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 the section of this report titled “Special Cautionary Notice Regarding Forward-Looking Statements” at the beginning of this Form 10-K. As used throughout this filing, (including in the risk factors described in Item 1A), the words “we”, “us” and “our” may refer to Fortress Biotech, Inc. individually, to one or more of its subsidiaries and/or partner companies, or to all such entities as a group, as dictated by context.
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.
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 our extensive network of key opinion leaders to identify and evaluate promising products and product candidates for potential acquisition. We have executed arrangements 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 financial 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 two have consummated strategic partnerships with industry leaders AstraZeneca plc as successor-in-interest to Alexion Pharmaceuticals, Inc. (“AstraZeneca”) and Sentynl Therapeutics, Inc. (“Sentynl”) a wholly owned subsidiary of Zydus Lifesciences Ltd.
Our subsidiary 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.
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Recent Events
Revenue Portfolio
Late Stage Product Candidates
Cosibelimab (anti-PD-L1 antibody)
● A resubmission of the cosibelimab BLA is expected in 2024.
CUTX-101 (copper histidinate injection for Menkes disease)
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DFD-29 (modified release oral minocycline for the treatment of rosacea)
CAEL-101 (monoclonal antibody for AL amyloidosis)
IV Tramadol
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Triplex (cytomegalovirus (CMV) vaccine)
Early Stage Product Candidates
MB-106 (CD20-targeted CAR T cell therapy)
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Dotinurad (urate transporter (URAT1) inhibitor for gout)
MB-101 (IL13Rα2‐targeted CAR-T cell therapy)
● MB-101 was sourced by Fortress and is currently in development at Mustang.
MB-109 (MB-101 + MB-108 (HSV-1 oncolytic virus))
● MB-108 was sourced by Fortress and is currently in development at Mustang.
MB-110 (Ex Vivo Lentiviral Gene Therapy for RAG1 Severe Combined Immunodeficiency)
● MB-110 was sourced by Fortress and is currently in development at Mustang.
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AJ201 (Nrf1 and Nrf2 activator, androgen receptor degradation enhancer)
● AJ201 was sourced by Fortress and is currently in development at Avenue.
BAER-101(GABAA α2/3 positive allosteric modulator)
General Corporate and Other
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Critical Accounting Policies and Use of Estimates
Our consolidated financial statements included in this Annual Report on Form 10-K include certain amounts that are based on management’s best estimates and judgments. Our significant estimates include, but are not limited to, provisions for product returns, coupons, rebates, allowances and distribution fees paid by Journey to certain wholesalers, inventory realization, useful lives assigned to long-lived assets and amortizable intangible assets, fair value of stock options and warrants, stock-based compensation, common stock issued to acquire licenses, accrued expenses, and contingencies. Due to the uncertainty inherent in such estimates, actual results may differ from these estimates. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
While our significant accounting policies are described in the Notes to our Consolidated Financial Statements included in “Part IV, Item 15, Exhibits and Financial Statement Schedules” in this Annual Report on Form 10-K, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results.
Revenue Recognition
Our gross product revenues are subject to a variety of deductions, which generally are estimated and recorded in the same period that the revenues are recognized. Such variable consideration represents chargebacks, coupons, discounts, other sales allowances and sales returns. These deductions represent estimates of the related obligations and, as such, knowledge and judgment are required when estimating the impact of these revenue deductions on gross sales for a reporting period. Historically, adjustments to these estimates to reflect actual results or updated expectations have not been material to our overall business. Coupons, however, can have a significant impact on year-over-year individual product revenue growth trends. If any of our ratios, factors, assessments, experiences, or judgments are not indicative or accurate estimates of our future experience, our results could be materially affected. The potential of our estimates to vary differs by program, product, type of customer and geographic location.
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.
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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. Our 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 our 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.
Issuance of Debt and Equity
Fortress and its partner companies and subsidiaries issue complex financial instruments which include equity and/or debt features. We analyze each instrument under ASC 480, Distinguishing Liabilities from Equity, ASC 815, Derivatives and Hedging and, ASC 470, Debt, in order to establish whether such instruments include any embedded derivatives.
We accounted for the Oaktree Note with detachable warrants in accordance with ASC 470, Debt. We assessed the classification of the common stock purchase warrants issued in connection with such transaction and determined that such instruments met the criteria for equity classification. The note proceeds were allocated between the Oaktree Note and the warrants on a relative fair value basis.
