Fortress Biotech(US:FBIO)2024-05-15 20:32PART I. FINANCIAL INFORMATION Unaudited Condensed Consolidated Financial Statements This section presents Fortress Biotech's unaudited condensed consolidated financial statements for Q1 2024, detailing financial position, performance, and cash flows Unaudited Condensed Consolidated Balance Sheets As of March 31, 2024, Fortress Biotech reported total assets of $164.6 million, a slight decrease from $167.5 million at December 31, 2023, resulting in a total stockholders' deficit of $3.9 million Condensed Consolidated Balance Sheet Data (in thousands) | | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total Current Assets | $116,548 | $117,022 | | Total Assets | $164,645 | $167,526 | | Total Current Liabilities | $87,696 | $84,908 | | Total Liabilities | $168,582 | $165,939 | | Total Stockholders' Equity (Deficit) | ($3,937) | $1,587 | Unaudited Condensed Consolidated Statements of Operations For Q1 2024, net revenues increased to $13.0 million, with loss from operations narrowing to $36.6 million due to reduced R&D and SG&A expenses, leading to a net loss attributable to Fortress of $15.4 million Condensed Consolidated Statements of Operations (in thousands, except per share data) | | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Net Revenue | $13,030 | $12,429 | | Total Operating Expenses | $49,596 | $71,296 | | Loss from Operations | ($36,566) | ($58,867) | | Net Loss | ($39,023) | ($55,145) | | Net Loss Attributable to Fortress | ($15,417) | ($21,537) | | Net Loss Per Common Share | ($1.03) | ($3.47) | Unaudited Condensed Consolidated Statements of Cash Flows Net cash used in operating activities improved to $25.4 million in Q1 2024, with $27.9 million provided by financing activities, resulting in a net increase in cash of $2.5 million Summary of Cash Flows (in thousands) | | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Net cash used in operating activities | ($25,387) | ($43,220) | | Net cash used in investing activities | $0 | ($5,000) | | Net cash provided by financing activities | $27,859 | $22,187 | | Net increase (decrease) in cash | $2,472 | ($26,033) | | Cash, cash equivalents and restricted cash at end of period | $85,837 | $154,921 | Notes to Unaudited Condensed Consolidated Financial Statements These notes detail Fortress Biotech's business model, significant accounting policies, debt, equity, and segment performance, along with liquidity and subsequent events - Fortress operates as a biopharmaceutical company focused on acquiring and advancing assets through subsidiaries and partner companies, including Avenue, Checkpoint, Journey, and Mustang. The parent company's cash of $43.9 million is considered sufficient to fund its operations for at least the next 12 months, but additional funding will be needed for broader development and regulatory activities414345 - In May 2024, Mustang and uBriGene executed a National Security Agreement with CFIUS, agreeing to abandon the previously planned sale of Mustang's Worcester manufacturing facility to uBriGene60 Total Debt Outstanding (in thousands) | Debt Instrument | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Oaktree Note | $50,000 | $50,000 | | SWK Term Loan | $15,000 | $15,000 | | Less: Discount on notes payable | ($3,580) | ($4,144) | | Total notes payable | $61,420 | $60,856 | - In January 2024, Fortress closed a registered direct offering, raising net proceeds of approximately $10.2 million101 - Subsequent to the quarter end, in April 2024, Avenue effected a 1-for-75 reverse stock split. In May 2024, Avenue raised approximately $4.4 million in gross proceeds through a warrant inducement transaction140141142 - Subsequent to the quarter end, in April 2024, Mustang reduced its workforce by approximately 81%. In May 2024, Mustang raised approximately $3.3 million in net proceeds from a public offering145146 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's Q1 2024 financial performance, highlighting increased net revenue, significantly reduced operating expenses, and a strong liquidity position Overview and Recent Events Fortress Biotech's Q1 2024 saw a 5% net revenue increase to $13.0 million, alongside key pipeline updates and successful financing activities across the company and its partners - Cosibelimab: Following a CRL from the FDA due to issues at a third-party manufacturer, Checkpoint plans to resubmit the BLA mid-year 2024160 - DFD-29: The FDA accepted the NDA for this rosacea treatment, setting a PDUFA goal date of November 4, 2024160 - CUTX-101: The rolling NDA submission for this Menkes disease treatment is ongoing and expected to be completed by partner Sentynl in 2024158 - IV Tramadol: Avenue reached an agreement with the FDA on the Phase 3 safety study protocol and plans to initiate the study subject to financing162 - Corporate Financing: In Q1 2024, Fortress raised ~$11.0M, and Checkpoint raised ~$14.0M. Post-quarter, Avenue raised ~$4.4M and Mustang raised ~$4.0M170 Results of Operations Q1 2024 net revenue increased 5% to $13.0 million, while total operating expenses decreased 30% to $49.6 million, significantly improving the loss from operations to $36.6 million Comparison of Results of Operations (in thousands) | | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change (%) | | :--- | :--- | :--- | :--- | | Net Revenue | $13,030 | $12,429 | 5% | | Cost of Goods Sold | $6,816 | $6,449 | 6% | | Research & Development | $24,839 | $35,276 | (30)% | | R&D - Licenses Acquired | $0 | $4,230 | (100)% | | Selling, General & Administrative | $17,941 | $25,341 | (29)% | | Loss from Operations | ($36,566) | ($58,867) | 38% | - The decrease in R&D spending was mainly due to reduced personnel and program costs at Mustang ($10.2M decrease) and lower BLA-related expenses at Checkpoint ($7.3M decrease), partially offset by a $5.9M increase at Journey for DFD-29 filing fees and milestones187 - The