeutics, Inc. (“UR-1”).
Liquidity and Capital Resources
Since inception, the Company’s operations have been financed primarily through the sale of equity and debt securities, from the sale of partner companies, and the proceeds from the exercise of warrants and stock options. The Company has incurred losses from operations and negative cash flows from operating activities since inception and expects to continue to incur substantial losses for the next several years as it continues to fully develop and prepare regulatory filings and obtain regulatory approvals for its existing and new product candidates. The Company’s current cash and cash equivalents are sufficient to fund operations for at least the next 12 months. However, the Company will need to raise additional funding through strategic relationships, public or private equity or debt financings, sale of a partner companies, grants or other arrangements to develop and prepare regulatory filings and obtain regulatory approvals for the existing and new product candidates, fund operating losses, and, if deemed appropriate, establish or secure through third parties manufacturing for the potential products, sales and marketing capabilities. If such funding is not available or not available on terms acceptable to the Company, the Company’s current development plans, and plans for expansion of its general and administrative infrastructure may be curtailed. The Company also has the ability, subject to limitations imposed by Rule 144 of the Securities Act of 1933 and other applicable laws and regulations, to raise money from the sale of common stock of the public companies in which it has ownership positions. In addition to the foregoing, the Company experienced minimal impact on its development timelines, revenue levels and its liquidity due to the worldwide spread of COVID-19.
F-11
Table of Contents
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The Company’s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The Company’s consolidated financial statements include the accounts of the Company and the accounts of the Company’s subsidiaries, listed above. All intercompany balances and transactions have been eliminated.
The accompanying consolidated financial statements include the accounts of the Company’s subsidiaries. For consolidated entities where the Company owns less than 100 % of the subsidiary, the Company records net loss attributable to non-controlling interests in its consolidated statements of operations equal to the percentage of the economic or ownership interest retained in such entities by the respective non-controlling parties. The Company also consolidates subsidiaries in which it owns less than 50 % of the subsidiary but maintains voting control. The Company continually assesses whether changes to existing relationships or future transactions may result in the consolidation or deconsolidation of partner companies.
Use of Estimates
The Company’s consolidated financial statements include certain amounts that are based on management’s best estimates and judgments. The Company’s significant estimates include, but are not limited to, provisions for product returns, coupons, rebates, chargebacks, discounts, allowances and distribution fees paid by Journey to certain wholesalers, inventory realization, useful lives assigned to long-lived assets and amortizable intangible assets, fair value of stock options and warrants, stock-based compensation, common stock issued to acquire licenses, investments, accrued expenses, provisions for income taxes and contingencies. Due to the uncertainty inherent in such estimates, actual results may differ from these estimates.
Revenue Recognition
The Company records revenue in accordance with the provisions of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of this revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The Company’s revenues primarily result from contracts with customers, which are generally short-term and have a single performance obligation — the delivery of product. The Company’s performance obligation to deliver products is satisfied when the goods are received by the customer, which is the point at which the customer obtains title to, and accepts the risks and rewards of ownership of, the products. The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both.
Many of the Company’s products sold are subject to trade discounts, rebates, coupons and right of return. Revenues are recorded net of provisions for variable consideration, including discounts, rebates, governmental rebate programs, price adjustments, returns, chargebacks, promotional programs and other sales allowances. Accruals for these provisions are presented in the consolidated financial statements as reductions in determining net sales and as a contra asset in accounts receivable, net (if settled via credit) and other current liabilities (if paid in cash). Amounts recorded for revenue deductions can result from a complex series of judgements about future events and uncertainties and can rely heavily on estimates and assumptions. The following section briefly describes the nature of the Company’s provisions for variable consideration and how such provisions are estimated.
F-12
Table of Contents
Gross-to-Net Sales Accruals — The Company records gross-to-net sales accruals for government rebates, chargebacks, wholesaler distributor service fees, other rebates and administrative fees, sales returns and allowances and sales discounts.
Trade Discounts and Other Sales Allowances — The Company provides trade discounts and allowances to its wholesale customers for sales order management, data, and distribution services. The Company also provides for prompt pay discounts if payment is received within the payment term days which generally range from 30 to 75 days . These discounts and allowances are recorded at the time of sale based on the customer’s contracted rate and have been recorded as a reduction of revenue and a reduction to accounts receivables.
Wholesaler fees — The Company pays administrative and other fees to certain wholesale customers consistent with pharmaceutical industry practices. The Company records a provision for these fees based on contracted rates and historical redemption rates. Assumptions used to establish the provision include level of wholesaler inventories, contract sales volumes and average contract pricing. The Company regularly reviews the information related to these estimates and adjust the provision accordingly.
Product Returns — Consistent with industry practice, the Company offers customers a right to return any unused product. Such right of return commences six months prior to the product expiration date and ends one year after the product expiration date. Products returned for expiration are reimbursed at current or contracted price, less 5%. The Company estimates the amount of its product sales that may be returned by its customers and accrues this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company currently estimates product return reserves using available industry data and its own sales information, including its visibility and estimates into the inventory remaining in the distribution channel.
The Company bases its product returns allowance on estimated on-hand inventories in the sales channels, measured end-customer demand, actual returns history and other factors, such as the trend experience for lots where product is still being returned, as applicable. If the historical data the Company uses to calculate these estimates does not properly reflect future returns, then a change in the allowance would be made in the period in which such a determination is made and revenues in that period could be materially affected. Under this methodology, the Company tracks actual returns by individual production lots. Returns on closed lots, that is, lots no longer eligible for return credits, are analyzed to determine historical returns experience. Returns on open lots, that is, lots still eligible for return credits, are monitored and compared with historical return trend rates. Any changes from the historical trend rates are considered in determining the current sales return allowance.
Government Chargebacks — Chargebacks for fees and discounts to indirect qualified government healthcare providers represent the estimated obligations resulting from contractual commitments to sell products to qualified U.S. Department of Veterans Affairs hospitals and 340B entities at prices lower than the list prices charged to customers who purchase product directly from the Company. Customers charge the Company for the difference between what they pay for the product and the statutory selling price to the qualified government entity. These allowances are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable, net. The chargeback amount from our direct customers is generally determined at the time of our direct customers’ resale to the qualified government healthcare provider, and the Company generally issues credits for such amounts within a few weeks of our direct customer’s notification to the Company of the resale. The allowance for chargebacks is based on expected sell-through levels by our direct customers to indirect customers, as well as estimated wholesaler inventory levels.
F-13
Table of Contents
Government Rebates — The Company is subject to discount obligations under state Medicaid programs and Medicare. These accruals are recorded in the same period that the related revenue is recognized, resulting in a reduction of product revenue. For Medicare, the Company also estimates the number of patients in the prescription drug coverage gap, for whom the Company will owe an additional liability under the Medicare Part D program. For Medicaid programs, the Company estimates the portion of sales attributed to Medicaid patients and records a liability for the rebates to be paid to the respective state Medicaid programs. The Company’s liability for these rebates consists of invoices received for: claims from prior quarters that have not been paid or for which an invoice has not yet been received; estimates of claims for the current quarter; and estimated future claims that will be made for product that has been recognized as revenue, but which remains in the distribution channel inventories at the end of each reporting period.
Wholesaler Chargeback Accruals — The Company sells a portion of its products indirectly through wholesaler distributors to contracted customers commonly referred to as “indirect customers.” The Company enters into specific agreements with these indirect customers to establish pricing for its products, and in-turn, the indirect customers independently select a wholesaler from which to purchase the products. Because the price paid by the indirect customers is lower than the price paid by the wholesaler (wholesale acquisition cost, or “WAC”), the Company provides a credit, called a chargeback, to the wholesaler for the difference between the contractual price with the indirect customers and WAC. The Company’s provision for chargebacks is based on expected sell-through levels by the Company’s wholesale customers to the indirect customers and estimated wholesaler inventory levels as well as historical chargeback rates. The Company continually monitors its reserve for chargebacks and adjusts the reserve accordingly when expected chargebacks differ from actual experience.
Coupons — The Company offers coupons on products for qualified commercially-insured parties with prescription drug co-payments. Such product sales flow through both traditional wholesaler and specialty pharmacy channels. Approximately 85 % of the Company's product revenues are sold through the specialty pharmacy channel, which has a shorter cycle from the Company’s sales date to the fulfilment of the prescription by the specialty pharmacy customer, resulting in less inventory in this channel. Coupons are processed and redeemed at the time of prescription fulfilment by the pharmacy, and the Company is charged for the coupons redeemed monthly. The majority of coupon liability at the end of the period represents coupons that have been redeemed and for which the Company has been billed, and an accrual for expected redemptions for product in the distribution channel. This element of the liability requires the Company to estimate the distribution channel inventory at period end, the expected redemption rates, and the cost per coupon claim that the Company expects to receive associated with product that has been recognized as revenue but remains in the distribution channel at the end of each reporting period. The estimate of product remaining in the distribution channel is comprised of actual inventory at the wholesaler as well as an estimate of inventory at the specialty pharmacies, which the Company estimates based upon historical ordering patterns, which consist of reordering approximately every two weeks. The estimated redemption rate is based on historical redemptions as a percentage of units sold. The cost per coupon is based on the coupon rate .
Managed Care Rebates — The Company offers managed care rebates to certain providers. The Company calculates rebate payment amounts due under this program based on actual qualifying products and applies a contractual discount rate. The accrual is based on an estimate of claims that the Company expects to receive and inventory in the distribution channel. The accrual is recognized at the time of sale, resulting in a reduction of product revenue.
Collaboration Revenue
Our collaboration revenue includes service revenue, license fees and future contingent milestone-based payments. We recognize collaboration revenue for contracted R&D services performed for our customers over time. We measure our progress using an input method based on the effort we expend or costs we incur toward the satisfaction of our performance obligation. We estimate the amount of effort we expend, including the time it will take us to complete the activities, or the costs we may incur in a given period, relative to the estimated total effort or costs to satisfy the performance obligation. This results in a percentage that we multiply by the transaction price to determine the amount of revenue we recognize each period. This approach requires us to make estimates and use judgement. If our estimates or judgements change over the course of the collaboration, they may affect the timing and amount of revenue that we recognize in the current and future periods.
F-14
Table of Contents
Reclassifications
Certain comparative figures have been reclassified to conform to the current year presentation. The Company reclassified certain return reserves related to sales allowances of $4.6 million from accounts receivable to current liabilities on the consolidated balance sheet at December 31, 2020. This reclassification was deemed to be immaterial.
Fair Value Measurement
The Company follows accounting guidance on fair value measurements for financial assets and liabilities measured at fair value on a recurring basis. Under the accounting guidance, fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.
The accounting guidance requires fair value measurements be classified and disclosed in one of the following three categories:
Level 1 : Quoted prices in active markets for identical assets or liabilities.
Level 2 : Observable inputs other than Level 1 prices for similar assets or liabilities that are directly or indirectly observable in the marketplace.
Level 3 : Unobservable inputs which are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.
Certain of the Company’s financial instruments are not measured at fair value on a recurring basis but are recorded at amounts that approximate their fair value due to their liquid or short-term nature, such as accounts payable, accrued expenses and other current liabilities.
Segment Reporting
The Company operates in two operating and reportable segments, Dermatology Product Sales and Pharmaceutical and Biotechnology Product Development. The Company evaluates the performance of each segment based on operating profit or loss. There is no inter-segment allocation of interest expense and income taxes.
Cash and Cash Equivalents
The Company considers highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents at December 31, 2021 and 2020, consisted of cash and certificates of deposit in institutions in the United States. Balances at certain institutions have exceeded Federal Deposit Insurance Corporation insured limits.
Property and Equipment
Computer equipment, furniture & fixtures and machinery & equipment are recorded at cost and depreciated using the straight-line method over the estimated useful life of each asset. Leasehold improvements are amortized over the shorter of the estimated useful lives or the term of the respective leases.
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In connection with Mustang’s cell processing facility, Mustang incurred costs for the design and construction of the facility and the purchase of equipment; $ 2.0 million and $ 0.5 million are recorded in fixed assets – construction in process on the balance sheet at December 31, 2021 and 2020, respectively. Upon completion of the facility’s construction, all costs associated with the buildout will be recorded as leasehold improvements and amortized over the shorter of the estimated useful lives or the term of the respective leases, upon the improvement being placed in service.
Intangible Assets
Intangible assets are reported at cost, less accumulated amortization and impairments. Intangible assets with finite lives are amortized over their estimated useful lives, which represents the estimated life of the product. Amortization is calculated primarily using the straight-line method.
During the ordinary course of business, the Company has entered into certain licenses and asset purchase agreements. Potential milestone payments for achieving sales targets or regulatory development milestones are recorded when it is probable of achievement. Upon a milestone payment being achieved, the milestone payment will be capitalized and amortized over the remaining useful life for approved products and expensed for milestones prior to FDA approval. Royalty payments are recorded as cost of goods sold as sales are recognized.
Restricted Cash
The Company records cash held in trust or pledged to secure certain debt obligations as restricted cash. As of December 31, 2021 and 2020, the Company had $ 2.2 million and $ 1.6 million, respectively, of restricted cash representing pledges to secure letters of credit in connection with certain office leases.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash from the consolidated balance sheets to the consolidated statements of cash flows for the years ended 2021 and 2020:
December 31,
2021
2020
Cash and cash equivalents
$
305,744
$
233,351
Restricted cash
2,220
1,645
Total cash and cash equivalents and restricted cash
$
307,964
$
234,996
Inventories
Inventories comprise finished goods, which are valued at the lower of cost and net realizable value, on a first-in, first-out basis. The Company evaluates the carrying value of inventories on a regular basis, taking into account anticipated future sales compared with quantities on hand, and the remaining shelf life of goods on hand. Included in inventories is the acquired Qbrezxa finished goods inventory which includes a fair value step-up of $ 6.5 million. The $ 6.5 million was fully expensed within cost of sales for the year ended December 31, 2021, as the inventory was sold to customers.
Accounts Receivable, net
Accounts receivable consists of amounts due to the Company for product sales of JMC. The Company’s accounts receivable reflects discounts for estimated early payment and for product estimated returns. Accounts receivable are stated at amounts due from customers, net of an allowance for doubtful accounts that are outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due and the customer’s current ability to pay its obligation to the Company. The Company writes off accounts receivable when they become uncollectible. For the years ended December 31, 2021 and 2020, the allowance for doubtful accounts was approximately $ 0.1 million and $ 0.1 million, respectively.
Investments at Fair Value
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The Company elects the fair value option for its long-term investments at fair value (see Note 6). The decision to elect the fair value option, which is irrevocable once elected, is determined on an instrument-by-instrument basis and applied to an entire instrument. The net gains or losses, if any, on an investment for which the fair value option has been elected are recognized as a change in fair value of investments on the Consolidated Statements of Operations.
The Company has various processes and controls in place to ensure that fair value is reasonably estimated. While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Issuance of Debt and Equity
The Company issues complex financial instruments which include both equity and debt features. The Company analyzes each instrument under ASC 480, Distinguishing Liabilities from Equity, ASC 815, Derivatives and Hedging and, ASC 470, Debt , in order to establish whether such instruments include any embedded derivatives.
