Fortress Biotech, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Fortress develops and commercializes biopharmaceutical products through subsidiaries and controls National Holdings Corporation, a brokerage and financial-services business. Period-comparability note: National’s assets and liabilities are included on a one-quarter lag, and its revenue and expenses reported for Fortress’s Q1 2018 reflect National’s quarter ended December 31, 2017. The comparison uses National’s quarter ended December 31, 2016.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net revenue | $55.4 million | $44.7 million |
| Operating loss | $35.5 million | $17.6 million |
| Net loss | $38.2 million | $14.6 million |
| Net loss attributable to common stockholders | $21.0 million | $12.0 million |
| Basic and diluted loss per share | $0.49 | $0.30 |
| Cash used in operating activities | $27.6 million | $11.5 million |
| Cash used in investing activities | $2.0 million | $0.9 million |
| Cash provided by financing activities | $39.7 million | $58.2 million |
At March 31, 2018, cash and cash equivalents were $124.0 million, short-term certificates of deposit were $37.0 million, and restricted cash was $17.4 million. Total current assets were $200.2 million and current liabilities were $79.3 million. Total assets were $265.1 million; total liabilities were $157.5 million. Debt was $87.1 million before discounts and $86.1 million net of discounts. Management stated that cash and cash equivalents were sufficient to fund operations for at least 12 months, while also anticipating a need for additional funding to advance development and other plans.
Net loss attributable to non-controlling interests was $17.2 million. Fortress’s accumulated deficit was $333.1 million. The filing does not provide a consolidated gross-margin measure; Journey’s product revenue was $5.5 million and related cost of goods sold was $1.5 million.
Material changes versus the prior comparable period
- Revenue rose 24% to $55.4 million. Journey product revenue increased $3.4 million; National revenue increased $7.6 million, led by investment banking and investment advisory. Related-party revenue declined $0.3 million.
- Operating expenses increased 46% to $90.9 million, and operating loss more than doubled. Fortress research and development expense rose to $25.0 million from $7.1 million, primarily reflecting greater activity at Avenue, Checkpoint, Mustang, and Caelum. General and administrative expense increased to $13.5 million from $10.3 million.
- National revenue and operating expenses each increased 18% to $49.5 million and $50.8 million, respectively. The segment reported a $1.3 million operating loss. Its results reflect the one-quarter reporting lag described above.
- Interest expense and financing fees rose to $2.1 million from $0.7 million. Fair-value changes in derivative liabilities shifted from $4.3 million of income to $1.1 million of expense, contributing to the larger net loss.
- Cash used in operations increased to $27.6 million. Financing provided $39.7 million, including proceeds from subsidiary offerings and the new venture notes. Cash, clearing deposits, and restricted cash together increased $10.1 million during the quarter.
Outlook, management commentary, risks, and unusual items
- Outlook: No specific revenue or earnings guidance is provided. Management expects substantial losses to continue and says additional financing may be needed; if funding is unavailable on acceptable terms, development and infrastructure plans may be curtailed.
- Financing and debt: Fortress raised $21.7 million through 2018 Venture Notes at 8% interest, generally with no principal due for the first 24 months and maturities about 36 months after issuance. The Opus facility was extended to September 2019 and continues to bear 12% interest. The filing reports $87.1 million of total debt before discounts.
- Development and commercial milestones: Checkpoint raised approximately $20.8 million net in a public offering. Its CK-301 Phase 1 dose escalation was completed and dose expansion began; initial expansion data was expected in the second half of 2018, with a first-line non-small-cell lung cancer registration trial targeted for Q1 2019. Helocyte discontinued further development of its PepVax program.
- Legal contingency: Dr. Falk Pharma obtained a German court judgment awarding EUR 2.5 million plus interest over a disputed collaboration milestone. Fortress appealed and said it intended to defend its position. The balance sheet includes a $3.1 million accrued Dr. Falk Pharma milestone; verify the relationship between the accrual and the litigation exposure.
- Other risks: The filing highlights ongoing operating losses, dependence on future financing and third-party collaborators, clinical and regulatory uncertainty, commercialization and reimbursement risks, intellectual-property disputes, and potential volatility in financial-instrument valuations. National also faces ordinary-course litigation and regulatory matters whose outcomes cannot be determined.
- Related parties and accounting: National acted as placement agent for the venture notes and received a $1.7 million fee, eliminated in consolidation. Fortress adopted ASC 606 on January 1, 2018 using the modified retrospective method; management reported no material impact on revenue.
Important facts for investors to verify
- Confirm the timing and amount of future financing needs, cash burn, and the availability and restrictions on cash, including restricted cash and subsidiary-level funds.
- Review debt terms, interest burden, maturities, covenants, and the potential dilution or subsidiary warrant issuance associated with the venture notes and other financings.
- Track clinical, regulatory, and commercial progress at Avenue, Checkpoint, Mustang, and other subsidiaries, including whether management’s stated milestones are achieved.
- Follow the Dr. Falk Pharma appeal, accrued milestone amount, and National’s litigation and regulatory exposures.
- Assess revenue concentration and period comparability, particularly the major Journey customers and National’s one-quarter reporting lag.