Fortress Biotech, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Financial statements are unaudited. Fortress is a biopharmaceutical company with multiple development-stage subsidiaries and a controlling interest in National Holdings Corporation (National), a brokerage and financial-services business. National’s assets and liabilities are reported one quarter in arrears; its revenue and expenses included for Q3 2017 relate to the quarter ended June 30, 2017.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net revenue | $46.9 million | $1.0 million | $142.3 million | $3.9 million |
| Operating loss | $32.6 million | $16.2 million | $73.4 million | $46.5 million |
| Net loss | $36.3 million | $17.0 million | $73.8 million | $50.0 million |
| Net loss attributable to common stockholders | $27.1 million | $13.0 million | $56.5 million | $37.7 million |
| Basic and diluted loss per share | $0.67 | $0.32 | $1.39 | $0.94 |
| Cash used in operating activities | Not presented for quarter | Not presented for quarter | $61.5 million | $27.8 million |
- Revenue mix: Nine-month revenue included $132.6 million from National, $8.3 million in product revenue (primarily Journey Medical products), and $1.4 million of related-party revenue. National’s addition following its 2016 acquisition substantially drives the year-over-year revenue increase.
- Expenses and margins: Nine-month operating expenses were $215.6 million, including $139.2 million for National and $34.7 million of R&D expense. Operating loss was about 51.6% of reported net revenue; this ratio combines materially different businesses and is not a standalone product margin.
- Cash and liquidity at September 30: Cash and cash equivalents were $110.5 million, with a further $44.1 million in short-term certificates of deposit and $16.9 million of restricted cash. Current assets were $184.1 million and current liabilities $68.4 million. These totals include National and other subsidiary balances.
- Debt: Notes payable and subsidiary convertible notes totaled $63.6 million, net of discounts. Debt increased from $28.2 million at December 31, 2016. The portfolio included 8% subordinated notes, the 12% Opus facility, and the 2.25% IDB note; the IDB note maturity was extended to August 2020. Fortress repaid its $3.6 million NSC note in July.
- Financing and cash movement: Nine-month financing cash inflows were $129.7 million, including $94.6 million from subsidiary offerings and $28.4 million gross proceeds from Fortress’s 2017 subordinated-note financing. Cash increased by $22.2 million despite $61.5 million of operating cash use and $46.0 million of investing cash use.
Material changes versus prior comparable periods
- Reported revenue and operating costs rose sharply, primarily because National was consolidated after its September 2016 acquisition; the comparison is not like-for-like. National generated $44.4 million of Q3 revenue and $132.6 million for the nine-month period, with related operating expenses of $47.7 million and $139.2 million.
- Excluding National’s reported segment, Fortress revenue grew, chiefly as Journey product revenue increased. Nine-month product revenue was $8.3 million versus $1.8 million; related-party revenue declined to $1.4 million from $2.1 million.
- Nine-month R&D increased 62% to $34.7 million, reflecting expanded clinical and preclinical programs, including Checkpoint, Mustang, Helocyte, Caelum, and newer subsidiaries. General and administrative expense rose 44% to $36.5 million, including increased staffing and commercial infrastructure, stock compensation, and a legal settlement.
- Interest expense increased to $5.3 million for nine months from $1.8 million. A $5.2 million favorable change in derivative-liability fair value partly offset expenses below operating loss; this noncash valuation change contributed to the period’s other-income result.
Outlook, commentary, risks, and unusual items
- Management expects continued substantial operating losses as development and clinical-trial activity expands; it cautions that current candidates may never be successfully developed or commercialized. Management said cash and anticipated proceeds from the preferred offering were expected to fund operations for at least 12 months, while warning that additional capital may be needed and may not be available on acceptable terms.
- On November 6, 2017, Fortress priced an offering of 1.0 million shares of 9.375% Series A cumulative redeemable perpetual preferred stock at $25 per share, for expected gross proceeds of $25 million. Closing was expected November 14, subject to customary conditions; the filing does not report the closing result.
- Development milestones include Avenue’s first Phase 3 patient dosing in September 2017, with topline data anticipated in Q2 2018, and Checkpoint’s first patient dosing in a Phase 1 CK-301 study in October. Mustang’s CD20 Phase 1/2 trial began in Q4 2017. Mustang also signed a facility lease in October, with production operations expected in 2018 and planned improvements of about $3.5 million.
- Unusual items include a $2.2 million accrued legal settlement expense related to delivery of 200,000 Mustang shares; Mustang also paid $0.2 million in cash in November. A separate $0.3 million investment in a migraine-device company was written off after a clinical trial failed to show strong statistical evidence of benefit and the company ceased operations.
- Key risks include development, clinical-trial, regulatory, manufacturing, commercialization, reimbursement, intellectual-property, and financing uncertainty; potential dilution and debt obligations; National’s brokerage regulatory, credit, and litigation exposures; and related-party transactions and conflicts. The filing also notes customer concentration in product revenue and broker-dealer restrictions that may limit transfers of subsidiary funds.
Most important facts for investors to verify
- Whether the preferred-stock offering closed as planned, its net proceeds, and the resulting preferred dividend and redemption terms.
- Cash runway and expected funding needs, taking account of $61.5 million of nine-month operating cash use, restricted cash, subsidiary cash restrictions, and future debt service.
- National’s standalone performance and the effect of the one-quarter reporting lag when comparing consolidated periods.
- Clinical and regulatory progress, timelines, and funding requirements for key programs, especially Avenue, Checkpoint, and Mustang.
- Debt terms, financing costs, potential warrant and equity dilution, and the extent to which related-party placement and management arrangements affect Fortress and its subsidiaries.