Mustang Bio, Inc. — Q3 2016 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2016. Mustang is a clinical-stage biopharmaceutical company developing CAR-T cancer immunotherapies licensed from City of Hope (COH). It reported no product sales. The filing describes an open IND and Phase 1 trial for glioblastoma, and an additional IND filed for acute myeloid leukemia (AML).
Financial results and liquidity
Amounts below are in millions of dollars unless otherwise stated. The company reported no revenue, so revenue-based margins are not meaningful.
| Metric | Q3 2016 | Comparable period |
|---|---|---|
| Research and development expense | $0.569 | $0.570 in Q3 2015 |
| General and administrative expense | $1.101 | $0.088 in Q3 2015 |
| Total operating expenses / operating loss | $1.670 | $0.658 in Q3 2015 |
| Net loss | $1.870; $0.19 per share | $0.716; $0.07 per share in Q3 2015 |
For the nine months ended September 30, 2016, operating expenses were $3.532 million and net loss was $3.906 million, or $0.39 per share. The comparison period in 2015 runs from inception on March 13 through September 30; it is not a full nine-month period. Net loss was $3.555 million in that period, including $2.147 million of acquired-license research and development expense.
At September 30, cash and total assets were $11.118 million, with no other current assets. Current liabilities were $4.869 million and total liabilities were $7.796 million; stockholders’ equity was $3.322 million. Liabilities included $2.001 million of related-party notes payable, $2.927 million of long-term NSC debt net of a $0.673 million discount, and $0.446 million of related-party accrued interest. Net working capital was approximately $6.249 million.
Operating cash use was $1.866 million for the first nine months; financing provided $12.984 million and ending cash was $11.118 million. Investing cash flow was zero. The company said its September 30 cash was expected to fund anticipated operating needs for approximately 12 months.
Material changes, outlook and notable items
- Quarterly R&D expense was essentially flat year over year. Nine-month R&D fell to $1.718 million from $3.281 million in the inception-to-September 2015 period, which included the prior-year COH license acquisition charge.
- G&A rose sharply, to $1.814 million for the first nine months from $0.174 million in the 2015 inception period. Management attributed much of the 2016 expense to legal costs, including Form 10 filing and intellectual-property matters, and Fortress management-service fees. Q3 2016 included $0.6 million of legal fees.
- Management expected R&D and G&A to increase as development and corporate-support activity expanded. It warned of continued significant operating losses and said the company might never become profitable; no specific earnings or clinical-development timetable guidance was provided.
- A September private placement generated $12.4 million gross proceeds; the filing reports $11.1 million net of fees and expenses in financing cash flows. An additional $7.1 million gross private placement closed October 25, 2016, after quarter-end. Both offerings included common shares and warrants priced at an $8.50 exercise price; placement-agent fees and warrants applied.
- The $3.6 million NSC note carries 8% stated interest; its reported effective interest rate was approximately 23.1% after discounts and the related warrant. After the October financing, Mustang issued National a further warrant and Fortress was released as guarantor of the note.
- Fortress controls a voting majority through 250,000 Class A preferred shares, which carry voting and stock-dividend rights. The filing also describes equity grants tied to financings. These arrangements may dilute common shareholders; the amended agreement eliminated the former annual equity fee, but the preferred-stock PIK dividend provisions remain.
- Dr. Winson Tang’s lawsuit alleges entitlement to 15% of Mustang’s shares. Claims were dismissed without prejudice in September 2016; a second amended complaint was filed in October, with a renewed demurrer hearing scheduled for December 16, 2016. The company accrued no loss and intends to defend the case.
- Management identified substantial development and financing risks, including clinical-trial delays or failure, regulatory approval uncertainty, dependence on COH and third-party manufacturers and research providers, intellectual-property risks, and the need for additional capital. Disclosure controls were reported effective as of September 30, 2016; no material change in internal control was reported.
Important facts for investors to verify
- Cash runway assumptions and how the October financing proceeds affect the stated approximately 12-month runway.
- Clinical progress, trial enrollment and safety updates for the glioblastoma and AML programs, and the status of the filed AML IND.
- Full debt terms, repayment schedule, warrant issuance and the effect of the note’s high effective interest cost.
- Current and potential dilution from private-placement warrants, Fortress-related financing grants and preferred-stock PIK dividends, as well as Fortress’s voting control.
- Developments in the Tang litigation and any resulting financial or dilution exposure.