Fortress Biotech(FBIO) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents Fortress Biotech, Inc.'s unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Unaudited Condensed Consolidated Financial Statements This section presents Fortress Biotech, Inc.'s unaudited condensed consolidated financial statements, including the balance sheets, statements of operations, statements of changes in stockholders' equity, and statements of cash flows for the periods ended June 30, 2020, and December 31, 2019 (balance sheet), and June 30, 2020 and 2019 (income statement, equity, cash flow) Condensed Consolidated Balance Sheets The Condensed Consolidated Balance Sheets provide a snapshot of the company's financial position as of June 30, 2020, and December 31, 2019 | Metric | June 30, 2020 ($ in thousands) | December 31, 2019 ($ in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Total Assets | 268,573 | 226,422 | | Cash and Cash Equivalents | 183,278 | 136,858 | | Total Current Assets | 199,799 | 156,252 | | Total Liabilities | 151,715 | 153,890 | | Total Stockholders' Equity | 116,858 | 72,532 | Condensed Consolidated Statements of Operations The Condensed Consolidated Statements of Operations show the company's financial performance for the three and six months ended June 30, 2020 and 2019 | Metric | Three Months Ended June 30, 2020 ($ in thousands) | Three Months Ended June 30, 2019 ($ in thousands) | Six Months Ended June 30, 2020 ($ in thousands) | Six Months Ended June 30, 2019 ($ in thousands) | | :------------------------------------------ | :------------------------------------------------ | :------------------------------------------------ | :---------------------------------------------- | :---------------------------------------------- | | Net Revenue | 9,457 | 9,250 | 22,375 | 15,727 | | Product Revenue, net | 9,415 | 8,199 | 21,361 | 14,324 | | Research and Development | 15,703 | 18,511 | 30,570 | 41,784 | | Net Loss Attributable to Common Stockholders | (13,314) | (13,098) | (25,684) | (11,706) | | Net Loss per Common Share - Basic and Diluted | (0.19) | (0.24) | (0.39) | (0.23) | Condensed Consolidated Statement of Changes in Stockholders' Equity This section details the changes in stockholders' equity for the three and six months ended June 30, 2020 and 2019 | Metric | June 30, 2020 ($ in thousands) | December 31, 2019 ($ in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Total Stockholders' Equity | 116,858 | 72,532 | | Stock-based compensation expense (Six Months) | 7,148 | N/A | | Issuance of common stock for at-the-market offering, net (Six Months) | 22,083 | N/A | | Issuance of Series A preferred stock for cash, net (Six Months) | 23,503 | N/A | Condensed Consolidated Statements of Cash Flows The Condensed Consolidated Statements of Cash Flows present the cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2020 and 2019 | Cash Flow Activity | Six Months Ended June 30, 2020 ($ in thousands) | Six Months Ended June 30, 2019 ($ in thousands) | Change ($ in thousands) | Change (%) | | :----------------------------------------------------------- | :---------------------------------------------- | :---------------------------------------------- | :---------------------- | :--------- | | Net Cash Used in Operating Activities | (39,304) | (53,645) | 14,341 | -26.7% | | Net Cash Provided by (Used in) Investing Activities | (2,839) | 23,537 | (26,376) | -112.1% | | Net Cash Provided by Financing Activities | 88,563 | 114,007 | (25,444) | -22.3% | | Net Increase (Decrease) in Cash and Cash Equivalents and Restricted Cash | 46,420 | 83,899 | (37,479) | -44.7% | Notes to Condensed Consolidated Financial Statements This section provides detailed disclosures and explanations for the unaudited condensed consolidated financial statements, covering the company's organization, significant accounting policies, discontinued operations, collaboration agreements, property and equipment, fair value measurements, licenses acquired, research and clinical trial agreements, intangibles, debt, accrued liabilities, non-controlling interests, net loss per share, stockholders' equity, commitments, related party transactions, segment information, revenues, and income taxes 1. Organization and Description of Business Fortress Biotech, Inc. is a biopharmaceutical company focused on acquiring, developing, and commercializing pharmaceutical and biotechnology products through its own operations, majority-owned subsidiaries, joint ventures, and entities with significant minority ownership - Fortress Biotech is a biopharmaceutical company that acquires, develops, and commercializes products at the Fortress level, through majority-owned subsidiaries, joint ventures, and entities with significant minority ownership[43] - The company's operations are financed primarily through the sale of equity and debt securities, from the sale of partner companies, and the proceeds from the exercise of warrants and stock options[46] - Fortress expects to incur substantial losses for several years as it continues to fully develop and prepare regulatory filings and obtain regulatory approvals for its existing and new product candidates[46] - Current cash and cash equivalents are sufficient to fund operations for at least the next 12 months, but additional funding will be needed for full development and regulatory approvals[46] - The company does not expect the COVID-19 pandemic to materially impact its operations based on current assessment[46] 2. Summary of Significant Accounting Policies This section outlines the significant accounting policies, including the basis of presentation, principles of consolidation, and use of estimates for the unaudited interim condensed consolidated financial statements - Unaudited interim condensed consolidated financial statements are prepared in accordance with GAAP for interim financial information and Form 10-Q instructions[49] - The company consolidates subsidiaries where it owns less than 100% but maintains voting control, recording net loss attributable to non-controlling interests[51] - Adoption of ASU 2018-13 (Fair Value Measurement) on January 1, 2020, did not have a material impact on its condensed consolidated financial statements[57] - The company is evaluating the impact of ASU 2020-06 (Convertible Instruments), effective for fiscal years after December 15, 2023, and ASU 2019-12 (Income Taxes), effective for fiscal years after December 15, 2020[58][60] - The FASB delayed adoption of ASU 2016-13 (Credit Losses) for smaller reporting companies to calendar year 2023, and the company is assessing its impact[59] 3. Discontinued Operations This note details the cash flows from the sale of the company's investment in National Holdings Corporation (NHLD) for the six months ended June 30, 2019 | Metric | June 30, 