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, 2023, 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, 2023. 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, 2023, our internal control over financial reporting was effective.
Changes in Internal Controls over Financial Reporting
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
During the three months ended December 31, 2023, none of our directors or officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934, as amended) adopted, modified or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K of the Securities Act of 1933).
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information required by this item is incorporated by reference from the information contained under the sections “Corporate Governance,” “Code of Business Conduct and Ethics,” and “Our Executive Officers” in our Proxy Statement for the 2024 Annual Meeting of Stockholders.
The information under the heading “Executive Officers of Fortress” in Part I of this Annual Report on Form 10-K is also incorporated herein by reference.
Item 11. Executive Compensation
Information required by this item is incorporated by reference from the information contained under the sections “Executive Compensation,” and “Director Compensation” in our Proxy Statement for the 2024 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by this item is incorporated by reference from the information contained under the sections “Stock Ownership of Our Directors, Executive Officers, and 5% Beneficial Owners,” “Outstanding Equity Awards at Fiscal Year-End,” and “Equity Compensation Plan Information” in our Proxy Statement for the 2024 Annual Meeting of Stockholders.
Item 13. Certain Relationship s and Related Transactions, and Director Independence
Information required by this item is incorporated by reference from the information contained under the sections “Related-Person Transactions,” and “Corporate Governance” in our Proxy Statement for the 2024 Annual Meeting of Stockholders.
Item 14. Principal Accounting Fees and Services
During the year ended December 31, 2023, KPMG LLP audited the consolidated financial statements of the Registrant and its subsidiaries.
Information required by this item is incorporated by reference from the information contained under the section “Independent Registered Public Accounting Firm Fees and Other Matters” in our Proxy Statement for the 2024 Annual Meeting of Stockholders.
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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
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-9
Notes to the Consolidated Financial Statements
F-11 – F-59
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(b) Exhibits.
Exhibit
Number
Exhibit Title
3.1
Amended and Restated Certificate of Incorporation of Fortress Biotech, Inc. (formerly Coronado Biosciences, Inc.) dated April 21, 2010 (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 to Amended and Restated Certificate of Incorporation of Fortress Biotech, Inc. dated May 20, 2011 (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 Certificate of Amendment to Amended and Restated Certificate of Incorporation, as amended, of Fortress Biotech, Inc. dated October 1, 2013 (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) .
3.4
Third Certificate of Amendment to Amended and Restated Certificate of Incorporation, as amended, of Fortress Biotech, Inc. dated April 22, 2015 (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) .
3.5
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Fortress Biotech, Inc. dated June 18, 2020 (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).
3.6
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Fortress Biotech, Inc. dated 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, 2021).
3.7
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Fortress Biotech, Inc. dated July 8, 2022, (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 July 11, 2022).
3.8
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Fortress Biotech, Inc. dated October 9, 2023 (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 October 10, 2022).
3.9
Third Amended and Restated Bylaws of the Registrant (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 August 14, 2023.
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 of the Fortress Biotech, Inc. 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
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. dated June 18, 2020 (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).
4.4
Description of Securities of Fortress Biotech, Inc.*
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Exhibit
Number
Exhibit Title
4.5
Form of Amended and Restated Warrant (incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K (file No. 001-35366) filed with the SEC on June 16, 2023).
4.6
Form of Warrant (incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K (file No. 001-35366) filed with the SEC on November 14, 2023).
4.7
Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K (file No. 001-35366) filed with the SEC on January 3, 2024.
10.2
Form of Stock Option Award Agreement (incorporated by reference to Exhibit 10.9 of the Registrant’s Form 10 (file No. 000-54463) 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).#
10.5
Restricted Stock Issuance Agreement, dated as of February 20, 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). #
10.6
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). #
10.7
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).
10.8
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).#
10.9
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).#
10.10
Amendment to Fortress Biotech, Inc. 2012 Employee Stock Purchase Plan (incorporated by reference to Exhibit A of the Registrant’s Schedule 14A (file No. 001-35366) filed with the SEC on April 30, 2018).#
10.11
Amendment to the Fortress Biotech, Inc. 2012 Employee Stock Purchase Plan (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 June 23, 2023).#
10.12
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).#
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Exhibit
Number
Exhibit Title
10.13
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 Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q (file No. 001-35366) filed with the SEC on May 10, 2019).
10.14
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).#
10.15
Form of Stock Incentive Plan Award Agreement (Fortress Biotech, Inc. 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).#
10.16
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).#
10.17
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 27, 2022).#
10.18
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 23, 2023).#
10.19
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) .
10.20
Restricted Stock Unit Award Agreement between Fortress Biotech, Inc. and David Jin effective October 26, 2022 (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 October 28, 2022).#
10.21
Indemnification Agreement between Fortress Biotech, Inc. and Lucy Lu, M.D. dated as of December 14, 2022 (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 December 19, 2022).#
10.22
Form of Securities Purchase Agreement, dated November 10, 2023, by and among the Registrant and the purchasers party thereto (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 14, 2023).
10.23
Form of Securities Purchase Agreement, dated December 29, 2023, by and among the Registrant and the purchasers party thereto (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 January 3, 2024).
10.24
Form of Placement Agency Agreement, dated November 10, 2023, by and among the Registrant and Roth Capital Partners, LLC (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 14, 2023).
10.25
Placement Agency Agreement, dated December 29, 2023, by and among the Registrant and Roth Capital Partners, LLC (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 January 3, 2024).
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Exhibit
Number
Exhibit Title
10.26
At Market Issuance Sales Agreement between the Company and Cantor Fitzgerald & Co., Oppenheimer & Co. Inc., H.C. Wainwright & Co., LLC, B. Riley FBR, Inc., and Dawson James Securities, Inc., dated May 29, 2020 (incorporated by reference to Exhibit 1.1 of the Registrant’s Current Report on Form 8-K (file No. 001-35366) filed with the SEC on May 29, 2020) .
21.1
Subsidiaries of the Registrant. *
23.1
Consent Independent Registered Accounting Firm (KPMG LLP, Short Hills, NJ). *
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.**
97.1
Clawback Policy of Fortress Biotech, Inc.*
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.
**Furnished 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
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-9
Notes to the Consolidated Financial Statements
F-11 – F-59
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, 2023 and 2022, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2023, 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 audits. 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 audits 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 audits, 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 audits 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 audits 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 audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were 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 matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which it relates.
F-2
Table of Contents
Evaluation of accrued coupon liability
As discussed in Note 10 of the consolidated financial statements, the Company accrues for coupons on products for certain qualified commercially-insured parties. At December 31, 2023, the Company recorded $9,987 thousand in accrued coupon and rebates, which included the accrued coupon liabilities. 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 primary based on historical company coupon redemption costs, cost per coupon claim, 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 developed an expectation of the accrued coupon liability based on an independent estimate of the product in the distribution channel and we compared our expectation to the Company’s accrued coupon liability.
Accounting for and fair value of the warrant inducement transaction
As discussed in Notes 6 and 13 to the financial statements, in October 2023, Checkpoint Therapeutics, Inc. (Checkpoint), a consolidated subsidiary of the Company, entered into an inducement offer letter agreement with a holder of certain existing warrants. As part of the inducement, Checkpoint issued new unregistered Series A and Series B warrants. The Series A and B warrants are exercisable immediately upon issuance with an exercise price of $1.51 per share. The total gross proceeds from the inducement were approximately $11.1 million with net proceeds of approximately $10.0 million after deducting commissions and other transaction costs. Prior to the inducement, some of the existing warrants were liability classified and accounted for at fair value. At the date of the inducement, the Company revalued the existing liability classified warrants which resulted in a loss on common stock warrant liabilities. The other existing warrants, which were equity classified, were revalued to calculate the difference in fair value as a result of the change in exercise price, which was recorded as a deemed dividend. The Company also calculated the fair value of the Series A and Series B warrants and allocated that fair value to the existing warrants on a weighted basis. The Company used the Black-Scholes model to determine the estimated fair value of the warrants.
We identified the evaluation of the Company’s accounting for the inducement transaction and the determination of the fair value of the warrants as a critical audit matter. Specifically, challenging and complex auditor judgment and specialized skills and knowledge were required in evaluating 1) the application of the relevant accounting guidance for equity and liability classified warrants and 2) the estimated fair value of the warrants due to the degree of subjectivity associated with the volatility assumption.
The following are the primary procedures we performed to address this critical audit matter. We inspected the Company’s accounting analysis for the transaction. We involved professionals with specialized skills and knowledge, who assisted in inspecting the underlying agreements to understand the relevant terms and conditions of the transaction and evaluating whether the Company’s accounting for the transaction is in accordance with the relevant accounting guidance. We also involved valuation professionals with specialized skills and knowledge who assisted in:
● developing an independent expectation of the volatility assumption based on consideration of implied share price volatility information
● developing an independent range of the fair value of the warrant liability for the December 2022 warrants, the fair value of the February 2023 equity classified warrants, and the fair value of both the Series A and Series B
F-3
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warrants as of the inducement date using publicly available market data and the independently developed volatility assumption
● comparing the independently developed ranges of the fair value to the respective fair value of the warrant liability and the equity classified awards determined by the Company.
We have served as the Company’s auditor since 2021.
Short Hills, New Jersey
March 28, 2024
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FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
($ in thousands except for share and per share amounts)
December 31,
2023
2022
ASSETS
Current assets
Cash and cash equivalents
$
80,927
$
178,266
Accounts receivable, net
15,222
28,208
Inventory
10,206
14,159
Other receivables - related party
167
138
Prepaid expenses and other current assets
10,500
9,661
Total current assets
117,022
230,432
Property, plant and equipment, net
6,505
13,020
Operating lease right-of-use asset, net
16,990
19,991
Restricted cash
2,438
2,688
Intangible asset, net
20,287
27,197
Other assets
4,284
973
Total assets
$
167,526
$
294,301
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities
Accounts payable and accrued expenses
$
73,562
$
97,446
Income taxes payable
843
722
Common stock warrant liabilities
886
13,869
Operating lease liabilities, short-term
2,523
2,447
Partner company convertible preferred shares, short-term, net
3,931
2,052
Partner company line of credit
—
2,948
Partner company installment payments - licenses, short-term, net
3,000
7,235
Other short-term liabilities
163
996
Total current liabilities
84,908
127,715
Notes payable, long-term, net
60,856
91,730
Operating lease liabilities, long-term
18,282
21,572
Partner company installment payments - licenses, long-term, net
—
1,412
Other long-term liabilities
1,893
1,847
Total liabilities
165,939
244,276
Commitments and contingencies (Note 14)
Stockholders’ equity (deficit)
Cumulative redeemable perpetual preferred stock, $ 0.001 par value, 15,000,000 authorized, 5,000,000 designated Series A shares, 3,427,138 shares issued and outstanding as of December 31, 2023 and December 31, 2022, respectively, liquidation value of $ 25.00 per share
3
3
Common stock, $ 0.001 par value, 200,000,000 shares authorized, 15,093,053 and 7,366,283 shares issued and outstanding as of December 31, 2023 and December 31, 2022, respectively
15
7
Additional paid-in-capital
717,396
675,944
Accumulated deficit
( 694,870 )
( 634,233 )
Total stockholders' equity attributed to the Company
22,544
41,721
Non-controlling interests
( 20,957 )
8,304
Total stockholders' equity (deficit)
1,587
50,025
Total liabilities and stockholders' equity (deficit)
$
167,526
$
294,301
The accompanying notes are an integral part of these consolidated financial statements.
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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,
2023
2022
Revenue
Product revenue, net
$
59,662
$
70,995
Collaboration revenue
5,229
1,882
Revenue - related party
103
192
Other revenue
19,519
2,674
Net revenue
84,513
75,743
Operating expenses
Cost of goods sold - product revenue
26,660
30,775
Research and development
101,747
134,199
Research and development - licenses acquired
4,324
677
Selling, general and administrative
94,124
113,656
Total operating expenses
226,855
279,307
Loss from operations
( 142,342 )
( 203,564 )
Other income (expense)
Interest income
3,003
1,398
Interest expense and financing fee
( 15,315 )
( 13,642 )
Change in fair value of warrant liabilities
4,424
1,129
Other income (expense)
( 3,403 )
1,215
Total other income (expense)
( 11,291 )
( 9,900 )
Loss before income tax expense
( 153,633 )
( 213,464 )
Income tax expense
521
449
Net loss
( 154,154 )
( 213,913 )
Net loss attributable to non-controlling interests
93,517
127,338
Net loss attributable to Fortress
( 60,637 )
$
( 86,575 )
Preferred A dividends declared and paid
( 8,032 )
( 8,032 )
Net loss attributable to common stockholders
$
( 68,669 )
( 94,607 )
Net loss per common share attributable to common stockholders - basic and diluted
$
( 8.47 )
$
( 15.97 )
Weighted average common shares outstanding - basic and diluted
8,110,906
5,924,967
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 and per share amounts)
For the Year Ended December 31, 2023
Common
Additional
Total
Series A Preferred Stock
Common Stock
Shares
Paid-In
Accumulated
Non-Controlling
Stockholders'
($ in thousands except for share amounts)
Shares
Shares
Amount
Issuable
Capital
Deficit
Interests
Equity
Balance at December 31, 2022
3,427,138
$
3
7,366,283
$
7
$
—
`
$
675,944
$
( 634,233 )
$
8,304
$
50,025
Stock-based compensation expense
—
—
—
—
—
17,029
—
—
17,029
Issuance of common stock related to equity plans
—
—
224,690
—
—
—
—
—
—
Issuance of stock for public offerings, net
—
—
6,994,526
7
—
22,078
—
—
22,085
Issuance of common stock for at-the-market offering, net
—
—
224,003
—
—
2,041
—
—
2,041
Warrant charge in conjunction with Oaktree debt
272
272
Common shares issued for dividend on partner company's convertible preferred shares
—
—
58,551
—
—
266
—
—
266
Payment of Series A perpetual preferred stock dividends
—
—
—
—
—
( 8,032 )
—
—
( 8,032 )
Exercise of warrants for cash
—
—
225,000
1
—
382
—
—
383
Partner companies’ proceeds from stock and warrants, net
—
—
—
—
59,956
—
—
59,956
Partner companies' at-the-market offering, net
—
—
—
—
—
4,620
—
—
4,620
Partner company’s exercise of options for cash
—
—
—
—
—
121
—
—
121
Issuance of common stock under partner company’s ESPP
—
—
—
—
—
178
—
—
178
Partner company’s dividends declared and paid
—
—
—
—
—
( 736 )
—
—
( 736 )
Partner company’s redemption of preferred shares
—
—
—
—
—
( 400 )
—
—
( 400 )
Issuance of partner company’s common shares for research and development expenses
—
—
—
—
—
1,240
—
—
1,240
Deconsolidation/dissolution of partner companies
—
—
—
—
—
—
—
6,693
6,693
Non-controlling interest in subsidiaries
—
—
—
—
—
( 57,563 )
—
57,563
—
Net loss attributable to non-controlling interest
—
—
—
—
—
—
—
( 93,517 )
( 93,517 )
Net loss attributable to common stockholders
—
—
—
—
—
—
( 60,637 )
—
( 60,637 )
Balance at December 31, 2023
3,427,138
$
3
15,093,053
$
15
$
—
$
717,396
$
( 694,870 )
$
( 20,957 )
$
1,587
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 Changes in Stockholders’ Equity
($ in thousands except for share and per share amounts)
For the Year Ended December 31, 2022
Common
Additional
Total
Series A Preferred Stock
Common Stock
Shares
Paid-In
Accumulated
Non-Controlling
Stockholders'
($ in thousands except for share amounts)
Shares
Shares
Amount
Issuable
Capital
Deficit
Interests
Equity
Balance at December 31, 2021
3,427,138
$
3
6,762,368
$
7
$
—
$
656,127
$
( 547,463 )
$
117,203
$
225,877
Stock-based compensation expense
—
—
—
—
—
22,987
—
—
22,987
Issuance of common stock related to equity plans
—
—
327,586
—
—
174
—
—
174
Issuance of common stock for at-the-market offering, net
—
—
276,329
—
—
6,053
—
—
6,053
Payment of Series A perpetual preferred stock dividends
—
—
—
—
—
( 8,031 )
—
—
( 8,031 )
Partner company’s offering, net
—
—
—
—
—
3,205
—
—
3,205
Partner companies' at-the-market offering, net
—
—
—
—
—
16,370
—
—
16,370
Issuance of common stock under partner company’s ESPP
—
—
—
—
—
206
—
—
206
Partner company’s dividends declared and paid
—
—
—
—
—
( 749 )
—
—
( 749 )
Partner company’s exercise of options for cash
—
—
—
—
—
142
—
—
142
Partner company’s exercise of warrants for cash
—
—
—
—
—
148
—
—
148
Partner company’s reclassification of warrant liability to equity