We recorded the related issue costs and value ascribed to the warrants as a debt discount of the Oaktree Note. The discount is being amortized utilizing the effective interest method over the term of the Oaktree Note, which is approximately 16.13% at December 31, 2023.
Accrued Research and Development Expense
We record accruals for estimated costs of research, preclinical, clinical and manufacturing development within accrued expenses which are significant components of research and development expenses. A substantial portion of our ongoing research and development activities is conducted by third-party service providers. We accrue the costs incurred under agreements with these third parties based on estimates of actual work completed in accordance with the respective agreements. We determine the estimated costs through discussions with internal personnel and external service providers as to the progress, or stage of completion or actual timeline (start-date and end-date) of the services and the agreed-upon fees to be paid for such services. Payments made to third parties under these arrangements in advance of the performance of the related services are recorded as prepaid expenses until the services are rendered.
If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust accrued expenses or prepaid expenses accordingly, which impact research and development expenses. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period.
Recent Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies, in the Notes to the Consolidated Financial Statements included in “Part IV, Item 15, Exhibits and Financial Statement Schedules” in this Annual Report on Form 10-K.
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Smaller Reporting Company Status
We are a “smaller reporting company,” meaning that either (i) the market value of our shares held by non-affiliates is less than $250 million or (ii) the market value of our shares held by non-affiliates is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our shares held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our shares held by non-affiliates is less than $700 million. As a smaller reporting company, we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K , have reduced disclosure obligations regarding executive compensation, and smaller reporting companies are permitted to delay adoption of certain recent accounting pronouncements discussed in Note 2 to our Consolidated Financial Statements located in “Part IV, Item 15, Exhibits and Financial Statement Schedules” in this Annual Report on Form 10-K.
Basis of Presentation and Principles of Consolidation
The Company’s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The Company’s consolidated financial statements include the 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.
The following table summarizes the Company’s basic ownership of the issued and outstanding common and preferred shares in consolidated Fortress subsidiaries:
December 31,
Partner Company/Subsidiary 2023
Avenue1 4 %
Cellvation 79 %
Checkpoint1 9 %
Cyprium 74 %
Helocyte 83 %
Oncogenuity 73 %
Urica 68 %
Note 1: Denotes entities that are publicly-traded.
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Results of Operations
Comparison of Years Ended December 31, 2023 and 2022
Year Ended December 31,
Revenue
Collaboration revenue 5,229 1,882
Revenue – related party 103 192
Operating expenses
Cost of goods sold – product revenue 26,660 30,775
Research and development – licenses acquired 4,324 677
Selling, general and administrative 94,124 113,656
Other income (expense)
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
Income tax expense 521 449
Less: net loss attributable to non-controlling interest 93,517 127,338
Net loss attributable to Fortress $ (60,637) $ (86,575)
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Revenue
Year Ended December 31, Change
Revenue
Revenue – related party 103 192 (89) (46) %
For the year ended December 31, 2023 we generated $84.5 million of net revenue, of which $59.7 million relates to the sale of Journey branded and generic products, $19.5 million of other revenue relates to Journey’s $19 million milestone payment and royalties of $0.5 million from Maruho Co., Ltd. (“Maruho”) related to the manufacturing and marketing approval and sales of Rapifort® Wipes 2.5% in Japan, $5.2 million relates to Cyprium’s collaboration revenue with Sentynl, and $0.1 million of revenue relates to Checkpoint’s collaborative agreements with TGTX, a related party. For the year ended December 31, 2022, we generated $75.7 million of net revenue, of which $71.0 million relates to the sale of Journey branded and generic products, $2.7 million relates to Journey’s royalties from Maruho, $1.9 million relates to Cyprium’s collaboration revenue with Sentynl and $0.2 million relates to Checkpoint’s collaborative agreements with TGTX.
For the year ended December 31, 2023, the net increase in revenue of $8.8 million or 12% is due to Journey’s $19.0 million non-refundable upfront payment from Maruho, offset by a decrease of $11.3 million or 16% of product revenue due to lower unit volumes, due to continued generic competition for Targadox and the discontinuation of Ximino in the third quarter of 2023. Collaboration revenue related to Cyprium’s agreement with Sentynl increased $3.3 million due to the receipt of $4.5 million associated with Sentynl’s assumption of control of the CUTX-101 development program, as well as recognition of $0.7 million of deferred revenue.
