Fortress Biotech, Inc. quarterly report, Q2 FY2020

Fortress Biotech, Inc. — Q2 2020 Form 10-Q

Reporting period: Three and six months ended June 30, 2020. Unaudited consolidated results include Fortress and majority-owned or controlled subsidiaries; non-controlling interests are significant. Fortress is a biopharmaceutical development company, with dermatology product sales through Journey Medical as its principal commercial revenue source.

Key financial metrics

Metric	Q2 2020	Six months 2020	Comparison
Net revenue	$9.5 million	$22.4 million	Q2 +2%; six months +42% versus 2019
Operating loss	$25.4 million	$46.9 million	Six-month loss narrowed from $57.9 million
Net loss	$28.5 million	$52.5 million	Six-month loss versus $43.7 million in 2019
Net loss attributable to common stockholders	$13.3 million; $0.19 per share	$25.7 million; $0.39 per share	Six-month loss versus $11.7 million; $0.23 per share in 2019
Operating cash flow	Not presented by quarter	$(39.3) million	Compared with $(53.6) million in 2019

Product revenue was $9.4 million in Q2 and $21.4 million for the first half, primarily from Journey’s marketed products. Related-party revenue was $42,000 and $1.0 million, respectively.
For the first half, cash and cash equivalents were $183.3 million; restricted cash was $16.6 million. Cash and restricted cash together were $199.9 million. Cash increased $46.4 million including restricted cash, supported by $88.6 million of financing cash flow.
At June 30, total current assets were $199.8 million and current liabilities $57.0 million. Total liabilities were $151.7 million; notes payable were $86.0 million net of discounts ($89.7 million before discounts). Operating lease liabilities were $25.0 million.
Stockholders’ equity was $116.9 million, including $56.4 million of non-controlling interests. Accumulated deficit was $461.9 million.
Product gross profit before sales and marketing costs was approximately $6.3 million in Q2 and $14.4 million for the first half, calculated as product revenue less cost of goods sold.

Material changes versus comparable periods

First-half product revenue rose 49%, reflecting Journey’s expanded product portfolio, including Ximino, and sales growth. Management said growth was below expectations due to COVID-19. Q2 revenue growth was partly offset by lower collaboration revenue, including the absence of a prior-year $1.0 million TGTX-related upfront licensing fee.
First-half R&D expense declined 27% to $30.6 million, mainly because Avenue’s abdominoplasty and safety studies were completed and certain Checkpoint manufacturing and clinical costs declined. Mustang R&D spending increased with headcount and clinical-development activity. License-acquisition expense rose to $1.8 million from $0.7 million.
First-half G&A increased 11% to $30.0 million, including higher Journey sales and marketing costs and Fortress headcount and professional fees. Cost of goods sold rose 62% with product sales.
First-half net loss attributable to common stockholders increased to $25.7 million from $11.7 million. The 2019 comparison included an $18.5 million gain on Caelum deconsolidation; that gain did not recur in 2020.
Financing included $23.6 million net proceeds from Series A preferred stock and $32.7 million net proceeds from company and partner at-the-market offerings. Fortress issued approximately 9.3 million common shares through its ATM in the first half, at an average $2.47 per share.

Outlook, commentary, risks and unusual items

Management stated that cash and cash equivalents were sufficient to fund operations for at least the next 12 months, but additional funding will be needed to advance development, fund losses and support potential commercialization. Failure to raise acceptable financing could curtail development and expansion plans.
No quantified earnings or revenue guidance was provided. Management expects substantial losses to continue for the foreseeable future.
Pipeline milestones disclosed include Avenue’s IV tramadol NDA FDA goal date of October 10, 2020; Cyprium’s planned rolling NDA submission for CUTX-101 in Q4 2020; and Mustang’s planned XSCID trials, with topline data targeted for the second half of 2022. These are management expectations, not assured outcomes.
COVID-19 had affected Journey sales and prompted a temporary furlough of Journey’s sales force, which management said had since been reinstated. The filing describes potential further effects on clinical trials, enrollment, suppliers, regulatory reviews, staff productivity and liquidity; the long-term impact remained uncertain.
Fortress disclosed an indemnification obligation to InvaGen of up to $35 million related to Avenue representations and warranties, ending upon the Avenue merger transaction. Recovery of payments may depend on that transaction closing. Avenue’s proposed transaction depends on FDA approval and other conditions.
Other notable items include the 9.375% Series A preferred stock, which has cumulative dividends; a $413,000 Cyprium warrant liability arising from a fair-value change; and further potential dilution from equity plans and registered offerings. Legal proceedings were reported as none.
Management concluded disclosure controls were effective as of June 30, 2020 and reported no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

Whether cash resources and planned financing remain adequate against operating cash use, debt maturities and development commitments.
Journey’s product sales, margins, customer concentration and COVID-19 effects, as well as reliance on third-party manufacturers.
Progress and regulatory outcomes for IV tramadol, CUTX-101 and Mustang’s XSCID programs, including trial timing and funding needs.
Potential dilution from common-stock and preferred-stock issuance, partner-company financings and outstanding equity awards; common shares outstanding were 88,007,185 as of August 6, 2020.
The Avenue-InvaGen merger conditions and the related contingent indemnification exposure, plus other license, clinical-trial and partner-company commitments.