MUSTANG BIO, INC. annual report, FY2019

Business context and reporting period

Mustang Bio, Inc. is a clinical-stage biopharmaceutical company developing cell and gene therapies for cancers and rare genetic diseases. This Form 10-K covers the fiscal year ended December 31, 2019; it also reports unaudited fourth-quarter results. The company had no approved products or product-sale revenue and reported an accumulated deficit of $125.5 million. It is majority-controlled by Fortress Biotech.

Financial performance and position

Operating expenses increased 47% and net loss increased 51% year over year. R&D growth reflected higher personnel, laboratory, consulting, clinical-trial and facility costs. License expense included a $4.9 million Fortress annual stock dividend; the 2018 comparison included $2.1 million for that dividend. Interest expense rose to $1.8 million, primarily reflecting the Horizon loan and related debt discount; interest income was $1.3 million.

In Q4 2019, revenue was $0, operating expenses were $15.9 million, other expense was $0.3 million and net loss was $16.2 million, versus a $11.8 million net loss in Q4 2018. The filing does not provide a clear gross margin measure; with no product sales, it is not meaningful.

At year-end, cash and cash equivalents were $61.4 million, restricted cash was $1.0 million, total current assets were $63.1 million and total assets were $73.4 million. Current liabilities were $7.8 million; total liabilities were $21.8 million and stockholders’ equity was $51.7 million. Notes payable had a $13.4 million carrying amount, including $1.25 million current and $12.18 million long-term. The $15 million Horizon advance is secured by substantially all assets other than specified intellectual property and collateral; a further $5 million was conditional on milestones. The filing states year-end cash and cash equivalents were expected to fund anticipated operating needs for at least one year from the filing date, while warning that additional financing would be needed for full development and commercialization.

Financing provided $65.1 million of cash in 2019: about $22.0 million net from the at-the-market offering, $29.5 million net from a public offering and $13.6 million net from the Horizon loan. Cash and restricted cash increased by $45.4 million overall. Investing activities provided $13.9 million, mainly from certificate-of-deposit maturities, partly offset by fixed-asset purchases. Common shares outstanding increased from 26.6 million to 39.4 million during the year, before issuable shares and other potential dilution.

Material changes and business developments

• The FDA cleared Mustang’s IND for a company-sponsored, multicenter Phase 1/2 MB-102 trial; enrollment was expected to begin in the first half of 2020. MB-102 also received orphan drug designations for AML and BPDCN.
• MB-107 for XSCID remained in two Phase 1/2 trials. Reported early data from 24 patients were encouraging, including immune recovery; the filing notes that longer follow-up is needed to evaluate durability and long-term safety. The FDA granted MB-107 RMAT designation.
• MB-104, MB-106, MB-101, MB-103 and MB-105 were in early clinical development through academic partners. A Phase 1 MB-108 trial began enrolling in 2019.
• Mustang licensed the C134 oncolytic virus (MB-108) and a producer cell line for MB-107, and continued development of its Worcester cell-processing facility. The company remains reliant on research partners and third parties for important clinical materials and manufacturing.
• Mustang increased authorized common shares from 50 million to 85 million and filed a new $75 million shelf registration statement; no sales under the new shelf had occurred by year-end.

Outlook, risks and unusual items

Management expected R&D and general and administrative spending to rise as programs advance and additional trials, personnel, manufacturing and regulatory work are funded. The company gave no revenue or profitability guidance and cautioned that it may never become profitable. Its development plans depend on clinical results, regulatory decisions, patient enrollment, manufacturing capacity and access to further capital.

• Clinical and regulatory risk: Candidates are experimental and mostly early-stage; positive early results do not assure later success or approval. Safety events, trial delays, enrollment challenges or changing regulatory requirements could delay or end programs.
• Funding and dilution: Continued losses and substantial development costs make future financing likely. Equity issuance may dilute investors; debt or collaborations may constrain operations or require giving up rights.
• Debt and liquidity covenants: The Horizon loan includes minimum monthly cash requirements (reported at $13 million as of December 31, 2019), other covenants, collateral and default remedies.
• Related-party governance: Fortress controls voting power and receives annual stock dividends and equity fees tied to financing, as well as a management-services fee. These arrangements create potential dilution and conflicts of interest.
• Third-party dependence and intellectual property: Partners conduct substantial research and clinical work; manufacturing capacity, license compliance, patent protection and third-party rights could affect development.
• COVID-19: The filing said the outbreak had not materially affected business at that time, but warned of possible future disruption to trials, operations, financing and supply.

Unusual or important accounting items include the $4.9 million Fortress stock-dividend charge in R&D licenses acquired, and the adoption of lease accounting that recorded a $1.2 million right-of-use asset and approximately $2.0 million lease liability at January 1, 2019. Management reported effective disclosure controls and internal control over financial reporting. The auditor issued an unqualified opinion on the financial statements; the auditor was not engaged to opine on internal-control effectiveness. No material litigation was reported.

Important facts for investors to verify

• Whether cash runway assumptions remain valid against actual cash burn, planned trial spending and the terms for the conditional Horizon advance.
• Updated clinical-trial enrollment, safety, efficacy, durability and regulatory milestones for MB-107 and the CAR T and MB-108 programs.
• The extent of future dilution from equity financing, Fortress’s annual stock dividend and financing-related equity fees, and outstanding warrants and equity awards.
• Horizon covenant compliance, interest and repayment obligations, collateral terms and the consequences of any default.
• The Nationwide license disclosure: the business discussion cites $77.5 million of milestone payments, while the financial-statement note cites $152.8 million. Investors should verify the applicable contractual amount and scope.
• Manufacturing readiness and the company’s reliance on academic partners, contract manufacturers and licensors.