Fortress Biotech, Inc. quarterly report, Q2 FY2015

Fortress Biotech, Inc. — Q2 2015 Form 10-Q

Reporting period: Three and six months ended June 30, 2015; unaudited. Fortress, formerly Coronado Biosciences, changed its name on April 27, 2015. It operates a portfolio of early-stage biotechnology and pharmaceutical programs through subsidiaries.

Financial results and liquidity

Metric	Q2 2015	Q2 2014	First six months 2015	First six months 2014
Revenue	$0	$0	$0.5 million	$0
Operating expenses	$7.8 million	$4.8 million	$20.3 million	$11.3 million
Operating loss	$7.8 million	$4.8 million	$19.8 million	$11.3 million
Net loss attributable to common stockholders	$6.2 million	$4.7 million	$18.2 million	$12.1 million
Loss per share	$0.16	$0.13	$0.47	$0.34
Net cash used in operating activities	Not stated by quarter	Not stated by quarter	$16.7 million*	$10.1 million

First-half revenue was a $0.5 million upfront license fee from Checkpoint’s collaboration with TG Therapeutics. No revenue was reported for Q2; margins are not meaningful at this revenue level.
At June 30, cash and cash equivalents were $41.0 million, marketable securities $20.0 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 $62.0 million and current liabilities $5.0 million. Total liabilities were $28.5 million. Notes payable were $24.0 million gross and $23.2 million net of discount: $14.0 million under the IDB note and a $10.0 million NSC note.
Cash and cash equivalents fell $8.7 million during the first half. Financing provided $9.4 million, primarily from the NSC note, partly offset by issuance costs. The filing reports no material effect from a hypothetical 100-basis-point interest-rate change.
Fortress reported an accumulated deficit of $160.0 million. Its weighted-average basic and diluted shares were 39.1 million for Q2 and 38.8 million for the first half; 46.8 million shares were outstanding as of August 7.

Material changes versus comparable periods

First-half net loss attributable to common stockholders increased $6.2 million year over year. Operating expenses rose 79%, including $9.0 million of acquired-license R&D costs and a 62% increase in general and administrative expense.
Q2 operating expenses increased 63% year over year, primarily reflecting license costs and higher G&A. Management attributed higher G&A chiefly to building Journey Medical’s sales and marketing infrastructure and increased business-development and legal costs.
Regular R&D expense fell 41% year over year in the first half, mainly because TSO development was wound down and 2014 included higher trial, manufacturing, and personnel costs. This reduction was more than offset by new license-acquisition expense.
Other income included a $1.4 million first-half fair-value gain on the CB Pharma investment ($1.6 million in Q2). The investment was valued using Level 3 inputs, so reported earnings include a significant valuation estimate.
Interest expense was $0.7 million for the first half versus $1.1 million in 2014; the prior period included Hercules debt repayment-related expense, while 2015 included the NSC note.

Outlook, risks, contingencies, and unusual items

Management said existing cash was expected to fund operations for at least the next 12 months, but also expected substantial operating losses for the foreseeable future and said additional financing may be needed. Financing may not be available on acceptable terms; insufficient funds could delay or curtail programs and the growth strategy. R&D and G&A costs may rise as programs advance and the business expands.
On April 20, Fortress stopped developing TSO and terminated ongoing trials, including a Phase 2A pediatric autism trial, after preliminary data showed no signal of activity. TSO development costs declined. Supplier Ovamed had filed for insolvency; Fortress recorded a $1.5 million current obligation for manufacturing rights.
During the first half, the company and subsidiaries acquired or licensed programs including IV Tramadol, EGFR inhibitors, CAR-T technology, immuno-oncology antibodies, a Hand-Foot Syndrome treatment, and CMV vaccines. Most remain preclinical or in development; these expenditures do not establish commercial viability.
Journey Medical’s licensed acne product was approved but could not be sold until manufacturing regulatory clearance; sales were expected in late 2015 or early 2016. Checkpoint expected clinical trials to begin in the second half of 2016.
Subsequent events included Altamira’s July 2015 ManNAc license acquisition for approximately $1.3 million; July equity awards and approval of a long-term incentive plan; and notice from Falk that, upon access to a clinical study report, Fortress would record a €2.5 million (approximately $2.7 million) liability.
Checkpoint’s TG Therapeutics collaboration involves an affiliated entity: Fortress’s Executive Vice Chairman was also an executive and stockholder of TG Therapeutics. The filing also discloses a shared-services arrangement with OPPM, whose partners included Fortress executives.
The filing states there were no legal proceedings, defaults upon senior securities, or off-balance-sheet arrangements. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.

Key facts investors should verify

Cash-flow discrepancy: The cash-flow statement reports first-half operating cash use of $16.702 million and financing cash flow of $9.387 million; MD&A reports $16.676 million and $9.361 million, respectively. Confirm the correct figures against the filed financial statements.
Assess the adequacy and availability of financing against operating cash burn, planned development spending, the NSC note’s 8% stated interest and repayment terms, and the IDB note’s restricted-cash collateral.
Review the status and funding requirements of licensed programs, regulatory and clinical milestones, and whether expected product launches or trial timelines were achieved.
Evaluate the $1.4 million Level 3 CB Pharma valuation gain and the assumptions behind the investment’s reported fair value.
Confirm the timing and amount of the Falk liability, and the status of the Ovamed obligation following insolvency and the discontinuation of TSO.
Consider potential dilution: the filing lists approximately 9.6 million potentially dilutive securities excluded from diluted loss per share as anti-dilutive.

*The cash-flow table in MD&A gives $16.676 million; the financial statement gives $16.702 million. The discrepancy is preserved rather than resolved here.