—
—
—
—
—
89
—
—
89
Partner company’s repurchase of stock
—
—
—
—
—
( 1,105 )
—
—
( 1,105 )
Partner company’s stock adjustment
—
—
—
—
—
( 29 )
—
—
( 29 )
Partner company’s net settlement of shares withheld for taxes
( 1,698 )
( 1,698 )
Partner company’s warrants issued in conjunction with debt
—
—
—
—
—
384
—
—
384
Partner company’s retained earnings adjustment
—
—
—
—
—
195
( 195 )
—
—
Partner company’s redemption of preferred shares
—
—
—
—
—
( 85 )
—
—
( 85 )
Non-controlling interest in subsidiaries
—
—
—
—
—
( 18,439 )
—
18,439
—
Net loss attributable to non-controlling interest
—
—
—
—
—
—
—
( 127,338 )
( 127,338 )
Net loss attributable to common stockholders
—
—
—
—
—
—
( 86,575 )
—
( 86,575 )
Balance at December 31, 2022
3,427,138
$
3
7,366,283
$
7
$
—
`
$
675,944
$
( 634,233 )
$
8,304
$
50,025
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,
2023
2022
Cash Flows from Operating Activities:
Net loss
$
( 154,154 )
$
( 213,913 )
Reconciliation of net loss to net cash used in operating activities:
Depreciation expense
2,230
3,109
(Gain) loss on sale of property and equipment
( 1,466 )
255
Bad debt expense
435
284
Amortization of debt discount
3,032
2,065
Accretion of partner company convertible preferred shares
757
—
Non-cash interest
353
770
Loss on extinguishment of debt
2,796
—
Amortization of acquired intangible assets
3,767
4,277
Reduction in the carrying amount of operating lease right-of-use assets
2,078
1,967
Stock-based compensation expense
17,029
22,987
Issuance of partner company’s common shares for research and development expenses
1,240
—
Common shares issued for dividend on partner company's convertible preferred shares
266
—
Change in fair value of partner companies' warrant liabilities
( 4,424 )
( 1,129 )
Research and development - licenses acquired, expense
3,085
642
Loss from deconsolidation/dissolution of subsidiaries
4,127
—
Asset impairment loss
3,143
—
Increase (decrease) in cash and cash equivalents resulting from changes in operating assets and liabilities:
Accounts receivable
12,551
( 5,380 )
Inventory
3,953
1,744
Other receivables - related party
( 29 )
540
Prepaid expenses and other current assets
( 848 )
( 2,595 )
Other assets
( 808 )
344
Accounts payable and accrued expenses
( 24,382 )
8,349
Deferred revenue
—
( 1,883 )
Income taxes payable
121
377
Lease liabilities
( 2,291 )
( 2,025 )
Other long-term liabilities
( 786 )
( 186 )
Net cash used in operating activities
( 128,225 )
( 179,401 )
Cash Flows from Investing Activities:
Purchase of research and development licenses
( 3,035 )
( 340 )
Purchase of property and equipment
( 63 )
( 2,715 )
Proceeds from sale of property and equipment
6,000
127
Other
( 5 )
—
Acquisition of VYNE products
—
( 20,000 )
Acquired intangible assets
( 5,000 )
—
Net cash used in investing activities
( 2,103 )
( 22,928 )
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,
2023
2022
Cash Flows from Financing Activities:
Payment of Series A perpetual preferred stock dividends
$
( 8,032 )
$
( 8,031 )
Proceeds from issuance of common stock for public offering, net
22,078
—
Proceeds from issuance of common stock for at-the-market offering, net
2,041
6,053
Proceeds from issuance of common stock under ESPP
—
174
Exercise of warrants for cash
382
—
Proceeds from partner companies' ESPP
178
206
Partner company’s dividends declared and paid
( 736 )
( 749 )
Partner company’s redemption of preferred shares
( 400 )
( 85 )
Proceeds from partner companies' sale of stock and warrants, net
51,637
17,835
Proceeds from partner companies' at-the-market offering, net
4,620
16,370
Proceeds from exercise of partner companies’ options and warrants, net
121
290
Partner company’s net settlement of shares withheld for taxes
—
( 1,698 )
Partner company's cash payout for reverse stock split fractional shares
—
( 6 )
Payment of partner company's repurchase of stock
—
( 1,105 )
Payment of partner company's deferred financing cost
—
( 119 )
Repayment of partner company installment payments - licenses
( 1,000 )
( 5,000 )
Proceeds from partner company convertible preferred shares
854
2,533
Payment of debt issuance costs associated with partner company convertible preferred shares
( 210 )
( 597 )
Proceeds from partner companies' long-term debt, net
14,529
47,112
Repayment of partner companies' long-term debt
( 50,375 )
—
Proceeds from partner company's line of credit
28,000
5,000
Repayment of partner company's line of credit
( 30,948 )
( 2,864 )
Net cash (used in) provided by financing activities
32,739
75,319
Net decrease in cash and cash equivalents and restricted cash
( 97,589 )
( 127,010 )
Cash and cash equivalents and restricted cash at beginning of period
180,954
307,964
Cash and cash equivalents and restricted cash at end of period
$
83,365
$
180,954
Supplemental disclosure of cash flow information:
Cash paid for interest
$
7,945
$
9,419
Cash paid (refunded) for income taxes
$
( 55 )
$
858
Supplemental disclosure of non-cash financing and investing activities:
Conversion of partner company annual maintenance fee to a promissory note
$
—
$
268
Partner company's unpaid intangible assets
$
—
$
4,740
Unpaid partner company’s debt offering cost
$
—
$
1,058
Unpaid partner company’s offering cost
$
263
$
4
Partner company’s retained earning adjustment
$
—
$
195
Partner company’s reclassification of warrant liability to equity
$
—
$
89
Partner company derivative warrant liability associated with partner company convertible preferred shares
$
33
$
90
Partner company's warrants issued in conjunction with debt
$
—
$
384
Unpaid research and development licenses acquired
$
50
$
325
Lease Liabilities arising from obtaining right-of-use assets
$
923
$
2,953
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 focused on acquiring and advancing assets to enhance long-term value for shareholders through product revenue, equity holding and dividend and royalty revenue streams. Fortress works in concert with its extensive network of key opinion leaders to identify and evaluate promising products and product candidates for potential acquisition. The Company 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 (“COH” or “City of Hope”), Fred Hutchinson Cancer Center, St. Jude Children’s Research Hospital (“St. Jude”), 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 (“Mayo Clinic”), 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 and subsidiary 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, sales transactions, and public and private financings. To date, four partner companies are publicly-traded, and three have consummated strategic partnerships with industry leaders, including AstraZeneca plc as successor-in-interest to Alexion Pharmaceuticals, Inc. (“AstraZeneca”) and Sentynl Therapeutics, Inc. (“Sentynl”).
Our subsidiaries and partner companies that are pursuing development and/or commercialization of biopharmaceutical products and product candidates are: Avenue Therapeutics, Inc. (Nasdaq: ATXI, “Avenue”), Baergic Bio, Inc. (“Baergic”, a subsidiary of Avenue), Cellvation, Inc. (“Cellvation”), Checkpoint Therapeutics, Inc. (Nasdaq: CKPT, “Checkpoint”), Cyprium Therapeutics, Inc. (“Cyprium”), Helocyte, Inc. (“Helocyte”), Journey Medical Corporation (Nasdaq: DERM, “Journey” or “JMC”), Mustang Bio, Inc. (Nasdaq: MBIO, “Mustang”), Oncogenuity, Inc. (“Oncogenuity”) and Urica Therapeutics, Inc. (“Urica”). Aevitas Therapeutics, Inc. (“Aevitas”) was a consolidated subsidiary company until the sale of its primary asset to 4D Molecular Therapeutics in April 2023.
As used throughout this filing, the words “we”, “us” and “our” may refer to Fortress individually, to one or more of its subsidiaries and/or partner companies, or to all such entities as a group, as dictated by context. Generally, “subsidiary” refers to a private Fortress subsidiary, “partner company” refers to a public Fortress subsidiary, and “partner” refers to an entity with whom one of the foregoing parties has a significant business relationship, such as an exclusive license or an ongoing product-related payment obligation. The context in which any such term is used throughout this document, however, may dictate a different construal from the foregoing.
Reverse Stock Split
On October 9, 2023, Fortress filed a Certificate of Amendment to its Amended and Restated Certificate of Incorporation, as amended, to effect the 1 -for-15 Reverse Stock Split of the Company’s shares of Common Stock (the “Reverse Stock Split”). The Reverse Stock Split was approved on August 10, 2023, by the Company’s Board of Directors and by the Company’s stockholders at a special meeting held on October 9, 2023. As a result of the Reverse Stock Split, every 15 shares of the Company’s pre-reverse split Common Stock was combined and reclassified as one share of Common Stock. The proportionate voting rights and other rights of common stockholders were not affected by the Reverse Stock Split, other than as the result of payment for fractional shares. No fractional shares were issued in connection with the Reverse Stock Split. Stockholders who would otherwise have held a fractional share of Common Stock received a cash payment in lieu thereof. In addition, there was no change to the authorized capital of the Company as a result of the reverse Stock Split and the number of authorized shares of common stock remained 200,000,000 .
F-11
Table of Contents
All share and per share information has been retroactively adjusted to give effect to the Reverse Stock Split for all periods presented. Proportionate adjustments were made to the per share exercise price and/or the number of shares issuable upon the exercise or vesting of all stock options, restricted stock and warrants outstanding at October 10, 2023, which resulted in a proportional decrease in the number of shares of the Company’s common stock reserved for issuance upon exercise or vesting of such stock options, restricted stock and warrants, and, in the case of stock options and warrants, a proportional increase in the exercise price of all such stock options and warrants.
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 subsidiaries/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 parent Company’s current cash and cash equivalents of $ 40.6 million are sufficient to fund the parent entity and private subsidiary 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. Fortress 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.
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 GAAP. The Company’s consolidated financial statements include the results of the Company’s subsidiaries for which it has voting control but does not own 100 % of the outstanding equity of the subsidiaries. For consolidated entities where the Company owns less than 100 % of the subsidiary, but retains voting control, the Company records net loss attributable to non-controlling interests in its consolidated statements of operations and presents non-controlling interests as a component of stockholders’ equity on its consolidated balance sheets. All intercompany income and/or expense items are eliminated entirely in consolidation prior to the allocation of net gain/loss attributable to non-controlling interest, which is based on ownership interests as calculated quarterly for each subsidiary.
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reporting period. 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, valuation of intangible assets, 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, accrued expenses and contingencies. Due to the uncertainty inherent in such estimates, actual results may differ from these estimates.
F-12
Table of Contents
Revenue Recognition
The Company records and recognizes revenue in a manner that depicts 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 at the point in time that the goods are received by the customer, which is when the customer obtains title to and has 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 a variety of deductions. Revenues are recorded net of provisions for variable consideration, including coupons, chargebacks, wholesaler fees, prompt pay discounts, specialty pharmacy discounts, managed care rebates, product returns, government rebates and other deductions customary to the pharmaceutical industry. Accruals for these provisions are presented in the consolidated financial statements as reductions to gross sales in determining net sales and as a contra asset within 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:
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. Coupons are processed and redeemed at the time of prescription fulfilment by the pharmacy. The expected accrual reserve requires us 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. The estimate of product remaining in the distribution channel is comprised of estimated inventory at the wholesaler as well as an estimate of inventory at the specialty pharmacies, which the Company estimates based upon historical ordering patterns. 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.
Chargebacks and Government Chargebacks — The Company sells a portion of its products indirectly through wholesaler distributors to contracted indirect customers and qualified government healthcare providers. The Company enters into specific agreements with or provides discounts to these indirect customers and entities to establish pricing for the Company’s products, and in-turn, the indirect customers and entities independently purchase these products. 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.
Wholesaler fees — The Company provides allowances to its wholesale customers for sales order management, data, and distribution services. The Company also 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. Assumptions used to establish the provision include contract sales volumes and average contract pricing. The Company regularly reviews the information related to these estimates and adjusts the provision accordingly.
Specialty Pharmacy Discounts — The Company has in place contractual arrangements with specialty pharmacies and provides for contractually agreed upon discounts. These discounts are recorded at the time of sale based on the customer’s contracted rate and recorded as a reduction of revenue.
F-13
Table of Contents
Managed Care Rebates — The Company is subject to rebates in connection with its agreements with certain contracted commercial payers. The Company estimates its managed care rebates based on the Company’s estimated payer mix and the applicable contractual rebate rate. The Company’s accrual for managed care rebates is based on an estimate of future claims that the Company expects to receive, which considers an estimate for inventory in the distribution channel. The accrual is recognized at the time of sale, resulting in a reduction of gross product revenue.
Product Returns — Consistent with industry practice, the Company offers customers a right to return any unused product. The customer’s right of return commences six months prior to product expiration date and ends one year after product expiration date. Products returned for expiration are reimbursed at current wholesale acquisition cost or indirect contract price. The Company estimates the amount of its product sales that may be returned by the Company’s customers and accrues this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company estimates products returns as a percentage of sales to its customers. The rate is estimated by using historical sales information, including its visibility and estimates into the inventory remaining in the distribution channel.
Collaboration Revenue
The Company’s collaboration revenue includes service revenue, license fees and future contingent milestone-based payments. Collaboration revenue is recognized for contracted R&D services performed for its customers over time. The Company measures its progress using an input method based on the effort expended or costs incurred toward the satisfaction of the Company’s performance obligation. The Company estimates the amount of effort to be expended, including the time it will take to complete the activities, or the costs that may be incurred in a given period, relative to the estimated total effort or costs to satisfy the performance obligation. This results in a percentage that is multiplied by the transaction price to determine the amount of revenue the Company recognizes each period. This approach requires the use of estimates and judgement. If the Company’s estimates or judgements change over the course of the collaboration, they may affect the timing and amount of revenue that is recognized in the current and future periods.
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.
F-14
Table of Contents
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, 2023 and 2022, consisted of cash and certificates of deposit in institutions in the United States. The Company maintains its cash and cash equivalent balances with high-quality financial institutions and, consequently, the Company believes that such funds are currently adequately protected against credit risk. At times, portions of the Company’s cash and cash equivalents may be uninsured or in deposit accounts that exceed Federal Deposit Insurance Corporation (FDIC) limits, though the Company customarily invests a significant portion of its cash in Certificate of Deposit Account Registry Service (“CDARS”) accounts to maximize FDIC insurance coverage across its holdings. As of December 31, 2023, the Company had not experienced losses on these accounts, and management believes the Company is not exposed to significant risk on such accounts. The Company’s cash equivalents and investments may comprise money market funds that are invested in U.S. Treasury obligations, corporate debt securities, U.S. Treasury obligations and government agency securities. The Company has no significant off-balance sheet risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements.
Property and Equipment
Computer equipment, furniture and fixtures and machinery and 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.
Intangible Assets
The Company’s finite-lived intangible assets consist of intangible assets acquired by Journey. Intangible assets are reported at cost, less accumulated amortization. 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.
F-15
Table of Contents
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.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, including intangible assets with finite useful lives, for impairment at least annually or whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable (a “triggering event”). Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the long-lived asset in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset over its fair value, determined based on discounted cash flows. During the year ended December 31, 2023, Journey recorded an intangible asset impairment charge of $ 3.1 million during the year ended December 31, 2023. This non-cash charge was recorded to selling, general and administrative expenses on the consolidated statements of operations. The Company did not record any impairment loss on long-lived assets for the year ended December 31, 2022.
Restricted Cash
The Company records cash held in trust or pledged to secure certain debt obligations as restricted cash. As of December 31, 2023, the Company had $ 2.4 million of restricted cash representing pledges to secure letters of credit in connection with certain office leases and an undertaking posted by Cyprium to secure potential damages in an injunctive proceeding. As of December 31, 2022, the Company had $ 2.7 million 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 as of the dates presented:
December 31,
2023
2022
Cash and cash equivalents
$
80,927
$
178,266
Restricted cash
2,438
2,688
Total cash and cash equivalents and restricted cash
$
83,365
$
180,954
Inventories
The Company’s inventory consists of raw materials, work-in-process and finished goods supporting Journey’s sales of dermatology products. Inventories are recorded at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. The Company periodically reviews the composition of inventory in order to identify excess, obsolete, slow-moving or otherwise non-saleable items taking into account anticipated future sales compared with quantities on hand, and the remaining shelf life of goods on hand. If non-saleable items are observed and there are no alternate uses for the inventory, the Company records a write-down to net realizable value in the period that the decline in value is first recognized. The Company’s inventory reserves were $ 0.3 million and $ 0.4 million at December 31, 2023 and 2022, respectively.
