Fortress Biotech, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Financial statements are unaudited. Fortress, formerly Coronado Biosciences, is a biopharmaceutical company building a portfolio of product candidates through its own programs and consolidated subsidiaries (“Fortress Companies”).
Financial results and liquidity
Amounts below are in millions of dollars, except per-share data.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $0.025 | $0 | $0.525 | $0 |
| Operating expenses | $18.097 | $4.346 | $38.430 | $15.691 |
| Operating loss | $(18.072) | $(4.346) | $(37.905) | $(15.691) |
| Net loss | $(19.855) | $(4.592) | $(38.808) | $(16.673) |
| Net loss attributable to common stockholders | $(18.161) | $(4.592) | $(36.392) | $(16.673) |
| Basic and diluted loss per share | $(0.46) | $(0.13) | $(0.93) | $(0.46) |
- Revenue arose from Checkpoint’s collaboration with TG Therapeutics (TGTX), an affiliated entity. Revenue was immaterial relative to expenses; the filing does not present a meaningful gross margin.
- Research and development was $9.1 million in Q3 and $13.2 million for nine months; acquired-license R&D charges were $1.9 million and $10.9 million, respectively. General and administrative expense was $7.1 million and $14.4 million. Stock-based compensation totaled $8.5 million in Q3 and $11.9 million for nine months.
- Cash used in operations was $23.2 million for nine months, versus $12.8 million in the prior-year period. Investing used $21.4 million, including $20.0 million to purchase marketable securities; financing provided $20.5 million. Cash and cash equivalents declined $24.2 million to $25.6 million.
- At September 30, cash and cash equivalents were $25.6 million, current marketable securities $40.0 million, and restricted cash $14.6 million. Restricted cash secures the $14.0 million IDB Note and a $0.6 million lease letter of credit. Current assets were $66.6 million and current liabilities $8.5 million.
- Long-term notes had $24.0 million principal outstanding, reported net at $23.3 million: the $14.0 million IDB Note at 2.25% due February 2017 and the $10.0 million NSC Note at 8% due March 2018. The NSC Note’s effective interest rate is approximately 11.3% after issuance costs.
Material changes versus prior periods
- Q3 net loss increased to $19.9 million from $4.6 million; nine-month net loss increased to $38.8 million from $16.7 million. Higher R&D, acquired-license charges, G&A, stock compensation, and Q3 investment fair-value loss contributed.
- Revenue began in 2015: $0.5 million for nine months, primarily from the TGTX collaboration. Minority investors’ share of subsidiary losses was $1.7 million in Q3 and $2.4 million for nine months; accordingly, common-stockholder loss was lower than consolidated net loss.
- Cash declined from $49.8 million at year-end 2014 to $25.6 million, while marketable securities rose from $20.0 million to $40.0 million. The company raised $10.0 million through the NSC Note and its subsidiary received $12.6 million gross in the first tranche of a private placement, with approximately $1.5 million of associated costs.
- Fortress expanded its development portfolio through licenses and subsidiary formation, including IV Tramadol, CAR-T, immuno-oncology antibodies, CMV vaccines, a Hand-Foot Syndrome treatment, and ManNAc. A $1.25 million dermatology-product license payment is recorded as an intangible asset; sales had not begun by quarter-end.
Outlook, commentary and risks
- Management said current cash was expected to fund operations for at least the next 12 months, but also anticipated substantial losses and rising R&D and G&A costs. Additional financing may be required; funding may not be available on acceptable terms, potentially delaying or curtailing programs and the growth strategy.
- Checkpoint expected clinical trials for its immuno-oncology antibody programs to begin in the second half of 2016 and for its EGFR-inhibitor program in the first half of 2016. These were expectations, not assurances.
- Fortress discontinued TSO development and terminated its trials after preliminary pediatric autism-trial analysis showed no signal of activity. TSO supplier Ovamed had filed for insolvency. The company recorded a $1.5 million accrued obligation for manufacturing rights; its payment status and recovery prospects warrant attention.
- Fortress accrued approximately $2.8 million for a Dr. Falk Pharma clinical study report after receiving notice it was available. Fortress disputes the report’s adequacy and says it does not believe payment is due; the recorded liability remains a contingency.
- Q3 included a $1.5 million decrease in the fair value of the CB Pharma investment. Level 3 investments totaled approximately $4.1 million at quarter-end and depend on valuation assumptions.
- Potential dilution and compensation costs are notable: nine-month stock-based compensation was $11.9 million, and potentially dilutive securities were excluded from diluted loss per share as anti-dilutive. Fortress reported effective disclosure controls and no material change in internal control during the quarter; no legal proceedings or risk-factor updates were reported in this filing.
- Subsequent to quarter-end, a subsidiary closed a second private-placement tranche on October 30, 2015, raising approximately $12.6 million gross with approximately $1.3 million in costs. Fortress also paid an additional $50,000 to fund CB Pharma in October.
Investor verification priorities
- Confirm the timing, net proceeds, restrictions, and use of both subsidiary private-placement tranches, and whether Fortress’s stated 12-month runway remains supported by cash burn.
- Review the terms, guarantees, repayment schedules, and subsidiary allocations of the IDB and NSC debt, including restricted-cash requirements and NSC-related warrants.
- Track resolution of the disputed $2.8 million Falk liability and the $1.5 million Ovamed obligation following supplier insolvency and TSO discontinuation.
- Assess the basis for Level 3 investment valuations, particularly CB Pharma, and the effect of valuation changes on reported earnings.
- Verify clinical, regulatory, and commercialization milestones for the new portfolio, including the expected trials and dermatology-product launch, alongside further licensing commitments and dilution from subsidiary equity awards.
- Evaluate related-party governance and economics involving TGTX, including the collaboration revenue, shared services, and overlapping executive relationships.