Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Statements in the following discussion and throughout this report that are not historical in nature are “forward-looking statements.” You can identify forward-looking statements by the use of words such as “expect,” “anticipate,” “estimate,” “may,” “will,” “should,” “intend,” “believe,” and similar expressions. Although we believe the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risk and we can give no assurances that our expectations will prove to be correct. Actual results could differ from those described in this report because of numerous factors, many of which are beyond our control. These factors include, without limitation, those described under Item 1A “Risk Factors.” We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect actual outcomes. Please see “Forward-Looking Statements” at the beginning of this Form 10-K.
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information appearing elsewhere in this Form 10-K. We undertake no obligation to update any forward-looking statements in the discussion of our financial condition and results of operations to reflect events or circumstances after the date of this report or to reflect actual outcomes
We are a biopharmaceutical company dedicated to acquiring, developing and commercializing pharmaceutical and biotechnology products and product candidates, which we do at the Fortress level, at our majority-owned and majority-controlled subsidiaries and joint ventures, and at entities we founded and in which we maintain significant minority ownership positions. Fortress has a talented and experienced business development team, comprising scientists, doctors and finance professionals, who identify and evaluate promising products and product candidates for potential acquisition by new or existing partner companies. Through our partner companies, we have executed arrangements with some of the world’s foremost universities, research institutes and pharmaceutical companies, including City of Hope National Medical Center, Fred Hutchinson Cancer Research Center, St. Jude Children’s Research Hospital, Dana-Farber Cancer Institute, Nationwide Children’s Hospital, Cincinnati Children’s Hospital Medical Center, Columbia University, the University of Pennsylvania, and AstraZeneca plc.
Following the exclusive license or other acquisition of the intellectual property underpinning a product or product candidate, we leverage our business, scientific, regulatory, legal and finance expertise to help our partners achieve their goals. Our partner companies then assess a broad range of strategic arrangements to accelerate and provide additional funding to support research and development, including joint ventures, partnerships, out-licensings, and public and private financings; to date, three partner companies are publicly-traded, and two have consummated strategic partnerships with industry leaders Alexion Pharmaceuticals, Inc. and InvaGen Pharmaceuticals, Inc. (a subsidiary of Cipla Limited).
Recent Events
Marketed Dermatology Products
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Late Stage Product Candidates
Intravenous (IV) Tramadol
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• increase in authorized shares of Avenue’s capital stock;
CUTX-101 (Copper Histidinate injection for Menkes Disease)
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CAEL-101 (mAB for AL Amyloidosis)
MB-107 and MB-207 (Ex vivo Lentiviral Therapies for X-linked Severe Combined Immunodeficiency (XSCID))
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Cosibelimab (Anti-PD-L1 mAb for mCSCC and NSCLC)
CK-101 (EGFR inhibitor for EGFR mutation-positive NSCLC)
Early Stage Product Candidates
MB-102 (CD123-targeted CAR T cell therapy)
MB-101 (IL13Rα2-targeted CAR T cell therapy)
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MB-105 (PSCA-targeted CAR T cell therapy)
MB-106 (CD20-targeted CAR T cell therapy)
MB-108 (HSV-1 Oncolytic Virus C134)
ONCOlogues (proprietary platform technology using PNA oligonucleotides)
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General Corporate
Critical Accounting Policies and Use of Estimates
See Note 2 to the Consolidated Financial Statements.
Results of Operations
General
For the year ended December 31, 2020 we generated $45.6 million of net revenue $44.5 million relates to the sale of Journey branded and generic products and $1.1 million of revenue is in connection with Checkpoint’s collaborative agreements with TGTX, a related party. At December 31, 2020, we had an accumulated deficit of $482.8 million primarily as a result of research and development expenses, purchases of in-process research and development and selling, general and administrative expenses. While we may in the future generate revenue from a variety of sources, including license fees, milestone payments, research and development payments in connection with strategic partnerships and/or product sales, our current non-marketed product candidates are at various stages of development and may never be successfully developed or commercialized. Accordingly, we expect to continue to incur substantial losses from operations for the foreseeable future and there can be no assurance that we will ever generate significant revenues.
