Fortress Biotech, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Unaudited consolidated results include Fortress’s subsidiaries. The company describes itself primarily as a biopharmaceutical developer, and acquired a controlling interest in brokerage firm National Holdings Corporation (National) on September 9, 2016. National’s results were not included in reported operations because Fortress used a three-month reporting lag.
Financial performance and position
| Metric | Q3 2016 | Nine months 2016 |
|---|---|---|
| Revenue | $0.975 million | $3.865 million |
| Gross profit | $0.934 million | $3.500 million |
| Operating loss | $16.246 million | $46.473 million |
| Net loss | $16.956 million | $49.988 million |
| Net loss attributable to common stockholders | $12.981 million | $37.664 million |
| Loss per common share, basic and diluted | $0.32 | $0.94 |
Revenue consisted of product sales and related-party collaboration revenue: for the nine months, $1.793 million and $2.072 million, respectively. Product sales came from Journey Medical Corporation (JMC); collaboration revenue was primarily from TG Therapeutics arrangements with Checkpoint Therapeutics. National generated no revenue included in reported results through September 30.
For the nine months, research and development expense was $21.416 million, license-acquisition expense was $3.143 million, and general and administrative expense was $25.414 million. The filing does not provide a standalone operating margin; reported gross profit was $3.500 million against $49.973 million in total operating expenses.
| Balance-sheet / cash-flow item | Amount |
|---|---|
| Cash and cash equivalents, September 30 | $82.537 million |
| Restricted cash | $15.859 million |
| Current assets / current liabilities | $98.583 million / $38.593 million |
| Total assets / total liabilities | $145.421 million / $70.580 million |
| Cash used in operating activities, nine months | $27.842 million |
| Cash used in investing activities, nine months | $4.755 million |
| Cash provided by financing activities, nine months | $16.952 million |
Cash and cash equivalents declined by $15.645 million from year-end 2015. Restricted cash includes approximately $15.5 million collateralizing the IDB note and a lease letter of credit.
Debt at September 30 included IDB principal of $14.929 million, NSC debt of $7.208 million, a Helocyte convertible note with a reported fair value of $3.031 million, and $5.000 million drawn under the Opus facility. The debt table reports $30.168 million gross and $27.404 million net of discounts. The IDB note is secured by approximately $15.0 million in a money-market account; Opus debt is secured by shares in certain subsidiaries. The Opus facility permits borrowings up to $25 million.
Changes versus comparable periods
- For Q3, revenue rose from $25,000 to $975,000, while net loss narrowed from $19.855 million to $16.956 million. Common-stockholder loss narrowed from $18.161 million to $12.981 million.
- For the nine months, revenue increased from $525,000 to $3.865 million, but operating loss widened from $37.905 million to $46.473 million and net loss increased from $38.808 million to $49.988 million. Common-stockholder loss rose more modestly, from $36.392 million to $37.664 million.
- Nine-month R&D expense increased 63% and G&A increased 77%; license-acquisition expense declined 71%. Management cited increased subsidiary development, staffing, professional fees, New York office costs and the National tender offer, among other factors.
- Operating cash use increased from $13.316 million to $27.842 million. Investing cash use fell substantially year over year, in part because prior-year marketable-security purchases were not repeated and because the National acquisition brought in net cash.
Outlook, developments and risks
- Management said existing cash was sufficient to fund operations for at least the next 12 months, but expected substantial losses to continue and stated that additional capital may be needed. It warned that unavailable or unacceptable financing could force delays or cuts to development programs and growth plans. No revenue or earnings guidance was provided.
- National was acquired for approximately $22.9 million in cash for about 56% ownership. The preliminary purchase accounting included $21.739 million of goodwill, not expected to be tax-deductible; the allocation remained subject to finalization. Pro forma results, assuming acquisition at the start of 2015, are not the same as reported results.
- Pipeline and commercial developments included Checkpoint’s EGFR inhibitor entering a Phase 1/2 trial after FDA acceptance of its IND; Avenue’s completion of a pharmacokinetics study and FDA end-of-Phase-2 meeting for IV tramadol; and JMC’s launch of Luxamend and Ceracade, with Targadox sales beginning in October 2016. The filing describes these development and commercialization plans as forward-looking.
- After quarter-end, Mustang raised $7.1 million gross in an October private placement; Helocyte raised $1.0 million gross in an October note closing; and Cellvation entered into license agreements with a $300,000 upfront fee and an equity grant to the licensor.
- Key risks include ongoing cash burn, dependence on future financing, clinical and regulatory uncertainty, reliance on third-party collaborators and manufacturers, dilution, and the possibility that products will not be commercialized. National faces legal and regulatory proceedings; management said outcomes could not be determined, while stating that matters assessed as probable and estimable were not expected to be material in aggregate.
- Related-party arrangements are significant: the Opus facility is with an affiliate of entities connected to senior Fortress officers, and Checkpoint collaboration revenue includes arrangements with TGTX, whose leadership overlaps with Fortress and Checkpoint leadership. The filing reports that disinterested directors approved the Opus transaction.
Fortress reported effective disclosure controls and procedures as of September 30, 2016, and no material change in internal control over financial reporting during the quarter. It reported no Fortress legal proceedings in Part II, while separately disclosing National proceedings in the notes.
Investor verification points
- Assess cash runway using the operating cash burn, restricted cash, debt service and the timing and availability of additional financing.
- Review debt maturities, collateral, conversion and warrant terms, and the potential dilution from the Opus facility and subsidiary financings.
- Track National’s actual consolidated contribution after the three-month reporting lag, and the final acquisition accounting and goodwill valuation.
- Verify clinical, regulatory and sales milestones for the pipeline and JMC products against subsequent filings; the filing provides no quantified revenue guidance.
- Examine the terms, governance and economic effects of related-party arrangements, including TGTX collaborations and the Opus financing.
- Monitor National’s legal and regulatory matters and any changes in accrued liabilities or management’s assessment of potential losses.