9. Debt and Interest

Debt

Total debt consists of the following:

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Oaktree Note

In August 2020, Fortress, as borrower, entered into a $60.0 million senior secured credit agreement with Oaktree Fund Administration, LLC and the lenders from time-to-time thereto (collectively, “Oaktree”) (the “Oaktree Agreement” and the debt thereunder, the “Oaktree Note”).  The Oaktree Agreement contains customary representations and warranties and customary affirmative and negative covenants as well as certain financial covenants, including, among other things, (i) maintenance of minimum liquidity and (ii) a minimum revenue test that requires Journey’s annual revenue to be equal to or to exceed annual revenue projections set forth in the Oaktree Agreement.  Failure by the Company or Journey, as applicable, to comply with the Oaktree Agreement covenants will result in an event of default, subject to certain cure rights of the Company.  The Company was in compliance with all applicable covenants under the Oaktree Agreement as of March 31, 2023.

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The Company is required to make quarterly interest-only payments until the fifth anniversary of the closing date, August 27, 2025, the “Maturity Date,” at which point the outstanding principal amount is due. The Company may voluntarily prepay the Oaktree Note at any time subject to a prepayment fee.  The Company is required to make mandatory prepayments of the Oaktree Note under various circumstances as defined in the Oaktree Agreement.  No mandatory prepayments were required in the three months ended March 31, 2023.

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Journey Working Capital Line of Credit Amendment and Term Loan

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On January 12, 2022, Journey entered into a third amendment (the “Amendment”) of its loan and security agreement with East West Bank, which increased the borrowing capacity of Journey’s revolving line of credit to $10.0 million, from $7.5 million, and added a term loan (“EWB Term Loan”) not to exceed $20.0 million. Both the revolving line of credit and the EWB Term Loan mature on January 12, 2026.  In January 2022 and August 2022, Journey borrowed $15.0 million and $5.0 million, respectively, against the EWB Term Loan.  The EWB Term Loan bears interest at a floating rate equal to 1.73% above the prime rate and is payable monthly. The EWB Term Loan effective interest rate at March 31, 2023 was 10.20%. The EWB Term Loan contain an interest only payment period through January 12, 2024, after which the outstanding balance of each term loan is payable in equal monthly installments of principal, plus all accrued interest, through the EWB Term Loan maturity date.  At March 31, 2023 and December 31, 2022, there was $3.0 million and $2.9 million, respectively, outstanding on the revolving line of credit.

Journey may prepay all or any part of the EWB Term Loan without penalty or premium, but may not re-borrow any amount, once repaid. Any outstanding borrowing against the revolving line of credit bears interest at a floating rate equal to 0.70% above the prime rate. The Amendment includes customary financial covenants such as collateral ratios and minimum liquidity provisions as well as audit provisions, which pertain solely to Journey. Journey was in compliance with all applicable financial covenants under the Amendment as of March 31, 2023. As of March 31, 2023, Journey had access to an additional $5.4 million under the revolving line of credit which reflects the $10.0 borrowing capacity under the revolving line of credit less the $3.0 outstanding at March 31, 2023 and less a $1.6 million restriction in the amount of royalties payable at March 31, 2023. The $5.4 million is available to Journey without further restrictions.

Mustang Runway Growth Finance Corp. (“Runway”) Debt Facility

On April 11, 2023, the Mustang Term Loan was terminated upon receipt by Runway of a payoff amount of $30.7 million from Mustang (comprising principal, interest and the applicable final payment amount).

On March 4, 2022 (the “Closing Date”), Mustang entered into a $75.0 million long-term debt facility with Runway Growth Finance Corp. (the “Mustang Term Loan” or the “Runway Note”). Under the Mustang Term Loan, $30.0 million of the $75.0 million loan was funded on the Closing Date, with the remaining $45.0 million available if and when Mustang achieved certain predetermined milestones.

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The Mustang Term Loan was set to mature on April 15, 2027 (the “Maturity Date”).  Starting March 15, 2022, Mustang was required to make monthly payments of interest only until April 1, 2024 (the “Amortization Date”). The Amortization Date may have been extended to April 1, 2025 if Mustang had achieved certain predetermined milestones based on equity raises and the initiation of certain clinical trials. After that, Mustang would have made monthly payments of interest and principal. If the Amortization Date was extended to April 1, 2025, the monthly payments would have been recalculated in equal amounts according to the remaining number of payment dates through the Maturity Date. All unpaid outstanding principal and accrued and unpaid interest would have been due and payable in full on the Maturity Date (see Note 19).

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The Runway Note accrued interest at a variable annual rate equal to 8.75% plus the greater of (i) 0.50% and (ii) the three-month LIBOR Rate for U.S. dollar deposits or the rate otherwise reasonably determined by the Lender to be the rate at which U.S. dollar deposits with a term of three months would be offered by banks in London or other offshore interbank markets (the “Applicable Rate”); provided that the Applicable Rate would not be less than 9.25%. On December 7, 2022, Mustang entered into the First Amendment (the “Runway First Amendment”) to the Mustang Term Loan by and between Mustang and Runway. The Runway First Amendment amended certain definitions and other provisions of the Mustang Term Loan to replace LIBOR-based benchmark rates applicable to loans outstanding under the Mustang Term Loan with SOFR-based rates, subject to adjustments as specified in the runway First Amendment. At March 31, 2023 the Applicable Rate was 13.77%. For the three months ended March 31, 2023, Mustang made interest payments of $1.0 million recorded in interest expense in the unaudited condensed consolidated Statements of Operations.