decrease in SG&A expenses was primarily driven by a $4.9M reduction at Journey due to cost reduction initiatives in sales and marketing193 Liquidity and Capital Resources As of March 31, 2024, the company held $83.8 million in cash and cash equivalents, with management deeming it sufficient for at least the next 12 months of operations, supported by $27.9 million from financing activities Cash and Cash Equivalents by Entity (in millions) as of March 31, 2024 | Entity | Cash & Cash Equivalents | | :--- | :--- | | Fortress & private subsidiaries | $43.9 | | Checkpoint | $11.2 | | Mustang | $1.3 | | Journey | $24.1 | | Avenue | $3.2 | | Total | $83.8 | - The company and its subsidiaries have actively raised capital through at-the-market programs and registered direct offerings. In Q1 2024, Fortress raised net proceeds of ~$10.2M from a direct offering and $0.9M from its ATM program207208 - Partner companies also secured financing in Q1 2024, with Checkpoint raising ~$12.8M in a direct offering, Avenue raising ~$4.5M from a warrant inducement, and Journey raising $1.5M from its ATM program211214216 Quantitative and Qualitative Disclosures About Market Risks As a "smaller reporting company," Fortress Biotech, Inc. is not required to provide the information for this item - The company is a "smaller reporting company" and is therefore not required to provide quantitative and qualitative disclosures about market risks220 Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of March 31, 2024, with no material changes in internal control over financial reporting during the quarter - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of March 31, 2024221 - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls222 PART II. OTHER INFORMATION Legal Proceedings There were no material developments in legal proceedings during the quarter, with the company noting its indemnification obligation for Caelum in the ongoing UTRF Litigation, scheduled for trial in September 2024 - Fortress has an indemnification obligation to its former subsidiary Caelum in a lawsuit brought by The University of Tennessee Research Foundation (UTRF) regarding alleged trade secret misappropriation119 - Fortress's indemnification is capped at the amount of acquisition proceeds it received (~$57 million) and may be offset against future payments from the acquirer, AstraZeneca. The company believes the amount in escrow ($15 million) is sufficient to cover anticipated costs and has not accrued a liability119 - A trial for the UTRF Litigation is scheduled for September 2024, pending a motion for summary judgment119 Risk Factors This section outlines significant investment risks, encompassing drug development, financing, revenue dependence, business strategy, third-party reliance, and regulatory compliance Risks Inherent in Drug Development The company faces substantial risks in drug development, including high failure rates in clinical trials, intense competition, and potential delays or terminations of studies - Most product candidates are in early development stages, requiring substantial capital and time, with a high risk of failure in clinical trials or at the regulatory approval stage227 - The company faces intense competition from larger pharmaceutical companies with greater resources, which may develop more effective or cheaper treatments, rendering Fortress's candidates obsolete241245 - Delays, suspensions, or terminations of clinical trials can occur for numerous reasons, including patient enrollment difficulties, safety issues, or regulatory holds, which would increase costs and hinder development234239 Risks Pertaining to the Need for and Impact of Existing and Additional Financing Activities Fortress has a history of operating losses and requires substantial additional funding, with its ability to raise capital limited by existing debt covenants and SEC rules, leading to potential R&D curtailment and stockholder dilution - The company has a history of operating losses ($39.0M for Q1 2024) and an accumulated deficit of $710.3 million as of March 31, 2024, with losses expected to continue262 - Substantial additional funding is required for R&D, commercialization, and acquisitions. The company's ability to raise capital through shelf registrations is limited by the SEC's "baby shelf rules" due to its public float being under $75 million272276277 - Existing debt, such as the Oaktree Note, contains restrictive covenants that limit the company's ability to incur more debt, make certain investments, and pay dividends, potentially hindering growth opportunities259261 Risks Pertaining to Our Existing Revenue Stream from Journey Medical Corporation The company's revenue heavily relies on Journey's dermatology products, which face risks from generic competition and dependence on favorable managed care formulary inclusion and third-party payor reimbursement - The vast majority of operating income is expected to come from Journey's dermatology products. Any setbacks related to supply, demand, manufacturing, or competition for these products could significantly impair financial results282 - A significant portion of Journey's sales comes from products without patent protection (e.g., Accutane, Targadox), making them vulnerable to generic competition, which can lead to intense price pressure and loss of market share283284285 - Sales depend on reimbursement from third-party payors and inclusion in managed care formularies. Failure to secure favorable formulary status or adequate reimbursement levels could negatively impact product utilization and market share291292 Risks Pertaining to our Business Strategy, Structure and Organization The company's business model, involving complex collaborations and acquisitions, creates financial risks through subsidiary guarantees and potential conflicts of interest due to shared officers and concentrated ownership - The strategy of entering