2019 ($ in thousands) | | :------------------------------------- | :----------------------------- | | Proceeds from sale of National | 13,089 | | Total cash provided by discontinued investing activities | 13,089 | - The company had no ownership interest in National Holdings Corporation as of June 30, 2020, and 2019[61] 4. Collaboration and Stock Purchase Agreements This section describes key collaboration and stock purchase agreements, including Caelum's Development, Option and Stock Purchase Agreement with Alexion, and Avenue's Stock Purchase and Merger Agreement with InvaGen - Caelum entered a Development, Option and Stock Purchase Agreement with Alexion in January 2019, where Alexion purchased a 19.9% equity interest for $30 million and obtained a contingent exclusive option to acquire the remaining equity for up to $500 million[64] - An amendment in December 2019 modified Alexion's option terms, provided an additional $20 million in upfront funding, and $60 million for additional equity upon a development milestone[65] - Avenue entered a Stock Purchase and Merger Agreement with InvaGen in November 2018, where InvaGen purchased 33.3% of Avenue's fully diluted capital stock for $31.5 million[66] - InvaGen is obligated to acquire Avenue for $180 million (subject to reductions) upon FDA approval for IV Tramadol[67] - A Contingent Value Rights Agreement entitles Avenue common shareholders to contingent cash payments based on IV Tramadol net sales milestones, ranging from 10% to 20% of Gross Profit, with payments terminating by December 31, 2036[72] 5. Property and Equipment This note details Fortress' property and equipment, net of accumulated depreciation, as of June 30, 2020, and December 31, 2019 | Metric | June 30, 2020 ($ in thousands) | December 31, 2019 ($ in thousands) | | :------------------------- | :----------------------------- | :----------------------------- | | Property and equipment, net | 12,360 | 12,433 | | Total property and equipment (gross) | 17,949 | 16,919 | | Less: Accumulated depreciation | (5,589) | (4,486) | | Depreciation Expense | Three Months Ended June 30, 2020 ($ in thousands) | Three Months Ended June 30, 2019 ($ in thousands) | Six Months Ended June 30, 2020 ($ in thousands) | Six Months Ended June 30, 2019 ($ in thousands) | | :------------------- | :------------------------------------------------ | :------------------------------------------------ | :---------------------------------------------- | :---------------------------------------------- | | Depreciation expense | 600 | 500 | 1,100 | 900 | 6. Fair Value Measurements This note details the fair value measurements of Fortress' financial instruments, particularly its investment in Caelum and Cyprium warrant liability | Metric | June 30, 2020 ($ in thousands) | December 31, 2019 ($ in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Fair value of investment in Caelum | 11,148 | 11,148 | | Warrant liabilities | 413 | 27 | - The investment in Caelum was valued using a risk-free rate of return of 1.6%, volatility of 70%, and a discount for lack of marketability of 28.7%[77] - The change in fair value of derivative liability for the six months ended June 30, 2020, was $386 thousand[83] 7. Licenses Acquired This note details the costs incurred for technology licenses, which are expensed as research and development if the technology has not reached technological feasibility | Metric | Three Months Ended June 30, 2020 ($ in thousands) | Three Months Ended June 30, 2019 ($ in thousands) | Six Months Ended June 30, 2020 ($ in thousands) | Six Months Ended June 30, 2019 ($ in thousands) | | :------------------- | :------------------------------------------------ | :------------------------------------------------ | :---------------------------------------------- | :---------------------------------------------- | | Total licenses acquired expense | 1,570 | 200 | 1,820 | 650 | | Mustang | 1,300 | 200 | 1,550 | 650 | | Oncogenuity | 270 | — | 270 | — | - Oncogenuity entered a license agreement with Columbia University in May 2020, paying an upfront fee of $0.3 million and transferring 1,000,000 shares of Oncogenuity common stock (valued at $21,000)[88] - Development milestone payments for Oncogenuity's license total up to $18.0 million for the initial indication and $15.3 million for subsequent indications, plus a $15 million sales milestone and low-to mid-single digit royalties[89] 8. Sponsored Research and Clinical Trial Agreements This note summarizes expenses related to sponsored research and clinical trial agreements for various partner companies | Partner Company | Three Months Ended June 30, 2020 ($ in thousands) | Three Months Ended June 30, 2019 ($ in thousands) | Six Months Ended June 30, 2020 ($ in thousands) | Six Months Ended June 30, 2019 ($ in thousands) | | :---------------- | :------------------------------------------------ | :------------------------------------------------ | :---------------------------------------------- | :---------------------------------------------- | | Mustang Total | 2,816 | 1,670 | 4,166 | 3,265 | | Oncogenuity | 100 | — | 100 | — | - Mustang entered a clinical research and support agreement with COH in June 2020 for MB-104, with payments of $0.8 million for costs incurred and reimbursements up to $2.4 million[95] - Mustang entered a Data Transfer Agreement with St. Jude in June 2020 for XSCID (MB-107), with an upfront fee of $1.1 million paid on July 1, 2020[96] - Oncogenuity entered a clinical research and support agreement with Columbia in May 2020, with payments up to $4.8 million semiannually for five years[98] 9. Intangibles, net This note provides a summary of Journey's intangible assets, primarily product licenses, net of accumulated amortization | Metric | June 30, 2020 ($ in thousands) | December 31, 2019 ($ in thousands) | | :------------------------- | :----------------------------- | :----------------------------- | | Net intangible assets | 6,667 | 7,377 | | Accumulated amortization | (3,267) | (2,557) | | Future Amortization | Six Months Ended Dec 31, 2020 ($ in thousands) | Year Ended Dec 31, 2021 ($ in thousands) | Year Ended Dec 31, 2022 ($ in thousands) | Year Ended Dec 31, 2023 ($ in thousands) | Year Ended Dec 31, 2024 ($ in thousands) | Thereafter ($ in thousands) | Total Amortization ($ in thousands) | | :------------------ | :--------------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------------- | :---------------------------------- | | Ximino® | 509 | 1,019 | 1,019 | 1,019 | 1,019 | 1,615 | 6,200 | | Exelderm® | 200 | 267 | — | — | — | — | 467 | | Total | 709 | 1,286 | 1,019 | 1,019 | 1,019 | 1,615 | 6,667 | 10. Debt and Interest This note details the company's total debt and interest expense | Metric | June 30, 2020 ($ in thousands) | December 31, 2019 ($ in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Total notes payable, net | 85,980 | 84,656 | | Debt Type | June 30, 2020 ($ in thousands) | Interest Rate | Maturity | | :-------------------------------- | :----------------------------- | :------------ | :--------------- | | IDB Note | 14,929 | 2.25% | Aug - 2021 | | 2017 Subordinated Note Financing | 28,356 | 8.00% (9.00% in 2020) | March - 2022 to Sept - 2022 | | 2018 Venture Notes | 21,707 | 8.00% | Aug - 2021 to Sept - 2021 | | 2019 Notes | 9,000 | 12.00% | Sept - 2021 | | Mustang Horizon Notes | 15,750 | 9.00% + 1-month LIBOR > 2.5% | Oct - 2022 | | Interest Expense and Financing Fee | Three Months Ended June 30, 2020 ($ in thousands) | Three Months Ended June 30, 2019 ($ in thousands) | Six Months Ended June 30, 2020 ($ in thousands) | Six Months Ended June 30, 2019 ($ in thousands) | | :--------------------------------- | :------------------------------------------------ | :------------------------------------------------ | :---------------------------------------------- | :---------------------------------------------- | | Total Interest Expense and Financing Fee | 3,059 | 3,106 | 6,184 | 5,575 | 11. Accrued Liabilities and other Long-Term Liabilities This note provides a breakdown of accrued expenses and other long-term liabilities | Metric | June 30, 2020 ($ in thousands) | December 31, 2019 ($ in thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Total accrued expenses | 21,138 | 25,399 | | Total other long-term liabilities | 7,338 | 7,126 | | Accrued Expense Category | June 30, 2020 ($ in thousands) | | :------------------------- | :----------------------------- | | Professional fees | 1,568 | | Salaries, bonus and related benefits | 4,064 | | Research and development | 5,477 | | Accrued coupon expense | 4,630 | - Other long-term liabilities include a $5.3 million long-term note payable (net of imputed interest discount) related to Journey's Ximino acquisition as of June 30, 2020[111] 12. Non-Controlling Interests This note details the non-controlling interests (NCI) in consolidated entities, which represent the portion of equity in subsidiaries not attributable to Fortress | Metric | June 30, 2020 ($ in thousands) | December 31, 2019 ($ in thousands) | | :------------------------------------- | :----------------------------- | :----------------------------- | | Total Non-Controlling Interests in Consolidated Entities | 56,381 | 46,317 | | Net Loss Attributable to Non-Controlling Interests (Six Months) | (26,847) | (61,700) | | Partner Company | NCI Equity Share (June 30, 2020, $ in thousands) | Non-controlling Ownership (%) | | :---------------- | :----------------------------------------------- | :---------------------------- | | Mustang | 71,410 | 75.6% | | Checkpoint | 17,334 | 76.9% | - Fortress maintains voting control over Checkpoint, Avenue, and Mustang through ownership of Preferred Class A Shares or Class A Common Shares, leading to their consolidation despite less than 100% ownership[115] 13. Net Loss per Common Share This note explains the calculation of basic and diluted net loss per common share and lists potentially dilutive securities excluded from the diluted weighted-average shares outstanding calculation because their inclusion would be anti-dilutive - Basic net loss per share is calculated by dividing net loss by the weighted-average number of shares of Common Stock outstanding, and diluted net loss per share includes common stock equivalents[116] | Potentially Dilutive Security | Six Months Ended June 30, 2020 (Number of Shares) | | :---------------------------- | :------------------------------------------------ | | Warrants to purchase Common Stock | 904,037 | | Opus warrants to purchase Common Stock | 1,880,000 | | Options to purchase Common Stock | 1,210,502 | | Convertible preferred stock | 1,993,905 | | Unvested Restricted Stock | 14,306,355 | | Unvested Restricted Stock Units | 458,658 | | Total | 20,753,457 | 14. Stockholders' Equity This comprehensive note details changes in stockholders' equity, including common stock authorization, stock-based compensation, equity compensation plans, stock options, restricted stock, warrants, capital raises, and a share repurchase program Common Stock At the 2020 Annual Meeting, stockholders approved an amendment to increase the number of authorized common stock shares by 50 million to 150 million, with a par value of $0.001 per share - Authorized common stock increased by 50,000,000 shares to 150,000,000 shares with a par value of $0.001 per share, effective June 18, 2020[118] Stock-based Compensation Stock-based compensation expense for the three months ended June 30, 2020, was $3.7 million, an increase from $3.4 million in the prior year, and for the six months, it was $7.1 million, up from $6.7 million | Metric | Three Months Ended June 30, 2020 ($ in thousands) | Three Months Ended June 30, 2019 ($ in thousands) | Six Months Ended June 30, 2020 ($ in thousands) | Six Months Ended June 30, 2019 ($ in thousands) | | :--------------------------------- | :------------------------------------------------ | :------------------------------------------------ | :---------------------------------------------- | :---------------------------------------------- | | Total stock-based compensation expense | 3,748 | 3,373 | 7,148 | 6,682 | - For the six months ended June 30, 2020, approximately $1.8 million of stock-based compensation expense was included in research and development, and $5.4 million in general and administrative expenses[122] Equity Compensation Plans Shareholders approved an amendment to the 2013 Stock Incentive Plan, increasing common shares issuable by 3.0 million to 13.0 million - The 2013 Stock Incentive Plan was amended to increase common shares issuable by 3.0 million to 13.0 million[123] - As of June 30, 2020, 4.7 million shares remain to be issued under the Stock Plan[123] Stock Options As of June 30, 2020, Fortress had 1,410,501 options vested and expected to vest, with a weighted-average exercise price of $4.30 and a weighted-average remaining contractual life of 2.84 years | Metric | Number of shares | Weighted average exercise price | Weighted average remaining contractual life (years) | | :--------------------------------------- | :--------------- | :------------------------------ | :-------------------------------------------------- | | Options vested and expected to vest at June 30, 2020 | 1,410,501 | $4.30 | 2.84 | - As of June 30, 2020, Fortress had no unrecognized stock-based compensation expense related to options[125] Restricted Stock and Restricted Stock Units As of June 30, 2020, the unvested balance of restricted stock and restricted stock units was 14,015,023 shares, with a weighted-average grant price of $2.44 | Metric | Number of shares | Weighted