Cost of goods sold
Year Ended December 31, Change
We had $26.7 million and $30.8 million of costs of goods sold in connection with the sale of JMC branded and generic products for the years ended December 31, 2023 and 2022, respectively. Cost of goods sold decreased by $4.1 million, or 13% year-over-year, with the decrease mainly due to lower-than-prior-year product royalties driven by lower sales of products from period-to-period, and a permanent contractual decrease in the Qbrexza royalty percentage from the prior-year period.
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.
For the years ended December 31, 2023 and 2022, research and development expenses were approximately $101.7 million and $134.2 million, respectively. The table below provides a summary of research and development by entity, for the years ended December 31, 2023 and 2022:
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Year Ended
December 31, Change
Research & development
Subsidiaries/Partner Companies:
Note 1: Includes the following subsidiaries: Aevitas (until April 2023), Baergic (until November 2022), Cellvation, Cyprium, Helocyte, Oncogenuity and Urica.
The decrease in research and development spending at Mustang is due to a review of its portfolio of product candidates to determine the future strategy of its programs and the proper allocation of resources, which led to the discontinuation of development of MB-102 (CD123), MB-103 (HER2), MB-104 (CS1) and MB-105 (PSCA) programs, comprising a portion of Mustang’s portfolio of CAR T therapies being developed in partnership with COH, in addition to costs offset by reimbursements received from uBriGene through a subcontracting agreement. Journey’s decreased research and development costs are due to lower clinical trial expenses to develop DFD-29, as the project winds down and eventually concludes. Potential FDA approval for DFD-29 is expected in the second half of 2024.
Checkpoint’s decrease in research and development spending of $7.8 million is attributable to a $6.6 million decrease in manufacturing costs and a $5.6 million decrease in clinical costs, offset by an increase in regulatory costs of $0.8 million, due to the PDUFA fee to the FDA for the BLA filing for cosibelimab, and $2.3 million in license fees due upon the FDA filing acceptance of the BLA. Avenue’s increase in research and development in 2023 is primarily attributable to clinical costs related to the Phase 1b/2a of AJ201 for the treatment of SBMA, also known as Kennedy’s disease. The decrease in “Other” is attributable to a decrease of $1.3 million in costs incurred by Cyprium for the CUTX-101 development program as it was assumed by Sentynl, a decrease of $0.4 million for Aevitas development since the deconsolidation of that subsidiary due to the transaction with 4DMT, offset by an increase of $1.7 million of costs incurred by Urica for the dotinurad clinical program.
Noncash, stock-based compensation expense included in research and development for the years ended December 31, 2023 and 2022, was $3.2 million and $4.4 million, respectively.
Year Ended December 31, Change
Stock-based compensation - research & development
Partner Companies:
Note 1: Includes the following subsidiaries: Aevitas (until April 2023), Baergic (until November 2022), Cellvation, Cyprium, Helocyte, Oncogenuity and Urica.
We expect research and development costs to remain flat or decrease modestly in 2024.
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Research and development – licenses acquired
Year Ended December 31, Change
Research and development – licenses acquired $ 4,324 $ 677 $ 3,647 539 %
The increase in research and development – licenses acquired of $3.6 million in 2023 is due primarily to $4.2 million paid for Avenue’s license from AnnJi for AJ201.
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, 2023 and 2022, selling, general and administrative expenses were $94.1 million and $113.7 million, respectively. The table below provides a summary by entity of selling, general and administrative expenses for the years ended December 31, 2023 and 2022, respectively:
Year Ended
December 31, Change
Selling, general & administrative
Subsidiaries/Partner Companies:
Note 1: Includes an asset impairment charge of $3.1 million in the year ended December 31, 2023 for the Ximino product line.
Note 2: Includes the following subsidiaries: Aevitas (until April 2023), Baergic (until November 2022), Cellvation, Cyprium, Helocyte, Oncogenuity and Urica.
For the year ended December 31, 2023, the decrease in selling, general and administrative expenses of $19.0 million or 17% is primarily attributable to decreased expenses at Journey related to their expense reduction efforts in sales and marketing, as JMC began a cost reduction initiative designed to improve operational efficiencies, optimize expenses and reduce overall costs to better align costs to their revenue-generating capabilities. JMC’s cost reductions were offset slightly by a loss on impairment of intangible assets of $3.1 million related to the impairment of Ximino as a result of lower net product revenues and gross profit levels. JMC discontinued Ximino in September 2023. The decrease in selling, general and administrative costs at Fortress and Mustang is attributable to cost reduction efforts and optimization relating to personnel, consulting, and infrastructure.
