Fortress Biotech, Inc. Annual Report 2018

FY2018 Annual Report · Fortress Biotech, Inc.

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2018 Annual Report

Included in the 2018 Annual Report:
Form 10-K, as filed by Fortress Biotech, Inc.
with the U.S. Securities and Exchange Commission on March 18, 2019

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2018

For the Transition Period from

Commission File No. 001-35366

FORTRESS BIOTECH, INC.
(Exact Name of Registrant as Specified in its Charter)

Delaware
(State or Other Jurisdiction of Incorporation or Organization)

20-5157386
(I.R.S. Employer Identification No.)

2 Gansevoort Street, 9th Floor New York, New York 10014
(Address of Principal Executive Offices)

10014
(Zip Code)

Registrant’s telephone number, including area code: (781) 652-4500
Securities registered pursuant to Section 12(b) of the Act:

(Title of Class)

Common Stock, par value $0.001 per share 9.375%
Series A Cumulative Redeemable Perpetual Preferred Stock

(Name of exchange on which registered)

NASDAQ Capital Market
NASDAQ Capital Market

Securities registered pursuant to section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files). Yes ☒ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐
Non-accelerated filer ☐

☒
Accelerated filer
Smaller reporting company ☒
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for

complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

The aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of the registrant’s most
recently completed second fiscal quarter: $94,124,331 based upon the closing sale price of our common stock of $2.98 on that date. Common
stock held by each officer and director and by each person known to own in excess of 5% of outstanding shares of our common stock has
been excluded in that such persons may be deemed to be affiliates. The determination of affiliate status in not necessarily a conclusive
determination for other purposes.

As of March 14, 2019, there were 61,302,251 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for its 2019 Annual Meeting of Stockholders are incorporated by reference into

Part III hereof.

[This Page Intentionally Left Blank]

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FORTRESS BIOTECH, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS

PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 1.

Business.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 1B. Unresolved Staff Comments

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 2.

Item 3.

Item 4.

Properties

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Mine Safety Disclosures

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 5.

Item 6.

Item 7.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Management’s Discussion and Analysis of Financial Condition and Results of
Operations.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Financial Statements and Supplementary Data.
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial
Item 9.
Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related
Item 12.
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions, and Director Independence . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 13.
Item 14.

PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Exhibits, Financial Statement Schedules.
Form 10-K Summary.

Item 15.
Item 16.

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

Statements in this Annual Report on Form 10-K that are not descriptions of historical facts are
forward-looking statements that are based on management’s current expectations and are subject to risks
and uncertainties that could negatively affect our business, operating results, financial condition and stock
price. We have attempted to identify forward-looking statements by terminology including “anticipates,”
“believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,”
“potential,” “predicts,” “should,” or “will” or the negative of these terms or other comparable terminology.
Factors that could cause actual results to differ materially from those currently anticipated include those set
forth under “Item 1A. Risk Factors” including, in particular, risks relating to:

•

our growth strategy;

financing and strategic agreements and relationships;

our need for substantial additional funds and uncertainties relating to financings;

our ability to identify, acquire, close and integrate product candidates successfully and on a timely
basis;

our ability to attract, integrate and retain key personnel;

the early stage of products under development;

the results of research and development activities;

uncertainties relating to preclinical and clinical testing;

the ability to secure and maintain third-party manufacturing, marketing and distribution of our
and our affiliates’ products and product candidates;

government regulation;

patent and intellectual property matters;

dependence on third-party manufacturers; and

competition.

We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in our expectations or any changes in
events, conditions or circumstances on which any such statement is based, except as required by law.

Item 1. Business.

Overview

PART I

Fortress Biotech, Inc. (“Fortress” or the “Company”) is a biopharmaceutical company dedicated to
acquiring, developing and commercializing pharmaceutical and biotechnology products and product
candidates, which we do at the Fortress level, at our majority-owned and majority-controlled subsidiaries
and joint ventures, and at entities we founded and in which we maintain significant minority ownership
positions. Fortress has a talented and experienced business development team, comprising scientists, doctors
and finance professionals, who identify and evaluate promising products and product candidates for
potential acquisition by new or existing partner companies. We have executed such arrangements in
collaboration with some of
the world’s foremost universities, research institutes and pharmaceutical
companies, including City of Hope National Medical Center, St. Jude Children’s Research Hospital and
University College London.

Our business approach is designed for maximum flexibility, allowing us to pursue a broad array of new
biopharmaceutical technologies with clinical and commercial potential. It enables us to move quickly to
take advantage of time-sensitive opportunities when necessary and provides us with a range of options from
which to select what we deem the most advantageous corporate or financial structure for each drug
candidate. We seek to acquire, develop and commercialize drugs, drug candidates, technologies and
operating subsidiaries with high growth potential, both at the Fortress level and via our partner companies.
We believe that focusing on the identification, acquisition and early-stage development of product
candidates while benefitting from our partners’ development and commercialization expertise will reduce
our internal expenses and allow us to have a larger number of product candidates progress to later stages of
drug development.

As of the end of 2018, several of our partner companies possess licenses to product candidate intellectual
property, including Aevitas Therapeutics, Inc. (“Aevitas”), Avenue Therapeutics, Inc. (“Avenue”), Caelum
Biosciences,
Inc.
(“Checkpoint”), Cyprium Therapeutics, Inc. (“Cyprium”), Helocyte, Inc. (“Helocyte”), Journey Medical
Corporation (“Journey” or “JMC”), Mustang Bio, Inc. (“Mustang”), and Tamid Bio, Inc. (“Tamid”).

(“Cellvation”), Checkpoint Therapeutics,

(“Caelum”), Cellvation,

Inc.

As used throughout this filing, the words “we”, “us” and “our” may refer to Fortress individually or
together with our affiliates and partners, as dictated by context.

Product Candidates and Other Intellectual Property

Marketed Dermatology Products

Through our partner company Journey we market seven dermatology products:

Targadox: Targadox (doxycycline hyclate tablets) is a tetracycline-class antimicrobial indicated as
adjunctive therapy for severe acne.

Exelderm®: Exelderm® is an antifungal cream or solution that helps relieve the symptoms of
common skin infections such as ringworm and jock itch. Exelderm® cream can also help relieve the
symptoms of athlete’s foot. Since launch in October 2018, Exelderm® prescriptions have grown by
290% (October 2018 – December 2018).

Ceracade®: Ceracade® is a steroid-free, ceramide-dominant formulation used to treat dry skin
conditions and to manage and relieve the burning and itching associated with various types of
dermatitis and radiation dermatitis.

Luxamend®: Luxamend® is a water-based emulsion formulated for the dressing and management of
superficial wounds, minor abrasions, dermal ulcers, donor sites, first- and second-degree burns,
including sunburns, and radiation dermatitis.

Ala-Scalp®: Ala-Scalp® is a topical hydrocortisone lotion indicated for the relief of the inflammatory
and pruritic manifestations of corticosteroid-responsive dermatoses. Ala-Scalp® is sold under a
co-promote agreement with Crown Labs.

Ala-Quin®: Ala-Quin® is a broad-spectrum antibacterial and antifungal cream. Ala-Quin® is sold
under a co-promote agreement with Crown Labs.

Triderm™: Triderm™ is topical corticosteroid cream indicated for the he relief of the inflammatory
and pruritic manifestations of corticosteroid-responsive dermatoses. Triderm™ is sold under a
co-promote agreement with Crown Labs.

MB-107 (XSCID)

Our partner company Mustang also collaborates with St. Jude Children’s Research Hospital (“St. Jude”) in
the development of a first-in-class ex vivo lentiviral gene therapy for the treatment of X-linked severe
combined immunodeficiency (“XSCID”). On August 2, 2018, Mustang entered into an exclusive worldwide
license agreement with St. Jude for the development of a first-in-class ex vivo lentiviral gene therapy for the
treatment of XSCID. Mustang paid an upfront fee of $1.0 million, in August 2018 in consideration for the
exclusive license. Additional payments are due to St. Jude upon the achievement of five development and
commercialization milestones. XSCID is the most common form of severe immune deficiency. The
acquisition of this license expands our pipeline into gene-therapy, allowing us to leverage existing synergies
for Mustang’s Worcester, Massachusetts cell-processing facility.

CAEL-101 (AL Amyloidosis)

Our partner company Caelum, in collaboration with Alexion Pharmaceuticals, Inc., is working to develop a
novel antibody (“mAb 11-1F4”), CAEL-101, for the treatment of amyloid light chain (“AL”) amyloidosis.
CAEL-101 is a first-in-class monoclonal antibody (“mAb”) designed to improve organ function by
reducing or eliminating amyloid deposits in the tissues and organs of patients with AL amyloidosis. The
antibody is designed to bind to insoluble light chain amyloid protein, including both kappa and lambda
subtypes. In a Phase 1a/1b study, CAEL-101 demonstrated improved organ function, including cardiac and
renal function, in 27 patients with relapsed and refractory AL amyloidosis who had previously not had an
organ response to standard of care therapy. This data supports CAEL-101’s potential to be a well-tolerated
therapy that promotes amyloid resolution. CAEL-101 has received Orphan Drug Designation from the
U.S. Food and Drug Administration as a therapy for patients with AL amyloidosis, and as a radio-imaging
agent in AL amyloidosis.

Hematologic Malignancies

Our partner company Mustang collaborates with the City of Hope National Medical Center (“COH”) and
Fred Hutchinson Cancer Research Center (“Fred Hutch”) in the development of proprietary chimeric
antigen receptor (“CAR”) engineered T-cell (“CAR T”) therapies. CAR T uses the patient’s own T-cells to
engage and destroy specific tumors. The process involves selecting specific T-cell subtypes, genetically
engineering them to express chimeric antigen T-cell receptors and placing them back in the patient where
they recognize and destroy cancer cells. We believe that harnessing the body’s own immune system to treat
cancer is the next generation of cancer care that may prove curative across tumor types that have proved
resistant to standard pharmacological and biological treatments.

MB-102 (CD123 CAR T Program for AML)

CD123 is a subunit of the heterodimeric interleukin-3-receptor (“IL-3R”) which is widely expressed on
human hematologic malignancies including acute myeloid leukemia (“AML”). In addition, CD123 can be
found on the surface of B cell acute lymphoblastic leukemia (“B-ALL”), hairy cell leukemia, blastic
plasmacytoid dendritic cell neoplasm (“BPDCN”), chronic myeloid leukemia (“CML”) and Hodgkin’s
lymphoma.

Our partner Mustang is currently investigating CD123 as a target for adoptive cellular immunotherapy in
AML and BPDCN since high CD123 expression is associated with enhanced AML blast proliferation,
increased resistance of blasts to apoptosis, and poor clinical prognosis. CD123 is overexpressed in the vast
majority of cases of AML and in essentially all cases of BPDCN. MB-102 is currently in development at
our partner company Mustang.

MB-106 (CD20 CAR T Program for B cell non-Hodgkin lymphoma)

CD20 is a B-cell lineage-specific phosphoprotein that is expressed in high, homogeneous density on the
surface of more than 95% of B-cell non-Hodgkin lymphoma (“NHL”). CD20 is stable on the cell surface
with minimal shedding or internalization upon binding antibody and is present at only nanomolar levels as
soluble antigen. It is well established as an effective immunotherapy target, with extensive studies
demonstrating improved tumor responses and survival of B-NHL patients treated with rituximab and other
anti-CD20 antibodies.

lymphoma, marginal zone lymphoma,

More than 70,000 new cases of NHL are diagnosed each year in the United States, and more than 19,000
patients die of this group of diseases annually. Most forms of NHL including follicular lymphoma, mantle
cell
lymphocytic
lymphoma, which account collectively for ~45% of all cases of NHL are incurable with available therapies,
except for allogenic hematopoietic stem cell transplant (“allo-SCT”). However, many NHL patients are not
suitable candidates for allo-SCT, and this treatment is also limited by significant rates of morbidity and
mortality due to graft versus host disease. Innovative new treatments are therefore urgently needed.

lymphoplasmacytic lymphoma, and small

Fred Hutch has an open IND for a Phase 1 clinical study to assess the anti-tumor activity and safety of
administering CAR T cells; as of December 31, 2018, five patients have been treated. This IND was
submitted on February 24, 2017, with Fred Hutch as the sponsor. The trial will also assess the T cell
persistence and determine the potential immunogenicity of the cells, and Mustang together with Fred
Hutch will determine a recommended Phase 2 dose. MB-106 is currently in development at our partner
company Mustang.

MB-104 (CS1 CAR T for Multiple Myeloma and Light Chain Amyloidosis)

CS1 (also known as CD319, CRACC and SLAMF7) was identified as an NK cell receptor regulating
immune functions. It is also expressed on B cells, T cells, dendritic cells, NK-T cells, and monocytes. CS1 is
overexpressed in multiple myeloma (“MM”) and light chain amyloidosis (“AL”), which makes it a good
target
for immunotherapy. A humanized anti-CS1 antibody, elotuzumab (Empliciti™), has shown
promising results in clinical studies. Despite great advances in treatment, MM remains an incurable
malignancy of plasma cells. AL is a protein deposition disorder that is a result of a plasma cell dysplasia,
similar to MM. Immunotherapy is an attractive approach for AL because of the low burden of disease. Our
academic partners at COH have developed a novel second generation CS1-specific CAR T cell therapy. In
pre-clinical studies, they have demonstrated efficacy of these CAR T cells, both in vitro and in vivo, within
the context of clinically relevant models of MM and AL. COH will be evaluating the safety of this
CS1-specific CAR T cell therapy in a Phase 1/2 trial that is scheduled to commence in the first half of 2019.

Solid Tumors

MB-101 (IL13Rα2 CAR T Cell Program for Glioblastoma)

Glioblastoma multiforme (“GBM”) is the most common brain and central nervous system (“CNS”) cancer,
accounting for for 45.2% of malignant primary brain and CNS tumors, 54% of all gliomas, and 16% of all
primary brain and CNS tumors. There are an estimated 12,390 new glioblastoma cases predicted in 2017 in
the US. Malignant brain tumors are the most common cause of cancer-related deaths in adolescents and
young adults aged 15-39 and the most common cancer occurring among 15-19 year-olds in the US. While
GBM is a rare disease (2-3 cases per 100,000 persons per year in the US and EU), it is quite lethal, with
five-year survival rates historically under 10%. Standard of care therapy consists of maximal surgical
resection, radiation and chemotherapy with temozolomide, which, while rarely curative, is shown to extend
median overall survival from 4.5 to 15 months. GBM remains difficult to treat due to the inherent resistance
of the tumor to conventional therapies.

Immunotherapy approaches targeting brain tumors offer promise over conventional treatments. IL13Rα2 is
an attractive target for CAR T therapy, as it has limited expression in normal tissue but is over-expressed on
the surface of greater than 50% of GBMs. CAR T cells are designed to express membrane-tethered IL-13
receptor ligand mutated at a single site (glutamic acid at position 13 to a tyrosine; E13Y) with high affinity
for IL13Rα2 and reduced binding to IL13Rα1 in order to reduce healthy tissue targeting (Kahlon KS et al.
Cancer Research. 2004;64:9160-9166).

Our partner Mustang is currently developing an optimized CAR T product incorporating enhancements in
CAR T design and T cell engineering to improve antitumor potency and T cell persistence. The next step is
to continue to enroll patients in this Phase 1 study to determine the maximum tolerated dose and a
recommended Phase 2 dose. Additionally, in this Phase 1 study, Mustang is exploring optimal modes of
delivery for CAR T cells for the treatment of GBM and optimal T cell selection. MB-101 is currently in
development at our partner company Mustang.

MB-103 (HER2 CAR T for GBM & Metastatic Breast Cancer to Brain)

HER2/neu (often shortened to “HER2”) is a growth-promoting protein on the outside of all breast cells.
Breast cancer cells with higher than normal levels of HER2 are called HER2-positive (“HER2+”). These
cancers tend to grow and spread faster than other breast cancers. Breast cancer is the most commonly
diagnosed cancer in women, with over 40,000 women in the United States expected to die from advanced
metastatic disease in 2018. Approximately 20% to 25% of breast cancers overexpress HER2, which is an
established therapeutic target of both monoclonal antibodies (“mAbs”) and receptor tyrosine kinase
inhibitors. With the advent of effective mAbs directed against HER2, the median overall survival of
patients with metastatic HER2+ breast cancer has improved. However, management of metastatic disease
in the brain and/or CNS observed in up to 50% of HER2+ breast cancer patients, continues to be a clinical
challenge in large part due to the inability of mAbs to sufficiently cross the blood-brain barrier. Although
small-molecule inhibitors of HER2 exist and have been clinically approved, their single-agent efficacy in the
context of metastatic disease to the brain has been limited. While HER2-targeted therapy in combination
with conventional agents has shown some promise for the treatment of patients with metastatic breast
cancer, control of brain metastases remains a significant unmet clinical need, as most patients survive less
than two years following CNS involvement.

CAR-based T-cell immunotherapy is being actively investigated for the treatment of solid tumors, including
HER2+ cancers. Mustang’s academic partners at COH have developed a second-generation HER2-specific
CAR T-cell for the treatment of breast cancer that has metastasized to the brain. COH’s preclinical data
demonstrate effective targeting of breast cancer brain metastases with intraventricular delivery of
HER2-BB CAR T cells. COH will be evaluating the safety of this HER2-specific CAR T cell therapy in two
phase 1/2 Trials that commenced in Q4 2018. MB-103 is currently in development at our partner company
Mustang.

MB-105 (PSCA CAR T for Prostate & Pancreatic Cancers)

PSCA is a glycosylphosphatidylinositol-anchored cell membrane glycoprotein. In addition to being highly
expressed in the prostate it is also expressed in the bladder, placenta, colon, kidney, and stomach. Prostate
cancer may be amenable to T cell-based immunotherapy since several tumor antigens, including prostate
stem-cell antigen (PSCA), are widely over-expressed in metastatic disease. Mustang’s academic partners at
COH have developed a second-generation PSCA specific CAR T cell therapy that has demonstrated robust
in vitro and in vivo anti-tumor activity in patient-derived, clinically relevant, bone-metastatic prostate cancer
xenograft models. COH will be evaluating safety of this PSCA-specific CAR T cell therapy in a Phase 1/2
Trial that is scheduled to commence in the second half of 2019. MB-105 is currently in development at our
partner company Mustang.

Intravenous (IV) Tramadol

Our partner company Avenue,
is developing
intravenous (IV) Tramadol, for the treatment of moderate to moderately severe post-operative pain. IV
Tramadol may fill a gap in the acute pain market between IV acetaminophen/NSAIDs and IV conventional

in collaboration with InvaGen Pharmaceuticals, Inc.,

narcotics. Avenue is currently evaluating IV Tramadol in a pivotal Phase 3 program for the management of
postoperative pain with positive data from its first pivotal Phase 3 study announced in May 2018. The
second pivotal Phase 3 trial was initiated in the fourth quarter of 2018, and Avenue expects to announce
topline data in mid-2019.

CK-101 (EGFR mutation-positive NSCLC)

Our partner company Checkpoint is currently evaluating a lead small-molecule, targeted anti-cancer agent,
CK-101, in a Phase 1/2 clinical trial for the treatment of patients with EGFR mutation-positive non-small
cell lung cancer (NSCLC). In September 2018, Checkpoint announced preliminary interim safety and
efficacy data from its ongoing Phase 1/2 clinical trial of CK-101. The data were presented in an oral
presentation at the International Association for the Study of Lung Cancer (IASLC) 19th World
Conference on Lung Cancer in Toronto. Enrollment in the trial is ongoing to identify the optimal dose with
a new softgel capsule formulation to maximize therapeutic effect, following which a Phase 3 trial is planned
to initiate in 2019 in treatment-naïve EGFR mutation-positive NSCLC patients.

CK-301

Checkpoint is also currently evaluating its lead antibody product candidate, CK-301, an anti-PD-L1
antibody licensed from the Dana-Farber Cancer Institute,
in checkpoint
therapy-naïve patients with selected recurrent or metastatic cancers, including ongoing cohorts intended to
support one or more Biologies License Application (“BLA”) submissions.

in a Phase 1 clinical trial

CUTX-101

Our partner company Cyprium is currently developing CUTX-101, a copper histidinate injection for the
treatment of Menkes disease. Menkes disease is a rare X-linked pediatric disease caused by gene mutations
of copper transporter ATP7A, which affects approximately one in 100,000 newborns per year.
Biochemically, Menkes patients may have low levels of copper in their blood and brains, as well as
abnormal levels of catecholamine, but definitive diagnosis is typically made by sequencing of the ATP7A
gene. There is no current FDA-approved treatment for Menkes disease and its variants. CUTX-101, along
with an AAV-ATP7A gene therapy that is also being developed by Cyprium, was granted orphan drug
designation by the U.S. Food and Drug Administration (“FDA”). CUTX-101 was also granted Fast Track
Designation by the FDA for classic Menkes disease in patients who have not demonstrated significant
clinical progression.

In January 2019, Cyprium received notification from the U.S. FDA that the sponsorship of
Investigational New Drug (“IND”) Application for CUTX-101 was transferred to Cyprium.

the

Triplex

Through our partner company Helocyte we are developing Triplex, a first-in-class and potentially
best-in-class universal recombinant Modified Vaccinia Ankara viral vector vaccine engineered to induce a
robust and durable virus-specific T cell response to three immuno-dominant proteins [UL83 (pp65),
UL123 (IE1), UL122 (IE2)] linked to cytomegalovirus (CMV) complications in the transplant setting. In a
Phase 1 study, Triplex was found to be safe, well-tolerated and highly immunogenic when administered to
healthy volunteers at multiple dose
In a
recently-completed Phase 2 trial, Triplex was observed to be safe, well-tolerated, highly immunogenic and
efficacious in reducing CMV events in allogeneic stem cell transplant recipients (ClinicalTrials.gov
Identifier: NCT02506933). Triplex is currently the subject of multiple other ongoing and planned studies,
one involving vaccination of the stem cell transplant donor (followed by vaccination of the recipient) in
higher risk patients — potentially introducing CMV immunity sooner and positioning Triplex ahead of
prophylactic antivirals in the standard of care. Helocyte secured an exclusive, worldwide license to Triplex
from City of Hope National Medical Center in Duarte, California in April of 2015.

(ClinicalTrials.gov Identifier: NCT01941056).

levels

Other Product Candidates

ConVax

We and our partner Helocyte are also developing ConVax, a universal recombinant Modified Vaccinia
Ankara viral vector vaccine designed to induce robust and durable humoral and cellular immune responses
to cytomegalovirus (CMV).

CEVA-101

Through our partner company Cellvation we are working to develop CEVA-101, a cellular product
comprised of autologous Bone Marrow-derived Mononuclear Cells (“BMMNCs”) currently being
developed for the treatment of severe traumatic brain injury (TBI) in adults and children.

CEVA-D and CEVA-102

Also in partnership with Cellvation, we are developing CEVA-D, a novel bioreactor device that enhances
the anti-inflammatory potency of bone marrow-derived cells without genetic manipulation, using wall shear
stress (WSS) to suppress tumor necrosis factor-a (“TNF-a”) production by activated immune cells.
CEVA-102 is the first cell product produced by CEVA-D, which we plan to develop for the treatment of
severe traumatic brain injury (“TBI”) in adults and children.

TAMID-001

Through our majority-owned partner Tamid we are developing Tamid-001, an adeno-associated virus
(AAV) gene therapy that targets the ocular manifestations of Mucopolysaccharidosis type I (MPS I), a rare
and progressively debilitating disorder which is caused by the accumulation of glycosaminoglycans (GAGs)
in multiple organs.

AVTS-001

Through our majority-owned partner Aevitas we are developing AVTS-001, an AAV gene therapy that
restores lasting production of regulatory proteins, potentially providing a curative treatment for diseases
with high unmet need.

CNDO-109

We continue to develop CNDO-109, a lysate that activates donor Natural Killer (NK) cells. We are also
working with our partner company Mustang to genetically engineer CNDO-109-activated NK cells to
express a CD123 chimeric antigen receptor construct as a potential combination therapy to treat AML.

Methazalomide

We are developing, in collaboration with Effcon Laboratories, Inc., an extended release formulation of
methazalomide. Effcon leads the development efforts in connection therewith under our supervision and
direction. We expect to initiate a pivotal and food effects study in 2019.

Intellectual Property Generally

Our goal is to obtain, maintain and enforce patent protection for our and, in some cases, our partner
companies’ product candidates, formulations, processes, methods and any other proprietary technologies,
preserve our trade secrets, and operate without infringing on the proprietary rights of other parties, both in
the United States and in other countries. Our policy is to actively seek to obtain, where appropriate, the
broadest intellectual property protection possible for our and, in some cases, our partner companies’
product candidates, proprietary information and proprietary technology through a combination of
contractual arrangements and patents, both in the United States and abroad. However, patent protection
may not afford us with complete protection against competitors who seek to circumvent our patents.

We also depend upon the skills, knowledge, experience and know-how of our and our partners’
management and research and development personnel, as well as that of our advisers, consultants and other
contractors. To help protect our proprietary know-how, which is not patentable, and for inventions for
which patents may be difficult to enforce, we and our partners currently rely and will in the future rely on
trade secret protection and confidentiality agreements to protect our interests. To this end, we and our
partners require all of our employees, consultants, advisers and other contractors to enter into
confidentiality agreements that prohibit the disclosure of confidential information and, where applicable,
require disclosure and assignment to us of the ideas, developments, discoveries and inventions important to
our business.

Competition

We and our partners operate in highly competitive segments of the biotechnology and biopharmaceutical
markets. We face competition from many different sources, including commercial pharmaceutical and
biotechnology enterprises, academic institutions, government agencies, and private and public research
institutions. Many of our and our partners’ competitors have significantly greater financial, product
development, manufacturing and marketing resources than us. Large pharmaceutical companies have
extensive experience in clinical testing and obtaining regulatory approval for drugs. In addition, many
universities and private and public research institutes are active in cancer research, some in direct
competition with us and our partners. We and our partners also may compete with these organizations to
recruit scientists and clinical development personnel. Smaller or early stage companies may also prove to be
significant competitors, particularly through collaborative arrangements with large and established
companies.

The only pharmaceutical area in which we sell marketed products is dermatology, and the dermatological
product competitive landscape is highly fragmented, with a large number of mid-size and smaller
companies competing in both the prescription sector and the OTC and cosmeceutical sectors. The market
for our dermatological products is very competitive, both across product categories and geographies. In
addition to larger diversified pharmaceutical and medical device companies, we face competition from
mid-size and smaller, regional and entrepreneurial companies with fewer products in niche areas or regions.
The oral acne antibiotic market, in which Targadox competes, is divided into two categories: minocycline
and doxycycline. Targadox competes in the doxycycline category, primarily against Mayne Pharma’s
Doryx® brand. Also, Almirall recently introduced SEYSARA™, a tetracycline-class drug indicated for the
treatment of inflammatory lesions of non-nodular moderate to severe acne vulgaris in patients 9 years of
age and older. Exelderm®, a broad spectrum anti-fungal with two formulations, competes against Sebela
Pharma’s Naftin® and Ortho Dermatologics Luzu®.

Our competitors are pursuing the development and/or acquisition of pharmaceuticals, medical devices and
OTC products that target the same diseases and conditions that we are targeting in biotechnology,
biopharmaceutical, dermatological and other therapeutic areas. If competitors introduce new products,
delivery systems or processes with therapeutic or cost advantages, our products can be subject to
progressive price reductions or decreased volume of sales, or both. Most new products that we introduce
must compete with other products already on the market or products that are later developed by
competitors. The principal methods of competition for our products include quality, efficacy, market
acceptance, price, and marketing and promotional efforts, patient access programs and product insurance
coverage reimbursement.

Government Regulation and Product Approval

Government authorities in the United States, at the federal, state and local level, and other countries
extensively regulate, among other things, the research, development, testing, manufacture, quality control,
approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, post-approval
monitoring and reporting, marketing and export and import of products such as those we and our partners
are developing.

United States Pharmaceutical Product Development Process

substantial

In the United States, the FDA regulates pharmaceutical (drug and biologic) products under the Federal
Food, Drug and Cosmetic Act, and implementing regulations. Pharmaceutical products are also subject to
other federal, state and local statutes and regulations. The process of obtaining regulatory approvals and the
subsequent compliance with appropriate federal, state, local and foreign statutes and regulations require the
resources. Failure to comply with the applicable
expenditure of
U.S. requirements at any time during the product-development process, approval process or after approval,
may subject an applicant to administrative or judicial sanctions. FDA sanctions could include refusal to
approve pending applications, withdrawal of an approval, a clinical hold, warning letters, product recalls,
product seizures, total or partial suspension of production or distribution injunctions, fines, refusals of
government contracts, restitution, disgorgement or civil or criminal penalties. Any agency or judicial
enforcement action could have a material adverse effect on us. The process required by the FDA before a
pharmaceutical product may be marketed in the United States generally includes the following:

time and financial

•

completion of preclinical laboratory tests, animal studies and formulation studies according to
good laboratory practices (“GLPs”) or other applicable regulations;

submission to the FDA of an Investigational New Product Drug Application (“IND”), which
must become effective before human clinical trials may begin in the United States;

performance of adequate and well-controlled human clinical trials according to the FDA’s current
good clinical practices (“GCPs”),
the proposed
pharmaceutical product for its intended use;

to establish the safety and efficacy of

submission to the FDA of a New Drug Application (“NDA”) or Biologic License Application
(“BLA”) for a new pharmaceutical product;

satisfactory completion of an FDA inspection of the manufacturing facility or facilities where the
is produced to assess compliance with the FDA’s current Good
pharmaceutical product
Manufacturing Practices (“cGMP”), to assure that the facilities, methods and controls are
adequate to preserve the pharmaceutical product’s identity, strength, quality and purity;

potential FDA audit of the preclinical and clinical trial sites that generated the data in support of
the NDA/BLA; and

FDA review and approval of the NDA/BLA.

The lengthy process of seeking required approvals and the continuing need for compliance with applicable
statutes and regulations require the expenditure of substantial resources and approvals are inherently
uncertain.

Products for somatic cell therapy are derived from a variety of biologic sources, including directly harvested
autologous, allogeneic, or cultured cell
these sources be well
characterized, uniform, and not contaminated with hazardous adventitious agents. Also, cells directly from
humans pose additional product safety issues. Because of the complex nature of these products, a
controlled, reproducible manufacturing process and facility are required and relied on to produce a uniform
product. The degree of reliance on a controlled process varies depending on the nature of the product.
Because complete chemical characterization of a biologic product is not feasible for quality control, the
testing of the biologic potency receives particular attention and is costly.

lines. Product safety requires that

Before testing any compounds with potential therapeutic value in humans, the pharmaceutical product
candidate enters the preclinical testing stage. Preclinical tests include laboratory evaluations of product
chemistry, toxicity and formulation, as well as animal studies to assess the potential safety and activity of
the pharmaceutical product candidate. The conduct of the preclinical tests must comply with federal
regulations and requirements including GLPs. The sponsor must submit the results of the preclinical tests,
together with manufacturing information, analytical data, any available clinical data or literature and a
proposed clinical protocol, to the FDA as part of the IND. The IND automatically becomes effective
30 days after receipt by the FDA unless the FDA places the IND on a clinical hold within that 30-day time
period. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the
clinical trial can begin. The FDA may also impose clinical holds on a pharmaceutical product candidate at

any time before or during clinical trials due to safety concerns or non-compliance. Accordingly, we cannot
be certain that submission of an IND will result in the FDA allowing clinical trials to begin, or that, once
begun, issues will not arise that suspend or terminate such clinical trial.

Clinical trials involve the administration of the pharmaceutical product candidate to healthy volunteers or
patients under the supervision of qualified investigators, generally physicians not employed by the sponsor.
Clinical trials are conducted under protocols detailing, among other things, the objectives of the clinical
trial, dosing procedures, subject selection and exclusion criteria, and the parameters to be used to monitor
subject safety. Each protocol must be submitted to the FDA if conducted under a U.S. IND. Clinical trials
must be conducted in accordance with GCP requirements. Further, each clinical trial must be reviewed and
approved by an IRB or ethics committee if conducted outside of the United States, at or servicing each
institution at which the clinical trial will be conducted. An IRB or ethics committee is charged with
protecting the welfare and rights of trial participants and considers such items as whether the risks to
individuals participating in the clinical trials are minimized and are reasonable in relation to anticipated
benefits. The IRB or ethics committee also approves the informed consent form that must be provided to
each clinical trial subject or his or her legal representative and must monitor the clinical trial until
completed. We intend to use third-party clinical research organizations (“CROs”) to administer and
conduct our planned clinical trials and will rely upon such CROs, as well as medical institutions, clinical
investigators and consultants, to conduct our trials in accordance with our clinical protocols and to play a
significant role in the subsequent collection and analysis of data from these trials. The failure by any of
such third parties to meet expected timelines, adhere to our protocols or meet regulatory standards could
adversely impact the subject product development program. Human clinical trials are typically conducted in
three sequential phases that may overlap or be combined:

•

Phase 1. The pharmaceutical product is usually introduced into healthy human subjects and tested
for safety, dosage tolerance, absorption, metabolism, distribution and excretion. In the case of
some products for severe or life-threatening diseases, such as cancer treatments, especially when
the product may be too inherently toxic to ethically administer to healthy volunteers, the initial
human testing is often conducted in patients.

Phase 2. The pharmaceutical product is evaluated in a limited patient population to identify
possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for
specific targeted diseases and to determine dosage tolerance, optimal dosage and dosing schedule.

Phase 3. Clinical trials are undertaken to further evaluate dosage, clinical efficacy and safety in an
expanded patient population at geographically dispersed clinical trial sites. These clinical trials are
intended to establish the overall risk/benefit ratio of the product and provide an adequate basis for
product labeling. Generally, two adequate and well-controlled Phase 3 clinical trials are required
by the FDA for approval of an NDA/BLA or foreign authorities for approval of marketing
applications.

Post-approval studies, or Phase 4 clinical trials, may be conducted after initial marketing approval. These
studies are used to gain additional experience from the treatment of patients in the intended therapeutic
indication and may be requested by the FDA as a condition of approval.

Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA
and written IND safety reports must be submitted to the FDA and the investigators for serious and
unexpected adverse events or any finding from tests in laboratory animals that suggests a significant risk for
human subjects. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any
specified period, if at all. The FDA or the sponsor or, if used, its data safety monitoring board may suspend
a clinical trial at any time on various grounds, including a finding that the research subjects or patients are
being exposed to an unacceptable health risk. Similarly, an IRB or ethics committee can suspend or
terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in
accordance with the IRB’s or ethics committee’s requirements or if the pharmaceutical product has been
associated with unexpected serious harm to patients.

Concurrent with clinical trials, companies usually complete additional animal studies and must also develop
additional information about the chemistry and physical characteristics of the pharmaceutical product as
well as finalize a process for manufacturing the product in commercial quantities in accordance with cGMP
requirements. The manufacturing process must be capable of consistently producing quality batches of the
pharmaceutical product candidate and, among other things, must develop methods for testing the identity,
strength, quality and purity of the final pharmaceutical product. Additionally, appropriate packaging must
be selected, tested and stability studies must be conducted to demonstrate that the pharmaceutical product
candidate does not undergo unacceptable deterioration over its shelf life.

United States Review and Approval Processes

The results of product development, preclinical studies and clinical trials, along with descriptions of the
manufacturing process, analytical tests conducted on the chemistry of
the pharmaceutical product,
proposed labeling and other relevant information are submitted to the FDA as part of an NDA/BLA
requesting approval to market the product.

The NDA/BLA review and approval process is lengthy and difficult and the FDA may refuse to approve an
NDA/BLA if the applicable regulatory criteria are not satisfied or may require additional clinical data or
other data and information. Even if such data and information is submitted, the FDA may ultimately
decide that the NDA/BLA does not satisfy the criteria for approval. If a product receives regulatory
approval, the approval may be significantly limited to specific diseases and dosages or the indications for
use may otherwise be limited, which could restrict the commercial value of the product. Further, the FDA
may require that certain contraindications, warnings or precautions be included in the product labeling.
Drug manufacturers and their subcontractors are required to register their establishments with the FDA,
and are subject to periodic unannounced inspections by the FDA for compliance with cGMPs, which
impose certain procedural and documentation requirements upon us and our third-party manufacturers.
We cannot be certain that we, our partners or our or their suppliers will be able to comply with the cGMP
and other FDA regulatory requirements.

Post-Approval Requirements

Any pharmaceutical products for which we or our partners receive FDA approvals are subject to continuing
regulation by the FDA, including, among other things, record-keeping requirements, reporting of adverse
experiences with the product, providing the FDA with updated safety and efficacy information, product
sampling and distribution requirements, complying with certain electronic records and signature
requirements and complying with FDA promotion and advertising requirements, which include, among
others, standards for direct-to-consumer advertising, promoting pharmaceutical products for uses or in
patient populations that are not described in the pharmaceutical product’s approved labeling (known as
“off-label use”),
industry-sponsored scientific and educational activities, and promotional activities
involving the internet. Failure to comply with FDA requirements can have negative consequences, including
adverse publicity, enforcement letters from the FDA, mandated corrective advertising or communications
with doctors, and civil or criminal penalties.

The FDA also may require Phase 4 testing, risk minimization action plans and surveillance to monitor the
effects of an approved product or place conditions on an approval that could restrict the distribution or use
of the product.

Orphan Drugs

Under the Orphan Drug Act, special incentives exist for sponsors to develop products for rare diseases or
conditions, which are defined to include those diseases or conditions that affect fewer than 200,000 people
in the United States. Requests for orphan drug designation must be submitted before the submission of an
NDA or BLA. In June 2012, we were notified by the FDA that CNDO-109 was granted orphan drug
designation and in September 2012, the USPTO issued the first U.S. patent covering CNDO-109. If
CNDO-109 is commercialized, we will be obligated to pay UCLB annual royalties based upon the net sales
of product or if we sublicense CNDO-109, a portion of sub-licensing revenue we receive, if any.

If a product that has an orphan drug designation is the first such product to receive FDA approval for the
disease for which it has such designation, the product is entitled to orphan product exclusivity for that use.
This means that, subsequent to approval, the FDA may not approve any other applications to market the
same drug for the same disease, except in limited circumstances, for seven years. The FDA may approve a
subsequent application from another person if the FDA determines that the application is for a different
drug or different use, or if the FDA determines that the subsequent product is clinically superior, or that the
holder of the initial orphan drug approval cannot assure the availability of sufficient quantities of the drug
to meet the public’s need. If the FDA approves someone else’s application for the same drug that has
orphan exclusivity, but for a different use, the competing drug could be prescribed by physicians outside its
FDA approval for the orphan use, notwithstanding the existence of orphan exclusivity. A grant of an
orphan designation is not a guarantee that a product will be approved. If a sponsor receives orphan drug
exclusivity upon approval, there can be no assurance that the exclusivity will prevent another person from
receiving approval for the same or a similar drug for the same or other uses.

Pediatric Information

Under the Pediatric Research Equity Act, or PREA, NDAs and BLAs or supplements to NDAs and BLAs
must contain data to assess the safety and effectiveness of the treatment for the claimed indications in all
relevant pediatric subpopulations and to support dosing and administration for each pediatric
subpopulation for which the treatment is safe and effective. The FDA may grant full or partial waivers, or
deferrals, for submission of data. Unless otherwise required by regulation, PREA does not apply to any
product for an indication for which orphan designation has been granted.

The Best Pharmaceuticals for Children Act, or BPCA, provides BLA holders a six-month extension of any
exclusivity-patent or non-patent-for a product if certain conditions are met. Conditions for exclusivity
include the FDA’s determination that information relating to the use of a new drug in the pediatric
population may produce health benefits in that population, FDA making a written request for pediatric
studies, and the applicant agreeing to perform, and reporting on, the requested studies within a specific time
frame.

Other Healthcare Laws and Compliance Requirements

In the United States, our activities are potentially subject to regulation by various federal, state and local
authorities in addition to the FDA, including the Centers for Medicare and Medicaid Services (formerly the
Health Care Financing Administration), other divisions of the United States Department of Health and
Human Services (e.g., the Office of Inspector General), the United States Department of Justice and
individual United States Attorney offices within the Department of Justice, and state and local
governments.

Pharmaceutical Coverage, Pricing and Reimbursement

In the United States and markets in other countries, sales of any products for which we and our partners
receive regulatory approval for commercial sale will depend in part on the availability of reimbursement
from third-party payors, including government health administrative authorities, managed care providers,
private health insurers and other organizations. Third-party payors are increasingly examining the medical
necessity and cost-effectiveness of medical products and services, in addition to their safety and efficacy,
and, accordingly, significant uncertainty exists as to the reimbursement status of newly approved
therapeutics. Adequate third-party reimbursement may not be available for our products to enable us to
realize an appropriate return on our investment in research and product development. We are unable to
predict the future course of federal or state healthcare legislation and regulations, including the Affordable
Care Act.

International Regulation

In addition to regulations in the United States, there are a variety of foreign regulations governing clinical
trials and commercial sales and distribution of any product candidates. The approval process varies from
country to country, and the time may be longer or shorter than that required for FDA approval.

Employees

As of December 31, 2018, we had 88 full-time employees at Fortress and our partner companies.

Executive Officers of Fortress

The following table sets forth certain information about our executive officers as of December 31, 2018.

Name

Lindsay A. Rosenwald, M.D.

Robyn M. Hunter

George Avgerinos, Ph.D.

Michael S. Weiss

Age

Position

Chairman of the Board of Directors, President and Chief
Executive Officer

Chief Financial Officer

Senior Vice President, Biologics Operations

Executive Vice Chairman Strategic Development

the Company’s Board of Directors since
Lindsay A. Rosenwald, M.D. has served as a member of
October 2009 and as Chairman, President and Chief Executive Officer of
the Company since
December 2013. In addition, Dr. Rosenwald currently serves as President and Chief Executive Officer of
Fortress partner companies Aevitas Therapeutics, Inc. and Tamid Bio, Inc. From November 2014 to
August 2015 he served as interim President and Chief Executive Officer of Checkpoint Therapeutics, Inc.
Dr. Rosenwald currently serves as a member of the board of directors of Fortress partner companies
Aevitas Therapeutics, Inc., Avenue Therapeutics, Inc.
(Nasdaq: ATXI), Caelum Biosciences, Inc.,
Cellvation, Inc., Checkpoint Therapeutics, Inc. (Nasdaq: CKPT), Cyprium Therapeutics, Inc., Helocyte,
Inc.
Inc., Journey Medical Corporation, Mustang Bio,
Dr. Rosenwald is Co-Portfolio Manager and Partner of Opus Point Partners Management, LLC, an asset
management firm in the life sciences industry, which he joined in 2009. Prior to that, from 1991 to 2008, he
served as the Chairman of Paramount BioCapital, Inc. Dr. Rosenwald received his B.S. in finance from
Pennsylvania State University and his M.D. from Temple University School of Medicine.

(Nasdaq: MBIO) and Tamid Bio,

Inc.

Robyn M. Hunter was appointed as the Company’s Chief Financial Officer on June 26, 2017. Ms. Hunter
has more than 30 years of financial and operational experience in an array of industries. Prior to serving as
the Company’s CFO, Ms. Hunter served as the Company’s Vice President and Corporate Controller since
June 2011, where she implemented financial and operational processes, procedures and policies to facilitate
the Company’s execution of its growth strategy. From January 2006 to May 2011, Ms. Hunter served as
Senior Vice President and Chief Financial Officer of Schochet Associates. From August 2004 to
January 2006, Ms. Hunter served as the Corporate Controller for Indevus Pharmaceuticals. From 1990 to
2004, Ms. Hunter held several positions from Accounting Manager to Vice President and Treasurer of The
Stackpole Corporation. Ms. Hunter holds a Bachelor of Arts degree in Economics from Union College in
Schenectady New York.

George Avgerinos, Ph.D. has served as our Senior Vice President, Biologics Operations since June 2013.
Dr. Avgerinos joined us from AbbVie, Inc., where he was Vice President, HUMIRA® Manufacturing
Sciences and External Partnerships. In his 22-year career at AbbVie, Inc., formerly Abbott Laboratories,
formerly BASF Bioresearch Corporation (BASF), Dr. Avgerinos was responsible for many aspects of
biologics development and operations. These included the HUMIRA® operations franchise, global
biologics process and manufacturing sciences, biologics CMC, manufacturing operations, and third-party
manufacturing. During his tenure, Dr. Avgerinos led and participated in the development of numerous
clinical candidates which included the launch of HUMIRA®. He supported expansion of the supply chain
to over $9.0 billion in annual global sales. Dr. Avgerinos’ efforts on HUMIRA® have been recognized with
numerous awards, including the prestigious Abbott’s Chairman’s award in 2011. Dr. Avgerinos received a
B.A. in Biophysics from the University of Connecticut and a Ph.D. in Biochemical Engineering from the
Massachusetts Institute of Technology. Dr. Avgerinos also provides services for TG Therapeutics, Inc., a
related party, pursuant to a shared services agreement.

Michael S. Weiss has served as our Executive Vice Chairman, Strategic Development since February 2014.
He has
served as Executive Vice Chairman, Strategic Development of Fortress Biotech since
February 2014. He currently serves as a member of the board of directors of several of our partner

companies, including: Aevitas Therapeutics, Inc., Cellvation, Inc., Checkpoint Therapeutics, Inc. (Nasdaq:
CKPT), Cyprium Therapeutics, Inc., Helocyte, Inc., Mustang Bio, Inc. (Nasdaq: MBIO) and Tamid Bio,
Inc. Mr. Weiss is currently the Executive Chairman of Mustang Bio, Inc. (where he served as interim CEO
from March 2015 to April 2017) and the Chairman of the Board of Directors of Checkpoint Therapeutics,
Inc. (where he served as interim CEO from August 2015 to October 2015). From March 2015 until
February 2019, Mr. Weiss served on the board of Avenue Therapeutics, Inc. (Nasdaq: ATXI). Mr. Weiss
also served as the Chairman of the Board of Directors of National Holdings Corporation (Nasdaq:
NHLD) from September 2016 to June 2018. Since December 2011, Mr. Weiss has served in multiple
capacities at TG Therapeutics, Inc., a related party, and is currently its Executive Chairman, Chief
Executive Officer and President. He is a co-founder of, and has been a managing partner and principal of,
Opus Point Partners Management, LLC since 2008. In 1999, Mr. Weiss founded Access Oncology, which
was later acquired by Keryx Biopharmaceuticals (Nasdaq: KERX) in 2004. Following the merger,
Mr. Weiss remained as CEO of Keryx. He began his professional career as a lawyer with Cravath, Swaine &
Moore LLP. Mr. Weiss earned his B.S. in Finance from The University of Albany and his J.D. from
Columbia Law School.