We had $14.6 million of costs of goods sold in connection with the sale of JMC branded and generic products for the year ended December 31, 2020.
Research and Development Expenses
Research and development costs primarily consist of personnel related expenses, including salaries, benefits, travel, and other related expenses, stock-based compensation, payments made to third parties for licenses and milestones, costs related to in-licensed products and technology, payments made to third party contract research organizations for preclinical and clinical studies, investigative sites for clinical trials, consultants, the cost of acquiring and manufacturing clinical trial materials, costs associated with regulatory filings and patents, laboratory costs and other supplies.
Also included in research and development is the total purchase price for licenses acquired during the period.
For the years ended December 31, 2020 and 2019, research and development expenses were approximately $61.3 million and $75.2 million, respectively. Additionally, during the years ended December 31, 2020 and 2019, we expensed approximately $2.8 million and $6.1 million, respectively, in costs related to the acquisition of licenses.
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The table below provides a summary of research and development costs associated with the development of our licenses by entity, for the years ended December 31, 2020 and 2019:
Year Ended
December 31, % of total
Research & Development
Partner Companies:
Note 1: Includes the following partner companies: Aevitas, Baergic, Cellvation, Cyprium, Helocyte, Oncogenuity and Tamid Bio, Inc. (a Fortress partner company that has since discontinued operations) (“Tamid”).
Noncash, stock-based compensation expense included in research and development for the years ended December 31, 2020 and 2019, was $3.2 million and $2.8 million, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist principally of personnel related costs, costs required to support the marketing and sales of our commercialized products, professional fees for legal, consulting, audit and tax services, rent and other general operating expenses not otherwise included in research and development expenses. For the years ended December 31, 2020 and 2019, selling, general and administrative expenses were $61.2 million and $55.6 million, respectively. Stock based compensation expense included in selling, general and administrative expenses in 2020 and 2019 was $10.3 million and $10.4 million, respectively.
The table below provides a summary by entity of selling, general and administrative expenses for the years ended December 31, 2020 and 2019, respectively:
Year Ended
December 31, % of Total
Selling, General & Administrative
Partner Companies:
Note 1: Includes sales force costs for the year ended December 31, 2020 and 2019 of $10.4 million and $10.7 million, respectively.
Note 2: Includes the following partner companies: Aevitas, Baergic, Cellvation, Cyprium, Helocyte, Oncogenuity and Tamid.
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Comparison of Years Ended December 31, 2020 and 2019
Year Ended December 31, Change
Revenue
Operating expenses
Research and development – licenses acquired 2,834 6,090 (3,256) (53) %
Other income (expense)
Change in fair value of derivative liability (1,189) (27) (1,162) 4304 %
Change in fair value of investment 6,418 — 6,418 100 %
Gain on deconsolidation of Caelum — 18,476 (18,476) (100) %
Income tax expense 136 — 136 100
For the year ended December 31, 2020, $1.1 million of revenue – related party was in connection with Checkpoint’s collaborative agreements with TGTX. The net increase in revenue of $9.0 million or 24% is due to the expansion of Journey’s marketed products, as well as overall sales growth, which resulted in a product revenue increase of $9.6 million offset by a decrease in revenue from a related party of $0.6 million.
Cost of goods sold increased by $4.1 million or 39% due to the growth in Journey’s product sales.
Research and development expenses decreased $14.0 million, or 19%, from the year ended December 31, 2019 to the year ended December 31, 2020. The following table shows research and development spending for Fortress and each partner company:
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Year Ended December 31, Change
Research & Development
Stock-based compensation
Partner Companies:
Sub-total stock-based compensation expense 3,172 2,811 361 13 %
Other Research & Development
Partner Companies:
Note 1: Includes the following partner company: Aevitas, Baergic, Cellvation, Cyprium, Helocyte, Oncogenuity and Tamid.
The increase in stock-based compensation at both Fortress and Mustang is due to new equity grants to key employees and consultants in 2020, while the decrease in both Avenue and Checkpoint’s stock-based compensation is due to the effect of fully vested equity grants to key employees and consultants.