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Accounts Receivable, Net
The Company’s accounts receivable consists of amounts due from customers to Journey related to dermatological product sales and have standard payment terms. For certain customers, the accounts receivable for the customer are net of prompt payment or specialty pharmacy discounts. The Company monitors the financial performance and creditworthiness of its customers so that it can properly assess and respond to changes in their credit profile. The Company reserves against accounts receivable for estimated losses that may arise from a customer’s inability to pay, and any amounts determined to be uncollectible are written off against the reserve when it is probable that the receivable will not be collected. The Company has historically not experienced significant credit losses. The allowance for doubtful accounts was $ 0.5 million and $ 0.4 million at December 31, 2023 and 2022, respectively.
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.
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. Accordingly, the total purchase price for the licenses acquired is reflected in research and development – licenses acquired in the Company’s Consolidated Statements of Operations.
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 .
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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.
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, as of December 31, 2023 and December 31, 2022, the Company has recorded a liability related to an uncertain tax position of $ 0.8 million and $ 0.7 million, respectively. The 2019 through 2021 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. As of December 31, 2023 and December 31, 2022, the Company accrued interest related to uncertain tax positions of $ 0.1 million and approximately $ 32,000 , respectively. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position.
Net Loss Per Common Share
Basic and diluted net loss per share attributed to common stockholders is calculated by dividing the net loss attributed to Fortress (less the Series A Preferred Dividend) by the weighted-average number of shares of Common Stock outstanding during the period, not including unvested restricted stock, and without consideration for Common Stock equivalents. Diluted net loss per share is the same as the basic loss per share due to net losses incurred in all periods.
Non-Controlling Interests
The Company records net loss attributable to non-controlling interests in its consolidated statements of operations and presents non-controlling interests as a component of stockholders’ equity on its consolidated balance sheets. All intercompany income and/or expense items are eliminated entirely in consolidation prior to the allocation of net gain/loss attributable to non-controlling interest, which is based on a quarterly calculation of ownership interests for each relevant subsidiary.
Subsidiary preferred shares and Class A common shares, if issued, are included in the ownership calculation on a 1 :1 basis consistent with how the relevant contractual agreements provide for the allocation and distribution of earnings. These shares, if any, are convertible at Fortress’ election on a 1 :1 basis into common stock (with adjustments for stock splits, if any) and upon conversion would have the same voting rights as the common stock. Only preferred stock and Class A common stock held by Fortress have majority voting rights, which rights would terminate upon conversion into common stock. The Company allocates the subsidiaries’ net loss/income to the non-controlling interest on a quarterly basis, and the
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calculation of non-controlling interest ownership percentage is determined as the average of the prior quarter and the current quarter’s non-controlling ownership interest.
The Company continually assesses whether changes to existing relationships or future transactions may result in the consolidation or deconsolidation of subsidiaries and/or partner companies .
Comprehensive Loss
The Company’s comprehensive loss is equal to its net loss for all periods presented.
Recent Accounting Pronouncements
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280) : Improvements to Reportable Segment Disclosures The amendments in ASU 2023-07 improve reportable segment disclosure requirements through enhanced disclosures about significant segment expenses. The amendments introduce a new requirement to disclose significant segment expenses regularly provided to the chief operating decision maker (“CODM”), extend certain annual disclosures to interim periods, clarify that single reportable segment entities must apply ASC 280 in its entirety, permit more than one measure of segment profit or loss to be reported under certain conditions, and require disclosure of the title and position of the CODM. This guidance is effective for fiscal years, beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption will be permitted. The Company is currently evaluating the impact of the new standard on its consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures , which expands disclosures in an entity’s income tax rate reconciliation table and disclosures regarding cash taxes paid both in the U.S. and foreign jurisdictions. The update will be effective for annual periods beginning after December 15, 2024. The Company is currently evaluating the impact of the new standard on its consolidated financial statements.
3. Asset Purchase Agreements
Aevitas
Agreement with 4DMT
On April 21, 2023, Aevitas entered into an Asset Purchase Agreement (the “4DMT APA”) with 4DMT under which 4DMT acquired Aevitas’ proprietary rights to its short-form human complement factor H (“sCFH”) asset for the treatment of complement-mediated diseases. Under the terms of the 4DMT APA, 4DMT will make cash payments totaling up to $ 140 million if certain late-stage development, regulatory and sales milestones are met with respect to sCFH. A range of single-digit royalties on net sales are also payable. The aforementioned payments are payable solely to Aevitas, and 4DMT will be responsible for license payment obligations to the licensor of sCFH, University of Pennsylvania. 4DMT is not a related party to the Company and has assumed all ongoing and future development costs. The fair value of the interest in Aevitas retained by the Company of $ 2.6 million was based on the risk-adjusted present value of the aforementioned potential cash payments (see Note 6).
In connection with the 4DMT APA, the preferred shares of Aevitas held by the Company converted to Aevitas common shares, at which point the Company no longer maintained voting control of Aevitas. As a result, the Company deconsolidated its holdings in Aevitas. In connection with this transaction, the Company recorded a loss on deconsolidation of Aevitas of $ 3.4 million during the year ended December 31, 2023 in other expense in the Consolidated Statement of Operations.
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Mustang
Agreements with uBriGene (Boston) Biosciences, Inc. (“uBriGene”)
On May 18, 2023, Mustang entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with uBriGene, as amended by a first amendment thereto, dated June 29, 2023, and further amended by a second amendment thereto, dated as of July 28, 2023 (collectively the “Amended Asset Purchase Agreement”), pursuant to which Mustang agreed, subject to the terms and conditions therein, to sell its leasehold interest in its cell processing facility located in Worcester, MA (the “Facility”) and associated assets relating to the manufacturing and production of cell and gene therapies at the Facility to uBriGene. On July 28, 2023, the closing date, pursuant to the terms and conditions of the Amended Asset Purchase Agreement, Mustang completed the sale of Mustang’s assets primarily relating to the manufacturing and production of cell and gene therapies to uBriGene for base consideration of $ 6.0 million. Mustang recorded a gain of $ 1.5 million in connection with the sale of the assets and recorded approximately $ 0.3 million of the base consideration as deferred income, to be recognized upon the transfer of the lease. Certain assets, including Mustang’s lease of the Facility and related contracts did not transfer to uBriGene on the Closing date. uBriGene will be obligated to pay to Mustang a contingent amount of $ 5.0 million less certain severance obligations and payments payable in connection with the transfer of certain contracts related to the transferred assets, if Mustang, within two years of the closing date: (i) completes one or more issuances of equity securities in an aggregate gross amount equal to or greater than $ 10.0 million after the closing and (ii) obtains consent of the landlord to the proposed lease transfer within two years after the closing date.
The Asset Purchase Agreement contemplates that Mustang will seek to procure the consent and approval of the landlord of the Facility, WCS-377 Plantation Street, Inc. (the “Landlord”), and the Landlord informed Mustang that it will not consider the lease transfer request until receipt of the final determination letter from with the U.S. Committee on Foreign Investment in the United States (“CFIUS”), although there can be no guarantee that, even if CFIUS does approve the below-described Facility Transaction, the Landlord will approve the lease transfer. In connection with the sale of its leasehold interest in the Facility and associated assets relating to the manufacturing and production of cell and gene therapies at the Facility (the “Facility Transaction”) to uBriGene and an indirect, wholly owned subsidiary of uBriGene (Jiangsu) Biosciences Co., Ltd., a Chinese contract development and manufacturing organization, Mustang and uBriGene previously submitted a voluntary notice with CFIUS. The current 45-day review period will conclude no later than March 28, 2024. If CFIUS does not conclude its review by March 28, 2024, the proceeding will transition to a subsequent 45-day phase as CFIUS further investigates the Transaction. Unless and until the lease is transferred to uBriGene, Mustang will retain its facility lease and facility personnel, and will continue to occupy the leasehold premises and manufacture there its lead product candidates, including MB-106.
As contemplated by the Amended Asset Purchase Agreement, on the Closing Date, Mustang and uBriGene entered into a Manufacturing Services Agreement (the “Manufacturing Services Agreement”). Under the Manufacturing Services Agreement, Mustang contracted uBriGene to manufacture Mustang’s lead product candidates, including MB-106, and Mustang committed to spend at least $ 8 million over a period of two years after the closing of the transaction to purchase manufacturing and related services (the “Manufacturing Services”) from uBriGene (the “Minimum Commitment”). Mustang paid uBriGene 25 % of the Minimum Commitment at the time of signing of the Manufacturing Services Agreement and will pay the remainder of the Minimum Commitment over the following two years . Subject to Mustang’s payment of its Minimum Commitment, uBriGene will provide to Mustang a manufacturing rebate, payable in cash at the end of the second year of the Manufacturing Services Agreement term, for any amounts paid for Manufacturing Services in excess of the Minimum Commitment (but in no event will such rebate exceed $ 3 million). In connection with the Manufacturing Services Agreement, Mustang will provide uBriGene with the customary licenses to use intellectual property rights specific to Mustang’s cell and gene therapies to the extent reasonably necessary for uBriGene’s performance under the Manufacturing Services Agreement. Mustang intends to expense manufacturing costs under the Manufacturing Services Agreement and the sub-contracting Manufacturing Services Agreement, pursuant to which uBriGene contracted with Mustang to perform the Manufacturing Services to be performed by uBriGene under the Manufacturing Services Agreement and account for reimbursed costs associated with the agreements as an offset to such expense. For the year ended December 31, 2023, Mustang has expensed $ 4.1 million of manufacturing costs under the Manufacturing Services Agreement.
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In addition, as contemplated by the Asset Purchase Agreement, on the closing date, Mustang and uBriGene entered into a sub-contracting Manufacturing Services Agreement (the “Sub-Contracting CDMO Agreement”). Under the terms of the Sub-Contracting CDMO Agreement, Mustang will manufacture its lead product candidates, including MB-106, and may from time to time manufacture other products as requested by uBriGene. In addition, under the Sub-Contracting CDMO Agreement, Mustang and uBriGene agreed to establish a joint steering committee comprising two representatives from each of Mustang and uBriGene to review, discuss and decide on operational matters relating to the services to be performed by Mustang under such agreement, including matters relating to expenses. For the year ended December 31, 2023, Mustang received $ 2.4 million in reimbursed costs and has a receivable of $ 3.2 million associated with the Sub-Contracting CDMO Agreement.
Because the Facility was not assigned to uBriGene within 120 days following July 28, 2023, so long as the lease has not been so assigned, uBriGene may deliver a notice to Mustang indicating its intention to enter into good faith negotiations (the “Repurchase Notice”) to provide for Mustang to repurchase the associated assets relating to the manufacturing and production of cell and gene therapies at the Facility, re-assume the transferred liabilities and resume all transferred operations. Upon receipt of such Repurchase Notice, Mustang and uBriGene have agreed to use our best commercial efforts to negotiate in good faith the terms of any such Repurchase Transaction.
Cyprium
Agreement with Sentynl
On February 24, 2021, Cyprium entered into a development and asset purchase agreement (the “Sentynl APA”) with Sentynl, a U.S.-based specialty pharmaceutical company owned by the Zydus Group. Under the Sentynl APA, Sentynl provided $ 8.0 million of upfront development funding for Cyprium’s CUTX-101 program, with Cyprium remaining in control of development of such program; upon approval of the NDA for CUTX-101 by the FDA, Cyprium would be obligated to assign the NDA and certain other assets pertaining to the CUTX-101 program to Sentynl, after which point Sentynl would commercialize the drug and owe Cyprium royalties and regulatory and sales milestones.
The Sentynl APA contained an alternative “Approval Deadline Transfer” mechanism pursuant to which, in the event that CUTX-101 NDA approval had not been obtained by September 30, 2023, then Sentynl could elect, during the subsequent 45 -day period, to assume control over development of CUTX-101 by effecting a Closing under the Sentynl APA. Cyprium received notice of Sentynl’s election to effect the Approval Deadline Transfer during such 45-day period, and the Closing of such transfer occurred in December 2023. The Approval Deadline Transfer obligated Sentynl to pay Cyprium $ 4.5 million in connection with the Closing, which was received by Cyprium in December 2023 and recorded as collaboration revenue by Fortress in its consolidated statements of operations for the year ended December 31, 2023. There are no further obligations required by Cyprium in regards to the $ 4.5 million.
Following such Closing, Sentynl is obligated to use commercially reasonable efforts to develop and commercialize CUTX-101, including the funding of the same. Additionally, Cyprium remains eligible to receive up to $ 129 million in aggregate development and sales milestones under the Agreement, and royalties on net sales of CUTX-101 as follows: (i) 3 % of annual net sales up to $ 75 million; (ii) 8.75 % of annual net sales between $ 75 million and $ 100 million; and (iii) 12.5 % of annual net sales in excess of $ 100 million. Cyprium will retain 100% ownership over any FDA priority review voucher that may be issued at NDA approval for CUTX-101.
With respect to the $ 8.0 million upfront payment from Sentynl received in 2021, the Company recognized revenue over the period in which the development activities occurred using an input method based upon the costs incurred to date in relation to the total estimated costs to complete the development activities. As of the date of the Approval Deadline Transfer, the revenue related to the upfront payment has been fully recognized. For the years ended December 31, 2023 and 2022, the Company recognized revenue from this arrangement of $ 0.7 million and $ 1.9 million, respectively.
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Avenue
Agreements with InvaGen
In November 2018, Avenue entered into a Stock Purchase and Merger Agreement (the “Avenue SPMA”) with InvaGen Pharmaceuticals Inc. In November 2021, Avenue delivered InvaGen notice of termination of the Avenue SPMA and in July 2022, Avenue entered into a Share Repurchase Agreement (the “Avenue SRA”) with InvaGen which closed in October 2022. In connection with the closing of the Avenue SRA, Avenue repurchased all the common shares of Avenue held by InvaGen, and all of the rights retained by InvaGen pursuant to the Stockholders Agreement entered into by and among Avenue, InvaGen and Fortress on November 12, 2018, were terminated. Under the Avenue SRA, Avenue agreed to pay InvaGen seven and a half percent ( 7.5 %) of the proceeds from future financings, up to $ 4 million. In connection with the closing of financings that occurred in 2023 and 2022, Avenue made payments totaling $ 0.5 million to InvaGen.
4. Inventory
Inventory consisted of the following:
December 31,
($ in thousands)
2023
2022
Raw materials
$
4,640
$
6,454
Work-in-process
884
395
Finished goods
4,987
7,739
Inventory reserve
( 305 )
( 429 )
Total inventories
$
10,206
$
14,159
5. Property and Equipment
Fortress’ property and equipment consisted of the following:
Useful Life
December 31,
($ in thousands)
(Years)
2023
2022
Computer equipment
3
$
595
$
739
Furniture and fixtures
5
1,017
1,387
Machinery & equipment
5
—
8,632
Leasehold improvements
15
13,175
13,175
Buildings
40
581
581
Construction in progress
N/A
29
952
Total property and equipment
15,397
25,466
Less: Accumulated depreciation
( 8,892 )
( 12,446 )
Property, plant and equipment, net
$
6,505
$
13,020
Fortress’ depreciation expense for the years ended December 31, 2023 and 2022 was $ 2.2 million and $ 3.1 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 Aevitas
The Company valued its retained investment in Aevitas, as part of the deconsolidation of its holdings (see Note 3) in accordance with ASC Topic 820, Fair Value Measurements and Disclosures , and estimated the fair value to be $ 2.6 million based on a per share value of $ 0.328 . The following inputs were utilized to derive the value: risk free rate of return of 3.7 %, volatility of 80 % and a discount for lack of marketability of 39.7 %.
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Table of Contents
Common Stock Warrant Liabilities
Warrants
($ in thousands)
liabilities
Balance at December 31, 2021
$
—
Checkpoint Series A & B common stock warrants
7,640
Checkpoint placement agent warrants
278
Avenue common stock warrants
8,278
Urica placement agent warrants
90
Change in fair value of common stock warrants - Avenue
( 5,669 )
Change in fair value of common stock warrants - Checkpoint
3,252
Balance at December 31, 2022
13,869
Avenue common stock warrants
2,235
Urica placement agent warrants
33
Change in fair value of common stock warrants - Avenue
( 4,258 )
Change in fair value of common stock warrants - Checkpoint
( 7,924 )
Change in fair value of placement agent warrants - Urica
52
Exercise of common stock warrants - Checkpoint
( 3,121 )
Balance at December 31, 2023
$
886
Checkpoint
On December 16, 2022, Checkpoint closed on an offering for the sale of shares of its common stock and pre-funded warrants as part of a registered direct offering (the “December 2022 Registered Direct Offering”). The common stock and the pre-funded warrants were sold together with December 2022 Common Stock Warrants and placement agent warrants. Net proceeds to Checkpoint from the December 2022 Registered Direct Offering were $ 6.7 million after deducting commissions and other transaction costs (see Note 13).