The Company accounted for the Oaktree Note with detachable warrants in accordance with ASC 470, Debt . The Company assessed the classification of its common stock purchase warrants as of the date of the transaction and determined that such instruments met the criteria for equity classification. The note proceeds were allocated between the Oaktree Note and the warrants on a relative fair value basis.
The Company recorded the related issue costs and value ascribed to the warrants as a debt discount of the Oaktree Note. The discount is being amortized utilizing the effective interest method over the term of the Oaktree Note which is approximately 16.08 % at December 31, 2021.
Impairment of Long-Lived Assets
Long-lived assets, primarily fixed assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. The Company will perform a periodic assessment of assets for impairment in the absence of such information or indicators. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company would recognize an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and estimated fair value. As of December 31, 2021 and 2020 there were no indicators of impairment.
Research and Development
Research and development costs are expensed as incurred. Advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. Upfront and milestone payments due to third parties that perform research and development services on the Company’s behalf will be expensed as services are rendered or when the milestone is achieved.
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 license and milestone 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, and costs associated with regulatory filings, laboratory costs and other supplies.
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In accordance with ASC 730-10-25-1, Research and Development , costs incurred in obtaining technology licenses are charged to research and development expense if the technology licensed has not reached commercial feasibility and has no alternative future use. Such licenses purchased by the Company require substantial completion of research and development, regulatory and marketing approval efforts in order to reach commercial feasibility and has no alternative future use.
Contingencies
The Company records accruals for contingencies and legal proceedings expected to be incurred in connection with a loss contingency when it is probable that a liability has been incurred and the amount can be reasonably estimated.
If a loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
Leases
The Company accounts for its leases under ASC 842, Leases . Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases and are recorded on the consolidated balance sheet as both a right-of-use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company's incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right-of-use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right-of-use asset result in straight-line rent expense over the lease term. For finance leases, interest on the lease liability and the amortization of the right-of-use asset results in front-loaded expense over the lease term. Variable lease expenses are recorded when incurred.
In calculating the right-of-use asset and lease liability, the Company elects to combine lease and non-lease components. The Company continues to account for leases in the prior period consolidated financial statements under ASC Topic 840, Leases .
Stock-Based Compensation
The Company expenses stock-based compensation to employees and non-employees over the requisite service period based on the estimated grant-date fair value of the awards and forfeitures, which are recorded upon occurrence. The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment.
Income Taxes
The Company accounts for income taxes under ASC 740, Income Taxes (“ASC 740”). ASC 740 requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statement and tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax loss and tax credit carry forwards. ASC 740 additionally requires a valuation allowance to be established when it is more likely than not that all or a portion of deferred tax assets will not be realized.
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ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim period, disclosure and transition. Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements. The 2017 through 2019 tax years are the only periods subject to examination upon filing of appropriate tax returns. The Company believes that its income tax positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in a material change to its financial position.
The Company’s policy for recording interest and penalties associated with audits is to record such expense as a component of income tax expense. There were no amounts accrued for penalties or interest as of or during the years ended December 31, 2021 and 2020. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position.
Earnings Per Share
Basic net income (loss) per share of common stock is calculated by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the reporting period. Diluted earnings per share is calculated by dividing net income by the weighted-average number of shares of common stock outstanding during the reporting period after giving effect to dilutive potential common shares for stock options and restricted stock units, determined using the treasury stock method.
Non-Controlling Interests
Non-controlling interests in consolidated entities represent the component of equity in consolidated entities held by third parties. Any change in ownership of a subsidiary while the controlling financial interest is retained is accounted for as an equity transaction between the controlling and non-controlling interests.
Sequencing
On March 31, 2021, the Company adopted a sequencing policy under ASC 815-40-35 Derivatives and Hedging (“ASC 815”) whereby in the event that reclassification of contracts from equity to assets or liabilities is necessary pursuant to ASC 815 due to the Company’s inability to demonstrate it has sufficient authorized shares as a result of certain securities convertible or exchangeable for a potentially indeterminable number of shares, shares will be allocated on the basis of the earliest issuance date of potentially dilutive instruments, with the earliest grants receiving the first allocation of shares. Pursuant to ASC 815, grants or issuances of securities or options to the Company’s non-employees, employees or directors are not subject to the sequencing policy.
Comprehensive Loss
The Company’s comprehensive loss is equal to its net loss for all periods presented.
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Recently Adopted Accounting Pronouncements
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40) . This ASU reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. This ASU provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses: (1) how an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; (2) how an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. This ASU will be effective for all entities for fiscal years beginning after December 15, 2021. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted, including adoption in an interim period. The adoption of ASU 2021-04 is not expected to have a material impact on the Company’s consolidated financial statements or disclosures.
In August 2020, the FASB issued ASU No. 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. Early adoption will be permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company adopted the new guidance in the first quarter of 2021 and the adoption of this guidance did not to have a material impact on the consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses . The ASU sets forth a current expected credit loss model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. Recently, the FASB issued the final ASU to delay adoption for smaller reporting companies to calendar year 2023. The Company is currently assessing the impact of the adoption of this ASU on its consolidated financial statements.
3. Collaboration and Stock Purchase Agreements
Caelum
Agreement with AstraZeneca’s Alexion
In January 2019, Caelum, a subsidiary of the Company at that time, entered into a Development, Option and Stock Purchase Agreement (as amended, the "DOSPA") and related documents by and among Caelum, AstraZeneca as successor-in-interest to Alexion Therapeutics, Inc., the Company and Caelum’s other equity holders as parties thereto
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(such equity holders, including Fortress, the "Sellers"). Under the terms of the agreement, AstraZeneca obtained a minority interest in Caelum and a contingent exclusive option to acquire the remaining equity in Caelum.
On September 28, 2021 AstraZeneca notified Caelum of its intention to exercise its purchase option, and on October 5, 2021 AstraZeneca acquired Caelum. The Company received 42.4 % of the distribution of proceeds from the option exercise price of $ 150 million, approximately $ 56.9 million, which is net of the 10 % , 24-month escrow holdback and other miscellaneous transaction expenses. The Sellers currently remain eligible to receive up to an additional $ 350 million in contingent regulatory and commercial milestone payments, of which Fortress is eligible to receive 42.4 % or approximately $ 148.6 million.
Cyprium
Agreement with Sentynl
On February 24, 2021, Cyprium entered into a development and contingent asset purchase agreement with Sentynl. Pursuant to the terms of the agreement, Sentynl paid Cyprium an upfront fee of $ 8.0 million specifically earmarked to complete the CUTX-101 development program for the treatment of Menkes disease, through the filing of Cyprium’s New Drug Application (“NDA”) with the U.S. Food and Drug Administration (“FDA”). Cyprium also remains eligible to receive up to an additional $ 12.0 million payable as follows: (i) $ 3.0 million upon acceptance by the FDA of the NDA for review; and (ii) $ 9.0 million upon FDA approval of the NDA and transfer of CUTX-101 to Sentynl. The Company will recognize revenue associated with these future milestones based upon achievement. At December 31, 2021, none of these future milestones was deemed probable.
Following the transfer of CUTX-101 to Sentynl (if any), Cyprium would remain eligible to receive up to $ 255.0 million in additional sales milestone payments (payable pursuant to five milestones), as well as royalties on CUTX-101 net sales ranging from mid-single digits up to the mid-twenties. Cyprium would retain 100 % ownership over any FDA Priority Review Voucher that may be issued at NDA approval for CUTX-101.
The Company determined that this agreement falls within the scope of ASC 606-10-15-3 and ASC 808-10-15-5A Revenue from Collaborative Arrangements (“ASC 808”) and as such the Company will recognize revenue in connection with achievement of two future development milestone payments.
In connection with the $ 8.0 million upfront payment to Sentynl, the Company is recognizing revenue using an input method based upon the costs incurred to date in relation to the total estimated costs to complete the development activities. Accordingly, revenue is being recognized over the period in which the development activities are expected to occur. For the year ended December 31, 2021, the Company recognized revenue of $ 5.4 million. No revenue was recognized in connection with this agreement in 2020.
Avenue
Agreement with InvaGen
On November 12, 2018, Avenue entered into a Stock Purchase and Merger Agreement (the “Avenue SPMA”) with InvaGen Pharmaceuticals Inc. (“InvaGen”), and Madison Pharmaceuticals Inc. (the “Merger Sub”), which contemplated: (i) the purchase by InvaGen of a 33.3 % stake in Avenue and; (ii) the contingent sale of Avenue to InvaGen. The first stage stock purchase 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. Under a contingent second stage closing, InvaGen may have acquired the remaining shares of Avenue’s capital stock (in some cases compulsorily and in some cases at InvaGen’s option), pursuant to a reverse triangular merger with Avenue remaining as the surviving entity. On November 1, 2021, Avenue delivered InvaGen notice of termination of the Avenue SPMA, meaning that the second stage acquisition of Avenue by InvaGen pursuant to the Avenue SPMA is no longer possible.
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4. Inventory
Inventory consisted of the following:
December 31,
December 31,
($ in thousands)
2021
2020
Raw materials
$
5,572
$
—
Finished goods
4,290
1,404
Total inventories
$
9,862
$
1,404
The acquired Qbrezxa finished goods inventory includes a fair value step-up of $ 6.5 million, which was fully expensed within cost of sales for the year ended December 31, 2021 as the inventory was sold to customers. For additional information on Journey’s acquisition of Qbrexza, please refer to Note 9.
5. Property and Equipment
Fortress’ property and equipment consisted of the following:
Useful Life
December 31,
December 31,
($ in thousands)
(Years)
2021
2020
Computer equipment
3
$
739
$
663
Furniture and fixtures
5
1,387
1,199
Machinery & equipment
5
6,550
5,748
Leasehold improvements
2 - 15
13,175
10,580
Buildings
40
581
—
Construction in progress 1
N/A
2,028
499
Total property and equipment
24,460
18,689
Less: Accumulated depreciation
( 9,394 )
( 6,766 )
Property and equipment, net
$
15,066
$
11,923
Note 1: Relates to the Mustang cell processing facility.
Depreciation expenses of Fortress’ property and equipment for the years ended December 31, 2021 and 2020 was $ 2.6 million and $ 2.3 million, respectively, and was recorded in research and development, and selling, general and administrative expense in the Consolidated Statements of Operations.
6. Fair Value Measurements
Fair Value of Investment in Caelum
The Company valued its investment in Caelum in accordance with ASC Topic 820, Fair Value Measurements and Disclosures , and as of December 31, 2020, estimated the fair value to be $ 17.6 million based on a per share value of $ 2.43 . As of December 31, 2020, the following inputs were utilized to derive the value: risk free rate of return of 0.36 %, volatility of 70 % and a discount for lack of marketability of 21.0 % to 31.0 % based on maturity dates of various scenarios. Further, the Company considered the impact of the acquisition of Alexion by AZ, which upon consummation would shorten the timeframe in which the option could be exercised in accordance with the A&R DOSPA.
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Upon AstraZeneca’s notification of their intent to acquire Caelum in September 2021, the Company increase the carrying value of its investment in Caelum to 42.4 % of the distribution of proceeds from the option exercise price of $ 150 million, or $ 56.9 million. Fortress received the funds at the acquisition close in October 2021.
The following table classifies Fortress’ financial instruments, measured at fair value on a recurring basis, into the fair value hierarchy on the Consolidated Balance Sheet as of December 31, 2020:
Fair Value Measurement as of December 31, 2020
($ in thousands)
Level 1
Level 2
Level 3
Total
Assets
Fair value of investment in Caelum
$
—
$
—
$
17,566
$
17,566
Total
$
—
$
—
$
17,566
$
17,566
Journey Placement Agent Warrant Liability
The fair value of Journey’s contingently issuable Placement Agent Warrants in connection with Journey’s preferred offering (see Note 10), was measured using a Monte Carlo simulation valuation methodology. A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring Journey’s warrant liability that are categorized within Level 3 of the fair value hierarchy was as follows:
Risk-free interest rate
0.98
%
Expected dividend yield
—
Expected term in years
1.0
Expected volatility
50
%
Upon the closing of the Journey Initial Public Offering (“Journey IPO”) (see note 14), Journey issued the Placement Agent Warrants to purchase 5 % of the shares of Journey common stock into which the Journey Preferred Stock converted. The Placement Agent Warrants have a term of 5 years . At December 31,2021, Journey issued 111,567 shares of Journey common stock related to the conversion of all of the placement agent warrants.
Journey Contingent Payment Warrant
In connection with the Journey license, collaboration, and assignment agreement (the “DFD Agreement”) to obtain the global rights for the development and commercialization of DFD-29 with Dr. Reddy’s Laboratories, Ltd (“DRL”) (see Note 7), Journey agreed to pay DRL additional consideration upon either an IPO of the Company’s common stock or an acquisition of the Company, the agreement further specifies that only one payment can be made. The contingent payment associated with an IPO of Journey’s common stock is deemed to be achieved if upon the completion of an IPO Journey’s market capitalization on a fully diluted basis is $ 150 million or greater at the close of business on the date of such Journey IPO. The payment due for the achievement of the IPO criteria is a follows: (a) issue to DRL a number of shares of Journey’s common stock equal to $ 5.0 million as calculated using a fifteen (15) day volume weighted average price (“VWAP”) of Journey’s closing price, measured fifteen (15) days following the Journey IPO; or (b) make a cash payment to DRL equal to $ 5.0 million. As a result of Journey’s IPO on November 16, 2021, the Company issued 545,131 unregistered shares of Journey common stock to DRL, calculated using a 15-day VWAP of $ 9.1721 per share. The restrictions on the unregistered shares of common stock are governed by the terms set forth in the DFD-29 Agreement and applicable securities laws.
Cyprium Warrant Liability
The fair value of the Cyprium Contingently Issuable Warrants in connection with the 2018 Venture Debt (see Note 10) was determined by applying management’s estimate of the probability of issuance of the Contingently Issuable Warrants together with an option-pricing model, with the following key assumptions:
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December 31
2020
Risk-free interest rate
0.69
%
Expected dividend yield
—
Expected term in years
10.0
Expected volatility
85
%
The table below provides a roll forward of the changes in fair value of Level 3 financial instruments for the years ended December 31, 2021 and 2020:
Investment in
($ in thousands)
Caelum
Balance at January 1, 2020
$
11,148
Change in fair value of investment in Caelum
6,418
Balance at December 31, 2020
$
17,566
Change in fair value of investment in Caelum
39,294
Sale of Caelum
( 56,860 )
Balance at December 31, 2021
$
—
Warrants
($ in thousands)
liabilities
Balance at December 31, 2019
$
27
Change in fair value
1,189
Reclass partner company's warrants from liability to equity
( 1,216 )
Balance at December 31, 2020
$
—
Additions:
Journey contingent payment liability
3,819
Journey placement agent warrant
362
Change in fair value of derivative liability
447
Conversion of partner company derivative liabilities
( 4,628 )
Balance at December 31, 2021
$
—
7. Licenses Acquired
In accordance with ASC 730-10-25-1, Research and Development , costs incurred in obtaining technology licenses are charged to research and development expense if the technology licensed has not reached commercial feasibility and has no alternative future use. The licenses purchased by the Company require substantial completion of research and development, regulatory and marketing approval efforts in order to reach commercial feasibility and has no alternate use. As such, for the years ended December 31, 2021 and 2020, the total purchase price of licenses acquired, totaling approximately $ 15.6 million and $ 2.8 million, respectively, was classified as research and development-licenses acquired in the Consolidated Statements of Operations.