Stock based compensation expense included in selling, general and administrative expenses in the years ended December 31, 2023 and 2022 was $13.8 million and $18.5 million, respectively.
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Year Ended December 31, Change
Stock-based compensation - Selling, general and administrative
Partner Companies:
Note 1: Includes the following subsidiaries: Aevitas (until April 2023), Baergic (until November 2022), Cellvation, Cyprium, Helocyte, Oncogenuity and Urica.
We expect selling, general and administrative expenses to remain flat or decrease modestly in 2024.
Other expense
December 31, Change
Other income (expense)
Total other income (expense) increased $1.4 million, or (14)%, from expense of $9.9 million for the year ended December 31, 2022 to expense of $4.7 million for the year ended December 31, 2023, primarily due to the increase in change in fair value of warrant liabilities associated with warrants related to financings at Avenue and Checkpoint of $9.9 million, and an increase in interest income of $1.6 million, offset by an increase of $1.7 million in interest expense and financing fees due to costs associated with debt payoff at Journey and Mustang, and an increase of $4.6 million in other expense in the year ended December 31, 2023 due primarily to $4.1 million associated with the deconsolidation and dissolution of partner companies.
Liquidity and Capital Resources
Sources of Liquidity
At December 31, 2023, we had an accumulated deficit of $694.9 million primarily as a result of research and development expenses, purchases of in-process research and development and selling, general and administrative expenses.
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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, royalty financings, or through other sources of financing. See “Item 1A. Risk Factors—Risks Pertaining to the Need for and Impact of Existing and Additional Financing Activities.”
Stock Offerings and At-The-Market Share Issuances
We fund our operations through cash on hand, the sale of debt, third-party financings, and the sale of partner companies. At December 31, 2023, we had cash and cash equivalents of $80.9 million of which $40.6 million relates to Fortress and the private partner companies, primarily funded by Fortress, $4.9 million relates to Checkpoint, $6.2 million relates to Mustang, $27.4 million relates to JMC and $1.8 million relates to Avenue. Restricted cash related to an undertaking posted by Cyprium to secure potential damages in an injunctive proceeding and our office leases is $2.4 million.
In July 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"). 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. Approximately $100.1 million of securities remain available for sale under the 2021 Shelf as of December 31, 2023. The amount of securities we are able to sell pursuant to the registration statement on Form S-3 may be limited to an aggregate of one-third of our public float. See “Item 1A. Risk Factors– We may need substantial additional funding and may be unable to raise capital when needed, which may force us to delay, curtail or eliminate one or more of our R&D programs, commercialization efforts or planned acquisitions and potentially change our growth strategy.”
In February 2023, the Company completed a registered direct offering of common stock priced At-the-Market under Nasdaq rules pursuant to which it issued and sold 1.1 million shares of its common stock at a purchase price of $12.53 per share (as adjusted for the Reverse Stock Split) and secured approximately $13.3 million in net proceeds after deducting estimated offering expenses. This included a concurrent private placement with investors in the registered direct offering for the pro rata rights to acquire securities exercisable into common stock in certain future operating subsidiaries that consummate a specified corporate development transaction within the next five years.
In November 2023, the Company 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.
Subsequent to 2023, 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.
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Journey
In December 2022, Journey filed a shelf registration statement on Form S-3 (File No. 333-269079), which was declared effective in January 2023 (the “Journey 2022 S-3”). 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. 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
In March 2023, Checkpoint filed a shelf registration statement (File No. 333-270843) on Form S-3 (the “Checkpoint 2023 S-3”), 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.
In 2023, Checkpoint closed on 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.
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.
Mustang
In April 2021, Mustang filed a shelf registration statement on Form S-3 (File No. 333-255476) which was declared effective in May 2021 (the “Mustang 2021 S-3”). Under the Mustang 2021 S-3, Mustang may sell up to a total of $200.0 million of its securities. 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. As of December 31, 2023, approximately $195.6 million of the Mustang 2021 S-3 remained available for sales of securities.
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 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.
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Avenue
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. 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, before giving effect to any exercises of the November 2023 Warrants.
In January 2023, Avenue entered into an agreement with a single institutional investor for the sale of 1,940,299 shares of common stock and pre-funded warrants for gross proceeds of approximately $3.0 million. In a concurrent private placement, Avenue also agreed to issue to the same investor a total of 1,940,299 warrants to purchase up to one share of common stock each at an exercise price of $1.55 per share for gross proceeds of approximately $0.2 million. Avenue received approximately $2.8 million in net proceeds across both transactions.