average grant price | | :-------------------------- | :--------------- | :--------------------------- | | Unvested balance at June 30, 2020 | 14,015,023 | $2.44 | - As of June 30, 2020, the Company had unrecognized stock-based compensation expense related to restricted stock and restricted stock unit awards of approximately $17.1 million, expected to be recognized over a weighted-average vesting period of 4.0 years[128] Warrants As of June 30, 2020, Fortress had 2,841,180 outstanding warrants with a weighted-average exercise price of $3.15 and a remaining contractual life of 2.39 years | Metric | Number of shares | Weighted average exercise price | Weighted average remaining contractual life (years) | | :-------------------------- | :--------------- | :------------------------------ | :-------------------------------------------------- | | Outstanding as of June 30, 2020 | 2,841,180 | $3.15 | 2.39 | | Exercisable as of June 30, 2020 | 2,681,180 | $2.79 | 1.82 | Employee Stock Purchase Plan The Employee Stock Purchase Plan (ESPP) allows eligible employees to purchase common stock at 85% of the lower fair market value at the beginning or end of the offering period - As of June 30, 2020, 507,783 shares have been purchased under the ESPP, with 492,217 shares available for future sale[130] | Metric | Six Months Ended June 30, 2020 ($ in thousands) | | :--------------------------------- | :---------------------------------------------- | | Share-based compensation expense | 43 | Capital Raises Fortress Biotech conducted several capital raises, including two underwritten public offerings of its 9.375% Series A Cumulative Redeemable Perpetual Preferred Stock in February and May 2020, raising approximately $25.9 million in gross proceeds - In May 2020, the company closed an underwritten public offering of 555,556 shares of Series A Preferred Stock (plus option for 83,333 shares) at $18.00 per share, for gross proceeds of approximately $11.5 million[131] - In February 2020, the company closed an underwritten public offering of 625,000 shares of Series A Preferred Stock (plus option for 93,750 shares) at $20.00 per share, for gross proceeds of approximately $14.4 million[132][135] - Total gross proceeds from Series A Preferred Stock offerings as of June 30, 2020, were approximately $25.9 million[213] - For the six months ended June 30, 2020, Fortress issued approximately 9.3 million common shares through at-the-market (ATM) offerings at an average price of $2.47 per share, for gross proceeds of $23.0 million[138] - During the six months ended June 30, 2020, Mustang issued approximately 2.1 million common shares through its ATM offering for gross proceeds of $8.0 million[142] - During the six months ended June 30, 2020, Checkpoint sold 1,303,282 common shares through its ATM offering for gross proceeds of approximately $2.7 million[147] Share Repurchase Program The Board of Directors approved a share repurchase program for up to $5.0 million of the company's outstanding Preferred Stock, which concluded on May 31, 2020 - The Board of Directors approved a share repurchase program of up to $5.0 million of the Company's outstanding Preferred Stock, which ended on May 31, 2020[149] - As of June 30, 2020, 5,000 Preferred Stock shares were repurchased and retired under this program for total consideration of $0.1 million, net of fees[149] 15. Commitments and Contingencies This note outlines the company's commitments, primarily operating lease liabilities for its New York office and Mustang's cell processing facility, totaling $25.0 million as of June 30, 2020 | Metric | June 30, 2020 ($ in thousands) | | :----------------------------- | :----------------------------- | | Operating lease liabilities | 25,003 | | Right-of-use assets | 20,675 | | Lease Expense | Three Months Ended June 30, 2020 ($ in thousands) | Three Months Ended June 30, 2019 ($ in thousands) | Six Months Ended June 30, 2020 ($ in thousands) | Six Months Ended June 30, 2019 ($ in thousands) | | :-------------- | :------------------------------------------------ | :------------------------------------------------ | :---------------------------------------------- | :---------------------------------------------- | | Total lease expense | 310 | 688 | 913 | 1,085 | - The company has indemnification obligations to its officers and directors for certain events, and to clinical trial sites under certain conditions[157] - The company may be subject to both insured and uninsured litigation in the ordinary course of business[158] 16. Related Party Transactions This note details transactions with related parties, including significant ownership by the Chairman, President, CEO, and Executive Vice Chairman - The Company's Chairman, President and Chief Executive Officer, Lindsay A. Rosenwald, M.D., beneficially owned approximately 11.0% of the Company's common stock as of June 30, 2020[159] - The Company's Executive Vice Chairman, Strategic Development, Michael S. Weiss, beneficially owned approximately 11.9% of the Company's common stock as of June 30, 2020[159] - Under a shared services agreement, the Company invoiced TG Therapeutics, Inc. (TGTX) $0.2 million for both the six months ended June 30, 2020, and 2019[160] - The $9.0 million 2019 Notes (formerly Opus Credit Facility) bear 12% interest per annum and are held by DAK Capital Inc., Dr. Rosenwald, Mr. Weiss, and affiliated entities, with maturity extended to September 14, 2021[165][166] - Avenue entered a Facility Agreement in June 2020, allowing it to borrow up to $2 million from Fortress ($0.8 million commitment) and InvaGen ($1.2 million commitment) starting October 1, 2020, at a 7% annual interest rate[168] - Founders Agreements with partner companies typically include PIK dividends (2.5% of fully diluted capitalization) or annual equity fees (Checkpoint: 2.5%), and Management Services Agreements (MSAs) typically involve an annual consulting fee of $500 thousand from partner companies to Fortress[171][174] 17. Segment Information Fortress Biotech operates in two reportable segments: Dermatology Product Sales and Pharmaceutical and Biotechnology Product Development - The Company operates in two reportable segments: Dermatology Product Sales and Pharmaceutical and Biotechnology Product Development[175] | Segment | Net Revenue (Six Months Ended June 30, 2020, $ in thousands) | Segment Income (Loss) (Six Months Ended June 30, 2020, $ in thousands) | | :-------------------------------------- | :--------------------------------------------- | :--------------------------------------------------- | | Dermatology Products Sales | 21,361 | 3,667 | | Pharmaceutical and Biotechnology Product Development | 1,014 | (56,198) | | Consolidated | 22,375 | (52,531) | | Segment | Intangible Assets, net (June 30, 2020, $ in