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For the years ended December 31, 2021 and 2020, the Company’s research and development-licenses acquired are comprised of the following:
Year Ended December 31,
($ in thousands)
2021
2020
Partner companies:
JMC
$
13,819
$
—
Mustang
1,630
2,489
Other
176
345
Total
$
15,625
$
2,834
Journey
On June 29, 2021, Journey entered into a license, collaboration, and assignment agreement (the “DFD Agreement”) to obtain the global rights for the development and commercialization of DFD-29 with DRL. Journey paid $ 10.0 million, of which $ 2.0 million was paid upon execution and $ 8.0 million was paid on September 29, 2021. Additional contingent regulatory and commercial milestone payments totaling up to $ 163.0 million are also payable. Royalties ranging from approximately 10 % to approximately 15 % are payable on net sales of the DFD-29 product. Additionally, Journey is required to fund and oversee the Phase 3 clinical trials at a cost approximating $ 24.0 million, based upon the current development plan and budget.
The DFD Agreement also included contingent payments to be made to DRL in the event of a Journey IPO or the sale of Journey, See Note 6. The fair value of the contingent payment was deemed to be $ 3.8 million, and was recorded in research and development, licenses acquired expense for the year ended December 31, 2021. In connection with the closing of Journey’s IPO on November 16, 2021, Journey issued 545,131 unregistered shares of Journey Medical Inc. common stock to DRL to settle the obligation, calculated using a 15 -day volume weighted average price (“VWAP”) of $ 9.1721 per share.
Mustang
For the years ended December 31, 2021 and 2020 Mustang recorded the following expense in research and development – licenses acquired:
For the Year Ended December 31,
($ in thousands)
2021
2020
City of Hope National Medical Center
CD123 (MB-102)
$
250
$
334
IL13Rα2 (MB-101)
—
334
HER2 (MB-103)
—
500
CS1 (MB-104)
—
200
PSCA (MB-105)
250
200
Spacer
—
334
Mayo Clinic
750
—
Fred Hutchinson Cancer Research Center - CD20 (MB-106)
—
300
Leiden University Medical Centre (MB-110)
350
—
CSL Behring (Calimmune) (MB-107)
30
170
SIRION Biotech LentiBOOST TM (MB-207)
—
117
Total
$
1,630
$
2,489
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Partner Companies
The Company’s partner companies have entered into various license agreements with other medical centers. These license agreements include upfront payments which are expensed and various d evelopmental milestone payments due upon achievement of various milestones which in the aggregate are approximately $ 480.4 million, of which $ 335.4 million relates to Mustang agreements. The license agreements also have sales-based milestone payments that total approximately $ 226.1 million. The agreements also include royalty payments on any future sales .
8. Sponsored Research and Clinical Trial Agreements
For the years ended December 31, 2021 and 2020, the Company recorded $ 7.8 million and $ 9.2 million, respectively, in research and development expenses in the Company’s Consolidated Statement of Operations pursuant to the terms of various sponsored research and clinical trial agreements. The breakout of this expense by partner company is as follows:
For the Year Ended December 31,
($ in thousands)
2021
2020
Mustang
$
6,591
$
7,717
Oncogenuity
965
500
Aevitas
289
948
Total
$
7,845
$
9,165
9. Intangibles
On March 31, 2021, Journey executed an Asset Purchase Agreement (the “Qbrexza APA”) with Dermira, Inc. a subsidiary of Eli Lilly and Company (“Dermira”). Pursuant to the terms of the agreement, Journey acquired the rights to Qbrexza® (glycoprronium), a prescription cloth towelette to treat primary axillary hyperhidrosis in patients nine years of age or older. Upon HSR acceptance, which was received on May 13, 2021, Journey paid the upfront fee of $ 12.5 million to Dermira. In addition, Dermira is eligible to receive up to $ 144 million in the aggregate upon the achievement of certain sales milestones. The royalty structure for the agreement is tiered with royalties for the first two years ranging from approximately 40 % to 30 %. Thereafter for a period of eight years royalties are approximately 12.0 % to 19.0 %. Royalty amounts are subject to 50 % diminution in the event of loss of exclusivity due to the introduction of an authorized generic.
Upon closing of the Qbrexza® purchase, Journey became substituted for Dermira as the plaintiff in U.S. patent litigation commenced by Dermira on October 21, 2020 in the U.S. District Court of Delaware (the “Patent Litigation”) against Perrigo Pharma International DAC (“Perrigo”) alleging infringement of certain patents covering Qbrexza® (the “Qbrexza® Patents”), which are included among the proprietary rights to Qbrexza®. The Patent Litigation was initiated following the submission by Perrigo, in accordance with the procedures set out in the Drug Price Competition and Patent Term Restoration Act of 1984 (the “Hatch-Waxman Act”), of an Abbreviated New Drug Application (“ANDA”). The ANDA seeks approval to market a generic version of Qbrexza® prior to the expiration of the Qbrexza® Patents and alleges that the Qbrexza® Patents are invalid. Perrigo is subject to a 30-month stay preventing it from selling a generic version, but that stay is set to expire on March 9, 2023. Trial in the Patent Litigation is scheduled for September 19, 2022. The Company cannot make any predictions about the final outcome of this matter or the timing thereof.
The purchase price of $ 12.5 million included the asset Qbrexza as well as finished goods and raw material inventory. Journey also has the obligation to accept any product returns related to sales made by Dermira. Journey allocated the upfront payment to inventory since the fair value of the inventory and Qbrexza rights exceeded the purchase price. The future contingent milestone payments, if achieved, will be recorded to intangible asset and amortized over the seven-year life of the asset commencing on the closing date.
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In December 18, 2020, Journey entered an Asset Purchase Agreement with a third party (the “Anti-itch Product Agreement”) for a topical product that is indicated to treat scabies and skin itch conditions (“Anti-itch Product”). Pursuant to the terms and conditions of the Anti-itch Product Agreement, Journey agreed to pay $ 4.0 million, comprised of a non-refundable deposit of $ 0.2 million upon the execution of the term sheet, a cash upfront payment of $ 1.8 million on January 1, 2021 and additional future payments of $ 0.5 million on April 1, 2021, $ 0.5 million on July 1, 2021, and $ 1.0 million on January 1, 2022. There are no subsequent milestone payments or royalties beyond the aforementioned payments. Commercial launch of this product is expected in the first half of 2022.
On July 29, 2020, Journey entered into a license and supply agreement for Accutane® (“Accutane Agreement”) with DRL. Pursuant to the Accutane Agreement, Journey agreed to pay $ 5.0 million, comprised of an upfront payment of $ 1.0 million paid upon execution, with additional milestone payments totaling $ 4.0 million. Three additional milestone payments totaling $ 17.0 million are contingent upon the achievement of certain net sales milestones. Royalties in the low-double digits based on net sales, subject to specified reductions are also due.
The term of the agreement is ten years and renewable upon mutual agreement. Journey is required to pay royalties during the term of the agreement. The agreement contains customary representations, warranties, and indemnities. Each party may also terminate the agreement for material breach by the other party or for certain bankruptcy or insolvency related events and Journey may terminate for upon 180 days written notice to the other party.
The table below provides a summary of intangible assets as of December 31, 2021 and 2020, respectively:
Estimated Useful
($ in thousands)
Lives (Years)
December 31, 2021
December 31, 2020
Total intangible assets – asset purchases
3 to 7
$
19,003
$
18,606
Accumulated amortization
( 6,451 )
( 3,977 )
Net intangible assets
$
12,552
$
14,629
The table below provides a summary for the years ended December 31, 2021 and 2020, of recognized expense related to product licenses, which was recorded in costs of goods sold on the Consolidated Statement of Operations (see Note 19):
Intangible
($ in thousands)
Assets, Net
Beginning balance at December 31, 2019
$
7,377
Additions:
Accutane 1
4,727
Anti-itch product license acquisition 2
3,945
Amortization expense
( 1,420 )
Ending balance at December 31, 2020
$
14,629
Additions:
Exelderm milestone
397
Amortization expense
( 2,474 )
Ending balance at December 31, 2021
$
12,552
Note 1: Includes an upfront payment of $ 1.0 million and a milestone payment of $ 0.5 million in 2020 and three payments totaling $ 3.5 million due at various points between 2021 through 2023. Such payments were discounted by $ 0.3 million as a result of the long-term nature of such payments.
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Note 2: Includes an upfront payment of $ 0.2 million and three payments totaling $ 2.8 million in 2021 and $ 1.0 million in 2022. Such payments were discounted by $ 0.1 million as a result of the long-term nature of such payments. As of December 31, 2020, this asset has not yet been placed in service, therefore no amortization expense was recognized on this asset for the year ended December 31, 2020. The Company expects to launch this asset in the first half of 2022. Once the asset is placed in service Journey will amortize the asset over three years , which represents its expected useful life.
The future amortization of these intangible assets is as follows:
Total
($ in thousands)
Ximino®
Accutane®
Amortization
Year ended December 31, 2022
$
1,019
$
946
$
1,965
Year ended December 31, 2023
1,019
945
1,964
Year ended December 31, 2024
1,019
946
1,965
Year ended December 31, 2025
1,019
945
1,964
Thereafter
595
157
752
Sub-total
$
4,671
$
3,939
$
8,610
Assets not yet placed in service:
Anti-itch product license acquisition
—
—
3,942
Total
$
4,671
$
3,939
$
12,552
10. Debt and Interest
Debt
Total debt consists of the following:
December 31,
December 31,
($ in thousands)
2021
2020
Interest rate
Maturity
Total notes payable - Oaktree Note
$
60,450
$
60,000
11.00
%
August - 2025
Less: Discount on notes payable
( 7,063 )
( 8,323 )
Repayment of Oaktree Note
( 10,450 )
—
Total notes payable
$
42,937
$
51,677
Oaktree Note
On August 27, 2020 (the “Closing Date”), Fortress, as borrower, entered into a $ 60.0 million senior secured credit agreement with Oaktree (the “Oaktree Agreement” and the debt thereunder, the “Oaktree Note”) . The Oaktree Note bears interest at a fixed annual rate of 11.0 %, payable quarterly and maturing on the fifth anniversary of the Closing Date, August 27, 2025 , the (“Maturity Date”). The Company is required to make quarterly interest-only payments until the Maturity Date, at which point the outstanding principal amount is due. The Company may voluntarily prepay the Oaktree Note at any time subject to a Prepayment Fee. The Company is also required to make mandatory prepayments of the Oaktree Note under various circumstances. No amounts paid or prepaid may be reborrowed without Oaktree consent.
AstraZeneca’s notification of its intent to acquire Caelum, received on September 28, 2021, is defined in the Oaktree Agreement as a monetization event and as such, triggered a $ 10 million prepayment and an applicable prepayment fee of $ 0.5 million. The prepayment fee of $ 0.5 million is included in interest expense for the year ended December 31, 2021. The Company paid the $ 10.5 million on October 12, 2021.
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The Oaktree Agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among other things, restrictions on indebtedness, liens, affiliate transactions, investments, acquisitions, mergers, dispositions, prepayment of permitted indebtedness, and dividends and other distributions, subject to certain exceptions. These affirmative and negative covenants apply in different instances to Fortress itself, its private subsidiaries, its public subsidiaries, or certain combinations of the foregoing. The limitations on dividends and other distributions have the practical effect of preventing any further issuances by the Company or its private subsidiaries of equity securities with cash dividends or redemption features.
In addition, the Oaktree Agreement contains certain financial covenants, including, among other things, (i) maintenance of minimum liquidity and (ii) a minimum revenue test that requires Journey’s annual revenue to be equal to or to exceed annual revenue projections set forth in the agreement. Failure by the Company or Journey, as applicable, to comply with the financial covenants will result in an event of default, subject to certain cure rights of the Company. The Company was in compliance with all applicable covenants under the Oaktree Note as of December 31, 2021.
The Oaktree Agreement contains customary events of default, in certain circumstances subject to customary cure periods. These events of default apply in different instances to Fortress itself, its private subsidiaries, its public subsidiaries, or a certain combination of the foregoing. Following an event of default and any cure period, if applicable, the Agent will have the right upon notice to accelerate all amounts outstanding under the Oaktree Agreement, in addition to other remedies available to the lenders as secured creditors of the Company.
The Oaktree Agreement grants a security interest in favor of the Agent, for the benefit of the lenders, in substantially all of the Company’s assets (consisting principally of the Company’s shareholdings in, and in some cases debt owing from, its partner companies) as collateral securing the Company’s obligations under the Oaktree Agreement, except for: (i) certain interests in controlled foreign corporation subsidiaries of the Company; (ii) the Company’s holdings in Avenue; and (iii) those portions of the Company’s holdings in certain subsidiaries (plus Caelum) that are encumbered by pre-existing equity pledges to certain of the Company’s officers. None of Fortress’ subsidiaries or partner companies is a party to the Oaktree Agreement, and the collateral package does not include the assets of any such subsidiaries or partner companies.
Pursuant to the terms of the Oaktree Agreement, on the Closing Date the Company paid Oaktree an upfront commitment fee equal to 3 % of the $ 60.0 million, or $ 1.8 million. In addition, the Company paid a $ 35,000 Agency fee to the Agent, which was due on the Closing Date and will be due annually, together with fees of $ 2.5 million directly to third parties involved in the transaction, and issued warrants to Oaktree and certain of its affiliates to purchase up to 1,749,450 shares of common stock of the Company (see Note 14) with a relative fair value of $ 4.4 million. The Company recorded the fees totaling $ 8.7 million ($ 1.8 million to Oaktree, $ 2.5 million of expenses paid to third-parties and $ 4.4 million representing the relative fair value of the Oaktree Warrants) to debt discount, to be amortized over the term of the Oaktree Note. For the years ended December 31, 2021 and 2020, the Company amortized $ 1.3 million and $ 0.4 million, respectively, of debt discount associated with the Oaktree Note.
Debt Repayment
In August 2020, in connection with the Oaktree Note, the Company repaid the following indebtedness: the 2018 Venture Notes in the amount of $ 21.7 million, 2019 Notes (formerly the Opus Credit Facility) in the amount of $ 9.0 million and the 2017 Subordinated Notes in the amount of $ 28.4 million. Additionally the Company repaid its IDB Note of $ 14.0 million by utilizing the restricted cash securing the note. For the year ended December 31, 2020, the Company incurred interest expense related to the accelerated amortization of the debt discount associated with the aforementioned debt payoff. Interest expense included $ 1.2 million of unamortized debt discount fees for the 2017 Subordinated Note Financing, $ 0.3 million for the 2018 Venture Notes and $ 1.8 million for the Mustang Horizon Notes expensed at the time of the debt repayment.