The decrease in Fortress research and development spending is due to the lower research and development headcount in 2020 as compared to 2019. Avenue’s decrease in research and development spending is attributable to the decrease in clinical trial costs associated with the completion of both the abdominoplasty study and the safety study in the first half of 2019 as well as the costs associated with an NDA submission in December 2019. Checkpoint’s decrease in research and development spending is attributable to the decreased manufacturing costs for cosibelimab and clinical trial expense for CK-101. Mustang’s increase in research and development spending is attributable to increased headcount, lentiviral manufacturing costs and sponsored research for several programs, including XSCID. The increase in “Other” is attributable to costs incurred by Cyprium as it prepares to file its rolling NDA submission for CUTX-101 in 2021 and Oncogenuity for its sponsored research costs related to the continued development of novel oligonucleotides for the treatment of genetically driven diseases.
Selling, general and administrative expenses increased $5.6 million, or 10%, from the year ended December 31, 2019 to the year ended December 31, 2020. The following table shows selling, general and administrative spending for Fortress and by each partner company:
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Year Ended December 31, Change
Selling, General & Administrative
Stock-based compensation
Partner Companies:
Sub-total stock-based compensation expense 10,279 10,377 (98) (1) %
Other Selling, General & Administrative
Partner Companies:
Note 1: Includes sales force costs for the year ended December 31, 2020 and 2019 of $10.4 million and $10.7 million, respectively.
Note 2: Includes the following partner companies: Aevitas, Baergic, Cellvation, Cyprium, Helocyte, Oncogenuity and Tamid.
For the year ended December 31, 2020, the increase in selling, general and administrative expenses of $5.6 million or 10% is primarily attributable to increased headcount-related costs for Fortress and Checkpoint as well as an increase in JMC’s sales and marketing costs due to the increased product portfolio and costs related to the launch of Ximino, an oral acne treatment. Mustang’s decrease is due to less legal costs and less professional fees related to strategic marketing. The increase in “Other” is driven by the increase in professional fees incurred by Cyprium and Oncogenuity.
Total other income (expense) changed $17.7 million, or 194%, from income of $9.2 million for the year ended December 31, 2019 to expense of $8.6 million for the year ended December 31, 2020, primarily due to the $18.5 million gain on the deconsolidation of Caelum recognized in 2019 and an increase of $3.5 million in interest expense and financing fees due to the new credit facility transaction with Oaktree Fund Administration, LLC.
Net loss attributable to non-controlling interests decreased $5.2 million, or 8%, from the year ended December 31, 2019 to the year ended December 31, 2020. This decrease reflects the partner companies’ share of net loss.
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Liquidity and Capital Resources
Components of cash flows from publicly-traded partner companies are comprised of:
For the Year Ended December 31, 2020
($ in thousands) Fortress1 Avenue Checkpoint Mustang Total
Statement of cash flows data:
Total cash (used in)/provided by:
For the Year Ended December 31, 2019
($ in thousands) Fortress1 Avenue Checkpoint Mustang Total
Statement of cash flows data:
Total cash (used in)/provided by:
Note 1: Includes Fortress and non-public subsidiaries.
Operating Activities
Net cash used in operating activities decreased $11.3 million from the year ended December 31, 2019 to the year ended December 31, 2020. The decrease is primarily due to the decrease in gain from the deconsolidation of Caelum of $18.5 million recognized in 2019, offset by the increase in the fair value of investments of $6.4 million as well as the increase in net loss of $1.3 million for the year ended December 31, 2020.
Investing Activities
Net cash provided by investing activities for the year ended December 31, 2019 of $20.1 million decreased $27.3 million to net cash used in investing activities of $7.2 million for the year ended December 31, 2020. The change is primarily due to cash provided by discontinued investing activities of $13.1 million received in 2019 related to the sale of National, as well as the redemption of $22.6 million of certificates of deposit in 2019, offset by the purchase of $5.0 million of certificates of deposit, also in 2019. Cash used to purchase intangible assets decreased in 2020 by $1.2 million, cash used to purchase property and equipment and research and development licenses also decreased for the year ended December 31, 2020, by $0.4 million and $0.6 million, respectively.