Available Information

We and certain of our affiliates file annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, proxy and information statements and amendments to reports filed or furnished
pursuant to Sections 13(a), 14 and 15(d) of the Securities Exchange Act of 1934, as amended, or the
Exchange Act. The public may obtain these filings at the SEC’s Public Reference Room at 100 F Street, NE,
Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at
http://www.sec.gov that contains reports, proxy and information statements and other information
regarding our Company and other companies that file materials with the SEC electronically. Copies of our
and certain of our affiliates’ reports on Form 10-K, Forms 10-Q and Forms 8-K may be obtained, free of
charge, electronically through our website at www.fortressbiotech.com.

Item 1A. Risk factors

Investing in our Common Stock, Series A Preferred Stock or any other type of equity or debt securities
(together our “Securities”) involves a high degree of risk. You should consider carefully the risks and
uncertainties described below, together with all of the other information in this Annual Report on Form
10-K including the consolidated financial statements and the related notes, as well as the risks, uncertainties
and other information set forth in the reports and other materials filed or furnished by our partners and
affiliates Checkpoint, Mustang, and Avenue with the SEC, before deciding to invest in our Securities. If any
of the following risks or the risks included in the public filings of Checkpoint, Mustang or Avenue were to
materialize, our business, financial condition, results of operations, and future growth prospects could be
materially and adversely affected. In that event, the market price of our Securities could decline, and you
could lose part of or all of your investment in our Securities. In addition, you should be aware that the
below stated risks should be read as being applicable to our partners and affiliates such that, if any of the
negative outcomes associated with any such risk is experienced by one of our partners or affiliates, the value
of Fortress’ holdings in such partner or affiliate (if any) may decline.

Risks Related to our Growth Strategy

If we acquire, enter into joint ventures with or obtain a controlling interest in companies in the future, it could
adversely affect our operating results and the value of our Securities, thereby diluting stockholder value,
disrupting our business and/or diminishing the value of our holdings in our partner companies.

As part of our growth strategy, we might acquire, enter into joint ventures with, or obtain significant
joint ventures with and investments in other
ownership stakes in other companies. Acquisitions of,
companies involve numerous risks, including, but not necessarily limited to:

•

risk of entering new markets in which we have little to no experience;

diversion of financial and managerial resources from existing operations;

successfully negotiating a proposed acquisition or investment timely and at a price or on terms
and conditions favorable to us;

the impact of regulatory reviews on a proposed acquisition or investment;

the outcome of any legal proceedings that may be instituted with respect to the proposed
acquisitions or investment;

with respect to an acquisition, difficulties in integrating operations, technologies, services and
personnel; and

potential inability to maintain relationships with customers of the companies we may acquire or
invest in.

If we fail to properly evaluate potential acquisitions, joint ventures or investments, we might not achieve the
anticipated benefits of any such transaction, we might incur higher costs than anticipated, and management
resources and attention might be diverted from other necessary or valuable activities.

If we or certain of cannot innovate and develop products and services and/or commercialize biopharmaceutical
products or grow our and their respective businesses, we may not be able to generate revenue.

Our growth strategy also depends on our ability to generate revenue. If we cannot innovate and develop
products and services or commercialize future biopharmaceutical products or grow their respective
businesses, we may not be able to generate revenue growth as anticipated.

We may not be able to generate returns for our investors if certain of our partners or affiliates, several of which
have limited or no operating history, no commercialized revenue generating products, and are not yet profitable,
cannot obtain additional third-party financing.

As part of our growth strategy, we have made and will likely continue to make substantial financial and
operational commitments in our affiliated partners, which at the time of investment often have limited or no
operating history, no commercialized revenue generating products, and require additional third-party

financing to fund product and services development or acquisitions. Our business depends in large part on
the ability of one or more of our partner companies to innovate, in-license, acquire or invest in successful
biopharmaceutical products, develop financial
in increasingly
competitive and highly regulated markets. If certain of our partner companies do not successfully obtain
additional third-party financing to commercialize products, successfully acquire companies, as applicable,
the value of our businesses and our ownership stakes in our partner companies may be materially adversely
affected.

services and/or acquire companies

If we cannot continue to fund our research and development programs, we may be required to reduce product
development, which will adversely impact our growth strategy.

Our research and development (“R&D”) programs will require substantial additional capital to conduct
research, preclinical testing and clinical trials, establish pilot scale and commercial scale manufacturing
processes and facilities, and establish and develop quality control, regulatory, marketing, sales, and
administrative capabilities to support these programs. We expect to fund our R&D activities from a
combination of cash generated from royalties and milestones from our partners in various past, ongoing,
and future collaborations, and through additional equity or debt financings from third parties. These
financings could depress the stock prices of our Securities. If additional funds are required to support our
operations and such funds cannot be obtained on favorable terms, we may not be able to develop products,
which will adversely impact our growth strategy.

Collaborative relationships with third parties could cause us to expend significant resources and incur
substantial business risk with no assurance of financial return.

We anticipate substantial reliance upon strategic collaborations for marketing and commercializing our
existing product candidates and we may rely even more on strategic collaborations for R&D of other
product candidates. We may sell product offerings through strategic partnerships with pharmaceutical and
biotechnology companies. If we are unable to establish or manage such strategic collaborations on terms
favorable to us in the future, our revenue and drug development may be limited.

If we enter into R&D collaborations during the early phases of drug development, success will, in part,
depend on the performance of research collaborators. We may not directly control the amount or timing of
resources devoted by research collaborators to activities related to product candidates. Research
collaborators may not commit sufficient resources to our R&D programs. If any research collaborator fails
to commit sufficient resources, the preclinical or clinical development programs related to the collaboration
could be delayed or terminated. Also, collaborators may pursue existing or other development-stage
products or alternative technologies in preference to those being developed in collaboration with us. Finally,
if we fail to make required milestone or royalty payments to collaborators or to observe other obligations in
agreements with them, the collaborators may have the right to terminate or stop performance of those
agreements.

Establishing strategic collaborations is difficult and time-consuming. Our discussions with potential
collaborators may not lead to the establishment of collaborations on favorable terms, if at all. Potential
collaborators may reject collaborations based upon their assessment of our financial, regulatory or
intellectual property positions. In addition, there has been a significant number of recent business
combinations among large pharmaceutical companies that have resulted in a reduced number of potential
future collaborators. Even if we successfully establish new collaborations, these relationships may never
result in the successful development or commercialization of product candidates or the generation of sales
revenue. To the extent that we enter into collaborative arrangements, the related product revenues that
might follow are likely to be lower than if we directly marketed and sold products. Such collaborators may
also consider alternative product candidates or technologies for similar indications that may be available to
collaborate on, and such collaborations could be more attractive than the one with us for any future
product candidate.

Management of our relationships with collaborators will require:

•

significant time and effort from our management team;

coordination of our marketing and R&D programs with the respective marketing and R&D
priorities of our collaborators; and

effective allocation of our resources to multiple projects.

As we continue to execute our growth strategy, we may be subject to further government regulation which would
adversely affect our operations.

If we engage in business combinations and other transactions that result in holding passive investment
interests in a number of entities, we may become subject to regulation under the Investment Company Act
of 1940, as amended (the “Investment Company Act”). If we do become subject to the Investment
Company Act, we would be required to register as an investment company and could be expected to incur
significant registration and compliance costs in the future.

We may not be able to manage our anticipated growth, which may in turn adversely impact our business.

We will need to continue to expend capital on improving our infrastructure to address our anticipated
growth. Acquisitions of companies or products could place a strain on our management, and
administrative, operational and financial systems. In addition, we may need to hire, train, and manage more
employees, focusing on their integration with us and corporate culture. Integration and management issues
associated with increased acquisitions may require a disproportionate amount of our management’s time
and attention and distract our management from other activities related to running our business.

We may not be able to hire or retain key officers or employees needed to implement our business strategy and
develop products and businesses.

Our success depends on the continued contributions of our executive officers, financial, scientific, and
technical personnel and consultants, and on our ability to attract additional personnel as we continue to
implement growth strategies and acquire and invest in companies with varied businesses. During our
operating history, many essential responsibilities have been assigned to a relatively small number of
individuals. However, as we continue to implement our growth strategy, the demands on our key employees
will expand, and we will need to recruit additional qualified employees. The competition for such qualified
personnel is intense, and the loss of services of certain key personnel, or our inability to attract additional
personnel to fill critical positions, could adversely affect our business.

We currently depend heavily upon the efforts and abilities of our management team and the management
teams of our partners. The loss or unavailability of the services of any of these individuals could have a
material adverse effect on our business, prospects, financial condition and results. In addition, we have not
obtained, do not own, are not the beneficiary of key-person life insurance for any of our key personnel. We
only maintain a limited amount of directors’ and officers’ liability insurance coverage. There can be no
assurance that this coverage will be sufficient to cover the costs of the events that may occur, in which case,
there could be a substantial impact on our ability to continue operations.

Our employees, consultants, or third-party partners may engage in misconduct or other improper activities,
including but not necessarily limited to noncompliance with regulatory standards and requirements or internal
procedures, policies or agreements to which such employees, consultants and partners are subject, any of which
could have a material adverse effect on our business.

We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees, consultants,
or third-party partners could include intentional failures to comply with FDA regulations, provide accurate
information to the FDA, comply with current good manufacturing practices (“CGMPs”), comply with
federal and state healthcare fraud and abuse laws and regulations, report financial information or data
accurately, comply with internal procedures, policies or agreements to which such employees, consultants or
partners are subject, or disclose unauthorized activities to us. In particular, sales, marketing and business
arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent

fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or
prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer
incentive programs and other business arrangements. Employee, consultant, or third-party misconduct
could also involve the improper use of information obtained in the course of clinical trials, which could
result in regulatory sanctions and serious harm to our reputation, as well as civil and criminal liability. The
precautions we take to detect and prevent this activity may not be effective in controlling unknown or
unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits
stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted
against us, and we are not successful in defending ourselves or asserting our rights, those actions could have
a significant impact on our business and results of operations, including the imposition of significant fines
or other civil and/or criminal sanctions.

We receive a large amount of proprietary information from potential or existing licensors of intellectual
property and potential acquisition target companies, all pursuant to confidentiality agreements. The
confidentiality and proprietary invention assignment agreements that we have in place with each of our
employees and consultants prohibit the unauthorized disclosure of such information, but such employees
or consultants may nonetheless disclose such information through negligence or willful misconduct. Any
such unauthorized disclosures could subject us to monetary damages and/or injunctive or equitable relief.
The notes, analyses and memoranda that we have generated based off such information are also valuable to
our businesses, and the unauthorized disclosure or misappropriation of such materials by our employees
and consultants could significantly harm our strategic initiatives — especially if such disclosures are made
to our competitor companies.

Certain of our officers and directors serve in similar roles at our partners, affiliates, related parties and/or
other entities with which we transact business or in which we hold significant minority ownership positions;
ongoing and future relationships and transactions between these parties could result in conflicts of interest.

We share directors and/or officers with certain of our partners, affiliates, related parties and/or other
entities with which we transact business or in which we hold significant minority ownership positions, and
such arrangements could create conflicts of interest in the future, including with respect to the allocation of
corporate opportunities. While we believe that we have put in place policies and procedures to identify and
mitigate such conflicts, and that any existing agreements that may give rise to such conflicts and any such
policies or procedures were negotiated at arm’s length in conformity with fiduciary duties, such conflicts of
interest may nonetheless arise. The existence and consequences of such potential conflicts could expose us
to lost profits, claims by our investors and creditors, and harm to our results of operations.

Risks Related to Our Biopharmaceutical Business and Industry

We are an early-stage company with limited operating history on which stockholders can base an investment
decision, and we rely heavily on third parties for the development and manufacturing of their products and
product candidates.

We are primarily an early-stage biopharmaceutical company and certain of our partners and affiliates, on
whose successes we largely rely, are also early-stage biopharmaceutical companies with limited operating
histories. To date, we have engaged primarily in acquisition, evaluative and R&D activities and have not
generated any revenues from product sales (except through Journey Medical Corporation). We have
incurred significant net losses since our inception. As of December 31, 2018, we had an accumulated deficit
of approximately $396.3 million. We may need to rely on third parties for activities critical to the product
candidate development process, including but not necessarily limited to:

•

identifying and evaluating product candidates;

negotiating, drafting and entering into licensing and other arrangements with product
development partners; and

continuing to undertake pre-clinical development and designing and executing clinical trials.

We have also not demonstrated the ability to perform the functions necessary for the successful
commercialization of any of our pre-commercial product candidates, should any of them be approved for
marketing. If we were to have any such product candidates approved, the successful commercialization of
such products would require us to perform or contract with third parties for performance of a variety of
critical functions, including, but not necessarily limited to:

•

advising and participating in regulatory approval processes;

formulating and manufacturing products for clinical development programs and commercial sale;
and

conducting sales and marketing activities.

Our operations have been limited to acquiring, developing and securing the proprietary rights for, and
undertaking pre-clinical development and clinical trials of, product candidates, both at the Fortress level and
via our partner companies. These operations provide a limited basis for our stockholders and prospective
investors to assess our ability to develop and commercialize potential product candidates, as well as for you
to assess the advisability of investing in our Securities. Each of these requirements will require substantial
time, effort and financial resources.

If we are unable to establish or maintain sales and marketing capabilities or fail to enter into agreements with
third parties to market, distribute and sell products that may be successfully developed, we may not be able to
effectively market and sell products and generate product revenue.

We do not currently have the infrastructure for the sales, marketing and distribution of any of our product
candidates (except for that which exists through Journey Medical Corporation), and we must build and
maintain such infrastructures or make arrangements with third parties to perform these functions in order
to commercialize any products that we may successfully develop. The establishment and development of a
sales force, either by us or certain of our partners, or the establishment of a contract sales force to market
any products for which we may receive marketing approval, is expensive and time-consuming and could
delay any such product launch or compromise the successful commercialization of such products. If we are
unable to establish and maintain sales and marketing capabilities or any other non-technical capabilities
necessary to commercialize any products that may be successfully developed, we will need to contract with
third parties to market and sell such products. We may not be able to establish arrangements with third
parties on commercially reasonable terms, or at all.

If any of our product candidates that are successfully developed do not achieve broad market acceptance
among physicians, patients, healthcare payors and the medical community, the revenues that any such product
candidates generate from sales will be limited.

Even if our product candidates receive regulatory approval, which may not occur, they may not gain market
acceptance among physicians, patients, healthcare payors and the medical community. Coverage and
reimbursement of our product candidates by third-party payors, including government payors, generally is
also necessary for commercial success. The degree of market acceptance of any approved products would
depend on a number of factors, including, but not necessarily limited to:

•

the efficacy and safety as demonstrated in clinical trials;

the timing of market introduction of such product candidate as well as competitive products;

the clinical indications for which the product is approved;

acceptance by physicians, major operators of hospitals and clinics and patients of the product as a
safe and effective treatment;

the potential and perceived advantages of product candidates over alternative treatments;

•

the safety of product candidates seen in a broader patient group, including its use outside the
approved indication;

the cost of treatment in relation to alternative treatments;

the availability of adequate reimbursement and pricing by third parties and government
authorities;

changes in regulatory requirements by government authorities for our product candidates;

relative convenience and ease of administration;

the prevalence and severity of side effects and adverse events;

the effectiveness of our sales and marketing efforts; and

unfavorable publicity relating to the product.

If any product candidate is approved but does not achieve an adequate level of acceptance by physicians,
hospitals, healthcare payors and patients, we may not generate sufficient revenue from these products and in
turn we may not become or remain profitable.

Reimbursement may be limited or unavailable in certain market segments for our product candidates, which
could make it difficult for us to sell our products profitably.

We intend to seek approval to market our future products in both the United States and in countries and
territories outside the United States. If we obtain approval in one or more foreign countries, we will be
subject to rules and regulations in those countries relating to such products. In some foreign countries,
particularly in the European Union, the pricing of prescription pharmaceuticals and biologics is subject to
governmental control. In these countries, pricing negotiations with governmental authorities can take
considerable time after the receipt of marketing approval for a product candidate. In addition, market
acceptance and sales of our product candidates will depend significantly on the availability of adequate
coverage and reimbursement from third-party payors for any of our product candidates and may be
affected by existing and future healthcare reform measures.

Government authorities and third-party payors, such as private health insurers and health maintenance
organizations, decide which pharmaceuticals they will pay for and establish reimbursement
levels.
Reimbursement by a third-party payor may depend upon a number of factors, including the third-party
payor’s determination that use of a product is:

•

a covered benefit under its health plan;

safe, effective and medically necessary;

appropriate for the specific patient;

cost-effective; and

experimental or investigational.

Obtaining coverage and reimbursement approval for a product from a government or other third-party
payor is a time consuming and costly process that could require that we provide supporting scientific,
clinical and cost-effectiveness data for the use of our products to the payor. We may not be able to provide
data sufficient to gain acceptance with respect to coverage and reimbursement. If reimbursement of our
future products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, we
may be unable to achieve or sustain profitability. Additionally, while we may seek approval of our products
in combination with each other, there can be no guarantee that we will obtain coverage and reimbursement
for any of our products together, or that such reimbursement will incentivize the use of our products in
combination with each other as opposed to in combination with other agents which may be priced more
favorably to the medical community.

In both the United States and certain foreign countries, there have been a number of legislative and
regulatory changes to the healthcare system that could impact our ability to sell our products profitably. In
particular, the Medicare Modernization Act of 2003 revised the payment methodology for many products
reimbursed by Medicare, resulting in lower rates of reimbursement for many types of drugs, and added a
prescription drug benefit to the Medicare program that involves commercial plans negotiating drug prices
for their members. Since 2003, there have been a number of other legislative and regulatory changes to the
coverage and reimbursement landscape for pharmaceuticals.

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education
Reconciliation Act of 2010, collectively, the “ACA,” was enacted in 2010 and made significant changes to
the United States’ healthcare system. The ACA and any revisions or replacements of that Act, any
substitute legislation, and other changes in the law or regulatory framework could have a material adverse
effect on our business.

Among the provisions of the ACA of importance to our potential product candidates are:

•

an annual, nondeductible fee on any entity that manufactures, or imports specified branded
prescription drugs and biologic agents, apportioned among these entities according to their
market share in certain government healthcare programs;

an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug
Rebate Program to 23.1% and 13.0% of the average manufacturer price for branded and generic
drugs, respectively;

expansion of healthcare fraud and abuse laws, including the federal False Claims Act and the
federal Anti-Kickback Statute, new government investigative powers and enhanced penalties for
non-compliance;

a new Medicare Part D coverage gap discount program, in which manufacturers must agree to
offer point-of-sale discounts off negotiated prices of applicable brand drugs to eligible
beneficiaries during their coverage gap period, as a condition for a manufacturer’s outpatient
drugs to be covered under Medicare Part D;

extension of a manufacturer’s Medicaid rebate liability to covered drugs dispensed to individuals
who are enrolled in Medicaid managed care organizations;

expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to
offer Medicaid coverage to additional
individuals and by adding new mandatory eligibility
categories for certain individuals with income at or below 138% of the federal poverty level,
thereby potentially increasing a manufacturer’s Medicaid rebate liability;

expansion of the entities eligible for discounts under the 340B Drug Pricing Program;

the new requirements under the federal Open Payments program and its implementing
regulations;

a new requirement to annually report drug samples that manufacturers and distributors provide to
physicians;

a new regulatory pathway for the approval of biosimilar biological products, all of which will
impact existing government healthcare programs and will result in the development of new
programs; and

a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct
comparative clinical effectiveness research, along with funding for such research.

The Supreme Court upheld the ACA in the main challenge to the constitutionality of the law in 2012.
Specifically, the Supreme Court held that the individual mandate and corresponding penalty was
constitutional because it would be considered a tax by the federal government. The Supreme Court also
upheld federal subsidies for purchasers of insurance through federally facilitated exchanges in a decision
released in June 2015.

President Trump ran for office on a platform that supported the repeal of the ACA, and one of his first
actions after his inauguration was to sign an Executive Order instructing federal agencies to waive or delay
requirements of the ACA that impose economic or regulatory burdens on states, families, the health-care
industry and others. Modifications to or repeal of all or certain provisions of the ACA have been attempted
in Congress as a result of the outcome of the recent presidential and congressional elections, consistent with
statements made by the incoming administration and members of Congress during the presidential and
congressional campaigns and following the election.

In January 2017, Congress voted to adopt a budget resolution for fiscal year 2017, or the Budget
Resolution, that authorizes the implementation of legislation that would repeal portions of the ACA. The
Budget Resolution is not a law. However, it is widely viewed as the first step toward the passage of
legislation that would repeal certain aspects of the ACA. In March 2017, following the passage of the
budget resolution for fiscal year 2017, the United States House of Representatives passed legislation known
as the American Health Care Act of 2017, which, if enacted, would amend or repeal significant portions of
the ACA. Attempts in the Senate in 2017 to pass ACA repeal legislation, including the Better Care
Reconciliation Act of 2017, so far have been unsuccessful. At the end of 2017, Congress passed the Tax
Cuts and Jobs Act, which repealed the penalty for individuals who fail to maintain minimum essential
health coverage as required by the ACA. Following this legislation, Texas and 19 other states filed a lawsuit
alleging that the ACA is unconstitutional as the individual mandate was repealed, undermining the legal
basis for the Supreme Court’s prior decision. On December 14, 2018, Texas federal district court judge Reed
O’Connor issued a ruling declaring that the ACA in it is entirety is unconstitutional. While this decision has
no immediate legal effect on the ACA and its provisions, this lawsuit is ongoing and the outcome through
the appeals process may have a significant impact on our business.

Most recently, the Bipartisan Budget Act of 2018, the “BBA,” which set government spending levels for
Fiscal Years 2018 and 2019, revised certain provisions of the ACA. Specifically, beginning in 2019, the BBA
increased manufacturer point-of-sale discounts off negotiated prices of applicable brand drugs in the
Medicare Part D coverage gap from 50% to 70%, ultimately increasing the liability for brand drug
manufacturers. Further, this mandatory manufacturer discount applies to biosimilars beginning in 2019.

The Trump Administration has also taken several regulatory steps to redirect ACA implementation. The
Department of Health and Human Services (“HHS”) finalized Medicare fee-for-service hospital payment
reductions for Part B drugs acquired through the 340B Drug Pricing Program. HHS also has signaled its
intent to pursue reimbursement policy changes for Medicare Part B drugs as a whole that likely would
reduce hospital and physician reimbursement for these drugs.

HHS has made numerous other proposals aimed at lowering drug prices for Medicare beneficiaries and
increasing price transparency. These proposals include giving Medicare Advantage and Part D plans
flexibility in the availability of drugs in “protected classes,” more transparency in the cost of drugs,
including the beneficiary’s financial liability, and less costly alternatives and permitting the use of step
therapy as a means of prior authorization. HHS has also proposed requiring pharmaceutical manufacturers
disclose the prices of certain drugs in direct-to-consumer television advertisements.

HHS also has taken steps to increase the availability of cheaper health insurance options, typically with
fewer benefits and less generous coverage. The Administration has also signaled its intention to address
drug prices and to increase competition, including by increasing the availability of biosimilars and generic
drugs. As these are regulatory actions, a new administration could undo or modify these efforts.

There likely will continue to be legislative and regulatory proposals at the federal and state levels directed at
broadening the availability of healthcare and containing or lowering the cost of healthcare products and
services. We cannot predict the initiatives that may be adopted in the future. The continuing efforts of the
government, insurance companies, managed care organizations and other payors of healthcare services to
contain or reduce costs of healthcare may adversely affect:

•

the demand for any products for which we may obtain regulatory approval;

our ability to set a price that we believe is fair for our products;

•

our ability to generate revenues and achieve or maintain profitability;

the level of taxes that we are required to pay; and

the availability of capital.

In addition, governments may impose price controls, which may adversely affect our future profitability.

Our current and future relationships with customers and third-party payors in the United States and elsewhere
may be subject, directly or indirectly, to applicable anti-kickback, fraud and abuse, false claims, transparency,
health information privacy and security and other healthcare laws and regulations, which could expose us to
criminal sanctions, civil penalties, contractual damages, reputational harm, administrative burdens and
diminished profits and future earnings.

Healthcare providers, physicians and third-party payors in the US and elsewhere will play a primary role in
the recommendation and prescription of any product candidates for which we obtain marketing approval.
Our future arrangements with third-party payors and customers may expose us to broadly applicable fraud
and abuse and other healthcare laws and regulations,
the federal
Anti-Kickback Statute and the federal False Claims Act, which may constrain the business or financial
arrangements and relationships through which we sell, market and distribute any product candidates for
which we obtain marketing approval. In addition, we may be subject to transparency laws and patient
privacy regulation by the federal and state governments and by governments in foreign jurisdictions in
which we conduct our business. The applicable federal, state and foreign healthcare laws and regulations
that may affect our ability to operate include, but are not necessarily limited to:

including, without

limitation,

•

the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly
and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash
or in kind, to induce or reward, or in return for, either the referral of an individual for, or the
purchase, order or recommendation of, any good or service, for which payment may be made
under federal and state healthcare programs, such as Medicare and Medicaid;

federal civil and criminal false claims laws and civil monetary penalty laws, including the federal
False Claims Act, which impose criminal and civil penalties, including civil whistleblower or qui
tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to
the federal government, including the Medicare and Medicaid programs, claims for payment that
are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to
pay money to the federal government; the federal Health Insurance Portability and Accountability
Act of 1996, or HIPAA, which imposes criminal and civil liability for executing a scheme to
defraud any healthcare benefit program or making false statements relating to healthcare matters;

HIPAA, as amended by the Health Information Technology for Economic and Clinical Health
Act of 2009, or HITECH, and their respective implementing regulations, which impose
obligations on covered healthcare providers, health plans, and healthcare clearinghouses, as well as
their business associates that create, receive, maintain or transmit individually identifiable health
information for or on behalf of a covered entity, with respect to safeguarding the privacy, security
and transmission of individually identifiable health information;

the federal Open Payments program, which requires manufacturers of certain drugs, devices,
biologics and medical supplies for which payment is available under Medicare, Medicaid or the
Children’s Health Insurance Program, with specific exceptions, to report annually to the Centers
for Medicare & Medicaid Services, or CMS, information related to “payments or other transfers
of value” made to “covered recipients,” which include physicians (defined to include doctors,
dentists, optometrists, podiatrists and chiropractors, and teaching hospitals) and applicable
manufacturers. Applicable group purchasing organizations also are required to report annually to
CMS the ownership and investment interests held by the physicians and their immediate family
members. The SUPPORT for Patients and Communities Act added to the definition of covered
recipient practitioners including physician assistants, nurse practitioners, clinical nurse specialists,
certified registered nurse anesthetists and certified nurse-midwives effective in 2022. Data

•

collection began on August 1, 2013 with requirements for manufacturers to submit reports to
CMS by March 31, 2014 and 90 days after the end each subsequent calendar year. Disclosure of
such information was made by CMS on a publicly available website beginning in September 2014;
and

analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws,
which may apply to sales or marketing arrangements and claims involving healthcare items or
services reimbursed by non-governmental third-party payors, including private insurers; state and
foreign laws that require pharmaceutical companies to comply with the pharmaceutical industry’s
voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal
government or otherwise restrict payments that may be made to healthcare providers; state and
foreign laws that require drug manufacturers to report information related to payments and other
transfers of value to physicians and other healthcare providers or marketing expenditures; and
state and foreign laws governing the privacy and security of health information in certain
circumstances, many of which differ from each other in significant ways and often are not
preempted by HIPAA, thus complicating compliance efforts.

Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare
laws and regulations may involve substantial costs. It is possible that governmental authorities will conclude
that our business practices may not comply with current or future statutes, regulations or case law involving
applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in
violation of any of these laws or any other governmental regulations that may apply to us, we may be
subject to significant civil, criminal and administrative penalties, including, without limitation, damages,
fines, imprisonment, exclusion from participation in government healthcare programs, such as Medicare
and Medicaid, and the curtailment or restructuring of our operations, which could have a material adverse
effect on our businesses. If any of the physicians or other healthcare providers or entities with whom we
expect to do business, including our collaborators, is found not to be in compliance with applicable laws, it
may be subject to criminal, civil or administrative sanctions, including exclusions from participation in
government healthcare programs, which could also materially affect our businesses.

Failure to be included in formularies developed by managed care organizations and coverage by other
organizations may negatively impact the utilization of our products, which could harm our market shares and
could have a material adverse effect on our business and financial condition.

Managed care organizations and other third-party payors try to negotiate the pricing of medical services
and products to control their costs. Managed care organizations and pharmacy benefit managers typically
develop formularies to reduce their cost for medications. Formularies can be based on the prices and
therapeutic benefits of the available products. Due to their lower costs, generic products are often favored.
The breadth of
the products covered by formularies varies considerably from one managed care
organization to another, and many formularies include alternative and competitive products for treatment
of particular medical conditions. Failure to be included in such formularies or to achieve favorable
formulary status may negatively impact the utilization and market share of our products. If our products
are not included within an adequate number of formularies or adequate reimbursement levels are not
provided, or if those policies increasingly favor generic products, this could have a material adverse effect on
our business and financial condition.

Most of our product candidates are at early stages of development and may not be successfully developed or
commercialized.

Most of our existing product candidates remain in the early stages of development and will require
substantial further capital expenditures, development, testing and regulatory clearances/approvals prior to
commercialization. The development and regulatory approval processes take several years, and it is not
likely that our product candidates, even if successfully developed and approved by the FDA, would be
commercially available for several years. Of
the large number of drugs in development, only a
small percentage successfully completes the FDA regulatory approval process and is commercialized.
Accordingly, even if we are able to obtain the requisite financing to fund development programs, we cannot
assure you that any of our product candidates will be successfully developed or commercialized, which
could result in the failure of our business and a loss of your investment in our Company.

Because we in-license the intellectual property needed to develop and commercialize products and product
candidates from third parties, any dispute with the licensors or the non-performance of such license agreements
may adversely affect our ability to develop and commercialize the applicable product candidates.

The patents, patent applications and other intellectual property rights underpinning all of our existing
product candidates were in-licensed from third parties. Under the terms of such license agreements, the
licensors generally have the right to terminate such agreements in the event of a material breach. The
licenses require us to make annual, milestone or other payments prior to commercialization of any product
and our ability to make these payments depends on the ability to generate cash in the future. These license
agreements also generally require the use of diligent and reasonable efforts to develop and commercialize
product candidates.

If there is any conflict, dispute, disagreement or issue of non-performance between us or one of our
partners, on the one hand, and the respective licensing partner, on the other hand, regarding the rights or
obligations under the license agreements, including any conflict, dispute or disagreement arising from a
failure to satisfy payment obligations under such agreements, the ability to develop and commercialize the
affected product candidate may be adversely affected.

The types of disputes that may arise between us and the third parties from whom we license intellectual
property include, but are not necessarily limited to:

•

the scope of rights granted under such license agreements and other interpretation-related issues;

the extent to which our technologies and processes infringe on intellectual property of the licensor
that is not subject to such license agreements;

the scope and interpretation of the representations and warranties made to us by our licensors,
including those pertaining to the licensors’ right title and interest in the licensed technology and
the licensors’ right to grant the licenses contemplated by such agreements;

the sublicensing of patent and other rights under our license agreements and/or collaborative
development relationships, and the rights and obligations associated with such sublicensing,
including whether or not a given transaction constitutes a sublicense under such license
agreement;

the diligence and development obligations under license agreements (which may include specific
diligence milestones) and what activities or achievements satisfy those diligence obligations;

whether or not the milestones associated with certain milestone payment obligations have been
achieved or satisfied;

the applicability or scope of indemnification claims or obligations under such license agreements;

the permissibility and advisability of, and strategy regarding, the pursuit of potential third-party
infringers of the intellectual property that is the subject of such license agreements;

the calculation of royalty, milestone, sublicense revenue and other payment obligations under such
license agreements;

the extent to which rights, if any, are retained by licensors under such license agreements;

whether or not a material breach has occurred under such license agreements and the extent to
which such breach, if deemed to have occurred, is or can be cured within applicable cure periods,
if any;

disputes regarding patent filing and prosecution decisions, as well as payment obligations
regarding past and ongoing patent expenses;

intellectual property
intellectual property rights resulting from the joint creation or use of
(including improvements made to licensed intellectual property) by our and our partners’ licensors
and us and our partners; and

the priority of invention of patented technology.

In addition, the agreements under which we currently license intellectual property or technology from third
parties are complex, and certain provisions in such agreements may be susceptible to multiple
interpretations or may conflict in such a way that puts us in breach of one or more agreements, which
would make us susceptible to lengthy and expensive disputes with one or more of such third-party licensing
partners. The resolution of any contract interpretation disagreement that may arise could narrow what we
believe to be the scope of our rights to the relevant intellectual property or technology, or increase what we
believe to be our financial or other obligations under the relevant agreements, either of which could have a
material adverse effect on our business, financial condition, results of operations and prospects. Moreover,
if disputes over intellectual property that we have licensed prevent or impair our ability to maintain our
current licensing arrangements on commercially acceptable terms, we may be unable to successfully develop
and commercialize the affected product candidates, which could have a material adverse effect on our
business, financial conditions, results of operations and prospects.

Product candidates that we advance into clinical trials may not receive regulatory approval.

Pharmaceutical development has inherent risks. We will be required to demonstrate through well-controlled
clinical trials that product candidates are effective with a favorable benefit-risk profile for use in their target
indications before seeking regulatory approvals for their commercial sale. Success in early clinical trials does
not mean that later clinical trials will be successful, as product candidates in later-stage clinical trials may
fail to demonstrate sufficient safety or efficacy despite having progressed through initial clinical testing.
Also, we may need to conduct additional clinical trials that are not currently anticipated. Companies
frequently suffer significant setbacks in advanced clinical trials, even after earlier clinical trials have shown
promising results. As a result, product candidates that we advance into clinical trials may not receive
regulatory approval.

In addition, even if our product candidates were to obtain approval, regulatory authorities may approve any
such product candidates or any future product candidate for fewer or more limited indications than we
request, may not approve the price we intend to charge for our products, may grant approval contingent on
the performance of costly post-marketing clinical trials, or may approve a product candidate with a label
that does not include the labeling claims necessary or desirable for the successful commercialization of that
product candidate. Any of these scenarios could compromise the commercial prospects for one or more of
our current or future product candidates. The regulatory authority may also require the label to contain
warnings, contraindications, or precautions that limit the commercialization of the product.

Any product candidates we advance into clinical development are subject to extensive regulation, which can be
costly and time consuming, cause unanticipated delays or prevent the receipt of the required approvals to
commercialize product candidates.

The clinical development, manufacturing, labeling, storage, record-keeping, advertising, promotion, import,
export, marketing and distribution of any product candidate, including our product candidates, is subject to
extensive regulation by the FDA in the United States and by comparable health authorities in foreign
markets. In the United States, we are not permitted to market a product candidate until such product
candidate’s Biologics License Application (“BLA”) or New Drug Application (“NDA”) is approved by the
FDA. The process of obtaining approval is expensive, often takes many years, and can vary substantially
based upon the type, complexity and novelty of the products involved. In addition to significant clinical
testing requirements, our ability to obtain marketing approval for product candidates depends on obtaining
the final results of
the manufactured
components of our product candidates and validation of our manufacturing processes. The FDA may
determine that our product manufacturing processes, testing procedures or facilities are insufficient to
justify approval. Approval policies or regulations may change, and the FDA has substantial discretion in the
pharmaceutical approval process, including the ability to delay, limit or deny approval of a product
candidate for many reasons. Despite the time and expense invested in the clinical development of product
candidates, regulatory approval is never guaranteed.

including characterization of

required non-clinical

testing,

The FDA and other regulatory agencies can delay, limit or deny approval of a product candidate for many
reasons, including, but not limited to:

•

the FDA or comparable foreign regulatory authorities may disagree with the design or
implementation of our clinical trials;

our inability to demonstrate to the satisfaction of the FDA that a product candidate is safe and
effective for an indication;

the FDA may not accept clinical data from trials conducted by individual investigators or in
countries where the standard of care is potentially different from that of the United States;

the results of clinical trials may not meet the level of statistical significance required by the FDA
for approval;

the FDA may disagree with the interpretation of data from preclinical studies or clinical trials;

the FDA may not approve the manufacturing processes or facilities or those of third-party
manufacturers with which we or our respective collaborators currently contract for clinical
supplies and plan to contract for commercial supplies; or

the approval policies or regulations of the FDA may significantly change in a manner rendering
the clinical data insufficient for approval or the product characteristics or benefit-risk profile
unfavorable for approval.

With respect to foreign markets, approval procedures vary among countries and,
in addition to the
aforementioned risks, can involve additional product testing, administrative review periods and agreements
with pricing authorities. In addition, recent events raising questions about the safety of certain marketed
pharmaceuticals may result in increased cautiousness by the FDA and comparable foreign regulatory
authorities in reviewing new pharmaceuticals based on safety, efficacy or other regulatory considerations
and may result in significant delays in obtaining regulatory approvals. Any delay in obtaining, or inability to
obtain, applicable regulatory approvals would prevent us from commercializing our product candidates.

Any product candidate we advance into clinical trials may cause unacceptable adverse events or have other
properties that may delay or prevent their regulatory approval or commercialization or limit their commercial
potential.

Unacceptable adverse events caused by any of our product candidates that we advance into clinical trials
could cause regulatory authorities to interrupt, delay or stop clinical trials and could result in the denial of
regulatory approval by the FDA or other regulatory authorities for any or all targeted indications and
markets. This,
in turn, could prevent us from commercializing the affected product candidate and
generating revenues from its sale. For example, in Phase 1/2 oncology trials, dose limiting toxicity (“DLT”)
stopping rules are commonly applied.

We have not completed testing for any of our product candidates for the indications for which we intend to
seek product approval in humans, and we currently do not know the extent of the adverse events, if any,
that will be observed in patients who receive any of our product candidates. If any of our product
candidates causes unacceptable adverse events in clinical trials, we may not be able to obtain regulatory
approval or commercialize such products, or, if such product candidates are approved for marketing, future
adverse events could cause us to withdraw such products from the market.

Delays in the commencement of our clinical trials could result in increased costs and delay our ability to pursue
regulatory approval.

The commencement of clinical trials can be delayed for a variety of reasons, including, but not necessarily
limited to, delays in:

•

obtaining regulatory clearance/approval to commence a clinical trial;

identifying, recruiting and training suitable clinical investigators;

•

reaching agreements on acceptable terms with prospective clinical research organizations
(“CROs”) and trial sites, the terms of which can be subject to extensive negotiation, may be
subject to modification from time to time and may vary significantly among different CROs and
trial sites;

obtaining sufficient quantities of a product candidate for use in clinical trials;

obtaining Institutional Review Board (“IRB”) or ethics committee approval to conduct a clinical
trial at a prospective site;

identifying, recruiting and enrolling patients to participate in a clinical trial; or

retaining (or replacing) patients who have initiated a clinical trial but who may withdraw due to
adverse events from the therapy,
insufficient efficacy, fatigue with the clinical trial process,
personal issues, or other reasons.

Any delays in the commencement of our clinical trials will delay our ability to pursue regulatory approval
for product candidates. In addition, many of
the factors that cause, or lead to, a delay in the
commencement of clinical trials may also ultimately lead to the denial of regulatory approval of a product
candidate.

Suspensions or delays in the completion of clinical testing could result in increased costs and delay or prevent
our ability to complete development of that product or generate product revenues.

Once a clinical trial has begun, patient recruitment and enrollment may be slower than we anticipate.
Clinical trials may also be delayed as a result of ambiguous or negative interim results or difficulties in
obtaining sufficient quantities of product manufactured in accordance with regulatory requirements and on
a timely basis. Further, a clinical trial may be modified, suspended or terminated by us, an IRB, an ethics
committee or a data safety monitoring committee overseeing the clinical trial, any clinical trial site with
respect to that site, or the FDA or other regulatory authorities, due to a number of factors, including, but
not necessarily limited to:

•

failure to conduct the clinical trial in accordance with regulatory requirements or our clinical
protocols;

inspection of the clinical trial operations or clinical trial site by the FDA or other regulatory
authorities resulting in the imposition of a clinical hold;

stopping rules contained in the protocol;

unforeseen safety issues or any determination that the clinical trial presents unacceptable health
risks; and

lack of adequate funding to continue the clinical trial.

Changes in regulatory requirements and guidance also may occur, and we may need to amend clinical trial
protocols to reflect these changes. Amendments may require us to resubmit clinical trial protocols to IRBs
for re-examination, which may in turn impact the costs and timing of, and the likelihood of successfully
completing, a clinical trial. If we experience delays in the completion of, or if we must suspend or terminate,
any clinical trial of any product candidate, our ability to obtain regulatory approval for that product
candidate will be delayed, and the commercial prospects, if any, for the product candidate may suffer as a
result. In addition, many of these factors may also ultimately lead to the denial of regulatory approval of a
product candidate.

Even if approved, any product candidates that we may develop and market may be later withdrawn from the
market or subject to promotional limitations.

We may not be able to obtain the labeling claims necessary or desirable for the promotion of our product
candidates if approved. We may also be required to undertake post-marketing clinical trials. If the results of
such post-marketing studies are not satisfactory or if adverse events or other safety issues arise after
approval, the FDA or a comparable regulatory authority in another jurisdiction may withdraw marketing

authorization or may condition continued marketing on commitments from us that may be expensive
and/or time consuming to complete. In addition, if we or others identify adverse side effects after any of
our products are on the market, or if manufacturing problems occur, regulatory approval may be
withdrawn and reformulation of our products, additional clinical trials, changes in labeling of our products
and additional marketing applications may be required. Any reformulation or labeling changes may limit
the marketability of such products if approved.

We currently rely predominantly on third parties to manufacture our preclinical and clinical pharmaceutical
supplies and expect to continue to rely heavily on them and other contractors to produce commercial supplies of
our products, and our dependence on third-party suppliers could adversely impact our businesses.

We depend heavily on third party manufacturers for product supply. If our contract manufacturers cannot
successfully manufacture material that conforms to applicable specifications and with FDA regulatory
requirements, we will not be able to secure and/or maintain FDA approval for those products. Our
third-party suppliers will be required to maintain compliance with CGMPs and will be subject to
inspections by the FDA and comparable agencies and authorities in other jurisdictions to confirm such
compliance. In the event that the FDA or such other authorities determine that our third-party suppliers
have not complied with CGMPs or comparable regulations, the relevant clinical trials could be terminated
or subjected to a clinical hold until such time as we are able to obtain appropriate replacement material
and/or applicable compliance, and commercial product could be unfit for sale, or if distributed, could be
recalled from the market. Any delay, interruption or other issues that arise in the manufacture, testing,
packaging, labeling, storage, or distribution of our products as a result of a failure of the facilities or
operations of our third-party suppliers to comply with regulatory requirements or pass any regulatory
agency inspection could significantly impair our abilities to develop and commercialize our products and
product candidates.

We also rely on third-party manufacturers to purchase from third-party suppliers the materials necessary to
produce product candidates for anticipated clinical trials. There are a small number of suppliers for certain
capital equipment and raw materials that are used to manufacture those products. We do not have any
control over the process or timing of
these raw materials by our third-party
the acquisition of
manufacturers. Moreover, we currently do not have any agreements for the commercial production of these
raw materials. Any significant delay in the supply of raw material components related to an ongoing clinical
trial could considerably delay completion of our clinical trials, product testing and potential regulatory
approval.

We do not expect to have the resources or capacity to commercially manufacture our products internally, if
approved, and would likely continue to be heavily dependent upon third-party manufacturers. Our
dependence on third parties to manufacture and supply clinical trial materials, as well as our planned
dependence on third party manufacturers for any products that may be approved, may adversely affect our
abilities to develop and commercialize products in a timely or cost-effective manner, or at all.

We rely on third parties to conduct clinical trials. If these third parties do not meet agreed-upon deadlines or
otherwise conduct the trials as required, our clinical development programs could be delayed or unsuccessful,
and we may not be able to obtain regulatory approval for or commercialize our product candidates when
expected or at all.

We do not have the ability to conduct all aspects of our preclinical testing or clinical trials ourselves. We
intend to, and do, use CROs to conduct planned clinical trials and will, and do, rely upon such CROs, as
well as medical institutions, clinical investigators and consultants, to conduct our trials in accordance with
specified clinical protocols. These CROs, investigators, and other third parties will and do play a significant
role in the conduct of our trials and the subsequent collection and analysis of data from the clinical trials.

There is no guarantee that any CROs, investigators and other third parties upon which we rely for
administration and conduct of our clinical trials will devote adequate time and resources to such trials or
perform as contractually required. If any of these third parties fails to meet expected deadlines, fails to
adhere to our clinical protocols or otherwise perform in a substandard manner, our clinical trials may be
extended, delayed or terminated. If any of the clinical trial sites terminates for any reason, we may lose

follow-up information on patients enrolled in our ongoing clinical trials unless the care of those patients is
transferred to another qualified clinical trial site. In addition, principal investigators for our clinical trials
may serve as scientific advisers or consultants to us from time to time and receive cash or equity
compensation in connection with such services. If these relationships and any related compensation result in
perceived or actual conflicts of interest, the integrity of the data generated at the applicable clinical trial site,
or the FDA’s willingness to accept such data, may be jeopardized.

We rely on clinical and pre-clinical data and results obtained by third parties that could ultimately prove to be
inaccurate or unreliable.