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Mustang Horizon Notes
On September 30, 2020, Mustang repaid the amount outstanding under the Horizon Notes in full, which was comprised of $ 15.0 million face value of the outstanding notes, $ 0.1 million in accrued and unpaid interest, a $ 0.8 million final payment fee and prepayment penalties of $ 0.6 million.
IDB Letters of Credit
The Company has several letters of credit (“LOC”) with IDB securing rent deposits for lease facilities totaling approximately $ 2.2 million and $ 1.6 million as of December 31, 2021 and December 31, 2020, respectively. The LOC’s are secured by cash, which is included in restricted cash on the Company’s Consolidated Balance Sheet . Interest paid on the letters of credit is 2 % per annum.
Journey 8 % Cumulative Convertible Class A Preferred Offering
In March 2021, Journey commenced an offering of 8 % Cumulative Convertible Class A Preferred Stock (“Journey Preferred Offering”) in an aggregate minimum amount of $ 12.5 million and an aggregate maximum amount of $ 30.0 million. The Journey Preferred Offering terminated on July 18, 2021. Journey issued an aggregate of 758,680 Class A Preferred shares at a price of $ 25.00 per share, for gross proceeds of $ 19.0 million. Following the payment of placement agent fees of $ 1.9 million, and other expenses of $ 0.1 million, Journey received $ 17.0 million of net proceeds.
The Journey Preferred Stock automatically converts into Journey’s Common Stock upon a sale of Journey or a financing in an amount of at least $ 25.0 million within a year of the closing date of the Journey Preferred Offering (extendable by another six months at Journey’s option) at a discount of 15 % to the per share qualified stock price. On November 12, 2021 the Journey IPO was completed, resulting in the conversion of all of the Journey Preferred Stock into 2,231,346 shares of Journey common stock (see Note 14).
The Company evaluated the terms of the Journey Preferred Offering under ASC 480, Distinguishing Liabilities from Equity , and determined the instrument met the criteria to be recorded as a liability. The value at conversion does not vary with the value of Journey’s common shares, therefore the settlement provision would not be considered a conversion feature. Accordingly, the Company determined liability classification is appropriate and as such, this instrument was accounted for as a liability, until it converted into Journey common stock upon completion of the Journey IPO.
Dividends on the Journey Preferred Stock were paid quarterly in shares of Fortress common stock based upon a 7.5 % discount to the average trading price over the 10-day period preceding the dividend payment date. Dividends paid on the Journey Preferred Stock was recorded as interest expense on the consolidated statements of operations. For the year ended December 31, 2021, the Company issued 253,815 shares of common stock representing dividends paid of $ 0.8 million from issuance through conversion. As consideration for the foregoing, Journey issued to Fortress 81,985 shares of its common stock at the Journey IPO price of $ 10.00 .
In connection with the Journey Preferred Offering, Journey issued upon the closing of the Journey IPO to the placement agent (“the Placement Agent Warrants”) to purchase 5 % of the shares of Journey common stock into which the Journey Preferred Stock converted. The Placement Agent Warrants have a term of 5 years . At December 31,2021 Journey issued 111,567 shares of Journey common stock related to the conversion of all of the placement agent warrants.
Journey East West Bank Working Capital Line of Credit
On March 31, 2021, Journey entered into an agreement with East West Bank (“EWB”) in which EWB agreed to provide a $ 7.5 million working capital line of credit. The line of credit is secured by Journey’s receivables and cash. Interest on the line is the greater of 4.25% or the Prime Rate plus 1% . The agreement matures in 36 months . The outstanding balance of the working capital line of credit was $ 0.8 million at December 31, 2021.
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Interest Expense
The following table shows the details of interest expense for all debt arrangements during the periods presented. Interest expense includes contractual interest and amortization of the debt discount and amortization of fees represents fees associated with loan transaction costs, amortized over the life of the loan:
Year Ended December 31,
2021
2020
($ in thousands)
Interest
Fees
Total
Interest
Fees
Total
IDB Note
$
—
$
—
$
—
$
246
$
-
$
246
2017 Subordinated Note Financing 1
—
—
—
2,870
1,890
4,760
2019 Notes
—
—
—
710
—
710
2018 Venture Notes 1
—
—
—
1,253
1,000
2,253
LOC Fees
51
—
51
34
—
34
Mustang Horizon Notes 1,2
—
—
—
1,585
2,321
3,906
Oaktree Note 2
6,897
1,342
8,239
2,311
411
2,722
Partner company convertible preferred shares
2,845
2,572
5,417
—
—
Partner company dividend payable
820
—
820
—
—
—
Partner company installment payments - licenses 3
781
—
781
697
—
697
Other
—
—
—
( 2 )
—
( 2 )
Total Interest Expense and Financing Fee
$
11,394
$
3,914
$
15,308
$
9,704
$
5,622
$
15,326
Note 1:For the year ended December 31, 2020, includes $ 1.2 million expense of unamortized debt discount fees for the 2017 Subordinated Note Financing, $ 0.3 million for the 2018 Venture Notes and $ 1.8 million for the Mustang Horizon Notes expensed at the time of debt repayment on September 30, 2020.
Note 2: Includes $ 0.5 million prepayment fee for the Oaktree Note included in interest expense in 2021 and $ 0.6 million of prepayment penalties included in interest expense for the Mustang Horizon Notes in 2020 .
Note 3: Imputed interest expense related to Ximino, Accutane and Anti-itch product license acquisition (see Note 9).
11. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following:
December 31,
December 31,
($ in thousands)
2021
2020
Accounts Payable
$
47,429
$
11,412
Accrued expenses:
Professional fees
1,835
1,236
Salaries, bonus and related benefits
8,809
6,701
Research and development
7,932
5,007
Research and development - manufacturing
—
518
Research and development - license maintenance fees
4,640
461
Research and development - milestones
850
600
Accrued royalties payable
3,833
2,682
Accrued coupon and rebates
10,603
12,869
Income taxes payable
—
136
Return reserve
3,240
2,580
Other
1,489
1,187
Total accounts payable and accrued expenses
$
90,660
$
45,389
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12. Non-Controlling Interests
Non-controlling interests in consolidated entities are as follows:
For the Year Ended
As of December 31, 2021
December 31, 2021
As of December 31, 2021
Net loss attributable to
Non-controlling interests
Non-controlling
($ in thousands)
NCI equity share
non-controlling interests
in consolidated entities
ownership
UR-1
$
( 442 )
$
( 1,353 )
$
( 1,795 )
34.5
%
Aevitas
( 4,159 )
( 901 )
( 5,060 )
45.9
%
Avenue 2
5,739
( 2,909 )
2,830
82.0
%
Baergic
( 2,047 )
( 39 )
( 2,086 )
39.0
%
Cellvation
( 1,413 )
( 131 )
( 1,544 )
21.7
%
Checkpoint 1
63,464
( 39,226 )
24,238
81.5
%
Coronado SO
( 290 )
—
( 290 )
13.0
%
Cyprium
( 1,397 )
( 807 )
( 2,204 )
29.8
%
Helocyte
( 5,440 )
( 89 )
( 5,529 )
18.3
%
JMC
23,150
( 5,652 )
17,498
41.6
%
Mustang 2
141,527
( 48,518 )
93,009
82.7
%
Oncogenuity
( 627 )
( 497 )
( 1,124 )
24.9
%
Tamid
( 739 )
( 1 )
( 740 )
22.8
%
Total
$
217,326
$
( 100,123 )
$
117,203
For the Year Ended
As of December 31, 2020
December 31, 2020
As of December 31, 2020
Net loss attributable to
Non-controlling interests
Non-controlling
($ in thousands)
NCI equity share
non-controlling interests
in consolidated entities
ownership
UR-1
$
( 7 )
( 27 )
$
( 34 )
10.0
%
Aevitas
( 2,370 )
( 823 )
( 3,193 )
39.0
%
Avenue 2
5,800
( 3,974 )
1,826
77.4
%
Baergic
( 1,662 )
( 97 )
( 1,759 )
39.5
%
Cellvation
( 1,089 )
( 182 )
( 1,271 )
22.1
%
Checkpoint 1
41,704
( 13,265 )
28,439
80.4
%
Coronado SO
( 290 )
—
( 290 )
13.0
%
Cyprium
567
( 1,478 )
( 911 )
30.5
%
Helocyte
( 4,986 )
( 259 )
( 5,245 )
18.8
%
JMC
138
491
629
7.1
%
Mustang 2
116,060
( 36,429 )
79,631
80.9
%
Oncogenuity
( 82 )
( 376 )
( 458 )
25.3
%
Tamid
( 663 )
( 40 )
( 703 )
22.8
%
Total
$
153,120
$
( 56,459 )
$
96,661
Note 1: Checkpoint is consolidated with Fortress’ operations because Fortress maintains voting control through its ownership of Checkpoint’s Class A Common Shares which provide super-majority voting rights.
Note 2: Avenue and Mustang are consolidated with Fortress’ operations because Fortress maintains voting control through its ownership of Preferred Class A Shares which provide super-majority voting rights.
13. Net Loss per Common Share
Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of Common Stock outstanding during the period, without consideration for Common Stock equivalents. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of Common Stock and Common Stock equivalents outstanding for the period.
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The following shares of potentially dilutive securities, weighted during the years ended December 31, 2021 and 2020 have been excluded from the computations of diluted weighted average shares outstanding as the effect of including such securities would be antidilutive:
Year Ended December 31,
2021
2020
Warrants to purchase Common Stock
4,528,196
3,419,812
Options to purchase Common Stock
832,134
1,103,643
Unvested Restricted Stock
16,363,068
14,302,004
Unvested Restricted Stock Units
180,848
391,336
Total
21,904,246
19,216,795
14. Stockholders’ Equity
Common Stock
The Company’s Certificate of Incorporation, as amended, authorizes the Company to issue 170,000,000 shares of $ 0.001 par value Common Stock of which 101,435,505 shares of common stock are outstanding as of December 31, 2021. As of December 31, 2020, 150,000,000 shares were authorized and 94,877,492 shares of common stock were outstanding.
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 the 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.
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Series A Cumulative Redeemable Perpetual Preferred Stock
On October 26, 2017, the Company designated 5,000,000 shares of $ 0.001 par value preferred stock as Series A Cumulative Redeemable Perpetual Preferred Stock (the “Series A Preferred Stock”). As of December 31, 2021 and 2020, 3,427,138 shares of Series A Preferred Stock were issued and outstanding.
The terms, rights, preference and privileges of the Series A Preferred Stock are as follows:
Voting Rights
Except as may be otherwise required by law, the voting rights of the holders of the Series A Preferred Stock are limited to the affirmative vote or consent of the holders of at least two-thirds of the votes entitled to be cast by the holders of the Series A Preferred Stock outstanding at the time in connection with the: (1) authorization or creation, or increase in the authorized or issued amount of, any class or series of capital stock ranking senior to the Series A Preferred Stock with respect to payment of dividends or the distribution of assets upon liquidation, dissolution or winding up or reclassification of any of the Company’s authorized capital stock into such shares, or creation, authorization or issuance of any obligation or security convertible into or evidencing the right to purchase any such shares; or (2) amendment, alteration, repeal or replacement of the Company’s certificate of incorporation, including by way of a merger, consolidation or otherwise in which the Company may or may not be the surviving entity, so as to materially and adversely affect and deprive holders of Series A Preferred Stock of any right, preference, privilege or voting power of the Series A Preferred Stock.
Dividends
Dividends on Series A Preferred Stock accrue daily and will be cumulative from, and including, the date of original issue and shall be payable monthly at the rate of 9.375 % per annum of its liquidation preference, which is equivalent to $ 2.34375 per annum per share. The first dividend on Series A Preferred Stock sold in the offering was payable on December 31, 2017 (in the amount of $ 0.299479 per share) to the holders of record of the Series A Preferred Stock at the close of business on December 15, 2017 and thereafter for each subsequent quarter in the amount of $ 0.5839375 per share. The Company recorded approximately $ 8.0 million and $ 6.5 million of dividends in Additional Paid in Capital on the Consolidated Balance Sheets as of December 31, 2021 and 2020, respectively.
No Maturity Date or Mandatory Redemption
The Series A Preferred Stock has no maturity date, and the Company is not required to redeem the Series A Preferred Stock. Accordingly, the Series A Preferred Stock will remain outstanding indefinitely unless the Company decides to redeem it pursuant to its optional redemption right or its special optional redemption right in connection with a Change of Control (as defined below), or under the circumstances set forth below under “Limited Conversion Rights Upon a Change of Control” and elect to convert such Series A Preferred Stock. The Company is not required to set aside funds to redeem the Series A Preferred Stock.
Optional Redemption
The Series A Preferred Stock may be redeemed in whole or in part (at the Company’s option) any time on or after December 15, 2022, upon not less than 30 days nor more than 60 days ’ written notice by mail prior to the date fixed for redemption thereof, for cash at a redemption price equal to $ 25.00 per share, plus any accumulated and unpaid dividends to, but not including, the redemption date.
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Special Optional Redemption
Upon the occurrence a Change of Control (as defined below), the Company may redeem the shares of Series A Preferred Stock, at its option, in whole or in part, within one hundred twenty (120) days of any such Change of Control, for cash at $ 25.00 per share, plus accumulated and unpaid dividends (whether or not declared) to, but excluding, the redemption date. If, prior to the Change of Control conversion date, the Company has provided notice of its election to redeem some or all of the shares of Series A Preferred Stock (whether pursuant to the Company’s optional redemption right described above under “Optional Redemption” or this special optional redemption right), the holders of shares of Series A Preferred Stock will not have the Change of Control conversion right with respect to the shares of Series A Preferred Stock called for redemption. If the Company elects to redeem any shares of the Series A Preferred Stock as described in this paragraph, the Company may use any available cash to pay the redemption price.
A “Change of Control” is deemed to occur when, after the original issuance of the Series A Preferred Stock, the following have occurred and are continuing:
● the acquisition by any person, including any syndicate or group deemed to be a “person” under Section 13(d)(3) of the Exchange Act of beneficial ownership, directly or indirectly, through a purchase, merger or other acquisition transaction or series of purchases, mergers or other acquisition transactions of the Company’s stock entitling that person to exercise more than 50% of the total voting power of all the Company’s stock entitled to vote generally in the election of the Company’s directors (except that such person will be deemed to have beneficial ownership of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition); and
● following the closing of any transaction referred to in the bullet point above, neither the Company nor the acquiring or surviving entity has a class of common equity securities (or American Depositary Receipts representing such securities) listed on the NYSE, the NYSE American LLC or the Nasdaq Stock Market, or listed or quoted on an exchange or quotation system that is a successor to the NYSE, the NYSE American LLC or the Nasdaq Stock Market.
Conversion, Exchange and Preemptive Rights
Except as described below under “Limited Conversion Rights upon a Change of Control,” the Series A Preferred Stock is not subject to preemptive rights or convertible into or exchangeable for any other securities or property at the option of the holder.
