Fortress Biotech, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unaudited consolidated results include Fortress and its subsidiaries. Fortress is a biopharmaceutical company that acquires, develops and commercializes products through a portfolio of subsidiaries; it also began reporting two segments in Q2: Dermatology Product Sales and Pharmaceutical and Biotechnology Product Development. Amounts below are in U.S. dollars; financial statement amounts are generally in millions.
Financial results and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $2.230 | $0 | $2.890 | $0.500 |
| Product revenue | $0.981 | $0 | $1.364 | $0 |
| Related-party revenue | $1.249 | $0 | $1.526 | $0.500 |
| Gross margin dollars | $1.906 | $0 | $2.566 | $0.500 |
| Operating expenses | $17.042 | $7.762 | $32.793 | $20.333 |
| Loss from operations | $(15.136) | $(7.762) | $(30.227) | $(19.833) |
| Net loss | $(16.389) | $(6.418) | $(33.032) | $(18.953) |
| Net loss attributable to common stockholders | $(12.478) | $(6.175) | $(24.683) | $(18.231) |
| Basic and diluted loss per share | $(0.31) | $(0.16) | $(0.62) | $(0.47) |
- Q2 product cost of goods sold was $0.324 million; gross margin dollars are not operating profit and exclude substantial sales and marketing and development expenses.
- At June 30, cash and cash equivalents were $71.336 million, down from $98.182 million at year-end 2015. Restricted cash was $14.586 million, primarily securing the IDB note and a lease letter of credit. Total assets were $98.062 million; current assets were $76.552 million and current liabilities $14.337 million.
- Six-month operating cash outflow was $19.019 million, investing outflow $6.921 million and financing outflow $0.906 million, producing a $26.846 million net decrease in cash. Investing included $4.300 million for the New York office build-out.
- Debt at June 30 included a $14.009 million IDB note, $7.208 million NSC note and $1.000 million Helocyte convertible note; reported long-term notes payable, net of discount, were $21.805 million. The IDB note bears 2.25% interest, matures in February 2017 and is secured by a $15 million money-market account. The NSC note bears 8% stated interest and matures in March 2018.
- Long-term investments at fair value were $0.766 million, versus $2.485 million at December 31, 2015. A $1.719 million six-month fair-value loss was recorded, primarily reflecting the Origo investment.
Material changes versus the prior comparable periods
- Q2 revenue increased from zero to $2.230 million, reflecting initial sales of Journey Medical products and collaboration/reimbursement revenue from related party TG Therapeutics (TGTX). Six-month revenue rose by $2.390 million year over year.
- Six-month operating expenses rose 61% to $32.793 million. Research and development expense increased to $14.100 million from $4.066 million, while acquired-license expense declined to $2.143 million from $8.987 million. General and administrative expense increased to $16.550 million from $7.280 million.
- Six-month net loss widened to $33.032 million from $18.953 million. The comparison also reflects a shift from a $1.407 million investment fair-value gain in 2015 to a $1.719 million loss in 2016, and higher interest and financing expense.
- Fortress began selling Journey-branded Luxamend and Ceracade in Q2. Journey’s acne product received FDA manufacturing approval in July 2016, with sales expected in the second half of 2016.
- Cash used in operations increased to $19.019 million from $8.073 million. Financing cash flow changed from $9.387 million provided in the first half of 2015 to $0.906 million used in the first half of 2016, including repayment of $2.792 million of NSC debt.
Outlook, commentary, risks and unusual items
- Management said existing cash should fund operations for at least the next 12 months, while also warning that additional financing may be needed for development, regulatory work, operations and acquisitions. Management expects continued substantial operating losses and no assurance of significant revenue or profitability; it anticipates G&A expense will increase as the business and development activities expand. No specific financial guidance was provided.
- Fortress agreed in April 2016 to acquire National Holdings Corporation (NHLD) through a tender offer at $3.25 per share, subject to conditions including FINRA review. The filing says the offer has no financing condition or minimum tender condition. Fortress warned that broad participation could strain liquidity and require additional financing. Termination fees may be approximately $4.4 million for Fortress and $1.8 million for NHLD in specified circumstances, plus certain expense reimbursements.
- Key business risks include early-stage programs and uncertain clinical and regulatory outcomes; reliance on third-party licensors, manufacturers and research collaborators; ongoing cash burn and possible inability to obtain financing on acceptable terms; dilution; and commercial, reimbursement and competition risks. The NHLD transaction, if completed, could add material funding needs. Three customers each represented more than 10% of Q2 product revenue, and three each represented more than 10% of accounts receivable at quarter-end.
- Related-party dealings are significant: TGTX revenue and reimbursements, shared office and personnel costs, and collaboration/sub-license arrangements. The filing discloses management connections between Fortress and TGTX and other related parties; investors should assess governance and transaction terms.
- In June, Helocyte issued $1.0 million of convertible notes, guaranteed by Fortress, with conversion discounts and an offering that could raise up to $5.0 million in aggregate. The notes and embedded features are carried at fair value; associated financing fees were expensed.
- After quarter-end, Fortress transferred $3.6 million of Mustang indebtedness to its NSC note on July 5. On August 1, it agreed to settle approximately $1.9 million of Ovamed obligations with payments of $1.1 million within ten days and $0.8 million nine months later. The filing states the settlement amount relates to an obligation already recorded.
- The company reported no legal proceedings and no material change to contractual obligations outside the ordinary course. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the NHLD tender offer proceeds, how many shares are tendered, the resulting cash requirement and the availability and cost of any needed financing.
- Cash burn, restricted-cash availability, the timing and repayment terms of IDB and NSC debt, and Fortress’s stated 12-month liquidity assessment.
- Revenue quality and repeatability, including the split between Journey product sales and TGTX-related revenue, and the effect of customer concentration and related-party arrangements.
- Clinical, regulatory and commercialization progress across subsidiaries, including Avenue’s anticipated Phase 3 program, Checkpoint’s IND review and Journey’s planned acne-product launch.
- Potential dilution from common shares, subsidiary financings, convertible notes, warrants and stock-based awards; the filing lists 12.35 million potentially dilutive securities excluded from loss-per-share calculations as antidilutive.
- Terms and remaining obligations under license, milestone, royalty and sponsored-research agreements, as well as execution of the post-quarter Ovamed settlement.