Debt
In December 2023, Journey announced it had entered into a credit agreement with SWK Funding LLC that provided a term loan facility in the original principal amount of $20 million. Of the $20 million, $15 million was funded upon closing, and the remaining $5.0 million may be drawn upon request by Journey within the first 12 months following credit agreement execution.
Cash Flows
The following table summarizes our cash flows during the periods indicated:
Year Ended December 31,
Total cash (used in)/provided by:
Operating Activities
Net cash used in operating activities decreased $51.2 million from the year ended December 31, 2022 to the year ended December 31, 2023. The decrease is primarily attributable to the decrease in net loss of $59.8 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022, and the net decrease in cash from changes in operating assets and liabilities of $11.9 million offset by the increase in loss from deconsolidation and dissolution of subsidiaries of $4.1 million and a $3.1 million asset impairment loss.
Investing Activities
Net cash used by investing activities for the year ended December 31, 2022 of $22.9 million decreased $20.8 million to net cash used by investing activities of $2.1 million for the year ended December 31, 2023. The change is primarily due to Journey’s purchase of the VYNE Therapeutics, Inc. (“VYNE”) product licenses of $20.0 million and Mustang’s property and equipment purchases of $2.7 million for the year ended December 31, 2022, offset by $6 million in proceeds from the sale of property and equipment recorded by Mustang for the uBriGene transaction.
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Financing Activities
Net cash provided by financing activities was $75.3 million for the year ended December 31, 2022, compared to $32.7 million of net cash provided by financing activities for the year ended December 31, 2023, a decrease of $42.6 million. The decrease is primarily due to the repayment of partner company debt of $81.3 million, partially offset by proceeds from the issuance of common stock in public offerings of $22.1 million, and proceeds from new partner company debt of $14.5 million.
Components of cash flows from publicly-traded partner companies are:
For the Year Ended December 31, 2023
($ in thousands) Fortress1 Avenue Checkpoint JMC Mustang Total
Statement of cash flows data:
Total cash (used in)/provided by:
For the Year Ended December 31, 2022
($ in thousands) Fortress1 Avenue Checkpoint JMC Mustang Total
Statement of cash flows data:
Total cash (used in)/provided by:
Note 1: Includes Fortress and non-public subsidiaries.
Contractual Obligations
Our short-term and long-term contractual obligations as of December 31, 2023 include:
Under the license agreements, we are required to make milestone payments upon successful completion and achievement of certain development, regulatory and commercial milestones, the payment obligations of which are contingent upon future events, such as our achievement of specified development, regulatory and commercial milestones, and the amount, timing, and likelihood of such payments are not known. We may also be required to make milestone payments and royalty payments in connection with the sale of products developed under these agreements, if approved and sold.
Additionally, we enter into agreements in the normal course of business with CROs and other vendors for clinical trials and with vendors for preclinical services and products for operating purposes, which are generally terminable by us upon written notice.
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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.
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:
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 Relationships 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:
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
4.4 Description of Securities of Fortress Biotech, Inc.*
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Exhibit
Number Exhibit Title
90
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Exhibit
Number Exhibit Title
91
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Exhibit
Number Exhibit Title
21.1 Subsidiaries of the Registrant. *
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.*
# 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
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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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.:
1Opinion on theConsolidated 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.
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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:
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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,
ASSETS
Current assets
Other receivables - related party 167 138
Prepaid expenses and other current assets 10,500 9,661
Property, plant and equipment, net 6,505 13,020
Operating lease right-of-use asset, net 16,990 19,991
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 line of credit — 2,948
Other short-term liabilities 163 996
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
Commitments and contingencies (Note 14)
Stockholders’ equity (deficit)
Total stockholders' equity attributed to the Company 22,544 41,721
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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FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
($ in thousands except for share and per share amounts)
Year Ended December 31,
Revenue
Collaboration revenue 5,229 1,882
Revenue - related party 103 192
Operating expenses
Cost of goods sold - product revenue 26,660 30,775
Research and development - licenses acquired 4,324 677
Selling, general and administrative 94,124 113,656
Other income (expense)
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)
Income tax expense 521 449
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)
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 and per share amounts)
For the Year Ended December 31, 2023
Common Additional Total
Stock-based compensation expense — — — — — 17,029 — — 17,029
Exercise of warrants for cash — — 225,000 1 — 382 — — 383