thousands) | Tangible Assets (June 30, 2020, $ in thousands) | Total Segment Assets (June 30, 2020, $ in thousands) | | :-------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :------------------------------------------- | | Dermatology Products Sales | 6,667 | 19,133 | 25,800 | | Pharmaceutical and Biotechnology Product Development | — | 242,773 | 242,773 | | Consolidated | 6,667 | 261,906 | 268,573 | 18. Revenues from Contracts and Significant Customers This note disaggregates total revenue, showing that product revenue primarily comes from Journey's five marketed dermatology products, while related party revenue is from Checkpoint's collaboration with TGTX | Revenue Type | Three Months Ended June 30, 2020 ($ in thousands) | Three Months Ended June 30, 2019 ($ in thousands) | Six Months Ended June 30, 2020 ($ in thousands) | Six Months Ended June 30, 2019 ($ in thousands) | | :-------------------- | :------------------------------------------------ | :------------------------------------------------ | :---------------------------------------------- | :---------------------------------------------- | | Product revenue, net | 9,415 | 8,199 | 21,361 | 14,324 | | Revenue – related party | 42 | 1,051 | 1,014 | 1,403 | | Net Revenue | 9,457 | 9,250 | 22,375 | 15,727 | - Product revenue is comprised of Journey's five marketed dermatology products: Targadox®, Luxamend®, Ceracade®, Exelderm® and Ximino®[184] - Related party revenue is from Checkpoint's collaboration with TG Therapeutics, Inc. (TGTX)[184] - For the six months ended June 30, 2020, one Dermatology Products customer accounted for more than 10.0% of its total gross product revenue and 12.4% of its total accounts receivable balance[185][186] 19. Income taxes This note discusses the company's income tax policies, including the recognition of deferred tax assets and liabilities and the impact of the CARES Act - The Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law on March 27, 2020, including tax provisions related to refundable payroll tax credits, deferment of employer's social security payments, net operating loss utilization, and modifications to net interest deduction limitations[187] - The company does not believe the CARES Act will have a material impact on its income tax provision for 2020[187] - The company files a consolidated income tax return with subsidiaries for which it has an 80% or greater ownership interest; other subsidiaries file separate returns[189] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Fortress Biotech's financial condition and operational results, highlighting its biopharmaceutical business model, recent product development milestones, and financial performance for the three and six months ended June 30, 2020 and 2019 Forward-Looking Statements This section contains forward-looking statements, identified by words like 'expect,' 'anticipate,' and 'intend,' which are based on current information and subject to substantial risks and uncertainties - All forward-looking statements are based on information available on the date of the report and are subject to substantial risks and uncertainties[194] - The company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995[194] - Readers should carefully consider the information under 'Risk Factors' in this Form 10-Q and the Annual Report on Form 10-K[194] Overview Fortress Biotech is a biopharmaceutical company focused on acquiring, developing, and commercializing products through its own operations and a network of majority-owned and minority-owned partner companies - Fortress Biotech is a biopharmaceutical company dedicated to acquiring, developing, and commercializing pharmaceutical and biotechnology products and product candidates[195] - The company operates at the Fortress level, through majority-owned and majority-controlled subsidiaries and joint ventures, and at entities where it maintains significant minority ownership positions[195] - Fortress has executed arrangements in partnership with leading universities, research institutes, and pharmaceutical companies, including City of Hope, Fred Hutchinson, St. Jude, and AstraZeneca[195] - Three partner companies are publicly-traded, and two have consummated strategic partnerships with Alexion Pharmaceuticals, Inc. and InvaGen Pharmaceuticals, Inc.[196] Recent Events This section highlights recent operational and corporate developments, including net revenue from marketed dermatology products, progress in late-stage product candidates, early-stage developments, and corporate activities Marketed Dermatology Products Through its partner company Journey Medical Corporation (JMC), Fortress's marketed dermatology products generated $21.4 million in net revenue during the six months ended June 30, 2020 - Marketed dermatology products generated net revenue of $21.4 million for the six months ended June 30, 2020, through Journey Medical Corporation[197] Late Stage Product Candidates Fortress's late-stage pipeline includes IV Tramadol (Avenue), CUTX-101 (Cyprium), MB-107/MB-207 (Mustang), and Cosibelimab (Checkpoint), all progressing through clinical development and regulatory milestones - IV Tramadol (Avenue) NDA submitted in December 2019, accepted by FDA in February 2020, with a Prescription Drug User Fee Act (PDUFA) goal date of October 10, 2020[198] - CUTX-101 (Cyprium) granted Rare Pediatric Disease Designation for Menkes disease in January 2020; rolling NDA submission expected in the fourth quarter of 2020[200] - MB-107 (Mustang) received Advanced Therapy Medicinal Product (ATMP) classification from EMA in April 2020 and Regenerative Medicine Advanced Therapy (RMAT) designation from FDA in August 2019 for X-linked severe combined immunodeficiency (XSCID)[201] - Mustang submitted an IND application for a multicenter Phase 2 clinical trial of MB-107 in newly diagnosed infants with XSCID, targeting topline data in the second half of 2022[202] - Mustang expects to file an IND early in Q4 2020 for MB-207, a registrational multi-center Phase 2 clinical trial in previously transplanted XSCID patients, targeting topline data in the second half of 2022[203] - Cosibelimab (Checkpoint) continues enrollment in its registration-enabling Phase 1 clinical trial for cutaneous squamous cell carcinoma (CSCC), expecting to complete enrollment near the end of 2020[204] - Checkpoint announced in April 2020 that the U.S. Patent and Trademark Office issued a composition of matter patent for Cosibelimab, providing protection through at least May 2038[205] Early Stage Product Candidates Early-stage developments include MB-106 (Mustang), a CD20-targeted CAR T cell therapy, which achieved a complete response in the first subject at the lowest dose in a Phase 1/2 trial, and ONCOlogues (Oncogenuity), a proprietary platform for genetically driven cancers, also