Financing Activities
Net cash provided by financing activities was $172.4 million for the year ended December 31, 2020, compared to $146.7 million of net cash provided by financing activities for the year ended December 31, 2019, an increase of $25.7 million. The increase is primarily due to an increase of $33.0 million in net proceeds from the issuance of Series A preferred stock, $26.8 million increase in proceeds from the Company’s at-the-market offering, $42.0 million increase in partner companys’ at-the-market offering, and the $60 million gross proceeds from the Oaktree Note. Offsetting these financing activities was the decrease in proceeds from partner companies’ sale of stock of $28.5 million, payment of partner company’s Horizon Notes of $15.8 million, and repayment of $28.4 million of 2017 Subordinated Note Financing, $21.7 million of 2018 Venture Notes, $9.0 million of 2019 Notes, and $14.9 million for the payoff of the IDB Note.
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We fund our operations through cash on hand, the sale of debt and third-party financings. At December 31, 2020, we had cash and cash equivalents of $233.4 million of which $78.8 million relates to Fortress, $40.8 million relates to Checkpoint, $97.8 million relates to Mustang, $3.1 million relates to Avenue, and $12.9 million relates to the remaining partner companies. Restricted cash of $1.6 million is comprised of: $0.6 million secures a letter of credit used as a security deposit for the New York, NY lease that became effective on October 3, 2014, $1.0 million secures the Worcester, Massachusetts lease signed by Mustang that became effective on October 27, 2017, and $0.1 million securing the Waltham, Massachusetts lease signed by Fortress that became effective in October 2015.
On June 28, 2019, Fortress entered into an At Market Issuance Sales Agreement (“2019 Common ATM”), with Cantor Fitzgerald & Co., Oppenheimer & Co., Inc., H.C. Wainwright & Co. Inc., Jones Trading Institutional Services LLC and B. Riley, as selling agents, governing potential sales of the Company’s common stock. For the year ended December 31, 2020, the Company issued approximately 17.4 million shares of common stock for gross proceeds of $47.5 million at an average selling price of $2.73. Under the 2019 Common ATM, the Company pays the agents a commission rate of up to 3.0% of the gross proceeds from the sale of any shares of common stock, and in connection with these sales, with respect to the year ended December 31, 2020, Fortress paid aggregate fees of approximately $1.4 million.
On February 14, 2020, the Company announced the closing of an underwritten public offering, whereby it sold 625,000 shares of its 9.375% Series A Cumulative Redeemable Perpetual Preferred Stock (Nasdaq: FBIOP) (the "Preferred Stock"), (plus a 45-day option to purchase up to an additional 93,750 shares, which was exercised in February 2020) at a price of $20.00 per share for gross proceeds of approximately $14.4 million, before deducting underwriting discounts and commissions and offering expenses of approximately $1.3 million.
On May 29, 2020, the Company closed on an underwritten public offering whereby it sold 555,556 shares of its Preferred Stock, (plus a 45-day option to purchase up to an additional 83,333 shares, which was exercised in May 2020) at a price of $18.00 per share for gross proceeds of approximately $11.5 million, before deducting underwriting discounts and commissions and offering expenses of approximately $1.1 million.
On August 26, 2020, the Company closed on an underwritten public offering whereby it sold 666,666 shares of its Preferred Stock, (plus a 45-day option to purchase up to an additional 66,666 shares, which was exercised in August 2020) at a price of $18.00 per share for gross proceeds of approximately $13.2 million, before deducting underwriting discounts and commissions and offering expenses of approximately $1.1 million.
During the year ended December 31, 2020, Checkpoint sold a total of 5,104,234 shares of common stock under an At-the-Market Issuance Sales Agreement for aggregate total gross proceeds of approximately $12.8 million at an average selling price of $2.50 per share, resulting in net proceeds of approximately $12.4 million after deducting commissions and other transaction costs.
In September 2020, Checkpoint completed an underwritten public offering in which it sold 7,321,429 shares of its common stock at a price of $2.80 per share for gross proceeds of approximately $20.5 million. Total net proceeds from the offering were approximately $18.9 million, net of underwriting discounts and offering expenses of approximately $1.6 million. The shares were sold under the Checkpoint 2017 S-3.
From January 1, 2021 through March 5, 2021 Checkpoint issued approximately 3.2 million shares of common stock for gross proceeds of $12.3 million at an average selling price of $3.88 under the Checkpoint ATM.