Checkpoint deemed the December 2022 common warrants and placement agent warrants to be classified as liabilities on the balance sheet as they contain terms for redemption of the underlying security that are outside its control. The common warrants and placement agent warrants were recorded at the time of closing at a fair value, determined by using the Black-Scholes model. As the total fair value of the common stock warrant liability exceeded the total net proceeds, no proceeds were allocated to the common stock and pre-funded warrants issued as part of this transaction. Checkpoint revalued the December 2022 common warrants and placement agent warrants at December 31, 2022 resulting in a fair value of $ 11.2 million. Checkpoint also revalued the December 2022 Common Stock Warrants and December 2022 Placement Agent Warrants at each reporting period in 2023, resulting in gains throughout the year.
F-23
Table of Contents
In February 2023, Checkpoint closed on an offering for the sale of shares of its common stock and pre-funded warrants as part of a registered direct offering (the “February 2023 Registered Direct Offering”). The common stock and pre-funded warrants were sold together with February 2023 Common Stock Warrants and placement agent warrants (collectively, the “February 2023 Common Stock Warrants”). The total gross proceeds from the February 2023 Registered Direct Offering were approximately $ 7.5 million with net proceeds of approximately $ 6.7 million after deducting approximately $ 0.8 million in commissions and other transaction costs. The February 2023 Common Stock Warrants and placement agent warrants met the criteria for equity classification.
In October 2023, Checkpoint entered into an inducement offer letter agreement (the “October 2023 Inducement”) with a holder of certain of its existing warrants to exercise for cash an aggregate of 6,325,354 shares of the Checkpoint’s common stock at a reduced exercise price of $ 1.76 per share. The exercised warrants included the December 2022 Common Stock Warrants with an original exercise price of $ 4.075 per share and the February Common Stock Warrants with an original exercise price of $ 5.00 per share. These warrants were issued as part of the December 2022 Registered Direct Offering and February 2023 Registered Direct Offering. As part of the October 2023 Inducement, Checkpoint agreed to issue new unregistered Series A Warrants to purchase up to 6,325,354 shares of Common Stock and new unregistered Series B Warrants to purchase up to 6,325,354 shares of Common Stock (the October 2023 Common Stock Warrants”). Checkpoint also issued the placement agent warrants to purchase up to 379,521 shares of common stock with an exercise price of $ 2.20 per share. The total gross proceeds from the October 2023 Inducement were approximately $ 11.1 million with net proceeds of approximately $ 10.0 million after deducting approximately $ 1.1 million in commissions and other transaction costs. The October 2023 Common Stock Warrants and placement agent warrants met the criteria for equity classification.
The December 2022 Common Stock Warrants, which were liability classified, were revalued on October 4, 2023 using Black-Scholes Model to calculate the difference in fair value as a result of the change in exercise price. The difference in fair value of $ 1.2 million was recorded as a loss on common stock warrant liabilities in the Consolidated Statements of Operations. The issuance of the October 2023 Common Stock Warrants was also considered as part of the cost of the inducement and were valued using Black-Scholes Model and allocated between the December 2022 Common Stock Warrants and The February 2023 Common Stock Warrants on a weighted basis. The approximately $ 7.7 million allocated to the December 2022 Common Stock Warrants was recorded as loss on common stock warrant liabilities in the Consolidated Statements of Operations with a corresponding offset to additional paid-in-capital.
The February 2023 Common Stock Warrants, which were equity classified and treated under ASC 815-40, Derivatives and Hedging - Contracts in Entity’s Own Equity , were revalued using Black-Scholes Model to calculate the difference in fair value as a result of the change in exercise price. The difference in fair value of $ 1.1 million was deemed to be a dividend and recorded to additional paid-in-capital by Checkpoint because Checkpoint had an accumulated deficit on the exercise date. The approximately $ 6.3 million allocated to the February 2023 Common Stock Warrants from the issuance of the October 2023 Common Stock Warrants was also deemed to be a dividend and recorded to additional paid-in-capital by Checkpoint because Checkpoint had an accumulated deficit on the exercise date.
Checkpoint
Warrant
($ in thousands)
Liability
Common stock warrant liabilities at December 31, 2021
$
-
Issuance of Checkpoint common warrants
7,640
Issuance of placement agent warrants
278
Change in fair value of common stock warrant liabilities
3,252
Common Stock Warrant liabilities at December 31, 2022
11,170
Change in fair value of common stock warrant liabilities
( 7,924 )
Exercise of common stock warrants
( 3,121 )
Common Stock Warrant liabilities at December 31, 2023
$
125
A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the warrant liability that are categorized within Level 3 of the fair value hierarchy was as follows:
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Table of Contents
December 31,
October 4,
December 31,
Checkpoint Warrants
2023
2023
2022
Exercise price
$
5.41
$
1.76
$
4.08 - 5.41
Volatility
96.4
%
91.4 - 99.6
%
82.4 - 89.4
%
Expected life
4.0
0.7 - 4.2
1.5 - 5.0
Risk-free rate
3.8
%
4.7 - 5.4
%
4.0 - 4.7
%
Avenue
Avenue issued freestanding warrants to purchase shares of its common stock in connection with financing activities in October 2022 (the “October 2022 Warrants”) and January 2023 (the “January 2023 Warrants”, collectively the “Avenue Warrants”) (see Note 13). The Avenue Warrants are classified as liabilities on the balance sheet as they contain terms for redemption of the underlying security that are outside of its control. The October 2022 Warrants were valued using the Monte Carlo simulation approach. In connection with the Avenue January 2023 Registered Direct Offering (see Note 13) in January 2023, the down-round price protection feature was triggered and the exercise price for the October 2022 Warrants was permanently adjusted to $ 1.55 , which was the offering price for the Avenue Registered Offering in January 2023. The Black-Scholes model was used to value the October 2022 Warrants and January 2023 Warrants as of December 31, 2023.
For the year ended December 31, 2023, the decrease in the fair value of the Avenue Warrants resulted in a decrease in common stock warrant liabilities of $ 4.3 million, with an offsetting gain recorded in the Statements of Operations.
Avenue
Warrant
($ in thousands)
Liability
Common stock warrant liabilities at December 31, 2021
$
-
Issuance of Avenue common warrants
8,278
Change in fair value of common stock warrant liabilities
( 5,669 )
Common Stock Warrant liabilities at December 31, 2022
2,609
Issuance of Avenue common warrants
2,235
Change in fair value of common stock warrant liabilities
( 4,258 )
Common Stock Warrant liabilities at December 31, 2023
$
586
A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the Avenue warrant liability that are categorized within Level 3 of the fair value hierarchy was as follows:
December 31,
January 31
December 31
2023
2023
2022
Stock price
$ 0.16
$ 1.38
$ 1.16
Risk-free interest rate
3.84 - 4.23
%
3.90
%
4.02
%
Expected dividend yield
—
—
—
Expected term in years
2.1 - 3.8
3.00
4.78
Expected volatility
148 - 175
%
160
%
93
%
Urica
Urica’s contingently issuable placement agent warrants were issued in connection with Urica’s first close of their preferred offering in December 2022 (see Note 9). A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring Urica’s warrant liability that are categorized within Level 3 of the fair value hierarchy was as follows:
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December 31,
2023
2022
Risk-free interest rate
3.93
%
3.94
%
Expected dividend yield
—
—
Expected term in years
0.5
1.5
Expected volatility
153.6
%
70.7
%
At December 31, 2023 and 2022, the value of Urica’s contingent payment warrant was $ 0.2 million and $ 0.1 million, respectively, and was recorded on the consolidated balance sheet.
7. License Agreements
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. Expense recognized was $ 4.3 million (primarily Avenue) and $ 0.7 million, for the years ended December 31, 2023 and 2022, respectively. The purchase prices of the licenses acquired were classified as research and development-licenses acquired in the consolidated statements of operations.
Avenue
On February 28, 2023, Avenue entered into a license agreement with AnnJi Pharmaceutical Co. Ltd. ("AnnJi"), whereby Avenue obtained an exclusive license (the "AnnJi License Agreement") from AnnJi to the intellectual property rights pertaining to the molecule known as JM17, which activates Nrf1 and Nrf2, enhances androgen receptor degradation and underlies AJ201, a clinical product candidate currently in a Phase 1b/2a clinical trial in the U.S. for the treatment of SBMA, also known as Kennedy's Disease. Under the AnnJi License Agreement, in exchange for exclusive rights to the intellectual property underlying the AJ201 product candidates, Avenue agreed to pay $ 3.0 million, of which $ 2.0 million was paid on April 27, 2023 and $ 1 million was paid on September 8, 2023.
The license provided under the AnnJi License Agreement is exclusive as to all oral forms of AJ201 for use in all indications (other than androgenetic alopecia and Alzheimer’s disease) in the United States, Canada, the European Union, the United Kingdom and Israel. The AnnJi License Agreement also contains customary representations and warranties and provisions related to confidentiality, diligence, indemnification and intellectual property protection. Avenue will initially be obligated to obtain both clinical and commercial supply of AJ201 exclusively through AnnJi. AnnJi retains the manufacturing rights for AJ201 and Avenue has the option to acquire those rights from AnnJi as described in the AnnJi License Agreement.
Pursuant to the terms of the AnnJi License Agreement, Avenue was also obligated to issue two tranches of shares of its common stock and make additional payments including: reimbursement of payments up to $ 10.8 million in connection with the product’s Phase 1b/2a clinical trial (which AnnJi is currently administering with Joint Steering Committee Oversight before assigning the IND to Avenue upon such trial’s conclusion, and which is reflective of market pricing for the services to be received), up to $ 14.5 million in connection with certain development milestones pertaining to the first indication in the U.S., up to $ 27.5 million in connection with certain drug development milestones pertaining to additional indications and development outside the U.S., up to $ 165 million upon the achievement of certain net sales milestones ranging from $ 75 million to $ 750 million in annual net sales, and royalty payments based on a percentage of net sales ranging from mid-single digits to the low-double digits, which are subject to potential diminution in certain circumstances.
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In connection with the signing of the AnnJi License Agreement, Avenue issued 831,618 shares of its common stock to AnnJi (“First Tranche Shares”) and recognized expense of $ 0.9 million; and issued 276,652 shares of common stock (“Second Tranche Shares”), recorded at a fair value of $ 0.3 million, on September 26, 2023 upon enrollment of the eighth patient in the ongoing Phase 1b/2a SBMA clinical trial. Avenue and AnnJi entered into a Subscription Agreement, dated as of February 28, 2023, that provided for the issuance of First Tranche Shares which were issued March 30, 2023. In the event that the common stock of Avenue ceases to be traded on a national securities exchange, AnnJi has the right to sell the common stock of Avenue back to Avenue at a price of $ 2.10 per share, subject to the terms of the AnnJi License Agreement.
Journey
On August 31, 2023, Journey entered into a license agreement (the “New License Agreement”) with Maruho, whereby Journey agreed to grant an exclusive license to Maruho to develop and commercialize Qbrexza® for the treatment of primary axillary hyperhidrosis, in South Korea, Taiwan, Hong Kong, Macau, Thailand, Indonesia, Malaysia, Philippines, Singapore, Vietnam, Brunei, Cambodia, Myanmar and Laos (the “Territory”). Under the terms of the New License Agreement, in exchange for the exclusive rights to Qbrexza in the Territory and the amendment to the royalty payments associated with the Japanese license, Maruho paid $ 19.0 million to Journey as a non-refundable upfront payment. Prior to the date of the New License Agreement, Journey and Maruho were party to an existing exclusive amended and restated license agreement (the “First A&R License Agreement”), under which Maruho acquired exclusive license rights to Qbrexza® in Japan. In connection with Journey’s entry into the New License Agreement, Journey and Maruho also entered into the Second Amended and Restated Exclusive License Agreement (the “Second A&R License Agreement”), which supersedes the First A&R License Agreement. The Second A&R License Agreement contains modifications that remove Maruho’s obligation to pay Journey royalties on its net sales of Rapifort® (the Japanese equivalent of Qbrexza®) in Japan for sales occurring after October 1, 2023 and removes Maruho’s obligation to pay $ 10 million to Journey in the event that Maruho achieves net sales of at least ¥ 4 billion (yen) of Rapifort® during a single fiscal year. All other remaining potential milestone payment obligations, which aggregate to $ 45 million, remain in full force and effect. Journey recognized $ 19.0 million as other revenue in the consolidated statements of operations during the year ended December 31, 2023.
In June 2021, Journey entered a license, collaboration, and assignment agreement (the “DFD-29 Agreement”) to obtain global rights for the development and commercialization of a late-stage development modified release oral minocycline for the treatment of rosacea (“DFD-29”) with Dr. Reddy’s Laboratories, Ltd (“DRL”); provided, that DRL retained certain rights to the program in select markets including Brazil, Russia, India and China. Pursuant to the terms and conditions of the DFD-29 Agreement, Journey paid $ 10.0 million. Based on the development and commercialization of DFD-29, additional contingent regulatory and commercial milestone payments totaling up to $ 158.0 million may also become payable by Journey. Journey is required to pay royalties ranging from approximately ten percent to fifteen percent on net sales of the DFD-29 product, subject to certain reductions. Additionally, Journey was required to fund and oversee the Phase 3 clinical trials beginning upon the license of DFD-29 in 2021. The Phase 3 clinical trials substantially concluded in July 2023 upon Journey’s receipt of positive topline results from the trials. From inception to date Journey has incurred approximately $ 23.8 million in costs associated with the development of DFD-29.
On March 31, 2021, Journey acquired global rights to Qbrexza®, a prescription cloth towelette to treat primary axillary hyperhidrosis in patients nine years of age or older. Journey is obligated to pay Dermira 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 generic competition.
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Urica
In May 2021, Urica entered into an exclusive license agreement with Fuji to develop dotinurad in North America, Europe, and the UK. Dotinurad is approved for the treatment of gout and hyperuricemia in Japan. The license agreement includes contingent regulatory and commercial milestone payments totaling up to $ 88 million with subsequent sales royalties ranging from approximately 7 % to approximately 10 % payable on net sales of dotinurad. Urica paid a $ 3.0 million milestone payment in December 2021 upon IND submission of dotinurad. In December 2022 Urica Therapeutics expanded its exclusive license agreement with Fuji for the development of dotinurad to include the Middle East and North Africa (“MENA”) and Turkey territories. The amendment to the exclusive license agreement included a one-time license amendment payment of $ 0.3 million.
Partner Companies and Subsidiaries
The Company’s partner companies and subsidiaries have also entered into other various license agreements with research institutions and medical centers. These license agreements include upfront payments which were expensed and various d evelopment milestone payments due upon achievement of various milestones which in the aggregate are approximately $ 439.5 million, of which $ 285.2 million relates to Mustang agreements. The license agreements also have sales-based milestone payments that total approximately $ 337.9 million. The agreements also include royalty payments on any future sales .
8. Intangible Assets
The Company’s finite-lived intangible assets consist of intangible assets acquired by Journey. During the year ended December 31, 2023, Journey experienced lower net product revenues and gross profit levels for its Ximino products. Based on these results, Journey revised the financial outlook and plans for its Ximino products. Journey assessed the revised forecast for Ximino and determined that this constituted a triggering event and the results of the analysis indicated the carrying amount was not expected to be recovered. Journey recorded an intangible asset impairment charge of $ 3.1 million during the year ended December 31, 2023. This non-cash charge was recorded to selling, general and administrative expenses on the consolidated statements of operations. The Company did not record any impairment loss on long-lived assets for the year ended December 31, 2022.
Agreement with VYNE Therapeutics Inc.
In January 2022, Journey entered into an agreement with VYNE Therapeutics, Inc. (“VYNE”) to acquire two FDA-Approved Topical Minocycline Products, Amzeeq (minocycline) topical foam, 4%, and Zilxi (minocycline) topical foam, 1.5%, and a Molecule Stabilizing Technology TM proprietary platform from VYNE for an upfront payment of $ 20.0 million and an additional $ 5.0 million payment on the one-year anniversary of the closing (the “VYNE Product Acquisition Agreement”). This expanded Journey’s product portfolio to eight marketed branded dermatology products. Journey also acquired certain associated inventory.