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Mustang had the option to prepay all of the outstanding Runway Note but not less than all. Prepayment would include outstanding principal, accrued interest, prepayment fee and final payment which was equal to the original principal amount of the Runway Note times 3.5% or $1.1 million and was accreted over the life of the loan.

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In addition, the Runway Note was secured by a lien on substantially all of Mustang’s assets other than certain intellectual property assets and certain other excluded collateral, and it contained a minimum liquidity covenant and other covenants including among other items, limits on indebtedness and repurchase of stock from employees, officers and directors.  Mustang was in compliance with all applicable covenants as of March 31, 2023.

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The Runway Note contained customary events of default, in certain circumstances subject to customary cure periods. Following an event of default and any cure period, if applicable, Runway would have had the right upon notice to accelerate all amounts outstanding under the Runway Note, in addition to other remedies available to the lenders as secured creditors of the Mustang.

Pursuant to the terms of the Runway Note, upon closing Mustang paid Runway upfront fees out of proceeds of $0.4 million consisting of a 1% commitment fee and a deposit of $0.1 million.  In addition, Mustang paid other cash fees directly to third parties comprising of an advisory fee and legal fees totaling $2.3 million. Mustang also issued to Runway a warrant to purchase up to 49,869 of Mustang common shares with an exercise price of $12.03 per share, pursuant to the terms of the Runway Note. In addition, the provisions of the warrant provide for additional warrants to be issued upon funding of the loan tranches.

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The fair value of the warrant was determined utilizing a Black Scholes Model with the following assumptions: risk free rate of return 1.74%, volatility of 57.3%, 10-year life yielding a value of approximately $0.4 million at March 4, 2022.  The fair value of the warrant was recorded in debt discount and was amortized over the life of the note.

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For the three months ended March 31, 2023 and 2022, Mustang amortized approximately $0.2 million and approximately $19,400, respectively, of debt discount associated with the Runway Note, which was included in interest expense in the unaudited condensed consolidated statement of operations.

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Urica 8% Cumulative Convertible Class B Preferred Offering

On December 27, 2022, Urica consummated the first closing in a private offering of its 8% Cumulative Convertible Class B Preferred Stock (the “Urica Preferred Stock”), at a price of $25.00 per share (“Subscription Price”) pursuant to which it sold 101,334 shares of Preferred Stock for gross proceeds of $2.5 million, before deducting underwriting discounts and commissions and offering expenses of approximately $0.3 million (the “Urica Offering”). A non-cash contingent warrant value of $0.1 million was also recorded in debt discount (see Note 6).

Dividends on the Preferred Stock are payable quarterly in shares of Fortress common stock based upon a 7.5% discount to the average trading price over the 10-day period preceding the dividend payment date. Dividends will be recorded as interest expense and were immaterial in 2022.  

The shares mandatorily convert into Urica common stock upon either: (i) a qualified financing pursuant to which Urica raises at least $20 million in aggregate gross proceeds; or (ii) a sale of Urica (in each case, at a 20% discount to the lowest price per share at which Urica common stock is issued/sold in such transaction). Additionally, in the event that neither such a qualified financing nor a sale of Urica has occurred prior to June 27, 2024, then each holder of Urica Preferred Stock is eligible to receive, at Fortress’ election, one of: (x) a cash payment equal to the product of the Subscription Price and the number of shares of Urica Preferred Stock held by such holder; (y) a number of shares of Fortress common stock equal to the Fortress Share Exchange Amount; or (z) a combination of the foregoing (in each case plus cash in lieu of any fractional shares, plus cash in lieu of accumulated and unpaid dividends otherwise payable in Fortress shares up to the conversion/exchange date).

The Urica Preferred Shares have no voting rights and have liquidation rights on parity with all equity securities issued by Urica, and junior to all equity securities issued by Urica with terms outlining senior rank and current and future indebtedness.

The Company evaluated the terms of the Urica Preferred Offering under ASC 480, Distinguishing Liabilities from Equity, and determined the instrument met the criteria to be recorded as a liability. The value at conversion does not vary with the value of Urica’s common shares, therefore the settlement provision would not be considered a conversion feature. Accordingly, the Company determined liability classification is appropriate and as such, this instrument was accounted for as a liability.

Harley Capital LLC (“Harley”) was the primary placement agent for the Urica Offering and received a 10% fee on gross proceeds raised, plus either warrants to purchase 10% of the Urica common stock into which the Urica Preferred Stock converts (in the event of a sale of Urica or a qualified financing) or 10% of the Company common stock for which the Urica Preferred Stock is exchanged (in the event neither a sale of Urica nor a qualified financing occurs), in addition to reimbursement of legal and other expenses.  See Note 6.

In February 2023, Urica completed two additional closings, raising a combined additional $0.9 million and paid placement agent fees of $0.1 million for net proceeds of $0.8 million.

Partner Company Installment Payments – Licenses

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The following tables show the details of partner company installment payments – licenses for the periods presented.

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Interest Expense

The following table shows the details of interest expense for all debt arrangements during the periods presented. Interest expense includes contractual interest, and fees include amortization of the debt discount and amortization of fees associated with loan transaction costs, amortized over the life of the loan:

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