Limited Conversion Rights upon a Change of Control
Upon the occurrence of a Change of Control, each holder of shares of Series A Preferred Stock will have the right (unless, prior to the Change of Control Conversion Date, the Company has provided or provides irrevocable notice of its election to redeem the Series A Preferred Stock as described above under “Optional Redemption,” or “Special Optional Redemption”) to convert some or all of the shares of Series A Preferred Stock held by such holder on the Change of Control Conversion Date, into the Common Stock Conversion Consideration, which is equal to the lesser of:
● the quotient obtained by dividing (i) the sum of the $ 25.00 liquidation preference per share of Series A Preferred Stock plus the amount of any accumulated and unpaid dividends (whether or not declared) to, but not including, the Change of Control Conversion Date (unless the Change of Control Conversion Date is after a record date for a Series A Preferred Stock dividend payment and prior to the corresponding Dividend Payment Date, in which case no additional amount for such accumulated and unpaid dividend will be included in this sum) by (ii) the Common Stock Price (such quotient, the “Conversion Rate”); and
● 13.05483 shares of common stock, subject to certain adjustments.
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In the case of a Change of Control pursuant to which the Company’s common stock will be converted into cash, securities or other property or assets, a holder of Series A Preferred Stock will receive upon conversion of such Series A Preferred Stock the kind and amount of Alternative Form Consideration which such holder would have owned or been entitled to receive upon the Change of Control had such holder held a number of shares of the Company’s common stock equal to the Common Stock Conversion Consideration immediately prior to the effective time of the Change of Control.
Notwithstanding the foregoing, the holders of shares of Series A Preferred Stock will not have the Change of Control Conversion Right if the acquiror has shares listed or quoted on the NYSE, the NYSE American LLC or Nasdaq Stock Market or listed or quoted on an exchange or quotation system that is a successor to the NYSE, the NYSE American LLC or Nasdaq Stock Market, and the Series A Preferred Stock becomes convertible into or exchangeable for such acquiror’s listed shares upon a subsequent Change of Control of the acquiror.
Liquidation Preference
In the event the Company liquidates, dissolves or is wound up, holders of the Series A Preferred Stock will have the right to receive $ 25.00 per share, plus any accumulated and unpaid dividends to, but not including, the date of payment, before any payment is made to the holders of the Company’s common stock.
Ranking
The Series A Preferred Stock will rank, with respect to rights to the payment of dividends and the distribution of assets upon the Company’s liquidation, dissolution or winding up, (1) senior to all classes or series of the Company’s common stock and to all other equity securities issued by the Company other than equity securities referred to in clauses (2) and (3); (2) on a par with all equity securities issued by the Company with terms specifically providing that those equity securities rank on a par with the Series A Preferred Stock with respect to rights to the payment of dividends and the distribution of assets upon the Company’s liquidation, dissolution or winding up; (3) junior to all equity securities issued by the Company with terms specifically providing that those equity securities rank senior to the Series A Preferred Stock with respect to rights to the payment of dividends and the distribution of assets upon the Company liquidation, dissolution or winding up; and (4) junior to all of the Company’s existing and future indebtedness.
Stock-Based Compensation
As of December 31, 2021, 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 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 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 and in 2020, the Company’s Board of Directors and stockholders approved an increase of 3,000,000 shares bringing the total number of shares approved under this plan to 13,000,000 , with the aggregate total of authorized shares available for grants under the 2007 Plan and the 2013 Plan of up to 19,000,000 shares. An aggregate 16,506,003 shares have been granted under both the Company’s 2007 and 2013 plans, net of cancellations, and 2,493,997 shares were available for issuance as of December 31, 2021.
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Certain partner companies have their own equity compensation plan under which shares are granted to eligible employees, directors and consultants in the form of restricted stock, stock options, and other types of grants of stock of the respective partner company’s common stock. The table below provides a summary of those plans as of December 31, 2021:
Partner
Shares
Shares available at
Company
Stock Plan
Authorized
December 31, 2021
Aevitas
Aevitas Therapeutics, Inc. 2018 Long Term Incentive Plan
2,000,000
376,585
Avenue
Avenue Therapeutics, Inc. 2015 Stock Plan
4,000,000
1,827,336
Baergic
FBIO Acquisition Corp. III 2017 Incentive Plan
2,000,000
1,150,000
Cellvation
Cellvation Inc. 2016 Incentive Plan
2,000,000
300,000
Checkpoint
Checkpoint Therapeutics, Inc. Amended and Restated 2015 Stock Plan
9,000,000
3,025,119
Cyprium
Cyprium Therapeutics, Inc. 2017 Stock Plan
2,000,000
575,000
Helocyte
DiaVax Biosciences, Inc. 2015 Incentive Plan
2,000,000
341,667
Journey
Journey Medical Corporation 2015 Stock Plan
3,000,000
1,020,661
Mustang
Mustang Bio, Inc. 2016 Incentive Plan
8,000,000
2,823,838
Oncogenuity
FBIO Acquisition Corp. VII 2017 Incentive Plan
2,000,000
1,600,000
UR-1
FBIO Acquisition Corp. VIII 2017 Incentive Plan
4,000,000
2,050,750
The purpose of the Company’s and partner 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.
Incentive and non-statutory stock options are granted pursuant to option agreements adopted by the plan administrator. Options generally have 10-year contractual terms and vest in three equal annual installments commencing on the grant date.
The Company estimates the fair value of stock option grants using a Black-Scholes option pricing model. In applying this model, the Company uses the following assumptions:
● 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 : The Company utilizes the trading history of its Common Stock to determine the expected stock price volatility for its Common Stock.
● 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 on its common stock.
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.
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, 2021 and 2020
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Year Ended December 31,
($ in thousands)
2021
2020
Employee and non-employee awards
$
8,603
$
5,150
Executive awards of Fortress Companies' stock
1,446
1,504
Warrants
—
130
Partner Companies:
Avenue
442
710
Checkpoint
3,137
2,780
Mustang
3,308
2,987
Journey
2,466
153
Other
84
37
Total stock-based compensation expense
$
19,486
$
13,451
For the years ended 2021 and 2020, $ 4.3 million and $ 3.2 million was included in research and development expenses, and $ 15.2 million and $ 10.3 million was included in selling, general and administrative expenses, respectively.
Options
The following table summarizes Fortress stock option activities excluding activities related to partner companies:
Weighted average
Total
remaining
Weighted average
weighted average
contractual life
Number of shares
exercise price
intrinsic value
(years)
Options vested and expected to vest at December 31, 2019
1,410,501
$
4.30
$
684,752
2.33
Exercised
( 100,000 )
1.18
—
—
Forfeited
( 257,011 )
2.57
—
—
Options vested and expected to vest at December 31, 2020
1,053,490
$
5.02
$
647,482
2.63
Forfeited
( 35,000 )
4.33
—
—
Options vested and expected to vest at December 31, 2021
1,018,490
$
5.04
$
368,344
1.68
Options vested and exercisable at December 31, 2021
1,018,490
$
5.04
$
368,344
1.68
During the years ended December 31, 2021 and 2020, there were no exercises of stock options.
As of December 31, 2021, the Company had no unrecognized stock-based compensation expense related to options.
Restricted Stock
Stock-based compensation expense from restricted stock awards and restricted stock units for the years ended December 31, 2021 and 2020 was $ 19.5 million and $ 12.5 million, respectively. Restricted stock awards and restricted stock unit awards are expensed under the straight-line method over the vesting period. Expense for awards with performance-based vesting criteria will be measured and recorded if and when it becomes probable that the milestone will be achieved.
During 2021, the Company granted 2.3 million restricted shares of its Common Stock to executives and directors of the Company and 1.4 million restricted stock units to employees and non-employees of the Company. The fair value of the restricted stock awards issued during 2021 of $ 7.4 million and the fair value of the restricted stock unit awards issued during 2021 of $ 5.5 million were estimated on the grant date using the Company’s stock price as of the grant date. The 2021 restricted stock awards and restricted stock unit awards vest upon both the passage of time as well as meeting certain performance criteria.
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During 2020, the Company granted 1.9 million restricted shares of its Common Stock to executives and directors of the Company and 0.6 million restricted stock units to employees and non-employees of the Company. The fair value of the restricted stock awards issued during 2020 of $ 4.8 million and the fair value of the restricted stock unit awards issued during 2020 of $ 2.4 million were estimated on the grant date using the Company’s stock price as of the grant date. The 2020 restricted stock awards and restricted stock unit awards vest upon both the passage of time as well as meeting certain performance criteria.
The following table summarizes Fortress restricted stock awards and restricted stock units activities, excluding activities related to Fortress subsidiaries:
Weighted
average grant
Number of shares
price
Unvested balance at December 31, 2019
13,768,014
$
2.46
Restricted stock granted
1,873,072
2.57
Restricted stock vested
( 230,000 )
2.78
Restricted stock units granted
630,126
3.82
Restricted stock units forfeited
( 148,750 )
3.30
Restricted stock units vested
( 384,958 )
3.49
Unvested balance at December 31, 2020
15,507,504
$
2.49
Restricted stock granted
2,330,678
3.17
Restricted stock vested
( 374,825 )
2.69
Restricted stock units granted
1,405,842
3.92
Restricted stock units forfeited
( 96,750 )
3.49
Restricted stock units vested
( 712,449 )
3.54
Unvested balance at December 31, 2021
18,060,000
$
2.64
The total fair value of restricted stock units and awards that vested during the years ended December 31, 2021 and 2020 was $ 3.5 million and $ 2.0 million, respectively. As of December 31, 2021, the Company had unrecognized stock-based compensation expense related to all unvested restricted stock and restricted stock unit awards of $ 19.4 million and $ 4.3 million, respectively, which is expected to be recognized over the remaining weighted-average vesting period of 3.2 years and 2.1 years, respectively. This amount does not include 0.1 million restricted stock units as of December 31, 2020 which are performance-based and vest upon achievement of certain corporate milestones. Stock-based compensation for these awards will be measured and recorded if and when it is probable that the milestone will be achieved.
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, 2021 and 2020, certain non-employee directors elected to defer an aggregate of 230,000 and 230,000 restricted stock awards, respectively, 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.
As of December 31, 2021, 694,729 shares have been purchased and 305,271 shares are available for future sale under the Company’s ESPP. The Company recognized share-based compensation expense of $ 0.1 million and $ 0.1 million for the years ended December 31, 2021 and 2020, respectively.
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Warrants
The following table summarizes Fortress warrant activities, excluding activities related to partner companies:
Total weighted
Weighted average
average
remaining
Number of
Weighted average
intrinsic
contractual life
shares
exercise price
value
(years)
Outstanding as of December 31, 2019
2,741,180
$
3.19
$
111,000
2.73
Granted
1,849,450
3.14
101,000
—
Forfeited
( 9 )
3.00
2
—
Outstanding as of December 31, 2020
4,590,621
$
3.17
$
607,848
4.85
Expired
( 60,000 )
1.37
—
Forfeited
( 25,000 )
3.00
—
Outstanding as of December 31, 2021
4,505,621
$
3.20
$
68,800
3.93
Exercisable as of December 31, 2021
4,370,621
$
3.23
$
8,500
3.86
During 2020, in connection with the issuance of the Oaktree Note, the Company issued warrants to purchase 1,749,450 shares of common stock; in connection with a consulting agreement the Company issued warrants to purchase 100,000 shares of common stock. The relative fair value of the Oaktree warrants was recorded to debt discount and is being amortized over the term of the Oaktree Note (see Note 10). As of December 31, 2021, the Company had no unrecognized stock-based compensation expense related to warrants.
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 January 1, 2022 and 2021, the Compensation Committee granted 1,102,986 and 1,030,339 shares each to Dr. Rosenwald and Mr. 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 2021 and 2020. The shares will vest in full once both of the following conditions are met: (i) the Company’s market capitalization has increased 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 $ 2.8 million for the 2022 grant and $ 3.3 million for the 2021 grant. For the year ended December 31, 2021 and 2020, the Company recorded stock compensation expense of approximately $ 3.8 million and $ 2.5 million, respectively related to the LTIP grants on the Consolidated Statements of Operations.
Capital Raises
2021 Shelf
On July 23, 2021, the Company filed a shelf registration statement 333-255185 on Form S-3, which was declared effective on July 30, 2021 (the "2021 Shelf"). No securities have been drawn down under the 2021 Shelf.
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Common Stock At the Market Offering and 2020 Shelf
On May 18, 2020, the Company filed a shelf registration statement on Form S-3, which was declared effective on May 26, 2020 (the "2020 Shelf"). In connection with the 2020 Shelf, the Company entered into an At Market Issuance Sales Agreement ("2020 Common ATM"), governing potential sales of the Company's common stock. ATM activity since June 1, 2020 were made under the 2020 Shelf.
For the year ended December 31, 2021, the Company issued approximately 3.1 million shares of common stock at an average price of $ 3.05 per share for gross proceeds of $ 9.4 million. In connection with these sales, the Company paid aggregate fees of $ 0.3 million. Approximately $ 17.4 million of securities remain available for sale under the 2020 Shelf at December 31, 2021.
On July 23, 2021, the Company filed shelf registration statement 333-255185 on Form S-3, which was declared effective on July 30, 2021 (the “2021 Shelf”). No securities have been drawn down under the 2021 Shelf.
2019 Common Stock At the Market Offering
On June 28, 2019, the Company entered into an At Market Issuance Sales Agreement (“2019 Common ATM”) governing potential sales of the Company’s common stock. Under the 2019 Common ATM, the Company paid the agents a commission rate of up to 3.0 % of the gross proceeds from the sale of any shares of common stock. For the year ended December 31, 2020, the Company issued approximately 17.4 million shares of common stock, at an average selling price of $ 2.73 per share for gross proceeds of $ 47.5 million. In connection with these sales, the Company paid aggregate fees of approximately $ 1.4 million.
2019 9.375 % Series A Cumulative Redeemable Perpetual Preferred Stock Offering
On February 14, 2020, the Company announced the closing of an underwritten public offering, whereby it sold 625,000 shares of its 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.
All of the Company’s Perpetual Preferred Offerings were made under the 2020 Shelf.
Journey
Journey’s common stock began trading on the Nasdaq Capital Market on November 12, 2021 under the ticker symbol “DERM.” On November 16, 2021, Journey completed an initial public offering (the “Journey IPO”) whereby it sold 3,520,000 shares of its common stock at a price of $ 10.00 per share for gross proceeds of $ 35.2 million, before deducting underwriting discounts and other offering costs of $ 4.6 million for net proceeds of $ 30.6 million.
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In March 2021, Journey commenced an offering of 8 % Cumulative Convertible Class A Preferred Stock (“Journey Preferred Offering”) in an aggregate minimum amount of $ 12.5 million and an aggregate maximum amount of $ 30.0 million. The Journey Preferred Offering terminated on July 18, 2021. Journey issued an aggregate of 758,680 Class A Preferred shares at a price of $ 25.00 per share, for gross proceeds of $ 19.0 million. Following the payment of placement agent fees of $ 1.9 million, and other expenses of $ 0.1 million, Journey received $ 17.0 million in net proceeds. Due to the Journey IPO in November 2021 as noted above, the Journey Preferred Stock converted into 2,231,346 shares of Journey common stock.