As part of the strategy we implement to mitigate development risk, we seek to develop product candidates
with well-studied mechanisms of action, and we intend to utilize biomarkers to assess potential clinical
efficacy early in the development process. This strategy necessarily relies upon clinical and pre-clinical data
and other results produced or obtained by third parties, which may ultimately prove to be inaccurate or
unreliable. If the third-party data and results we rely upon prove to be inaccurate, unreliable or not
applicable to our product candidates, we could make inaccurate assumptions and conclusions about our
product candidates, and our research and development efforts could be compromised or called into
question during the review of any marketing applications that we submit.

If our competitors develop treatments for any of the target indications for which our product candidates are
being developed and those competitor products are approved more quickly, marketed more successfully or
demonstrated to be more effective, the commercial opportunity with respect to that product candidate will be
reduced or eliminated.

sources,

enterprises, academic

including commercial pharmaceutical

We operate in highly competitive segments of the biopharmaceutical market and face competition from
many different
institutions,
government agencies, and private and public research institutions. Our product candidates, if successfully
developed and approved, will compete with established therapies, as well as new treatments that may be
introduced by our competitors. Many of our competitors have significantly greater financial, product
development, manufacturing and marketing resources than we do. Large pharmaceutical companies have
extensive experience in clinical testing and obtaining regulatory approval for drugs. In addition, many
universities and private and public research institutes are active in clinical and pre-clinical research, some in
direct competition with us. Smaller or early-stage companies may also prove to be significant competitors,
particularly through collaborative arrangements with large and established companies. New developments,
including the development of other biological and pharmaceutical technologies and methods of treating
disease, occur in the pharmaceutical and life sciences industries at a rapid pace. Developments by
competitors may render our product candidates obsolete or noncompetitive. We will also face competition
from these third parties in establishing clinical trial sites, in patient registration for clinical trials, and in
identifying and in-licensing new product candidates.

We may incur substantial product liability or indemnification claims relating to the clinical testing of product
candidates.

We face an inherent risk of product liability exposure related to the testing of product candidates in human
clinical trials, and claims could be brought against us if use or misuse of one of our product candidates
causes, or merely appears to have caused, personal injury or death. While we have and/or intend to maintain
product liability insurance relating to clinical trials, that coverage may not be sufficient to cover potential
claims, and we may be unable to maintain such insurance. Any claims against us, regardless of their merit,
could severely harm our financial condition, strain management and other resources or destroy the
prospects for commercialization of the product which is the subject of any such claim. We are unable to
predict if we will be able to obtain or maintain product liability insurance for any products that may be
approved for marketing. Additionally, we have entered into various agreements under which we indemnify
third parties for certain claims relating to product candidates. These indemnification obligations may
require us to pay significant sums of money for claims that are covered by these indemnifications.

We may use biological materials and hazardous materials, and any claims relating to improper handling,
storage or disposal of these materials could be time consuming and costly.

We, and/or third parties on our behalf, may use hazardous materials, including chemicals and biological
agents and compounds that could be dangerous to human health and safety or the environment. Our
operations may also produce hazardous waste products. Federal, state and local laws and regulations govern
the use, generation, manufacture, storage, handling and disposal of these materials and wastes. Compliance
with applicable environmental laws and regulations may be expensive, and current or future environmental
laws and regulations may impair our product development efforts. In addition, we cannot entirely eliminate
the risk of accidental injury or contamination from these materials or wastes. We do not carry specific
biological or hazardous waste insurance coverage, and our property and casualty and general liability
insurance policies specifically exclude coverage for damages and fines arising from biological or hazardous
waste exposure or contamination. Accordingly, in the event of contamination or injury, we could be held
liable for damages or penalized with fines in an amount exceeding our respective resources, and clinical
trials or regulatory approvals could be suspended.

Although we maintain workers’ compensation insurance to cover costs and expenses incurred due to
injuries to our employees resulting from the use of hazardous materials, this insurance may not provide
adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or
toxic tort claims that may be asserted in connection with the storage or disposal of biological or hazardous
materials.

In addition, we may incur substantial costs in order to comply with current or future environmental, health
and safety laws and regulations. These current or future laws and regulations may impair our research,
development or production efforts. Failure to comply with these laws and regulations also may result in
substantial fines, penalties or other sanctions.

Our success depends upon our abilities to obtain and maintain intellectual property rights and take advantage
of certain regulatory market exclusivity periods.

Our success depends, in large part, on our ability to obtain patent protection for product candidates and
their formulations and uses. The patent application process is subject to numerous risks and uncertainties,
and there can be no assurance that we or our partners will be successful in obtaining patents or what the
scope of an issued patent may ultimately be. These risks and uncertainties include, but are not necessarily
limited to, the following:

•

patent applications may not result in any patents being issued, or the scope of issued patents may
not extend to competitive product candidates and their formulations and uses developed or
produced by others;

our competitors, many of which have substantially greater resources than us or our partners, and
many of which have made significant investments in competing technologies, may seek, or may
already have obtained, patents that may limit or interfere with our abilities to make, use, and sell
potential product candidates, file new patent applications, or may affect any pending patent
applications that we may have;

there may be significant pressure on the U.S. government and other international governmental
bodies to limit the scope of patent protection both inside and outside the United States for disease
treatments that prove successful as a matter of public policy regarding worldwide health concerns;
and

countries other than the United States may have patent laws less favorable to patentees than those
upheld by U.S. courts, allowing foreign competitors a better opportunity to create, develop and
market competing products.

In addition, patents that may be issued or in-licensed may be challenged, invalidated, modified, revoked,
circumvented, found to be unenforceable, or otherwise may not provide any competitive advantage.
Moreover, we may be subject to a third-party pre-issuance submission of prior art to the PTO, or become
involved in opposition, derivation, reexamination, inter partes review, post-grant review or interference

proceedings challenging our patent rights or the patent rights of others. The costs of these proceedings
could be substantial, and it is possible that our efforts to establish priority of invention would be
unsuccessful, resulting in a material adverse effect on our US patent positions. An adverse determination in
any such submission, patent office trial, proceeding or litigation could reduce the scope of, render
unenforceable, or invalidate, our patent rights, allow third parties to commercialize our technologies or
products and compete directly with us, without payment to us, or result in our inability to manufacture or
commercialize products without infringing third-party patent rights. In addition, if the breadth or strength
of protection provided by our patents and patent applications is threatened, it could dissuade companies
from collaborating with us to license, develop or commercialize current or future product candidates. Third
parties are often responsible for maintaining patent protection for our product candidates, at our and their
expense. If that party fails to appropriately prosecute and maintain patent protection for a product
candidate, our abilities to develop and commercialize products may be adversely affected, and we may not
be able to prevent competitors from making, using and selling competing products. Such a failure to
properly protect intellectual property rights relating to any of our product candidates could have a material
adverse effect on our financial condition and results of operations.

In addition, U.S. patent laws may change, which could prevent or limit us from filing patent applications or
patent claims to protect products and/or technologies or limit the exclusivity periods that are available to
patent holders, as well as affect the validity, enforceability, or scope of issued patents. For example, on
September 16, 2011, the Leahy-Smith America Invents Act (the “Leahy-Smith Act”), was signed into law,
and includes a number of significant changes to U.S. patent law. These include changes to transition from a
“first-to-invent” system to a “first-to-file” system and to the way issued patents are challenged. The
formation of the Patent Trial and Appeal Board now provides a quicker and less expensive process for
challenging issued patents. These changes may favor larger and more established companies that have more
resources to devote to patent application filing and prosecution. The USPTO implemented the America
Invents Act on March 16, 2013.

We and our licensors also rely on trade secrets and proprietary know-how to protect product candidates.
Although we have taken steps to protect our and their trade secrets and unpatented know-how, including
entering into confidentiality and non-use agreements with third parties, and proprietary information and
invention assignment agreements with employees, consultants and advisers, third parties may still come
upon this same or similar information independently. Despite these efforts, any of these parties may also
breach the agreements and may unintentionally or willfully disclose our or our licensors’ proprietary
information, including our trade secrets, and we may not be able to identify such breaches or obtain
adequate remedies. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is
difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside
and outside the United States are less willing or unwilling to protect trade secrets. Moreover, if any of our
or our licensor’ trade secrets were to be lawfully obtained or independently developed by a competitor, we
and our licensors would have no right to prevent them, or those to whom they communicate it, from using
that technology or information to compete with us. If any of our or our licensors’ trade secrets were to be
disclosed to or independently developed by a competitor, our competitive positions would be harmed.

We also may rely on the regulatory period of market exclusivity for any of our biologic product candidates
that are successfully developed and approved for commercialization. Although this period in the United
States is generally 12 years from the date of marketing approval (depending on the nature of the specific
product), there is a risk that the U.S. Congress could amend laws to significantly shorten this exclusivity
period, as initially proposed by President Obama. Once any regulatory period of exclusivity expires,
depending on the status of our patent coverage and the nature of the product, we may not be able to
prevent others from marketing products that are biosimilar to or interchangeable with our products, which
would materially adversely affect our business.

If we or our licensors are sued for infringing intellectual property rights of third parties, it will be costly and
time consuming, and an unfavorable outcome in that litigation would have a material adverse effect on our
business.

Our success also depends on our ability, and the abilities of any of our respective current or future
collaborators, to develop, manufacture, market and sell product candidates without infringing the
third parties. Numerous U.S. and foreign issued patents and pending patent
proprietary rights of
applications, which are owned by third parties, exist in the fields in which we are developing products, some
of which may be directed at claims that overlap with the subject matter of our or our licensors’ intellectual
property. Because patent applications can take many years to issue, there may be currently pending
applications, unknown to us, which may later result in issued patents that our product candidates or
proprietary technologies may infringe. Similarly, there may be issued patents relevant to our product
candidates of which we or our licensors are not aware. Publications of discoveries in the scientific literature
often lag behind the actual discoveries, and patent applications in the US and other jurisdictions are
typically not published until 18 months after a first filing, or in some cases not at all. Therefore, we cannot
know with certainty whether we/such licensors were the first to make the inventions claimed in patents or
pending patent applications that we own or licensed, or that we and our licensors were the first to file for
patent protection of such inventions. In the event that a third party has also filed a US patent application
relating to our product candidates or a similar invention, depending upon the priority dates claimed by the
competing parties, we may have to participate in interference proceedings declared by the PTO to determine
priority of invention in the US. The costs of these proceedings could be substantial, and it is possible that
our efforts to establish priority of invention would be unsuccessful, resulting in a material adverse effect on
our U.S. patent position. As a result, the issuance, scope, validity, enforceability and commercial value of
our or any of our licensors’ patent rights are highly uncertain.

There is a substantial amount of litigation involving patent and other intellectual property rights in the
biotechnology and biopharmaceutical industries generally. If a third party claims that we or any of our
licensors, suppliers or collaborators infringe the third party’s intellectual property rights, we may have to,
among other things:

•

obtain additional licenses, which may not be available on commercially reasonable terms, if at all;

abandon an infringing product candidate or redesign products or processes to avoid infringement;

pay substantial damages, including the possibility of treble damages and attorneys’ fees, if a court
decides that the product or proprietary technology at issue infringes on or violates the third
party’s rights;

pay substantial royalties, fees and/or grant cross-licenses to product candidates; and/or

defend litigation or administrative proceedings which may be costly regardless of outcome, and
which could result in a substantial diversion of financial and management resources.

We may be involved in lawsuits to protect or enforce patents or the patents of licensors, which could be
expensive, time consuming and unsuccessful.

Competitors may infringe our or our licensors’ patents. To counter infringement or unauthorized use, we
may be required to file infringement claims, which can be expensive and time-consuming. Any claims we
assert against accused infringers could provoke these parties to assert counterclaims against us alleging
invalidity of our or our licensors’ patents or that we infringe their patents; or provoke those parties to
petition the PTO to institute inter partes review against the asserted patents, which may lead to a finding
that all or some of the claims of the patent are invalid. In addition, in a patent infringement proceeding, a
court may decide that a patent of ours or our licensor’s is invalid or unenforceable, in whole or in part,
construe the patent’s claims narrowly or refuse to stop the other party from using the technology at issue on
the grounds that our or our licensors’ patents do not cover the technology in question. An adverse result in
any litigation or defense proceedings could put one or more of our patents at risk of being invalidated,
found to be unenforceable, or interpreted narrowly and could likewise put pending patent applications at

risk of not issuing. Furthermore, because of the substantial amount of discovery required in connection
with intellectual property litigation, there is a risk that some of our confidential information could be
compromised by disclosure during this type of litigation.

We may be subject to claims that our consultants or independent contractors have wrongfully used or disclosed
to us alleged trade secrets of their other clients or former employers.

As is common in the biopharmaceutical industry, we engage the services of consultants to assist in the
development of product candidates. Many of these consultants were previously employed at, or may have
previously been or are currently providing consulting services to, other pharmaceutical companies,
including our competitors or potential competitors. We may become subject to claims related to whether
these consultants have inadvertently or otherwise used or disclosed trade secrets or other proprietary
information of their former employers or their former or current customers. Litigation may be necessary to
defend against these claims. Even if we are successful in defending these claims, litigation could result in
substantial costs and be a distraction to management.

Any product for which we obtain marketing approval could be subject to restrictions or withdrawal from the
market and we may be subject to penalties if we fail to comply with regulatory requirements or if we
experience unanticipated problems with products, when and if any of them is approved.

Any product for which we obtain marketing approval, along with the manufacturing processes and facilities,
post-approval clinical data, labeling, advertising and promotional activities for such product, will be subject
to continual requirements of and review by the FDA and comparable regulatory authorities. These
requirements include submissions of safety and other post-marketing information and reports, registration
requirements, cGMP requirements relating to quality control, quality assurance and corresponding
maintenance of records and documents, requirements regarding the distribution of samples to physicians
and recordkeeping, and requirements regarding company presentations and interactions with healthcare
professionals. Even if we obtain regulatory approval of a product, the approval may be subject to
limitations on the indicated uses for which the product may be marketed or to the conditions of approval,
or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy
of the product. We also may be subject to state laws and registration requirements covering the distribution
of drug products. Later discovery of previously unknown problems with products, manufacturers or
manufacturing processes, or failure to comply with regulatory requirements, may result in actions such as:

•

restrictions on product manufacturing, distribution or use;

restrictions on the labeling or marketing of a product;

requirements to conduct post-marketing studies or clinical trials;

warning letters;

withdrawal of the products from the market;

refusal to approve pending applications or supplements to approved applications that we submit;

recalls;

fines;

suspension or withdrawal of marketing or regulatory approvals;

refusal to permit the import or export of products;

product seizure or detentions;

injunctions or the imposition of civil or criminal penalties; and

adverse publicity.

If we or our suppliers, third-party contractors, clinical investigators or collaborators are slow to adapt, or
are unable to adapt, to changes in existing regulatory requirements or adoption of new regulatory
requirements or policies, we or our collaborators may lose marketing approval for products when and if any
of them are approved, resulting in decreased revenue from milestones, product sales or royalties.

We rely on information technology, and any internet or internal computer system failures, inadequacies,
interruptions or compromises of our systems or the security of confidential information could damage our
reputation and harm our business.

Although a significant portion of our business is conducted using traditional methods of contact and
communications such as face-to-face meetings, our business is increasingly dependent on critical, complex
and interdependent information technology systems, including internet-based systems, to support business
processes as well as internal and external communications. We could experience system failures and
degradations in the future. We also rely on space and office-sharing arrangements that impose additional
burdens on our ability to maintain the security of confidential information. We cannot assure you that we
will be able to prevent an extended and/or material system failure or the unintentional disclosure of
confidential information if any of the following or similar events occurs:

•

human error;

subsystem, component, or software failure;

a power or telecommunications failure;

hacker attacks, cyber-attacks, software viruses, security breaches, unauthorized access or
intentional acts of vandalism; or

terrorist acts or war.

If any of the foregoing events were to occur, our business operations could be disrupted in ways that would
require the incurrence of substantial expenditures to remedy. To the extent that any disruption or security
breach were to result in a loss of, or damage to, our data and applications, or inappropriate/unauthorized
disclosure of confidential or proprietary information (including trade secrets), we could incur liability and
our business and financial condition could be harmed.

The occurrence of a catastrophic disaster could damage our facilities beyond insurance limits or we could lose
key data which could cause us to curtail or cease operations.

We are vulnerable to damage and/or loss of vital data from natural disasters, such as earthquakes,
tornadoes, power loss, fire, floods and similar events, as well as from accidental loss or destruction. If any
disaster were to occur, our ability to operate our business could be seriously impaired. We have property,
liability and business interruption insurance which may not be adequate to cover losses resulting from
disasters or other similar significant business interruptions, and we do not plan to purchase additional
insurance to cover such losses due to the cost of obtaining such coverage. Any significant losses that are not
recoverable under our insurance policies could seriously impair our business, financial condition and
prospects.

We cannot predict the likelihood, nature or extent of government regulation that may arise from future
legislation or administrative or executive action, either in the United States or abroad.

We cannot predict the likelihood, nature or extent of how government regulation that may arise from future
legislation or administrative or executive action taken by the U.S. presidential administration may impact
our business and industry. In particular, the U.S. President has taken several executive actions, including the
issuance of a number of Executive Orders, that could impose significant burdens on, or otherwise
materially delay, the FDA’s ability to engage in routine regulatory and oversight activities such as
implementing statutes through rulemaking, issuance of guidance, and review and approval of marketing
applications. Notably, on January 23, 2017, President Trump ordered a civilian hiring freeze for all executive
departments and agencies, including the FDA, which prohibits the FDA from filling employee vacancies or
creating new positions. Under the terms of the order, the freeze was to remain in effect until implementation

of a plan to be recommended by the Director for the Office of Management and Budget (“OMB”) in
consultation with the Director of the Office of Personnel Management, to reduce the size of the federal
workforce through attrition. An under-staffed FDA could result in delays in FDA’s responsiveness or in its
ability to review submissions or applications, issue regulations or guidance or implement or enforce
regulatory requirements in a timely fashion or at all. This hiring freeze was lifted later in 2017. Moreover, on
January 30, 2017, President Trump issued an Executive Order, applicable to all executive agencies, including
the FDA, which requires that for each notice of proposed rulemaking or final regulation to be issued in
fiscal year 2017, the agency shall identify at least two existing regulations to be repealed, unless prohibited
by law. These requirements are referred to as the “two-for-one” provisions. This Executive Order includes a
budget neutrality provision that requires the total incremental cost of all new regulations in the 2017 fiscal
year, including repealed regulations, to be no greater than zero, except in limited circumstances. For
fiscal years 2018 and beyond, the Executive Order requires agencies to identify regulations to offset any
incremental cost of a new regulation and approximate the total costs or savings associated with each new
regulation or repealed regulation. In interim guidance issued by the Office of Information and Regulatory
Affairs within OMB on February 2, 2017, the administration indicates that the “two-for-one” provisions
may apply not only to agency regulations, but also to significant agency guidance documents. It is difficult
to predict how these requirements will be implemented, and the extent to which they will impact the FDA’s
ability to exercise its regulatory authority. If these executive actions impose constraints on the FDA’s ability
to engage in oversight and implementation activities in the normal course, our business may be negatively
impacted.

Changes in funding for the FDA and other government agencies could hinder their ability to hire and retain key
leadership and other personnel, or otherwise prevent new products and services from being developed or
commercialized in a timely manner, which could negatively impact our business or the business of our partners.

The ability of the FDA to review and approve new products can be affected by a variety of factors,
including government budget and funding levels, ability to hire and retain key personnel and accept the
payment of user fees, and statutory, regulatory, and policy changes. Average review times at the agency have
fluctuated in recent years as a result. In addition, government funding of other government agencies that
fund research and development activities is subject to the political process, which is inherently fluid and
unpredictable.

Disruptions at the FDA and other agencies may also slow the time necessary for new drugs to be reviewed
and/or approved by necessary government agencies, which would adversely affect our business or the
business of our partners. For example, over the last several years, including for 35 days beginning on
December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such
as the FDA, have had to furlough critical FDA employees and stop critical activities. If a prolonged
government shutdown occurs, it could significantly impact the ability of the FDA to timely review and
process our regulatory submissions, which could have a material adverse effect on our business. If the
timing of FDA’s review and approval of new products is delayed, the timing of our or our partners’
development process may be delayed which would result in delayed milestone revenues and materially harm
our operations of business.

Risks Relating to our Finances, Capital Requirements and Other Financial Matters

We are an early-stage company with a history of operating losses that is expected to continue, and we are
unable to predict the extent of future losses, whether we will generate significant or any revenues or whether we
will achieve or sustain profitability. We have also historically financed our growth and operations in part
through the assumption of debt; should an event of default occur under any applicable loan documents, our
business would be materially adversely affected.

We are an early-stage company and our prospects must be considered in light of the uncertainties, risks,
expenses and difficulties frequently encountered by companies in their early stages of operations. We
continue to generate operating losses in all periods including losses from continuing operations of
approximately $130.8 million and $97.5 million for the years ended December 31, 2018 and 2017,
respectively. At December 31, 2018, we had an accumulated deficit of approximately $396.3 million. We
expect to make substantial expenditures and incur increasing operating costs and interest expense in the

future, and our accumulated deficit will increase significantly as we expand development and clinical trial
activities for our product candidates and finance investments in certain of our existing and new partners
and affiliates in accordance with our growth strategy. Our losses have had, and are expected to continue to
have, an adverse impact on our working capital, total assets and stockholders’ equity. Because of the risks
and uncertainties associated with product development, we are unable to predict the extent of any future
losses, whether we will ever generate significant or any revenues or if we will ever achieve or sustain
profitability.

At December 31, 2018, the total amount of debt outstanding was $79.5 million. If we default on our
obligations, the holders of our debt may declare the outstanding amounts immediately payable together
with accrued interest. If an event of default occurs, we may not be able to cure it within any applicable cure
period, if at all. If the maturity of our indebtedness is accelerated, we may not have sufficient funds
available for repayment or we may not have the ability to borrow or obtain sufficient funds to replace the
accelerated indebtedness on terms acceptable to us, or at all. In addition, current or future debt obligations
may limit our ability to finance future operations or satisfy capital needs or to engage in, expand or pursue
our business activities. Such restrictive covenants may also prevent us from engaging in activities that could
be beneficial to our business and our stockholders unless we repay the outstanding debt, which may not be
desirable or possible.

To service our debt securities, which includes series of preferred stock, we will be required to generate a
significant amount of cash. Our ability to generate cash depends on a number of factors, some of which are
beyond our control, and any failure to meet our debt obligations would have a material adverse effect on our
business, financial condition, cash flows and results of operations and could cause the market value of our
common stock and/or debt securities to decline.

Prevailing economic conditions and financial, business and other factors, many of which are beyond our
control, may affect our ability to make payments on our debt. If we do not generate sufficient cash flow to
satisfy our debt obligations, we may have to undertake alternative financing plans, such as refinancing or
restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional
capital. Alternatively, as we have done in the past, we may also elect to refinance certain of our debt, for
example, to extend maturities. Our ability to restructure or refinance our debt will depend on the capital
markets and our financial condition at such time. If we are unable to access the capital markets, whether
because of the condition of those capital markets or our own financial condition or reputation within such
capital markets, we may be unable to refinance our debt. In addition, any refinancing of our debt could be
at higher interest rates and may require us to comply with more onerous covenants, which could further
restrict our business operations. Our inability to generate sufficient cash flow to satisfy our debt obligations
or to refinance our obligations on commercially reasonable terms, or at all, could have a material adverse
effect on our business, financial condition, cash flows and results of operations and could cause the market
value of our common stock and/or debt securities to decline.

Repayment of our indebtedness is dependent in part on the generation of cash flow by Journey and its
ability to make such cash available to us, by dividend, debt repayment or otherwise. Journey may not be able
to, or may not be permitted to, make distributions to enable us to make payments in respect of our
indebtedness. Each of our subsidiaries, including Journey, is a distinct legal entity and, under certain
circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries.

Our ability to continue to reduce our indebtedness will depend upon factors including our future operating
performance, our ability to access the capital markets to refinance existing debt and prevailing economic
conditions and financial, business and other factors, many of which are beyond our control. We can provide
no assurance of the amount by which we will reduce our debt, if at all. In addition, servicing our debt will
result in a reduction in the amount of our cash flow available for other purposes, including operating costs
and capital expenditures that could improve our competitive position and results of operations.

We have in the past acted, do currently act, and are likely to continue in the future to act as guarantor and/or
indemnitor of the obligations, actions or inactions of certain of our subsidiaries and affiliated companies;
depending on the terms of such arrangements, we may be contractually obligated to pay substantial amounts to
third parties based on the actions or inactions of our subsidiaries and/or affiliates.

We have in the past acted, do currently act, and are likely to continue in the future to act as guarantor of
the debt obligations of several of our subsidiaries and/or affiliates, including Aevitas, Cellvation, Cyprium
and Tamid. Depending on the terms of such guaranty arrangements, we may be contractually obligated to
pay substantial amounts to third parties lenders based on the actions or inactions of such subsidiaries
and/or affiliates, which would result in a reduction of the amount of our cash available for other purposes
and may have a material adverse effect on the price of our Securities.

We also have in the past acted, do currently act, and are likely to continue in the future to act as indemnitor
of potential losses that may be experienced by one or more of our affiliated companies and/or their
partners or investors. In particular, under that certain Indemnification Agreement, dated as of
November 12, 2018 (the “Indemnification Agreement”), we indemnify InvaGen Pharmaceuticals Inc.
(“InvaGen”) and its affiliates for any losses they may sustain in connection with inaccuracies that may
appear in the representations and warranties that our partner company Avenue made to InvaGen in that
certain Stock Purchase and Merger Agreement, dated as of November 12, 2018 (the “Avenue SPMA”). The
maximum amount of indemnification we may have to provide under the Indemnification Agreement is
$35 million, and such obligation terminates upon the consummation of the Merger Transaction (as defined
in the Avenue SPMA). In the event of payment by us of any such indemnification amount, we would be
able to recoup such amounts (other than our pro rata share of the indemnification as a shareholder in
Avenue) from the Merger Transaction proceeds, but if the Merger Transaction never occurs, we would have
no means of recouping such previously-paid indemnification amounts. If we become obligated to pay all or
a portion of such indemnification amounts (regardless of whether or not we are partially reimbursed out of
the proceeds of the Merger Transaction), our business and the market value of our common stock and/or
debt securities may be materially adversely impacted.

We have in the past and are likely in the future to undergo collaborations and/or divestitures with respect to
certain of our assets and subsidiaries, some of which may be material and/or transformative, which could
adversely affect our business, prospects and opportunities for growth.

We have in the past completed a number of partnerships and/or contingent sales of our assets and
subsidiaries, including an equity investment and contingent sale between Avenue and InvaGen and an
equity investment and option transaction between Caelum and Alexion Pharmaceuticals, Inc. Each of these
transactions has been time-consuming and has diverted management’s attention. As a result of these
contingent sales (and other similar transactions we may in the future complete), we may experience a
reduction in the size or scope of our business, our market share in particular markets, our opportunities
with respect to certain markets, products or therapeutic categories or our ability to compete in certain
markets and therapeutic categories. For example, in connection with execution of the Avenue SPMA, we
signed a Restrictive Covenant Agreement, which prohibits us from, directly or indirectly, engaging in the
business of hospital administered pain management anywhere in the world other than Canada, Central
America or South America for a period of five years after the earlier of the termination of the Avenue
SPMA or consummation of the Merger Transaction (as defined in the SPMA).

In addition, in connection with any such transaction that involves a (contingent or non-contingent) sale of
one of our assets or subsidiaries, we may surrender our ability to realize long-term value from such asset or
subsidiary, in the form of foregone royalties, milestone payments, sublicensing revenue or otherwise, in
exchange for upfront and/or other payments. In the event, for instance, that a product candidate
underpinning any such asset or subsidiary is granted FDA approval for commercialization following the
execution of documentation governing the sale by us of such asset or subsidiary, the transferee of such asset
or subsidiary may realize tremendous value from commercializing such product, which we would have
realized for ourselves had we not executed such sale transaction and been able to achieve applicable
approvals independently.

Should we seek to enter into collaborations or divestitures with respect to other assets or subsidiaries, we
may be unable to consummate such arrangements on satisfactory or commercially reasonable terms within
our anticipated timelines. In addition, our ability to identify, enter into and/or consummate collaborations
and/or divestitures may be limited by competition we face from other companies in pursuing similar
transactions in the biotechnology and pharmaceutical industries. Any collaboration or divestiture we
pursue, whether we are able to complete it or not, may be complex, time consuming and expensive, may
divert the management’s attention, have a negative impact on our customer relationships, cause us to incur
costs associated with maintaining the business of the targeted collaboration or divestiture during the
transaction process and also to incur costs of closing and disposing the affected business or transferring the
operations of the business to other facilities. In addition, if such transactions are not completed for any
reason, the market price of our common stock may reflect a market assumption that such transactions will
occur, and a failure to complete such transactions could result in a negative perception by the market of us
generally and a decline in the market price of our common stock.

As a result of these factors, any collaboration or divestiture (whether or not completed) could have a
material adverse effect on our business, financial condition, cash flows and results of operations and could
cause the market value of our common shares and/or debt securities to decline.

The occurrence of a catastrophic disaster could damage our facilities beyond insurance limits or we could lose
key data which could cause us to curtail or cease operations.

We may need substantial additional funding and may be unable to raise capital when needed, which may force
us to delay, curtail or eliminate one or more of our R&D programs, commercialization efforts or planned
acquisitions and potentially change our growth strategy.

Our operations have consumed substantial amounts of cash since inception. During the years ended
December 31, 2018 and 2017 we incurred R&D expenses of approximately $83.3 million and $48.3 million,
respectively. We expect to continue to spend significant amounts on our growth strategy. We believe that our
current cash and cash equivalents will enable us to continue to fund operations in the normal course of
business for at least the next 12 months. Until such time, if ever, as we can generate a sufficient amount of
product revenue and achieve profitability, we expect to seek to finance potential cash needs. Our ability to
obtain additional funding when needed, changes to our operating plans, our existing and anticipated
working capital needs, the acceleration or modification of our planned R&D activities, expenditures,
acquisitions and growth strategy, increased expenses or other events may affect our need for additional
capital in the future and require us to seek additional funding sooner or on different terms than anticipated.
In addition, if we are unable to raise additional capital when needed, we might have to delay, curtail or
eliminate one or more of our R&D programs and commercialization efforts and potentially change our
growth strategy.

Raising additional funds by issuing securities or through licensing or lending arrangements may cause dilution
to our existing stockholders, restrict our operations or require us to relinquish proprietary rights.

To the extent that we raise additional capital by issuing equity securities, the share ownership of existing
stockholders will be diluted. Any future debt financings may involve covenants that restrict our operations,
including limitations on our ability to incur liens or additional debt, pay dividends, redeem our stock, make
certain financial commitments and engage in certain merger, consolidation or asset sale transactions, among
other restrictions. In addition, if we raise additional funds through licensing or sublicensing arrangements,
it may be necessary to relinquish potentially valuable rights to our product candidates or grant licenses on
terms that are not favorable to us.

If we fail to maintain proper and effective internal control over financial reporting in the future, our ability to
produce accurate and timely financial statements could be impaired, which could harm our operating results,
investors’ views of us and, as a result, the value of our Securities.

Pursuant to Section 404 of the Sarbanes Oxley Act of 2002 and related rules, our management is required
to report on, and our independent registered public accounting firm is required to attest to, the effectiveness
of our internal control over financial reporting. The rules governing the standards that must be met for
management to assess our internal control over financial reporting are complex and require significant
documentation, testing and possible remediation. To comply with the requirements of being a reporting
company under the Exchange Act, we may need to further upgrade our systems, including information
technology, implement additional financial and management controls, reporting systems and procedures
and hire additional accounting and finance staff. If material weaknesses or deficiencies in our internal
controls exist and go undetected, our financial statements could contain material misstatements that, when
discovered in the future could cause us to fail to meet our future reporting obligations and cause the price
of our Securities to decline.

Future revenue based on sales of our dermatology products, especially Targadox and Exelderm®, may be lower
than expected or lower than in previous periods.

The vast majority of our operating income for the foreseeable future is expected to come from the sale of
dermatology products through our partner company Journey Medical Corporation. Any setback that may
occur with respect to such products, in particular Targadox and Exelderm®, could significantly impair our
operating results and/or reduce our revenue and the market prices of our Securities. Setbacks for such
products could include, but are not necessarily limited to problems with shipping, distribution, demand,
manufacturing, product safety, marketing, government regulation or reimbursement, licenses and approvals,
intellectual property rights, competition with existing or new products, physician or patient acceptance of
the products, as well as higher than expected total rebates, returns or rebates. These products also are or
may become subject to third party generic competition.

Risks Associated with our Capital Stock

Some of our executives, directors and principal stockholders can control our direction and policies, and their
interests may be adverse to the interests of our other stockholders.

At December 31, 2018, Lindsay A. Rosenwald, M.D. our Chairman, President and Chief Executive Officer,
beneficially owned 13.1% of our issued and outstanding capital stock, including 98,164 Series A Preferred
Shares. At December 31, 2018, Michael S. Weiss, our Executive Vice Chairman, Strategic Development,
beneficially owned 15.2% of our issued and outstanding capital stock. By virtue of their holdings and
membership on our Board of Directors, Dr. Rosenwald and Mr. Weiss may individually influence our
management and our affairs and may make it difficult for us to consummate corporate transactions such as
mergers, consolidations or the sale of all or substantially all of our assets that may be favorable from our
standpoint or that of our other stockholders.

The market price of our Securities may be volatile and may fluctuate in a way that is disproportionate to our
operating performance.

The stock prices of our Securities may experience substantial volatility as a result of a number of factors,
including, but not necessarily limited to:

•

announcements we make regarding our current product candidates, acquisition of potential new
product candidates and companies and/or in-licensing through multiple partners/affiliates;

sales or potential sales of substantial amounts of our Common Stock;

issuance of debt or other Securities;

our delay or failure in initiating or completing pre-clinical or clinical trials or unsatisfactory results
of any of these trials;

announcements about us or about our competitors, including clinical trial results, regulatory
approvals or new product introductions;

developments concerning our licensors and/or product manufacturers;

litigation and other developments relating to our patents or other proprietary rights or those of
our competitors;

conditions in the pharmaceutical or biotechnology industries;

governmental regulation and legislation;

unstable regional political and economic conditions, such as those caused by the U.S. presidential
administration change;

variations in our anticipated or actual operating results; and

change in securities analysts’ estimates of our performance, or our failure to meet analysts’
expectations.

these factors are beyond our control. The stock markets in general, and the market for
Many of
pharmaceutical and biotechnological companies in particular, have historically experienced extreme price
and volume fluctuations. These fluctuations often have been unrelated or disproportionate to the operating
performance of these companies. These broad market and industry factors could reduce the market prices
of our Securities, regardless of our actual operating performance.

Sales of a substantial number of shares of our Common Stock, or the perception that such sales may occur,
may adversely impact the price of our Common Stock.

Almost all of the 57.8 million outstanding shares of our Common Stock, inclusive of outstanding equity
awards, as of December 31, 2018 are available for sale in the public market, either pursuant to Rule 144
under the Securities Act of 1933, as amended (the “Securities Act”), or an effective registration statement.
In addition, pursuant to our current shelf registration statement on Form S-3, from time to time we may

issue and sell shares of our Common Stock having an aggregate offering price of up to $16.5 million as of
December 31, 2018. Any sale of a substantial number of shares of our Common Stock could cause a drop
in the trading price of our Common Stock on the Nasdaq Stock Market.

We have never paid and currently do not intend to pay cash dividends in the near future, except for the dividend
we pay on our Preferred A shares. As a result, capital appreciation, if any, will be your sole source of gain.

We have never paid cash dividends on any of our or their common stock, or made stock dividends, except
for the dividend we pay on our Preferred A shares, and we currently intend to retain future earnings, if any,
to fund the development and growth of our businesses, and retain our stock positions. In addition, the
terms of existing and future debt agreements may preclude us from paying cash of stock dividends. Equally,
each of our affiliates and partners is governed by its own board of directors with individual governance and
decision-making regimes and mandates to oversee such entities in accordance with their respective fiduciary
duties. As a result, we alone cannot determine the acts that could maximize value to you of such affiliates/
partners in which we maintain ownership positions, such as declaring cash or stock dividends. As a result,
capital appreciation, if any, of our Common Stock will be your sole source of gain for the foreseeable
future.

Provisions in our certificate of incorporation, our bylaws and Delaware law might discourage, delay or prevent
a change in control of our Company or changes in our management and, therefore, depress the trading price of
our Common Stock or other Securities.

Provisions of our certificate of incorporation, our bylaws and Delaware law may have the effect of deterring
unsolicited takeovers or delaying or preventing a change in control of our Company or changes in our
management, including transactions in which our stockholders might otherwise receive a premium for their
shares over then-current market prices. In addition, these provisions may limit the ability of stockholders to
approve transactions that they may deem to be in their best interests. These provisions include:

•

the inability of stockholders to call special meetings; and

the ability of our Board of Directors to designate the terms of and issue new series of preferred
stock without stockholder approval, which could include the right to approve an acquisition or
other change in our control or could be used to institute a rights plan, also known as a poison pill,
that would work to dilute the stock ownership of a potential hostile acquirer, likely preventing
acquisitions that have not been approved by our Board of Directors.

In addition, the Delaware General Corporation Law prohibits a publicly held Delaware corporation from
engaging in a business combination with an interested stockholder, generally a person which together with
its affiliates owns, or within the last three years has owned, 15% of our voting stock, for a period of
three years after the date of the transaction in which the person became an interested stockholder, unless
the business combination is approved in a prescribed manner.

The existence of the foregoing provisions and anti-takeover measures could limit the price that investors
might be willing to pay in the future for shares of our Common Stock. They could also deter potential
acquirers of our Company, thereby reducing the likelihood that you would receive a premium for your
ownership of our Securities through an acquisition.

Item 1B. Unresolved Staff Comments

None.

Item 2.

Properties

On October 3, 2014, we entered into a 15-year lease for office space at 2 Gansevoort Street, New York,
NY 10014, at an average annual rent of $2.7 million. We took possession of this space, which serves as our
principal executive offices, in December 2015, and took occupancy in April 2016. Total rent expense, over
the full term of the lease for this space will approximate $40.7 million. In conjunction with the lease, we
entered into Desk Space Agreements with two related parties: OPPM and TGTX, to occupy 10% and 45%,
respectively, of the office space that requires them to pay their share of the average annual rent of
$0.3 million and $1.1 million, respectively. The total net rent expense to us will approximate $16.0 million
over the lease term. These initial rent allocations will be adjusted periodically for each party based upon
actual percentage of the office space occupied. Additionally, we have reserved the right to execute desk
space agreements with other third parties and those arrangements will also affect the cost of the lease
actually borne by us.

In October 2015, we entered into a 5-year lease for approximately 6,100 square feet of office space in
Waltham, MA at an average annual rent of approximately $0.2 million. We took occupancy of this space in
January 2016.

Journey

In June 2017, Journey extended its lease for 2,295 square feet of office space in Scottsdale, AZ by one year,
at an average annual rent of approximately $55,000. Journey originally took occupancy of this space in
November 2014. In August 2018, Journey amended their lease and entered into a new-two year extension
for 3,681 square feet of office space in the same location in Scottsdale, AZ at an annual rate of
approximately $94,000. The term of this amended lease commenced on December 1, 2018 and will expire
on November 30, 2020.

Mustang

On October 27, 2017, Mustang entered into a lease agreement with WCS — 377 Plantation Street, Inc., a
Massachusetts nonprofit corporation (“Landlord”). Pursuant to the terms of the lease agreement, Mustang
agreed to lease 27,043 square feet from the Landlord, located at 377 Plantation Street in Worcester, MA
(the “Facility”), through November 2026, subject to additional extensions at Mustang’s option. Base rent,
net of abatements of $0.6 million over the lease term, totals approximately $3.6 million, on a triple-net
basis. Mustang plans to make improvements to the facility of approximately $3.5 million.

The Facility initiated cell processing operations for both personalized CAR T and gene therapies in late
2018.

Item 1.

Legal Proceedings

Fortress Biotech, Inc.

Inc.

(Frankfurt am Main Regional Court,
Dr. Falk Pharma, GmbH v. Fortress Biotech,
Ref. No. 3-06 0 28/16). Dr. Falk Pharma, GmbH (“Dr. Falk Pharma”) and Fortress were among the parties
to that certain Collaboration Agreement dated March 20, 2012, whereby they agreed to collaborate to
develop a product for treatment of Crohn’s disease. A dispute arose between Dr. Falk Pharma and Fortress
with respect to their relative rights and obligations under the Collaboration Agreement; specifically,
Dr. Falk Pharma contended that it had fulfilled its contractual obligations to Fortress and is entitled to the
final milestone payment due under the Collaboration Agreement — EUR 2.5 million. Fortress contended
that no such payment is due because a condition of the EUR 2.5 million payment was the delivery of a
Clinical Study Report that addressed the primary and secondary objectives of a Phase II trial, and Fortress
contended that Dr. Falk Pharma failed to deliver such a Clinical Study Report. Dr. Falk Pharma filed a
lawsuit against Fortress
the
EUR 2.5 million plus interest and attorneys’ fees, and Fortress filed an answer to the complaint, denying

in Frankfurt, Germany to recover

in the above-referenced Court

that it had any liability to Dr. Falk Pharma. On July 27, 2017, Fortress received a judgment from the court
in Frankfurt awarding the full amount (EUR 2.5 million) plus interest to Dr. Falk Pharma. Fortress
appealed the decision to the Higher Regional Court of Frankfurt on August 28, 2017, and the initial
response of Dr. Falk Pharma to the appeal was filed on February 16, 2018. At an appellate hearing in the
Higher Regional Court on June 12, 2018, the court issued an oral ruling upholding the lower court’s
judgment and indicating that an impending written, enforceable judgment would do the same. On July 12,
2018, the Higher Regional Court approved and recorded terms of settlement between Fortress and Dr. Falk
Pharma pursuant to which Fortress paid $3.3 million to Dr. Falk Pharma during the calendar year of 2018,
and approximately $39,500 to the court in mandated administrative fees. An additional $300,000 is due
during calendar year 2019.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of

Equity Securities

Market Information for Common Stock

We became a public company on November 17, 2011. Our Common Stock is listed for trading on the
NASDAQ Capital Market under the symbol “FBIO.” The following table sets forth the high and low
intraday sales prices of our Common Stock for each full quarterly period within the two most recent
fiscal years.

First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Holders of Record

2018

2017

High

$5.35

$5.10

$3.13

$1.53

Low

$3.42

$2.92

$1.44

$0.57

High

$3.91

$4.98

$4.89

$4.84

Low

$2.25

$3.15

$3.83

$3.26

As of March 14, 2019, there were approximately 557 holders of record of our Common Stock. The actual
number of stockholders is greater than this number of record holders and includes stockholders who are
beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of
holders of record also does not include stockholders whose shares may be held in trust by other entities.

Dividends

We have never paid cash dividends and currently intend to retain our future earnings, if any, to fund the
development and growth of our business.

Equity Compensation Plans

The information required by Item 5 of Form 10-K regarding equity compensation plans is incorporated
herein by reference to “Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.”

Item 6.

Selected Consolidated Financial Data

Not applicable.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Statements in the following discussion and throughout this report that are not historical
in nature are
“forward-looking statements.” You can identify forward-looking statements by the use of words such as
“expect,” “anticipate,” “estimate,” “may,” “will,” “should,” “intend,” “believe,” and similar expressions.
Although we believe the expectations reflected in these forward-looking statements are reasonable, such
statements are inherently subject to risk and we can give no assurances that our expectations will prove to be
correct. Actual results could differ from those described in this report because of numerous factors, many of
which are beyond our control. These factors include, without limitation, those described under Item 1A “Risk
Factors.” We undertake no obligation to update these forward-looking statements to reflect events or
circumstances after the date of this report or to reflect actual outcomes. Please see “Forward-Looking
Statements” at the beginning of this Form 10-K.

The following discussion of our financial condition and results of operations should be read in conjunction with
our financial statements and the related notes thereto and other financial information appearing elsewhere in
this Form 10-K. We undertake no obligation to update any forward-looking statements in the discussion of our
financial condition and results of operations to reflect events or circumstances after the date of this report or to
reflect actual outcomes

We are a biopharmaceutical company dedicated to acquiring, developing and commercializing
pharmaceutical and biotechnology products and product candidates, which we do at the Fortress level, at
our majority-owned and majority-controlled subsidiaries and joint ventures, and at entities we founded and
in which we maintain significant minority ownership positions. Fortress has a talented and experienced
business development team, comprising scientists, doctors and finance professionals, who identify and
evaluate promising products and product candidates for potential acquisition by new or existing partner
companies. We have executed such arrangements in collaboration with some of the world’s foremost
universities, research institutes and pharmaceutical companies, including City of Hope National Medical
Center, St. Jude Children’s Research Hospital and University College London.

Following the exclusive license or other acquisition of the intellectual property underpinning a product or
product candidate, we leverage our business, scientific, regulatory, legal and finance expertise to help our
partners achieve their goals. Our partner companies then assess a broad range of strategic arrangements to
accelerate and provide additional funding to support research and development, including joint ventures,
partnerships, out-licensings, and public and private financings.

2018 Activity

Marketed Dermatology Products

In 2018, through our partner company Journey, our seven marketed products generated net revenue of
$23.4 million and $3.8 million in net income.

In the fourth quarter of 2018, Journey launched Exelderm®, a cream and solution for fungal infections.
Also, in 2018, Journey signed a co-promotion agreement with Crown Laboratories to promote Triderm®, a
topical corticosteroid indicated for the relief of
the inflammatory and pruritic manifestations of
corticosteroid-responsive dermatoses; Ala-quin®, a cream for mixed infections; and Ala-scalp®, a
hydrocortisone lotion for corticosteroid-responsive dermatoses. We anticipate launching at least one or two
new prescription drugs in 2019. Our partner company Journey markets our dermatology products.

IV Tramadol

In May 2018, our partner company Avenue announced that the first pivotal Phase 3 trial of IV tramadol
achieved the primary endpoint of a statistically significant improvement in Sum of Pain Intensity
Difference over 48 hours compared to placebo in patients with moderate to moderately severe postoperative
pain following bunionectomy surgery. In addition, the trial met its key secondary endpoints and
demonstrated a clear dose response.