During the year ended December 31, 2020, Mustang issued approximately 17.6 million shares of common stock at an average price of $3.40 per share for gross proceeds of $59.8 million under the Mustang ATM. In connection with these sales, Mustang paid aggregate fees of approximately $1.1 million for net proceeds of approximately $58.7 million.
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On June 11, 2020, Mustang entered into an underwriting agreement (the “Mustang Underwriting Agreement”) with Cantor Fitzgerald & Co., as representative of the underwriters named therein (each, an “Underwriter” and collectively with Cantor Fitzgerald & Co., the “Underwriters”). In connection with the Mustang Underwriting Agreement, Mustang issued 10,769,231 shares of common stock (plus a 30-day option to purchase up to an additional 1,615,384 shares of common stock, of which 686,373 were exercised) at a price of $3.25 per share for gross proceeds of approximately $37.2 million, before deducting underwriting discounts and commissions and offering expenses. In connection with the public offering, Mustang paid aggregate fees of approximately $2.4 million for net proceeds of approximately $34.8 million. The shares were sold under our S-3 registrations filed with the Securities and Exchange Commission.
From January 1, 2021 through March 18, 2021 Mustang issued approximately 10.6 million shares of common stock for gross proceeds of $44.9 million at an average selling price of $4.24 under the Mustang ATM.
In 2020, Fortress raised $0.3 million from the issuance of common shares in connection with the ESPP, compared to $0.1 million raised from the issuance of common shares in connection with the ESPP in 2019 .
We will require additional financing to fully develop and prepare regulatory filings and obtain regulatory approvals for our existing and new product candidates, fund operating losses, and, if deemed appropriate, establish or secure through third parties manufacturing for our potential products, and sales and marketing capabilities. We have funded our operations to date primarily through the sale of equity and debt securities. We believe that our current cash and cash equivalents is sufficient to fund operations for at least the next twelve months. Our failure to raise capital as and when needed would have a material adverse impact on our financial condition and our ability to pursue our business strategies. We may seek funds through equity or debt financings, joint venture or similar development collaborations, the sale of partner companies (such as the stock purchase of Caelum by Alexion that would result from option exercise or the contingent merger of Avenue with InvaGen), royalty financings, or through other sources of financing.
In addition to the foregoing, based on the Company’s current assessment, the Company does not expect any material impact on its long-term development timeline and its liquidity due to the worldwide spread of the COVID-19 virus. However, the Company is continuing to assess the effect on its operations by monitoring the spread of COVID-19 and the actions implemented to combat the virus throughout the world.
Off-Balance Sheet Arrangements
We do not have any financings or other relationships with unconsolidated entities or other persons.
Recently Issued Accounting Pronouncements
See Note 2 of Notes to the Consolidated Financial Statements for a discussion of recent accounting standards and pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item is set forth in the consolidated financial statements and notes thereto beginning at page F-1 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
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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, 2020, 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:
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.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. 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, 2020, 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.
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Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2021 Annual Meeting of Stockholders.
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2021 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2021 Annual Meeting of Stockholders.
Item 13.Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2021 Annual Meeting of Stockholders.
Item 14. Principal Accounting Fees and Services
The information required by this Item is incorporated herein by reference from our Proxy Statement for our 2021 Annual Meeting of Stockholders.
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PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a)Financial Statements.
The following financial statements are filed as part of this report:
Reports of Independent Registered Public Accounting Firms F-2
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Changes in Stockholders’ Equity F-6
Consolidated Statements of Cash Flows F-8
Notes to the Consolidated Financial Statements F-11 – F-77
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(b) Exhibits.