The VYNE Product Acquisition Agreement also provides for contingent net sales milestone payments. In the first calendar year in which annual sales reach each of $ 100 million, $ 200 million, $ 300 million, $ 400 million and $ 500 million, a one-time payment of $ 10 million, $ 20 million, $ 30 million, $ 40 million and $ 50 million, respectively, will be paid in that year only, per product, totaling up to $ 450 million. In addition, Journey will pay VYNE 10 % of any upfront payment received by Journey from a licensee or sublicensee of the products in any territory outside of the United States, subject to exceptions for certain jurisdictions as detailed in the VYNE Product Acquisition Agreement.
The following table summarizes the aggregate consideration transferred for the assets acquired by Journey in connection with the VYNE Product Acquisition Agreement:
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($ in thousands)
Aggregate Consideration Transferred
Consideration transferred to VYNE at closing
$
20,000
Fair value of deferred cash payment due January 2023
4,740
Transaction costs
223
Total consideration transferred at closing
$
24,963
The fair value of the deferred cash payment was accreted to the $ 5.0 million January 2023 cash payment over a one-year period through interest expense. Journey made the $ 5.0 million deferred cash payment in January 2023.
The following table summarizes the assets acquired in the VYNE Product Acquisition Agreement:
($ in thousands)
Assets Recognized
Inventory
$
6,041
Identifiable intangibles:
Amzeeq
15,162
Zilxi
3,760
Fair value of net identifiable assets acquired
$
24,963
The intangible assets were valued using an income approach, while the inventory was valued using a final sales value less cost to dispose approach.
In July 2020, Journey entered into an exclusive license and supply agreement for Accutane (the “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. To date, Journey has paid all milestone payments. Three additional milestone payments totaling $ 17.0 million are contingent upon the achievement of certain net sales milestones. Journey is required to pay royalties in an amount equal to a low-double-digit percentage of net sales. The term of the Accutane Agreement is ten years and renewable upon mutual agreement. Each party may terminate the Accutane Agreement for an uncured material breach by the other party or for certain bankruptcy or insolvency related events. Journey may also terminate the Accutane Agreement without cause upon 180 days written notice to DRL.
The table below provides a summary of intangible assets as of December 31, 2023 and 2022, respectively:
Estimated Useful
Year Ended December 31,
($ in thousands)
Lives (Years)
2023
2022
Intangible assets – product licenses
3 to 9
$
37,925
$
37,925
Accumulated amortization
( 14,495 )
( 10,728 )
Impairment loss
( 3,143 )
—
Net intangible assets
$
20,287
$
27,197
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The future amortization of these intangible assets is as follows:
Total
($ in thousands)
Amortization
December 31, 2024
$
3,257
December 31, 2025
3,257
December 31, 2026
2,471
December 31, 2027
1,775
Thereafter
5,585
Sub-total
$
16,345
Asset not yet placed in service
3,942
Total
$
20,287
9. Debt and Interest
Debt
Total debt consists of the following:
December 31,
($ in thousands)
2023
2022
Interest rate
Maturity
Oaktree Note
$
50,000
$
50,000
11.0
%
August - 2025
SWK Term Loan
15,000
—
15.1
%
December - 2027
EWB Term Loan
—
20,000
10.2
%
January - 2026
Runway Note
—
31,050
13.8
%
April - 2027
Less: Discount on notes payable
( 4,144 )
( 9,320 )
Total notes payable
$
60,856
$
91,730
Oaktree Note
On August 27, 2020 (the “Oaktree Closing Date”), Fortress, as borrower, entered into the $ 60.0 million senior secured credit agreement with Oaktree (the “Oaktree Agreement” and the debt thereunder, the “Oaktree Note”) with Oaktree Fund Administration, LLC and the lenders from time-to-time party thereto (collectively, “Oaktree”) . The Oaktree Note bears interest at a fixed annual rate of 11.0 %, payable quarterly and maturing on the fifth anniversary of the Oaktree 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 mandatory prepayments were required in the years ended December 31, 2023 or 2022. No amounts paid or prepaid may be reborrowed without Oaktree consent.
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.
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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, 2023.
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 subsidiaries and 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 and partner companies 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 Oaktree 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 Oaktree 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 116,624 shares of common stock of the Company (see Note 13) 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, 2023 and 2022, the Company amortized $ 2.1 million and $ 1.5 million, respectively, of debt discount associated with the Oaktree Note.
SWK Term Loan
On December 27, 2023 (the “SWK Closing Date”), Journey entered into a Credit Agreement with SWK Funding LLC (“SWK”). The Credit Agreement provides for a term loan facility (the “Credit Facility”) in the original principal amount of up to $ 20.0 million. On the SWK Closing Date, Journey drew $ 15 million. The remaining $ 5.0 million may be drawn upon request by Journey within 12 months after the SWK Closing Date. Loans under the Credit Facility (the “Term Loans”) mature on December 27, 2027 unless the Credit Facility is otherwise terminated pursuant to the terms of the Credit Agreement. The Term Loans accrue interest which is payable quarterly in arrears. The Term Loans bear interest at a rate per annum equal to the three-month term SOFR (subject to a SOFR floor of 5 %) plus 7.75 %. The interest rate resets quarterly.
Beginning in February 2026, Journey is required to repay a portion of the outstanding principal of the Term Loans quarterly in an amount equal to 7.5 % of the principal amount of funded Term Loans. If the total revenue of Journey, measured on a trailing twelve-month basis, is greater than $ 70.0 million as of December 31, 2025, principal repayment is not required until February 2027, at which point Journey is required to repay a portion of the outstanding principal of the Term Loans quarterly in an amount equal to 15 % of the principal amount of funded Term Loans.
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Journey may at any time prepay the outstanding principal balance of the Term Loans in whole or in part. Prepayment of the Term Loans is subject to payment of a prepayment premium equal to (i) 2 % of the Term Loans prepaid plus the amount of interest that would have been due through the first anniversary of the SWK Closing Date if the Term Loans are prepaid prior to the first anniversary of the SWK Closing Date, (ii) 1 % of the Term Loans prepaid if the Term Loans are prepaid on or after the first anniversary of the SWK Closing Date but prior to the second anniversary of the SWK Closing Date, or (iii) 0 % if prepaid thereafter.
Upon repayment in full of the Term Loans, Journey will pay an exit fee equal to 5 % of the original principal amount of the Term Loans. Additionally, Journey paid an origination fee of $ 0.2 million on the SWK Closing Date and incurred issuance costs of $ 0.2 million, both of which have been recorded as a debt discount. Journey is accreting the carrying value of the SWK Term Loan to the original principal balance plus the exit fee over the term of the loan using the effective interest method. The amortization of the discount is accounted for as interest expense in the Consolidated Statement of Operations. The effective interest rate on the SWK Term Loan for the fiscal year ended December 31, 2023 was 15.1 %.
The SWK Credit Facility also includes both revenue and liquidity covenants, restrictions as to payment of dividends, and is secured by substantially all assets of Journey. As of December 31, 2023, Journey was in compliance with the financial covenants under the SWK Credit Facility.
East West Bank Line of Credit and Long-Term Debt (“EWB Term Loan”)
Journey was previously party to a Loan and Security Agreement, dated March 31, 2021 (as amended, the “EWB Facility”), with East West Bank (“EWB”), under which EWB made a $ 20.0 million term loan and a $ 10 million revolving line of credit available to Journey. In January 2022 and August 2022, Journey borrowed $ 15 million and $ 5 million, respectively, against the term loan. During 2023, Journey voluntarily repaid the entire $ 20 million outstanding term loan principal balance under the EWB Facility. The repayment satisfied all of Journey’s outstanding debt obligations under the EWB Facility. Journey has no further obligations to EWB.
Mustang Runway Growth Finance Corp. Debt Facility (“Runway Note”)
On April 11, 2023, the long-term debt facility with Runway Growth Finance Corp. (the “Mustang Term Loan” or the “Runway Note”), was terminated upon receipt by Runway of a payoff amount of $ 30.4 million from Mustang comprising of principal, interest and the applicable final payment amount. A loss on extinguishment of $ 2.8 million was recorded to interest expense in the consolidated statement of operations for the year ended December 31, 2023.
IDB Letters of Credit
The Company has letters of credit (“LOC”) with one of its commercial banks, IDB Bank (“IDB”), of approximately $ 2.4 million and $ 2.7 million as of December 31, 2023 and December 31, 2022, respectively, securing rent deposits for lease facilities and an undertaking posted by Cyprium to secure potential damages in an injunctive proceeding. The Company’s 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.
Urica 8 % Cumulative Convertible Class B Preferred Offering
In December 2022 and February 2023, Urica closed private offerings of its 8 % Cumulative Convertible Class B Preferred Stock (the “Urica Preferred Stock”), at a price of $ 25.00 per share (“Subscription Price”) pursuant to which it sold a total of 135,494 shares of Preferred Stock for gross proceeds of $ 3.4 million, before deducting underwriting discounts and commissions and offering expenses of approximately $ 0.5 million (the “Urica Offering”). A non-cash contingent warrant value of $ 0.1 million was also recorded in debt discount (see Note 6).
Dividends on the Urica Preferred Stock are payable monthly by Fortress 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 are recorded as interest expense. For the year ended December 31, 2023, the Company recorded expense of $ 0.3 million associated with the Urica dividends owed on the outstanding Urica Preferred Stock.
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The shares mandatorily convert into Urica common stock upon either: (i) a qualified financing pursuant to which Urica raises at least $ 20 million in aggregate gross proceeds; or (ii) a sale of Urica (in each case, at a 20 % discount to the lowest price per share at which Urica common stock is issued/sold in such transaction). Additionally, in the event that neither such a qualified financing nor a sale of Urica has occurred prior to June 27, 2024, then each holder of Urica Preferred Stock is eligible to receive, at Fortress’ election, one of: (x) a cash payment equal to the product of the Subscription Price and the number of shares of Urica Preferred Stock held by such holder; (y) a number of shares of Fortress common stock equal to the Fortress Share Exchange Amount; or (z) a combination of the foregoing (in each case plus cash in lieu of any fractional shares, plus cash in lieu of accumulated and unpaid dividends otherwise payable in Fortress shares up to the conversion/exchange date).
The Urica Preferred Shares have no voting rights and have liquidation rights on parity with all equity securities issued by Urica, and junior to all equity securities issued by Urica with terms outlining senior rank and current and future indebtedness.
The Company evaluated the terms of the Urica 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 Urica’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.
Harley Capital LLC (“Harley”) was the primary placement agent for the Urica Offering and received a 10 % fee on gross proceeds raised, plus either warrants to purchase 10 % of the Urica common stock into which the Urica Preferred Stock converts (in the event of a sale of Urica or a qualified financing) or 10 % of the Company common stock for which the Urica Preferred Stock is exchanged (in the event neither a sale of Urica nor a qualified financing occurs), in addition to reimbursement of legal and other expenses (see Note 6).
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,
2023
2022
($ in thousands)
Interest
Fees
Total
Interest
Fees
Total
Oaktree Note
5,561
2,073
7,634
5,561
1,532
7,093
Partner company convertible preferred shares
1,023
503
1,526
—
—
—
Partner company installment payments - licenses
353
—
353
770
—
770
Partner company notes payable 1
4,856
492
5,348
4,021
533
4,554
Other
122
332
454
65
—
65
Total Interest Expense and Financing Fee
$
11,915
$
3,400
$
15,315
$
10,417
$
2,065
$
12,482
Note 1: Imputed interest expense related to Ximino, Accutane, Anti-itch product license and VYNE product licenses (see Note 8); includes loss on extinguishment of $ 2.8 million recorded by Mustang related to payoff of the Runway Note on April 11, 2023 .
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10. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following:
December 31,
($ in thousands)
2023
2022
Accounts payable
$
34,810
$
57,244
Accrued expenses:
Professional fees
1,681
1,693
Salaries, bonus and related benefits
8,531
9,772
Research and development
11,644
7,390
Research and development - license maintenance fees
—
632
Research and development - milestones
—
4,600
Accrued royalties payable
2,015
2,627
Accrued coupon and rebates
9,987
7,604
Return reserve
4,077
3,689
Accrued interest
—
342
Other
817
1,853
Total accounts payable and accrued expenses
$
73,562
$
97,446
11. Non-Controlling Interests
On April 21, 2023, Aevitas ceased to be a controlled Fortress entity and as such is no longer consolidated (see Note 3). Fortress’ ownership in Baergic was transferred to Avenue as of November 7, 2022 (see Note 14). Tamid was dissolved in the year ended December 31, 2023 due to inactivity.
The Company’s ownership interest in its consolidated subsidiaries in 2023 was similar to 2022, except for Checkpoint which decreased from 18 % to 9 % and Journey, which decreased from 56 % to 50 %.
12. Net Loss per Common Share
Basic and diluted net loss per share attributed to common stockholders is calculated by dividing the net loss attributed to Fortress (less the Series A Preferred dividends) by the weighted-average number of shares of Common Stock outstanding during the period, not including unvested restricted stock, and without consideration for Common Stock equivalents. Diluted net loss per share is the same as the basic loss per share due to net losses in all periods.
The Company updated its presentation of net loss attributable to common stockholders and its net loss per share as an immaterial correction to reflect the preferred stock dividend of $ 2.0 million per quarter. The statement of changes in stockholders’ equity (deficit) and statement of cash flows reflected the dividend and as such are not impacted by this change in presentation. For the year ended December 31, 2022, in addition to being retroactively adjusted to give effect to the Reverse Stock Split (see Note 1), the net loss attributable to Fortress increased from ($ 86.6 ) million to ($ 94.6 ) million and the net loss per share increased from ($ 14.61 ) to ($ 15.97 ) per share to reflect the preferred stock dividend.
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The following shares of potentially dilutive securities, weighted during the years ended December 31, 2023 and 2022 have been excluded from the computations of diluted weighted average shares outstanding as the effect of including such securities would be anti-dilutive:
Year Ended December 31,
2023
2022
Warrants to purchase Common Stock
873,065
233,057
Options to purchase Common Stock
32,601
48,317
Unvested Restricted Stock
1,362,880
1,225,000
Unvested Restricted Stock Units
151
2,608
Total
2,268,697
1,508,982
13. Stockholders’ Equity
Reverse Stock Split
On October 9, 2023, Fortress filed a Certificate of Amendment to its Amended and Restated Certificate of Incorporation, as amended, to effect the 1 -for-15 Reverse Stock Split of the Company’s shares of Common Stock. The Reverse Stock Split was approved on August 10, 2023, by the Company’s Board of Directors and by the Company’s stockholders at a special meeting held on October 9, 2023. As a result of the Reverse Stock Split, every 15 shares of the Company’s pre-reverse split Common Stock was combined and reclassified as one share of Common Stock. The proportionate voting rights and other rights of common stockholders were not affected by the Reverse Stock Split, other than as the result of payment for fractional shares. No fractional shares were issued in connection with the Reverse Stock Split. Stockholders who would otherwise have held a fractional share of Common Stock received a cash payment in lieu thereof.
All share and per share information has been retroactively adjusted to give effect to the Reverse Stock Split for all periods presented, unless otherwise indicated. Proportionate adjustments were made to the per share exercise price and/or the number of shares issuable upon the exercise or vesting of all stock options, restricted stock and warrants outstanding at October 10, 2023, which resulted in a proportional decrease in the number of shares of the Company’s common stock reserved for issuance upon exercise or vesting of such stock options, restricted stock and warrants, and, in the case of stock options and warrants, a proportional increase in the exercise price of all such stock options and warrants.
Common Stock
Fortress’ Certificate of Incorporation, as amended, authorizes the Company to issue 200,000,000 shares of $ 0.001 par value Common Stock of which 15,093,053 and 7,366,283 shares of Common Stock were outstanding as of December 31, 2023 and 2022, respectively.
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.
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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.
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, 2023 and 2022, 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 $ 8.0 million of dividends in Additional Paid in Capital on the Consolidated Balance Sheets as of December 31, 2023 and 2022, respectively.
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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. As of December 31, 2023, no Series A Preferred Stock shares have been redeemed.
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.
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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.
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.