In November 2018, Avenue announced definitive agreements regarding an equity subscription and
contingent acquisition by InvaGen, a subsidiary of Cipla Limited, a leading pharmaceutical company. The
first stage of the transaction closed in February 2019, and InvaGen acquired 5,833,333 shares of Avenue
Therapeutics’ common stock at $6.00 per share for total gross consideration of $35.0 million, representing a
33.3% stake in Avenue’s capital stock on a fully diluted basis.

In December 2018, Avenue announced that the first patient has been dosed in a pivotal Phase 3 clinical trial
of IV tramadol for the management of moderate to moderately severe pain in patients following
abdominoplasty surgery. Topline data is expected to be available in mid-2019.

CAEL-101

In January 2019, Caelum signed a collaboration agreement with Alexion Pharmaceuticals, Inc. (“Alexion”)
to advance the development of CAEL-101. Under the terms of the agreement, Alexion acquired a minority
equity interest in Caelum and an exclusive option to acquire the remaining equity in the company based on
Phase 2 data for pre-negotiated economics. Alexion will make payments to Caelum totaling $60 million,
including the purchase price for the equity and milestone-dependent development funding payments. The
collaboration also provides for potential additional payments of up to $500 million, including the upfront,
regulatory and commercial milestone payments, in the event Alexion exercises the acquisition option.

In March 2018, a new analysis of data from the Phase 1b trial of CAEL-101 (mAb 11-1F4), a light chain
fibril-reactive monoclonal antibody (“mAb”) 11-1F4, for the treatment of relapsed or refractory amyloid
light chain (“AL”) amyloidosis was presented at the 16th International Symposium on Amyloidosis. The
data demonstrated a correlation between a sustained decrease in N-terminal pro-brain natriuretic peptide
(NT-proBNP) levels and an improvement in global longitudinal strain (“GLS”) following CAEL-101
treatment in patients with cardiac AL amyloidosis.

In June 2018, Caelum announced a complete analysis of cardiac data from a Phase 1b trial of CAEL-101
(mAb 11-1F4) for the treatment of relapsed or refractory AL amyloidosis demonstrating CAEL-101’s
potential to improve myocardial function as assessed by GLS and generate a sustained decrease in
in AL amyloidosis patients experiencing cardiac
N-terminal pro-brain natriuretic peptide levels
involvement. Columbia University presented the data at the American Society of Echocardiography’s
29th Annual Scientific Sessions.

In December 2018, Caelum announced additional GLS data from the Phase 1b study of CAEL-101 in
patients with cardiac AL amyloidosis, which further confirmed CAEL-101’s efficiency improving GLS and
NT-proBNP. Caelum also announced imaging data from a preclinical study that demonstrate the potential
of using radiolabeled CAEL-101 for real-time imaging of human amyloidosis in vivo. The data were
presented during two oral sessions at the 60th American Society of Hematology (“ASH”) Annual Meeting.

Triplex

The multicenter Phase 2 study of Triplex for cytomegalovirus (“CMV”) control in allogeneic stem cell
transplant recipients has concluded, and its primary endpoint was met. The full dataset has been accepted
for oral presentation at the 45th Annual Meeting of the European Society for Blood and Marrow
Transplantation (“EBMT”) being held in Frankfurt, Germany March 24-27, 2019. Our partner company
Helocyte is developing this program in collaboration with COH.

MB-107 (XSCID Gene Therapy)

In August 2018, our partner company Mustang announced that it entered into an exclusive worldwide
license agreement with St. Jude Children’s Research Hospital (“St. Jude”) for the development of a
potentially first-in-class ex vivo lentiviral gene therapy for the treatment of X-linked severe combined
immunodeficiency (XSCID), also known as bubble boy disease. The therapy is currently being evaluated in
a Phase 1/2 multicenter trial in infants under the age of two. This study is the world’s first lentiviral gene
therapy trial for infants with XSCID. The therapy is also being investigated in patients over the age of two
in a second Phase 1/2 trial at the National Institutes of Health (“NIH”). Mustang believes these may be
registration trials. Mustang is currently developing XSCID in collaboration with St Jude.

CK-301 (anti-PD-L1 antibody)

In March 2018, our partner company Checkpoint completed the dose escalation portion of the ongoing
Phase 1 trial of CK-301, a fully human anti-PD-L1 antibody, in selected recurrent or metastatic cancers,
and initiated the first dose expansion cohort, which is evaluating an 800 mg dose of CK-301 administered
every two weeks.

In January 2019, Checkpoint announced that the ongoing multi-center clinical trial of anti-PD-L1 antibody
CK-301 was expanded to enroll patients in three endometrial and colorectal cohorts intended to support
requests for accelerated approval and Biologics License Application (“BLA”) submissions to the FDA. The
ongoing trial is also enrolling cohorts of patients with NSCLC and cutaneous squamous cell carcinoma.

CK-101 (third-generation EGFR inhibitor)

In September 2018, Checkpoint announced interim safety and efficacy data from our Phase 1/2 clinical trial
of CK-101, a third-generation EGFR tyrosine kinase inhibitor (“TKI”) being evaluated in advanced
NSCLC. The data were presented in an oral presentation at the International Association for the Study of

Lung Cancer (“IASLC”) 19th World Conference on Lung Cancer in Toronto. CK-101 was well tolerated
across multiple dose groups and safe. Durable anti-tumor activity was observed, particularly in
treatment-naïve EGFR mutation-positive NSCLC patients.

CUTX-101 and AAV-based gene therapy

In July 2018, our partner company Cyprium announced that the FDA granted Fast Track Designation to
CUTX-101 (“Copper Histidinate”), a product candidate for patients diagnosed with classic Menkes disease
who have not demonstrated significant clinical progression. CUTX-101 is currently in a Phase 3 clinical
trial.

In September 2018, Cyprium announced the publication of preclinical data on adeno-associated virus
(AAV)-based gene therapy combined with subcutaneous CUTX-101 for Menkes disease in Molecular
Therapy: Methods & Clinical Development.

In January 2019, Cyprium received notification from the U.S. FDA that the sponsorship of
Investigational New Drug (“IND”) application for CUTX-101 was transferred to Cyprium.

the

MB-102 (CD123 CAR T)

In July 2018, our partner company Mustang Bio, Inc. completed a pre-Investigational New Drug
(“pre-IND”) meeting with the U.S. Food and Drug Administration (“FDA”) for MB-102 (“CD123
CAR T”). Based on the meeting, Mustang expects to initiate a Phase 1/2 trial of MB-102 in acute myeloid
leukemia (“AML”), blastic plasmacytoid dendritic cell neoplasm (“BPDCN”) and high-risk myelodysplastic
syndrome in the first half of 2019.

In November 2018, Mustang announced that additional safety and efficacy Phase 1 data evaluating
MB-102 (CD123 CAR) in relapsed or refractory AML and BPDCN were presented in an oral session at the
American Association for Cancer Research (“AACR”) Special Conference on Tumor Immunology and
Immunotherapy.

In December 2018, the FDA granted Orphan Drug Designation to MB-102 (CD123 CAR T) for the
treatment of BPDCN, a rare and incurable blood cancer with a median survival of less than 18 months and
no standard of care.

MB-101 (IL13Rα2-specific CAR T)

In May 2018, Mustang announced the publication of preclinical data in JCI Insight demonstrating that
glioblastoma-targeted CD4+ CAR T cells mediate superior antitumor activity over CD8+ CAR T cells. The
data, published by research partner City of Hope, will be applied in the ongoing Phase 1 trial of
IL13Rα2-specific CAR T MB-101 in glioblastoma.

Oncolytic Virus (C134)

In February 2019, Mustang announced that they partnered and entered into an exclusive worldwide license
agreement with Nationwide Children’s Hospital to develop an oncolytic virus (C134) for the treatment of
glioblastoma multiforme (“GBM”). Mustang intends to combine the oncolytic virus with MB-101
(IL13Rα2-specific CAR) to potentially enhance efficacy in treating GBM.

MB-103 (HER2-specific CAR T)

In October 2018, Mustang announced that a first-of-its-kind Phase 1 clinical trial evaluating the safety and
effectiveness of intraventricular delivery of CAR T cells to the brains of patients with HER2-positive breast
cancer with brain metastases was initiated at City of Hope. City of Hope dosed the first patient in
December 2018. In addition, Mustang announced that City of Hope dosed the first patient in a Phase 1
clinical trial of HER2-specific CAR T cells in treating recurrent or refractory grade III-IV glioma. The trial
is evaluating the side effects and best dose of HER2-specific CAR T cells in treating patients with
grade III-IV glioma that has come back or does not respond to treatment.

CK-103 (BET Inhibitor)

In April 2018, preclinical data was presented on Checkpoint’s BET inhibitor, CK-103, at the AACR Annual
Meeting. CK-103 demonstrated combinatorial effects in an in vivo model with anti-PD-1 antibodies, which
may support the development of CK-103 as an anti-cancer agent alone and in combination with CK-301.

CNDO-109

In June 2018, data from a Phase 1 trial evaluating CNDO-109-activated allogeneic natural killer (“NK”)
cells in AML patients were published in the journal Biology of Blood and Marrow Transplantation. The data
demonstrated that CNDO-109-activated NK cells are safe, well tolerated and may be capable of extending
complete remissions in high-risk AML patients.

AAV Gene Therapy

In January 2018, our partner company Aevitas entered into a sponsored research agreement with the
laboratory of Guangping Gao, Ph.D., at the University of Massachusetts Medical School to evaluate
construct optimization for our AAV gene therapy treatment for complement-mediated diseases, including
dry age-related macular degeneration, paroxysmal nocturnal hemoglobinuria and atypical hemolytic uremic
syndrome.

In August 2018, Aevitas announced that it entered into a sponsored research agreement with the laboratory
of Wenchao Song, Ph.D., at the University of Pennsylvania to evaluate our AAV gene therapy technology
in the university’s proprietary animal models of complement-mediated diseases.

2018 Venture Notes

In the quarter ended March 2018, we closed a private placement of promissory notes for an aggregate of
through National Securities Corporation (“NSC”), a
$21.7 million (the “2018 Venture Notes”)
wholly-owned subsidiary of National, and, at the time a related party by virtue of our ownership of
National. We intend to use the proceeds from the 2018 Venture Notes to acquire and license medical
technologies and products through existing or recently formed partner companies.

NSC acted as the sole placement agent for the 2018 Venture Notes. We paid NSC a fee of $1.7 million
during the year ended December 31, 2018 in connection with its placement of the 2018 Venture Notes.

Sale of National

In November 2018, we entered into an agreement to sell our 56.1% majority stake in National Holdings
Corporation, to NHC Holdings, LLC, a wholly-owned subsidiary of B. Riley Financial, Inc. Under the
terms of the agreement, we sold approximately 3.0 million of our shares in National, in an initial closing on
November 16, 2018 at $3.25 per share for proceeds of $9.8 million. We sold our remaining 4.0 million
shares at the same per-share price in February 2019 for proceeds of $13.1 million. The aggregate purchase
price totaled approximately $22.9 million for our 56.1% stake and following the second closing we no longer
owned shares in National.

Critical Accounting Policies and Use of Estimates

See Note 2 to the Consolidated Financial Statements.

Results of Operations

General

For the year ended December 31, 2018 we generated $26.9 million of net revenue; $23.4 million of revenue
relates primarily to the sale of Journey branded and generic products and $3.5 million of revenue is in
connection with Checkpoint’s collaborative agreements with TGTX, a related party. At December 31, 2018,
we had an accumulated deficit of $396.3 million primarily as a result of research and development
expenses, purchases of in-process research and development and general and administrative expenses. While

we may in the future generate revenue from a variety of sources, including license fees, milestone payments,
research and development payments in connection with strategic partnerships and/or product sales, our
current product candidates are at an early stage of development and may never be successfully developed or
commercialized. Accordingly, we expect to continue to incur substantial losses from operations for the
foreseeable future and there can be no assurance that we will ever generate significant revenues.

We had $6.1 million of costs of goods sold in connection with the sale of JMC branded and generic
products for the year ended December 31, 2018.

Research and Development Expenses

Research and development costs primarily consist of personnel related expenses, including salaries, benefits,
travel, and other related expenses, stock-based compensation, payments made to third parties for licenses
and milestones costs related to in-licensed products and technology, payments made to third party contract
research organizations for preclinical and clinical studies, investigative sites for clinical trials, consultants,
the cost of acquiring and manufacturing clinical trial materials, costs associated with regulatory filings and
patents, laboratory costs and other supplies.

Also included in research and development is the total purchase price for licenses acquired during the
period.

For the year ended December 31, 2018 and 2017, research and development expenses were approximately
$83.3 million and $48.3 million, respectively. Additionally, during the year ended December 31, 2018 and
2017, we expensed approximately $4.1 million and $4.2 million, respectively,
in costs related to the
acquisition of licenses.

The table below provides a summary of research and development costs associated with the development of
our licenses by entity, excluding noncash stock-based compensation expenses, for the years ended
December 31, 2018 and 2017:

($ in thousands)

Research & Development

Year Ended
December 31,

% of total

2018

2017

2018

2017

Fortress . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 5,472

$ 6,403

14%

Partner companies:

Avenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Checkpoint . . . . . . . . . . . . . . . . . . . . . . . . . .
Mustang . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Research & Development . . . . . . . . . . . . . . .

16,710
30,562
17,425
7,852

6,246
14,954
7,002
9,685

21%
39%
22%
11%

14%
34%
16%
22%

$78,021

$44,290

100%

Note 1:

Includes the following partner companies: Aevitas, Caelum, Cellvation, Cyprium, Helocyte and
Tamid

Noncash, stock-based compensation expense included in research and development for the year ended
December 31, 2018 and 2017, was $5.3 million and $4.0 million, respectively.

General and Administrative Expenses

General and administrative expenses consist principally of personnel related costs, professional fees for
legal, consulting, audit and tax services, rent and other general operating expenses not otherwise included in
research and development expenses. For the years ended December 31, 2018 and 2017, general and
administrative expenses were $53.4 million and $50.9 million, respectively. Stock based compensation
expense included in general and administrative expenses in 2018 and 2017 was $9.7 million and $9.4 million,
respectively.

The table below provides a summary by entity of general and administrative expenses excluding non-cash
stock compensation expenses for the years ended December 31, 2018 and 2017, respectively:

($ in thousands)

General & Administrative

Year Ended
December 31,

% of Total

2018

2017

2018

2017

Fortress . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$15,370

$14,034

35%

34%

Partner companies:

Avenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Checkpoint . . . . . . . . . . . . . . . . . . . . . . . . . .
JMC(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mustang . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total General &Administrative . . . . . . . . . . . . . . .

3,137

3,626
13,417

4,978
3,143

2,018

3,232
11,550

8,603
2,089

8%
31%

11%
8%

8%
28%

21%
4%

$43,671

$41,526

100%

Note 1:

Includes cost of outsourced sales force

Note 2:

Includes the following partner companies: Aevitas, Caelum, Cellvation, Cyprium, Escala,
Helocyte and Tamid

Comparison of Years Ended December 31, 2018 and 2017

($ in thousands, except per share amounts)

2018

2017

For the Years Ended
December 31,

Change

Revenue

Product revenue, net . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,376

$ 15,520

$ 7,856

Revenue – from a related party . . . . . . . . . . . . . . . . . . .

3,506

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

26,882

1,725

17,245

1,781

9,637

Operating expenses

Cost of goods sold – product revenue . . . . . . . . . . . . . . .

Research and development . . . . . . . . . . . . . . . . . . . . . .

Research and development – licenses acquired . . . . . . . .

General and administrative . . . . . . . . . . . . . . . . . . . . . .

6,125

83,333

4,050

53,371

3,658

48,322

4,164

50,897

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . .

146,879

107,041

2,467

35,011

(114)

2,474

39,838

Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(119,997)

(89,796)

(30,201)

Other income (expenses)

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense and financing fee . . . . . . . . . . . . . . . . .
Change in fair value of derivative liabilities . . . . . . . . . . .
Change in fair value of Partner convertible note . . . . . . .
Change in fair value of investments . . . . . . . . . . . . . . . .
Other income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,104
(10,340)
(682)
437
(1,390)
68

Total other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(10,803)

819
(7,687)
(368)
(457)
226
(250)

(7,717)

285
(2,653)
(314)
894
(1,616)
318

(3,086)

Loss from continuing operations . . . . . . . . . . . . . . . . . . . .

(130,800)

(97,513)

(33,287)

Discontinued operations:

Gain from disposal of National . . . . . . . . . . . . . . . . . . .
Loss from discontinued operations, net of tax . . . . . . . . .

2,333
(13,469)

Total loss from discontinued operations . . . . . . . . . . . . . . .

(11,136)

—
(2,323)

(2,323)

2,333
(11,146)

(8,813)

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(141,936)

(99,836)

(42,100)

Less: net loss attributable to non-controlling interest . . . . . .

(57,789)

(32,960)

(24,829)

Net loss attributable to common stockholders

. . . . . . . . . . . $ (84,147) $ (66,876) $(17,271)

51%

103%

56%

67%

72%

-3%

37%

34%

35%
35%
85%
-196%
-715%
-127%

40%

34%

100%
480%

379%

42%

75%

26%

For the year ended December 31, 2018, $3.5 million of revenue was in connection with Checkpoint’s
collaborative agreements with TGTX, and $23.4 million of revenue related primarily to the sale of Journey
branded and generic products. The net increase in revenue of $9.6 million or 56% is due to the growth in
sales of Journey’s products of $7.9 million and an increase in revenue from a related party of $1.8 million.

Cost of goods sold increased by $2.5 million or 67% due to the growth in Journey’s product sales.

Research and development expenses increased $35.0 million, or 72%, from the year ended December 31,
2017 to the year ended December 31, 2018. The following table shows the change in research and
development spending for Fortress and by partner company:

($ in thousands)

Research & Development

Stock-based compensation

Year Ended
December 31,

Change

2018

2017

Fortress . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1,068

$ 1,258

$ (190)

-15%

Partner company:

Avenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Checkpoint . . . . . . . . . . . . . . . . . . . . . . . . . .

Mustang . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sub-total stock-based compensation . . . . . . . . . .

596

3,429
124

5,312

203

1,181

691
699

4,032

393

(1,086)

2,738
(575)

1,280

194%

-92%

396%
-82%

32%

Other research & development

Fortress . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,472

6,403

(931)

-42%

Partner company:

16,710
30,562
17,425
7,852

6,246
14,954
7,002
9,685

10,464
15,608
10,423
(1,833)

$83,333

$48,322

$35,011

168%
104%
149%
-19%

72%

Note 1:

Includes the following partner company: Aevitas, Caelum, Cellvation, Cyprium, Escala,
Helocyte and Tamid

The increase in stock-based compensation for Avenue and Mustang is attributable to new grants made to
new hires, while the decrease in Fortress, Checkpoint, and the “Other” category is due to overall vesting of
grants as well as the decrease in value attributed to marking to market grants held by non-employees.

The decrease in Fortress research and development spending is due to the lower research and development
headcount subsequent to the transfer of Fortress research and development employees to TGTX, a related
party, in the quarter ended September 30, 2018. Checkpoint’s increase in research and development
spending is attributable to the increased manufacturing costs and clinical trial expense for CK-101 and
CK-301. Mustang’s increase in research and development spending is attributable to the fitting out of the
cell processing facility, as well as increased headcount. The decrease in “Other” is attributable to costs
incurred by Caelum for the start-up of product development activities, and Helocyte for the start-up of
sponsored research activities not replicated in 2018.

General and administrative expenses increased $2.5 million, or 5%, from the year ended December 31, 2017
to the year ended December 31, 2018. The following table shows the change in general and administrative
spending for Fortress and by partner company:

($ in thousands)

General & Administrative

Stock-based compensation

Year Ended
December 31,

Change

2018

2017

Fortress . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 4,966

$ 5,431

$ (465)

-9%

Partner company:

Avenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Checkpoint . . . . . . . . . . . . . . . . . . . . . . . . . .

Mustang . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sub-total stock-based compensation . . . . . . . . . .

940

1,900

1,531
363

9,700

400

1,937

1,322
281

9,371

540

(37)

209
82

329

135%

-2%

16%
29%

Other general and administrative

Fortress . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15,370

14,034

1,336

10%

Partner company:

Avenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Checkpoint . . . . . . . . . . . . . . . . . . . . . . . . . .
JMC(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mustang . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total General &Administrative . . . . . . . . . . . . . . .

3,137
3,626
13,417
4,978
3,143

2,018
3,232
11,550
8,603
2,089

1,119
394
1,867
(3,625)
1,054

$53,371

$50,897

$ 2,474

55%
12%
16%
-42%
50%

Note 1:

Includes cost of outsourced sales force

Note 2:

Includes the following partner companies: Aevitas, Caelum, Cellvation, Cyprium, Escala,
Helocyte and Tamid

For the year ended December 31, 2018, the increase in general and administrative expenses of $2.5 million
or 5% is primarily attributable to Fortress and Avenue’s increase in public company costs, investor relations
and a legal settlement accrual as well as an increase in JMC’s sales and marketing costs, offset by a decrease
in legal costs at Mustang for non-recurring expenses related to the Tang litigation.

Total other expense increased $3.1 million, or 40%, from $7.7 million for the year ended December 31, 2017
to $10.8 million for the year ended December 31, 2018, primarily due to an increase of $2.7 million in
interest expense and financing fees, $1.6 million decrease in the fair value of investments, offset by
$0.9 million decrease in the fair value of Caelum’s convertible notes as they were written down to face value
due to the probability of conversion in the first quarter of 2019, as well as an increase of $0.3 million in
interest income.

Non-controlling interests increased $24.8 million, or 75%, from the year ended December 31, 2017 to the
year ended December 31, 2018. This increase reflects the partner companies.

Operating Activities

Net cash used in operating activities increased $17.5 million from the year ended December 31, 2017 to the
year ended December 31, 2018. The increase was primarily due to the increase of $33.3 million in net loss
from continuing operations, offset by an increase in the fair value of investments of $1.6 million, an
increase in stock-based compensation expense of $1.6 million and an increase of $9.6 million in changes in
operating assets and liabilities, and a change in cash provided by discontinued operations of $2.4 million.

Investing Activities

Net cash provided by investing activities increased $59.0 million from the year ended December 31, 2017 to
the year ended December 31, 2018. The increase is primarily due to a $50.9 million increase in the
redemption of certificates of deposit, as well as a decrease in the purchase of short-term investments of
$3.5 million, a decrease of $2.3 million in funds used to purchase research and development licenses, offset
by an increase of $6.5 million in the purchase of property and equipment as the build-out of the cell
processing facility in Worcester, Massachusetts by Mustang continues, as well. Net cash provided by
discontinued investing activities amounted to $9.8 million for the year ended December 31, 2018.

Financing Activities

Net cash provided by financing activities was $50.6 million for the year ended December 31, 2018,
compared to $150.4 million of net cash provided by financing activities for the year ended December 31,
2017. During the year ended December 31, 2018, net proceeds from partner companies’ offerings were
$22.7 million, net proceeds from the 2018 Venture Notes were $19.8 million, net proceeds from
at-the-market offering was $7.0 million and net proceeds from subsidiaries’ at-the-market offering was
$7.7 million. This was offset by $4.4 million used to pay subsidiaries’ Convertible Notes and $2.3 million
paid in Preferred A dividends.

Liquidity and Capital Resources

We fund our operations through cash on hand, the sale of debt and third-party financings. At
December 31, 2018, we had cash, cash equivalents and restricted cash of $81.6 million of which
$36.3 million relates to Fortress, $22.0 million relates to Checkpoint, $17.0 million relates to Mustang,
$2.7 million relates to Avenue, $1.2 million relates to Caelum, $1.7 million relates to Journey and
$0.7 million relates to the remaining partner companies combined. Restricted cash of $16.1 million is
comprised of: $14.9 million collateralizing the IDB Note, $0.6 million of which is securing a letter of credit
used as a security deposit for the New York, NY lease that became effective on October 3, 2014,
$0.5 million secures the Worcester, Massachusetts lease signed by Mustang that became effective on
October 27, 2017, and $0.1 million securing the Waltham, Massachusetts lease signed by Fortress that
became effective in October 2015.

In 2018 the Company closed a private placement of promissory notes for an aggregate of $21.7 million (the
“2018 Venture Notes”) through NSC, the proceeds of which will be used to acquire and license medical
technologies and products through existing or recently formed partner companies, as well as financing its
existing partner companies.

Pursuant to the terms of an Amended and Restated At Market Issuance Sales Agreement with MLV &
Co. LLC, and FBR Capital Markets & Co., (“ATM”), for the year ended December 31, 2018, the Company
issued 2,914,410 shares of common stock at an average price of $2.50 per share for gross proceeds of
$7.3 million. No shares were issued under the ATM in 2017. In 2018 Checkpoint sold a total of
1,841,774 shares of common stock in connection with an S-3 declared effective in December 2017;
Checkpoint had entered into an At-the-Market Issuance Sales Agreement (the “Checkpoint ATM”) with
Cantor Fitzgerald & Co., Ladenburg Thalmann & Co. Inc. and H.C. Wainwright & Co., LLC, relating to
the sale of shares of common stock. The Checkpoint ATM raised aggregate total gross proceeds of
approximately $8.0 million at an average selling price of $4.33 per share. Additionally, in March 2018
Checkpoint completed an underwritten public offering, whereby it sold 5,290,000 shares of its common
stock at a price of $4.35 per share for gross proceeds of approximately $23.0 million. In 2018, we also raised
$0.2 million from the issuance of our common shares in connection with our ESPP.

In 2017, Avenue completed an IPO of its common stock, issuing 6,325,000 shares inclusive of 825,000
shares subject to an underwriter over-allotment at $6.00 per share, resulting in gross proceeds of
approximately $38.0 million. Also in 2017, Mustang raised gross proceeds of $56.0 million, before expenses,
in a private placement of shares and warrants for which OPN Capital Markets was the placement agent.
Further, in November 2017, we received gross proceeds of $25.0 million related to the issuance of shares of
9.375% Series A Cumulative Redeemable Perpetual Preferred stock in a private placement, and also during
2017, we raised $0.2 million from the issuance of our common shares in connection with our ESPP.

We will require additional financing to fully develop and prepare regulatory filings and obtain regulatory
approvals for our existing and new product candidates, fund operating losses, and, if deemed appropriate,
establish or secure through third parties manufacturing for our potential products, and sales and marketing
capabilities. We have funded our operations to date primarily through the sale of equity and debt securities.
We believe that our current cash and cash equivalents is sufficient to fund operations for at least the next
twelve months. Our failure to raise capital as and when needed would have a material adverse impact on our
financial condition and our ability to pursue our business strategies. We may seek funds through equity or
debt financings, collaborative or other arrangements with corporate sources, sale of partner companies such
as National, the exercise of purchase options for Avenue and Caelum, or through other sources of
financing.

Off-Balance Sheet Arrangements

We do not have any financings or other relationships with unconsolidated entities or other persons.

Recently Issued Accounting Pronouncements

See Note 2 of Notes to the Consolidated Financial Statements for a discussion of recent accounting
standards and pronouncements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 8.

Financial Statements and Supplementary Data.

The information required by this Item is set forth in the consolidated financial statements and notes thereto
beginning at page F-1 of this Annual Report on Form 10-K.

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Disclosure Controls and Procedures

Controls and Procedures

Disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) are
designed only to provide reasonable assurance that they will meet their objectives. Under the supervision
and with the participation of our management, including our principal executive officer and principal
financial officer, we conducted an evaluation of the effectiveness, as of December 31, 2018, of the design
and operation of our disclosure controls and procedures, as such term is defined in Exchange Act Rules
13a-15(e) and 15d-15(e). Based on this evaluation, our principal executive officer and principal financial
officer have concluded that, as of such date, our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in our Exchange Act reports is recorded, processed,
summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to our management, including our principal executive
officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Control over Financial Reporting

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over
financial reporting refers to the process designed by, or under the supervision of, our principal executive
officer and principal financial officer, and effected by our Board of Directors, management and other

personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting
principles, and includes those policies and procedures that:

(1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the

transactions and dispositions of our assets;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with GAAP, and that our receipts and expenditures are being
made only in accordance with authorization of our management and directors; and

(3) provide reasonable assurance regarding prevention or

timely detection of unauthorized
acquisitions, use or disposition of our assets that could have a material effect on the financial
statements.

Internal control over financial reporting has inherent limitations. Internal control over financial reporting is
a process that involves human diligence and compliance and is subject to lapses in judgment and
breakdowns resulting from human failures. Internal control over financial reporting also can be
circumvented by collusion or improper management override. Because of such limitations, there is a risk
that material misstatements may not be prevented or detected on a timely basis by internal control over
financial reporting. However, these inherent limitations are known features of the financial reporting
process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this
risk.

Our management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2018. In making the assessment, management used the criteria set forth by the Committee of
in Internal Control — Integrated
Sponsoring Organizations of
Framework (2013).

the Treadway Commission (COSO)

Based on the results of this assessment, management (including our Chief Executive Officer and our Chief
Financial Officer) has concluded that, as of December 31, 2018, our internal control over financial
reporting was effective.

Attestation Report of Registered Public Accounting Firm

The effectiveness of our internal controls over financial reporting as of December 31, 2018 has been audited
by our independent registered accounting firm, BDO USA, LLP, as stated in their attestation report, which
is included on page F-3 herein.

Changes in Internal Controls over Financial Reporting.

There were no changes in our internal control over financial reporting during our most recent fiscal quarter
that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.

Item 9B. Other Information

None.

PART II

Item 10. Directors, Executive Officers and Corporate Governance

The information required by this Item is incorporated herein by reference from our Proxy Statement for our
2019 Annual Meeting of Stockholders.

Item 11.

Executive Compensation

The information required by this Item is incorporated herein by reference from our Proxy Statement for our
2019 Annual Meeting of Stockholders.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters

The information required by this Item is incorporated herein by reference from our Proxy Statement for our
2019 Annual Meeting of Stockholders.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this Item is incorporated herein by reference from our Proxy Statement for our
2019 Annual Meeting of Stockholders.

Item 14.

Principal Accounting Fees and Services

The information required by this Item is incorporated herein by reference from our Proxy Statement for our
2019 Annual Meeting of Stockholders.

PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a) Financial Statements.

The following financial statements are filed as part of this report:

Reports of Independent Registered Public Accounting Firms . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Changes in Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Cash Flows

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-2

F-5

F-7

F-8

F-10

Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-13 – F-79

(b) Exhibits.

Exhibit
Number

Exhibit Title

Form

File

Exhibit

Filing Date

Incorporated by Reference
(Unless Otherwise Indicated)

3.1

3.2

3.3

3.4

3.5

4.1

4.2

10.1

10.2

10.3

10.4

10.5

10.6

10.7

10.8

10.9

Amended and Restated Certificate of
Incorporation of the Registrant.

First Certificate of Amendment of
Amended and Restated Certificate of
Incorporation of the Registrant.

Second Amended and Restated Bylaws of
the Registrant.

Second Certificate of Amendment of
Amended and Restated Certificate of
Incorporation, as amended.

Third Certificate of Amendment of
Amended and Restated Certificate of
Incorporation, as amended

10-12G

000-54463 3.1

July 15, 2011

10-12G

000-54463 3.2

July 15, 2011

8-K

10-K

8-K

—

3.7

October 31, 2013

3.8 March 14, 2014

3.9

April 27, 2015

Form of Common Stock Certificate.

10-12G

000-54463 4.1

July 15, 2011

Certificate of Designation of Rights and
Preferences 9.375% Series A Perpetual
Preferred Stock.

Coronado Biosciences, Inc. 2007 Stock
Incentive Plan.#

8-K

001-35366 3.1

November 7, 2017

10-12G

000-54463 10.8

July 15, 2011

Form of Stock Option Award Agreement.# 10-12G

000-54463 10.9

July 15, 2011

Amended and Restated Consulting
Agreement, entered into as of January 1,
2019, by and between the Registrant and
Eric Rowinsky.*

Form of Indemnification Agreement by and
between the Registrant and its officers and
directors.

Coronado Biosciences, Inc. 2012 Employee
Stock Purchase Plan.#

Promissory Note issued by Registrant to
Israel Discount Bank of New York, dated
February 13, 2014.

Assignment and Pledge of Money Market
Account date February 13, 2014 in favor of
Israel Discount Bank of New York.

Restricted Stock Issuance Agreement, dated
as of February 2, 2014, by and between the
Registrant and Michael S. Weiss.#

Restricted Stock Issuance Agreement, dated
as of December 19, 2013, by and between
the Registrant and Michael S. Weiss.#

—

10-12G/A 000-54463 10.25 August 23, 2011

DEF 14A —

—

July 13, 2012

8-K

—

10.53 February 18, 2014

10.54 February 18, 2014

8-K/A

—

10.55 February 26, 2014

10-K

—

10.57 March 14, 2014

Exhibit Title

Form

File

Exhibit

Filing Date

Incorporated by Reference
(Unless Otherwise Indicated)

10-K

—

10.58 March 14, 2014

S-8

333-194588 10.60 March 14, 2014

Fortress Biotech, Inc. 2013 Stock Incentive
Plan, as amended.#

DEF 14A —

Fortress Biotech, Inc. Long-Term Incentive
Plan.#

DEF 14A —

Exhibit
Number

10.10

10.11

10.12

10.13

10.14

10.15

10.16

10.17

10.18

10.19

10.20

10.21

10.22

10.23

10.24

Restricted Stock Issuance Agreement, dated
as of December 19, 2013, by and between
the Registrant and Lindsay A. Rosenwald,
M.D.#

Form of Coronado Biosciences, Inc. 2013
Stock Incentive Plan Award Agreement
(2013 Stock Incentive Plan).#

Form of Subscription Agreement

Note Purchase Agreement, dated
February 27, 2015, by and between the
Registrant and NSC Biotech Venture Fund.

Form of Subco Securities Purchase
Agreement.

Form of Subco Warrant.

Form of Subco Promissory Note.

Coronado Biosciences, Inc. Deferred
Compensation Plan for Directors, dated
March 12, 2015.#

Restricted Stock Unit Award Agreement
between Fortress Biotech, Inc. and George
Avgerinos effective July 15, 2015.#

Amended and Restated Promissory Note
issued by the Registrant to NSC Biotech
Venture Fund I LLC, dated July 29, 2015.

Form of Support and Voting Agreement by
and among Fortress Biotech, Inc., FBIO
Acquisition, Inc., and certain officers and
directors (and certain of their affiliates) of
National Holdings Corporation.

Stockholder Rights Agreement by and
between National Holdings Corporation
and FBIO Acquisition, Inc., dated April 27,
2016.

Form of Voting Agreement by and among
Fortress Biotech, Inc., FBIO Acquisition,
Inc., and certain officers and directors (and
certain of their affiliates) of National
Holdings Corporation.

8-K

—

8-K

—

10.61 November 10, 2014

10.62 March 5, 2015

10.64 March 5, 2015

10.65 March 5, 2015

10.66 March 5, 2015

10.67 March 18, 2015

—

June 4, 2015

10.70 July 17, 2015

10.71 August 4, 2015

10.28 April 28, 2016

8-K

—

10.29 April 28, 2016

8-K

—

10.30 April 28, 2016

Exhibit
Number

10.25

10.26

10.27

10.28

10.29

10.30

10.31

10.32

10.33

10.34

10.35

10.36

10.37

Incorporated by Reference
(Unless Otherwise Indicated)

Exhibit Title

Form

File

Exhibit

Filing Date

Amended and Restated At Market Issuance
Sales Agreement, dated August 27, 2016,
between the registrant, MLV & Co., LLC
and FBR Capital Markets & Co.

8-K

—

10.32 August 17, 2016

Form of Fortress Biotech, Inc. Convertible
Second Promissory Note.

10-Q

Form of Common Stock Purchase Warrant. 10-Q

Pledge and Security Agreement dated as of
September 14, 2016 made by Fortress
Biotech, Inc. and FBIO Acquisition, Inc. in
favor of Opus Point Healthcare Innovations
Fund, LP.

10-Q

—

10.34 November 9, 2016

10.35 November 9, 2016

10.36 November 9, 2016

10-Q

—

10.33 May 10, 2017

10-Q

—

10.34 May 10, 2017

10-Q

—

10.35 May 10, 2017

10.36 May 10, 2017

10-Q

—

10.37 May 10, 2017

8-K

10-K

—

10.38 June 12, 2017

10.39 June 12, 2017

10.39 March 16, 2018

8-K

000-54463 1.1

April 5, 2018

Placement Agency Agreement dated
March 25, 2017, between Fortress Biotech,
Inc., NAM Biotech Fund II, LLC- Series I
and National Securities Corporation.

Placement Agency Agreement dated
March 25, 2017, between Fortress Biotech,
Inc., NAM Special Situations Fund I QP,
LLC – FBIO Series I and National
Securities Corporation.

Form of Common Stock Purchase Warrant
in favor of National Securities Corporation.

Form of Note Purchase Agreement between
Fortress Biotech, Inc., NAM Biotech
Fund II, LLC – Series I and NAM Special
Situations Fund I QP, LLC – FBIO Series I.

Form of Promissory Note issued by Fortress
Biotech, Inc. to NAM Biotech Fund II,
LLC – Series I and NAM Special Situations
Fund I QP, LLC – FBIO Series I.

Fortress Biotech, Inc. 2012 Employee Stock
Purchase Plan, as amended.

Fortress Biotech, Inc. Amended and
Restated Long-Term Incentive Plan.

Amended and Restated Credit Facility
Agreement dated as of March 12, 2018, by
and among Fortress Biotech, Inc. and Opus
Healthcare Innovations Fund, LP.*

At Market Issuance Sales Agreement,
among the Company and B. Riley FBR,
Inc., National Securities Corporation,
LifeSci Capital LLC, Maxim Group LLC
and Noble Capital Markets, Inc. dated
April 5, 2018.

Exhibit
Number

10.38

10.39

10.40

10.41

10.42

10.43

10.44

10.45

10.46

10.47

Exhibit Title

Form

File

Exhibit

Filing Date

Incorporated by Reference
(Unless Otherwise Indicated)

Stock Purchase and Merger Agreement,
dated as of November 12, 2018, by and
between Avenue Therapeutics, Inc., InvaGen
Pharmaceuticals Inc. and Madison
Pharmaceuticals Inc.

Stockholders Agreement, dated as of
November 12, 2018, by and between
Fortress Biotech, Inc., Avenue Therapeutics,
Inc., Dr. Lucy Lu, M.D. and InvaGen
Pharmaceuticals Inc.

Credit Agreement, dated as of
November 12, 2018, by and between Avenue
Therapeutics, Inc. and InvaGen
Pharmaceuticals Inc.

Guaranty, dated as of November 12, 2018,
by and between Fortress Biotech, Inc. and
InvaGen Pharmaceuticals Inc.

Voting and Support Agreement, dated as of
November 12, 2018, by and between
Fortress Biotech, Inc., Avenue Therapeutics,
Inc., Dr. Lucy Lu, M.D. and InvaGen
Pharmaceuticals Inc.

Waiver Agreement, dated as of
November 12, 2018, by and between
Fortress Biotech, Inc., Avenue Therapeutics,
Inc. and InvaGen Pharmaceuticals Inc.

Restrictive Covenant Agreement, dated as of
November 12, 2018, by and between
Fortress Biotech, Inc. and InvaGen
Pharmaceuticals Inc.

Indemnification Agreement, dated as of
November 12, 2018, by and between
Fortress Biotech, Inc. and InvaGen
Pharmaceuticals Inc.

Stock Purchase Agreement by and among
FBIO Acquisition, Inc., Fortress Biotech,
Inc., and NHC Holdings, LLC, dated
November 14, 2018.

Development, Option and Stock Purchase
Agreement by and among Caelum
Biosciences, Inc., Alexion Pharmaceuticals,
Inc., Fortress Biotech, Inc., and the several
shareholders of Caelum Biosciences, Inc.,
dated January 30, 2019.*

8-K

000-54463 10.1 November 16, 2018

8-K

000-54463 10.2 November 16, 2018

8-K

000-54463 10.3 November 16, 2018

8-K

000-54463 10.4 November 16, 2018

8-K

000-54463 10.5 November 16, 2018

8-K

000-54463 10.6 November 16, 2018

8-K

000-54463 10.7 November 16, 2018

8-K

000-54463 10.8 November 16, 2018

8-K

000-54463 10.1 November 20, 2018

8-K

000-54463 —

January 31, 2019

14.1

Code of Ethics of Registrant applicable to
Directors, Officers and Employees.

21.1

Subsidiaries of the Registrant.

S-1

—

333-177041 14.1

September 28, 2011

—

Filed herewith

Exhibit
Number

23.1

24.1

31.1

31.2

32.1

32.2

Exhibit Title

Form

File

Exhibit

Filing Date

Incorporated by Reference
(Unless Otherwise Indicated)

Consent Independent Registered Public
Accounting Firm.

Power of Attorney (included on the
signature page of this Form 10-K)

Certification of Chairman, President and
Chief Executive Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of
2002.

Certification of Chief Financial Officer,
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.

Certification of Chairman, President and
Chief Executive Officer, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.

Certification of the Chief Financial Officer
pursuant to 18 U.S.C Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

—

Filed herewith

—

Filed herewith

—

Filed herewith

—

Filed herewith

—

Filed herewith

101.INS XBRL Instance Document.

101.SCH XBRL Taxonomy Extension Schema

Document.

101.CAL XBRL Taxonomy Extension Calculation

Linkbase Document.

101.DEF XBRL Taxonomy Extension Definition

Linkbase Document.

101.LAB XBRL Taxonomy Extension Label

Linkbase Document.

—

101.PRE XBRL Taxonomy Extension Presentation

—

Linkbase Document.

# Management contract or compensatory plan.

Filed herewith

Item 16. Form 10-K Summary

None.

[This Page Intentionally Left Blank]

FORTRESS BIOTECH, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

Index to Consolidated Financial Statements

Reports of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Changes in Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-2

F-5

F-7

F-8

F-10

Notes to the Consolidated Financial Statements

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-13 – F-79

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors
Fortress Biotech, Inc. and subsidiaries
New York, New York

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Fortress Biotech, Inc. and subsidiaries
(the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations,
stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2018, and
the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the
Company and subsidiaries at December 31, 2018 and 2017, and the results of their operations and their
cash flows for each of the two years in the period ended December 31, 2018, in conformity with accounting
principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of
December 31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report
dated March 18, 2019 expressed an unqualified opinion thereon.

Basis for Opinion

the Company’s management. Our
These consolidated financial statements are the responsibility of
responsibility is to express an opinion on the Company’s consolidated financial statements based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of
the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company’s auditor since 2016.

/s/ BDO USA, LLP

Boston, Massachusetts
March 18, 2019

F-2

Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors
Fortress Biotech, Inc. and subsidiaries
New York, New York

Opinion on Internal Control over Financial Reporting

We have audited Fortress Biotech, Inc. and subsidiaries (the “Company’s”) internal control over financial
reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2018, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States) (“PCAOB”), the consolidated balance sheets of the Company and subsidiaries as of
December 31, 2018 and 2017, the related consolidated statements of operations, stockholders’ equity, and
cash flows for each of the two years in the period ended December 31, 2018, and the related notes and our
report dated March 18, 2019 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting, included in
the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on
our audit. We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit of internal control over financial reporting in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.

F-3

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

/s/ BDO USA, LLP

Boston, Massachusetts
March 18, 2019

F-4

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Consolidated Balance Sheets

in thousands except for share and per share amounts)

December 31,

2018

2017

ASSETS
Current assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
Short-term investments (certificates of deposit)
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other receivables – related party . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . .
Current assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term investments, at fair value . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncurrent assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued expenses – related party . . . . . . . . . . . .
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest payable – related party . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes payable, short-term – related party (net of debt discount of $336
and $973 at December 31, 2018 and December 31, 2017, respectively)
Partner company convertible note, short-term, at fair value . . . . . . . . .
Derivative warrant liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes payable, long-term (net of debt discount of $4,567 and $4,072 at

December 31, 2018 and December 31, 2017, respectively) . . . . . . . . .
Partner company convertible note, long-term, at fair value . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 65,508
5,498
17,604
678
2,095
6,735
13,089
111,207
12,019
16,074
—
1,417
276
—
$140,993

$ 34,067
149
1,232
97

9,164
9,914
991
—
55,614

60,425
—
5,211
121,250

$ 94,952
7,758
36,002
171
618
5,732
37,948
183,181
7,116
16,006
1,390
883
258
37,116
$245,950

$ 27,412
222
315
669

8,528
4,700
309
29,283
71,438

39,212
10,059
4,739
125,448

The accompanying notes are an integral part of these consolidated financial statements.
F-5

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Consolidated Balance Sheets — (continued)
in thousands except for share and per share amounts)

December 31,

2018

2017

Commitments and contingencies

Stockholders’ equity
Preferred stock, $.001 par value, 15,000,000 authorized, 5,000,000

designated Series A shares, 1,000,000 shares issued and outstanding
as of December 31, 2018 and December 31, 2017; liquidation value of
$25.00 per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Common stock, $.001 par value, 100,000,000 shares authorized,
57,845,447 and 50,991,285 shares issued and outstanding as of
December 31, 2018 and December 31, 2017, respectively . . . . . . . . .
Common stock issuable, 744,322 and 158,015 shares as of December 31,
2018 and December 31, 2017, respectively . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in-capital
Accumulated deficit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity attributed to the Company . . . . . . . . . . . . .

659
397,408
(396,274)
1,852

Non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . .

17,891
19,743
$ 140,993

500
364,148
(312,127)
52,573

67,929
120,502
$ 245,950

The accompanying notes are an integral part of these consolidated financial statements.
F-6

1,725

17,245

3,658

48,322

4,164

50,897

107,041

(89,796)

819
(7,687)
(368)
(457)
226
(250)

(7,717)

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
($ in thousands except for share and per share amounts)

Revenue

Product revenue, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23,376

15,520

For the Years Ended December 31,

2018

2017

Revenue – from a related party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Operating expenses

Cost of goods sold – product revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Research and development – licenses acquired . . . . . . . . . . . . . . . . . . . . . .