Exhibit
Number Exhibit Title
3.1 Amended and Restated Certificate of Incorporation of the Registrant.
3.3 Second Amended and Restated Bylaws of the Registrant.
4.1 Form of Common Stock Certificate.
4.3 Description of Securities of Fortress Biotech, Inc.
10.2 Form of Stock Option Award Agreement. #
10.5 Fortress Biotech, Inc. 2012 Employee Stock Purchase Plan. #
10.11 Fortress Biotech, Inc. 2013 Stock Incentive Plan, as amended. #
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Exhibit
Number Exhibit Title
10.14 Fortress Biotech, Inc. 2012 Employee Stock Purchase Plan, as amended.
10.15 Fortress Biotech, Inc. Amended and Restated Long-Term Incentive Plan.
10.25 Amendment to the Fortress Biotech, Inc. 2013 Stock Incentive Plan.#
21.1 Subsidiaries of the Registrant.
23.1 Consent Independent Registered Public Accounting Firm.
24.1 Power of Attorney (included on the signature page of this Form 10-K).
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Exhibit
Number Exhibit Title
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.*
# Management contract or compensatory plan.
* Filed herewith
Item 16. Form 10-K Summary
None.
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FORTRESS BIOTECH, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Changes in Stockholders’ Equity F-6
Consolidated Statements of Cash Flows F-8
Notes to the Consolidated Financial Statements F-10 – F-74
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Fortress Biotech, Inc. and subsidiaries
New York, New York
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Fortress Biotech, Inc. and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our 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 Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Accounting for Oaktree Note
As described in Note 2 and Note 10 to the consolidated financial statements, in August 2020, the Company entered into a $60.0 million senior secured credit agreement with Oaktree (“Note”). In connection with the Oaktree Note, the Company issued warrants to Oaktree and certain of its affiliates to purchase up to 1,749,450 shares of common stock (see Note 14)
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with a relative fair value of $4.4 million. In accounting for the Oaktree Note, the Company analyzed the Note and warrants and their related features for the appropriate accounting of the arrangement, including assessment of potential embedded derivatives.
We identified the accounting for the Oaktree Note as a critical audit matter. The principal considerations that led us to determine this matter was a critical audit matter included the inherent complexity in assessing the accounting for the Note and related embedded derivatives. Auditing these elements required complex auditor judgment and an increased level of audit effort, including the need for specialized knowledge and skill in assessing these elements.
The procedures we performed to address this critical audit matter included:
●Evaluating management’s accounting policies and practices including the appropriateness of
management’s evaluation of various terms and conditions in the debt agreement, and assessment of embedded derivatives.
We have served as the Company’s auditor since 2016.
/s/ BDO USA, LLP
Boston, Massachusetts
March 31, 2020
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FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
($ in thousands except for share and per share amounts)
December 31,
ASSETS
Current assets
Other receivables - related party 744 865
Prepaid expenses and other current assets 6,723 4,133
Operating lease right-of-use asset, net 20,487 21,480
Long-term investment, at fair value 17,566 11,148
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued expenses $ 40,674 $ 35,451
Interest payable — 1,042
Interest payable - related party — 92
Income taxes payable 136 —
Notes payable, short-term — 7,220
Operating lease liabilities, short-term 1,849 1,784
Derivative warrant liability — 27
Partner company note payable, short-term 5,300 —
Operating lease liabilities, long-term 22,891 23,712
Partner company note payable, long-term 7,359 4,990
Other long-term liabilities 1,949 2,136
Commitments and contingencies
Stockholders’ equity
Total stockholders' equity attributed to the Company 100,338 26,215
Total liabilities and stockholders' equity $ 328,834 $ 226,422
The accompanying notes are an integral part of these consolidated financial statements.
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FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
($ in thousands except for share and per share amounts)
Year Ended December 31,
Revenue
Operating expenses
Cost of goods sold - product revenue 14,594 10,532
Research and development - licenses acquired 2,834 6,090
Selling, general and administrative 61,166 55,590
Other income (expense)
Interest expense and financing fee (15,326) (11,849)
Change in fair value of derivative liability (1,189) (27)
Change in fair value of investments 6,418 —
Gain on deconsolidation of Caelum — 18,476
Total other income (expense) (8,579) 9,159
Income tax expense 136 —
Less: net loss attributable to non-controlling interests 56,459 61,700
Net loss attributable to common stockholders $ (46,526) $ (39,960)
Net loss per common share - basic and diluted $ (1.43) $ (1.86)
The accompanying notes are an integral part of these consolidated financial statements.