being explored for COVID-19 treatment - MB-106 (Mustang), a CD20-targeted CAR T cell therapy, achieved a complete response at the lowest starting dose in an ongoing Phase 1/2 clinical trial for relapsed or refractory B-cell non-Hodgkin lymphomas[206] - In May 2020, Fortress entered an exclusive worldwide licensing agreement with Columbia University to develop novel oligonucleotides (ONCOlogues) for genetically driven cancers[207] - The ONCOlogues platform is also being explored for its potential to treat novel coronaviruses, such as COVID-19[210] General Corporate Fortress successfully completed two underwritten public offerings of its Series A Preferred Stock in February and May 2020, raising approximately $25.9 million in gross proceeds, and was added to the Russell 3000® index in June 2020 - Fortress raised gross proceeds of approximately $25.9 million as of June 30, 2020, through the sale of its Series A Preferred Stock from two underwritten public offerings in February and May 2020[212][213] - From January 1, 2020, through August 5, 2020, the Company issued approximately 11.4 million shares of common stock for gross proceeds of $28.9 million through at-the-market offerings[214] - In June 2020, Fortress was added to the Russell 3000® index[215] Critical Accounting Policies and Use of Estimates This section refers to Note 2 of the Condensed Consolidated Financial Statements for details on critical accounting policies and the use of estimates, which are integral to the preparation of the financial statements - Refer to Note 2 to the Condensed Consolidated Financial Statements for details on critical accounting policies and use of estimates[216] Results of Operations This section provides an overview of the company's financial performance, detailing net revenue, cost of goods sold, research and development expenses, and general and administrative expenses General For the three and six months ended June 30, 2020, Fortress generated $9.5 million and $22.4 million in net revenue, respectively, primarily from Journey's product sales and Checkpoint's collaboration with TGTX | Metric | Three Months Ended June 30, 2020 ($ in thousands) | Six Months Ended June 30, 2020 ($ in thousands) | | :-------------------- | :------------------------------------------------ | :---------------------------------------------- | | Net Revenue | 9,457 | 22,375 | | Cost of goods sold – product revenue | 3,124 | 6,934 | - As of June 30, 2020, the company had an accumulated deficit of $461.9 million and expects to continue incurring substantial losses from operations[217] - The increase in cost of goods sold is attributed to a growth in sales primarily from the expansion of Journey's marketed product portfolio with the addition of Ximino in the second half of 2019[218] Research and Development Expenses Research and development expenses for the three months ended June 30, 2020, were $15.7 million, a decrease from $18.5 million in the prior year, while licenses acquired expense increased significantly to $1.6 million | Metric | Three Months Ended June 30, 2020 ($ in thousands) | Three Months Ended June 30, 2019 ($ in thousands) | | :--------------------------------- | :------------------------------------------------ | :------------------------------------------------ | | Research and development expenses | 15,703 | 18,511 | | Research and development – licenses acquired | 1,570 | 200 | | Noncash, stock-based compensation expense in R&D | 900 | 800 | | Partner Company | Research & Development (Three Months Ended June 30, 2020, $ in thousands) | % of Total | | :---------------- | :-------------------------------------------------------- | :--------- | | Mustang | 9,767 | 62% | | Checkpoint | 3,029 | 19% | | Avenue | 1,219 | 8% | | Fortress | 344 | 2% | | Other | 1,344 | 9% | | Total | 15,703 | 100% | General and Administrative Expenses General and administrative expenses for the three months ended June 30, 2020, increased to $14.5 million from $13.4 million in the prior year | Metric | Three Months Ended June 30, 2020 ($ in thousands) | Three Months Ended June 30, 2019 ($ in thousands) | | :--------------------------------- | :------------------------------------------------ | :------------------------------------------------ | | General and administrative expenses | 14,456 | 13,443 | | Noncash, stock-based compensation expense in G&A | 2,900 | 2,600 | | Partner Company | General & Administrative (Three Months Ended June 30, 2020, $ in thousands) | % of Total | | :---------------- | :-------------------------------------------------------- | :--------- | | Fortress | 5,177 | 36% | | JMC | 4,767 | 33% | | Mustang | 1,922 | 13% | | Checkpoint | 1,496 | 10% | | Avenue | 684 | 5% | | Other | 410 | 3% | | Total | 14,456 | 100% | - Cost of outsourced sales force for JMC was $1.6 million for the three months ended June 30, 2020[225] Comparison of three months ended June 30, 2020 and 2019 For the three months ended June 30, 2020, net revenues increased by 2% to $9.5 million, driven by a $1.2 million increase in product revenue from Journey, partially offset by a $1.0 million decrease in related party collaboration revenue | Metric | Three Months Ended June 30, 2020 ($ in thousands) | Three Months Ended June 30, 2019 ($ in thousands) | Change ($ in thousands) | Change (%) | | :------------------------------------------ | :------------------------------------------------ | :------------------------------------------------ | :---------------------- | :--------- | | Net Revenue | 9,457 | 9,250 | 207 | 2% | | Product Revenue, net | 9,415 | 8,199 | 1,216 | 15% | | Revenue – related party | 42 | 1,051 | (1,009) | -96% | | Cost of goods sold – product revenue | 3,124 | 2,386 | 738 | 31% | | Research and development | 15,703 | 18,511 | (2,808) | -15% | | General and administrative | 14,456 | 13,443 | 1,013 | 8% | | Total other expense | (3,067) | (2,190) | (877) | 40% | | Net loss attributable to common stockholders | (13,314) | (13,098) | (216) | 2% | - The decrease in research and development expense is primarily due to a $5.1 million decrease at Avenue (completion of studies) and a $1.1 million decrease at Checkpoint (reduced manufacturing and clinical costs), partially offset by a $2.9 million increase at Mustang (personnel, sponsored research, outside services)[232] - The increase in general and administrative expenses is primarily attributable to Fortress's increased expenses related to headcount, while Journey's decrease is due to the temporary furlough of its sales force[235] Comparison of six months ended June 30, 2020 and 2019 For the six months ended June 30, 2020, net revenues increased by 42% to $22.4 million, primarily driven by a $7.0 million increase in Journey's product revenue | Metric | Six Months Ended June 30, 2020 ($ in thousands) | Six