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Stock-Based Compensation
As of December 31, 2023, the Company had four equity compensation plans: the Fortress Biotech, Inc. 2007 Stock Incentive Plan, the Fortress Biotech, Inc. 2013 Stock Incentive Plan, as amended (collectively, the “Plans”), the Fortress Biotech, Inc. 2012 Employee Stock Purchase Plan (the “ESPP”) and the Fortress Biotech, Inc. Long Term Incentive Plan (the “LTIP”). In the years ended December 31, 2023 and 2022, the Company’s Board of Directors and stockholders approved increases of 0.5 million and 0.2 million shares, respectively, to the Plans, bringing the aggregate total of authorized shares available under the Plans to 1.9 million shares. A total of 1,858,879 shares have been granted under the Plans, net of cancellations, and 74,454 shares remained available for issuance as of December 31, 2023.
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, 2023:
Partner
Shares
Shares available at
Company
Stock Plan
Authorized
December 31, 2023
Avenue
Avenue Therapeutics, Inc. 2015 Stock Plan
5,266,666
3,352,489
Cellvation
Cellvation Inc. 2016 Incentive Plan
2,000,000
300,000
Checkpoint
Checkpoint Therapeutics, Inc. Amended and Restated 2015 Stock Plan
6,000,000
3,510,830
Cyprium
Cyprium Therapeutics, Inc. 2017 Stock Plan
2,000,000
675,000
Helocyte
DiaVax Biosciences, Inc. 2015 Incentive Plan
2,000,000
341,667
Journey
Journey Medical Corporation 2015 Stock Plan
7,642,857
1,487,994
Mustang
Mustang Bio, Inc. 2016 Incentive Plan
733,333
282,334
Oncogenuity
FBIO Acquisition Corp. VII 2017 Incentive Plan
2,000,000
1,200,000
Urica
FBIO Acquisition Corp. VIII 2017 Incentive Plan
4,000,000
204,510
The purpose of the Company’s and its subsidiaries’ and partner companies’ 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.
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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, 2023 and 2022:
Year Ended December 31,
($ in thousands)
2023
2022
Employee and non-employee awards
$
8,369
$
9,934
Executive awards of Fortress Companies' stock
1,576
2,718
Partner Companies:
Avenue
907
649
Checkpoint
2,897
2,924
Mustang
567
2,283
Journey
2,606
4,425
Other
107
54
Total stock-based compensation expense
$
17,029
$
22,987
For the years ended 2023 and 2022, $ 3.2 million and $ 4.4 million was included in research and development expenses, and $ 13.8 million and $ 18.5 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, 2022
176,732
$
22.08
$
230,000
5.64
Forfeited
( 133,503 )
8.14
—
—
Expired
( 24,333 )
99.78
—
—
Options vested and expected to vest at December 31, 2023
18,896
$
20.55
$
—
1.76
Options vested and exercisable at December 31, 2023
18,896
$
20.55
$
—
1.76
During the years ended December 31, 2023 and 2022, there were no exercises of stock options.
The Company used the Black-Scholes option pricing model for determining the estimated fair value of stock-based compensation related to stock options. The table below summarizes the assumptions used:
Year Ended
December 31, 2022
Risk-free interest rate
3.78
%
Expected dividend yield
—
Expected term in years
7.0
Expected volatility
78.48
%
As of December 31, 2023, the Company had no unrecognized stock-based compensation expense related to options.
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Restricted Stock
Consolidated stock-based compensation expense from restricted stock awards and restricted stock units for the years ended December 31, 2023 and 2022 was $ 16.0 million and $ 21.9 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 2023, the Company granted 0.2 million restricted shares of its Common Stock to executives and directors of the Company and 0.2 million restricted stock units to employees and non-employees of the Company. The fair value of the restricted stock awards issued during 2023 of $ 1.7 million and the fair value of the restricted stock unit awards issued during 2023 of $ 0.6 million were valued on the grant date using the Company’s stock price as of the grant date. The 2023 restricted stock awards and restricted stock unit awards vest upon both the passage of time as well as meeting certain performance criteria.
During 2022, the Company granted 0.3 million restricted shares of its Common Stock to executives and directors of the Company and 0.1 million restricted stock units to employees and non-employees of the Company. The fair value of the restricted stock awards issued during 2022 of $ 7.0 million and the fair value of the restricted stock unit awards issued during 2022 of $ 2.1 million were valued on the grant date using the Company’s stock price as of the grant date. The 2022 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, 2022
1,370,001
$
35.44
Restricted stock granted
173,904
9.90
Restricted stock vested
( 181,831 )
36.01
Restricted stock units granted
169,466
3.59
Restricted stock units forfeited
( 19,182 )
42.05
Restricted stock units vested
( 53,658 )
48.80
Unvested balance at December 31, 2023
1,458,700
$
28.05
The total fair value of restricted stock units and awards that vested during the years ended December 31, 2023 and 2022 was $ 9.6 million and $ 7.3 million, respectively. As of December 31, 2023, the Company had unrecognized stock-based compensation expense related to all unvested restricted stock and restricted stock unit awards of $ 10.6 million and $ 1.4 million, respectively, which is expected to be recognized over the remaining weighted-average vesting period of 1.6 years and 1.7 years, respectively. This amount does not include restricted stock units 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.
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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, 2023 and 2022, certain non-employee directors elected to defer an aggregate of approximately 27,000 and 22,000 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, 2023, 0.1 million shares have been purchased and 0.1 million shares are available for future sale under the Company’s ESPP. The Company recognized share-based compensation expense of approximately $ 11,000 and $ 0.1 million for the years ended December 31, 2023 and 2022, respectively.
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, 2021
300,374
$
47.96
$
68,800
3.93
Expired
( 173,086 )
48.97
—
Outstanding as of December 31, 2022
127,288
$
46.58
$
—
7.45
Granted
5,885,000
1.70
Exercised
( 225,000 )
1.70
Outstanding as of December 31, 2023
5,787,288
$
1.88
$
7,794,450
4.91
Exercisable as of December 31, 2023
5,787,288
$
1.88
$
7,794,450
4.91
In connection with the Oaktree Note (see Note 9), the Company had issued warrants to Oaktree and certain of its affiliates to purchase up to approximately 0.1 million shares of Common Stock at a purchase price of $ 48.00 per share (the “Oaktree Warrants”). Oaktree is entitled to additional warrants if at any time prior to the expiration of the Oaktree Warrants the Company issues equity, warrants or convertible notes (collectively known as “Security Instruments”) at a price that is less than 95 % of the market price of the Company’s Common Stock on the trading day prior to the issuance of the Security Instruments. The Oaktree Warrants expire on August 27, 2030 and may be net exercised at the holder’s election. The Company filed registration statement No. 333-249983 on Form S-3 to register the resale of the shares of Common Stock issuable upon exercise of the Oaktree Warrants that was declared effective by the SEC on November 20, 2020.
On June 13, 2023, the Company entered into a Letter Agreement (the “Letter Agreement”) by and among the Company, Oaktree and certain of its affiliates, pursuant to which the Company agreed to lower the exercise price of the existing warrants to $ 8.136 per share (adjusted for the Reverse Stock Split) and issue amended and restated warrants reflecting the new exercise price (the “Amended and Restated Warrants”), as consideration for the warrant holders’ agreement to permit the Company and/or certain of its subsidiaries to take certain actions. The Amended and Restated Warrants are exercisable on or after June 13, 2023 and expire August 27, 2030.
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The Oaktree Warrants were reported as a component of additional paid in capital within Stockholders’ equity, and the value ascribed to the warrants was recorded as debt discount of the Oaktree Note and is amortized utilizing the effective interest method over the term of the Oaktree Note. The modification of the warrants resulted in a change in value of $ 0.3 million which was recorded as interest expense in the condensed consolidated statement of operations for the year ended December 31, 2023.
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, 2023 and 2022, the Compensation Committee granted 81,286 and 73,532 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. The shares will vest in full if the employee is either in the service of the Company as an employee, Board member or consultant (or any combination of the foregoing) on the tenth anniversary of the LTIP, or the eligible employee has had an involuntary Separation from Service (as defined in the LTIP). The only other vesting condition – one based on achievement of an increase in the Company’s market capitalization – has already been achieved, with respect to each annual award under the LTIP. The shares awarded under the LTIP will also vest in full (and the Company’s repurchase option on each tranche of shares granted thereunder will accordingly lapse) upon the occurrence of a Corporate Transaction (as defined in the LTIP) if the eligible employee is in service to the Company on the date of such Corporate Transaction. The fair value of each grant on the grant date was approximately $ 0.8 million for the 2023 grant and $ 2.8 million for the 2022 grant. For the year ended December 31, 2023 and 2022, the Company recorded stock compensation expense related to LTIP grants of approximately $ 5.8 million and $ 5.3 million, respectively, on the consolidated statement of operations.
Capital Raises
2021 Shelf
On July 23, 2021, the Company filed a shelf registration statement (File No. 333-255185 ) on Form S-3, which was declared effective on July 30, 2021 (the "2021 Shelf"). Approximately $ 100.1 million of securities remain available for sale under the 2021 Shelf as of December 31, 2023. The Company’s shelf registration statement (File No. 333-238327) on Form S-3 filed in 2020 expired on May 26, 2023.
Common Stock At the Market Offering
For the year ended December 31, 2023, the Company issued approximately 0.2 million shares of common stock at an average price of $ 9.61 per share for gross proceeds of $ 2.2 million. In connection with these sales, the Company paid aggregate fees of $ 0.1 million.
For the year ended December 31, 2022, the Company issued approximately 0.3 million shares of common stock at an average price of $ 22.58 per share for gross proceeds of $ 6.2 million. In connection with these sales, the Company paid aggregate fees of $ 0.2 million.
February 2023 Registered Direct Offering and Concurrent Private Placement
On February 10, 2023, the Company completed a registered direct offering of Common Stock pursuant to which it issued and sold approximately 1.1 million shares of its common stock at a purchase price of $ 12.53 (as adjusted for the Reverse Stock Split) per share and secured approximately $ 13.2 million in net proceeds after deducting offering expenses.
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The Company also simultaneously closed on a concurrent private placement with investors in the registered direct offering, for the pro rata rights to acquire, in the aggregate, securities exercisable into approximately 3.5 % of the outstanding shares of common stock in each of the Company’s next 20 new operating subsidiaries (the “Contingent Subsidiary Securities”). The Contingent Subsidiary Securities will only be issued to the extent such a new operating subsidiary first consummates a specified corporate development transaction within the next five years , and will be exercisable immediately upon issuance, with an exercise period of 10 years , at an exercise price equal to the fair market value of one share of common stock of the subsidiary on the date of the corporate development transaction. The Company’s stockholders approved the issuance of the rights and Contingent Subsidiary Securities at a special meeting of stockholders on April 10, 2023, as required by Nasdaq Listing Rule 5635.
November 2023 Public Offering
In November 2023, Fortress closed on a public offering of the issuance and sale of an aggregate of 5,885,000 units at a purchase price of $ 1.70 per unit. Each unit consists of (i) one share of common stock, and (ii) one warrant to purchase one share of common stock, exercisable immediately upon issuance at a price of $ 1.70 per share and expiring five years following the issuance date. The total gross proceeds from the offering were approximately $ 10.0 million with net proceeds of approximately $ 8.9 million after deducting placement agent fees and other transaction costs. Certain directors and officers of the Company participated in the offering and purchased an aggregate amount of approximately $ 2.9 million of units at the same purchase price.
Journey 2022 Shelf Registration Statement and At the Market Offering (the “Journey ATM”)
On December 30, 2022, Journey filed a shelf registration statement on Form S-3 (File No. 333-269079 ), which was declared effective by the SEC on January 26, 2023. This shelf registration statement covers the offering, issuance and sale by Journey of up to an aggregate of $ 150.0 million of Journey’s common stock, preferred stock, debt securities, warrants, and units. In connection with the Journey 2022 S-3, Journey has entered into the Sales Agreement with B. Riley, relating to shares of the Journey’s common stock. In accordance with the terms of the Sales Agreement, Journey may offer and sell up to 4,900,000 shares of its common stock, par value $ 0.0001 per share, from time to time through or to B. Riley acting as Journey’s agent or principal.
For the year ended December 31, 2023, Journey issued approximately 0.7 million shares of common stock at an average price of $ 6.189 per share for gross proceeds of $ 4.6 million under the Journey ATM. In connection with these sales, Journey paid aggregate fees of $ 0.1 million. At December 31, 2023, 4,151,297 shares remain available for issuance under the Journey 2022 S-3.
Checkpoint 2020 and 2023 Shelf Registration Statements and At the Market Offering
In March 2023, the Checkpoint 2023 S-3 (File No. 333-270843), which was declared effective May 5, 2023. Under the Checkpoint 2023 S-3, Checkpoint may sell up to a total of $ 150 million of its securities. As of December 31, 2023, approximately $ 91.7 million of the securities remains available for sale through the Checkpoint 2023 S-3.
There were no sales under the Checkpoint 2020 ATM in the year ended December 31, 2023. During the year ended December 31, 2022, Checkpoint sold a total of 532,816 shares of common stock under the Checkpoint 2020 ATM for aggregate total gross proceeds of approximately $ 10.1 million at an average selling price of $ 18.99 per share, resulting in net proceeds of approximately $ 9.9 million after deducting commissions and other transaction costs.
Checkpoint Registered Direct Offerings
In 2023, Checkpoint made registered direct offerings in February, April, May and July and sold a total of 6,957,186 shares of common stock and 2,663,903 pre-funded warrants at prices ranging from $ 3.07 to $ 5.25 . All pre-funded warrants were exercised in 2023. Each of these offerings included Series A warrants with a five -year term and Series B warrants with an 18 -month term. Total Series A warrants were 9,621,089 and total Series B warrants were 9,621,089 with exercise prices ranging from $ 2.82 to $ 5.00 . Total gross proceeds were $ 33.6 million, with net proceeds of $ 30.4 million.
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In October 2023, Checkpoint entered into an inducement offer letter agreement with a holder of certain of its existing warrants to exercise for cash an aggregate of 6,325,354 warrants for shares of Checkpoint’s common stock at a reduced exercise price of $ 1.76 per share. The warrants were issued to the holder on December 16, 2022 with an exercise price of $ 4.075 per share and on February 22, 2023 with an exercise price of $ 5.00 per share as part of registered direct offerings. The shares of Checkpoint common stock issuable upon exercise of the warrants were registered pursuant to effective registration statements on Form S-3 (File No. 333-251005) and Form S-3 (File No. 333-270474), respectively. As part of the inducement, Checkpoint agreed to issue new unregistered Series A Warrants to purchase up to 6,325,354 shares and new unregistered Series B Warrants to purchase up to 6,325,354 shares of Checkpoint Common Stock. The Series A and B warrants are exercisable immediately upon issuance with an exercise price of $ 1.51 per share. The Series A warrants will expire in five years and the Series B warrants will expire twenty-four months . The total gross proceeds from the offering were approximately $ 11.1 million with net proceeds of approximately $ 10.0 million after deducting approximately $ 1.1 million in commissions and other transaction costs.
In December 2022, Checkpoint closed on the December 2022 Registered Direct Offering with a single institutional investor for the issuance and sale of 950,000 shares of its common stock and 784,105 pre-funded warrants for one share of Checkpoint’s common stock. The common stock and the pre-funded warrants were sold together with Series A warrants to purchase up to 1,734,105 shares of common stock and Series B warrants to purchase up to 1,734,105 shares of common stock, at a purchase price of $ 4.325 per share of common stock. The Series A warrants will expire in five years and the Series B warrants will expire in eighteen months, and both have an exercise price of $ 4.075 per share. Net proceeds from the registered direct offering were $ 6.7 million and allocated to the common stock warrant liabilities (see Note 6).
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 398,660 shares and 56,671 shares to Fortress for the year ended December 31, 2023 and 2022, respectively.
Mustang 2020 and 2021 Shelf Registration Statements and At-the-Market Offering
On April 23, 2021, Mustang filed a shelf registration statement (File No. 333-255476) on Form S-3 (the “Mustang 2021 S-3”), which was declared effective on May 24, 2021. Through the Mustang 2021 S-3, Mustang may sell up to a total of $ 200 million of its securities. As of December 31, 2023, approximately $ 195.6 million of the Mustang 2021 S-3 remained available for sales of securities.
On July 2018, Mustang entered into an At-the-Market Issuance Sales Agreement (the “Mustang ATM”) relating to the sale of shares of common stock pursuant to the Mustang 2021 S-3. 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 April 14, 2023, the Mustang ATM was amended to add the limitations imposed by General Instruction I.B.6 to Form S-3.
During the year ended December 31, 2023, Mustang issued approximately 0.1 million shares of common stock at an average price of $ 3.15 per share for gross proceeds of $ 0.2 million under the ATM Agreement. In connection with these sales, Mustang paid aggregate fees of approximately $ 3,000 for net proceeds of approximately $ 0.2 million.