into collaborations or divestitures (like with Caelum and Cyprium) is complex and may reduce business scope or fail to consummate, impairing asset value305306 - Fortress acts as a guarantor and/or indemnitor for certain obligations of its subsidiaries, which could require substantial payments based on the actions of those entities312313 - Shared officers and directors across Fortress and its partner companies could create conflicts of interest regarding corporate opportunities and transactions317 Risks Pertaining to Reliance on Third Parties Fortress heavily relies on third parties for manufacturing, clinical trials, and R&D, introducing risks of non-compliance, delays, and disputes that could significantly hinder product development and commercialization - The company depends heavily on third-party manufacturers for preclinical, clinical, and commercial supply. Any failure by these manufacturers to comply with cGMP or other regulations could halt trials and sales327328 - Reliance on third-party CROs to conduct clinical trials is critical. If these parties fail to meet deadlines, adhere to protocols, or comply with GCP, clinical data may be deemed unreliable, delaying or preventing regulatory approval334337338 - Collaborative relationships are difficult to establish and manage. Partners may not commit sufficient resources or may prioritize other projects, and disputes can terminate agreements, jeopardizing development programs342344 Risks Pertaining to Intellectual Property and Potential Disputes with Licensors Thereof The company's success depends on maintaining patent protection, much of which is in-licensed, exposing it to risks of litigation, validity challenges, and licensor disputes that could jeopardize product development and commercialization - The company's ability to commercialize products depends on maintaining sufficient patent protection, which is uncertain and subject to challenges, invalidation, or circumvention by competitors348352 - The majority of intellectual property is in-licensed from third parties. Any dispute with these licensors over terms, payments, or diligence obligations could adversely affect the ability to develop and commercialize the applicable product candidates366367 - The company may be sued for infringing third-party intellectual property rights, which could be costly, time-consuming, and result in being forced to obtain licenses, pay substantial damages, or abandon product candidates364365 Risks Pertaining to the Commercialization of Product Candidates Even with regulatory approval, products face significant commercialization risks, including uncertain market acceptance, potential product liability claims, and ongoing regulatory scrutiny that could lead to marketing restrictions or withdrawal - Approved products may not achieve broad market acceptance, which depends on factors like efficacy, safety, cost-effectiveness, and competition. Failure to gain acceptance will limit revenue372373 - The company faces potential product liability exposure from clinical trials and commercial sales. Successful claims could result in substantial liabilities, reputational harm, and limit commercialization376 - Approved products are subject to ongoing regulatory requirements. Later discovery of problems or failure to comply can result in restrictions, recalls, fines, or withdrawal of marketing approval380381 Risks Pertaining to Legislation and Regulation Affecting the Biopharmaceutical and Other Industries The company's business is subject to extensive and evolving healthcare laws and regulations, with compliance costs and potential penalties, while legislative efforts to control healthcare costs could negatively impact drug pricing and profitability - The company is subject to complex healthcare laws (e.g., Anti-Kickback Statute, False Claims Act), and non-compliance can lead to criminal sanctions, civil penalties, and exclusion from government healthcare programs384 - Healthcare reform measures, particularly those aimed at containing drug costs like the Inflation Reduction Act of 2022, could reduce prices and reimbursement for products, adversely affecting profitability299301 - If the company's holdings of minority interests in other entities expand, it may become subject to regulation under the Investment Company Act of 1940, which would incur significant compliance costs388 General and Other Risks This section covers a range of general business risks, including cybersecurity threats, reliance on key personnel, potential for employee misconduct, stock price volatility, and challenges in managing growth - The business is vulnerable to computer system failures and cyber-attacks. A 2021 incident at Journey resulted in a $9.5 million misdirection of funds, highlighting the financial and reputational risks390392 - The company's success depends on retaining key officers and employees. Competition for qualified personnel is intense, and their loss could adversely affect the business397 - The company has previously failed to meet Nasdaq's minimum bid price requirement. Future non-compliance with listing standards could result in the delisting of its securities, which would decrease market liquidity and price423 Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - None425 Defaults Upon Senior Securities The company reported no defaults upon senior securities - None426 Mine Safety Disclosures This item is not applicable to the company - None427 Other Information The company reported no other information required to be disclosed in this item - None428 Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, agreements related to recent financing activities, and certifications by the CEO and CFO - Exhibits filed include certifications from the CEO and CFO (Exhibits 31.1, 31.2, 32.1, 32.2) and documents related to the December 2023 Securities Purchase Agreement and Placement Agency Agreement (Exhibits 10.1, 10.2)432