SCHEDULE 13D/A: Fortress Biotech Increases Stake in Avenue Therapeutics, Maintains Voting Majority Through Preferred Stock

Fortress Biotech, Inc. has increased its beneficial ownership in Avenue Therapeutics, Inc. to 13.8% through equity grants, solidifying its control via Class A preferred stock.

Summary

• Fortress Biotech, Inc. (the 'Reporting Person') has filed Amendment No. 6 to its Schedule 13D regarding its beneficial ownership in Avenue Therapeutics, Inc. (the 'Issuer').
• The Reporting Person now beneficially owns 295,022 shares of the Issuer's common stock, representing 13.8% of all outstanding shares.
• This ownership includes 250,000 shares of the Issuer's Class A preferred stock, which are convertible into 222 shares of common stock.
• The Class A preferred stock grants Fortress Biotech a voting majority, as each share is entitled to 1.1 times a fraction based on the sum of outstanding common stock and convertible preferred stock, divided by outstanding Class A preferred stock.
• Fortress Biotech also holds 296 shares of common stock underlying Warrants, exercisable until July 15, 2035, with an exercise price of $492.75 per share.
• The increase in ownership is due to the issuance of 12,662 shares of common stock as Offering Equity Grants and 101,935 shares as an Annual Equity Grant.
• These grants are pursuant to the Amended and Restated Founders Agreement and the Issuer's Third Amended and Restated Certificate of Incorporation.
• The Offering Equity Grant is an equity fee equal to 2.5% of the gross amount of any Issuer equity or debt financing.
• The Annual Equity Grant is an annual issuance of common stock equal to 2.5% of the Issuer's fully-diluted outstanding equity.

Sentiment

Score: 6

Explanation: The filing is largely neutral, as it primarily updates beneficial ownership based on pre-existing agreements. The continued strategic alignment and control by Fortress Biotech could be seen positively for stability, but the potential for dilution from ongoing equity grants might be a minor negative for other common shareholders. Overall, it's an expected procedural update with no major surprises.

Positives

• Fortress Biotech, as a significant shareholder and strategic partner, continues to demonstrate its commitment to Avenue Therapeutics through increased equity ownership.
• The Class A preferred stock structure ensures Fortress Biotech maintains a voting majority, providing stable governance and strategic alignment between the two entities.

Negatives

• The issuance of new shares for equity grants could lead to dilution for other common stockholders, although the specific impact on per-share value is not detailed in this filing.
• The significant control held by Fortress Biotech through its Class A preferred stock may limit the influence of other common shareholders on corporate decisions.

Risks

• Potential dilution for existing common shareholders due to ongoing equity grants tied to financing and annual capitalization.
• The high exercise price of $492.75 for the Warrants, compared to the likely current market price of Avenue Therapeutics common stock, could mean they are out-of-the-money, potentially limiting their value to the holders.

Future Outlook

Fortress Biotech, Inc. is expected to continue receiving annual equity grants (2.5% of fully-diluted outstanding equity) and offering equity grants (2.5% of gross equity or debt financing) from Avenue Therapeutics, Inc. as per their existing agreements. The Class A preferred stock will continue to receive PIK Dividends in common stock annually until conversion or redemption.

Management Comments

• Lindsay A. Rosenwald, M.D., Chairman, President and Chief Executive Officer of Fortress Biotech, Inc., signed the filing, affirming the accuracy of the information.

Industry Context

This filing reflects an ongoing strategic relationship between a biotechnology company (Fortress Biotech) and one of its portfolio companies (Avenue Therapeutics). Such arrangements are common in the biotech sector where larger entities or incubators provide funding and strategic oversight to smaller, developing companies, often maintaining significant equity stakes and governance control.

Comparison to Industry Standards

• The structure involving Class A preferred stock granting a voting majority (1.1x voting power) is a common mechanism used by strategic investors or founders to maintain control over a company, even if their common equity percentage might fluctuate due to dilution from other financings. This is seen in various tech and biotech startups where early investors or founders want to ensure long-term strategic direction.
• Equity grants tied to financing events (Offering Equity Grants) and annual capitalization (Annual Equity Grants) are typical compensation or fee structures in venture capital or strategic partnership agreements, ensuring the strategic partner's stake grows with the company's funding and valuation.
• The issuance of Warrants to key executives (Lindsay A. Rosenwald, Michael S. Weiss) is a standard incentive mechanism, aligning management's interests with shareholder value, although the high exercise price suggests these might be long-term, out-of-the-money options designed for significant future appreciation or are a result of reverse stock splits.

Corporate Governance

Related Party Transactions

• Fortress Biotech, Inc. (Reporting Person) is party to an Amended and Restated Founders Agreement with Avenue Therapeutics, Inc. (Issuer), under which it receives equity fees (Offering Equity Grants and Annual Equity Grants).
• Fortress Biotech, Inc. owns all outstanding shares of Avenue Therapeutics' Class A preferred stock, which grants it a voting majority and receives PIK Dividends.
• Warrants for Avenue Therapeutics common stock are held by Lindsay A. Rosenwald, M.D. (Chairman, President and CEO of Fortress Biotech) and Michael S. Weiss (Executive Vice Chairman, Strategic Development of Fortress Biotech), linking executive compensation to the Issuer's performance.

Stakeholder Impact

• **Shareholders:** Existing common shareholders may experience dilution due to the issuance of new shares for equity grants. The significant voting control held by Fortress Biotech via preferred stock may limit the influence of other common shareholders.
• **Fortress Biotech, Inc.:** Benefits from increased equity stake and continued strategic control over Avenue Therapeutics, aligning its financial interests with the Issuer's growth and financing activities.
• **Management (Fortress Biotech Executives):** Lindsay A. Rosenwald, M.D. and Michael S. Weiss benefit from Warrants, aligning their personal financial interests with the long-term performance of Avenue Therapeutics.

Next Steps

• Avenue Therapeutics, Inc. is expected to continue issuing Annual Equity Grants to Fortress Biotech, Inc. annually, equal to 2.5% of its fully-diluted outstanding equity.
• Avenue Therapeutics, Inc. will continue to issue Offering Equity Grants to Fortress Biotech, Inc. equal to 2.5% of any future equity or debt financing.
• Fortress Biotech, Inc. will continue to receive PIK Dividends in common stock on its Class A preferred stock on each January 1 until conversion or redemption.

Key Dates

Keywords

Fortress Biotech, Avenue Therapeutics, SEC Filing, Schedule 13D, Beneficial Ownership, Equity Grants, Preferred Stock, Voting Rights, Warrants, Corporate Governance, Biotechnology, Pharmaceuticals