Fortress Biotech, Inc. annual report, FY2017

Fortress Biotech, Inc. — FY2017 Form 10-K

Reporting period: Fiscal year ended December 31, 2017. Although the request refers to 2017 Q4, this is an annual filing; fourth-quarter figures are unaudited. Fortress is a biopharmaceutical company that develops products through subsidiaries and also controls National Holdings Corporation, a financial-services business. National’s results are included on a one-quarter lag.

Financial results and liquidity

Metric	FY2017	FY2016
Net revenue	$187.6 million	$16.5 million
Operating loss	$101.2 million	$65.7 million
Net loss	$99.8 million	$71.3 million
Net loss attributable to common stockholders	$66.9 million; $1.61 per share	$55.1 million; $1.38 per share
Cash used in operating activities	$85.4 million	$45.8 million

FY2017 revenue comprised $170.3 million from National, $15.5 million in product revenue (primarily Journey Medical), and $1.7 million of related-party revenue. National’s brokerage and financial-services revenue makes consolidated revenue and margins difficult to compare with a biopharmaceutical-only business.
Revenue was up 1,038% year over year, largely reflecting a full year of National results versus only a partial post-acquisition period in 2016. Fortress product revenue increased 333%, primarily from Targadox sales.
Research and development expense was $48.3 million, up 63%; general and administrative expense was $50.9 million, up 50%. The filing reports no consolidated profit or margin measure that is directly comparable across the changed business mix.
At year-end, total assets were $246.0 million, current assets $183.2 million, current liabilities $67.4 million, and stockholders’ equity $120.5 million. Cash and cash equivalents were $113.9 million; short-term certificates of deposit were $36.0 million; restricted cash was $17.4 million.
Gross debt outstanding was $67.5 million; notes payable were reported net of discounts at $66.5 million. Debt included $28.4 million of 8% subordinated notes, a $14.9 million IDB note, and $9.5 million outstanding under a 12% Opus facility. Restricted cash included $14.9 million pledged against the IDB note.
Financing activities provided $154.2 million in 2017, including subsidiary offerings, the subordinated note financing, and $22.2 million net proceeds from a preferred-stock offering. The 9.375% Series A preferred stock carries cumulative dividends; $0.3 million was paid in 2017.
For Q4 2017, revenue was $45.3 million, operating expenses were $73.2 million, and net loss attributable to common stockholders was $10.4 million, or $0.25 per share.

Material changes and operating developments

Fortress acquired control of National in September 2016; FY2017 included a full year of National results, while FY2016 included only a partial period. National’s reported FY2017 figures cover October 2016 through September 2017 because of the reporting lag.
Fortress and its subsidiaries expanded clinical and commercial activity. Avenue began Phase 3 trials of IV tramadol; Checkpoint started a Phase 1 study of CK-301; Caelum reported Phase 1a/1b data for CAEL-101; Cellvation received FDA RMAT designation for CEVA101; and Mustang expanded its CAR-T pipeline and planned a Worcester manufacturing facility.
Journey’s product sales increased substantially, primarily due to Targadox. Avenue and Checkpoint completed public offerings, and Mustang raised capital through private placements.
The company’s common-stock loss per share widened to $1.61 from $1.38, while total net loss increased to $99.8 million. The reported net loss included a non-cash $8.4 million gain from changes in derivative-liability fair value.

Outlook, risks, and unusual items

Management said available cash and cash equivalents were expected to fund operations for at least 12 months; the financial-statement note describes current cash and cash equivalents as sufficient through March 2019. Fortress expects continued substantial losses and additional funding needs to develop its pipeline and support operations.
Management identified clinical and regulatory uncertainty, financing requirements, dependence on third-party manufacturers and research partners, intellectual-property and licensing risks, competition, and the ability to commercialize products as significant risks. Most pipeline programs remained in development and were not established sources of product revenue.
Fortress appealed an August 2017 German judgment awarding Dr. Falk Pharma EUR 2.5 million plus interest. The company recorded a related liability of approximately $3.0 million at year-end. Separately, the Tang litigation was settled in November 2017; the recorded settlement expense was approximately $2.2 million, including shares and cash.
National is subject to broker-dealer capital rules and ongoing litigation and regulatory matters. Its broker-dealer subsidiaries’ excess capital and dividend restrictions should be considered when assessing parent-company liquidity.
After year-end, Fortress raised $6.5 million in subordinated notes, Checkpoint completed an offering with approximately $20.9 million net proceeds, and the Opus facility maturity was extended to September 2019. Helocyte discontinued PepVax development in the first quarter of 2018.
The independent auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective.

Important facts for investors to verify

How much of reported revenue and cash is generated or held by National and subsidiaries, and what amounts are practically available to Fortress for corporate needs.
Cash runway assumptions against operating cash use of $85.4 million, committed development and lease spending, restricted cash, and debt maturities and interest costs.
Clinical timelines and outcomes, particularly Avenue’s Phase 3 IV tramadol program and the development progress and funding needs of major subsidiary programs.
The appeal status and ultimate cost of the Dr. Falk judgment, and the adequacy of reserves for National’s legal and regulatory matters.
Potential dilution from equity offerings, warrants, stock compensation, and the 9.375% cumulative preferred dividend obligation.