General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,506

26,882

6,125

83,333

4,050

53,371

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

146,879

Loss from operations

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(119,997)

Other income (expenses)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense and financing fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of subsidiary convertible note . . . . . . . . . . . . . . . . . . .
Change in fair value of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Loss from continuing operations
Discontinued operations:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain from disposal of National
Loss from discontinued operations, net of tax . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total loss from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,104
(10,340)
(682)
437
(1,390)
68

(10,803)

(130,800)

(97,513)

2,333
(13,469)

(11,136)

—
(2,323)

(2,323)

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(141,936)

(99,836)

Less: net loss attributable to non-controlling interests . . . . . . . . . . . . . . . . .

57,789

32,960

Net loss attributable to common stockholders . . . . . . . . . . . . . . . . . . . . . . .

Loss from continuing operations per common share – basic and diluted. . . . .
Loss from discontinued operations per common share – basic and diluted . . .
Net loss per common share attributable to common stockholders – basic and
diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$
$

(84,147) $

(66,876)

(3.01) $
(0.26) $

(2.34)
(0.06)

(1.94) $

(1.61)

Weighted average common shares outstanding – basic and diluted . . . . . . . .

43,461,978

41,658,733

The accompanying notes are an integral part of these consolidated financial statements.
F-7

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
($ in thousands except for share amounts)

Series A
Preferred Stock

Common Stock

Amount

Shares
Issuable

Paid-In
Capital

Accumulated
Deficit

Non-Controlling
Interests

Total
Stockholders’
Equity

Balance at December 31, 2016 . . . .

— $— 48,932,023

$49

$ — $283,697 $(245,251)

$ 44,473

$ 82,968

Exercise of options for cash . . .

— —

20,000 —

—

Stock-based compensation

expense . . . . . . . . . . . . .

— —

— 13,403

Issuance of restricted stock . . . .

— — 1,796,270

—

(2)

Issuance of Series A preferred

stock for cash, net

. . . . . . . 1,000,000

— —

— 22,195

Issuance of partner companies’
common shares for license
expenses . . . . . . . . . . . . .

Issuance of partner companies’
common shares for research
and development expenses . . .

Issuance of partner companies’

common shares for
settlement . . . . . . . . . . . .

Issuance of common stock under
ESPP . . . . . . . . . . . . . .

Issuance of common stock for
research and development
expenses . . . . . . . . . . . . .

Disposal of National

. . . . . . .

Partner companies’ offering, net .

Debt discount related to Opus

Credit Facility . . . . . . . . .

Issuance of warrants by partner
companies’ in conjunction
with NSC debt . . . . . . . . .

Conversion of subsidiary’s notes

payable . . . . . . . . . . . . .

Common shares issuable for 2017
Subordinated Note Financing
interest expense . . . . . . . . .

Common shares issued for 2017
Subordinated Note Financing
interest expense . . . . . . . . .

Preferred A dividends declared

and paid . . . . . . . . . . . .

Non-controlling interest in

— —

—

1,727

— —

67,733 —

— —

43,292 —

— —

—

2,062

191

200

391

— 95,116

—

201

750

314

— —

500

—

— —

131,967 —

— —

—

541

(299)

partner companies’ . . . . . . .

— —

— (56,416)

Net loss attributable to

non-controlling interest

. . . .

— —

Net loss attributable to common

stockholders

. . . . . . . . . .

— —

—

56,416

13,403

—

22,196

1,727

2,062

191

200

391

95,116

201

750

314

500

541

(299)

—

(32,960)

— (66,876)

—

(66,876)

The accompanying notes are an integral part of these consolidated financial statements.
F-8

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity — (continued)
($ in thousands except for share amounts)

Series A
Preferred Stock

Common Stock

Amount

Shares
Issuable

Paid-In
Capital

Accumulated
Deficit

Non-Controlling
Interests

Total
Stockholders’
Equity

Balance at December 31, 2017 . . . . 1,000,000

$ 1

50,991,285

$51

$ 500 $364,148 $(312,127)

$ 67,929

$120,502

Stock-based compensation

expense . . . . . . . . . . . . .

— —

— 15,012

Settlement of restricted

stock units into common stock

— — 2,601,701

Issuance of common stock under
ESPP . . . . . . . . . . . . . .

Issuance of subsidiaries’ common
shares for license expenses . . .

Partner company’s offering, net

Partner company’s at-the-market

offering, net . . . . . . . . . . .

Exercise of partner company’s

warrants for cash . . . . . . . .

Issuance of common stock for
at-the-market offering, net

. .

Contribution of capital for 2017

bonuses . . . . . . . . . . . . .

Common shares issuable for 2017
Subordinated Note Financing
interest expense . . . . . . . . .

Common shares issued for 2017
Subordinated Note Financing
interest expense . . . . . . . . .

Common shares issued for Opus

interest expense . . . . . . . . .

Preferred A dividends declared

and paid . . . . . . . . . . . .

2017 Preferred A offering cost

adjustment

. . . . . . . . . . .

Disposal of National

. . . . . . .

Non-controlling interest in

subsidiaries . . . . . . . . . . .

— —

110,856 —

— —

— — 2,914,410

— —

—

164

(3)

198

112

— 22,668

—

7,747

181

7,014

1,000

— —

495

—

— —

783,965

(500)

1,971

— —

443,230 —

—

859

— —

— (2,344)

— —

—

154

2,247

— —

— (23,556)

—

15,012

—

198

276

22,668

7,747

181

7,017

1,000

495

1,472

859

(2,344)

154

(15,805)

(13,558)

23,556

—

(57,789)

Net loss attributable to

non-controlling interest

. . . .

— —

Net loss attributable to common

stockholders

. . . . . . . . . .

— —

—

— (84,147)

—

(84,147)

Balance at December 31, 2018 . . . . 1,000,000

$ 1

57,845,447

$58

$ 659 $397,408 $(396,274)

$ 17,891

$ 19,743

The accompanying notes are an integral part of these consolidated financial statements.
F-9

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows

in thousands)

Cash Flows from Operating Activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Net loss on discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain from disposal of National
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from continuing operations
Reconciliation of net loss to net cash used in operating activities:
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of debt discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of product revenue license fee . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock for research and development expenses . . . . . . . .
Issuance of common stock for research and development-licenses acquired

For the Years Ended December 31,

2018

2017

$(141,936)
(13,469)
2,333
(130,800)

$(99,836)
(2,323)
—
(97,513)

1,393
2,419
666
15,012
—

726
3,141
534
13,403
200

expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

276

—

Issuance of subsidiaries’ common shares for research and development

expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common shares issued for Opus interest expense . . . . . . . . . . . . . . . . . . . .
Change in fair value of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of subsidiary convertible note . . . . . . . . . . . . . . . . . . .
Loss on write off of investment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development-licenses acquired, expense . . . . . . . . . . . . . . . . .
Change in fair value of subsidiaries’ assets and liabilities . . . . . . . . . . . . . . .
Common shares issuable for interest expense . . . . . . . . . . . . . . . . . . . . . . .
Common shares issued for interest expense . . . . . . . . . . . . . . . . . . . . . . . .

Increase (decrease) in cash and cash equivalents resulting from changes in

operating assets and liabilities:

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other receivables – related party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued expenses
Accounts payable and accrued expenses – related party . . . . . . . . . . . . . . . .
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest payable – related party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncurrent assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in continuing operating activities . . . . . . . . . . . . . . . . . . . . .
Net cash used in discontinued operating activities . . . . . . . . . . . . . . . . . . . .
Net cash used in operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—
859
1,390
682
(437)
—
3,774
—
495
1,472

2,260
(507)
(1,477)
(3)
(17)
4,686
(23)
917
(572)
—
—
—
472
(97,063)
(1,785)
(98,848)

50
—
(226)
368
457
250
4,164
104
500
541

(5,928)
32
1,172
(4,011)
—
10,651
172
176
602
3,189
(620)
(9,008)
(284)
(77,158)
(4,147)
(81,305)

The accompanying notes are an integral part of these consolidated financial statements.
F-10

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows — (continued)
($ in thousands)

For the Years Ended December 31,

2018

2017

Cash Flows from Investing Activities:
Purchase of research and development licenses . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of property and equipment
Purchase of short-term investment (certificates of deposit)
. . . . . . . . . . . . .
Redemption of short-term investment (certificates of deposit) . . . . . . . . . . .
Security deposits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security deposits refund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of intangible assets – Journey . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) continuing investing activities . . . . . . . . . . . .
Net cash provided by discontinued investing activities . . . . . . . . . . . . . . . . .
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . .

Cash Flows from Financing Activities:
Proceeds from issuance of Series A preferred stock . . . . . . . . . . . . . . . . . . .
Payment of costs related to the issuance of Series A preferred stock . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of Preferred A dividends
Proceeds from at-the-market offering . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of cost related to at-the-market offering . . . . . . . . . . . . . . . . . . . .
Proceeds from partner company’s public offering . . . . . . . . . . . . . . . . . . . .
Payment of costs related partner company’s public offering . . . . . . . . . . . . .
Proceeds from partner company’s at-the-market offering . . . . . . . . . . . . . . .
Payment of costs related to partner company’s at-the-market offering . . . . . .
Proceeds from exercise of partner companies’ warrants . . . . . . . . . . . . . . . .
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of common stock under ESPP . . . . . . . . . . . . . . . .
Proceeds from 2017 Subordinated Note Financing . . . . . . . . . . . . . . . . . . .
Payment of debt issuance costs associated with 2017 Subordinated Note

Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from Opus Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from 2018 Venture Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of debt issue costs associated with 2018 Venture Notes . . . . . . . . . .
Payment of NSC Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of debt issue costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from partner company’s Convertible Note . . . . . . . . . . . . . . . . . .
Payment of debt issuance costs associated with partner companies’

Convertible Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of partner companies’ Convertible Note . . . . . . . . . . . . . . . . . . . .
Net cash provided by continuing financing activities . . . . . . . . . . . . . . . . . .
Net cash used in discontinued financing activities . . . . . . . . . . . . . . . . . . . .
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease in cash and cash equivalents and restricted cash . . . . . . . . . . . .
Cash and cash equivalents and restricted cash at beginning of period . . . . . .
Cash and cash equivalents and restricted cash at end of period . . . . . . . . . . . .

(1,074)
(7,082)
(52,604)
71,002
(1)
—
(1,200)
9,041
9,783
18,824

154
—
(2,344)
7,274
(257)
23,011
(343)
7,981
(234)
181
—
198
—

—
—
21,707
(1,868)
—
(404)
—

(3,365)
(648)
(56,091)
20,089
(251)
42
—
(40,224)
—
(40,224)

25,000
(2,804)
(299)
—
—
95,117
—
—
—
—
27
191
28,355

(81)
2,500
—
—
(3,608)
—
9,914

—
(4,408)
50,648
—
50,648
(29,376)
110,958
$ 81,582

(104)
—
154,208
(3,827)
150,381
28,852
82,106
$110,958

The accompanying notes are an integral part of these consolidated financial statements.
F-11

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows — (continued)
($ in thousands)

For the Years Ended December 31,

2018

2017

Supplemental disclosure of cash flow information:

Cash paid for interest

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash paid for interest – related party . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Supplemental disclosure of non-cash financing and investing activities:

Settlement of restricted stock units into common stock . . . . . . . . . . . . . . . .

Issuance of warrants by partner companies’ in conjunction with NSC debt . .

Issuance of partner companies’ common shares for settlement . . . . . . . . . . .

Debt discount related to Opus Credit Facility . . . . . . . . . . . . . . . . . . . . . . .

Unpaid debt offering cost

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Conversion of partner company’s notes payable . . . . . . . . . . . . . . . . . . . . .

Common shares issuable for license acquired . . . . . . . . . . . . . . . . . . . . . . .
Common shares issued for 2017 Subordinated Note Financing interest

expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receivables of contribution of capital for 2017 bonuses . . . . . . . . . . . . . . . .
Unpaid fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unpaid research and development licenses acquired . . . . . . . . . . . . . . . . . .

$4,448

$ 281

$ —

$ 500
$1,000
$ 196
$2,700

$ 207

$ 571

$ 750

$2,062

$ 201

$ 314

$1,682

$ —
$ —
$ 982
$ 755

The accompanying notes are an integral part of these consolidated financial statements.
F-12

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

1. Organization and Description of Business

Fortress Biotech, Inc. (“Fortress” or the “Company”) is a biopharmaceutical company dedicated to
acquiring, developing and commercializing pharmaceutical and biotechnology products and product
candidates, which the Company does at the Fortress level, at its majority-owned and majority-controlled
subsidiaries and joint ventures, and at entities the Company founded and in which it maintains significant
minority ownership positions. Fortress has a talented and experienced business development team,
comprising scientists, doctors and finance professionals, who identify and evaluate promising products and
product candidates for potential acquisition by new or existing partner companies. The Fortress Companies
have executed such arrangements in partnership with some of the world’s foremost universities, research
institutes and pharmaceutical companies, including City of Hope National Medical Center, St. Jude
Children’s Research Hospital and University College London.

Following the exclusive license or other acquisition of the intellectual property underpinning a product or
product candidate, Fortress leverages its business, scientific, regulatory, legal and finance expertise to help
the partners achieve their goals. Partner companies then assess a broad range of strategic arrangements to
accelerate and provide additional funding to support research and development, including joint ventures,
partnerships, out-licensings, and public and private financings; to date, three partner companies are
publicly-traded, and two have consummated strategic partnerships with industry leaders Alexion
Pharmaceuticals, Inc. and InvaGen Pharmaceuticals, Inc. (a subsidiary of Cipla Limited), respectively.

including Aevitas Therapeutics,

the partner companies contain licenses to product candidate
As of December 31, 2018, several of
intellectual property,
Inc.
(“Avenue”), Caelum Biosciences, Inc. (“Caelum”), Cellvation, Inc. (“Cellvation”), Checkpoint Therapeutics,
Inc. (“Checkpoint”), Cyprium Therapeutics, Inc. (“Cyprium”), Helocyte, Inc. (“Helocyte”), Journey
Medical Corporation (“Journey” or “JMC”), Mustang Bio, Inc. (“Mustang”), and Tamid Bio, Inc.
(“Tamid”). The Company also maintains exclusive ownership positions in operational subsidiaries CB
Securities Corporation, Innmune Limited and FBIO Acquisition, Inc. and majority ownership positions in
acquisition companies for which the Company is actively seeking product candidate licenses, including
Coronado SO Co., Escala Therapeutics, Inc., GeneXion Oncology, Inc., FBIO Acquisition Corp. IV, FBIO
Acquisition Corps. VI — XIV and Fortress Biotech, China, Inc.

(“Aevitas”), Avenue Therapeutics,

Inc.

Liquidity and Capital Resources

Since inception, the Company’s operations have been financed primarily through the sale of equity and debt
securities, from the sale of companies, the proceeds from the exercise of warrants and stock options. The
Company has incurred losses from operations and negative cash flows from operating activities since
inception and expects to continue to incur substantial losses for the next several years as it continues to fully
develop and prepare regulatory filings and obtain regulatory approvals for its existing and new product
candidates. The Company’s current cash and cash equivalents are sufficient to fund operations for at least
the next 12 months. However, the Company will need to raise additional funding through strategic
relationships, public or private equity or debt financings, sale of a partner company, grants or other
arrangements to fully develop and prepare regulatory filings and obtain regulatory approvals for the
existing and new product candidates, fund operating losses, and, if deemed appropriate, establish or secure
through third parties manufacturing for the potential products, sales and marketing capabilities. If such
funding is not available or not available on terms acceptable to the Company, the Company’s current
development plan and plans for expansion of its general and administrative infrastructure will be curtailed.
The Company also has the ability, subject to limitations imposed by Rule 144 of the Securities Act of 1933
and other applicable laws and regulations, to raise money from the sale of common stock of the public
companies in which it has ownership positions.

National Holdings Corporation

During 2016, the Company purchased 56.6% of National Holdings Corporation, a diversified independent
brokerage company (together with its subsidiaries, herein referred to as “NHLD” or “National”) through

F-13

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

wholly-owned subsidiary FBIO Acquisition, Inc.
(“FBIO Acquisition”). The Company paid total
consideration of $22.9 million or approximately 7.0 million shares at $3.25 per share in connection with this
transaction. On November 14, 2018, the Company announced that it had reached an agreement with NHC
Holdings, LLC (“NHC”) to sell all of its shares of National, representing 56.1% of the total outstanding
shares of NHLD for $3.25 per share or total consideration of $22.9 million. Pursuant to the terms of the
agreement with NHC the sale of the shares was subject to two closings. The first closing occurred on
November 14, 2018 in which the Company sold approximately 3.0 million of its shares in NHLD and
received $9.8 million in proceeds. The second closing occurred on February 11, 2019 upon the receipt of
FINRA approval of the sale in which the Company received $13.1 million in proceeds for the sale of its
remaining 4.0 million shares of NHLD to NHC and two other minority holders and received. At
December 31, 2018, the Company’s holding in National approximated 32.1% and was recorded on the
consolidated balance sheets at fair value as a component of current assets held for sale.

2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The Company’s consolidated financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America (“GAAP”). The Company’s consolidated
financial statements include the accounts of the Company and the accounts of the Company’s subsidiaries,
listed above. All intercompany balances and transactions have been eliminated.

The accompanying consolidated financial statements include the accounts of the Company’s subsidiaries.
For consolidated entities where the Company owns less than 100% of the subsidiary, the Company records
net loss attributable to non-controlling interests in its consolidated statements of operations equal to
the percentage of
the economic or ownership interest retained in such entities by the respective
non-controlling parties. The Company also consolidates subsidiaries in which it owns less than 50% of the
subsidiary but maintains voting control.

Use of Estimates

The Company’s consolidated financial statements include certain amounts that are based on management’s
best estimates and judgments. The Company’s significant estimates include, but are not limited to, useful
lives assigned to long-lived assets, fair value of stock options and warrants, stock-based compensation,
common stock issued to acquire licenses, investments, accrued expenses, provisions for income taxes and
contingencies. Due to the uncertainty inherent in such estimates, actual results may differ from these
estimates.

Discontinued Operations

At December 31, 2018, the Company determined that its National segment met the discontinued operations
criteria set forth in Accounting Standards Codification (ASC) Subtopic 205-20-45, Presentation of
Financial Statements, for the twelve months ended December 30, 2018 and 2017. As such, the National
segment results have been classified as discontinued operations in the accompanying Consolidated Balance
Sheets and Consolidated Statements of Operations. See Note 3 for more information relating to the
Company’s discontinued operations.

Fair Value Measurement

The Company follows accounting guidance on fair value measurements for financial assets and liabilities
measured at fair value on a recurring basis. Under the accounting guidance, fair value is defined as an exit
price, representing the amount that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. As such, fair value is a
market-based measurement that should be determined based on assumptions that market participants
would use in pricing an asset or a liability.

F-14

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

The accounting guidance requires fair value measurements be classified and disclosed in one of the
following three categories:

Level 1:

Quoted prices in active markets for identical assets or liabilities.

Level 2:

Observable inputs other than Level 1 prices for similar assets or liabilities that are directly
or indirectly observable in the marketplace.

Level 3: Unobservable inputs which are supported by little or no market activity and that are
financial instruments whose values are determined using pricing models, discounted cash
flow methodologies, or similar techniques, as well as instruments for which the
determination of fair value requires significant judgment or estimation.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. Assets and liabilities measured at fair value are
classified in their entirety based on the lowest level of
input that is significant to the fair value
measurement. The Company’s assessment of the significance of a particular input to the fair value
measurement in its entirety requires management to make judgments and consider factors specific to the
asset or liability.

Certain of the Company’s financial instruments are not measured at fair value on a recurring basis, but are
recorded at amounts that approximate their fair value due to their liquid or short-term nature, such as
accounts payable, accrued expenses and other current liabilities.

Segment Reporting

The Company operates in two operating and reportable segments, Dermatology Product Sales and
Pharmaceutical and Biotechnology Product Development. The Company evaluates the performance of
each segment based on operating profit or loss. There is no inter-segment allocation of interest expense and
income taxes.

Cash and Cash Equivalents

The Company considers highly liquid investments with a maturity of three months or less when purchased
to be cash equivalents. Cash and cash equivalents at December 31, 2018 and at December 31, 2017 consisted
of cash and certificates of deposit in institutions in the United States. Balances at certain institutions have
exceeded Federal Deposit Insurance Corporation insured limits and U.S. government agency securities.

Short-term Investments

The Company classifies its certificates of deposit as cash and cash equivalents or held to maturity in
accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 320, Investments — Debt and Equity Securities. The Company considers all short-term investments
with an original maturity in excess of three months when purchased to be short-term investments.
Short-term investments consist of short-term FDIC insured certificates of deposit with a maturity of more
than three months and less than twelve months, carried at amortized cost using the effective interest
method. The cost of
the Company’s certificates of deposit approximated fair value. The Company
reassesses the appropriateness of the classification of its investments at the end of each reporting period.

At December 31, 2018, the Company had approximately $27.6 million in certificates of deposit. The
Company classified $10.0 million as cash and cash equivalents and classified $17.6 million as short-term
investments (certificates of deposits) held-to-maturity as of December 31, 2018. At December 31, 2017, the
Company had approximately $50.0 million in certificates of deposit. The Company classified $14.0 million
as cash and cash equivalents and classified $36.0 million as short-term investments (certificates of deposits)
held-to-maturity as of December 31, 2017. This classification was based upon management’s determination
that it has the positive intent and ability to hold the securities until their maturity dates, as its investments
mature within one year and the underlying cash invested in these securities is not required for current
operations.

F-15

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

Property and Equipment

Computer equipment, furniture & fixtures and machinery & equipment are recorded at cost and
life of each asset. Leasehold
depreciated using the straight-line method over the estimated useful
improvements are amortized over the shorter of the estimated useful lives or the term of the respective
leases.

Impairment of Long-Lived Assets

The Company reviews long-lived assets, including property and equipment, for impairment whenever events
or changes in business circumstances indicate that the carrying amount of the assets may not be fully
recoverable. Factors that the Company considers in deciding when to perform an impairment review include
significant underperformance of the business in relation to expectations, significant negative industry or
economic trends, and significant changes or planned changes in the use of the assets. If an impairment
review is performed to evaluate a long-lived asset for recoverability, the Company compares forecasts of
undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to
its carrying value. An impairment loss would be recognized when estimated undiscounted future cash flows
expected to result from the use of an asset are less than its carrying amount. The impairment loss would be
based on the excess of the carrying value of the impaired asset over its fair value, determined based on
discounted cash flows.

Restricted Cash

The Company records cash held in trust or pledged to secure certain debt obligations as restricted cash. As
of December 31, 2018, and 2017, the Company has $16.1 million and $16.0 million, respectively, of
restricted cash collateralizing a note payable of $14.9 million in 2018 and 2017, and certain pledges to
secure a letter of credit in connection with certain office leases of $1.2 million and $1.1 million in 2018 and
2017, respectively.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash from the
consolidated balance sheets to the consolidated statements of cash flows for the years ended December 31,
2018, and 2017 ($ in thousands).

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$65,508
16,074

Total cash and cash equivalents and restricted cash . . . . . . . . . . . . . . .

$81,582

$ 94,952
16,006

$110,958

December 31,

2018

2017

Inventories

Inventories comprise finished goods, which are valued at the lower of cost or market, on a first-in, first-out
basis. The Company evaluates the carrying value of inventories on a regular basis, taking into account
anticipated future sales compared with quantities on hand, and the remaining shelf life of goods on hand.

Accounts Receivable

Accounts receivable consists of amounts due to the Company for product sales from JMC. The Company’s
accounts receivable reflects discounts for estimated early payment and for product estimated returns.
Accounts receivable are stated at amounts due from customers, net of an allowance for doubtful accounts.
Accounts that are outstanding longer than the contractual payment terms are considered past due. The
Company determines its allowance for doubtful accounts by considering a number of factors, including the
length of time trade accounts receivable are past due and the customer’s current ability to pay its obligation
to the Company. The Company writes off accounts receivable when they become uncollectible. The

F-16

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

allowance for product estimated returns were $3.1 million and $1.3 million at December 31, 2018 and
December 31, 2017, respectively. The Company recorded expense related to returns reserve of $2.4 million
and $1.2 million for the years ended December 31, 2018 and 2017, respectively.

Current Investments at Fair Value

The Company elects the fair value option, instead of the equity method, for its current investment in
National at fair value (see Note 3). The decision to elect the fair value option, which is irrevocable once
elected, is determined on an instrument by instrument basis and applied to an entire instrument. The net
gains or losses, if any, on an investment for which the fair value option has been elected are recognized as a
change in fair value of investments on the Consolidated Statements of Operations.

Fair Value Option

As permitted under the FASB, ASC 825, Financial Instruments, (“ASC 825”), the Company has elected the
fair value option to account for the Helocyte and Caelum convertible notes. In accordance with ASC 825,
the Company records these convertible notes at fair value with changes in fair value recorded in the
Consolidated Statement of Operations. As a result of applying the fair value option, direct costs and fees
related to the Helocyte and Caelum convertible notes were recognized in earnings as incurred and were not
deferred. During 2018, the Helocyte convertible notes matured and the Company repaid the principal
amount due of approximately $4.4 million.

Accounting for Warrants at Fair Value

The Company classifies as liabilities any contracts that (i) require net-cash settlement (including a
requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the
Company) or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical
settlement or net-share settlement).

The fair value of warrants that include price protection reset provision features are deemed to be
“down-round protection” and, therefore, do not meet the scope exception for treatment as a derivative
under ASC 815, Derivatives and Hedging, since “down-round protection” is not an input into the
calculation of the fair value of warrants and cannot be considered “indexed to the Company’s own stock”
which is a requirement for the scope exception as outlined under ASC 815. The accounting treatment of
derivative financial instruments requires that the Company record the warrants at their fair values as of the
inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in
fair value is recorded as non-operating, non-cash income or expense for each reporting period at each
balance sheet date. The Company reassesses the classification of its derivative instruments at each balance
sheet date. If the classification changes as a result of events during the period, the contract is reclassified as
of the date of the event that caused the reclassification.

The Company assessed the classification of warrants issued, in connection with convertible note financing
for Helocyte in 2016 and Caelum’s convertible note financing in 2017 (the “Helocyte and Caelum
Warrants”), and determined that the Helocyte, and Caelum Warrants met the criteria for liability
classification. Accordingly, the Company classified the Helocyte and Caelum Warrants as a liability at their
fair value and adjusts the instruments to fair value at each balance sheet date until the warrants are
exercised or expired. Any change in the fair value of the Helocyte, and Caelum Warrants is recognized as
“change in the fair value of derivative liabilities” in the Consolidated Statements of Operations.

Opus Credit Facility, with Detachable Warrants

The Company accounts for the Opus Credit Facility with detachable warrants in accordance with ASC 470,
Debt. The Company assessed the classification of its common stock purchase warrants as of the date of the
transaction and determined that such instruments meet the criteria for equity classification. The warrants
are reported on the Consolidated Balance Sheets as a component of additional paid in capital within
stockholders’ equity.

F-17

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

The Company recorded the related issue costs and value ascribed to the warrants as a debt discount of the
Opus Credit Facility. The discount is amortized utilizing the effective interest method over the term of the
Opus Credit Facility. The unamortized discount, if any, upon repayment of the Opus Credit Facility will be
expensed to interest expense. In accordance with ASC Subtopic 470-20, the Company determined the
weighted average effective interest rate of the debt was approximately 17% at December 31, 2018. The
Company has also evaluated the Opus Credit Facility and warrants in accordance with the provisions of
ASC 815, Derivatives and Hedging, including consideration of embedded derivatives requiring bifurcation.

Issuance of Debt and Equity

The Company issues complex financial instruments which include both equity and debt features. The
Company analyzes each instrument under ASC 480, Distinguishing Liabilities from Equity, ASC 815,
Derivatives and Hedging and, ASC 470, Debt, in order to establish whether such instruments include any
embedded derivatives.

Long-Lived Assets

Long-lived assets, primarily fixed assets, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets might not be recoverable. The Company will
perform a periodic assessment of assets for impairment in the absence of such information or indicators.
Conditions that would necessitate an impairment assessment include a significant decline in the observable
market value of an asset, a significant change in the extent or manner in which an asset is used, or a
significant adverse change that would indicate that the carrying amount of an asset or group of assets is not
recoverable. For long-lived assets to be held and used, the Company would recognize an impairment loss
only if it’s carrying amount is not recoverable through its undiscounted cash flows and measures the
impairment loss based on the difference between the carrying amount and estimated fair value. As of
December 31, 2018 and 2017 there were no indicators of impairment.

Research and Development

Research and development costs are expensed as incurred. Advance payments for goods and services that
will be used in future research and development activities are expensed when the activity has been
performed or when the goods have been received rather than when the payment is made. Upfront and
milestone payments due to third parties that perform research and development services on the Company’s
behalf will be expensed as services are rendered or when the milestone is achieved.

Research and development costs primarily consist of personnel related expenses, including salaries, benefits,
travel, and other related expenses, stock-based compensation, payments made to third parties for license
and milestone costs related to in-licensed products and technology, payments made to third party contract
research organizations for preclinical and clinical studies, investigative sites for clinical trials, consultants,
the cost of acquiring and manufacturing clinical trial materials, and costs associated with regulatory filings,
laboratory costs and other supplies.

In accordance with ASC 730-10-25-1, Research and Development, costs incurred in obtaining technology
licenses are charged to research and development expense if the technology licensed has not reached
commercial feasibility and has no alternative future use. Such licenses purchased by the Company require
substantial completion of research and development, regulatory and marketing approval efforts in order to
reach commercial feasibility and has no alternative future use. Accordingly, the total purchase price for the
licenses acquired during the period was reflected as research and development — licenses acquired on the
Consolidated Statements of Operations for the year ended December 31, 2018 and 2017.

Contingencies

The Company records accruals for contingencies and legal proceedings expected to be incurred in
connection with a loss contingency when it is probable that a liability has been incurred and the amount can
be reasonably estimated.

F-18

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

If a loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, the
nature of the contingent liability, together with an estimate of the range of possible loss if determinable and
material, would be disclosed.

Stock-Based Compensation

The Company expenses stock-based compensation to employees over the requisite service period based on
the estimated grant-date fair value of the awards and forfeiture rates. For stock-based compensation awards
to non-employees, the Company remeasures the fair value of the non-employee awards at each reporting
period prior to vesting and finally at the vesting date of the award. Changes in the estimated fair value of
these non-employee awards are recognized as compensation expense in the period of change.

The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model
or 409A valuations, as applicable. The assumptions used in calculating the fair value of stock-based awards
represent management’s best estimates and involve inherent uncertainties and the application of
management’s judgment.

Income Taxes

The Company records income taxes using the asset and liability method. Deferred income tax assets and
liabilities are recognized for the future tax effects attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their respective income tax bases, and
operating loss and tax credit carryforwards. The Company establishes a valuation allowance if management
believes it is more likely than not that the deferred tax assets will not be recovered based on an evaluation of
objective verifiable evidence. For tax positions that are more likely than not of being sustained upon audit,
the Company recognizes the largest amount of the benefit that is greater than 50% likely of being realized.
For tax positions that are not more likely than not of being sustained upon audit, the Company does not
recognize any portion of the benefit.

Non-Controlling Interests

Non-controlling interests in consolidated entities represent the component of equity in consolidated entities
held by third parties. Any change in ownership of a subsidiary while the controlling financial interest is
retained is accounted for as an equity transaction between the controlling and non-controlling interests.

Comprehensive Loss

The Company’s comprehensive loss is equal to its net loss for all periods presented.

Reclassifications

Certain prior period amounts may have been reclassified to conform to the current year presentation.

Recently Adopted Accounting Pronouncements

In May 2017, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards
Update (“ASU”) 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification
Accounting, which clarifies when to account for a change to the terms or conditions of a share-based
payment award as a modification. Under the new guidance, modification accounting is required only if the
fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result

F-19

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

of the change in terms or conditions. The new standard was effective on January 1, 2018; however, early
adoption is permitted. The Company adopted ASU No. 2017-09 as of January 1, 2018. The adoption of
this update did not impact the Company’s financial statements.

In January 2017, the FASB issued an ASU 2017-01, “Business Combinations (Topic 805) Clarifying the
Definition of a Business”. The amendments in this ASU clarify the definition of a business with the
objective of adding guidance to assist entities with evaluating whether transactions should be accounted for
as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of
accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for
annual periods beginning after December 15, 2017, including interim periods within those periods. The
Company adopted ASU 2017-01 on January 1, 2018. The adoption of this update did not impact the
Company’s financial statements.

In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606):
Principal versus Agent Considerations” (“ASU 2016-08”). The purpose of ASU 2016-08 is to clarify the
implementation of guidance on principal versus agent considerations. The amendments in ASU 2016-08 are
effective for interim and annual reporting periods beginning after December 15, 2017. The Company
adopted the new standard effective January 1, 2018, using the modified retrospective approach applied to all
of its contracts. The adoption of this update did not have a material impact on the Company’s financial
statements.

In June 2018, the FASB issued ASU 2018-07, “Improvements to Nonemployee Share-Based Payment
Accounting”, which simplifies the accounting for share-based payments granted to nonemployees for goods
and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned
with the requirements for share-based payments granted to employees. The changes take effect for public
companies for fiscal years starting after December 15, 2018, including interim periods within that fiscal
year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019,
and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but
no earlier than an entity’s adoption date of Topic 606. The Company adopted ASU No. 2018-07 as of
January 1, 2019. The adoption of this update did not have a material impact on the Company’s financial
statements.

In November 2018, the FASB issued ASU No. 2018-18, “Collaboration Arrangements: Clarifying the
Interaction between Topic 808 and Topic 606”. The issuance of ASC 606 raised questions about the
interaction between the guidance on collaborative arrangements and revenue recognition. ASU 2018-18
addresses this uncertainty by (1) clarifying that certain transactions between collaborative arrangement
participants should be accounted for as revenue under ASC 606 when the collaboration arrangement
participant is a customer, (2) adding unit of account guidance to assess whether the collaboration
arrangement or a part of the arrangement is with a customer and (3) precluding a company from presenting
transactions with collaboration arrangement participants that are not directly related to sales to third
parties together with revenue from contracts with customers. The new standard is effective on January 1,
2020 with early adoption permitted. The Company elected to adopt ASU 2018-18 in December 2018. The
adoption of this update did not have a material impact on the Company’s financial statements.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) in order to increase transparency and
comparability among organizations by, among other provisions, recognizing lease assets and lease liabilities
on the balance sheet for those leases classified as operating leases under previous GAAP. For public
companies, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim
periods within those periods) using a modified retrospective approach and early adoption is permitted. In
transition, entities may also elect a package of practical expedients that must be applied in its entirety to all
leases commencing before the adoption date, unless the lease is modified, and permits entities to not
reassess (a) the existence of a lease, (b) lease classification or (c) determination of initial direct costs, as of
the adoption date, which effectively allows entities to carryforward accounting conclusions under previous

F-20

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

U.S. GAAP. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements,
which provides entities an optional transition method to apply the guidance under Topic 842 as of the
adoption date, rather than as of the earliest period presented. The Company adopted Topic 842 on
January 1, 2019, using the optional transition method to apply the new guidance as of January 1, 2019,
rather than as of the earliest period presented, and elected the package of practical expedients described
above. The Company is still finalizing its analysis but expects to recognize additional operating liabilities
from approximately $27.5 million to $24.9 million, with corresponding Right of Use (ROU) assets of
approximately $24.6 million to $22 million as of January 1, 2019 based on the present value of the
remaining lease payments.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires that expected credit losses
relating to financial assets are measured on an amortized cost basis and available-for-sale debt securities be
recorded through an allowance for credit losses. ASU 2016-13 limits the amount of credit losses to be
recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and
also requires the reversal of previously recognized credit losses if fair value increases. The new standard will
be effective on January 1, 2020 and may be adopted earlier. The Company is currently evaluating the
impact, if any, that ASU 2016-13 will have on its consolidated financial statements and related disclosures.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from
Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial
Instruments with Down Round Features; II. Replacement of
the Indefinite Deferral for Mandatorily
Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable
Noncontrolling Interests with a Scope Exception. Part I of
this update addresses the complexity of
accounting for certain financial instruments with down round features. Down round features are features of
certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the
basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for
entities that issue financial instruments (such as warrants and convertible instruments) with down round
features that require fair value measurement of the entire instrument or conversion option. Part II of this
update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of
the existence of extensive pending content in the FASB Accounting Standards Codification. This pending
content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable
financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling
interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective
for fiscal years, and interim periods within those years, beginning after December 15, 2018 The Company
does not expect the adoption of this guidance to have a material impact on its financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), — Disclosure
Framework — Changes to the Disclosure Requirements for Fair Value Measurement, which makes a number
of changes meant to add, modify or remove certain disclosure requirements associated with the movement
amongst or hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. This guidance is
effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.
Early adoption is permitted upon issuance of the update. The Company does not expect the adoption of
this guidance to have a material impact on its financial statements.

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, “Disclosure Update and
Simplification”, amending certain disclosure requirements that were redundant, duplicative, overlapping,
outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis
of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in
each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate
statement. The analysis should present a reconciliation of the beginning balance to the ending balance of
each period for which a statement of comprehensive income is required to be filed. This final rule is
effective on November 5, 2018. The Company does not expect the adoption of this guidance to have a
material impact on its financial statements and anticipates its first presentation of changes in stockholders’
equity will be included in its Form 10-Q for the quarter ended March 31, 2019.

F-21

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

3. Discontinued Operations

As of December 31, 2018, the Company recorded its investment in National at fair value of $13.1 million or
$3.25 per share. This holding is reported on the Company’s Consolidated Balance Sheets as current assets
held for sale on December 31, 2018. Pursuant to the NHC Agreement the Company also recorded a net
gain of $2.3 million related to the transactions which is included in discontinued operations in the
consolidated statement of operations for the twelve months ended December 31, 2018.

The following is a summary of revenue and expenses of National for the years ended December 31, 2018
and 2017:

($ in thousands)

December 31,

2018

2017

Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$210,980

$170,339

Operating expenses

Commissions, compensation and fees . . . . . . . . . . . . . . . . . . . . . .
Clearing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Licenses and registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . .
Other administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Gain (loss) from operations

. . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other income (expenses)
Change in fair value of derivative liabilities . . . . . . . . . . . . . . . . . .
Interest expense and financing fees
. . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of warrants . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total other (expenses) income . . . . . . . . . . . . . . . . . . . . . . . . . . .

Loss from discontinued operations before income taxes . . . . . . . . .

Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

182,127
2,400
3,260
3,755
2,735
4,306
97
1,551
8,165

208,396

2,584

—
—
(13,018)
153

(12,865)

(10,281)

3,188

Loss from discontinued operations

. . . . . . . . . . . . . . . . . . . . . . .

(13,469)

Gain from disposal of National . . . . . . . . . . . . . . . . . . . . . . . . . .

2,333

155,187
2,343
2,767
4,286
1,726
4,531
14
2,089
8,808

181,751

(11,412)

304
1,827
8,455
16

10,602

(810)

1,513

(2,323)

—

Total loss from discontinued operations, net of tax . . . . . . . . . . . . .

$ (11,136)

$ (2,323)

F-22

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

In connection with this sale, the Company classified the assets and liabilities related to NHLD, included on
its consolidated balance sheet as of December 31, 2018 and December 31, 2017, as held for sale as presented
in the table below:

($ in thousands)

ASSETS

Current assets

December 31,

2018

2017

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ —

$18,963

Cash deposits with clearing organizations . . . . . . . . . . . . . . . . . . . . .

Receivables from broker-dealers and clearing organizations . . . . . . . . .

Forgivable loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Securities owned, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

Current assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13,089

Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . .

—

Total current assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13,089

Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total non-current assets held for sale . . . . . . . . . . . . . . . . . . . . . . . .

—
—
—
—
—

—

1,041

7,395

1,616

1,985

—

6,948

37,948

2,397
1,381
18,645
14,340
353

37,116

Total assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$13,089

$75,064

Liability classified as held for sale:

($ in thousands)

December 31,

2018

2017

Current liabilities
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . .
Accrued commissions and payroll payable . . . . . . . . . . . . . . . . . . . . .
Contingent consideration payable . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred clearing and marketing credits . . . . . . . . . . . . . . . . . . . . . .
Securities sold, not yet purchased at fair value . . . . . . . . . . . . . . . . . .
Warrants issued in 2017 and issuable in 2016 . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total current liabilities held for sale . . . . . . . . . . . . . . . . . . . . . .

Total liabilities held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$—
—
—
—
—
—
—

—

$—

$ 8,404
10,065
311
786
151
5,597
3,969

29,283

$29,283

F-23

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

The table below depicts the cash flows from the transaction for the twelve months ended December 31, 2018
and 2017, respectively:

($ in thousands)

Operating activities

December 31,

2018

2017

Effect of elimination entry with discontinued operations presentation . .

$(1,785)

Total cash used in discontinued operating activities

. . . . . . . . . . . . . .

$(1,785)

Investing activities

Proceeds from sale of National . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 9,783

Total cash provided by discontinued investing activities . . . . . . . . . . . .

$ 9,783

$(4,147)

$ —

Financing activities

Payment of debt issuance costs associated with 2017 Subordinated

Note Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ —

$(2,836)

Payment of debt issuance costs associated with partner company’s

Convertible Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

(991)

Total cash used in discontinued financing activities . . . . . . . . . . . . . . .

$ —

$(3,827)

4. Property and Equipment

Fortress’ property and equipment consisted of the following:

($ in thousands)

Useful Life
(Years)

December 31,

2018

2017

Computer equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and fixtures
Machinery & equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Total property and equipment . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . .

Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . .

3
5
5
5 – 15
N/A

648
1,128
3,143
9,271
393

543
1,009
143
5,351
1,241

14,583
(2,564)

8,287
(1,171)

$12,019

$ 7,116

Note 1: Relates to the Mustang cell processing facility.

Depreciation expenses of Fortress’ property and equipment for the years ended December 31, 2018 and
2017 was $1.4 million and $0.7 million, respectively, and was recorded in research and development,
manufacturing and general and administrative expense in the Consolidated Statements of Operations.

5. Fair Value Measurements

Certain of the Company’s financial instruments are not measured at fair value on a recurring basis but are
recorded at amounts that approximate their fair value due to their liquid or short-term nature, such as
accounts payable, accrued expenses and other current liabilities.

F-24

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

Origo Acquisition Corporation (formerly CB Pharma Acquisition Corporation)

On June 10, 2016, CB Pharma Acquisition Corp (“CB Pharma”) held an extraordinary general meeting of
shareholders (the “Meeting”). At the Meeting, the shareholders approved each of the following items: (i) an
amendment to the CB Pharma’s Amended and Restated Memorandum and Articles of Association (the
“Charter”) to extend the date by which CB Pharma has to consummate a business combination from
June 12, 2016 to December 12, 2016 (the “Extension”), (ii) an amendment to the Charter to allow the
holders of the CB Pharma’s ordinary shares issued in the their initial public offering to elect to convert their
shares into their pro rata portion of the funds held in trust, if the Extension is approved, and (iii) the
change of CB Pharma’s name from “CB Pharma Acquisition Corp.” to “Origo Acquisition Corporation”
(“Origo”). In connection with the Meeting, the Company transferred 1,050,000 of its CB Pharma ordinary
shares to Origo. The Company retained ownership of 265,000 Origo shares.

As of December 31, 2017, the Company valued its investment in Origo, a publicly traded company, utilizing
the following assumptions: probability of a successful business combination of 46.53%, and no dividend
rate, which yielded an underlying value of $10.65 per ordinary share for the private placement shares. The
rights and warrants were valued utilizing a binomial-lattice model utilizing a risk-free rate of return of
1.28% and a strike price of $11.50 per share arriving at a value of $1.06 for each right and $1.07 for each
warrant as of December 31, 2017. Time to expected business combination/liquidation was 0.05 at
December 31, 2017. At December 31, 2017, the fair value of the Company’s investment in Origo was
$1.4 million, respectively. The Company also had a working capital note with Origo of $0.3 million.

On August 10, 2018, Origo entered into a Termination and Mutual Release between Origo and Hightimes
Holding Corp. (“HTH”), HTHC Merger Sub, Inc. (“Merger Sub”) and Jose Aldeanueva, pursuant the
terms of the Merger Agreement, dated July 24, 2017, as amended, effectively terminating the possibility of
a business combination. Additionally, on August 10, 2018 the officers and directors of Origo notified
shareholders of their intention to dissolve and liquidate in accordance with the Memorandum and Articles
of Association of Origo. In accordance with the liquidation, Origo redeemed all of its outstanding ordinary
shares that were included in the units issued in its initial public offering (the “Public Shares”), at a per-share
redemption price of approximately $11.00. The redemption was completed on August 15, 2018. Since the
Company’s investment in Origo, was not eligible for the redemption, the Company wrote off its investment
in Origo and recorded a decrease in fair-value of
investment of $1.4 million for the year ended
December 31, 2018. The Company’s working capital note of $0.3 million, was also written off in the year
ended December 31, 2018.

Contingently Issuable Warrant

Pursuant to the terms of the 2018 Venture Notes (see Note 9), if a partner company receives proceeds from
the 2018 Venture Notes, such partner company will issue a note to the fund and the fund will receive a
warrant to purchase a number of shares of the partner company’s stock equal to 25% of the outstanding
partner company note divided by the lowest price for which the partner company sells its equity in its first
third party financing. The warrants issued will have a term of 10 years and an exercise price equal to the par
value of the partner company’s common stock and are accounted for in accordance with ASC 815,
Derivatives and Hedging. For the twelve months ended December 31, 2018, Aevitas, Cellvation and
Cyprium received funds from the 2018 Venture Notes. The Company evaluated whether or not a third party
financing was probable at December 31, 2018 for each of the entities and determined that it was not, as
such the Company did not record any value associated with the contingently issued warrants. The Company
did not have any borrowings under this note in 2017.

