Fortress Biotech, Inc. — 2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015; filed March 15, 2016. This is an annual report, not a quarterly filing. Fortress shifted toward a portfolio model, acquiring and developing products through controlled subsidiaries. Most programs remained in development, and the company reported no product-sales revenue.
Financial performance and position
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $0.863 million | $0 |
| Operating expenses | $51.394 million | $20.652 million |
| Operating loss | $50.531 million | $20.652 million |
| Net loss | $53.883 million | $20.386 million |
| Net loss attributable to common stockholders | $48.428 million; $1.24 per share | $20.386 million; $0.56 per share |
| Cash used in operating activities | $20.378 million | $16.334 million |
| Cash and cash equivalents at year-end | $98.182 million | $49.759 million |
| Total assets | $118.610 million | $89.325 million |
| Long-term notes payable, net | $23.174 million | $14.003 million |
2015 revenue comprised $0.590 million from a related-party collaboration with TG Therapeutics and $0.273 million from other sources, including Journey Medical’s co-promotion activity. With revenue still limited and losses substantial, the filing does not provide a meaningful positive operating margin.
Cash used in investing activities was $7.885 million provided, principally reflecting net proceeds from maturities of marketable securities. Financing activities provided $60.916 million, mainly from Checkpoint’s offering and Fortress’s $10 million NSC note. Cash rose by $48.423 million during the year. Of year-end cash, $50.4 million was attributed to Checkpoint; a further $14.586 million was restricted, including $14.0 million pledged against the IDB loan. Current assets were $99.779 million and current liabilities were $10.579 million.
Debt included approximately $14.0 million owed to IDB, secured by a $15.0 million money-market account, and a $10.0 million NSC note. The IDB note bore 2.25% interest and was due in February 2017; the NSC note bore 8% stated interest and was due in 2018. The filing gives differing estimates of the NSC note’s effective interest rate: approximately 11.3% in the liquidity discussion and approximately 14.0% in the debt note.
Material changes versus 2014
- Revenue began in 2015, but remained small. Operating expenses rose 149%, including $11.408 million expensed for acquired licenses, higher R&D and subsidiary activity, and increased general and administrative costs.
- R&D expense excluding acquired licenses increased 80% to $18.402 million; general and administrative expense more than doubled to $21.584 million. Stock-based compensation rose to $14.291 million from $5.546 million.
- Net loss increased to $53.883 million from $20.386 million. The 2015 result also included a $1.675 million investment fair-value loss and a $0.438 million subsidiary warrant-liability charge. $5.455 million of loss was attributed to non-controlling interests.
- Checkpoint raised $57.8 million gross, approximately $51.5 million net, in private placements. Fortress’s ownership fell to 37.7%, but it retained voting control through super-voting shares and continued to consolidate Checkpoint.
Business, outlook, risks and unusual items
- Portfolio and development: Key programs included Avenue’s IV tramadol; Checkpoint’s EGFR and PARP inhibitors and Dana-Farber antibodies; Mustang’s CAR-T programs; Helocyte’s CMV vaccines; Coronado SO’s topical uracil; and Escala’s ManNAc. CNDO-109 remained in a Phase 1/2 AML study. The filing anticipated clinical starts for certain Checkpoint programs in 2016; these are expectations, not assured milestones.
- Discontinued program: Fortress stopped developing TSO in April 2015 after preliminary Phase 2A autism-trial analysis showed no signal of activity. A related potential $2.7 million payment to Dr. Falk Pharma was accrued although Fortress disputed that payment was due. Fortress also reported an approximately $1.0 million German court judgment involving Ovamed and was evaluating enforceability; it had accrued $1.5 million for manufacturing rights owed to Ovamed.
- Management outlook: Fortress expected continued substantial operating losses and R&D spending, and anticipated higher G&A costs as the portfolio and infrastructure expanded. Management stated that cash and cash equivalents at year-end were expected to fund normal-course operations for at least 12 months; additional capital may be needed thereafter or sooner if plans or requirements change.
- Liquidity and commitments: Contractual obligations totaled $64.709 million, including debt and interest, leases, projected sublicense fees and purchase obligations. The New York office lease carries a stated $40.7 million total obligation, partly offset by desk-space agreements; the filing’s contractual-obligations table reports operating leases of $17.783 million after reflecting arrangements. Most open purchase orders were cancellable without significant penalty.
- Principal risks: The company and subsidiaries had limited operating histories, no product-sales revenue, accumulated deficit of $190.2 million, and dependence on external financing. Product approval, clinical outcomes, manufacturing and third-party collaboration remain uncertain. Additional equity or debt financing could dilute shareholders or constrain operations. The IDB loan is secured by cash and has default and set-off provisions.
- Other items: Related-party dealings include TGTX collaboration revenue, shared office arrangements and management-services agreements with subsidiaries. Fortress reported audited financial statements with an unqualified opinion and management and auditor conclusions that internal control over financial reporting was effective. No material litigation affecting financial position or results was identified in the main legal-proceedings disclosure, alongside the separately disclosed Ovamed judgment.
Important facts for investors to verify
- How much of reported cash is available to Fortress itself versus subsidiaries, and what cash is restricted, pledged or otherwise committed?
- What is the correct effective interest rate and repayment exposure for the NSC note, including subsidiary allocations, guarantees and warrants?
- What is the current status and potential financial impact of the Ovamed judgment, the accrued Ovamed obligation and the disputed Dr. Falk payment?
- Have the anticipated 2016 clinical starts, trials and product launches occurred, and what financing will be required to advance the portfolio?
- How do related-party arrangements, subsidiary management fees, ownership dilution and Fortress’s continuing voting control affect cash flows and common-stockholders’ interests?