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FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
($ in thousands except for share amounts)
Common Additional Total
Shares Shares Amount Issuable Stock Capital Deficit Interests Equity
Stock-based compensation expense — — — — — — 13,188 — — 13,188
Issuance of common stock under ESPP — — 98,007 — — — 123 — — 123
Partner company’s offering, net — — — — — — 78,607 — — 78,607
Common shares issued for Opus debt — — 396,825 — — — 500 — — 500
The accompanying notes are an integral part of these consolidated financial statements.
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FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
($ in thousands except for share amounts)
Common Additional Total
Shares Shares Amount Issuable Stock Capital Deficit Interests Equity
Stock-based compensation expense — — — — — — 13,451 — — 13,451
Partner company’s offering, net — — — — — — 53,749 — — 53,749
The accompanying notes are an integral part of these consolidated financial statements.
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FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
($ in thousands)
For the Year Ended
December 31,
Cash Flows from Operating Activities:
Reconciliation of net loss to net cash used in operating activities:
Bad debt expense 49 100
Amortization of debt discount 5,622 3,321
Non-cash interest 697 —
Amortization of product revenue license fee 1,420 1,174
Amortization of operating lease right-of-use assets 1,625 1,558
Issuance of common stock for service 18 —
Common shares issuable for 2019 Notes interest expense — 281
Common shares issued for 2019 Notes interest expense — 381
Change in fair value of derivative liability 1,189 27
Change in fair value of investment (6,418) —
Gain on deconsolidation of Caelum — (18,476)
Research and development-licenses acquired, expense 2,788 6,000
Other receivables - related party 121 1,230
Prepaid expenses and other current assets (2,590) 1,798
Accounts payable and accrued expenses 6,522 2,095
Accounts payable and accrued expenses - related party — (149)
Interest payable (1,042) 8
Interest payable - related party (92) (5)
Income taxes payable 136 —
Other long-term liabilities (187) 749
Net cash used in operating activities (83,682) (94,961)
Cash Flows from Investing Activities:
Purchase of research and development licenses (4,038) (4,650)
Purchase of property and equipment (1,926) (2,345)
Purchase of intangible asset (1,200) (2,400)
Purchase of short-term investment (certificates of deposit) — (5,000)
Redemption of short-term investment (certificates of deposit) — 22,604
Deconsolidation of Caelum — (1,201)
Net cash provided by (used in) continuing investing activities (7,164) 7,008
Net cash provided by discontinued investing activities — 13,089
Net cash provided by (used in) investing activities (7,164) 20,097
The accompanying notes are an integral part of these consolidated financial statements.
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FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
($ in thousands)
For the Year Ended
December 31,
Cash Flows from Financing Activities:
Payment of Series A preferred stock dividends $ (6,515) $ (2,559)
Purchase of treasury stock (70) —
Payment of costs related to purchase of treasury stock (2) —
Proceeds from issuance of Series A preferred stock 39,075 6,038
Proceeds from issuance of common stock under ESPP 253 123
Proceeds from partner companies' ESPP 349 —
Partner company’s dividends declared and paid (237) —
Proceeds from partner companies' sale of stock 57,729 86,180
Payment of costs related to partner companies' sale of stock (4,049) (6,671)
Proceeds from partner companies' at-the-market offering 72,570 30,526
Proceeds from partner company's preferred stock offering 8,000 —
Proceeds from exercise of partner company’s warrants 13 —
Proceeds from exercise of partner company’s options 13 —
Payment of debt issuance costs associated with 2018 Venture Notes (58) (134)
Proceeds from partner company's Horizon Notes — 15,000
Proceeds from Oaktree Note 60,000 —
Payment of debt issuance costs associated with Oaktree Note (4,302) —
Repayment of 2017 Subordinated Note Financing (28,356) —
Repayment of 2018 Venture Notes (21,707) —
Repayment of 2019 Notes (9,000) —
Repayment of partner company's Horizon Notes (15,750) —
Repayment of IDB Note (14,858) —
Installment payment related to intangible asset (500) —
Net cash provided by financing activities 172,410 146,714
Net increase in cash and cash equivalents and restricted cash 81,564 71,850
Supplemental disclosure of cash flow information:
Cash paid for interest $ 8,204 $ 5,444
Cash paid for interest - related party $ 617 $ 456
The accompanying notes are an integral part of these consolidated financial statements.
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FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows