Fortress Biotech, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; financial statements are unaudited. Fortress is a biopharmaceutical company with multiple development subsidiaries and a controlling interest in brokerage and financial-services company National Holdings Corporation (National). National’s assets, liabilities, revenues and expenses are consolidated on a one-quarter lag; therefore, National’s results included for the quarter ended June 30, 2017 are for the quarter ended March 31, 2017.
Key financial metrics
| Metric | Q2 2017 | Six months 2017 | Comparable 2016 |
|---|---|---|---|
| Net revenue | $50.7 million | $95.4 million | $2.2 million and $2.9 million, respectively |
| Operating loss | $23.2 million | $40.8 million | $15.1 million and $30.2 million, respectively |
| Net loss | $22.9 million | $37.5 million | $16.4 million and $33.0 million, respectively |
| Net loss attributable to common stockholders | $17.4 million | $29.3 million | $12.5 million and $24.7 million, respectively |
| Basic and diluted loss per share | $0.43 | $0.73 | $0.31 and $0.62, respectively |
All dollar amounts above are in U.S. dollars. Revenue growth primarily reflects National’s consolidation following its 2016 acquisition, rather than comparable growth in Fortress’s biopharmaceutical operations. For the first half, National contributed $88.2 million of revenue; Fortress product revenue was $6.1 million, and related-party revenue was $1.0 million. Q2 product revenue was $4.1 million. The filing does not provide a single consolidated gross-margin figure.
- Costs: First-half R&D expense was $18.8 million, up 33%; acquired-license R&D expense was $3.1 million, up 44%; and G&A was $21.4 million, up 29%. National reported $91.5 million of operating expenses for the first half.
- Cash flow: First-half operating cash use was $35.4 million and investing cash use was $21.2 million, offset by $112.6 million of financing cash inflows. Cash and cash equivalents increased $56.1 million to $144.3 million.
- Liquidity: Current assets were $190.2 million and current liabilities $53.5 million at June 30, 2017. Current assets included a $20.0 million short-term certificate of deposit; restricted cash was $15.9 million. Management said cash and access to committed credit were expected to fund operations for at least 12 months.
- Debt: Balance-sheet notes payable were $47.0 million net of $4.7 million in debt discounts; gross notes payable were $51.7 million. The company disclosed $44.0 million of debt outstanding in its risk discussion. Debt included the 8% 2017 subordinated notes, the 12% Opus facility and other notes; first-half interest expense and financing fees were $2.1 million.
- Equity and dilution: Total stockholders’ equity was $150.6 million, including $78.3 million of non-controlling interests; accumulated deficit was $274.6 million. Common shares outstanding were 50.46 million at June 30 and 50.53 million at August 9, 2017.
Material changes versus the prior comparable period
- First-half net revenue rose $92.5 million, largely because National contributed $88.2 million; National had no consolidated revenue in the 2016 comparison.
- First-half Fortress product revenue increased $4.8 million, primarily from Journey Medical branded products, while related-party revenue declined $0.5 million.
- First-half operating loss widened by $10.5 million and net loss by $4.5 million. Increased R&D, G&A and National expenses were partly offset below operating income by a $5.8 million favorable change in fair value of derivative liabilities.
- Operating cash use increased from $19.0 million to $35.4 million. Financing cash flow shifted from a $0.9 million use to $112.6 million provided, including subsidiary offerings, subordinated-note proceeds and Opus borrowings.
Outlook, commentary, risks and unusual items
- Management anticipated increasing R&D costs as development continues and increasing G&A costs to support development, business development and infrastructure. No specific revenue, earnings or product-launch guidance was provided.
- Management stated that additional financing may be required; if funding is unavailable on acceptable terms, the company may delay, curtail or eliminate development programs or alter its growth strategy. The company continues to expect substantial operating losses and does not assure future profitability.
- Avenue completed a June 30 IPO, raising approximately $34.5 million net, intended to support its first Phase 3 trial for intravenous tramadol. Avenue’s convertible debt converted upon the IPO. Subsequent to quarter-end, Avenue repaid a $3.0 million NSC note, the company repaid $0.6 million of its NSC note, and Avenue repaid a $3.8 million Fortress note.
- Fortress raised approximately $19.0 million in subordinated notes through June 30, with an 8% cash interest rate and 7% paid-in-kind interest; the placement agent, related-party National Securities Corporation, received approximately $1.9 million in fees and warrants. Such financing and equity awards may dilute shareholders.
- Key risks include clinical and regulatory failure or delay, reliance on third-party manufacturers and collaborators, need for further financing, competition, intellectual-property disputes, and the risks of acquisitions and managing a diverse group of subsidiaries. National faces ordinary-course litigation and regulatory matters whose outcomes could not be determined; Fortress reported no separate legal proceedings. The filing also notes potential conflicts from related-party arrangements.
- Fair-value changes were material: first-half derivative-liability changes produced $5.8 million of income, while investment fair-value changes caused a $0.5 million loss. These non-operating items affected reported results and cash-flow reconciliation.
- Management reported disclosure controls were effective as of June 30, 2017 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported revenue and cash generation is attributable to National, given its consolidation on a one-quarter lag and its distinct financial-services business?
- Whether Fortress and its subsidiaries can sustain development spending and meet debt, interest, licensing and milestone obligations without further financing.
- The status, timing, funding and clinical progress of key programs, including Avenue’s Phase 3 plans and the subsidiaries’ other clinical-stage candidates.
- The terms, restrictions and potential dilution associated with debt, warrants, subsidiary offerings and related-party placement-agent arrangements.
- The underlying assumptions and potential volatility of Level 3 fair-value measurements, and the resolution and financial exposure of National’s legal and regulatory matters.