Fortress Biotech, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Fortress is a biopharmaceutical company with product-development subsidiaries and a controlling interest in National Holdings, a brokerage and financial-services company. Results include National, acquired in September 2016, so the prior-year comparison is not like-for-like.
Financial results and position
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Net revenue | $44.7 million | $0.7 million |
| Operating loss | $17.6 million | $15.1 million |
| Net loss | $14.6 million | $16.6 million |
| Net loss attributable to common stockholders | $12.0 million; $0.30 per share | $12.2 million; $0.31 per share |
| Cash used in operating activities | $11.5 million | $11.6 million |
| Cash and cash equivalents | $134.0 million | $88.3 million at Dec. 31, 2016 |
| Total assets / liabilities | $211.9 million / $85.6 million | $170.7 million / $87.8 million at Dec. 31, 2016 |
| Notes payable, net | $33.0 million | $28.2 million at Dec. 31, 2016 |
- National generated $41.9 million of revenue and incurred $43.1 million of operating expenses. Fortress revenue was $2.8 million, including $2.1 million of product revenue and $0.7 million of related-party collaboration revenue.
- Total operating expenses were $62.3 million, including $8.4 million in research and development and $10.3 million in Fortress general and administrative costs. National contributed substantially to consolidated revenue and expenses; consolidated operating loss was $17.6 million, or about 39% of revenue.
- Other income included a $4.3 million favorable change in fair value of derivative liabilities, partly offset by a $0.7 million investment fair-value loss and $0.7 million of interest expense. The fair-value gain materially reduced reported net loss and is not operating cash generation.
- Financing cash inflows were $58.2 million, mainly from Mustang’s private placements, subordinated notes and the Opus facility. Investing cash outflow was $0.9 million; cash increased $45.7 million during the quarter.
- Current assets were $151.8 million and current liabilities $52.8 million. Restricted cash of $15.9 million is reported separately. The $14.9 million IDB note is secured by a $15.0 million pledge account.
Material changes and financing
- Revenue rose by $44.0 million, primarily because National was consolidated for Q1 2017 but had no revenue in the 2016 comparison. Fortress product revenue also increased, reflecting Journey branded-product sales.
- Operating loss widened by $2.5 million. Fortress operating expenses rose 21%, including higher G&A and newly expensed license costs; National’s expenses were absent from the prior-year quarter.
- Mustang raised $55.9 million gross in Q1 private placements. Fortress also received $3.25 million under subordinated notes and $2.0 million under the Opus facility. After quarter-end, a May 1 closing raised a further $8.55 million gross under the subordinated-note financing.
- The subordinated notes bear 8% cash interest plus 7% paid-in-kind interest, mature in 2020 subject to extension options, and have a stated financing capacity of at least $3.0 million and up to $40.0 million (potentially $50.0 million). Placement-agent fees and warrants apply.
Outlook, risks and other notable items
- Management stated that cash, including access to committed credit lines, was expected to fund operations for at least 12 months. The company also said it expects substantial losses for the foreseeable future and may need additional financing; no revenue or profitability guidance was provided.
- At March 31, $16.0 million remained available under the Opus facility, with outstanding borrowings maturing in September 2018. The IDB note matures in February 2018; the pledged cash substantially secures it.
- Key risks include early-stage drug development and regulatory uncertainty, ongoing cash burn and dependence on external financing, potential dilution, reliance on licensors and collaborators, and commercialization and reimbursement challenges. National also faces securities-industry regulatory, counterparty and litigation risks.
- National had pending and threatened arbitrations, administrative matters and lawsuits; the company said outcomes and potential losses could not be determined. Fortress reported no separate legal proceedings in Part II.
- Related-party arrangements include National acting as placement agent for Fortress financing and collaboration, shared-services and other arrangements involving TGTX and individuals with roles at both entities. These warrant attention when assessing governance and transaction terms.
- Management reported disclosure controls and procedures effective as of March 31, 2017, and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How much of reported cash is unrestricted and available to Fortress and its development subsidiaries, given restricted cash and regulatory limits on broker-dealer subsidiary transfers.
- Whether National’s revenue and operating costs produce sustainable earnings and cash flow; its inclusion makes year-over-year consolidated revenue growth misleading without a comparable basis.
- The effect of noncash derivative fair-value movements on reported losses, including the National warrants and other Level 3 valuations.
- Future financing needs, the terms and dilution from subordinated notes and warrants, and the availability and conditions of remaining credit capacity.
- Clinical, regulatory and funding milestones across subsidiaries, and potential obligations under licenses, research agreements and milestone commitments.