Fortress Biotech, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Comparisons are with Q1 2015 unless otherwise noted. Fortress is a biopharmaceutical company developing products through itself and consolidated subsidiaries; its candidates are generally at early stages, and product sales had not commenced for its licensed intangible assets.
Financial results and position
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Total revenue | $0.66 million | $0.50 million |
| Operating expenses | $15.75 million | $12.57 million |
| Loss from operations | $15.09 million | $12.07 million |
| Net loss | $16.64 million | $12.54 million |
| Net loss attributable to common stockholders; loss per share | $12.21 million; $0.31 | $12.06 million; $0.31 |
| Net cash used in operating activities | $11.64 million | $1.91 million |
| Cash and cash equivalents | $81.42 million | $98.18 million at Dec. 31, 2015 |
| Total assets / total liabilities | $104.91 million / $34.00 million | $118.61 million / $34.34 million at Dec. 31, 2015 |
| Long-term notes payable, net of discount | $20.75 million | $23.17 million at Dec. 31, 2015 |
Revenue consisted of $0.38 million from product-related activity and $0.28 million from a related party. The filing does not present a conventional gross-profit or gross-margin measure. Q1 cash flows also included $2.70 million used in investing and $2.43 million used in financing, producing a $16.77 million net decrease in cash. Fortress had $14.59 million of restricted cash, including collateral for an approximately $14.0 million note and a lease letter of credit.
Changes versus the comparable period
- Revenue rose 32%, primarily reflecting JMC co-promotion revenue; related-party revenue declined from $0.50 million to $0.28 million.
- Research and development expense, excluding separately reported acquired-license costs, rose to $7.74 million from $1.64 million, reflecting subsidiary development and clinical research activity, including $2.0 million for Helocyte studies.
- Acquired-license expense fell to $0.08 million from $7.44 million. This offset part of the increase in other operating costs.
- General and administrative expense increased 127% to $7.93 million, with higher sales and marketing infrastructure, staffing, professional fees, rent and stock compensation.
- Fair-value investment losses increased to $0.92 million from $0.22 million, and interest expense rose to $0.62 million from $0.33 million. These contributed to the larger consolidated net loss.
- Operating cash use increased substantially; management attributed the rise primarily to higher general and administrative expenses. The 2016 financing outflow included repayment of Checkpoint’s approximately $2.8 million NSC debt.
Outlook, risks and notable items
- Management stated that existing cash was expected to fund operations for at least the next 12 months, but also expected substantial operating losses to continue and said additional financing may be needed. Funding may not be available on acceptable terms; programs could be delayed, curtailed or eliminated.
- JMC expected to begin commercializing newly licensed dermatology products in Q2 or mid-2016. Avenue completed a pharmacokinetics study for IV tramadol; Checkpoint’s antibody programs remained preclinical, with clinical trials then expected to start in 2017.
- Helocyte entered Phase 2 clinical research support agreements for PepVax and Triplex. The filing reports $2.0 million of Q1 expense and potential additional clinical milestone payments of up to $2.0 million and $3.4 million, respectively.
- On April 27, 2016, after quarter-end, Fortress agreed to acquire National Holdings Corporation (NHLD) through a tender offer at $3.25 per share, subject to conditions. The offer had no financing condition. Fortress warned that substantial tenders could strain liquidity and require additional financing; termination fees may also apply in specified circumstances.
- Other notable items include a $0.92 million Q1 fair-value decline in the CB Pharma investment and $2.29 million of office build-out spending. Management reported no material change to contractual obligations outside the ordinary course, no off-balance-sheet arrangements and no legal proceedings.
- Management reported disclosure controls as effective as of March 31, 2016 and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Cash runway and whether the stated 12-month funding expectation remains valid after the proposed NHLD transaction and planned development spending.
- The expected cash cost, financing plan, status and closing conditions of the NHLD tender offer, including potential liquidity impact and termination exposure.
- Progress, costs and regulatory timelines for the clinical and product programs, particularly Helocyte’s Phase 2 studies and JMC’s planned product launches.
- Future funding needs, debt terms and maturities, restricted-cash availability, and contingent milestone or royalty obligations.
- Key assumptions underlying Level 3 investment valuations and stock-based compensation, as well as the extent of related-party arrangements and reimbursements.