Warrant Liabilities

Helocyte

The fair value of Helocyte’s warrant liability, which was issued in connection with Helocyte’s convertible
note, as of December 31, 2018 and 2017, approximated nil and $87,000, respectively. During 2018 the notes
matured and were paid off (see Note 9) and as such the warrant was not issued.. A summary of the

F-25

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring
Helocyte’s warrant liabilities that are categorized within Level 3 of
the fair value hierarchy as of
December 31, 2017 are as follows:

Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Expected term in years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

($ in thousands)

2018

December 31

2017

2.04% – 2.08%

—%

3.50 – 3.92

70%

Fair Value of
Derivative Warrant
Liability

Beginning balance at January 1, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Change in fair value of derivative liabilities

. . . . . . . . . . . . . . . . . . . . . . . .

Ending balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .

Change in fair value of derivative liabilities

Ending balance at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$167

(80)

$ 87
(87)

$ —

Caelum

The fair value of Caelum’s warrant liability, which was issued in connection with Caelum’s convertible note,
was written up to the full value of the liability at December 31, 2018 due to the conversion of the notes in
January 2019 (see Note 21). The fair value at December 31, 2018 and 2017 was measured using a Monte
Carlo simulation valuation methodology. A summary of the weighted average (in aggregate) significant
unobservable inputs (Level 3 inputs) used in measuring Caelum’s warrant liabilities that are categorized
within Level 3 of the fair value hierarchy as of December 31, 2018 and 2017 are as follows:

December 31

2018

2017

Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . .
Expected term in years . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.905% – 2.909%
—%
3.84 – 3.96
70%

2.154% – 2.168%
—%
4.58 – 4.71
70%

($ in thousands)

Fair Value of
Derivative Warrant
Liability

Beginning balance at January 1, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of derivative liabilities

Ending balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Change in fair value of derivative liabilities

. . . . . . . . . . . . . . . . . . . . . . . .

Ending balance at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ —

225
(3)

$222

769

$991

F-26

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

Convertible Notes at Fair Value

Helocyte

For the year ended December 31, 2017, Helocyte’s convertible debt was measured at fair value using the
Monte Carlo simulation valuation methodology. A summary of the weighted average (in aggregate)
significant unobservable inputs (Level 3 inputs) used in measuring the convertible debt that is categorized
the fair value hierarchy is presented in the following table. For the year ended
within Level 3 of
December 31, 2018 the note was not valued as it matured and was paid off. For the year ended
December 31, 2017 the following input were utilized to derive the note’s fair value:

Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term in years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2018
NA
NA
NA
NA

($ in thousands)
Beginning balance at January 1, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of convertible notes . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of convertible note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of convertible notes . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31

2017

1.53% – 1.72%
—
0.50 – 0.911
52.4%

Helocyte Convertible
Note, at fair value
$ 4,487
213
$ 4,700
(4,408)
(292)
$ —

Caelum

is measured at

Caelum’s convertible debt
fair value using the Monte Carlo simulation valuation
methodology. A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3
inputs) used in measuring Caelum’s convertible debt that is categorized within Level 3. As of December 31,
2018, conversion of the Caelum Convertible Note was probable and as such the fair value approximated
cost. For the years ended December 31, 2018 and 2017 the following input were utilized to derive the note’s
fair value:

December 31

2017

2018
2.302% 1.506% – 1.851%
—%
0.46 – 1.70
70.0%

67%

—%

0.32

($ in thousands)
Beginning balance at January 1, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of convertible notes . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of convertible notes . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Caelum Convertible
Note, at fair value
$ —
$ 9,914
145
$10,059
(145)
$ 9,914

F-27

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

The following tables classify into the fair value hierarchy of Fortress’ financial instruments, measured at fair
value on a recurring basis on the Consolidated Balance Sheets as of December 31, 2018 and 2017:

($ in thousands)
Liabilities
Warrant liabilities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Helocyte Convertible Note, at fair value . . . . . . . . . . . . . . . . . .
Caelum Convertible Note, at fair value . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total

($ in thousands)
Assets
Long-term investments, at fair value . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total

Liabilities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warrant liabilities
Caelum Convertible Note, at fair value . . . . . . . . . . . . . . . . . . .
Helocyte Convertible Note, at fair value . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total

Fair Value Measurement as of December 31, 2018

Level 1

Level 2

Level 3

Total

$—
—
—
$—

991
—
9,914
$10,905

Fair Value Measurement as of December 31, 2017

Level 1

Level 2

Level 3

Total

$—
$—

$—
—
—
$—

$—
$—

$—
—
—
$—

$ 1,390
$ 1,390

309
10,059
4,700
$15,068

The table below provides a roll forward of the changes in fair value of Level 3 financial instruments for
the years ended December 31, 2018 and 2017:

($ in thousands)

Investment
in Origo

Convertible Notes at fair value Warrants(1)
Caelum
National

Helocyte

Warrant
liabilities

Total

Balance at December 31, 2017 . . . . . . . . . . . . . $ 1,390
—
—
(1,390)
—
—

Payment of convertible note . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
Disposal of National
. . . . . . . .
Change in fair value of investments
Change in fair value of convertible notes . . . . .
Change in fair value of derivative liabilities . . . .

Balance at December 31, 2018 . . . . . . . . . . . . . $ —

$ 4,700
(4,408)
—
—
(292)
—

$ —

$10,059
—
—
—
(145)
—

$ 5,597
—
(5,597)
—
—
—

$ 87

$21,833
— (4,408)
222
(5,375)
— (1,390)
(437)
—
682
682

$ 9,914

$ — $991

$10,905

($ in thousands)

Investment in
Origo

Investment in
laser device

Convertible Notes,
at fair value

Helocyte Avenue Caelum

Warrants(1)
National

Warrant
liabilities

Total

Balance at December 31, 2016 . . . . . . .

$1,164

$ 250

$4,487

$ 200 $ — $14,673

$167

$20,941

Additions during the period . . . . . .

Conversion into common shares . . . .

Loss on write off investment . . . . . .

Change in fair value of investments . .

Change in fair value of convertible

notes

. . . . . . . . . . . . . . . . . .

Change in fair value of derivative

liabilities . . . . . . . . . . . . . . . .

—

226

—

(250)

—

— 9,914

— (299)

—

213

—

(765)

—

9,914

(1,064)

(250)

226

457

—

145

— (8,311)

(80)

(8,391)

Balance at December 30, 2017 . . . . . . .

$1,390

$ —

$4,700

$ — $10,059

$ 5,597

$ 87

$21,833

Note 1: Warrants issued and issuable related to National

F-28

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

6. Licenses Acquired

In accordance with ASC 730-10-25-1, Research and Development, costs incurred in obtaining technology
licenses are charged to research and development expense if the technology licensed has not reached
technological feasibility and has no alternative future use. The licenses purchased by Fortress, Aevitas,
Avenue, Caelum, Cellvation, Checkpoint, Coronado SO, Cyprium, Escala, Helocyte, Mustang and Tamid
require substantial completion of research and development, regulatory and marketing approval efforts in
order to reach technological feasibility. As such, for the year ended December 31, 2018 and 2017, the
purchase price of licenses, totaling approximately $4.1 million and $4.2 million, respectively, was classified
as research and development-licenses acquired in the Consolidated Statements of Operations.

For the years ended December 31, 2018 and 2017, the Company’s research and development-licenses
acquired are comprised of the following:

($ in thousands)
Fortress

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

For the Years Ended
December 31,

2018
$ —

2017
$ 300

Partner companies:
Aevitas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Caelum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Checkpoint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cellvation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cyprium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Helocyte . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mustang . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tamid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total

1
252
1,000
1
—
1,521
1,275
—
$4,050

—
219
400
—
100
—
2,875
270
$4,164

In September 2016, Fortress entered into a Development and License Agreement with Effcon Laboratories,
Inc. (“Effcon”) for the extended release formulation of methazolamide. Fortress made an upfront payment
to Effcon of $0.2 million. Seven additional milestone payments totaling up to $5.3 million may become
payable upon the achievement of certain developmental and sales milestones. Fortress agreed to fund a
related development budget of up to $1.6 million. A mid-single digit to low double-digit royalty on net sales
is due for the term of the contract. — licenses acquired. For the twelve months ended December 31, 2017,
the Company paid a $0.3 million milestone in connection with the successful completion of the Pilot
Pharmacokinetics study. No milestones were achieved during 2018.

Avenue

License Agreement with Revogenex Ireland Ltd

In February 2015, Avenue purchased an exclusive license to IV Tramadol for the U.S. market from
Revogenex, a privately held company in Dublin, Ireland. Fortress made an upfront payment of $2.0 million
to Revogenex upon execution of
the exclusive license, which has been included in research and
development-licenses acquired on the Consolidated Statements of Operations. In addition, on June 17,
2015, Avenue paid an additional $1.0 million to Revogenex after receiving all the assets specified in the
agreement. Under the terms of the agreement, Revogenex is eligible to receive additional milestone
payments upon the achievement of certain development milestones, in addition to royalty payments for
sales of the product. Tramadol is a centrally acting synthetic opioid analgesic for moderate to moderately
severe pain and is available as immediate release or extended-release tablets in the United States. For
the years ended December 31, 2018 and 2017, no research and development — licenses acquired expense
was recognized in connection with the license from Revogenex.

F-29

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

On October 29, 2018, Avenue and Zaklady Farmaceutyczne Polpharma (“Polpharma”) extended the term
of the supply agreement to eight years from the date of the launch of the product. In addition, under the
terms of the amended agreement, Polpharma is eligible to receive a milestone payment totaling $2.0 million
upon the achievement of a certain development milestone, as well as royalty payments for sales of the
product.

Caelum

License Agreement with Columbia University

In January 2017, Caelum entered into an exclusive license agreement with Columbia University
(“Columbia”) to secure worldwide license rights to CAEL-101 (11-1F4), a chimeric fibril-reactive
monoclonal antibody (mAb) being evaluated in a Phase 1a/1b study for the treatment of amyloid light
chain (“AL”) amyloidosis. This transaction was accounted for as an asset acquisition pursuant to
ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, as the majority of
the fair value of the assets acquired was concentrated in a group of similar assets, and the acquired assets
did not have outputs or employees. Caelum made an upfront payment of approximately $0.2 million to
Columbia upon execution of the exclusive license and also granted Columbia 1,050,000 shares of Common
Stock, representing 10% ownership of Caelum, as of such date valued at $29,000 or $0.028 per share
utilizing an Option pricing Method — Equity Allocation model, applying a volatility of 70%, a risk-free
rate of return of 1.93%, a term of 5 years and a discount for lack of marketability of 49.5%.

Under the terms of the agreement, Columbia is eligible to receive additional milestone payments of up to
$5.5 million upon the achievement of certain development milestones, in addition to royalty payments for
sales of the product. CAEL-101 is a novel antibody being developed for patients with AL Amyloidosis, a
rare systemic disorder caused by an abnormality of plasma cells in the bone marrow. For the year ended
December 31, 2018, Caelum recorded expense of approximately $0.2 million in connection with its license
for CAEL-101 from Columbia University, which is included in the Company’s Statements of Operations for
the year ended December 31, 2017.

Cellvation

In October 2016, Cellvation entered into a license agreement with the University of Texas Health Science
Center at Houston (“University of Texas”) for the treatment of traumatic brain injury using Autologous
Bone Marrow Mononuclear Cells (the “Initial TBI License”) for an upfront fee of approximately
$0.3 million and the issuance of 500,000 common shares representing 5% of the outstanding shares of
Cellvation. The Company valued the stock grant to the University of Texas utilizing a discounted cash flow
model to determine the weighted market value of invested capital, discounted by a lack of marketability of
40.2%, weighted average cost of capital of 30%, and net of debt utilized, resulting in a value of $0.024 per
share or $12,000 in October 2016. An additional 9 development milestones approximating $6.2 million are
due in connection with the development of adult indications, and an additional 8 development milestones
approximating $6.0 million are due in connection with the development of pediatric indications, as well as
single digit royalty net sales and royalty milestones are due for the term of the contract. An additional
minimum annual royalty ranging from $50,000 to $0.2 million is due, depending on the age of the license.

In addition, Cellvation entered into a secondary license with the University of Texas for a method and
apparatus for conditioning cell populations for cell therapies (the “Second TBI License”). Cellvation paid
an upfront fee of $50,000 in connection with the Second TBI License, and a minimum annual royalty of
$0.1 million is payable beginning in the year after first commercial sale occurs (which minimum annual
royalty is creditable against actual royalties paid under the Second TBI License. Additional payments of
$0.3 million are due for the completion of certain development milestones and single digit royalties upon
the achievement of net sales. In connection with the two University of Texas licenses, Cellvation granted
each of two University of Texas researchers acting as consultants to Cellvation 500,000 shares of Cellvation
common stock.

F-30

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

Checkpoint

Dana-Farber Cancer Institute

In March 2015, Checkpoint entered into an exclusive license agreement with Dana-Farber Cancer Institute
(“Dana-Farber”) to develop a portfolio of
fully human immuno-oncology targeted antibodies. The
portfolio of antibodies licensed from Dana-Farber include antibodies targeting PD-L1, GITR and CAIX.
Under the terms of the agreement, Checkpoint paid Dana-Farber an up-front licensing fee of $1.0 million
in 2015 and, on May 11, 2015, granted Dana-Farber 500,000 shares of Checkpoint common stock, valued
at $32,500 or $0.065 per share. The agreement
included an anti-dilution clause that maintained
Dana-Farber’s ownership at 5% until such time that Checkpoint raised $10.0 million in cash in exchange for
common shares. Pursuant to this provision, on September 30, 2015, Checkpoint granted to Dana-Farber an
additional 136,830 shares of common stock valued at approximately $0.6 million and the anti-dilution
clause thereafter expired. Dana-Farber is eligible to receive payments of up to an aggregate of
approximately $21.5 million for each licensed product upon Checkpoint’s successful achievement of certain
clinical development, regulatory and first commercial sale milestones. In addition, Dana-Farber is eligible to
receive up to an aggregate of $60.0 million upon Checkpoint’s successful achievement of certain sales
milestones based on aggregate net sales, in addition to royalty payments based on a tiered low to mid-single
digit percentage of net sales. Following the second anniversary of the effective date of the Dana-Farber
license agreement, Dana-Farber receives an annual license maintenance fee, which is creditable against
milestone payments or royalties due to Dana-Farber. The portfolio of antibodies licensed from
Dana-Farber include antibodies targeting PD-L1, GITR and CAIX.

In September 2018 Checkpoint expensed a non-refundable milestone payment of $1.0 million upon the
twelfth patient dosed in a Phase 1 clinical study of its anti-PD-LI antibody, CK-301, which is included in
the Statements of Operations for the year ended December 31, 2018.

In connection with the license agreement with Dana-Farber, Checkpoint entered into a collaboration
agreement with TGTX, a related party, to develop and commercialize the anti-PD-L1 and anti-GITR
antibody research programs in the field of hematological malignancies, while Checkpoint retains the right
to develop and commercialize these antibodies in the field of solid tumors. Michael Weiss, Chairman of the
Board of Directors of Checkpoint is also the Executive Chairman, President and Chief Executive Officer
and a stockholder of TGTX. Under the terms of the agreement, TGTX paid Checkpoint $0.5 million,
representing an upfront licensing fee, and Checkpoint is eligible to receive substantive potential milestone
payments up to an aggregate of approximately $21.5 million for each product upon TGTX’s successful
achievement of certain clinical development, regulatory and first commercial sale milestones. Checkpoint’s
potential milestone payments are comprised of up to approximately $7.0 million upon TGTX’s successful
completion of clinical development milestones, and up to approximately $14.5 million upon first
commercial sales in specified territories. In addition, Checkpoint is eligible to receive up to an aggregate of
$60.0 million upon TGTX’s successful achievement of certain sales milestones based on aggregate net sales,
in addition to royalty payments based on a tiered high single digit percentage of net sales. Following the
license
second anniversary of
maintenance fee, which is creditable against milestone payments or royalties due to Checkpoint. TGTX also
pays Checkpoint for its out-of-pocket costs of material used by TGTX for their development activities.
During the year ended December 31, 2018 and 2017, Checkpoint recognized approximately $3.0 million
and $0.1 million, respectively in revenue from its collaboration agreement with TGTX on the Consolidated
Statements of Operations.

the agreement, Checkpoint receives an annual

the effective date of

NeuPharma, Inc.

In March 2015, Checkpoint entered into an exclusive license agreement with NeuPharma, Inc.
(“NeuPharma”) to develop and commercialize novel irreversible, 3rd generation epidermal growth factor
receptor (“EGFR”) inhibitors including CK-101, on a worldwide basis (other than certain Asian countries).
On the same date, the Company assigned all of its right and interest in the EGFR inhibitors to Checkpoint.

F-31

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

Under the terms of the agreement, Checkpoint paid NeuPharma an up-front licensing fee of $1.0 million in
2015, and NeuPharma is eligible to receive payments of up to an aggregate of approximately $40.0 million
upon Checkpoint’s successful achievement of certain clinical development and regulatory milestones in up
to three indications, of which $22.5 million are due upon various regulatory approvals to commercialize the
products. In addition, NeuPharma is eligible to receive payments of up to an aggregate of $40.0 million
upon Checkpoint’s successful achievement of certain sales milestones based on aggregate net sales, in
addition to royalty payments based on a tiered mid to high-single digit percentage of net sales.

In September 2016, Checkpoint dosed the first patient in a Phase 1/2 clinical study of CK-101, which is
currently ongoing as of December 31, 2018.

In connection with the license agreement with NeuPharma, in March 2015, Checkpoint entered into an
option agreement with TGTX, a related party, which agreement was assigned to Checkpoint on the same
date, for a global collaboration of certain compounds licensed. The option agreement expired on
December 31, 2018.

Teva Pharmaceutical Industries Ltd. (through its subsidiary, Cephalon, Inc.)

In December 2015, Fortress entered into a license agreement with Teva Pharmaceutical Industries Ltd.
through its subsidiary, Cephalon, Inc. (“Cephalon”). This agreement was assigned Checkpoint by the
Company on the same date. Under the terms of the license agreement, Checkpoint obtained an exclusive,
worldwide license to Cephalon’s patents relating to CEP-8983 and its small molecule prodrug, CEP-9722, a
PARP inhibitor, which Checkpoint now refers to as CK-102. Checkpoint paid Cephalon an up-front
licensing fee of $0.5 million. In August 2018, Checkpoint gave notice to Cephalon of its intention to
terminate the license agreement, which became effective in February 2019.

Jubilant Biosys Limited

In May 2016, Checkpoint entered into a license agreement with Jubilant Biosys Limited (“Jubilant”),
whereby Checkpoint obtained an exclusive, worldwide license (the “Jubilant License”) to Jubilant’s family
of patents covering compounds that inhibit BRD4, a member of the BET domain for cancer treatment,
including CK-103. Under the terms of the Jubilant License, Checkpoint paid Jubilant an up-front licensing
fee of $2.0 million, and Jubilant is eligible to receive payments up to an aggregate of approximately
$89.0 million upon Checkpoint’s successful achievement of certain preclinical, clinical development, and
regulatory milestones, of which $59.5 million are due upon various regulatory approvals to commercialize
the products. In addition, Jubilant is eligible to receive payments up to an aggregate of $89.0 million upon
Checkpoint’s successful achievement of certain sales milestones based on aggregate net sales, in addition to
royalty payments based on a tiered low to mid-single digit percentage of net sales. In March 2017,
Checkpoint expensed a non-refundable milestone payment of $0.4 million upon the successful completion
of toxicology studies under the terms of the license agreement with Jubilant, which is included in the
Company’s Statements of Operations for the year ended December 31, 2017.

In connection with the Jubilant License, Checkpoint entered into a sublicense agreement with TGTX (the
“Sublicense Agreement”), a related party, to develop and commercialize the compounds licensed in the field
of hematological malignancies, with Checkpoint retaining the right to develop and commercialize these
compounds in the field of solid tumors. Michael Weiss, Chairman of the Board of Directors of Checkpoint
and the Company’s Executive Vice Chairman, Strategic Development, is also the Executive Chairman,
President and Chief Executive Officer and a stockholder of TGTX. Under the terms of the Sublicense
Agreement, TGTX paid Checkpoint $1.0 million, representing an upfront licensing fee, recorded as
collaboration revenue — related party and Checkpoint is eligible to receive substantive potential milestone
payments up to an aggregate of approximately $87.2 million upon TGTX’s successful achievement of
clinical development and regulatory milestones. Such potential milestone payments may approximate
$25.5 million upon TGTX’s successful completion of three clinical development milestones for two licensed
products, and up to approximately $61.7 million upon the achievement of five regulatory approvals and
first commercial sales in specified territories for two licensed products. In addition, Checkpoint is eligible to

F-32

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

receive potential milestone payments up to an aggregate of $89.0 million upon TGTX’s successful
achievement of three sales milestones based on aggregate net sales by TGTX, for two licensed products, in
addition to royalty payments based on a mid-single digit percentage of net sales by TGTX. TGTX also pays
Checkpoint for 50% of IND enabling costs and patent expenses. The Company recognized $0.4 million and
$1.0 million in revenue related to this arrangement during the year ended December 31, 2018 and 2017,
respectively.

Coronado SO Co.

License Agreement

In February 2015, Coronado SO entered into an exclusive license agreement and other arrangements with
third parties to acquire development and commercialization rights to a topical product used in the
treatment of hand-foot syndrome, a common painful side effect of chemotherapeutics. Coronado SO paid
$0.9 million upfront,
included in research and development-licenses acquired on the Consolidated
Statements of Operations and issued a stock grant of 150,000 shares of Coronado SO common stock to
such third party. In October 2015, Coronado SO paid an additional $0.5 million, which is included in
research and development-licenses acquired on the Consolidated Statements of Operations. Four milestones
totaling $10.7 million are due upon the achievement of certain development goals, three milestones totaling
$26.2 million are due upon certain net sales milestones and a single digit royalty on net sales is due for the
term of the contract.

The Company valued the stock grant to the third party utilizing a discounted cash flow model to determine
the weighted market value of invested capital, discounted by a lack of marketability of 44.8% and a
weighted average cost of capital of 30%, and net of debt utilized, resulting in a value of $1.19 per share or
$0.2 million recorded as part of licenses acquired.

In October 2017, Coronado SO transferred its proprietary interests and rights in its lead product candidate
to a third party. In exchange for this assignment, Fortress made a $50,000 cash payment and issued 43,292
shares of Fortress common stock valued at $0.2 million valued at $4.6197 per share, representing the
five-day volume-weighted average closing price of Fortress common stock prior to October 10, 2017, the
effective date of the transfer. Fortress recorded the expense of approximately $0.3 million during the fourth
quarter of 2017 on it Consolidated Statements of Operations, in research and development expense.
Further, terms of the assignment provide for the receipt by Coronado SO of three potential future sales
milestones totaling $1.8 million from the third-party transferee.

Cyprium

License Agreement with the Eunice Kennedy Shriver National Institute of Child Health and Human
Development

In March 2017, Cyprium and the Eunice Kennedy Shriver National Institute of Child Health and Human
Development (“NICHD”), part of the National Institutes of Health (“NIH”), entered into a Cooperative
Research and Development Agreement to advance the clinical development of Phase 3 candidate
CUTX-101 (copper histidinate injection) for the treatment of Menkes disease. Cyprium and NICHD also
entered into a worldwide, exclusive license agreement to develop and commercialize AAV-based ATP7A
gene therapy for use in combination with CUTX-101 for the treatment of Menkes disease and related
copper transport disorders. This transaction was accounted for as an asset acquisition pursuant to
ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, as the majority of
the fair value of the assets acquired was concentrated in a group of similar assets, and the acquired assets
did not have outputs or employees. Cyprium made an upfront payment of $0.1 million to NICHD upon
execution of the exclusive license, which was included in research and development — licenses acquired on
the Consolidated Statement of Operations.

F-33

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

Helocyte

License Agreement with the City of Hope

In March 2016, Helocyte entered into amended and restated license agreements for each of its PepVax and
Triplex immunotherapies programs with its licensor City of Hope National Medical Center (“COH”). The
amended and restated licenses expand the intellectual property and other rights granted to Helocyte by
COH in the original license agreement. The financial terms of the original license have not been modified,
and if Helocyte successfully develops and commercializes Triplex, COH will receive milestones, royalties
and other payments. In 2018, Helocyte discontinued the development of PepVax and terminated the related
license and clinical trial agreements with COH.

Helocyte entered into the original license agreement with COH on March 31, 2015, to secure: (i) an
exclusive worldwide license for two immunotherapies for CMV control in the post-transplant setting
(known as Triplex and PepVax); and (ii) an option for an exclusive worldwide license to an immunotherapy
for the prevention of congenital CMV (known as Pentamer). In consideration for the license and option,
Helocyte made an upfront payment of $150,000. On April 28, 2015, Helocyte exercised the option and
secured exclusive worldwide rights to Pentamer from COH for an upfront payment of $45,000. If Helocyte
successfully develops and commercializes Triplex, COH could receive up to $9.0 million for the achievement
of three developmental milestones, $26.0 million for three sales milestones, single digit royalties based on
net sales reduced by certain factors and a minimum annual royalty of $0.75 million per year following a first
marketing approval. Since Helocyte discontinued development of PepVax and terminated the related license
and clinical trial agreements with COH, no future milestones or royalties are due are due in connection with
this license. If Helocyte successfully develops and commercializes Pentamer, COH could receive up to
$5.5 million for the achievement of four development milestones, $26.0 million for three sales milestones,
single digit royalties based on net sales reduced by certain factors and a minimum annual royalty of
$0.75 million per year following a first marketing approval.

As further consideration for the licenses, in March and May 2016, Helocyte granted COH 500,000 shares of
Helocyte Class A common stock and 8,333 shares of Helocyte Class A common stock, respectively. The
Company valued the stock grants to the COH utilizing a discounted cash flow model to determine the
weighted market value of invested capital, discounted by a lack of marketability of 44.5% and a weighted
average cost of capital of 30%, net of debt utilized resulting in a value of $0.097 per share or $48,500
recorded as part of the license fee acquired.

For the twelve months ended December 31, 2018 and 2017, Helocyte recorded $1.5 million and nil,
respectively in research and development — licenses acquired on the Consolidated Statement of Operations
in connection with this license. The expense recorded in 2018 was in connection to the achievement of a
milestone due upon the completion of the Phase 2 clinical study for Triplex, which was met during the
fourth quarter of 2018. Also, during 2018, Helocyte discontinued development under the PepVax license
and terminated the related license and clinical trial agreements with COH.

Mustang

For the years ended December 31, 2018 and 2017 Mustang recorded the following expense in research and
development — licenses acquired:

($ in thousands)

City of Hope

For the year ended December 31,

2018

2017

Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IL13Rα2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IV/ICV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PSCA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

$ —

500

125

300

F-34

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

For the year ended December 31,

($ in thousands)

HER2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CSI

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Harvard – CRISPR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

UCLA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fred Hutch – CD20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

St. Jude – XSCID . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2018

200

—

1,000

$1,275

2017

600

250

200

300

—

$2,875

License Agreement with the City of Hope

In March 2015, Mustang entered into an exclusive license agreement with COH to acquire intellectual
property rights pertaining to CAR T (the “COH License”). Pursuant to the COH License, Mustang paid
COH an upfront fee of $2.0 million in April 2015 (included in research and development-licenses acquired
expenses on the Consolidated Statement of Operations) and granted COH 1.0 million shares of Mustang’s
Class A Common Stock, representing 10% ownership of Mustang. Additional payments totaling
$2.0 million are due upon the completion of two financial milestones, and payments totaling $14.5 million
are due upon the completion of six development goals. Future mid-single digit royalty payments are due on
net sales of licensed products, with a minimum annual royalty of $1.0 million.

Mustang valued the stock grant to COH utilizing a discounted cash flow model to determine the weighted
market value of invested capital, discounted by a lack of marketability of 44.8%, weighted average cost of
capital of 30%, and net of debt utilized, resulting in a value of $0.147 per share or $0.1 million on
March 31, 2015.

Effective October 2016, Mustang closed on gross proceeds of $10.0 million from third party investors in
connection with its private placement, which triggered the issuance of additional 293,588 shares of
Mustang Class A common stock to COH (the “COH Anti-Dilution Shares”) in connection with the COH
License. The shares were valued utilizing a weighted market model at approximately $5.73 per share or
$1.7 million in total. Since Mustang only had 1.0 million Class A common shares authorized at
December 31, 2016, of which all were issued to COH, Mustang recorded the contingent issuance as a
current liability. In February 2017, COH executed a waiver and acknowledgement agreement permitting
issuance of the COH Anti-Dilution Shares in the form of Mustang Common Stock, and such shares were
issued.

In February 2017, the Company and COH amended and restated the Original Agreement by entering into
three separate amended and restated exclusive license agreements, one relating to CD123, one relating to
IL13Rα2 and one relating to the Spacer technology, that amended the Original Agreement in certain other
respects, and collectively replace the Original Agreement in its entirety. The total potential consideration
payable to COH by the Company, in equity or cash, did not, in the aggregate, change materially from the
Original Agreement.

CD123 License

Pursuant to the CD123 License, Mustang and COH acknowledge that an upfront fee was paid under the
Original License. In addition, an annual maintenance fee will continue to apply. COH is eligible to receive
up to approximately $14.5 million in milestone payments upon and subject to the achievement of certain
milestones. Royalty payments in the mid-single digits are due on net sales of licensed products. Mustang is
obligated to pay COH a percentage of certain revenues received in connection with a sublicense in the
mid-teens to mid-thirties, depending on the timing of the sublicense in the development of any product. In
addition, equity grants made under the Original License were acknowledged, and the anti-dilution
provisions of the Original License were carried forward.

F-35

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

IL13R2 License
Pursuant to the IL13R2 License, Mustang and COH acknowledge that an upfront fee was paid under the
Original License. In addition, an annual maintenance fee will continue to apply. COH is eligible to receive
up to approximately $14.5 million in milestone payments upon and subject to the achievement of certain
milestones. Royalty payments in the mid-single digits are due on net sales of licensed products. Mustang is
obligated to pay COH a percentage of certain revenues received in connection with a sublicense in the
mid-teens to mid-thirties, depending on the timing of the sublicense in the development of any product. In
addition, equity grants made under the Original License were acknowledged, and the anti-dilution
provisions of the Original License were carried forward. During the years ended December 31, 2018 and
2017, Mustang recorded an expense of nil and $0.5 million, respectively in connection with the achievement
of certain milestones pursuant to the IL13R2 License.

Spacer License
Pursuant to the Spacer License, Mustang and COH acknowledge that an upfront fee was paid under the
Original License. In addition, an annual maintenance fee will continue to apply. No royalties are due if the
Spacer technology is used in conjunction with a CD123 CAR or an IL13R2 CAR, and royalty payments in
the low single digits are due on net sales of licensed products if the Spacer technology is used in conjunction
with other intellectual property. Mustang is obligated to pay COH a percentage (in the mid-thirties) of
certain revenues received in connection with a sublicense. In addition, equity grants made under the
Original License were acknowledged, and the anti-dilution provisions of the Original License were carried
forward.

IV/ICV Agreement
On February 17, 2017, Mustang entered into an exclusive license agreement (the “IV/ICV Agreement”)
with COH to acquire intellectual property rights in patent applications related to the intraventricular and
intracerebroventricular methods of delivering T cells that express CARs. Pursuant to the IV/ICV
Agreement, Mustang paid COH an upfront fee of $0.1 million in March 2017. COH is eligible to receive up
to approximately $0.1 million in milestone payments upon the achievement of a certain milestone as well as
an annual maintenance fee. Royalty payments in the low-single digits are due on net sales of licensed
products and services. During the years ended December 31, 2018 and 2017, respectively, Mustang recorded
an expense of nil and $0.1 million, respectively in connection with the acquisition of this license.

HER2 Technology License
On May 31, 2017, Mustang entered into an exclusive license agreement with the COH for the use of human
epidermal growth factor receptor 2 (HER2) CAR T technology (HER2 Technology), which will initially be
applied in the treatment of glioblastoma multiforme. Pursuant to the Agreement, Mustang paid an upfront
fee of $0.6 million and will owe an annual maintenance fee of $50,000 (beginning in 2019). Additional
payments of up to $14.9 million are due upon and subject to the achievement of ten development
milestones, and royalty payments in the mid-single digits are due on net sales of licensed products. During
the years ended December 31, 2018 and 2017, respectively, Mustang recorded an expense of $0.2 million
and $0.6 million, respectively in connection with the acquisition of this license as well as the achievement of
a milestone in connection with this license during 2018.

CS1 Technology License
On May 31, 2017, Mustang entered into an exclusive license agreement with the COH for the use of CS1
specific CAR T technology (CS1 Technology) to be directed against multiple myeloma. Pursuant to the
Agreement, Mustang paid an upfront fee of $0.6 million on July 3, 2017 and will owe an annual
maintenance fee of $50,000 (beginning in 2019). Additional payments of up to $14.9 million are due upon
and subject to the achievement of ten development milestones, and royalty payments in the mid-single digits
are due on net sales of licensed products. During the years ended December 31, 2018 and 2017, respectively,
Mustang recorded an expense of nil and $0.6 million, respectively in connection with the acquisition of this
license.

F-36

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

PSCA Technology License

On May 31, 2017, Mustang entered into an exclusive license agreement with the COH for the use of
prostate stem cell antigen (PSCA) CAR T technology (PSCA Technology) to be used in the treatment of
prostate cancer. Pursuant to the Agreement, Mustang paid an upfront fee of $0.3 million on July 3, 2017
and will owe an annual maintenance fee of $50,000 (beginning in 2019). Additional payments of up to
$14.9 million are due upon and subject to the achievement of ten development milestones, and royalty
payments in the mid-single digits are due on net sales of licensed products. During the years ended
December 31, 2018 and 2017, respectively, Mustang recorded an expense of nil and $0.3 million,
respectively in connection with the acquisition of this license.

Manufacturing License

On January 3, 2018, Mustang entered into a non-exclusive license agreement with COH to acquire patent
and licensed know-how rights related to developing, manufacturing, and commercializing licensed products.
The Company paid $75,000 in consideration for the licenses to the patent rights and the licensed know-how
in addition to an annual maintenance fee. Royalty payments in the low-single digits are due on net sales of
licensed products. During the years ended December 31, 2018 and 2017, respectively, Mustang recorded an
expense of $0.1 million and nil, respectively in connection with the acquisition of this license.

License with University of California

On March 17, 2017, Mustang entered into an exclusive license agreement with the Regents of the University
of California (“UCLA License”) to acquire intellectual property rights in patent applications related to the
engineered anti-prostate stem cell antigen antibodies for cancer targeting and detection. Pursuant to the
UCLA Agreement, Mustang paid UCLA an upfront fee of $0.2 million on April 25, 2017. Annual
maintenance fees also apply; additional payments are due upon achievement of certain development
milestones totaling $14.3 million, and royalty payments in the mid-single digits are due on net sales of
licensed products. During the years ended December 31, 2018 and 2017, respectively, Mustang recorded an
expense of nil and $0.2 million, respectively in connection with the acquisition of this license.

Fred Hutchinson Cancer Research Center License

On July 3, 2017, Mustang entered into an exclusive, worldwide licensing agreement with Fred Hutchinson
Cancer Research Center (“Fred Hutch”) for the use of a CAR T therapy related to autologous T cells
engineered to express a CD20-specific chimeric antigen receptor (“CD 20 Technology License”). Pursuant
to the CD 20 Technology License, Mustang paid Fred Hutch an upfront fee of $0.3 million and will owe an
annual maintenance fee of $50,000 on each anniversary of the license until the achievement by Mustang of
regulatory approval of a licensed product using CD20 Technology. Additional payments are due for the
achievement of certain development milestones totaling $39.1 million and royalty payments in the
mid-single digits are due on net sales of licensed products. During the years ended December 31, 2018 and
2017, respectively, Mustang recorded an expense of nil and $0.3 million, respectively in connection with the
acquisition of this license.

Harvard College License

On November 20, 2017, Mustang entered into an exclusive, worldwide license agreement with President and
Fellows of Harvard College (the “Harvard Agreement”) for the use of gene editing, via the use of
CRISPR/Cas9, to be used in enhancing the efficacy of chimeric antigen receptor T (CAR T) cell therapies
for solid tumor indications and to generate universal off the shelf CAR T cell therapies for both liquid and
solid tumor indications. Pursuant to the Harvard Agreement, Mustang paid Harvard College an upfront
fee of $0.3 million and will owe an annual maintenance fee of $25,000 and $50,000 for calendar years 2018
and 2019, respectively, and $100,000 for each subsequent calendar year during the term of the agreement.
Additional payments are due for the achievement of seven development milestones totaling $16.7 million

F-37

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

and royalty payments in the low-single digits are due on the net sales of licensed products. During the years
ended December 31, 2018 and 2017, respectively, Mustang recorded an expense of nil and $0.3 million,
respectively in connection with the acquisition of this license.

St. Jude Children’s Research Hospital

On August 2, 2018, Mustang entered into an exclusive worldwide license agreement with St. Jude Children’s
Research Hospital (“St. Jude”) for the development of a first-in-class ex vivo lentiviral gene therapy for the
treatment of X-linked severe combined immunodeficiency (“XSCID”). Mustang paid $1.0 million in
consideration for the exclusive license in addition to an annual maintenance fee of $0.1 million (beginning
in 2019). St. Jude is eligible to receive payments totaling $13.5 million upon the achievement of five
development and commercialization milestones. Royalty payments in the mid-single digits are due on net
sales of licensed products. During the years ended December 31, 2018 and 2017, respectively, Mustang
recorded an expense of $1.0 million and nil, respectively in connection with the acquisition of this license.

Tamid

Licenses with the University of North Carolina

On November 30, 2017, Tamid entered into three exclusive AAV gene therapies licensing arrangements with
the University of North Carolina at Chapel Hill (“UNC”). The preclinical product candidates acquired
type 1 (MPS1),
through these licenses
dysferlinopathies and corneal transplant rejections. The three therapies were developed in the lab of
Matthew Hirsch, Ph.D., Assistant Professor, Ophthalmology at the UNC Gene Therapy center. During
the years ended December 31, 2018 and 2017, Tamid recorded an expense of nil and $0.3 million,
respectively, in connection with these licensing arrangements.

target ocular manifestations of Mucopolysaccharidosis

As additional consideration for the three licenses, UNC received 1.0 million common shares of Tamid
representing 10% of the ownership of Tamid. The stock grant to the UNC was valued utilizing an equity
allocation method model to determine the value of the equity grant. The model utilized a discount for lack
of marketability of 40.5%, and a volatility of 75% resulting in a value of $0.015 per share or $15,000
recorded as part of the license fee acquired for the year ended December 31, 2017.

MPS1 License

Under the MPS1 license, additional payments are due to UNC upon the achievement by Tamid of two
development milestones totaling $5.5 million. Additional payments totaling $7.5 million are due upon the
achievement of certain net sales milestones. In addition, the achievement of certain diligence milestones is
required. Extension for such milestones is $10,000 per milestone for the first year and $20,000 per milestone
thereafter.

Nanadysferlin License

Under the Nanadysferlin license, additional payments are due to UNC upon the achievement by Tamid of
three development milestones totaling $5.4 million. Additional payments totaling $33 million are due upon
the achievement of five net sales milestones. In addition, the achievement of certain diligence milestones is
required. Extension for such milestones is $10,000 per milestone for the first year and $20,000 per milestone
thereafter.

HLA-G License

Under the HLA-G license, additional payments are due to UNC upon the achievement by Tamid of three
development milestones totaling $5.4 million. Additional payments totaling $42 million are due upon the
achievement of five net sales milestones. In addition, the achievement of certain diligence milestones is
required. Extension for such milestones is $10,000 per milestone for the first year and $20,000 per milestone
thereafter.

F-38

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

7. Milestones and Sponsored Research Agreements

The Company has a license agreement with the University College London Business PLC (“UCLB”) under
which the Company received an exclusive, worldwide license to develop and commercialize CNDO-109 to
activate NK cells for the treatment of cancer-related and other conditions. In consideration for the license,
the Company made upfront payments totaling $0.1 million and may be required to make future milestone
payments totaling up to approximately $22.0 million upon the achievement of various milestones related to
regulatory or commercial events In the event that CNDO-109 is commercialized, the Company is obligated
to pay to UCLB annual royalties ranging from 3% to 5% based upon various levels of net sales of the
product. Under the terms of the license agreement, the Company is allowed to grant sublicenses to third
parties without the prior approval of UCLB. In the event that the Company sublicenses CNDO-109 to a
third party, the Company is obligated to pay to UCLB all or a portion of the royalties the Company
receives from the sub-licensee. Through December 31, 2018, the Company has not sub-licensed CNDO-109
to a third party.

Aevitas

On January 25, 2018, Aevitas entered into a Sponsored Research Agreement with the University of
Massachusetts (“UMass SRA”) for certain continued research and development activities related to the
development of adeno-associated virus (“AAV”) gene therapies in complement-mediated diseases. The total
amount to be funded by Aevitas under the UMass SRA is $0.8 million. Pursuant to the terms of the
UMass SRA, Aevitas paid $0.8 million which was due upon execution. For the year ended December 31,
2018, Aevitas recorded expense of approximately $0.8 million in connection with the UMass SRA. The
expense was recorded in research and development expenses in the Company’s Consolidated Statements of
Operations. No expense related to this Agreement was recorded in 2017.

On July 24, 2018, Aevitas entered into a Sponsored Research Agreement with the Trustees of the University
of Pennsylvania (“UPenn SRA”) for certain continued research and development activities related to the
development of AAV gene therapies in complement-mediated diseases. The total amount to be funded by
Aevitas under the UPenn SRA is $2.0 million. Pursuant to the terms of the UPenn SRA, Aevitas paid
$0.3 million which was due upon execution. For the year ended December 31, 2018, Aevitas recorded
expense of approximately $0.5 million in connection with the UMass SRA. The expense was recorded in
research and development expenses in the Company’s Consolidated Statements of Operations. No expense
related to this Agreement was recorded in 2017.

Caelum

On March 12, 2018, Caelum entered into a Sponsored Research Agreement with Columbia University to
conduct preclinical research in connection with CAEL-101. The total cost of the study approximates
$0.1 million. For the year ended December 31, 2018, Caelum recorded expense of approximately
$0.1 million in connection with the agreement. The expense was recorded in research and development
expense in the Company’s Consolidated Statements of Operations. No expense related to this Agreement
was recorded in 2017.

Cellvation

In October 2016, Cellvation entered research funding agreement with the University of Texas in connection
with the license for a method and apparatus for conditioning cell populations for cell therapies. In
connection with this agreement Cellvation agreed to fund $0.8 million of research quarterly through
March 31, 2018. The agreement was revised effective May 1, 2017, with quarterly payments extended
through December 31, 2018. For the year ended December 31, 2018 and 2017 Cellvation recorded an
expense of $0.3 million and $0.1 million, respectively, representing amounts due under this arrangement.

F-39

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

Checkpoint

NeuPharma, Inc. Sponsored Research Agreement

In connection with its license agreement with NeuPharma, Checkpoint entered into a Sponsored Research
Agreement with NeuPharma for certain research and development activities. Effective January 11, 2016,
TGTX, a related party, agreed to assume all costs associated with this Sponsored Research Agreement and
paid Checkpoint for all amounts previously paid by the Company. For the year ended December 31, 2018
and 2017, approximately $35,000 and $0.6 million, respectively, was recognized in revenue in connection
with the Sponsored Research Agreement in the Consolidated Statements of Operations.

Helocyte

PepVax and Triplex Clinical Research and Support Agreements

In March 2016, Helocyte entered into an Investigator-Initiated Clinical Research Support Agreement, as
amended, with the COH, to support a Phase 2 clinical study of its PepVax immunotherapy for CMV
control in allogeneic stem cell transplant recipients (“PepVax Research Agreement”). The Phase 2 study is
additionally supported by grants from the National Institutes of Health/National Cancer Institute (“NCI”).
Under the terms of the agreement, Helocyte made an upfront payment to COH of $1.0 million, recorded as
sponsored research expense, and will pay COH up to an additional $2.0 million upon the achievement of
certain clinical milestones. Unless earlier terminated, the agreement expires upon the delivery of a final
study report or December 31, 2018. During the first quarter of 2018, Helocyte elected to discontinue the
further development of its HLA-restricted, single-antigen PepVax program and as such will cease to incur
costs associated with this program.

In February 2016, Helocyte entered into an Investigator-Initiated Clinical Research Support Agreement, as
amended, with the COH, to support a Phase 2 clinical study of its Triplex immunotherapy for CMV control
in allogeneic stem cell transplant recipients (“Triplex Research Agreement”). The Phase 2 study is
additionally supported by grants from the NCI. Under the terms of the agreement, Helocyte made an
upfront payment to COH of $1.0 million, recorded as sponsored research expense, and will pay COH up to
an additional $3.4 million upon the achievement of certain clinical milestones.

For the years ended December 31, 2018 and 2017, Helocyte recorded approximately $0.1 million and
$3.7 million, consisting of nil and $2.6 million in connection with the Triplex Research Agreement and
$0.1 million and $1.1 million in connection with the PepVax Research Agreement and nil, respectively,
recorded in research and development expenses in the Company’s Consolidated Statements of Operations
in connection with these agreements.

ConVax (Pentamer) Sponsored Research Agreement

On May 1, 2017, Helocyte and COH entered in a Sponsored Research Agreement for preclinical studies in
connection with the development of ConVax. In June 2017, Helocyte made an upfront payment of
$1.5 million to fund the development plan, the payment was recorded as a prepayment on the Consolidated
Balance Sheets. For the years ended December 31, 2018 and 2017, Helocyte recorded approximately
in research and development expenses in the Company’s
$1.3 million and $0.2 million, respectively,
Consolidated Statements of Operations. This agreement expired during 2018.