During the year ended December 31, 2022, Mustang issued approximately 0.5 million shares of common stock at an average price of $ 12.61 per share for gross proceeds of $ 6.6 million under the Mustang ATM. In connection with these sales, Mustang paid aggregate fees of approximately $ 0.1 million for net proceeds of approximately $ 6.5 million.
Mustang Registered Direct Offering
In October 2023, Mustang closed on the October 2023 Registered Direct Offering with a single institutional accredited investor for the issuance and sale of an aggregate of (i) 920,000 shares of its common stock and (ii) pre-funded warrants to purchase up to 1,688,236 shares of its common stock at a purchase price of $ 1.70 per share and $ 1.699 per pre-funded warrant in a registered direct offering priced at-the-market under the rules of The Nasdaq Stock Market LLC. In a concurrent private placement, Mustang issued and sold 2,588,236 unregistered warrants to purchase shares of common stock. The unregistered warrants have an exercise price of $ 1.58 , were exercisable immediately upon issuance and will
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expire five and one-half years following the issuance date. The total gross proceeds from the offerings were approximately $ 4.4 million before deducting approximately $ 0.5 million in placement agency fees and offering expenses.
Pursuant to the terms of the Second Amended and Restated Founders Agreement, Mustang owes to Fortress 2.5 % of the aggregate number of shares of Mustang common stock issued in the offerings noted above. Accordingly, Mustang recorded the value of 1,297 as shares issuable at December 31, 2023 and issued 13,131 common shares to Fortress for the year ended December 31 2022.
Avenue Registered Direct, Private Placement and PIPE
In November 2023, Avenue closed on a public offering of the issuance and sale of an aggregate of 16,633,400 units at a purchase price of $ 0.3006 per unit (the “November 2023 Offering”). Each unit consists of (i) one share of common stock (or pre-funded warrant in lieu of), and (ii) one Series A warrant to purchase one share of common stock, exercisable immediately upon issuance at a price of $ 0.3006 per share and expiring five years following the issuance date, and (iii) one Series B warrant to purchase one share of common stock, exercisable immediately upon issuance at a price of $ 0.3006 per share and expiring eighteen months following the issuance date (in aggregate the “November 2023 Warrants”). The total gross proceeds from the offering were approximately $ 5.0 million with net proceeds of approximately $ 3.8 million after deducting commissions and other transaction costs. In January 2024, Avenue entered into an inducement offer letter agreement with certain investors in the November 2023 Offering who agreed to exercise certain outstanding November 2023 Warrants to purchase up to an aggregate of 14,600,000 shares of Avenue common stock at their exercise price of $ 0.3006 per share (see Note 20).
In connection with the Avenue September 2023 Private Placement (see Note 16), Avenue entered into a registration rights letter agreement (the “Avenue Registration Rights Letter Agreement”) with Fortress and the Company’s Chairman, President and Chief Executive Officer, a director on the board of directors of Avenue (the “Avenue Private Placement Investors”). Avenue will file, on or prior to September 8, 2024, a resale registration statement to register the resale of the Avenue September 2023 Private Placement Shares.
In January 2023, Avenue agreed to issue and sell (i) 448,000 shares of Avenue’s common stock at a price per share of $ 1.55 , and (ii) pre-funded warrants to purchase 1,492,299 shares of common stock, at a price equal to the price per share, less $ 0.001 (the “Avenue January 2023 Registered Direct Offering”). The Avenue Pre-Funded Warrants had an exercise price of $ 0.001 per share.
Also in January 2023, Avenue entered into a private placement offering (“Avenue January 2023 Private Placement”) of January 2023 Warrants to purchase 1,940,299 shares of Avenue common stock, each with an exercise price of $ 1.55 per share. Avenue agreed to issue and sell the January 2023 Warrants at an offering price of $ 0.125 per January 2023 Warrant to purchase one share of Avenue common stock. The gross proceeds across the Avenue January 2023 Registered Direct Offering and the Avenue January 2023 Private Placement were $ 3.2 million and net proceeds were $ 2.8 million.
On October 11, 2022, Avenue announced the closing of an underwritten public offering of 3,636,365 common and pre-funded units. Each unit consists of one share of common stock or one pre-funded warrant and one warrant to purchase one share of common stock. Each unit was sold for a purchase price of $ 3.30 per common unit (or $ 3.2999 per pre-funded unit after reducing $ 0.0001 attributable to the exercise price of the pre-funded warrants). Avenue also simultaneously closed on the sale of an additional 545,454 warrants to purchase common stock, which were sold pursuant to a partial exercise of the underwriter’s over-allotment option. Avenue received net proceeds of approximately $ 10.3 million at closing, before giving effect to any warrant exercises. This transaction, along with Avenue’s repurchase of 100 % of the Avenue shares held by InvaGen for a purchase price of $ 3.0 million in October 2022 (see Note 3), resulted in the November 2022 consummation of the Contribution Agreement between Fortress and Avenue (see Note 16).
Pursuant to the Founders Agreement, Avenue issued to Fortress 2.5 % of the aggregate number of shares of Avenue common stock issued in the offerings noted above. Accordingly, Avenue issued 52,419 shares and recorded 415,718 shares issuable for the year ended December 31, 2023, and recorded 90,909 shares issuable to Fortress for the year ended December 31, 2022.
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14. Commitments and Contingencies
Leases
The Company’s lease portfolio includes leases for our corporate headquarters, office spaces, and a cell manufacturing facility. 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, 2023, the Company had operating lease liabilities of $ 20.8 million and right of use assets of $ 17.0 million, which are included in the Company’s Consolidated Balance Sheet.
The Company recognizes rent expense on a straight-line basis over the non-cancellable lease term. Rent expense for the years ended December 31, 2023 and 2022 was $ 1.9 million and $ 2.0 million, respectively. The components of lease cost are as follows:
Year Ended December 31,
($ in thousands)
2023
2022
Operating lease cost
$
3,236
$
3,524
Shared lease costs
( 2,086 )
( 2,127 )
Variable lease cost
761
648
Total lease expense
$
1,911
$
2,045
The following tables summarize quantitative information about the Company’s operating leases:
Year Ended December 31,
($ in thousands)
2023
2022
Operating cash flows from operating leases
$
( 3,549 )
$
( 3,473 )
Right-of-use assets exchanged for new operating lease liabilities
$
923
$
2,953
Weighted-average remaining lease term – operating leases (years)
4.2
4.7
Weighted-average discount rate – operating leases
6.5
%
6.6
%
Future Lease
($ in thousands)
Liability
Year Ended December 31, 2024
3,796
Year Ended December 31, 2025
3,799
Year Ended December 31, 2026
3,535
Year Ended December 31, 2027
3,191
Other
11,669
Total operating lease liabilities
25,990
Less: present value discount
( 5,185 )
Net operating lease liabilities, short-term and long-term
$
20,805
License Agreements
The Company has undertaken to make contingent development and commercial milestone payments to the licensors of its portfolio of drug products and candidates. In addition, the Company shall pay royalties to such licensors based on a percentage of net sales of each drug candidate following regulatory marketing approval. For additional information on future milestone payments and royalties, (see Note 7).
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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 subsidiaries and partner companies also provide indemnification of contractual counterparties (sometimes without monetary caps) 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.
University of Tennessee Research Foundation v. Caelum Biosciences, Inc.
Caelum Biosciences, Inc. (“Caelum”), a former subsidiary of Fortress that was sold to AstraZeneca’s Alexion (“Alexion”) in October 2021, is the defendant in a lawsuit brought by The University of Tennessee Research Foundation (“UTRF”) captioned as University of Tennessee Research Foundation v. Caelum Biosciences, Inc. , No. 19-cv-00508, which is pending in the United States District Court for the Eastern District of Tennessee (the “UTRF Litigation”). UTRF brought claims against Caelum, for, inter alia , tortious interference and trade secret misappropriation. UTRF primarily alleges that Caelum unauthorizedly used non-patent trade secrets owned by UTRF in the development of Caelum’s 11-1F4 monoclonal antibody, known as CAEL-101. Under the agreement pursuant to which Alexion acquired Caelum (as amended, the “DOSPA”), Fortress has indemnification obligations of Caelum under certain circumstances, including for certain of Caelum’s legal expenses and potential damages arising out of the UTRF Litigation (with such indemnification capped in the aggregate as to Fortress at the amount of Caelum acquisition proceeds received by Fortress and which, at Caelum’s election, may be satisfiable in the form of offsets against future amounts that Caelum may owe Fortress under the DOSPA). Caelum is defending the UTRF Litigation, with Fortress participating in such defense and maintaining a consent right over any potential settlements. Caelum’s legal fees and costs in defending the UTRF Litigation are being reimbursed by Fortress by distribution from a $15 million escrow account established concurrently with the acquisition of Caelum; Fortress considers the amount remaining in escrow to be in excess of the amount of its anticipated out-of-pocket indemnifiable costs and damages in the UTRF Litigation and therefore has not accrued any liability pertaining to this indemnity. Caelum and Fortress both believe the UTRF Litigation is without merit and intend to continue defending it vigorously (including exhausting all appeals if applicable). Caelum’s motion for summary judgment on all claims is currently pending, and a trial is scheduled for September 2024 with respect to any of UTRF’s claims that may survive summary judgment.
15. 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, 2023 and 2022, the Company paid a matching contribution of $ 1.1 million and $ 1.1 million, respectively.
16. 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 17.2 % and 10.5 % of the Company’s issued and outstanding Common Stock as of December 31, 2023 and 2022, respectively. The Company’s Executive Vice Chairman, Strategic Development individually owns approximately 7.5 % and 11.2 % of the Company’s issued and outstanding Common Stock at December 31, 2023 and 2022, respectively.
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Avenue September 2023 Private Placement
In September 2023, Avenue entered into an unwritten agreement with the Avenue Private Placement Investors, pursuant to which Avenue agreed to issue and sell 767,085 shares (the “Avenue September 2023 Private Placement Shares”) of Avenue common stock for an aggregate purchase price of approximately $ 550,000 in a private placement transaction (the “Avenue September 2023 Private Placement). The Avenue common shares were purchased by the Avenue Private Placement Investors at a price per Avenue September 2023 Private Placement Share of $ 0.717 , which was the “consolidated closing bid price” of the Avenue common stock on Nasdaq as of September 7, 2023, in compliance with Nasdaq Listing Rule 5365(c). The net proceeds to Avenue from the Avenue September 2023 Private Placement were approximately $ 550,000 . Avenue did not incur any underwriting or placement agent fees associated with the Avenue September 2023 Private Placement. Avenue intends to use the net proceeds from the Avenue September 2023 Private Placement for working capital and other general corporate purposes.
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 $ 0.4 million, and received payments of $ 0.4 million and $ 0.4 million for the years ended December 31, 2023 and 2022, respectively.
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, 2023 and 2022, the Company had paid $ 2.8 million and $ 2.7 million in rent, respectively, and invoiced TGTX approximately $ 1.8 million and $ 1.9 million respectively, for their prorated share of the rent base. At December 31, 2023, there were no amounts due from TGTX related to this arrangement.
From 2018 until 2022, TGTX employees occupied desks in the Waltham, MA office under the Desk Share Agreement. TGTX paid their share of the rent based on actual percentage of the office space occupied on a month by month basis. For the year ended December 31, 2022, the Company had paid approximately $ 0.2 million in rent for the Waltham, MA office, and invoiced TGTX approximately $ 0.1 million. The Desk Share Agreement with TGTX terminated on December 31, 2022.
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. Effective September 30, 2023, Checkpoint and TGTX agreed to mutually terminate both the collaboration agreement and the sublicense agreement.
Shared Services Agreement with Journey
In November 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 arrangement, Journey began reimbursing 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 in November 2021. In addition, Journey reimburses the Company
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for various payroll-related costs and selling, general and administrative costs incurred by Fortress for the benefit of Journey. For the year ended December 31, 2023 and 2022, the Company’s employees have provided services to Journey totaling approximately $ 0.1 million and $ 0.1 million, respectively. At December 31, 2023, approximately $ 0.2 million is due from Journey related to this arrangement.
Contribution Agreement with Avenue
On May 11, 2022, the Company entered into a stock contribution agreement (the “Contribution Agreement”) with Avenue, pursuant to which the Company agreed to transfer ownership of 100 % of its shares (common and preferred) in Baergic to Avenue. Under the Contribution Agreement, the Company also agreed to assign to Avenue certain intercompany agreements existing between Fortress and Baergic, including a Founders Agreement, by and between Fortress and Baergic, dated as of March 9, 2017, and Management Services Agreement, by and between Fortress and Baergic, dated as of March 9, 2017. Consummation of the transactions contemplated by the Contribution Agreement was subject to the satisfaction of certain conditions precedent, including, inter alia: (i) the closing of an equity financing by Avenue resulting in gross proceeds of at least $ 7.5 million, (ii) the agreement by minority Avenue shareholder InvaGen to (A) have 100 % of its shares in Avenue repurchased by Avenue and (B) terminate certain of the agreements to which it was party with Avenue and/or the Company in connection with InvaGen’s 2019 equity investment in Avenue, which eliminated certain negative consent rights of InvaGen over Avenue and restore certain rights and privileges of Fortress in Avenue; and (iii) the sustained listing of Avenue’s common stock on the Nasdaq Capital Market. On October 11, 2022, Avenue announced the closing of an underwritten public offering in which it received net proceeds of approximately $ 10.4 million (see Note 13). The offering, together with the October 2022 repurchase of Avenue common shares held by InvaGen, resulted in the consummation of the Contribution Agreement in November 2022 (see Note 3). As a result, Baergic became a majority-controlled and owned subsidiary company of Avenue.
Cyprium 9.375 % Series A Cumulative Redeemable Perpetual Preferred Stock Dividend Obligation
Pursuant to a private placement in August 2020, Cyprium sold shares of its 9.375 % Series A Cumulative Redeemable Perpetual Preferred Stock (“Cyprium PPS”); as of December 31, 2023, there are 300,600 shares of Cyprium PPS outstanding.
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 Sale”) issued by the FDA in connection with the approval of CUTX-101, a product candidate previously developed by Cyprium. Upon the PRV Sale, each share of Cyprium PPS will be automatically redeemed in exchange for a payment equal to twice the $ 25.00 liquidation preference, plus accumulated and unpaid dividends to, but excluding, the redemption date.
An optional exchange for Fortress Series A 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 Fortress Series A Preferred Stock or cash at the discretion of Fortress. The Cyprium PPS is fully and unconditionally guaranteed by Fortress.
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Founders Agreement and Management Services Agreement
The Company has entered into Founders Agreements with each of the Fortress partner companies and subsidiaries 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/subsidiary and the identification of specific assets the acquisition of which result in the formation of a viable emerging growth life science company, Fortress will loan each such partner company/subsidiary 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 Payment-in-Kind (“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/subsidiary, 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 or subsidiary’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 and subsidiaries 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/subsidiary 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/subsidiary that has a Founders Agreement with the Company.
As additional consideration under the Founders Agreement, each partner company and subsidiary 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/subsidiary, payable within five (5) business days of the closing of any equity or debt financing for each partner company/subsidiary 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 or subsidiary’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 or subsidiary’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/subsidiary 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 %). In the case of Urica, however, the obligation to pay Fortress royalties under the Founders Agreement would survive any such Change in Control.
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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’/subsidiaries’ certificates of incorporation.
PIK Dividend as
a % of fully
diluted
outstanding
Class of Stock
Partner Company/Subsidiary
Effective Date 1
capitalization
Issued
Avenue
February 17, 2015
2.5
% 2
Common Stock
Baergic
December 17, 2019 5
2.5
% 3
Common Stock
Cellvation
October 31, 2016
2.5
%
Common Stock
Checkpoint
March 17, 2015
-
% 4
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 5
2.5
%
Common Stock
Urica
November 7, 2017 5
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 were not be paid or accrued. Upon the repurchase of the securities held by InvaGen, such PIK dividends have resumed.
Note 3:
Pursuant to the Share Contribution Agreement between Fortress and Avenue, under which Baergic became a majority-controlled and owned subsidiary of Avenue, Fortress also assigned to Avenue the Founders Agreement previously between Fortress and Baergic, such that Baergic’s annual PIK dividend is now payable to Avenue.