Checkpoint
In November 2017, Checkpoint filed a shelf registration statement on Form S-3 (No. 333-221493) (the "Checkpoint 2017 S-3"), which was declared effective in December 2017. Under the Checkpoint S-3, Checkpoint may sell up to a total of $ 100 million of its securities. In connection with the Checkpoint S-3, Checkpoint entered into an At-the-Market Issuance Sales Agreement (the "Checkpoint 2017 ATM") relating to the sale of shares of common stock. Under the Checkpoint 2017 ATM, Checkpoint pays the Agents a commission rate of up to 3.0 % of the gross proceeds from the sale of any shares of common stock. The Checkpoint 2017 S-3 expired in December 2020.
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.
In November 2020, Checkpoint filed a shelf registration statement on Form S-3 (the “Checkpoint 2020 S-3”), which was declared effective in December 2020. Under the Checkpoint 2020 S-3, Checkpoint may sell up to a total of $ 100 million of its securities. In connection with the Checkpoint 2020 S-3, Checkpoint entered into an ATM (the “Checkpoint 2020 ATM”) with the Agents relating to the sale of shares of Checkpoint’s common stock. Under the Checkpoint 2020 ATM, Checkpoint pays the Agents a commission rate of up to 3.0 % of the gross proceeds from the sale of any shares of Checkpoint’s common stock.
During the year ended December 31, 2020, Checkpoint sold a total of 5,104,234 shares of common stock under the Checkpoint 2017 ATM and Checkpoint 2020 ATM combined 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.
During the year ended December 31, 2021, Checkpoint sold a total of 11,899,983 shares of common stock under the Checkpoint 2020 ATM for aggregate total gross proceeds of approximately $ 41.3 million at an average selling price of $ 3.47 per share, resulting in net proceeds of approximately $ 40.4 million after deducting commissions and other transaction costs.
As of December 31, 2021, approximately $ 54.6 million of the shelf remains available for sale under the Checkpoint 2020 S-3.
Pursuant to the Founders Agreement, Checkpoint issued to Fortress 2.5 % of the aggregate number of shares of Checkpoint common stock issued in the offerings noted above. Accordingly, Checkpoint issued 297,490 shares and 310,625 shares to Fortress for the year ended December 31, 2021 and 2020, respectively.
Mustang
On April 23, 2021, Mustang filed a shelf registration statement No. 333-255476 on Form S-3 (the “Mustang 2021 S-3”), which was declared effective on May 24, 2021. Under the Mustang 2021 S-3, Mustang may sell up to a total of $ 200 million of its securities. As of December 31, 2021, $ 200 million of the Mustang 2021 S-3 remains available for sales of securities.
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On July 13, 2018, Mustang filed a shelf registration statement No. 333-226175 on Form S-3 , as amended on July 20, 2018 (the "2018 Mustang S-3"), which was declared effective in August 2018. Under the 2018 Mustang S-3, Mustang may sell up to a total of $ 75.0 million of its securities. In connection with the 2018 Mustang S-3, Mustang entered into an At-the-Market Issuance Sales Agreement (the "Mustang ATM") relating to the sale of shares of common stock. Under the Mustang ATM, Mustang pays the Agents a commission rate of up to 3.0 % of the gross proceeds from the sale of any shares of common stock. On December 31, 2020, the ATM Agreement was amended to add H.C. Wainwright & Co., LLC as an Agent.
During the year ended December 31, 2021, the Company issued approximately 19.4 million shares of common stock at an average price of $ 3.70 per share for gross proceeds of $ 71.9 million under the ATM Agreement. In connection with these sales, the Company paid aggregate fees of approximately $ 1.3 million for net proceeds of approximately $ 70.6 million.
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.
On October 23, 2020, Mustang filed a shelf registration statement No. 333-249657 on Form S-3 (the "2020 Mustang S-3"), which was declared effective on December 4, 2020. Under the 2020 Mustang S-3, Mustang may sell up to a total of $ 100.0 million of its securities.
On June 11, 2020, Mustang entered into an underwriting agreement (the “Mustang Underwriting Agreement”). 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 the Mustang S-3 registrations filed with the Securities and Exchange Commission. The offering closed on June 15, 2020, and the over-allotment closed on June 25, 2020.
Pursuant to the terms of the Second Amended and Restated Founders Agreement, Mustang issued to Fortress 2.5 % of the aggregate number of shares of Mustang common stock issued in the offerings noted above. Accordingly, Mustang issued 576,157 shares of common stock and recorded 107,022 shares issuable to Fortress for the year ended December 31, 2021 and issued 730,795 common shares to Fortress for the year ended December 31, 2020.
Avenue
In November 2021, Avenue, pursuant to an underwritten public offering, sold 2,238,805 shares of its common stock at a price of $ 1.34 per share for gross proceeds of approximately $ 3.0 million. After deducting underwriting discounts and commissions and other expenses, net proceeds to Avenue from this underwritten public offering were $ 2.6 million.
In December 2021, Avenue, pursuant to an underwritten public offering, sold 1,910,100 shares of its common stock at a price of $ 1.07 per share for gross proceeds of approximately $ 2.0 million. After deducting underwriting discounts and commissions and other expenses, net proceeds to Avenue from this underwritten public offering were $ 1.8 million.
Cyprium
On August 28, 2020, Cyprium closed on an underwritten public offering whereby it sold 255,400 shares of its 9.375 % Series A Cumulative Redeemable Perpetual Preferred Stock (“Cyprium Perpetual Preferred Stock” or “Cyprium PPS”), plus an overallotment of an additional 64,600 shares, which was exercised on September 18, 2020 at a price of $ 25.00 per share for gross proceeds of $ 8.0 million, before deducting underwriting discounts and commissions and offering expenses of approximately $ 0.9 million (the “Cyprium Offering”).
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Pursuant to the terms of the Cyprium PPS, shareholders on the record date are entitled to receive a monthly cash dividend of $ 0.19531 per share which yields an annual dividend of $ 2.34375 per share. The Cyprium PPS will automatically be redeemed upon the first (and only the first) bona fide, arm’s-length sale of a Priority Review Voucher (a “PRV”) issued by the FDA in connection with the approval of CUTX-101, Cyprium’s lead product candidate. Upon the PRV sale, each share of Cyprium PPS will be automatically redeemed in exchange for a payment equal to twice (2x) the $ 25.00 liquidation preference, plus accumulated and unpaid dividends to, but excluding, the redemption date.
An optional exchange to Company Preferred Stock is available after 24 months from the issuance date so long as a sale of the PRV has not occurred. Additionally, if a PRV Sale has not occurred by September 30, 2024 the Cyprium PPS is either automatically exchanged for Company Preferred Stock or cash at the discretion of Fortress. The Cyprium PPS is fully and unconditionally guaranteed by Fortress.
Cyprium paid $ 0.7 million in dividends for the year ended December 31, 2021, and $ 0.2 million in dividends for the year ended December 31, 2020, including the initial dividend of $ 49,883 ($ 0.19531 per share) paid to shareholders of record on September 30, 2020.
15. Commitments and Contingencies
Leases
On October 3, 2014, the Company entered into a 15 -year lease for office space at 2 Gansevoort Street, New York, NY 10014, at an average annual rent of $ 2.5 million. The Company took possession of this space, which serves as its principal executive offices, in December 2015, and took occupancy in April 2016. Total rent expense, over the full term of the lease for this space will approximate $ 40.7 million. In conjunction with the lease, the Company entered into Desk Space Agreements with two related parties: OPPM and TGTX, to occupy 10 % and 45 %, respectively, of the office space that requires them to pay their share of the average annual rent of $ 0.3 million and $ 1.1 million, respectively. The total net rent expense will approximate $ 16.0 million over the lease term. These initial rent allocations will be adjusted periodically for each party based upon actual percentage of the office space occupied. Additionally, the Company has reserved the right to execute desk space agreements with other third parties and those arrangements will also affect the cost of the lease actually borne by us.
In October 2015, the Company entered into a 5-year lease for approximately 6,100 square feet of office space in Waltham, MA at an average annual rent of approximately $ 0.2 million. The Company took occupancy of this space in January 2016. In December 2020, we amended our lease and entered into a new two-year extension of the same office space in Waltham, MA at an average annual rent of $ 0.2 million. The term of this amended lease commences on April 1, 2021 and will expire on March 31, 2023 .
Journey
In June 2017, Journey extended its lease for 2,295 square feet of office space in Scottsdale, AZ by one year , at an average annual rent of approximately $ 55,000 . Journey originally took occupancy of this space in November 2014. In August 2018, Journey amended their lease and entered into a new two-year extension for 3,681 square feet of office space in the same location in Scottsdale, AZ at an annual rate of approximately $ 94,000 . The term of this amended lease commenced on December 1, 2018 and will expire on November 30, 2020 . In August 2020, Journey amended their lease and entered into a new 25-month extension of the same office space in Scottsdale, AZ at an average annual rent of $ 0.1 million. The term of this amended lease commenced on December 1, 2020 and will expire on December 31, 2022 .
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Mustang
On October 27, 2017, Mustang entered into a lease agreement with WCS - 377 Plantation Street, Inc., a Massachusetts nonprofit corporation (“Landlord”). Pursuant to the terms of the lease agreement, Mustang agreed to lease 27,043 square feet from the Landlord, located at 377 Plantation Street in Worcester, MA (the “Facility”), through November 2026, subject to additional extensions at Mustang’s option. Base rent, net of abatements of $ 0.6 million over the lease term, totals approximately $ 3.6 million, on a triple-net basis.
The terms of the lease also require that Mustang post an initial security deposit of $ 0.8 million, in the form of $ 0.5 million letter of credit and $ 0.3 million in cash, which increased to $ 1.3 million ($ 1.0 million letter of credit, $ 0.3 million in cash) on November 1, 2019. After the fifth lease year, the letter of credit obligation is subject to reduction.
The Facility began operations for the production of personalized CAR T and gene therapies in 2018.
Most of the Company’s lease liabilities result from the lease of its New York City, NY office, which expires in 2031 and Mustang’s Worcester, MA cell processing facility lease, which expires in 2026 . Such leases do not require any contingent rental payments, impose any financial restrictions, or contain any residual value guarantees. Certain of the Company’s leases include renewal options and escalation clauses; renewal options have not been included in the calculation of the lease liabilities and right of use assets as the Company is not reasonably certain to exercise the options. The Company does not act as a lessor or have any leases classified as financing leases. At December 31, 2021, the Company had operating lease liabilities of $ 23.1 million and right of use assets of $ 19.0 million, which are included in the Company’s Consolidated Balance Sheet.
During the years ended December 31, 2021 and 2020, the Company recorded $ 3.3 million and $ 3.2 million, respectively, as lease expense to current period operations.
Year Ended December 31,
($ in thousands)
2021
2020
Lease Cost
Operating lease cost
$
3,253
$
3,246
Shared lease costs
( 1,835 )
( 1,873 )
Variable lease cost
727
593
Total lease expense
$
2,145
$
1,966
The following tables summarize quantitative information about the Company’s operating leases, under the adoption of ASC Topic 842 , Leases :
Year Ended December 31,
($ in thousands)
2021
2020
Operating cash flows from operating leases
$
( 3,366 )
$
( 2,958 )
Right-of-use assets exchanged for new operating lease liabilities
$
207
$
634
Weighted-average remaining lease term – operating leases (years)
5.2
5.7
Weighted-average discount rate – operating leases
6.3
%
6.3
%
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Future Lease
($ in thousands)
Liability
Year Ended December 31, 2022
$
3,498
Year Ended December 31, 2023
3,270
Year Ended December 31, 2024
3,206
Year Ended December 31, 2025
3,241
Year Ended December 31, 2026
3,243
Other
14,014
Total operating lease liabilities
30,472
Less: present value discount
( 7,381 )
Net operating lease liabilities, short-term and long-term
$
23,091
The Company recognizes rent expense on a straight-line basis over the non-cancellable lease term. Rent expense for the years ended December 31, 2021 and 2020 was $ 2.1 million and $ 2.0 million, respectively.
Indemnification
In accordance with its certificate of incorporation, bylaws and indemnification agreements, the Company has indemnification obligations to its officers and directors for certain events or occurrences, subject to certain limits, while they are serving at the Company’s request in such capacity. There have been no claims to date, and the Company has director and officer insurance to address such claims. The Company and its partner companies also provide indemnification of contractual counterparties without limitation to clinical sites, service providers and licensors.
Legal Proceedings
In the ordinary course of business, the Company and its subsidiaries may be subject to both insured and uninsured litigation. Suits and claims may be brought against the Company by customers, suppliers, partners and/or third parties (including tort claims for personal injury arising from clinical trials of the Company’s product candidates and property damage) alleging deficiencies in performance, breach of contract, etc., and seeking resulting alleged damages.
Qbrexza
On March 31, 2021 Journey executed an Asset Purchase Agreement (the “Qbrexza APA”) with Dermira, Inc., a subsidiary of Eli Lilly and Company (“Dermira”), and the transaction closed on May 14, 2021. Pursuant to the terms of the agreement, Journey acquired the rights to Qbrexza® (glycoprronium), a prescription cloth towelette to treat primary axillary hyperhidrosis in patients nine years of age or older. Upon closing of the Qbrexza purchase, Journey became substituted for Dermira as the plaintiff in, and is currently vigorously litigating, U.S. patent litigation commenced by Dermira on October 21, 2020 in the U.S. District Court of Delaware (the “Perrigo Patent Litigation”) against Perrigo Pharma International DAC (“Perrigo”) (N/K/A Padagis Israel Pharmaceuticals Ltd.) alleging infringement of certain patents covering Qbrexza (the “Qbrexza Patents”), which are included among the proprietary rights to Qbrexza that Journey acquired pursuant to the Qbrexza APA. The Perrigo Patent Litigation was initiated following the submission by Perrigo, in accordance with the procedures set out in the Drug Price Competition and Patent Term Restoration Act of 1984 (the “Hatch-Waxman Act”), of an Abbreviated New Drug Application, or ANDA. The ANDA seeks approval to market a generic version of Qbrexza prior to the expiration of the Qbrexza Patents and alleges that the Qbrexza Patents are invalid. Perrigo is subject to a 30-month stay preventing it from selling a generic version, but that stay is set to expire on March 9, 2023. Trial in the Perrigo Patent Litigation is scheduled for September 19, 2022. Journey cannot make any predictions about the final outcome of this matter or the timing thereof.
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On March 4, 2022, Journey filed a complaint against Teva Pharmaceuticals, Inc., Teva Pharmaceuticals USA, Inc., and Teva Pharmaceuticals Industries Ltd. in the U.S. District Court of Delaware (the “Teva Patent Litigation”) alleging infringement of certain patents covering Qbrexza (the “Qbrexza Patents”), which are included among the proprietary rights to Qbrexza that were acquired pursuant to the Qbrexza APA. The Teva Patent Litigation was initiated following the submission by Teva, in accordance with the procedures set out in the Drug Price Competition and Patent Term Restoration Act of 1984 (the “Hatch-Waxman Act”), of an Abbreviated New Drug Application, or ANDA. The ANDA seeks approval to market a generic version of Qbrexza prior to the expiration of the Qbrexza Patents and alleges that the Qbrexza Patents are invalid. Teva is subject to a 30-month stay preventing it from selling a generic version. The stay should expire no earlier than August 8, 2024. Trial in the Teva Patent Litigation has not yet been scheduled. The Company cannot make any predictions about the final outcome of this matter or the timing thereof.