F-40

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

Mustang

For the years ended December 31, 2018 and 2017 Mustang recorded the following expense in research and
development for sponsored research and clinical trial agreements:

($ in thousands)

For the year ended
December 31,

2018

2017

City of Hope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,000

City of Hope – CD123 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
City of Hope – IL13Rα2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
City of Hope – Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fred Hutch – CD20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

BIDMC – CRISPR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

835

1,056

458

1,301

1,367

1,385

—

614

138

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$5,719

$5,504

City of Hope Sponsored Research Agreement

In March 2015, in connection with Mustang’s license with COH for the development of CAR T, Mustang
entered into a Sponsored Research Agreement in which Mustang will fund continued research in the
amount of $2.0 million per year, payable in four equal annual installments, until 2020. The research covered
under this arrangement is for IL13Rα2, CD123 and the Spacer technology. For the year ended
December 31, 2018 and 2017, Mustang incurred expense of $2.0 million and $2.0 million, respectively and
recorded as research and development expense in the Company’s Consolidated Statement of Operations.

CD 123 Clinical Research Support Agreement

On February 17, 2017, Mustang entered into a Clinical Research Support Agreement for CD123. Pursuant
to the terms of this agreement, Mustang made an upfront payment of approximately $20,000 and will
contribute an additional $0.1 million per patient in connection with the on-going investigator-initiated
study. Further, Mustang agreed to fund approximately $0.2 million over three years pertaining to the
clinical development of CD123. For the year ended December 31, 2018 and 2017 Mustang recorded
approximately $0.8 million and $1.4 million, respectively, in research and development expenses in the
Company’s Consolidated Statements of Operations.

IL13R2 Clinical Research Support Agreement

Also, on February 17, 2017, Mustang entered into a Clinical Research Support Agreement for IL13R2
(“IL13R2 CRA”). Pursuant to the terms of this agreement Mustang made an upfront payment of
approximately $9,300 and will contribute an additional $0.1 million per patient in connection with the
on-going investigator-initiated study. Further, Mustang agreed to fund approximately $0.2 million over
three years pertaining to the clinical development of IL13R2. For the year ended December 31, 2018 and
2017, Mustang recorded approximately $1.1 million and $1.4 million, respectively,
in research and
development expenses under the IL13R2 CRA in the Company’s Consolidated Statements of Operations.

City of Hope Sponsored Research Agreement — Manufacturing

On January 3, 2018, Mustang entered into a Sponsored Research Agreement with COH to optimize and
develop CAR T cell processing procedures. Pursuant to the SRA, the Company will fund continued
research in the amount of $0.9 million for the program, which has an initial term of two (2) years. For the
year ended December 31, 2018 and 2017 Mustang recorded approximately $0.5 million and nil, respectively,
in research and development expenses in the Company’s Consolidated Statements of Operations.

F-41

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

CD20 Clinical Trial Agreement

Also, on July 3, 2017, in conjunction with the CD20 Technology License from Fred Hutch, Mustang
entered into an investigator-initiated clinical trial agreement (“CD20 CTA”) to provide partial funding for a
Phase 1/2 clinical trial at Fred Hutch evaluating the safety and efficacy of the CD20 Technology in patients
with relapsed or refractory B-cell non-Hodgkin lymphomas. In connection with the CD20 CTA, Mustang
agreed to fund up to $5.3 million of costs associated with the clinical trial, which commenced during the
fourth quarter of 2017. For the year ended December 31, 2018 and 2017 Mustang recorded $1.3 million
and $0.6 million of expense, respectively, related to this agreement in research and development expenses in
the Company’s Consolidated Statements of Operations.

CRISPR Sponsored Research Agreement

On November 28, 2017, Mustang entered into a Sponsored Research Agreement with Beth Israel
Deaconess Medical Center Inc. (“BIDMC”) to perform research relating to gene editing, via the use of
CRISPR/Cas9, to be used in enhancing the efficacy of chimeric antigen receptor T (CAR T) cell therapies
for solid tumor indications and to generate universal off the shelf CAR T cell therapies for both liquid and
solid tumor indications. The Company agreed to fund approximately $0.8 million over a three-year period.
The Company recorded $0.1 million and $0.1 million in 2018 and 2017, respectively, related to this
arrangement related to this agreement
in research and development expenses in the Company’s
Consolidated Statements of Operations.

Tamid

On November 30, 2017, in connection with its three separate license agreements with UNC, Tamid entered
into a Sponsored Research Agreement with UNC (“UNC SRA”) for certain continued research and
development activities related to Nanodysferlin for treatment of Dysferlinopathy, and AAV-HLA-G for
corneal transplant rejection. Total amount to be funded by Tamid under the UNC SRA is $2.3 million over
a term of three years. Pursuant to the terms of the UNC SRA, Tamid paid $0.8 million which was due
upon execution. For the year ended December 31, 2018 and 2017, Tamid recorded expense of $0.7 million
and $0.1 million respectively in connection with the UNC SRA. The expense was recorded in research and
development expenses in the Company’s Consolidated Statements of Operations.

8. Intangibles

In January 2016, JMC entered into a licensing agreement with a third party to distribute its prescription
wound cream Luxamend® and paid an upfront fee of $50,000. Additionally, in January 2016, JMC entered
into a licensing agreement with a third party to distribute its prescription emollient Ceracade® for the
treatment of various types of dermatitis and paid an upfront fee of $0.3 million. JMC commenced the sale
of both of these products during the year ended December 31, 2016 and accordingly commenced the
amortization of these costs over their respective three year estimated useful life.

In March 2015, JMC entered into a license and supply agreement to acquire the rights to distribute
Targadox® a dermatological product for the treatment of acne. JMC made an upfront payment of
$1.3 million. Further payments will be made based on a revenue sharing arrangement. JMC received FDA
approval for the manufacturing of this product in July 2016 and commenced sales of this product in
October 2016.

On August 31, 2018, JMC entered into an agreement with a third party to acquire the exclusive rights to
Exelderm®, a topical antifungal available in a cream and solution. This acquisition was recorded as an
intangible asset and expense will be recognized over the expected life of Exelderm® of 3 years. JMC
commenced the sale of Exelderm® in September 2018 and accordingly commenced the amortization of this
cost.

F-42

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

The table below provides a summary of the JMC intangible asset as of December 31, 2018 and 2017,
respectively:

($ in thousands)
Ceracade® . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Luxamend® . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Targadox® . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exelderm® . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . .
Net intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Estimated Useful
Lives (in years)
3
3
3
3

2018
$ 300
50
1,250
1,200
2,800
1,383
$1,417

2017
$ 300
50
1,250
0
1,600
717
$ 883

The table below provides a summary for the years ended December 31, 2018 and 2017, of JMC recognized
expense related to its product licenses, which was recorded in costs of goods sold on the Consolidated
Statement of Operations (see Note 18):

($ in thousands)
Intangible assets at January 1, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Addition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Addition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,417
—
(534)
$ 883
1,200
(666)
$1,417

The future amortization of these intangible assets is as follows ($ in thousands):

Ceracade®

Luxamend®

Targadox®

Exelderm®

Year Ended December 31, 2019 . . . . . . . . . . .
Year Ended December 31, 2020 . . . . . . . . . . .
Year Ended December 31, 2021 . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$33
—
—

$33

$ 4
—
—

$ 4

$313
—
—

$313

$ 400
400
267

$1,067

Total
Amortization

$ 750
400
267

$1,417

9. Debt and Interest

Debt

Total debt consists of the following as of December 31, 2018 and December 31, 2017:

December 31,

($ in thousands)
IDB Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 Subordinated Note Financing . . . . . . . . . . . .
2017 Subordinated Note Financing . . . . . . . . . . . .
2017 Subordinated Note Financing . . . . . . . . . . . .
2017 Subordinated Note Financing . . . . . . . . . . . .
2017 Subordinated Note Financing . . . . . . . . . . . .
2018 Venture Debt . . . . . . . . . . . . . . . . . . . . . . . .

2018
$14,929
3,254
13,893
1,820
3,018
6,371
6,517

2017
$14,929
3,254
13,893
1,820
3,018
6,371
—

Maturity
Aug – 2020
March – 2020
May – 2020
June – 2020
August – 2020

Interest rate
2.25%
8.00%
8.00%
8.00%
8.00%
8.00% September – 2020
8.00% February – 2021

F-43

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

December 31,

($ in thousands)
2018 Venture Debt . . . . . . . . . . . . . . . . . . . . . . . .
Opus Credit Facility(3) . . . . . . . . . . . . . . . . . . . . . .
Helocyte Convertible Note, at fair value(2) . . . . . . . .
Helocyte Convertible Note, at fair value(2) . . . . . . . .
Helocyte Convertible Note, at fair value(2) . . . . . . . .
Helocyte Convertible Note, at fair value . . . . . . . . .
Caelum Convertible Note, at fair value(1) . . . . . . . . .
Caelum Convertible Note, at fair value(1) . . . . . . . . .
Caelum Convertible Note, at fair value(1) . . . . . . . . .
Total notes payable . . . . . . . . . . . . . . . . . . . . . .
Less: Discount on notes payable . . . . . . . . . . . . .
Total notes payable . . . . . . . . . . . . . . . . . . . . .

2018
15,190
9,500
—
—
—
—
1,000
6,800
2,114
84,406
4,903
$79,503

2017

—
9,500
1,000
2,194
1,062
444
1,017
6,900
2,142
67,544
5,045
$62,499

Interest rate
8.00%

Maturity
March – 2021

12.00% September – 2019
8.00%
December 2017
8.00% September – 2018
8.00%
8.00% November – 2018
8.00%
January – 2019
8.00% February – 2019
8.00%

March – 2019

April – 2018

Note 1: — Classified as short-term on the Company’s Consolidated Balance Sheet as of December 31,

2018.

Note 2: — Classified as short-term on the Company’s Consolidated Balance Sheet as of December 31,

2017.

Note 3: — Classified as short-term on the Company’s Consolidated Balance Sheet as of December 31, 2018

and 2017.

IDB Note

On February 13, 2014, the Company executed a promissory note in favor of IDB in the amount of
$15.0 million (the “IDB Note”). The Company borrowed $14.0 million against this note and used it to
repay its prior loan from Hercules Technology Growth Capital, Inc. The Company may request revolving
advances under the IDB Note in a minimum amount of $0.1 million (or the remaining amount of the
undrawn balance under the IDB Note if such amount is less than $0.1 million). All amounts advanced
under the IDB Note are due in full at the earlier of: (i) August 1, 2020, as extended or (ii) on the IDB’s
election following the occurrence and continuation of an event of default. The unpaid principal amount of
each advance shall bear interest at a rate per annum equal to the rate payable on the Company’s money
market account plus a margin of 150 basis points. The interest rate at December 31, 2018 was 2.25%. The
IDB Note contains various representations and warranties customary for financings of this type.

The obligations of the Company under the IDB Note are collateralized by a security interest in, a general
lien upon, and a right of set-off against the Company’s money market account of $15.0 million pursuant to
the Assignment and Pledge of Money Market Account, dated as of February 13, 2014 (the “Pledge
Agreement”). Pursuant to the Pledge Agreement, the Bank may, after the occurrence and continuation of
an event of default under the IDB Note, recover from the money market account all amounts outstanding
under the IDB Note. The Pledge Agreement contains various representations, warranties, and covenants
customary for pledge agreements of this type.

The Company will default on the IDB Note if, among other things, it fails to pay outstanding principal or
interest when due. Following the occurrence of an event of default under the IDB Note, the Bank may:
(i) declare the entire outstanding principal balance of the IDB Note, together with all accrued interest and
other sums due under the IDB Note, to be immediately due and payable; (ii) exercise its right of setoff
against any money, funds, credits or other property of any nature in possession of, under control or custody
of, or on deposit with IDB; (iii) terminate the commitments of IDB; and (iv) liquidate the money market
account to reduce the Company’s obligations to IDB.

F-44

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

During 2016, the Company and IDB extended the maturity date of the IDB Note to February 27, 2018. On
September 18, 2017, the maturity on the IDB Note was extended to August 1, 2020. The Company applied
the 10% cash flow test pursuant to ASC 470 to calculate the difference between the present value of the
amended IDB Note’s cash flows and the present value of the original remaining cash flow and concluded
that the results didn’t exceed the 10% factor, the debt modification is not considered substantially different
and did not apply extinguishment accounting, rather accounting for the modification on a prospective basis
pursuant to ASC 470. The Company only pays interest on the IDB Note through maturity.

At December 31, 2018 and 2017, the Company had approximately $14.9 million outstanding under its
promissory note with IDB.

NSC Note
In March 2015, the Company closed a private placement of a promissory note for $10.0 million through
National Securities Corporation’s “NSC Note”. The Company’s Chairman, President and Chief Executive
Officer and the Company’s Executive Vice President, Strategic Development, are Co-Portfolio Managers
and Partners of Opus Point Partners Management, LLC (“OPPM”), which owns approximately 4.7% of
National Holdings Corporation, Inc. the parent of National Securities Inc. The Company used the
proceeds from the NSC Note to acquire medical technologies and products. The NSC Note matured in
36 months, provided that during the first 24 months the Company can extend the maturity date by
six months. No principal amount is due for the first 24 months (or the first 30 months if the maturity date is
extended). Thereafter, the NSC Note will be repaid at the rate of 1/12 of the principal amount per month
for a period of 12 months. Interest on the note is 8% payable quarterly during the first 24 months (or the
first 30 months if the note is extended) and monthly during the last 12 months. NSC, a wholly owned
subsidiary of National Holdings Corporation, acted as the sole placement agent for the NSC Note. The
Company paid NSC a fee of $0.9 million during the year ended December 31, 2015, in connection with the
NSC Note. At December 31, 2015, the Company recorded the fee as a discount to notes payable, long-term
on the Consolidated Balance Sheets and amortized it over the life of the NSC Note. The effective interest
rate on the NSC Note was 14.00% at December 31, 2017, respectively. The NSC Note was paid in July 2017.

Helocyte Convertible Notes
During 2016 Helocyte entered into an agreement with Aegis Capital Corp. (“Aegis”) to raise up to
$5.0 million in convertible notes. The notes had an initial term of 18 months, which could be extended at
the option of the holder, on one or more occasions, for up to 180 days and accrue simple interest at the rate
of 5% per annum for the first 12 months and 8% per annum simple interest thereafter. The notes are
guaranteed by Fortress. The outstanding principal and interest of the notes automatically converts into the
type of equity securities sold by Helocyte in the next sale of equity securities in which Helocyte realizes
aggregate gross cash proceeds of at least $10.0 million (before commissions or other expenses and excluding
conversion of the notes) at a conversion price equal to the lesser of (a) the lowest price per share at which
equity securities of Helocyte are sold in such sale less a 33% discount and (b) a per share price based on a
pre-offering valuation of $50.0 million divided by the number of common shares outstanding on a
fully-diluted basis. The outstanding principal and interest of the notes may be converted at the option of
the holder in any sale of equity securities that does not meet the $10.0 million threshold for automatic
conversion using the same methodology. The notes also automatically convert upon a “Sale” of Helocyte,
defined as (a) a transaction or series of related transactions where one or more non-affiliates acquires
(i) capital stock of Helocyte or any surviving successor entity possessing the voting power to elect a
majority of the board of directors or (ii) a majority of the outstanding capital stock of Helocyte or the
surviving successor entity (b) the sale, lease or other disposition of all or substantially all of Helocyte’s
assets or any other transaction resulting in substantially all of Helocyte’s assets being converted into
securities of another entity or cash. Upon a Sale of Helocyte, the outstanding principal and interest of the
notes automatically converts into common shares at a price equal to the lesser of (a) a discount to the price
per share being paid in the Sale of Helocyte equal to 33% or (b) a conversion price per share based on a
pre-sale valuation of $50.0 million divided by the fully-diluted common stock of Helocyte immediately
prior to the Sale of Helocyte (excluding the notes).

F-45

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

As of December 31, 2016, Helocyte realized net proceeds in its four separate closings of $3.9 million after
paying Aegis, its placement fee of $0.4 million, or approximately 10% of the net proceeds, and legal fees of
approximately $0.1 million. Additionally, Aegis received warrants (“Helocyte Warrants”) to purchase the
number of shares of Helocyte’s common stock equal to $0.4 million, divided by the price per share at which
any note sold to investors first converts into Helocyte’s common stock. The warrants are issued at each
closing. The Helocyte Warrants, which were recorded as a liability in accordance with ASC 815, have a
five-year term and have a per share exercise price equal to 110% of the price per share at which any note
sold to investors first converts into Helocyte’s common stock. The Offering expired on December 31, 2016.

Due to the complexity and number of embedded features within each convertible note, and as permitted
under accounting guidance, the Company elected to account for the convertible notes and all the embedded
features under the fair value option (see note 5).

During the twelve months ended December 31, 2018, the Helocyte Convertible Notes matured, and were all
repaid in full.

Opus Credit Facility Agreement

On September 14, 2016, Fortress entered into a Credit Facility Agreement (the “Opus Credit Facility”) with
Opus Point Healthcare Innovations Fund, LP (“OPHIF”). Since Fortress’s Chairman, President and Chief
Executive Officer (Lindsay A. Rosenwald) and Fortress’s Executive Vice President, Strategic Development
(Michael S. Weiss), are Co-Portfolio Managers and Partners of Opus Point Partners Management, LLC
(“Opus”), an affiliate of OPHIF, all of the disinterested directors of Fortress’s board of directors approved
the terms of the Credit Facility Agreement and accompanying Pledge and Security Agreement and forms of
Note and Warrant (collectively, the “Financing Documents”).

Pursuant to the Opus Credit Facility, Fortress may borrow up to a maximum aggregate amount of
$25.0 million from OPHIF and any other lender that joins the Credit Facility Agreement from time to time
(OPHIF and each subsequent lender, a “Lender”) under one or more convertible secured promissory notes
(each a “Note”) from September 14, 2016 until September 1, 2017 (the “Commitment Period”). All
amounts borrowed under the Credit Facility Agreement must be paid in full on September 14, 2018 (the
“Maturity Date”), though Fortress may prepay the Notes at any time without penalty.

Pursuant to the Opus Credit Facility and form of Note, each Note will bear interest at 12% per annum and
interest will be paid quarterly in arrears commencing on December 1, 2016 and on the first business day of
each September, December, March and June thereafter until the Maturity Date. Upon the occurrence and
continuance of an event of default (as specified in Credit Facility Agreement and form of Note), each Note
will bear interest at 14% and be payable on demand. The Lenders may elect to convert the principal and
interest of the Notes at any time into shares of Fortress’s common stock (“Common Stock”) at a
conversion price of $10.00 per share. All Notes are secured by shares of capital stock currently held by
Fortress in certain Fortress Companies as set forth in the Pledge and Security Agreement entered into
between Fortress, its wholly owned subsidiary, FBIO Acquisition, Inc., and OPHIF (as collateral agent on
behalf of all the Lenders) on September 14, 2016 (the “Pledge and Security Agreement”).

Fortress may terminate the Opus Credit Facility upon notice to the Lenders and payment of all outstanding
obligations under the Credit Facility Agreement. Notwithstanding any early termination of the Credit
Facility Agreement, within 15 days after termination of the Commitment Period, Fortress will issue each
Lender warrants (each a “Warrant”) pursuant to the terms of the Credit Facility Agreement and form of
Warrant to purchase their pro rata share of (a) 1,500,000 shares of Common Stock; and (b) that number of
shares of Common Stock equal to the product of (i) 1,000,000, times (ii) the principal amount of all Notes
divided by 25,000,000. The Warrants will have a five-year term and will be exercisable at a price of $3.00 per
share.

On March 12, 2018, the Company and Opus Point Healthcare Innovation Healthcare Fund (“OPHIF”)
amended and restated the Opus Credit Facility (the “A&R Opus Credit Facility”). The A&R Opus Credit
Facility extended the maturity date of the notes issued under the Opus Credit Facility from September 14,

F-46

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

2018 by one year to September 14, 2019. The A&R Opus Credit Facility also permits the Company to make
portions of interest and principal repayments in the form of shares of the Company’s common stock and/or
in common stock of the Company’s publicly-traded subsidiaries, subject to certain conditions. Fortress
retains the ability to prepay the Notes at any time without penalty. The notes payable under the A&R Opus
Credit Facility continue to bear interest at 12% per annum. The A&R Opus Credit Facility was accounted
for as a debt modification for the year ended December 31, 2018.

As of December 31, 2018, and 2017, $9.5 million was outstanding under the Opus Credit Facility.

IDB Letters of Credit

The Company has several letters of credit (“LOC”) with IDB securing rent deposits for lease facilities
totaling approximately $1.1 million. The LOC’s are secured by cash, which is included in restricted cash.
Interest paid on the letters of credit is 2% per annum.

2017 Subordinated Note Financing

On March 31, 2017, the Company entered into Note Purchase Agreements (the “Purchase Agreements”)
with NAM Biotech Fund II, LLC I (“NAM Biotech Fund”) and NAM Special Situations Fund I QP, LLC
(“NAM Special Situations Fund”), both of which are accredited investors, and sold subordinated
promissory notes (the “Notes”) of the Company (the “2017 Subordinated Note Financing”) in the
aggregate principal amount of $3.25 million. The Notes bear interest at the rate of 8% per annum;
additionally, the Notes accrue paid-in-kind interest at the rate of 7% per annum, which will be paid
quarterly in shares of the Company’s common stock and/or shares of common stock of one of the
Company’s subsidiaries that are publicly traded, in accordance with the terms of the Notes. Each Note is
due on the third anniversary of its issuance, provided that the Company may extend the maturity date for
two one-year periods in its sole discretion. The 2017 Subordinated Note Financing is for a maximum of
$40.0 million (which the Company may, in its sole discretion, increase to $50.0 million).

the “Placement Agency Agreements”) acts as placement agent

National Securities Corporation (“NSC”), a subsidiary of National and a related party, (see Note 16),
pursuant to a Placement Agency Agreement entered into between the Company, NAM Biotech Fund and
NSC (the “NAM Placement Agency Agreement”) and a Placement Agency Agreement entered into
between the Company, NAM Special Situations Fund and NSC (together with the NAM Placement
in the 2017
Agency Agreement,
Subordinated Note Financing. Pursuant to the terms of the Placement Agency Agreements, NSC receives
(in addition to reimbursement of certain expenses) an aggregate cash fee equal to 10% of the aggregate sales
price of the Notes sold in the 2017 Subordinated Note Financing to NAM Biotech Fund and NAM Special
Situations Fund. The Placement Agent also receives warrants equal to 10% of the aggregate principal
amount of the Notes sold in the 2017 Subordinated Note Financing divided by the closing share price of
the Company’s common stock on the date of closing (the “Placement Agent Warrants”). The Placement
Agent Warrants are exercisable immediately at such closing share price for a period of five years. The
Placement Agent will have a right of first offer for a period of 12 months for any proposed issuance of the
Company’s capital stock in a private financing, subject to certain exceptions, and will also have the right to
participate as an investor in subsequent financings.

On March 31, 2017, the Company held its first closing of the 2017 Subordinated Note Financing and
received gross proceeds of $3.2 million. NSC received a cash fee of approximately $0.3 million and warrant
to purchase 87,946 shares of the Company’s common stock at an exercise price of per share $3.70.

On May 1, 2017, the Company held a second closing of the 2017 Subordinated Note Financing and
received gross proceeds of $8.6 million, before expenses. NSC received a placement agent fee of
approximately $0.9 million in the second closing and warrants to purchase 234,438 shares of the Company’s
common stock at an exercise price of $3.65 per share.

F-47

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

On May 31, 2017, the Company held a third closing of the 2017 Subordinated Note Financing and received
gross proceeds of $5.3 million, before expenses. NSC received a placement agent fee of approximately
$0.5 million in the third closing and warrants to purchase 147,806 shares of the Company’s common stock
at an exercise price of $3.61 per share.

On June 30, 2017, the Company held a fourth closing of the 2017 Subordinated Note Financing and
received gross proceeds of $1.8 million, before expenses. NSC received a placement agent fee of
approximately $0.2 million in the fourth closing and warrants to purchase 38,315 shares of the Company’s
common stock at an exercise price of $4.75 per share.

On August 31, 2017, the Company held a fifth closing of the 2017 Subordinated Note Financing and
received gross proceeds of $3.0 million, before expenses. NSC received a placement agent fee of
approximately $0.3 million in the fifth closing and warrants to purchase 63,526 shares of the Company’s
common stock at an exercise price of $4.75 per share.

On September 30, 2017, the Company held a sixth closing of the 2017 Subordinated Note Financing and
received gross proceeds of $6.4 million, before expenses. NSC received a placement agent fee of
approximately $0.6 million in the sixth closing and warrants to purchase 144,149 shares of the Company’s
common stock at an exercise price of $4.42 per share.

Caelum Convertible Notes

On July 31, 2017 Caelum through National Securities Corporation (“NSC” or “Placement Agent”), a
subsidiary of National offered up to $10 million, convertible promissory notes (the “Caelum Convertible
Notes”) to accredited investors (as defined under the U.S. Federal securities laws). Under the terms of the
offering the Placement Agent received a 10% selling commission, payable by Caelum and deducted from the
gross proceeds (see Note 16).

During the year ended December 31, 2017, Caelum raised $9.9 million in the offering, in three separate
closings and paid a placement fee equal to 10% of the proceeds of the sale or $0.9 million. Additionally
NSC received warrants to purchase a number of shares the Caelum’s Common Stock equal to 10% of the
aggregate amount of shares underlying the Notes with a per share exercise price equal to 110% of the per
share conversion price of the Notes; provided, however, that if no Note converts, the exercise price will be
$75 million dollars divided by the total number of fully-diluted shares of Common Stock outstanding
immediately prior to exercise of the warrant, giving effect to the assumed conversion of all options,
warrants, and convertible securities of the Company.

The notes convert upon a qualified financing in which Caelum raises gross proceeds of at least $10 million
as follows: the lesser of (a) a discount to the price per common share being paid in the Sale of the Company
equal to 20% or (b) a conversion price per share based on a pre-sale valuation of $75,000,000 divided by the
number of common shares outstanding at that time assuming the hypothetical conversion or exercise of any
convertible securities, options, warrants and other rights to acquire common shares of the Company. The
Company elected the fair value option to account for this note.

On January 30, 2019 Caelum entered into a Development, Option and Stock Purchase Agreement (the
“DOSPA”) and related documents by and among Caelum, Alexion Therapeutics, Inc. (“Alexion”), Fortress
and the Caelum security holders’ parties thereto (including Fortress, the “Sellers”) (see Note 21). The first
of four transactional components of the DOSPA is the purchase by Alexion of a number of shares of
Caelum preferred stock equal to 19.9% of Caelum’s total capitalization for consideration of $30 million.
This transaction caused the Caelum convertible notes to convert into 1,870,412, shares of Caelum preferred
Class B stock. Based on this transaction, the notes were written down to par value of $9.9 million and the
related warrant liability was written up to the full value of $1.0 million at December 31, 2018 (see Note 5).
Further, the Alexion transaction resulted in the automatic conversion of the notes, as such on January 30,
2019 the notes were converted into equity.

F-48

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

2018 Venture Notes

During the period ended March 31, 2018, the Company closed a private placement of promissory notes for
an aggregate of $21.7 million (the “2018 Venture Notes”) through National Securities Corporation
(“NSC”), a wholly-owned subsidiary of National and a related party by virtue of the Company’s ownership
of National. The Company intends to use the proceeds from the 2018 Venture Notes to acquire and license
medical technologies and products through existing or recently formed Company subsidiaries. The
Company may also use the proceeds to finance its subsidiaries. The notes mature 36 months from issuance,
provided that during the first 24 months the Company may extend the maturity date by six months. No
principal amount will be due for the first 24 months (or the first 30 months if the maturity date is
extended). Thereafter, the note will be repaid at the rate of 1/12 of the principal amount per month for a
period of 12 months. Interest on the note is 8% payable quarterly during the first 24 months (or the first
30 months if the note is extended) and monthly during the last 12 months.

NSC acted as the sole placement agent for the 2018 Venture Notes. The Company paid NSC a fee of
$1.7 million during the three months ended March 31, 2018 in connection with its placement of the 2018
Venture Notes.

The 2018 Venture Notes allows the Company to transfer a portion of the proceeds from the 2018 Venture
Notes to a Fortress subsidiary upon the completion by such subsidiary of an initial public offering in which
it raises sufficient equity capital so that it has cash equal to five times the amount of the portion of the
proceeds of the 2018 Venture Notes so transferred (the “SubCo Funding Threshold”). At the time of
transfer the Company’s obligation under the NSC Note will be reduced by the amount transferred.

During the year ended December 31, 2018, the Company has transferred $2.2 million to Aevitas,
$1.4 million to Tamid, $1.1 Million to Cyprium and $1.7 million to Cellvation. Notwithstanding such
transfers, the Company continues to hold such debt balances as liabilities on its own balance sheet on a
consolidated basis, until such time as the SubCo Funding Threshold is met with respect to a particular
subsidiary.

In connection with this transfer NSC will receive warrants to purchase each such subsidiary’s stock equal to
25% of that subsidiary’s proceeds of the 2018 Venture Notes divided by the lowest price at which the
subsidiary sells its equity in its first third party equity financing. The warrants issued will have a term of
10 years and an exercise price equal to the par value of the Fortress subsidiary’s common stock. As of
December 31, 2018, the warrants were contingently issuable as neither an initial public offering nor a
third-party financing had occurred.

Interest Expense

The following table shows the details of interest expense for all debt arrangements during the periods
presented. Interest expense includes contractual
the debt discount and
amortization of fees represents fees associated with loan transaction costs, amortized over the life of the
loan:

interest and amortization of

For the Years Ended December 31,

2017

2018
Fees(1)

Interest

($ in thousands)
IDB Note . . . . . . . . . . . . . . . . . . . . . . . . $ 341 $ — $
NSC Debt . . . . . . . . . . . . . . . . . . . . . . . .
2017 Subordinated Note Financing . . . . . .
Opus Credit Facility . . . . . . . . . . . . . . . . .
Venture Debt . . . . . . . . . . . . . . . . . . . . . .
LOC Fees . . . . . . . . . . . . . . . . . . . . . . . .
Helocyte Convertible Note . . . . . . . . . . . .
Avenue Convertible Note . . . . . . . . . . . . .
Caelum Convertible Note . . . . . . . . . . . . .

—
4,217
1,141
1,364
30
94
—
787

—
1,363
636
420
—
—
—
—

Total

Interest
341 $ 340
147
2,234
1,085
—
36
261
5
265

—
5,580
1,777
1,784
30
94
—
787

Financing

Total

Fees(1)
$ — $ — $ 340
348
2,920
2,122
—
36
262
8
1,582

201
686
1,037
—
—
—
—
1,217

—
—
—
—
—
1
3
100

F-49

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

Interest
($ in thousands)
64
Falk CSR . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
Total Interest Expense and Financing Fee . . $7,921 $2,419 $10,340 $4,442

Interest
(64)
11

(64)
11

Total

Financing
—
—
$104

Total

Fees(1)
—
—

64
5
$3,141 $7,687

2018
Fees(1)
—
—

For the Years Ended December 31,

2017

Note 1: Amortization of fees

10. Accrued Liabilities and other Long-Term Liabilities

Accrued expenses and other long-term liabilities, excluding National, consisted of the following:

($ in thousands)
Accrued expenses:

December 31,

2018

2017

Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Salaries, bonuses and related benefits . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses – related party . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development – milestones . . . . . . . . . . . . . . . . . . . . . .
Research and development – manufacturing . . . . . . . . . . . . . . . . . . .
Research and development – clinical supplies . . . . . . . . . . . . . . . . . . .
Research and development – license maintenance fees . . . . . . . . . . . . .
Dr. Falk Pharma settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued royalties payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued coupon expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1,434
5,843
—
3,805
200
826
160
519
300
1,108
838
1,327
$16,360

$ 1,625
5,279
95
1,873
800
1,188
85
100
3,059
1,411
1,087
1,030
$17,632

Other long-term liabilities:

Deferred rent and long-term lease abandonment charge . . . . . . . . . . .
Total other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,211
$ 5,211

4,739
$ 4,739

11. Non-Controlling Interests

Non-controlling interests in consolidated entities are as follows ($ in thousands):

As of December 31, 2018

For the twelve months ended
December 31, 2018

($ in thousands)
Aevitas . . . . . . . . . .
Avenue(1) . . . . . . . . .
Caelum . . . . . . . . . .
Cellvation . . . . . . . .
Checkpoint(1) . . . . . .
Coronado SO . . . . . .
Cyprium . . . . . . . . .
Helocyte . . . . . . . . .
JMC . . . . . . . . . . . .
Mustang(1) . . . . . . . .
Tamid . . . . . . . . . . .
Total . . . . . . . . . . . .

NCI equity
share
$ (474)
13,326
(2,436)
(457)
31,648
(290)
(210)
(3,372)
(475)
38,631
(211)
$75,680

Net loss attributable to
non- controlling interests

(606)
$
(13,735)
(2,413)
(185)
(23,470)
—
(62)
(684)
245
(16,628)
(251)
$(57,789)

F-50

As of December 31, 2018
Non-controlling
interests in
consolidated entities
$ (1,080)
(409)
(4,849)
(642)
8,178
(290)
(272)
(4,056)
(230)
22,003
(462)
$17,891

Non-controlling
ownership
36.1%
64.81%
36.8%
21.1%
69.3%
13.0%
10.8%
19.8%
6.9%
60.5%
23.4%

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

As of December, 31, 2017

For the twelve months ended
December 31, 2017

Aevitas . . . . . . . . .
Avenue(2) . . . . . . . .
Caelum . . . . . . . . .
Cellvation . . . . . . .
Checkpoint(1) . . . . .
Coronado SO . . . . .
Cyprium . . . . . . . .
Helocyte . . . . . . . .
JMC . . . . . . . . . . .
Mustang(2) . . . . . . .
National Holdings. .
Tamid . . . . . . . . . .
Total . . . . . . . . . . .

NCI equity
share

(126)
17,454
(815)
(259)
21,635
(236)
(143)
(1,907)
(469)
48,740
17,021
(6)
$100,889

Net gain/(loss) attributable to
non-controlling interests

(168)
(4,646)
(1,262)
(96)
(12,314)
(54)
(15)
(1,193)
7
(11,911)
(1,216)
(92)
$(32,960)

As of December 31, 2017
Non-controlling
interests in
consolidated entities
$ (294)
12,808
(2,077)
(355)
9,321
(290)
(158)
(3,100)
(462)
36,829
15,805
(98)
$67,929

Non-controlling
ownership
35.4%
66.1%
34.7%
21.5%
62.0%
13.0%
11.1%
20.0%
6.3%
61.6%
43.4%
24.0%

Note 1: Checkpoint is consolidated with Fortress’ operations because Fortress maintains voting control
through its ownership of Checkpoint’s Class A Common Shares which provide super-majority
voting rights.

Note 2: Avenue and Mustang are consolidated with Fortress’ operations because Fortress maintains voting
control through its ownership of Preferred Class A Shares which provide super-majority voting
rights.

12. Net Loss per Common Share

The Company calculates loss per share using the two-class method, which is an earnings allocation formula
that determines earnings per share for Common Stock and participating securities, if any, according to
dividends declared and non-forfeitable participation rights in undistributed earnings. Under this method, all
earnings (distributed and undistributed) are allocated to Common Stock and participating securities, if any,
based on their respective rights to receive dividends. Holders of restricted Common Stock were entitled to
all cash dividends, when and if declared, and such dividends are non-forfeitable. The participating securities
do not have a contractual obligation to share in any losses of the Company. As a result, net losses are not
allocated to the participating securities for any periods presented.

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of
Common Stock outstanding during the period, without consideration for Common Stock equivalents.
Diluted net loss per share is computed by dividing the net loss by the weighted-average number of Common
Stock and Common Stock equivalents outstanding for the period.

Included in Common Stock issued and outstanding as of December 31, 2018 and 2017 were 11,174,113 and
9,840,614 shares of unvested restricted stock, which is excluded from the weighted average Common Stock
outstanding since its effect would be dilutive.

The Company’s potential dilutive securities which consist of unvested restricted stock, unvested restricted
stock units, options, and warrants have been excluded from the computation of diluted net loss per share as
the effect would be to reduce the net loss per share. Therefore, the weighted-average Common Stock
outstanding used to calculate both basic and diluted net loss per share is the same.

The following shares of potentially dilutive securities, weighted during the years ended December 31, 2018
and 2017 have been excluded from the computations of diluted weighted average shares outstanding as the
effect of including such securities would be antidilutive:

F-51

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

For the Years Ended December 31,

Warrants to purchase Common Stock . . . . . . . . . . . . . . . . . . . . .

886,682

Opus warrants to purchase Common Stock . . . . . . . . . . . . . . . . .

1,880,000

2018

2017

745,285

628,383

Options to purchase Common Stock . . . . . . . . . . . . . . . . . . . . . .

1,085,502

1,093,283

Convertible preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,000,000

Unvested Restricted Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11,174,113

Unvested Restricted Stock Units . . . . . . . . . . . . . . . . . . . . . . . . .

1,655,849

2,740

9,840,614

1,390,799

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17,682,146

13,701,104

13. Stockholders’ Equity

Common Stock

The Company’s Certificate of Incorporation, as amended, authorizes the Company to issue 100,000,000
shares of $0.001 par value Common Stock of which 57,845,447 and 50,991,285 shares are outstanding at
December 31, 2018 and 2017, respectively.

The terms, rights, preference and privileges of the Common Stock are as follows:

Voting Rights

Each holder of Common Stock is entitled to one vote per share of Common Stock held on all matters
submitted to a vote of the stockholders, including the election of directors. The Company’s certificate of
incorporation and bylaws do not provide for cumulative voting rights.

Dividends

Subject to preferences that may be applicable to any then outstanding preferred stock, the holders of the
Company’s outstanding shares of Common Stock are entitled to receive dividends, if any, as may be
declared from time to time by the Company’s Board of Directors out of legally available funds.

Liquidation

In the event of the Company’s liquidation, dissolution or winding up, holders of Common Stock will be
entitled to share ratably in the net assets legally available for distribution to stockholders after the payment
of all of the Company’s debts and other liabilities, subject to the satisfaction of any liquidation preference
granted to the holders of any outstanding shares of Preferred Stock.

Rights and Preference

Holders of the Company’s Common Stock have no preemptive, conversion or subscription rights, and there
is no redemption or sinking fund provisions applicable to the Common Stock. The rights, preferences and
privileges of the holders of Common Stock are subject to, and may be adversely affected by, the rights of
the holders of shares of any series of the Company’s preferred stock that are or may be issued.

Fully Paid and Nonassessable

All of the Company’s outstanding shares of Common Stock are fully paid and nonassessable.

Series A Preferred Stock

On October 26, 2017, the Company designated 5,000,000 shares of preferred stock as Series A Preferred
Stock. On December 15, 2017, the Company issued $25.0 million (or 1,000,000 shares) of Series A
Preferred Stock through B. Riley FBR, as lead manager and joint bookrunner of the placement, and NSC
and H.C. Wainwright & Co. as joint bookrunners. NSC is a subsidiary of National Holdings Corporation.

F-52

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

Voting Rights

Except as may be otherwise required by law, the voting rights of the holders of the Series A Preferred Stock
are limited to the affirmative vote or consent of the holders of at least two-thirds of the votes entitled to be
cast by the holders of the Series A Preferred Stock outstanding at the time in connection with the:
(1) authorization or creation, or increase in the authorized or issued amount of, any class or series of capital
stock ranking senior to the Series A Preferred Stock with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up or reclassification of any of the
Company’s authorized capital stock into such shares, or creation, authorization or issuance of any
obligation or security convertible into or evidencing the right
to purchase any such shares; or
(2) amendment, alteration, repeal or replacement of the Company’s certificate of incorporation, including
by way of a merger, consolidation or otherwise in which the Company may or may not be the surviving
entity, so as to materially and adversely affect and deprive holders of Series A Preferred Stock of any right,
preference, privilege or voting power of the Series A Preferred Stock.

Dividends

Dividends on Series A Preferred Stock accrue daily and will be cumulative from, and including, the date of
original issue and shall be payable quarterly every March 31, June 30, September 30, and December 31, at
the rate of 9.375% per annum of its liquidation preference, which is equivalent to $2.34375 per annum per
share. The first dividend on Series A Preferred Stock sold in the offering was payable on December 31, 2017
(in the amount of $0.299479 per share) to the holders of record of the Series A Preferred Stock at the close
of business on December 15, 2017 and thereafter for each subsequent quarter in the amount of $0.5839375
per share. The Company recorded approximately $2.3 million and $0.3 million of dividends in Additional
Paid in Capital on the Consolidated Balance Sheets as of December 31, 2018 and 2017, respectively.

No Maturity Date or Mandatory Redemption

The Series A Preferred Stock has no maturity date, and the Company is not required to redeem the Series A
Preferred Stock. Accordingly, the Series A Preferred Stock will remain outstanding indefinitely unless the
Company decides to redeem it pursuant to its optional redemption right or its special optional redemption
right in connection with a Change of Control (as defined below), or under the circumstances set forth
below under “Limited Conversion Rights Upon a Change of Control” and elect to convert such Series A
Preferred Stock. The Company is not required to set aside funds to redeem the Series A Preferred Stock.

Optional Redemption

The Series A Preferred Stock may be redeemed in whole or in part (at the Company’s option) any time on
or after December 15, 2022, upon not less than 30 days nor more than 60 days’ written notice by mail prior
to the date fixed for redemption thereof, for cash at a redemption price equal to $25.00 per share, plus any
accumulated and unpaid dividends to, but not including, the redemption date.

Special Optional Redemption

Upon the occurrence a Change of Control (as defined below), the Company may redeem the shares of
Series A Preferred Stock, at its option, in whole or in part, within one hundred twenty (120) days of any
such Change of Control, for cash at $25.00 per share, plus accumulated and unpaid dividends (whether or
not declared) to, but excluding, the redemption date. If, prior to the Change of Control conversion date, the
Company has provided notice of its election to redeem some or all of the shares of Series A Preferred Stock
(whether pursuant
to the Company’s optional redemption right described above under “Optional
Redemption” or this special optional redemption right), the holders of shares of Series A Preferred Stock
will not have the Change of Control conversion right with respect to the shares of Series A Preferred Stock
called for redemption. If the Company elects to redeem any shares of the Series A Preferred Stock as
described in this paragraph, the Company may use any available cash to pay the redemption price.

F-53

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

A “Change of Control” is deemed to occur when, after the original issuance of the Series A Preferred
Stock, the following have occurred and are continuing:

•

the acquisition by any person, including any syndicate or group deemed to be a “person” under
Section 13(d)(3) of the Exchange Act of beneficial ownership, directly or indirectly, through a
purchase, merger or other acquisition transaction or series of purchases, mergers or other
acquisition transactions of the Company’s stock entitling that person to exercise more than 50%
of the total voting power of all the Company’s stock entitled to vote generally in the election of
the Company’s directors (except that such person will be deemed to have beneficial ownership of
all securities that such person has the right to acquire, whether such right is currently exercisable
or is exercisable only upon the occurrence of a subsequent condition); and

following the closing of any transaction referred to in the bullet point above, neither the Company
nor the acquiring or surviving entity has a class of common equity securities (or American
Depositary Receipts representing such securities) listed on the NYSE, the NYSE American LLC
or the Nasdaq Stock Market, or listed or quoted on an exchange or quotation system that is a
successor to the NYSE, the NYSE American LLC or the Nasdaq Stock Market.

Conversion, Exchange and Preemptive Rights

Except as described below under “Limited Conversion Rights upon a Change of Control,” the Series A
Preferred Stock is not subject to preemptive rights or convertible into or exchangeable for any other
securities or property at the option of the holder.

Limited Conversion Rights upon a Change of Control

Upon the occurrence of a Change of Control, each holder of shares of Series A Preferred Stock will have
the right (unless, prior to the Change of Control Conversion Date, the Company has provided or provides
irrevocable notice of its election to redeem the Series A Preferred Stock as described above under “Optional
Redemption,” or “Special Optional Redemption”) to convert some or all of the shares of Series A Preferred
Stock held by such holder on the Change of Control Conversion Date, into the Common Stock Conversion
Consideration, which is equal to the lesser of:

•

the quotient obtained by dividing (i) the sum of the $25.00 liquidation preference per share of
Series A Preferred Stock plus the amount of any accumulated and unpaid dividends (whether or
not declared) to, but not including, the Change of Control Conversion Date (unless the Change of
Control Conversion Date is after a record date for a Series A Preferred Stock dividend payment
and prior to the corresponding Dividend Payment Date, in which case no additional amount for
such accumulated and unpaid dividend will be included in this sum) by (ii) the Common Stock
Price (such quotient, the “Conversion Rate”); and

•

13.05483 shares of common stock, subject to certain adjustments.

In the case of a Change of Control pursuant to which the Company’s common stock will be converted into
cash, securities or other property or assets, a holder of Series A Preferred Stock will receive upon
conversion of such Series A Preferred Stock the kind and amount of Alternative Form Consideration
which such holder would have owned or been entitled to receive upon the Change of Control had such
holder held a number of shares of the Company’s common stock equal to the Common Stock Conversion
Consideration immediately prior to the effective time of the Change of Control.

Notwithstanding the foregoing, the holders of shares of Series A Preferred Stock will not have the Change
of Control Conversion Right if the acquiror has shares listed or quoted on the NYSE, the NYSE American
LLC or Nasdaq Stock Market or listed or quoted on an exchange or quotation system that is a successor to
the NYSE, the NYSE American LLC or Nasdaq Stock Market, and the Series A Preferred Stock becomes
convertible into or exchangeable for such acquiror’s listed shares upon a subsequent Change of Control of
the acquiror.

F-54

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

Liquidation Preference

In the event the Company liquidates, dissolves or is wound up, holders of the Series A Preferred Stock will
have the right to receive $25.00 per share, plus any accumulated and unpaid dividends to, but not including,
the date of payment, before any payment is made to the holders of the Company’s common stock.