Note 4:
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 5:
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’/subsidiaries’ certificates of incorporation for the years ended December 31, 2023 and 2022 ($ in thousands):
PIK Dividend
Year Ended December 31,
Partner company
Date
2023
2022
Aevitas
July 28
$
—
$
23
Avenue
January 1
271
268
Baergic 1
December 17
—
—
Cellvation
October 31
10
10
Checkpoint
January 1
3,418
1,885
Cyprium
January 1
304
422
Helocyte
January 1
120
90
Mustang
January 1
477
1,109
Oncogenuity
May 8
9
8
Urica
November 25
501
51
Fortress
( 5,110 )
( 3,866 )
Total
$
—
$
—
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Note 1: Pursuant to the Share Contribution Agreement between Fortress and Avenue, under which Baergic became a majority-controlled and owned subsidiary of Avenue, Fortress also assigned to Avenue the Founders Agreement previously between Fortress and Baergic, such that Baergic’s annual PIK dividend is now payable to Avenue.
Management Services Agreements
The Company has entered into Management Services Agreements (the “MSAs”) with certain of its partner companies and subsidiaries. Pursuant to each MSA, the Company’s management and personnel provide advisory, consulting and strategic services to each partner company/subsidiary 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 company’s operations, clinical trials, financial planning and strategic transactions and financings and (ii) conducting relations on behalf of each such company with accountants, attorneys, financial advisors and other professionals (collectively, the “Services”). Each such partner company/subsidiary 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 companies are not obligated to take or act upon any advice rendered from Fortress, and Fortress shall not be liable to any such partner company/subsidiary for its actions or inactions based upon Fortress’ advice. Fortress and its affiliates, including all members of Fortress’ Board of Directors, have been contractually exempted from fiduciary duties to each such partner company/subsidiary relating to corporate opportunities.
The following table summarizes, by partner company/subsidiary, the effective date of the MSA and the annual consulting fee payable by the partner company/subsidiary to Fortress in quarterly installments ($ in thousands):
Year Ended December 31,
Partner Company/Subsidiary
Effective Date
2023
2022
Aevitas 1
July 28, 2017
$
—
$
500
Avenue
February 17, 2015
500
83
Baergic 2
March 9, 2017
—
417
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
1,000
Oncogenuity
February 10, 2017
500
500
Urica
November 7, 2017
500
500
Fortress
( 4,000 )
( 5,000 )
Consolidated (Income)/Expense
$
—
$
—
Note 1:
Aevitas was deconsolidated in April 2023 as a result of the Asset Purchase Agreement with 4DMT (see Note 3).
Note 2: Pursuant to the Share Contribution Agreement between Fortress and Avenue, under which Baergic became a majority-controlled and owned subsidiary of Avenue, Fortress also assigned to Avenue the Founders Agreement previously between Fortress and Baergic, such that Baergic’s annual MSA is now payable to Avenue.
Fees and Stock Grants Received by Fortress
Fees recorded in connection with Fortress’ agreements with its subsidiaries and partner companies 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.
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17. 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.
The components of the income tax provision are as follows:
Year Ended December 31,
($ in thousands)
2023
2022
Current
Federal
$
33
$
—
State
254
449
Deferred
Federal
194
—
State
39
—
Total
$
521
$
449
For the years ended December 31, 2023 and 2022, income tax expense was $0.5 million and $ 0.4 million, respectively, resulting in an effective income tax rate of - 0.3 % and - 0.2 %. The income tax expense in 2023 is primarily due to uncovered deferred tax liabilities with respect to investments in subsidiaries, state income taxes and interest accrued related to a prior years' uncertain tax position.
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 $ 366.4 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.
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The significant components of the Company’s deferred taxes consist of the following:
As of December 31,
($ in thousands)
2023
2022
Deferred tax assets:
Net operating loss carryforwards
$
211,329
$
198,250
Amortization of license fees
33,996
30,151
Amortization of in-process R&D
315
334
Stock compensation
13,184
13,754
Lease liability
6,477
7,011
Accruals and reserves
3,897
3,402
Tax credits
37,894
33,501
Startup costs
40
42
Unrealized gain/loss on investments
55
406
Section 174 R&D expenditure capitalization
59,238
34,170
State taxes
33
192
Business interest limitation
2,880
2,359
Reserve on Sales Return, Discount and Bad Debt
4,556
2,286
Total deferred tax assets
373,895
325,858
Less: valuation allowance
( 366,375 )
( 317,959 )
Net deferred tax assets
$
7,520
$
7,899
Deferred tax liabilities:
Section 483 imputed interest
$
( 25 )
$
( 92 )
Debt issuance costs
( 297 )
( 347 )
Right of use asset
( 5,289 )
( 5,835 )
Basis in subsidiary
( 2,142 )
( 1,625 )
Total deferred tax liabilities, net
$
( 233 )
$
—
A reconciliation of the statutory tax rates and the effective tax rates is as follows:
For the Year Ended December 31,
2023
2022
Percentage of pre-tax income:
U.S. federal statutory income tax rate
21.0
%
21.0
%
State taxes, net of federal benefit
10.6
%
6.7
%
Credits
3.1
%
4.6
Non-deductible items
( 0.9 )
%
( 0.5 )
%
Provision to return
( 0.7 )
%
1.8
%
Stock based compensation shortfall
( 2.0 )
%
( 1.4 )
%
Change in state rate
4.1
%
( 1.6 )
%
Change in valuation allowance
( 31.5 )
%
( 31.3 )
%
Change in subsidiary basis
( 1.0 )
%
—
%
Deconsolidation/dissolution of subsidiaries
( 2.4 )
%
—
%
Adjustment for warrants
0.9
%
0.1
%
Section 162(m) compensation disallowance
( 1.2 )
%
( 0.8 )
%
Other
( 0.3 )
%
1.2
%
Effective income tax rate
( 0.3 )
%
( 0.2 )
%
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The Company files a consolidated income tax return with subsidiaries for which the Company has an 80 % or greater ownership interest. Subsidiaries and partner companies 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, 2023 and 2022. Accordingly, a full valuation allowance has been established against the net deferred tax assets as of December 31, 2023 and 2022. The valuation allowance increased by a net $ 48.4 million during the current year.
The Company has incurred net operating losses (“NOLs”) since inception. At December 31, 2023, the Company had federal NOLs of $ 714.4 million, which will begin to expire in the year 2032 , state NOLs of $ 970.0 million, which will begin to expire in 2026 , and federal income tax credits of $ 33.8 million and state income tax credits of $ 5.2 million, which will begin to expire in 2028 . Approximately $ 518.9 million of the federal NOLs and $ 16.2 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.
In accordance with the provisions related to accounting for uncertainty in income taxes, the Company recognizes the benefit of tax position if the position is “more likely than not” to prevail upon examination by the relevant tax authority. The table below sets forth a reconciliation of the beginning and ending amount of unrecognized tax benefits:
For the year ended December 31, 2022, the company added $ 3.2 million of unrecognized tax benefits. If the $ 3.2 million of unrecognized tax benefits is recognized, approximately $ 0.7 million would affect the effective tax rate. It is reasonably possible that the amount of the unrecognized benefit with respect to certain of the Company’s recognized tax positions will significantly increase or decrease within the next 12 months. At this time, the estimate of the range of the reasonably possible outcomes cannot be made.
The Company classifies interest and penalties related to uncertain tax positions as income tax expense. The Company has accrued for $ 0.1 million and approximately $ 32,000 of such interest as of December 31, 2023 and 2022, respectively. No penalties have been accrued for. The NOLs from tax years 2010 through 2023 remain open to examination (and adjustment) by the Internal Revenue Service and state taxing authorities. In addition, federal tax years ending December 31, 2020, 2021 and 2022 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.
18. 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:
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Pharmaceutical
and
Dermatology
Biotechnology
Products
Product
Year Ended December 31, 2023
Sales
Development
Consolidated
Net revenue
$
79,181
$
5,332
$
84,513
Cost of goods - product revenue
( 26,660 )
—
( 26,660 )
Research and development
( 7,541 )
( 98,530 )
( 106,071 )
Selling, general and administrative
( 47,053 )
( 47,071 )
( 94,124 )
Other expense
( 1,559 )
( 9,732 )
( 11,291 )
Income tax expense
( 221 )
( 300 )
( 521 )
Segment loss
$
( 3,853 )
$
( 150,301 )
$
( 154,154 )
Pharmaceutical
and
Dermatology
Biotechnology
Products
Product
Year Ended December 31, 2022
Sales
Development
Consolidated
Net revenue
$
73,669
$
2,074
$
75,743
Cost of goods - product revenue
( 30,775 )
—
( 30,775 )
Research and development
( 10,943 )
( 123,933 )
( 134,876 )
Selling, general and administrative
( 59,503 )
( 54,153 )
( 113,656 )
Other expense
( 2,048 )
( 7,852 )
( 9,900 )
Income tax (expense) benefit
—
( 449 )
( 449 )
Segment loss
$
( 29,600 )
$
( 184,313 )
$
( 213,913 )
The following tables summarize, for the periods indicated, total assets by reportable segment:
Pharmaceutical
and
($ in thousands)
Dermatology
Biotechnology
Products
Product
December 31, 2023
Sales
Development
Total Assets
Intangible assets, net
$
20,287
$
—
$
20,287
Tangible assets
56,561
90,678
147,239
Total segment assets
$
76,848
$
90,678
$
167,526
Pharmaceutical
and
($ in thousands)
Dermatology
Biotechnology
Products
Product
December 31, 2022
Sales
Development
Total Assets
Intangible assets, net
$
27,197
$
—
$
27,197
Tangible assets
77,964
189,140
267,104
Total segment assets
$
105,161
$
189,140
$
294,301
19. Revenues from Contracts and Significant Customers
Disaggregation of Total Revenues
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 16).
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The table below summarizes the Company’s revenue for the years ended December 31, 2023 and 2022:
Year Ended December 31,
2023
2022
Revenue
Qbrexza
$
25,410
$
26,715
Accutane
20,168
18,373
Amzeeq
6,201
7,242
Zilxi
1,962
2,273
Targadox
3,204
7,972
Exelderm
2,395
3,463
Ximino
287
4,957
Luxamend
35
—
Collaboration revenue
5,229
1,882
Revenue – related party
103
192
Other revenue
19,519
2,674
Total net revenue
$
84,513
$
75,743
Other revenue for the year ended December 31, 2023, includes royalties on sales of Rapifort® Wipes 2.5% (“Rapifort”) in Japan, from Maruho, Journey’s exclusive out-licensing partner in Japan, and also reflects a net $ 19.0 million payment from Maruho under the New License Agreement. Other revenue for the year ended December 31, 2022, included a net $ 2.5 million milestone payment from Maruho Co., Ltd, upon receipt of marketing and manufacturing approval for Rapifort, as well as $ 0.2 million in royalties from Maruho on sales of Rapifort in Japan.
Significant Customers
For the years ended December 31, 2023 and 2022, none of Journey’s Dermatology Products customers accounted for more than 10.0% of its total gross product revenue.
For the year ended December 31, 2023, one of Journey’s customers accounted for more than 10% of its total accounts receivable balance at 13 %. For the year ended December 31, 2022, two of Journey’s Dermatology Products customers accounted for more than 10% of its total accounts receivable balance at 16.7 % and 10.4 %.
20. Subsequent Events
January 2024 Private Placement - Avenue
On January 5, 2024, Avenue entered into (i) an inducement offer letter agreement (the “January 2023 Investor Inducement Letter”) with a certain investor (the “January 2023 Investor”) in connection with certain outstanding warrants to purchase up to an aggregate of 1,940,299 shares of Common Stock, originally issued to the January 2023 Investor on January 31, 2023 (the “January 2023 Warrants”) and (ii) an inducement offer letter agreement (the “November 2023 Investor Inducement Letter Agreement” and, together with the January 2023 Investor Inducement Letter, the “Inducement Letters”) with certain investors (the “November 2023 Investors” and, together with the January 2023 Investor, the “Holders”) in connection with certain outstanding warrants to purchase up to an aggregate of 14,600,000 shares of Common Stock, originally issued to the November 2023 Investors on November 2, 2023 (the “November 2023 Warrants” and, together with the January 2023 Warrants, the “Existing Warrants”). The January 2023 Warrants had an exercise price of $ 1.55 per share, and the November 2023 Warrants had an exercise price of $ 0.3006 per share. Pursuant to the Inducement Letters, (i) the January 2023 Investor agreed to exercise its January 2023 Warrants for cash at a reduced exercise price of $ 0.3006 per share and (ii) the November 2023 Investors agreed to exercise their November 2023 Warrants for cash at the existing exercise price of $ 0.3006 , in each case in consideration for Avenue’s agreement to issue in a private placement (x) Series A Warrants to purchase up to 16,540,299 shares of Avenue Common Stock and (y) Series B Warrants to purchase up to 16,540,299 shares of Avenue Common Stock. The gross proceeds to Avenue from the exercise of the warrants is approximately $ 5.0 million, before deducting placement agent fees and estimated offering costs.
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Registered Direct Offering – Checkpoint
In January 2024, Checkpoint closed on a registered direct offering (the “January 2024 Registered Direct Offering”) with a single institutional investor for the issuance and sale of 1,275,000 shares of its common stock and 6,481,233 Pre-Funded Warrants. Each Pre-Funded Warrant was exercisable for one share of Checkpoint common stock. The Checkpoint common stock and the Pre-Funded Warrants were sold together with common stock warrants (the “January 2024 Common Warrants”) to purchase up to 7,756,233 shares of Checkpoint common stock, at a purchase price of $ 1.805 per share of common stock and $ 1.8049 per Pre-Funded Warrant. The Pre-Funded Warrants are funded in full at closing except for a nominal exercise price of $ 0.0001 and are exercisable commencing on the closing date and will terminate when such Pre-Funded Warrants are exercised in full. The January 2024 Common Warrants are exercisable immediately upon issuance and will expire five years following the issuance date and have an exercise price of $ 1.68 per share. Checkpoint also issued the placement agent warrants to purchase up to 465,374 shares of common stock with an exercise price of $ 2.2563 per share. Net proceeds to Checkpoint from the January 2024 Registered Direct Offering were $ 12.8 million after deducting commissions and other transaction costs. As of March 19, 2024, 2,661,233 Pre-Funded warrants from the January 2024 Registered Direct Offering were fully exercised.
Nasdaq Hearing Panel Meeting - Avenue
On February 15, 2024, Avenue met with the Nasdaq Hearings Panel regarding the outstanding Nasdaq deficiencies and on March 11, 2024, the Nasdaq Hearings Panel informed Avenue that it granted Avenue's request for an extension until May 20, 2024 to demonstrate compliance with the Stockholders' Equity Requirement and Minimum-Bid Price Requirement. Avenue is considering all options available to it to regain compliance with these rules; however, there can be no assurance that Avenue will be able to evidence compliance with the Stockholders' Equity Requirement and the Minimum-Bid Price Requirement within the extension period granted by the Panel.
Registered Direct Offering – Fortress
In January 2024, Fortress closed on a registered direct offering for the issuance and sale of an aggregate of 3,303,305 shares of its common stock and warrants to purchase up to 3,303,305 shares of its common stock at a combined purchase price of $ 3.33 per share of common stock and accompanying warrant priced at-the-market under Nasdaq rules. The warrants have an exercise price of $ 3.21 per share, are immediately exercisable, and will expire five years following the date of issue. Net proceeds to Fortress, after deducting the placement agent’s fees and other offering expenses, were approximately $ 10.2 million.
As a result of the foregoing transactions and as of the date of this filing, the Company believes it has stockholders’ equity of at least $2.5 million and therefore satisfies the minimum Nasdaq listing requirement set forth in Nasdaq Listing Rule 5550(b)(1).
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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, 2024
By:
/s/ Lindsay A. Rosenwald, M.D.
Lindsay A. Rosenwald, M.D.
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
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, 2024
Lindsay A. Rosenwald, M.D.
Executive Officer ( Principal Executive Officer )
/s/ David Jin
Chief Financial Officer
March 28, 2024
David Jin
( Principal Financial Officer and Principal Accounting Officer )
/s/ Eric K. Rowinsky, M.D.
Vice Chairman of the Board of Directors
March 28, 2024
Eric K. Rowinsky, M.D.
/s/ Michael S. Weiss
Executive Vice Chairman, Strategic Development and
March 28, 2024
Michael S. Weiss
Director
/s/ Jimmie Harvey, Jr., M.D.
Director
March 28, 2024
Jimmie Harvey, Jr., M.D.
/s/ Malcolm Hoenlein
Director
March 28, 2024
Malcolm Hoenlein
/s/ Dov Klein
Director
March 28, 2024
Dov Klein
/s/ J. Jay Lobell
Director
March 28, 2024
J. Jay Lobell
/s/ Kevin L. Lorenz, J.D.
Director
March 28, 2024
Kevin Lorenz
/s/ Lucy Lu, M.D.
Director
March 28, 2024
Lucy Lu, M.D.
92