Amzeeq
In January 2022, Journey acquired Amzeeq (minocycline) topical foam, 4%, and Zilxi (minocycline) topical foam, 1.5%, two FDA-Approved Topical Minocycline Products and Molecule Stabilizing Technology (MST)™ from VYNE Therapeutics, Inc. Upon completion of the acquisition from VYNE, Journey became substituted for VYNE as the plaintiff in U.S. patent litigation commenced by VYNE on August 9, 2021 in the U.S. District Court of Delaware (the “Padagis Patent Litigation”) against Padagis Israel Pharmaceuticals Ltd. (F/K/A Perrigo Israel Pharmaceuticals Ltd.) (“Padagis”) alleging infringement of certain patents covering Amzeeq® (the “Amzeeq® Patents”), which are included among the proprietary rights to Amzeeq® that were acquired pursuant to the APA. The Padagis Patent Litigation was initiated following the submission by Padagis, in accordance with the procedures set out in the Drug Price Competition and Patent Term Restoration Act of 1984 (the “Hatch-Waxman Act”), of an Abbreviated New Drug Application (the “ANDA”). The ANDA seeks approval to market a generic version of Amzeeq® prior to the expiration of the Amzeeq® Patents and alleges that the Amzeeq® Patents are invalid. Padagis is subject to a 30-month stay preventing it from selling a generic version, but that stay is set to expire on December 30, 2023. Journey is seeking, among other relief, an order that the effective date of any United States Food and Drug Administration approval of Padagis’ ANDA be no earlier than the expiration of the patents listed in the Orange Book, the latest of which expires on September 8, 2037, and such further and other relief as the court may deem appropriate. Trial in the Padagis Patent Litigation is scheduled for July 10, 2023. Journey cannot make any predictions about the final outcome of this matter or the timing thereof.
16. Employee Benefit Plan
On January 1, 2008, the Company adopted a defined contribution 401(k) plan which allows employees to contribute up to a percentage of their compensation, subject to IRS limitations and provides for a discretionary Company match up to a maximum of 4 % of employee compensation. For the years ended December 31, 2021 and 2020, the Company paid a matching contribution of $ 0.8 million and $ 0.5 million, respectively.
17. Related Party Transactions
The Company’s Chairman, President and Chief Executive Officer, individually and through certain trusts over which he has voting and dispositive control, beneficially owned approximately 10.3 % and 9.9 % of the Company’s issued and outstanding Common Stock as of December 31, 2021 and 2020, respectively. The Company’s Executive Vice Chairman, Strategic Development individually owns approximately 11.1 % and 10.8 % of the Company’s issued and outstanding Common Stock at December 31, 2021 and 2020, respectively.
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Shared Services Agreement with TGTX
In July 2015, TGTX and the Company entered into an arrangement to share the cost of certain research and development employees. The Company’s Executive Vice Chairman, Strategic Development, is Executive Chairman and Interim Chief Executive Officer of TGTX. Under the terms of the Agreement, TGTX will reimburse the Company for the salary and benefit costs associated with these employees based upon actual hours worked on TGTX related projects. In connection with the shared services agreement, the Company invoiced TGTX $ 0.4 million and $ 0.6 million, and received payments of $ 0.4 million and $ 0.5 million for the years ended December 31, 2021 and 2020, respectively.
Shared Services Agreement with Journey
On November 12, 2021, Journey and the Company entered into an arrangement to share the cost of certain legal, finance, regulatory, and research and development employees. The Company’s Executive Chairman and Chief Executive Officer is the Executive Chairman of Journey. Under the terms of the Agreement, Journey will reimburse the Company for the salary and benefit costs associated with these employees based upon actual hours worked on Journey related projects following the completion of their initial public offering. For the year ended December 31, 2021, the Company’s employees have provided services to Journey totaling approximately $ 0.6 million. Upon completion of Journey’s initial public offering in November 2021 (see Note 14) $ 0.5 million was converted into 52,438 shares of Journey common stock at the initial public offering price of $ 10.00 per share.
Desk Share Agreement with TGTX
The Desk Share Agreement with TGTX, as amended, requires TGTX to pay 65 % of the average annual rent. Additionally, the Company has reserved the right to execute desk share agreements with other third parties and those arrangements will affect the cost of the lease actually borne by the Company. Each initial Desk Share Agreement has a term of five years . In connection with the Company’s Desk Share Agreement with TGTX for the New York, NY office space, for the years ended December 31, 2021 and 2020, the Company had paid $ 2.7 million and $ 2.6 million in rent, respectively, and invoiced TGTX approximately $ 1.5 million and $ 1.6 million respectively, for their prorated share of the rent base. At December 31, 2021, there were no amounts due from TGTX related to this arrangement.
As of July 1, 2018, TGTX employees began to occupy desks in the Waltham, MA office under the Desk Share Agreement. TGTX began to pay their share of the rent based on actual percentage of the office space occupied on a month by month basis. For the years ended December 31, 2021 and 2020, the Company had paid approximately $ 0.2 million and $ 0.3 million in rent for the Waltham, MA office, and invoiced TGTX approximately $ 0.1 million and $ 0.1 million, respectively.
Checkpoint Collaborative Agreements with TGTX
Checkpoint has entered into various agreements with TGTX to develop and commercialize certain assets in connection with its licenses, including a collaboration agreement for some of the Dana Farber licensed antibodies, and a sublicense agreement for the Jubilant family of patents. Checkpoint believes that by partnering with TGTX to develop these compounds in therapeutic areas outside of its business focus, it may substantially offset its preclinical costs and milestone costs related to the development and marketing of these compounds in solid tumor indications.
Journey Promissory Note
On September 30, 2021, the Company increased the Journey promissory note by $ 9.5 million in response to a cyber incident that occurred at Journey and resulted in $ 9.5 million of fraudulent payments. The $ 9.5 million contribution was approved by the boards of directors of both the Company and Journey, and ensured that Journey’s accounts payable function continued to operate smoothly. This contribution, along with the $ 5.2 million already outstanding under the Journey Promissory Note, converted into 1,476,044 shares of Journey common stock upon completion of Journey’s initial public offering in November 2021 (see Note 14) at the initial public offering price of $ 10.00 per share. The amounts associated with the Journey Promissory Note are eliminated in the consolidated balance sheets.
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2019 Notes (formerly the Opus Credit Facility)
During the year ended December 31, 2020, the Company used certain proceeds from the Oaktree Note to pay off the $ 9.0 million balance previously outstanding under the 2019 Notes. For the year ended December 31, 2020, in connection with the 2019 Notes pay off, the Company paid $ 0.5 million in interest on the portion of the 2019 Notes held by the Company's Chairman, President and Chief Executive Officer and the Company's Executive Vice President, Strategic Development.
Founders Agreement and Management Services Agreement
The Company has entered into Founders Agreements with each of the Fortress partner companies listed in the table below. Pursuant to each Founders Agreement, in exchange for the time and capital expended in the formation of each partner company and the identification of specific assets the acquisition of which result in the formation of a viable emerging growth life science company, the Company will loan each such partner company an amount representing the up-front fee required to acquire assets. Each Founders Agreement has a term of 15 years , which upon expiration automatically renews for successive one-year periods unless terminated by the Company or a Change in Control (as defined in the Founders Agreement) occurs. In connection with each Founders Agreement the Company receives 250,000 Class A Preferred shares (except for that with Checkpoint, in which the Company holds Class A Common Stock).
The Class A Preferred Stock (Class A Common Stock with respect to Checkpoint) is identical to common stock other than as to voting rights, conversion rights and the PIK Dividend right (as described below). Each share of Class A Preferred Stock (Class A Common Stock with respect to Checkpoint) is entitled to vote the number of votes that is equal to one and one-tenth (1.1) times a fraction, the numerator of which is the sum of (A) the shares of outstanding common stock and (B) the whole shares of common stock into which the shares of outstanding Class A Preferred Stock (Class A Common Stock with respect to Checkpoint) are convertible and the denominator of which is the number of shares of outstanding Class A Preferred Stock (Class A Common Stock with respect to Checkpoint). Thus, the Class A Preferred Stock (Class A Common Stock with respect to Checkpoint) will at all times constitute a voting majority. Each share of Class A Preferred Stock (Class A Common Stock with respect to Checkpoint) is convertible, at the holder’s option, into one fully paid and nonassessable share of common stock of such partner company, subject to certain adjustments.
The holders of Class A Preferred Stock (and the Class A Common Stock with respect to Checkpoint), as a class, are entitled receive on each effective date or “Trigger Date” (defined as the date that the Company first acquired, whether by license or otherwise, ownership rights to a product) of each agreement (each a “PIK Dividend Payment Date”) until the date all outstanding Class A Preferred Stock (Class A Common Stock with respect to Checkpoint) is converted into common stock or redeemed (and the purchase price is paid in full), pro rata per share dividends paid in additional fully paid and nonassessable shares of common stock (“PIK Dividends”) such that the aggregate number of shares of common stock issued pursuant to such PIK Dividend is equal to two and one-half percent ( 2.5 %) of such partner company’s fully-diluted outstanding capitalization on the date that is one (1) business day prior to any PIK Dividend Payment Date. The Company has reached agreements with several of the partner companies to change the PIK Dividend Interest Payment Date to January 1 of each year - a change that has not and will not result in the issuance of any additional partner company common stock beyond that amount to which the Company would otherwise be entitled absent such change(s). The Company owns 100 % of the Class A Preferred Stock (Class A Common Stock with respect to Checkpoint) of each partner company that has a Founders Agreement with the Company.
As additional consideration under the Founders Agreement, each partner company with which the Company has entered into a Founders Agreement will also: (i) pay an equity fee in shares of the common stock of such partner company, payable within five (5) business days of the closing of any equity or debt financing for each partner company or any of its respective subsidiaries that occurs after the effective date of the Founders Agreement and ending on the date when the Company no longer has majority voting control in such partner company’s voting equity, equal to two and one-half ( 2.5 %) of the gross amount of any such equity or debt financing; and (ii) pay a cash fee equal to four and one-half percent ( 4.5 %) of such partner company’s annual net sales, payable on an annual basis, within ninety (90) days of the end of each calendar year. In the event of a Change in Control, each such partner company will pay a one-time change in control fee equal to five (5x) times the product of (A) net sales for the twelve (12) months immediately preceding the change in control and (B) four and one-half percent ( 4.5 %).
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The following table summarizes, by subsidiary, the effective date of the Founders Agreements and PIK dividend or equity fee payable to the Company in accordance with the terms of the Founders Agreements, Exchange Agreements and the partner companies’ certificates of incorporation.
PIK Dividend as
a % of fully
diluted
outstanding
Class of Stock
Partner Company
Effective Date 1
capitalization
Issued
Aevitas
July 28, 2017
2.5
%
Common Stock
Avenue
February 17, 2015
0.0
% 2
Common Stock
Baergic
December 17, 2019 4
2.5
%
Common Stock
Cellvation
October 31, 2016
2.5
%
Common Stock
Checkpoint
March 17, 2015
0.0
% 3
Common Stock
Cyprium
March 13, 2017
2.5
%
Common Stock
Helocyte
March 20, 2015
2.5
%
Common Stock
Mustang
March 13, 2015
2.5
%
Common Stock
Oncogenuity
April 22, 2020 4
2.5
%
Common Stock
UR-1
November 7, 2017 4
2.5
%
Common Stock
Note 1:
Represents the effective date of each subsidiary’s Founders Agreement. Each PIK dividend and equity fee is payable on the annual anniversary of the effective date of the original Founders Agreement or has since been amended to January 1 of each calendar year.
Note 2:
Pursuant to the terms of the agreement between Avenue and InvaGen Pharmaceuticals, Inc. during the term of the Avenue SPMA PIK dividends will not be paid or accrued.
Note 3:
Instead of a PIK dividend, Checkpoint pays the Company an annual equity fee in shares of Checkpoint’s common stock equal to 2.5 % of Checkpoint’s fully diluted outstanding capitalization.
Note 4:
Represents the Trigger Date, the date that the Fortress partner company first acquires, whether by license or otherwise, ownership rights in a product.
Equity Fees
The following table summarizes, by subsidiary, the PIK dividend or equity fee recorded by the Company in accordance with the terms of the Founders Agreements, Exchange Agreements and the partner companies’ certificates of incorporation for the years ended December 31, 2021 and 2020 ($ in thousands):
PIK Dividend
Year Ended
Year Ended
Partner company
Date
December 31, 2021 1
December 31, 2020
Aevitas
January 1
$
22
$
11
Baergic
January 1
10
10
Cellvation
January 1
9
7
Checkpoint
January 1
6,598
4,617
Cyprium
January 1
1,304
711
Helocyte
January 1
141
138
Mustang
January 1
4,212
7,577
Oncogenuity
January 1
5
—
UR-1
26
—
Fortress
( 12,327 )
( 13,071 )
Total
$
—
$
—
Note 1: Includes 2022 PIK dividend accrued for the year ended December 31, 2021, as Type 1 subsequent event.
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Management Services Agreements
The Company has entered into Management Services Agreements (the “MSAs”) with certain of its partner companies. Pursuant to each MSA, the Company’s management and personnel provide advisory, consulting and strategic services to each partner company that has entered into an MSA with Fortress for a period of five (5) years. Such services may include, without limitation, (i) advice and assistance concerning any and all aspects of each such partner company’s operations, clinical trials, financial planning and strategic transactions and financings and (ii) conducting relations on behalf of each such partner company with accountants, attorneys, financial advisors and other professionals (collectively, the “Services”). Each such partner company is obligated to utilize clinical research services, medical education, communication and marketing services and investor relations/public relation services of companies or individuals designated by Fortress, provided those services are offered at market prices. However, such partner companies are not obligated to take or act upon any advice rendered from Fortress, and the Company shall not be liable to any such partner company for its actions or inactions based upon the Company’s advice. The Company and its affiliates, including all members of Fortress’ Board of Directors, have been contractually exempted from fiduciary duties to each such partner company relating to corporate opportunities.
The following table summarizes, by partner company, the effective date of the MSA and the annual consulting fee payable by the subsidiary to the Company in quarterly installments ($ in thousands):
Year Ended December 31,
Partner company
Effective Date
2021
2020
Aevitas
July 28, 2017
$
500
$
500
Avenue 1
February 17, 2015
—
—
Baergic
March 9, 2017
500
500
Cellvation
October 31, 2016
500
500
Checkpoint
March 17, 2015
500
500
Cyprium
March 13, 2017
500
500
Helocyte
March 20, 2015
500
500
Mustang
March 13, 2015
500
500
Oncogenuity
February 10, 2017
500
500
UR-1
November 7, 2017
500
—
Fortress
( 4,500 )
( 4,000 )
Consolidated (Income)/Expense
$
—
$
—
Note 1: Pursuant to the terms of the agreement between Avenue and InvaGen Pharmaceuticals, Inc. during the term of the Avenue SPMA fees under the MSA will not be due or accrued.