Months Ended June 30, 2019 ($ in thousands) | Change ($ in thousands) | Change (%) | | :------------------------------------------ | :---------------------------------------------- | :---------------------------------------------- | :---------------------- | :--------- | | Net Revenue | 22,375 | 15,727 | 6,648 | 42% | | Product Revenue, net | 21,361 | 14,324 | 7,037 | 49% | | Revenue – related party | 1,014 | 1,403 | (389) | -28% | | Cost of goods sold – product revenue | 6,934 | 4,270 | 2,664 | 62% | | Research and development | 30,570 | 41,784 | (11,214) | -27% | | General and administrative | 29,975 | 26,921 | 3,054 | 11% | | Total other (expense) income | (5,607) | 14,163 | (19,770) | -140% | | Net income (loss) attributable to common stockholders | (25,684) | (11,706) | (13,978) | 119% | - The decrease in research and development expense is primarily due to a $14.5 million decrease at Avenue (completion of studies) and a $3.0 million decrease at Checkpoint (reduced manufacturing and clinical costs), partially offset by a $4.8 million increase at Mustang (personnel, sponsored research, clinical trial materials)[244] - The increase in general and administrative expenses is primarily attributable to Journey's sales and marketing cost increases due to the expanded product portfolio, and Fortress's increase due to increased headcount-related costs and professional fees[247] - The shift in total other income (expense) is primarily due to the $18.5 million gain on deconsolidation of Caelum recorded in the prior year[248] Liquidity and Capital Resources Fortress Biotech will require additional financing to fully develop product candidates, fund operating losses, and establish commercial capabilities, despite believing current cash is sufficient for the next 12 months - Additional financing will be required to fully develop and prepare regulatory filings for existing and new product candidates, fund operating losses, and establish manufacturing, sales, and marketing capabilities[250] - The company believes its current cash and cash equivalents are sufficient to fund operations for at least the next 12 months[250] - Funding may be sought through equity or debt financings, collaborative arrangements, sales of partner company stakes, or other sources[250] - Based on current assessment, the company does not expect any material impact on its long-term development timeline and liquidity due to the worldwide spread of the COVID-19 virus[251] | Cash Flow Activity | Six Months Ended June 30, 2020 ($ in thousands) | Six Months Ended June 30, 2019 ($ in thousands) | Change ($ in thousands) | | :----------------------------------------------------------- | :---------------------------------------------- | :---------------------------------------------- | :---------------------- | | Operating Activities | (39,304) | (53,645) | 14,341 | | Investing Activities | (2,839) | 23,537 | (26,376) | | Financing Activities | 88,563 | 114,007 | (25,444) | | Net Increase (Decrease) in Cash and Cash Equivalents and Restricted Cash | 46,420 | 83,899 | (37,479) | - Net cash used in operating activities decreased by $14.3 million, primarily due to the decrease of $18.5 million in the gain recognized on the deconsolidation of Caelum, offset by increases in cash used from changes in operating assets and liabilities and licenses acquired[254] - Net cash provided by investing activities decreased by $26.4 million, primarily due to a $17.6 million decrease in the redemption of certificates of deposit and a $5.0 million decrease in the purchase of short-term investments[255] - Net cash provided by financing activities decreased by $25.4 million, with 2020 proceeds from Series A preferred stock ($23.6 million), at-the-market offerings ($32.7 million), and partner company stock sales ($34.9 million), offset by preferred dividends ($2.8 million)[256][257] Off-Balance Sheet Arrangements Fortress Biotech is not party to any off-balance sheet transactions and has no guarantees or obligations beyond those arising from normal business operations - The company is not party to any off-balance sheet transactions[259] - The company has no guarantees or obligations other than those which arise out of normal business operations[259] Item 3. Quantitative and Qualitative Disclosures About Market Risks This section discusses Fortress Biotech's exposure to market risks, primarily interest rate risk, as its assets and liabilities are denominated in U.S. dollars - The primary quantifiable market risk associated with the company's financial instruments is sensitivity to changes in interest rates[262] - The company's assets and liabilities are denominated in U.S. dollars, and it does not use foreign currency contracts or other derivative instruments for speculative or trading purposes[261] - Based on analysis, a hypothetical 100 basis point increase in interest rates would have an immaterial effect on the company's net loss for the years ended December 31, 2018 and 2019, and for the interim period through June 30, 2020[264] Item 4. Controls and Procedures Management, including the principal executive and financial officers, evaluated the effectiveness of disclosure controls and procedures as of June 30, 2020, concluding they are effective - Management, including the principal executive officer and principal financial officer, concluded that disclosure controls and procedures were effective as of June 30, 2020[265] - No change in internal control over financial reporting occurred during the most recent quarter that materially affected, or is reasonably likely to materially affect, internal controls over financial reporting[266] PART II. OTHER INFORMATION This section provides additional information including legal proceedings, risk factors, equity sales, defaults, and exhibits Item 1. Legal Proceedings This section states that there are no legal proceedings to report - No legal proceedings are reported[269] Item 1A. Risk Factors This section outlines significant risks associated with investing in Fortress Biotech's securities, covering a broad range of potential adverse impacts Impact of COVID-19 Pandemic The COVID-19 pandemic poses significant risks to clinical trials, supply chains, and financial condition - The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, and created significant volatility and disruption of financial markets[273] - Factors from the COVID-19 outbreak that may delay or adversely affect clinical trial programs include difficulties in clinical site initiation and patient enrollment, missed study visits, diversion of healthcare resources, and limitations on travel[274] - Disruptions and delays caused by potential workplace, laboratory, and office closures, and increased reliance on employees working from home, may negatively impact productivity and increase cybersecurity risk[276][280] Risks Related to our Growth Strategy Fortress's growth strategy, which involves acquisitions, joint ventures, and in-licensing, carries numerous risks including diversion of resources, integration difficulties, and potential inability to secure adequate financing - Acquisitions, joint ventures, and investments in other companies involve numerous risks, including diversion of financial and managerial resources, difficulties in integrating operations, and potential inability to maintain relationships with customers[283][285] - The company's growth strategy depends on its ability to innovate, develop, and commercialize biopharmaceutical products, and failure to do so may prevent revenue generation[287] - Future growth depends on identifying and acquiring or in-licensing products and product candidates, which entails risks such as exposure to unknown liabilities, business disruption, and difficulty securing financing[288][289] - The company's business depends in large part on the ability of its partner companies to obtain additional third-party financing to fund product development or acquisitions[293] - Research and development programs require substantial additional capital, and if funds cannot be obtained on favorable terms, product development may be reduced, adversely impacting the growth strategy[294][295] - Collaborative relationships with third parties for R&D and commercialization could cause significant resource expenditure and business risk with no assurance of financial return[296][298][299] - Inability to manage anticipated growth, including improving infrastructure and hiring/retaining key officers or employees, may adversely impact the business[303][304][306] Risks Related to Our Biopharmaceutical Business and Industry The biopharmaceutical business faces inherent risks due to its early-stage nature, heavy reliance on third parties for development and manufacturing, and the complex regulatory landscape - The company is an early-stage biopharmaceutical company with limited operating history and relies heavily on third parties for product development and manufacturing[314][315][318] - Failure to establish or maintain sales and marketing capabilities or enter into agreements with third parties could prevent effective marketing and sales of products[320][321] - Even if approved, product candidates may not achieve broad market acceptance among physicians, patients, healthcare payors, and the medical community, limiting revenue[322][323] - Reimbursement may be limited or unavailable, making it difficult to sell products profitably, and legislative/regulatory changes to the healthcare system (e.g., ACA) could adversely affect the business[327][330][332] - Relationships with customers and third-party payors are subject to anti-kickback, fraud and abuse, false claims, transparency, and privacy laws, which could expose the company to criminal sanctions, civil penalties, and reputational harm[349][350][353] - Most product candidates are at early stages of development and may not be successfully developed or commercialized, as only a small percentage of drugs in development obtain regulatory approval[357][358] - Disputes with licensors or non-performance of license agreements could adversely affect the ability to develop and commercialize product candidates, as intellectual property is in-licensed from third parties[359][361][365] - Product candidates advanced into clinical trials may not receive regulatory approval due to insufficient safety or efficacy, disagreements with regulatory authorities, or manufacturing issues[366][367][375] - Unacceptable adverse events from product candidates in clinical trials could delay or prevent regulatory approval or commercialization[378][379] - Delays in the commencement or completion of clinical trials increase costs and delay the ability to pursue regulatory approval, potentially leading to denial of approval[381][385] - Reliance on third parties to manufacture preclinical and clinical supplies, and commercial supplies, creates dependence that could adversely impact businesses if manufacturers fail to comply with regulatory requirements or meet supply needs[389][390][392] - Reliance on third parties to conduct clinical trials reduces control and could lead to delays or unsuccessful programs if they do not meet deadlines or adhere to protocols[393][394][397] - Reliance on clinical and pre-clinical data obtained by third parties carries the risk that such data could ultimately prove to be inaccurate or unreliable[399][400] - The biotechnology and pharmaceutical industries are subject to rapid and intense technological change, and competitors may develop more effective or faster-approved treatments, reducing commercial opportunity[401][402][406] - The company faces potential product liability exposure from clinical trials and product sales, which could result in substantial liability and limit commercialization[407][408] - Failure to comply with environmental, health, and safety laws and regulations could lead to fines, penalties, or substantial costs[410][413] - Inability to obtain and maintain patent protection for technology and products, or if the scope is insufficient, could allow competitors to develop similar products, impairing commercialization[414][415][417] - Lawsuits for infringing intellectual property rights of third parties are costly and time-consuming, and an unfavorable outcome would materially adversely affect the business[426][428] - Lawsuits to protect or enforce patents are expensive, time-consuming, and may be unsuccessful, potentially invalidating patents or limiting their enforceability[429][430] - The company may be subject to claims that employees/consultants wrongfully used or disclosed alleged trade secrets of former employers, leading to costly litigation[432][433] - Any product with marketing approval could be subject to restrictions or withdrawal from the market, and failure to comply with regulatory requirements could result in penalties[434][435][437] - Reliance on information technology means internet or internal computer system failures, inadequacies, interruptions, or compromises of systems could damage reputation and harm business[438][439][440] - A catastrophic disaster could damage facilities beyond insurance limits or lead to loss of key data, causing operations to curtail or cease[441][442] - The likelihood, nature, or extent of government regulation from future legislation or administrative/executive action, both in the United States and abroad, is unpredictable and could impact the business[444][445][446][447][448][449][450][451] - Changes in funding for the FDA and other government agencies could hinder their ability to hire personnel or prevent timely development/commercialization of new products[453](