Fees and Stock Grants Received by Fortress
Fees recorded in connection with the Company’s agreements with its subsidiaries are eliminated in consolidation. These include management services fees, issuance of common shares of partner companies in connection with third party raises and annual stock dividend or issuances on the anniversary date of respective Founders Agreements.
18. Income Taxes
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards.
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The components of the income tax provision are as follows:
For the years ended December 31,
($ in thousands)
2021
2020
Current
Federal
$
—
$
—
State
473
136
Deferred
Federal
—
—
State
—
—
Total
$
473
$
136
For the years ended December 31, 2021 and 2020, income tax expense was $ 0.5 million and $ 0.1 million, respectively, resulting in an effective income tax rate of 0 % and 0 %. The increase in income tax expense in 2021 is due to additional state tax return filings.
The Company has incurred net operating losses since inception. The Company has not reflected any benefit of such net operating loss carryforwards (“NOL”) in the accompanying consolidated financial statements and has established a valuation allowance of $ 251.1 million against its net deferred tax assets. Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards.
The significant components of the Company’s deferred taxes consist of the following:
As of December 31,
($ in thousands)
2021
2020
Deferred tax assets:
Net operating loss carryforwards
$
180,994
$
152,295
Amortization of license fees
31,556
20,628
Amortization of in-process R&D
384
415
Stock compensation
13,560
14,732
Lease liability
6,965
7,306
Accruals and reserves
2,265
1,570
Tax credits
23,239
16,326
Startup costs
49
54
Unrealized gain/loss on investments
420
1,075
State taxes
215
41
Business interest limitation
7
—
Reserve on Sales Return, Discount and Bad Debt
1,883
1,455
Total deferred tax assets
261,537
215,897
Less: valuation allowance
( 251,052 )
( 203,930 )
Net deferred tax assets
$
10,485
$
11,967
Deferred tax liabilities:
Right of use asset
$
( 5,732 )
$
( 6,050 )
Basis in subsidiary
( 4,753 )
( 1,113 )
Fair Value adjustment on investment in Caelum
—
( 4,804 )
Total deferred tax assets, net
$
—
$
—
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A reconciliation of the statutory tax rates and the effective tax rates is as follows:
For the Year Ended December 31,
2021
2020
Percentage of pre-tax income:
U.S. federal statutory income tax rate
21
%
21
%
State taxes, net of federal benefit
10
%
11
%
Credits
4
%
4
%
Non-deductible items
( 3 )
%
( 1 )
%
Provision to return
—
%
1
%
Stock based compensation shortfall
( 1 )
%
( 1 )
%
Change in state rate
1
%
—
%
Change in valuation allowance
( 29 )
%
( 35 )
%
Change in subsidiary basis
( 2 )
%
1
%
Other
( 1 )
%
( 1 )
%
Effective income tax rate
—
%
—
%
The Company files a consolidated income tax return with subsidiaries for which the Company has an 80 % or greater ownership interest. Subsidiaries for which the Company does not have an 80 % or more ownership are not included in the Company’s consolidated income tax group and file their own separate income tax return. As a result, certain corporate entities included in these financial statements are not able to combine or offset their taxable income or losses with other entities’ tax attributes.
ASC 740 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of all positive and negative evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. Realization of the deferred tax assets is substantially dependent on the Company’s ability to generate sufficient taxable income within certain future periods. Management has considered the Company’s history of cumulative tax and book losses incurred since inception, and the other positive and negative evidence, and has concluded that it is more likely than not that the Company will not realize the benefits of the net deferred tax assets as of December 31, 2021 and 2020. Accordingly, a full valuation allowance has been established against the net deferred tax assets as of December 31, 2021 and 2020. The valuation allowance increased by a net $ 47 million during the current year.
The Company has incurred net operating losses (“NOLs”) since inception. At December 31, 2021, the Company had federal NOLs of $ 615 million, which will begin to expire in the year 2032 , state NOLs of $ 797.3 million, which will begin to expire in 2022 , and federal income tax credits of $ 21.9 million and state income tax credits of $ 1.8 million, which will begin to expire in 2028 . Approximately $ 409.7 million of the federal NOLs and $ 3.1 million of the state NOLs can be carried forward indefinitely. Under the provisions of Section 382 of the Internal Revenue Code, a corporation that undergoes an “ownership change”, as defined therein, is subject to limitations on its use of pre-change NOLs and income tax credits carryforwards to offset future tax liabilities. It appears the Company underwent previous ownership changes potentially limiting its use of tax attributes. The Company has recorded a full valuation allowance on all of its deferred tax assets, as it believes that it is more likely than not that the deferred tax assets will not be realized regardless of whether an “ownership change” has occurred.
As of December 31, 2021, the Company had no unrecognized tax benefits and does not anticipate any significant change to the unrecognized tax benefit balance. The Company would classify interest and penalties related to uncertain tax positions as income tax expense, if applicable. There was no interest expense or penalties related to unrecognized tax benefits recorded through December 31, 2021. The NOLs from tax years 2008 through 2020 remain open to examination (and adjustment) by the Internal Revenue Service and state taxing authorities. In addition, federal tax years ending December 31, 2018, 2019 and 2020 are open for assessment of federal taxes. The expiration of the statute of limitations related to the various state income and franchise tax returns varies by state.
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Coronavirus Aid, Relief and Economic Security Act ("CARES Act")
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed into law on March 27, 2020. The CARES Act, among other things, includes tax provisions relating to refundable payroll tax credits, deferment of employer's social security payments, net operating loss utilization and carryback periods and modifications to the net interest deduction limitations. The CARES Act did not have a material impact on the Company’s income tax provision for 2021 or 2020. The Company will continue to evaluate the impact of the CARES Act on its financial position, results of operations and cash flows.
On December 27, 2020, the President of the United States signed the Consolidated Appropriations Act, 2021 (“Consolidated Appropriations Act”) into law. The Consolidated Appropriations Act is intended to enhance and expand certain provisions of the CARES Act, allows for the deductions of expenses related to the Paycheck Protection Program funds received by companies, and provides an update to meals and entertainment expensing for 2021. The Consolidated Appropriations Act did not have a material impact to the Company’s income tax provision for 2021 or 2020.
19. Segment Information
The Company operates in two reportable segments, Dermatology Product Sales and Pharmaceutical and Biotechnology Product Development. The accounting policies of the Company’s segments are the same as those described in Note 2. The following tables summarize, for the periods indicated, operating results from continued operations by reportable segment:
Pharmaceutical
and
Dermatology
Biotechnology
Products
Product
Year Ended December 31, 2021
Sales
Development
Consolidated
Net revenue
$
63,134
$
5,657
$
68,791
Cost of goods - product revenue
( 32,084 )
—
( 32,084 )
Research and development
( 16,558 )
( 112,307 )
( 128,865 )
Selling, general and administrative
( 39,895 )
( 46,948 )
( 86,843 )
Wire transfer fraud loss
( 9,540 )
—
( 9,540 )
Other income
( 7,479 )
31,667
24,188
Income tax expense
—
( 473 )
( 473 )
Segment loss
$
( 42,422 )
$
( 122,404 )
$
( 164,826 )
Pharmaceutical
and
Dermatology
Biotechnology
Products
Product
Year Ended December 31, 2020
Sales
Development
Consolidated
Net revenue
$
44,531
$
1,068
$
45,599
Cost of goods - product revenue
( 14,594 )
—
( 14,594 )
Research and development
—
( 64,109 )
( 64,109 )
Selling, general and administrative
( 22,100 )
( 39,066 )
( 61,166 )
Other expense
( 697 )
( 7,882 )
( 8,579 )
Income tax expense
( 96 )
( 40 )
( 136 )
Segment income (loss)
$
7,044
$
( 110,029 )
$
( 102,985 )
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The following tables summarize, for the periods indicated, total assets by reportable segment:
Pharmaceutical
and
($ in thousands)
Dermatology
Biotechnology
Products
Product
December 31, 2021
Sales
Development
Total Assets
Intangible assets, net
$
12,552
$
—
$
12,552
Tangible assets
84,732
299,219
383,951
Total segment assets
$
97,284
$
299,219
$
396,503
Pharmaceutical
and
($ in thousands)
Dermatology
Biotechnology
Products
Product
December 31, 2020
Sales
Development
Total Assets
Intangible assets, net
$
14,629
$
—
$
14,629
Tangible assets
35,422
283,362
318,784
Total segment assets
$
50,051
$
283,362
$
333,413
20. Revenues from Contracts and Significant Customers
Disaggregation of Total Revenues
Journey has the following actively marketed products, Qbrexza®, Accutane®, Targadox®, Ximino®, Exelderm®, and Luxamend®. All of Journey’s product revenues are recorded in the U.S. The Company’s collaboration revenue is from Cyprium’s agreement with Sentynl (see Note 3). The Company’s related party revenue is from Checkpoint’s collaborations with TGTX (see Note 17).
The table below summarizes the Company’s revenue for the years ended December 31, 2021 and 2020:
Year Ended December 31,
2021
2020
Revenue
Targadox®
$
22,378
$
30,708
Ximino®
8,247
9,518
Exelderm®
5,363
4,453
Accutane®
10,053
—
Qbrexza®
17,056
—
Other branded revenue
37
( 148 )
Collaboration revenue
5,389
—
Revenue – related party
268
1,068
Net revenue
$
68,791
$
45,599
Significant Customers
For the years ended December 31, 2021, none of the Company’s Dermatology Products customers accounted for more than 10.0% of its total gross product revenue.
At December 31, 2021, two of Journey’s customers accounted for more than 10% of its total accounts receivable balance at 16.3% and 12.9%. As of December 31, 2020, one of the Company’s Dermatology Products customers accounted for 12 % of its total accounts receivable balance.
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21. Subsequent Events
VYNE Therapeutics Product Acquisition (“VYNE Product Acquisition”)
On January 13, 2022 Journey entered into a definitive agreement with VYNE Therapeutics, Inc. (“VYNE”) to acquire its Molecule Stabilizing Technology (“MST”)™ franchise for an upfront payment of $ 20.0 million and an additional $ 5.0 million on the one (1)-year anniversary of the closing. The agreement also provides for contingent net sales milestone payments. The Company acquired Amzeeq (minocycline) topical foam, 4%, and Zilxi (minocycline) topical foam, 1.5%, two FDA-Approved Topical Minocycline Products and Molecule Stabilizing Technology (MST)™.
Maruho Milestone Payment
On February 11, 2022, Journey announced that its exclusive out-licensing partner in Japan received manufacturing and marketing approval in Japan for Rapifort® Wipes 2.5% (Japanese equivalent to U.S. FDA approved Qbrexza®) for the treatment of primary axillary hyperhidrosis, triggering a net $ 2.5 million milestone payment to Journey. The net payment reflects a milestone payment of $ 10 million to Journey from their exclusive licensing partner in Japan, Maruho Co., Ltd. (“Maruho”), offset by a $ 7.5 million payment to Dermira, Inc., pursuant to the terms of the Asset Purchase Agreement between Journey and Dermira Inc. In conjunction with the terms of the licensing agreement with Maruho, the milestone payment was due from Maruho within 30 days of the approval. Journey acquired global rights to Qbrexza® from Dermira Inc. in 2021.
Amendment to the East West Bank Working Capital Line of Credit
On January 12, 2022, Journey entered into a third amendment (the “Amendment”) of its loan and security agreement with East West Bank, which increased the borrowing capacity of Journey’s revolving line of credit to $ 10.0 million, from $ 7.5 million, and added a term loan not to exceed $ 20.0 million. Both the revolving line of credit and the term loan mature on January 12, 2026 . The term loan includes two tranches, the first of which is a $ 15.0 million term loan and the second of which is a $ 5.0 million term loan. On January 12, 2022, Journey borrowed $ 15.0 million against the first tranche of the term loan to facilitate the VYNE Product Acquisition. The term loan bears interest on its outstanding daily balance at a floating rate equal to 1.73 % above the prime rate and is payable monthly, on the first calendar day each month. The term loans contain an interest only payment period through January 12, 2024, with an extension through July 12, 2024 if certain covenants are met, after which the outstanding balance of each term loan is payable in equal monthly installments of principal, plus all accrued interest, through the term loan maturity date. Journey may prepay all or any part of the term loan without penalty or premium, but may not re-borrow any amount, once repaid. Any outstanding borrowing against the revolving line of credit bears interest at a floating rate equal to 0.70 % above the prime rate. The Amendment includes customary financial covenants such as collateral ratios and minimum liquidity provisions as well as audit provisions.
Runway Growth Capital LLC Debt Facility
On March 8, 2022, Mustang announced completion of a $ 75 million long-term debt facility with Runway Growth Capital LLC (“Runway”). Of the $ 75 million, $ 30 million was funded upon closing, and the additional $ 45 million available under the facility may be funded upon Mustang’s achieving certain predetermined milestones. The loan will be repaid in sixty monthly payments consisting of 24 month ly payments of interest only, followed by 36 month ly payments of principal and accrued interest, payable monthly in arrears, with all repayments ending on the same date as the initial tranche. The interest-only period may be extended to 36 months contingent upon Mustang achieving certain milestones. In connection with the debt financing, Mustang issued to Runway warrants to purchase up to 748,036 of its common shares at an exercise price of $ 0.8021 per share. Proceeds from the facility will be used to support the ongoing clinical development of key investigational product candidates within Mustang’s pipeline and for general working capital purposes.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Fortress Biotech, Inc.
March 28, 2022
By:
/s/ Lindsay A. Rosenwald, M.D.
Lindsay A. Rosenwald, M.D.
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
POWER OF ATTORNEY
We, the undersigned directors and/or executive officers of Fortress Biotech, Inc., hereby severally constitute and appoint Lindsay A. Rosenwald, M.D., acting singly, his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing necessary or appropriate to be done in connection therewith, as fully for all intents and purposes as he or she might or could do in person, hereby approving, ratifying and confirming all that said attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Lindsay A. Rosenwald, M.D.
Chairman of the Board of Directors, President and Chief
March 28, 2022
Lindsay A. Rosenwald, M.D.
Executive Officer ( Principal Executive Officer )
/s/ Robyn M. Hunter
Chief Financial Officer
March 28, 2022
Robyn M. Hunter
( Principal Financial Officer )
/s/ Eric K. Rowinsky, M.D.
Vice Chairman of the Board of Directors
March 28, 2022
Eric K. Rowinsky, M.D.
/s/ Michael S. Weiss
Executive Vice Chairman, Strategic Development and
March 28, 2022
Michael S. Weiss
Director
/s/ Jimmie Harvey, Jr., M.D.
Director
March 28, 2022
Jimmie Harvey, Jr., M.D.
/s/ Malcolm Hoenlein
Director
March 28, 2022
Malcolm Hoenlein
/s/ Dov Klein
Director
March 28, 2022
Dov Klein
/s/ J. Jay Lobell
Director
March 28, 2022
J. Jay Lobell
/s/ Kevin L. Lorenz, J.D.
Director
March 28, 2022
Kevin Lorenz
92
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.