Ranking

The Series A Preferred Stock will rank, with respect to rights to the payment of dividends and the
distribution of assets upon the Company’s liquidation, dissolution or winding up, (1) senior to all classes or
series of the Company’s common stock and to all other equity securities issued by the Company other than
equity securities referred to in clauses (2) and (3); (2) on a par with all equity securities issued by the
Company with terms specifically providing that those equity securities rank on a par with the Series A
Preferred Stock with respect to rights to the payment of dividends and the distribution of assets upon the
Company’s liquidation, dissolution or winding up; (3) junior to all equity securities issued by the Company
with terms specifically providing that those equity securities rank senior to the Series A Preferred Stock
with respect to rights to the payment of dividends and the distribution of assets upon the Company
liquidation, dissolution or winding up; and (4) junior to all of the Company’s existing and future
indebtedness.

As of December 31, 2018, and 2017, 1,000,000 shares of Series A Preferred Stock were issued and
outstanding.

Stock-Based Compensation

As of December 31, 2018, the Company had four equity compensation plans: the Fortress Biotech, Inc.
2007 Stock Incentive Plan (the “2007 Plan”), the Fortress Biotech, Inc. 2013 Stock Incentive Plan, as
amended (the “2013 Plan”), the Fortress Biotech, Inc. 2012 Employee Stock Purchase Plan (the “ESPP”)
and the Fortress Biotech, Inc. Long Term Incentive Plan (“LTIP”). In 2007, the Company’s Board of
Directors adopted and stockholders approved the 2007 Plan authorizing the Company to grant up to
6,000,000 shares of Common Stock to eligible employees, directors, and consultants in the form of
restricted stock, stock options and other types of grants. In 2013, the Company’s Board of Directors
adopted and stockholders approved the 2013 Plan authorizing the Company to grant up to 2,300,000
shares of Common Stock to eligible employees, directors, and consultants in the form of restricted stock,
stock options and other types of grants. In 2015, the Company’s Board of Directors and stockholders
approved an increase of 7,700,000 shares for the 2013 Plan bringing the total number of shares approved
under this plan to 10,000,000, with the aggregate total of authorized shares available for grants under the
2007 Plan and the 2013 Plan of up to 16,000,000 shares. An aggregate 13,176,146 shares were granted under
both the Company’s 2007 and 2013 plans, net of cancellations, and 2,823,854 shares were available for
issuance as of December 31, 2018.

Certain partner companies have their own equity compensation plan under which shares are granted to
eligible employees, directors and consultants in the form of restricted stock, stock options, and other types
of grants of stock of the respective partner company’s common stock. The table below provides a summary
of those plans as of December 31, 2018:

Partner Company

Stock Plan

Shares
available at
December 31,
2018

Shares
Authorized

Aevitas . . . . . . Aevitas Therapeutics, Inc. 2018 Long Term Incentive Plan

2,000,000

1,802,000

Avenue . . . . . . Avenue Therapeutics, Inc. 2015 Stock Plan

Caelum . . . . . . Caelum Biosciences Inc. 2017 Incentive Plan

Cellvation . . . . Cellvation Inc. 2016 Incentive Plan

2,000,000

3,000,000

2,000,000

647,022

371,336

300,000

F-55

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

Partner Company

Stock Plan

Checkpoint . . .

Checkpoint Therapeutics, Inc. Amended and Restated 2015
Stock Plan

Cyprium . . . . . Cyprium Therapeutics, Inc. 2017 Stock Plan

Helocyte . . . . . DiaVax Biosciences, Inc. 2015 Incentive Plan

Journey . . . . . .

Journey Medical Corporation 2015 Stock Plan

Mustang . . . . . Mustang Bio, Inc. 2016 Incentive Plan

Tamid . . . . . . . FBIO Acquisition Corp. V 2017 Incentive Plan

Shares
available at
December 31,
2018

Shares
Authorized

5,000,000

2,345,457

2,000,000

3,000,000

341,667

434,792

5,000,000

2,049,689

2,000,000

1,600,000

The purpose of the Company’s and partner company’s equity compensation plans is to provide for equity
awards as part of an overall compensation package of performance-based rewards to attract and retain
qualified personnel. Such awards include, without limitation, options, stock appreciation rights, sales or
bonuses of restricted stock, restricted stock units or dividend equivalent rights, and an award may consist of
one such security or benefit, or two or more of them in any combination or alternative. Vesting of awards
may be based upon the passage of time, the occurrence of one or more events, or the satisfaction of
performance criteria or other conditions.

Incentive and non-statutory stock options are granted pursuant to option agreements adopted by the plan
administrator. Options generally have 10-year contractual terms and vest in three equal annual installments
commencing on the grant date.

The Company estimates the fair value of stock option grants using a Black-Scholes option pricing model.
In applying this model, the Company uses the following assumptions:

•

Risk-Free Interest Rate: The risk-free interest rate is based on the yields of United States
Treasury securities with maturities similar to the expected term of the options for each option
group.

Volatility: As the Company has a limited trading history for its Common Stock, the expected
stock price volatility for its Common Stock was estimated by incorporating two years of the
Company’s historical volatility and the average historical price volatility for industry peers based
on daily price observations over a period equivalent to the expected term of the stock option
grants. Industry peers consist of several public companies in the biopharmaceutical industry
similar in size, stage of life cycle and financial leverage. The Company’s historical volatility is
weighted with that of the peer group and that combined historical volatility is weighted 80% with
a 20% weighting of the Company’s implied volatility, which is obtained from traded options of the
Company’s stock. The Company intends to continue to consistently apply this process using
the same or similar public companies until it has sufficient historical information regarding the
volatility of its Common Stock that is consistent with the expected life of the options. Should
circumstances change such that the identified companies are no longer similar to the Company,
more suitable companies whose share prices are publicly available would be utilized in the
calculation.

Expected Term: Due to the limited exercise history of
the Company’s stock options, the
Company determined the expected term based on the Simplified Method under SAB 107 and the
expected term for non-employees is the remaining contractual life for both options and warrants.

Expected Dividend Rate: The Company has not paid and does not anticipate paying any cash
dividends in the near future on its common stock.

The fair value of each option award was estimated on the grant date using the Black-Scholes option-pricing
model and expensed under the straight-line method. Journey and Mustang issued stock options during
the years ended December 31, 2018 and 2017.

F-56

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

The fair value for non-employee stock-based awards are marked-to-market on each valuation date until
vested using the Black-Scholes pricing model.

The following table summarizes the stock-based compensation expense from stock option, employee stock
purchase programs and restricted Common Stock awards and warrants for the years ended December 31,
2018 and 2017:

($ in thousands)

For the Years Ended December 31,

2018

2017

Employee awards

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 4,062

$ 6,606

Executive awards Fortress Companies’ stock . . . . . . . . . . . . . . . . .

Non-employee awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Partner companies:

Avenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Checkpoint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Mustang . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Caelum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Journey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,878

1,537

1,995

4,960
282
146
59

—

604

3,118

2,013
595
224
160

Total stock-based compensation expense . . . . . . . . . . . . . . . . . . .

$15,012

$13,403

For the years ended December 31, 2018 and 2017, $5.3 million and $4.0 million was included in research
and development expenses, and $9.7 million and $9.4 million was included in general and administrative
expenses, respectively.

Options

The following table summarizes Fortress stock option activities excluding activities related to partner
companies:

Number of
shares

Weighted
average
exercise price

Options vested and expected to vest at December 31, 2017 . . . 1,110,501
(25,000)

Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Options vested and expected to vest at December 31, 2018 . . . 1,085,501

Options vested and exercisable . . . . . . . . . . . . . . . . . . . . . . 1,085,501

Options outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,085,501

$3.78
4.75

$3.75

Total
weighted
average
intrinsic
value

Weighted
average
remaining
contractual
life (years)

$1,351,080
—

3.95
—

— 2.93

During the years ended December 31, 2018 and 2017, exercises of stock options resulted in total proceeds
of approximately nil and $27,000, respectively.

As of December 31, 2018, the Company had unrecognized stock-based compensation expense related to all
unvested options and vested options of nil and nil, respectively.

Restricted Stock

Stock-based compensation expense from restricted stock awards and restricted stock units for the years
ended December 31, 2018 and 2017 was $13.9 million and $11.3 million, respectively.

During 2018, the Company granted 1,721,802 restricted shares of its Common Stock to executives and
directors of the Company and 490,000 restricted stock units to employees and non-employees of the

F-57

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

Company. The fair value of the restricted stock awards issued during 2018 of $6.6 million and the fair value
of the restricted stock unit awards issued during 2018 of $1.8 million were estimated on the grant date using
the Company’s stock price as of the grant date. The 2018 restricted stock awards and restricted stock unit
awards vest upon both the passage of time as well as meeting certain performance criteria. Restricted stock
awards and restricted stock unit awards are expensed under the straight-line method over the vesting
period.

During 2017, the Company granted 1,325,396 restricted shares of its Common Stock to executives and
directors of the Company and 1,128,750 restricted stock units to employees and non-employees of the
Company. The fair value of the restricted stock awards issued during 2017 of $3.6 million and the fair value
of the restricted stock unit awards issued during 2017 of $4.7 million were estimated on the grant date using
the Company’s stock price as of the grant date. The 2017 restricted stock awards and restricted stock unit
awards vest upon both the passage of time as well as meeting certain performance criteria. Restricted stock
awards and restricted stock unit awards are expensed under the straight-line method over the vesting
period.

Restricted Stock Issuance Agreements to Chief Executive Officer and Executive Chair, Strategic Development
In December 2017, the Company modified the vesting schedule on the 1.9 million share grant made to its
Chief Executive Officer and Executive Chair, Strategic Development in December 2013, and the 3.9 million
share inducement grant made to its Executive Chair, Strategic Development in February 2014. The impact
of the 2017 modification, which extends the vesting to December 2022, was $2.5 million, which will be
amortized over the remaining life of the award.

The following table summarizes Fortress restricted stock awards and restricted stock units activities,
excluding activities related to Fortress subsidiaries:

Unvested balance at December 31, 2016 . . . . . . . . . . . . . . . . . . . .
Restricted stock granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units granted . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units forfeited . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units vested . . . . . . . . . . . . . . . . . . . . . . . . . .

Unvested balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . .
Restricted stock granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units granted . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units forfeited . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units vested . . . . . . . . . . . . . . . . . . . . . . . . . .

Number of
shares

10,094,095
1,325,396
(213,333)
1,128,750
(15,000)
(445,874)

11,874,034
1,721,802
(213,334)
490,000
(474,478)
(752,042)

Unvested balance at December 31, 2018 . . . . . . . . . . . . . . . . . . . .

12,645,982

Weighted
average
grant price

$2.49
2.70
2.75
4.17
2.98
3.50

$2.63
3.81
2.76
3.64
3.94
3.56

$2.72

The total fair value of restricted stock units and awards that vested during the years ended December 31,
2018 and 2017 was $3.3 million and $2.1 million, respectively. As of December 31, 2018, the Company had
unrecognized stock-based compensation expense related to all unvested restricted stock and restricted stock
unit awards of $6.1 million and $3.0 million, respectively, which is expected to be recognized over the
remaining weighted-average vesting period of 4.9 years and 2.5 years, respectively. This amount does not
include 294,583 restricted stock units as of December 31, 2018 which are performance-based and vest upon
achievement of certain corporate milestones. Stock-based compensation for these awards will be measured
and recorded if and when it is probable that the milestone will be achieved.

F-58

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

Deferred Compensation Plan

On March 12, 2015, the Company’s Compensation Committee approved the Deferred Compensation Plan
allowing all non-employee directors the opportunity to defer all or a portion of their fees or compensation,
including restricted stock and restricted stock units. During the year ended December 31, 2018 and 2017,
certain non-employee directors elected to defer an aggregate of 230,000 and 230,000 restricted stock awards,
respectively, under this plan.

Employee Stock Purchase Plan

Eligible employees can purchase the Company’s Common Stock at the end of a predetermined offering
period at 85% of the lower of the fair market value at the beginning or end of the offering period. The
ESPP is compensatory and results in stock-based compensation expense.

On June 1, 2018, the Company issued 43,707 shares of Common Stock under the ESPP. The shares were
issued at $2.93 per share, which represents 85% of the closing price of $3.45 of the Common Stock on
May 31, 2018. On December 31, 2018, the Company issued 67,148 shares of Common Stock under the
ESPP. The shares were issued at $1.04 per share, which represents 85% of the closing price of $1.22 of the
Common Stock on November 30, 2018.

On June 1, 2017, the Company issued 22,076 shares of Common Stock under the ESPP. The shares were
issued at $1.90 per share, which represents 85% of the closing price of $2.24 of the Common Stock on
December 1, 2016. On December 1, 2017, the Company issued 45,657 shares of Common Stock under the
ESPP. The shares were issued at $3.26 per share, which represents 85% of the closing price of $3.83 of the
Common Stock on June 1, 2017.

As of December 31, 2018, 356,507 shares have been purchased and 643,493 shares are available for future
sale under the Company’s ESPP. The Company recognized share-based compensation expense of
$0.2 million and $0.2 million for the years ended December 31, 2018 and 2017, respectively.

Warrants

The following table summarizes Fortress warrant activities, excluding activities related to partner
companies:

Outstanding as of December 31, 2016 . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding as of December 31, 2017 . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding as of December 31, 2018 . . . . . . . . . . . . .
Exercisable as of December 31, 2018 . . . . . . . . . . . . . .

Number of
shares
2,263,453
816,180
(305,444)
2,774,189
(20,000)
2,754,189
849,189

Weighted
average
exercise price
$3.62
3.84
7.07
$3.30
5.72
$3.28
$3.92

Total
weighted
average
intrinsic
value
79,800
260,380
—
$2,204,530
—
—
—

$
$

Weighted
average
remaining
contractual
life (years)
4.74
4.87
—
4.47
—
3.49
3.13

All stock-based expense in connection with these warrants has been recognized prior to January 1, 2017.

F-59

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

Long-Term Incentive Program (“LTIP”)

On July 15, 2015, the stockholders approved the LTIP for the Company’s Chairman, President and Chief
Executive Officer, Dr. Rosenwald, and Executive Vice Chairman, Strategic Development, Mr. Weiss. The
LTIP consists of a program to grant equity interests in the Company and in the Company’s subsidiaries,
and a performance-based bonus program that is designed to result in performance-based compensation that
is deductible without limit under Section 162(m) of the Internal Revenue Code of 1986, as amended.

Beginning in 2017, LTIP equity interest grants were made in the form of stock. During the year ended
December 31, 2017, Mr. Weiss and Dr. Rosenwald received, for their services to the Company, stock awards
of 500,000 shares representing 5% of the ownership in the following entities:

2017
Aevitas . . . . . . . . . . . . . . . . . . . . . . .
Caelum . . . . . . . . . . . . . . . . . . . . . . .
Cyprium . . . . . . . . . . . . . . . . . . . . . .
Acquisition Corp. III . . . . . . . . . . . . .
Acquisition Corp. IV . . . . . . . . . . . . .
Tamid . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition Corp. VI . . . . . . . . . . . . .
Acquisition Corp. VII . . . . . . . . . . . . .
Acquisition Corp. VIII . . . . . . . . . . . .

Stock
Shares
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000

Risk Free
Rate
1.92
1.93
1.92
1.92
1.92
1.92
1.92
1.92
1.92

Volatility
79.8%
70.0%
84.3%
83.9%
83.9%
83.9%
83.9%
83.9%
83.9%

Discount for
Lack of
Marketability
42.6%
49.5%
44.2%
44.0%
44.0%
44.0%
44.0%
44.0%
44.0%

Exercise
price
$0.020
$0.028
$0.004
$0.007
$0.007
$0.007
$0.007
$0.007
$0.007

Fair Value
$20,000
$28,000
$ 4,000
$ 7,000
$ 7,000
$ 7,000
$ 7,000
$ 7,000
$ 7,000

For the year ended December 31, 2017, the Company recorded expense of approximately $0.1 million
related to these grants on the Consolidated Statements of Operations. These grants are expensed by the
Company at the time of the grant, as they are immediately vested.

On January 1, 2018 and 2017, the Compensation Committee granted 586,429 and 552,698 shares each to
Dr. Rosenwald and Mr. Weiss, respectively. These equity grants, made in accordance with the LTIP,
represent 1% of total outstanding shares of the Company as of the dates of such grants and were granted in
recognition of their performance in 2017 and 2016. The shares are subject to repurchase by the Company
until both of the following conditions are met: (i) the Company’s market capitalization increases by a
minimum of $100.0 million, and (ii) the employee is either in the service of the Company as an employee or
as a Board member (or both) on the tenth anniversary of the LTIP, or the eligible employee has had an
involuntary separation from service (as defined in the LTIP). The Company’s repurchase option on such
shares will also lapse upon the occurrence of a corporate transaction (as defined in the LTIP) if the eligible
employee is in service on the date of the corporate transaction. The fair value of each grant on the grant
date was approximately $2.3 million for the 2018 grant and $1.5 million for the 2017 grant. For the year
ended December 31, 2018 and 2017, the Company recorded expense of approximately $1.3 million and
$0.6 million, respectively related to these grants on the Consolidated Statements of Operations.

For their service in 2017, Dr. Rosenwald and Mr. Weiss received bonuses of $500,000 each, paid in cash
during the quarter ended June 30, 2018 (the “LTIP Annual Cash Bonus”). Dr. Rosenwald and Mr. Weiss
waived their right to the LTIP Annual Cash Bonus. The Company treated this transaction as a capital
contribution, which is reflected on the Consolidated Statement of Changes in Stockholders’ Equity for the
year ended December 31, 2018. In lieu of the LTIP Annual Cash Bonus, on July 3, 2018 the Company’s
Board granted Dr. Rosenwald and Mr. Weiss each a restricted stock award for the number of shares of the
Company’s common stock with a fair market value equal to the LTIP Annual Cash Bonus, measured at the
date of such consent; such number of shares as calculated at the $3.04 closing trading price of the
Company’s common stock, equal to 164,473 shares each. The fair value of each grant on the grant date was
approximately $0.5 million. For the year ended December 31, 2018, the Company recorded expense of
approximately $0.1 million related to these grants on the Consolidated Statements of Operations.

F-60

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

Capital Raise

Avenue Therapeutics, Inc.

On June 26, 2017, Avenue completed an IPO of its common stock. In connection with the IPO, Avenue
issued 6,325,000 shares of its common stock,
inclusive of 825,000 shares subject to an underwriter
over-allotment. The shares were issued at $6.00 per share, resulting in net proceeds of approximately
$34.2 million after deducting underwriting discounts, and other offering costs. NSC acted as co-manager in
this offering and earned commissions and fees of approximately $2.3 million.

In conjunction with the closing of the IPO, Avenue issued warrants in connection with its NSC Debt and its
Convertible Notes.

Avenue issued to National warrants for 125,000 common shares at par with a fair value of $0.8 million,
relating to its aggregate gross proceeds from its third-party offerings exceeding five times the value of the
debt. Upon the issuance of the warrant, Fortress was removed as the guarantor on the note.

Checkpoint Therapeutics, Inc.

In November 2017, the Checkpoint filed a shelf registration statement on Form S-3 (the “S-3”), which was
declared effective in December 2017. Under the S-3, Checkpoint may sell up to a total of $100 million of its
securities. In connection with the S-3, Checkpoint entered into an At-the-Market Issuance Sales Agreement
(the “Checkpoint ATM”) with Cantor Fitzgerald & Co., Ladenburg Thalmann & Co. Inc. and H.C.
Wainwright & Co., LLC (each a “Agent” and collectively, the “Agents”), relating to the sale of shares of
common stock. Under the Checkpoint ATM, Checkpoint pays the Agents a commission rate of up to 3.0%
of the gross proceeds from the sale of any shares of common stock. During the year ended December 31,
2018, Checkpoint sold a total of 1,841,774 shares of common stock under the Checkpoint ATM for
aggregate total gross proceeds of approximately $8.0 million at an average selling price of $4.33 per share,
resulting in net proceeds of approximately $7.7 million after deducting commissions and other transactions
costs.

In March 2018, Checkpoint completed an underwritten public offering, whereby it sold 5,290,000 shares of
its common stock at a price of $4.35 per share for gross proceeds of approximately $23.0 million. Total net
proceeds from the offering were approximately $20.8 million, net of underwriting discounts and offering
including approximately $1.8 million to National Securities
expenses of approximately $2.2 million,
Corporation, a subsidiary of National.

Mustang Bio, Inc.

In 2017, Mustang raised gross proceeds of $56.0 million, before expenses, in a private placement of shares
and warrants for which OPN Capital Markets was the placement agent and received a fee of $5.6 million
(recorded as contra-equity) or 10% of the gross proceeds. The financing involved the sale of units, each
consisting of 10,000 shares of common stock and a warrant exercisable for 2,500 shares of common stock
at an exercise price of $8.50 per share, for a total price of $65,000 per unit. The warrants have a five-year
term and are only exercisable for cash. Mustang issued 8.6 million unregistered shares of common stock,
excluding founder shares, and 2.2 million warrants in connection with this transaction. In addition, the
placement agent received 861,077 warrants or 10% of the shares issued.

As of December 31, 2018, the Company determined that the warrants still did not meet the definition of a
derivative and continued to qualify for equity recognition.

At Market Offering

On August 17, 2016, the Company entered into an Amended and Restated At Market Issuance Sales
Agreement, or Sales Agreement, with MLV & Co. LLC, or MLV, and FBR Capital Markets & Co., or FBR
(“ATM”). On August 18, 2016, the Company filed a Registration Statement on Form S-3, which became

F-61

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

effective on December 1, 2016 and permits the Company to issue and sell shares of its common stock
having an aggregate offering price of up to $53.0 million from time to time through MLV and FBR, as sales
agents under the Sales Agreement. The Sales Agreement terminates on August 17, 2019.

Pursuant to the terms of the ATM, for the year ended December 31, 2018, the Company issued 2,914,410
shares of common stock at an average price of $2.50 per share for gross proceeds of $7.3 million. In
connection with these sales, the Company paid aggregate fees of approximately $0.3 million. No shares were
issued under the ATM in 2017.

Perpetual Preferred Offering

In November 2017, the Company raised gross proceeds of $25.0 million in an underwritten public offering
of one million shares of 9.375% Series A Cumulative Redeemable Perpetual Preferred Stock (“Series A
Preferred Stock”) at a price of $25.00 per share. Net proceeds totaled approximately $22.2 million in the
Series A Preferred Stock offering after the payment of underwriter fees of approximately $2.7 million, of
which $2.1 million was paid to NSC, one of several bookrunners for the offering and $0.1 million of other
fees.

14. Commitments and Contingencies

Operating Lease Obligations

In October 2015, the Company entered into a 5-year lease for approximately 6,100 square feet of office
space in Waltham, MA at an average annual rent of approximately $0.2 million. The Company took
occupancy of this space in January 2016. For the twelve months ended December 31, 2018 and 2017, the
Company recorded $0.2 million and 0.2 million, respectively of rent expense related to this facility.

On October 3, 2014, the Company entered into a 15-year lease for office space at 2 Gansevoort Street New
York, NY 10014, at an average annual rent of $2.5 million. The Company took possession of this space in
December 2015, and it became the Company’s principal executive office upon occupancy in the first half of
2016. Also, on October 3, 2014, the Company entered into Desk Share Agreements with each of OPPM
and TGTX, to occupy 10% and 45%, respectively, of the New York, NY office space that requires them to
pay their share of the average annual rent of $0.3 million and $1.1 million, respectively. These initial rent
allocations will be adjusted periodically for each party based upon actual percentage of the office space
occupied. At December 31, 2018, the office space occupied by OPPM and TGTX is 9% and 46%.
Additionally, the Company has reserved the right to execute additional desk share agreements with other
third parties and those arrangements will also affect the cost of the lease actually borne by the Company.
The lease was executed to further the business strategy, which includes forming additional subsidiaries and/
or affiliate companies. Mr. Weiss is Executive Chairman, Chief Executive Officer, President and a
stockholder of TGTX. The lease is subject to early termination by the Company, or in circumstances
including events of default, the landlord, and includes a five-year extension option in our favor. For the
twelve months ended December 31, 2018 and 2017, the Company recorded $0.9 million and $1.0 million,
respectively of rent expense related to this facility.

In December 2012, the Company assumed a lease from TSO Laboratories, Inc., a wholly owned subsidiary
of Ovamed GmbH, for approximately 8,700 square feet of space in Woburn, MA for the purpose of
establishing a manufacturing facility for TSO. The term of the lease ended February 28, 2018. The annual
rent payment was approximately $0.1 million. In July 2017, the Company entered into an agreement with
the landlord of this facility, whereby the Company returned the facility to the landlord.

F-62

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

Journey

In June 2017, Journey extended its lease for one year for 2,295 square feet of office space in Scottsdale, AZ,
at an annual rate of approximately $55,000. Journey took occupancy of this space in November 2014. In
August 2018, Journey amended their lease for two years and relocated to a 3,681 square feet of office space
in the same location in Scottsdale, AZ at an annual rate of approximately $94,000. The term of this
amended lease commenced on December 1, 2018 and will expire on November 30, 2020.

For the twelve months ended December 31, 2018 and 2017, the Company recorded $0.1 million and
$0.1 million, respectively of rent expense related to this facility.

Mustang

On October 27, 2017, Mustang entered into a lease agreement to lease a 27,043 sf cell processing facility,
located at 377 Plantation Street in Worcester, MA, through November 2026, subject to additional
extensions at Mustang’s option. Base rent, net of abatements of $0.6 million over the lease term, totals
approximately $3.6 million, on a triple-net basis. Mustang completed improvements to the facility of
approximately $3.5 million.

The terms of the lease also require that Mustang post an initial security deposit of $0.8 million, in the form
of $0.5 million letter of credit and $0.3 million in cash, which shall increase to $1.3 million ($1.0 million
letter of credit, $0.3 million in cash) when the facility is fully occupied by Mustang. After the fifth lease
year, the letter of credit obligation is subject to reduction.

The Facility became operational for the production of gene therapies and personalized CAR T therapies in
2018.

For the twelve months ended December 31, 2018 and 2017 Mustang recorded $0.4 million and $0.1 million
of rent expense.

Total future minimum lease payments under all leases are:

($ in thousands)

2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Beyond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 3,070
3,289
3,084
3,084
3,137
23,466

Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$39,130

The Company recognizes rent expense on a straight-line basis over the non-cancellable lease term. Rent
expense for the years ended December 31, 2018 and 2017 was $1.7 million and $1.2 million, respectively.

Indemnification

In accordance with its certificate of incorporation, bylaws and indemnification agreements, the Company
has indemnification obligations to its officers and directors for certain events or occurrences, subject to
certain limits, while they are serving at the Company’s request in such capacity. There have been no claims
to date, and the Company has director and officer insurance to address such claims. Pursuant to agreements
with clinical trial sites, the Company provides indemnification to such sites in certain conditions.

F-63

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

Legal Proceedings

Fortress Biotech, Inc.

In the ordinary course of business, the Company and its subsidiaries may be subject to both insured and
uninsured litigation. Suits and claims may be brought against the Company by customers, suppliers,
partners and/or third parties (including tort claims for personal injury arising from clinical trials of the
Company’s product candidates and property damage) alleging deficiencies in performance, breach of
contract, etc., and seeking resulting alleged damages.

Dr. Falk Pharma, GmbH v. Fortress Biotech, Inc.
(Frankfurt am Main Regional Court, Ref.
No. 3-06 0 28/16). Dr. Falk Pharma, GmbH (“Dr. Falk Pharma”) and Fortress were among the parties to
that certain Collaboration Agreement dated March 20, 2012, whereby they agreed to collaborate to develop
a product for treatment of Crohn’s disease. A dispute arose between Dr. Falk Pharma and Fortress with
respect to their relative rights and obligations under the Collaboration Agreement; specifically, Dr. Falk
Pharma contended that it had fulfilled its contractual obligations to Fortress and is entitled to the final
milestone payment due under the Collaboration Agreement — EUR 2.5 million. Fortress contended that
no such payment is due because a condition of the EUR 2.5 million payment was the delivery of a Clinical
Study Report that addressed the primary and secondary objectives of a Phase II trial, and Fortress
contended that Dr. Falk Pharma failed to deliver such a Clinical Study Report. Dr. Falk Pharma filed a
lawsuit against Fortress in the above-referenced Court in Frankfurt, Germany to recover the EUR
2.5 million plus interest and attorneys’ fees, and Fortress filed an answer to the complaint, denying that it
had any liability to Dr. Falk Pharma. On July 27, 2017, Fortress received a judgment from the court in
Frankfurt awarding the full amount (EUR 2.5 million) plus interest to Dr. Falk Pharma. Fortress appealed
the decision to the Higher Regional Court of Frankfurt on August 28, 2017, and the initial response of
Dr. Falk Pharma to the appeal was filed on February 16, 2018. At an appellate hearing in the Higher
Regional Court on June 12, 2018, the court issued an oral ruling upholding the lower court’s judgment and
indicating that an impending written, enforceable judgment would do the same. On July 12, 2018, the
Higher Regional Court approved and recorded terms of settlement between Fortress and Dr. Falk Pharma
pursuant to which Fortress paid $3.3 million to Dr. Falk Pharma during the calendar year of 2018, and
approximately $39,500 to the court in mandated administrative fees. An additional $300,000 is due during
calendar year 2019.

At December 31, 2018 and 2017, the Company recorded a liability of approximately $0.3 million and
$3.0 million, representing the U.S. dollar equivalent of the EUR 2.5 million on the Consolidated Balance
Sheets.

Fortress and Mustang

On January 15, 2016, Dr. Winson Tang (“Tang”) filed a Complaint against the Company in the Superior
Court of the State of California, County of Los Angeles. Winson Tang v. Lindsay Rosenwald et al., Case
No. BC607346. As amended, the Complaint alleged a breach of contract by the Company and two officers,
Dr. Rosenwald and Mr. Weiss, and two claims against other Defendants,
including Mustang. On
November 3, 2017, Tang and Defendants entered into a Settlement Agreement regarding this matter.

In connection with the legal settlement, above, the Company delivered 200,000 Mustang common shares,
held by the Company, to Tang. During the year ended December 31, 2017, Mustang recorded this
transaction as a capital contribution from Fortress and a corresponding expense of approximately
$2.0 million based upon the closing share price of Mustang shares as of the date of the Settlement
Agreement. In addition to the share issuance Mustang paid, in November 2017, a $0.2 million cash
settlement to Tang. The total settlement of $2.2 million, was recorded in general and administrative
expenses on the Consolidated Statements of Operations.

F-64

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

15. Employee Benefit Plan

On January 1, 2008, the Company adopted a defined contribution 401(k) plan which allows employees to
contribute up to a percentage of their compensation, subject to IRS limitations and provides for a
discretionary Company match up to a maximum of 4% of employee compensation. For the years ended
December 31, 2018 and 2017, the Company paid a matching contribution of $0.2 million and $0.2 million,
respectively.

16. Related Party Transactions

Other Related Parties

The Company’s Chairman, President and Chief Executive Officer, individually and through certain trusts
over which he has voting and dispositive control, beneficially owned approximately 13.1% and 13.0% of the
Company’s issued and outstanding Common Stock as of December 31, 2018 and 2017, respectively. The
Company’s Executive Vice Chairman, Strategic Development individually owns approximately 15.2% and
15.2% of the Company’s issued and outstanding Common Stock at December 31, 2018 and 2017,
respectively.

For their service in 2017, the Company’s CEO and Executive Vice Chairman received bonuses of $500,000
each, paid in cash during the quarter ended June 30, 2018. The bonus recipients waived their right to a cash
bonus from the Company. The Company treated this transaction as a capital contribution, which is
reflected on the Consolidated Statement of Changes in Stockholders’ Equity for the year ended
December 31, 2018.

Shared Services Agreement with TGTX

In July 2015, TGTX and the Company entered into an arrangement to share the cost of certain research
is
and development employees. The Company’s Executive Vice Chairman, Strategic Development,
Executive Chairman and Interim Chief Executive Officer of TGTX. Under the terms of the Agreement,
TGTX will reimburse the Company for the salary and benefit costs associated with these employees based
upon actual hours worked on TGTX related projects. For the year ended December 31, 2018 and 2017, the
Company invoiced TGTX $1.3 million and $1.0 million respectively. The Company received payments of
$1.3 million and $0.9, respectively, for the years ended December 31, 2018 and 2017.

Desk Share Agreements with TGTX and OPPM

In September 2014, the Company entered into Desk Share Agreements with OPPM and TGTX to occupy
20% and 40% of the New York, NY office space that requires TGTX and OPPM to pay their share of the
average annual rent of $0.5 million and $1.1 million, respectively. These initial rent allocations will be
adjusted periodically for each party based upon actual percentage of
the office space occupied.
Additionally, the Company has reserved the right to execute desk share agreements with other third parties
and those arrangements will also affect the cost of the lease actually borne by the Company. The Desk
Share Agreement was amended in May 2016, adjusting the initial rent allocations to 45% for TGTX and
10% for OPPM.

Each initial Desk Share Agreement has a term of five years. The Company took possession of the
New York, NY office space in December 2015, commenced build out of the space shortly thereafter and
took occupancy of the space in April 2016. As of December 31, 2017, the Company paid $2.4 million in
rent under the Desk Space Agreements, and invoiced OPPM and TGTX approximately $135,000 and
$1.0 million, respectively, for their prorated share of the rent base. In addition, as of December 31, 2017 the
Company had incurred $163,000 in connection with the build out of the space and recorded a receivable of
$24,000 due from TGTX and $6,600 due from OPPM.

F-65

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

As of July 1, 2018, TGTX employees began to occupy desks in the Waltham, MA office under the Desk
Share Agreement. TGTX began to pay their share of the rent based on actual percentage of the office space
occupied on a month by month basis. As of December 31, 2018, the Company had paid approximately
$223,000 in rent for the Waltham, MA office, and invoiced TGTX approximately $47,000.

As of December 31, 2018, the Company had paid $2.7 million in rent under the Desk Share Agreements for
both the New York, NY office and the Waltham, MA office combined, and invoiced TGTX and OPPM
approximately $1.0 million and $217,000, respectively, for their prorated shares of the rents. In addition, for
the year ended December 31, 2018, the Company had incurred approximately $121,000 in connection with
the build out of the space and received the $54,000 due from TGTX and recorded a receivable of $12,000
due from OPPM. At December 31, 2018, the amount due from TGTX approximated $105,000 and the
amount due from OPPM approximated $229,000.

Checkpoint Collaborative Agreements with TGTX

Checkpoint has entered into various agreements with TGTX to develop and commercialize certain assets in
connection with its licenses, including a collaboration agreement for some of the Dana Farber licensed
antibodies, an option agreement and sponsored research agreement
for compounds licensed from
NeuPharma, and a sublicense agreement for the Jubilant family of patents. Checkpoint believes that by
partnering with TGTX to develop these compounds in therapeutic areas outside of its business focus, it
may substantially offset its preclinical costs and milestone costs related to the development and marketing
of these compounds in solid tumor indications.

Opus Credit Facility

On September 14, 2016, the Company and Opus Point Health Innovations Fund (“OPHIF”) entered into a
Credit Facility Agreement (the “Opus Credit Facility”). Fortress’s Chairman, President and Chief Executive
Officer (Lindsay A. Rosenwald) and Fortress’s Executive Vice President, Strategic Development (Michael
Weiss), are Co-Portfolio Managers and Partners of OPPM, an affiliate of OPHIF. As such, all of the
disinterested directors of Fortress’s board of directors approved the terms of the Opus Credit Facility and
related agreements.

On March 12, 2018, the Company and OPHIF amended and restated the Opus Credit Facility (the “A&R
Opus Credit Facility”). The A&R Opus Credit Facility extends the maturity date of the notes issued under
the Opus Credit Facility from September 14, 2018 by one year to September 14, 2019. The A&R Opus
Credit Facility also permits the Company to make portions of interest and principal repayments in the form
of shares of the Company’s common stock and/or in common stock of the Company’s publicly-traded
subsidiaries, subject to certain conditions. Fortress retains the ability to prepay the Notes at any time
without penalty. The notes payable under the A&R Opus Credit Facility continue to bear interest at 12%
per annum. For the years ended December 31, 2018 and 2017, the Company paid cash for interest expense
of $0.3 million and $1.1 million, respectively (see Note 9).

Checkpoint Public Offering of Common Stock

NSC, a subsidiary of National (of which the Company owns 32.1%, as of December 31, 2018), served as an
underwriter in connection with Checkpoint’s 2018 equity offering, which closed on March 12, 2018. As the
underwriter, NSC received a fee of approximately $1.8 million, or 8% on the gross proceeds raised of
$23.0 million.

2018 Venture Notes

For the year ended December 31, 2018, the Company raised approximately $21.7 million in promissory
notes. National Securities Corporation (“NSC”), a wholly-owned subsidiary of National, and a related
party as a result of the Company’s ownership of National, acted as the sole placement agent for the 2018
Venture Notes. The Company paid NSC a fee of $1.7 million during the year ended December 31, 2018, in

F-66

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

connection with the 2018 Venture Notes. At December 31, 2018, the fee, which was recorded as debt
discount on the Company’s Consolidated Balance Sheet and will be amortized over the life of the 2018
Venture Notes. In November 2018, the Company announced that it had an agreement to sell its majority
holding in National, the sale was completed in February of 2019, see Note 3.

2017 Subordinated Note Financing

On March 17, 2017, the Company and NSC, a subsidiary of National, (entered into placement agency
agreements with NAM Biotech Fund and NAM Special Situation Fund in connection with the sale of
subordinated promissory notes (see Note 9). Pursuant to the terms of the agreements, NSC received a
placement agent fee in cash of 10% of the debt raised and warrants equal to 10% of the aggregate principal
amount of debt raised divided by the closing share price of the Company’s common stock on the date of
closing.

For the year ended December 31, 2017, NSC earned a placement agent fee of $2.8 million and a Placement
Agent Warrant to purchase 716,180 shares of the Company’s common stock, all of which are outstanding,
with exercise prices ranging from $3.61 to $4.75. In November 2018, the Company announced that it had
an agreement to sell its majority holding in National, of which NSC is a wholly owned subsidiary, the sale
was completed in February of 2019, see Note 3.

Caelum Convertible Notes

On July 31, 2017 Caelum through NSC, a subsidiary of National, offered up to $10 million, convertible
promissory notes to accredited investors (as defined under the U.S. Federal securities laws). Caelum raised
$9.9 million in the offering, in three separate closings and paid a placement fee equal to NSC of 10% of the
proceeds of the sale or $1.0 million. Additionally NSC received warrants to purchase a number of shares
the Caelum’s Common Stock equal to 10% of the aggregate amount of shares underlying the Notes with a
per share exercise price equal to 110% of the per share conversion price of the Notes; provided, however,
that if no Note converts, the exercise price will be $75 million dollars divided by the total number of
fully-diluted shares of Common Stock outstanding immediately prior to exercise of the warrant, giving
effect to the assumed conversion of all options, warrants, and convertible securities of the Company, see
Note 9. In January 2019, as a result of the Caelum strategic financing these notes were converted pursuant
to the terms of the note agreement.

For the year ended December 31, 2017, NSC earned fees of approximately $1.0 million. No fees were earner
for the year ended December 31, 2018. In November 2018, the Company announced that it had an
agreement to sell its majority holding in National, of which NSC is a wholly owned subsidiary, the sale was
completed in February of 2019, see Note 3.

Avenue IPO

On June 26, 2017, Avenue completed an IPO in which NSC acted as co-manager and earned fees and
commissions of approximately $2.3 million that were deducted from the proceeds. In November 2018, the
Company announced that it had an agreement to sell its majority holding in National, of which NSC is a
wholly owned subsidiary, the sale was completed in February of 2019, see Note 3.

Founders Agreement and Management Services Agreement

The Company has entered into Founders Agreements with each of the Fortress subsidiaries listed in the
table below. Pursuant to each Founders Agreement, in exchange for the time and capital expended in the
formation of each partner company and the identification of specific assets the acquisition of which result
in the formation of a viable emerging growth life science company, the Company will loan each such
partner company an amount representing the up-front fee required to acquire assets. Each Founders
Agreement has a term of 15 years, which upon expiration automatically renews for successive one-year
periods unless terminated by the Company or a Change in Control (as defined in the Founders Agreement)

F-67

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

occurs. In connection with each Founders Agreement the Company receives 250,000 Class A Preferred
shares (except for that with Checkpoint, in which the Company holds Class A Common Stock). The
Class A Preferred Stock (Class A Common Stock with respect to Checkpoint) is identical to common stock
other than as to voting rights, conversion rights and the PIK Dividend right (as described below). Each
share of Class A Preferred Stock (Class A Common Stock with respect to Checkpoint) is entitled to vote
the number of votes that is equal to one and one-tenth (1.1) times a fraction, the numerator of which is the
sum of (A) the shares of outstanding common stock and (B) the whole shares of common stock into which
the shares of outstanding Class A Preferred Stock (Class A Common Stock with respect to Checkpoint) are
convertible and the denominator of which is the number of shares of outstanding Class A Preferred Stock
(Class A Common Stock with respect to Checkpoint). Thus, the Class A Preferred Stock (Class A Common
Stock with respect to Checkpoint) will at all times constitute a voting majority. Each share of Class A
Preferred Stock (Class A Common Stock with respect to Checkpoint) is convertible, at the holder’s option,
into one fully paid and nonassessable share of common stock of such partner company, subject to certain
adjustments. The holders of Class A Preferred Stock (and the Class A Common Stock with respect to
Checkpoint), as a class, are entitled receive on each effective date or “Trigger Date” (defined as the date that
the Company first acquired, whether by license or otherwise, ownership rights to a product) of each
agreement (each a “PIK Dividend Payment Date”) until the date all outstanding Class A Preferred Stock
(Class A Common Stock with respect to Checkpoint) is converted into common stock or redeemed (and the
purchase price is paid in full), pro rata per share dividends paid in additional fully paid and nonassessable
shares of common stock (“PIK Dividends”) such that the aggregate number of shares of common stock
issued pursuant to such PIK Dividend is equal to two and one-half percent (2.5%) of such partner
company’s fully-diluted outstanding capitalization on the date that is one (1) business day prior to any PIK
Dividend Payment Date. The Company has reached agreements with several of the partner companies to
change the PIK Dividend Interest Payment Date to January 1 of each year — a change that has not and
will not result in the issuance of any additional partner company common stock beyond that amount to
which the Company would otherwise be entitled absent such change(s). The Company owns 100% of the
Class A Preferred Stock (Class A Common Stock with respect to Checkpoint) of each partner company
that has a Founders Agreement with the Company.

As additional consideration under the Founders Agreement, each partner company with which the
Company has entered into a Founders Agreement will also: (i) pay an equity fee in shares of the common
stock of such partner company, payable within five (5) business days of the closing of any equity or debt
financing for each partner company or any of its respective subsidiaries that occurs after the effective date
of the Founders Agreement and ending on the date when the Company no longer has majority voting
control in such partner company’s voting equity, equal to two and one-half (2.5%) of the gross amount of
any such equity or debt financing; and (ii) pay a cash fee equal to four and one-half percent (4.5%) of such
partner company’s annual net sales, payable on an annual basis, within ninety (90) days of the end of each
calendar year. In the event of a Change in Control, each such partner company will pay a one-time change
in control fee equal to five (5x) times the product of (A) net sales for the twelve (12) months immediately
preceding the change in control and (B) four and one-half percent (4.5%).

F-68

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

The following table summarizes, by subsidiary, the effective date of the Founders Agreements and PIK
dividend or equity fee payable to the Company in accordance with the terms of the Founders Agreements,
Exchange Agreements and the subsidiaries’ certificates of incorporation.

Partner company

Effective Date(1)

Helocyte . . . . . . . . . . . . . . . . . . . March 20, 2015

Avenue . . . . . . . . . . . . . . . . . . . . . February 17, 2015

Mustang . . . . . . . . . . . . . . . . . . . March 13, 2015

Checkpoint . . . . . . . . . . . . . . . . . . March 17, 2015
Cellvation . . . . . . . . . . . . . . . . . . . October 31, 2016

Caelum . . . . . . . . . . . . . . . . . . . .

January 1, 2017

Cyprium . . . . . . . . . . . . . . . . . . . March 13, 2017

. . . . . . . . . . . . . . . . . . . .

Aevitas
Tamid . . . . . . . . . . . . . . . . . . . . . November 30, 2017(3)

July 28, 2017

PIK Dividend as a
% of fully diluted
outstanding
capitalization

2.5%
2.5%(4)
2.5%
0.0%(2)
2.5%

2.5%

2.5%
2.5%

Class of Stock Issued

Common Stock

Common Stock
Common Stock

Common Stock

Common Stock
Common Stock

Note 1: Represents the effective date of each subsidiary’s Founders Agreement. Each PIK dividend and
equity fee is payable on the annual anniversary of the effective date of the original Founders
Agreement.

Note 2:

Instead of a PIK dividend, Checkpoint pays the Company an annual equity fee in shares of
Checkpoint’s common stock equal
fully diluted outstanding
capitalization.

to 2.5% of Checkpoint’s

Note 3: Represents the Trigger Date.

Note 4: Pursuant to the terms of the agreement between Avenue and InvaGen Pharmaceuticals, Inc.

during the option period PIK dividends will not be paid nor accrued

Financing Fees

Pursuant to the Founders’ Agreement, Caelum, in connection with each Convertible Note Closing during
the three months ended September 30, 2017, issued to Fortress approximately 218,000 shares of its common
stock representing the 2.5% fee or approximately $0.2 million.

On June 26, 2017, pursuant to the Founders’ Agreement, Avenue, in connection with its IPO, issued to
Fortress approximately 158,000 shares or approximately $0.9 million of its common stock representing the
2.5% financing fee.

F-69

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

Equity Fees

The following table summarizes, by subsidiary, the PIK dividend or equity fee recorded by the Company in
accordance with the terms of the Founders Agreements, Exchange Agreements and the subsidiaries’
certificates of incorporation for the years ended December 31, 2018 and 2017 ($ in thousands):

Partner company

PIK Dividend Date

Aevitas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Avenue(3)
Caelum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

January 1

Cellvation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

January 1

Checkpoint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 17

Cyprium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

January 1

Helocyte . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mustang . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tamid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fortress

January 1
January 1
January 1

Year Ended
December 31,
2018(1)

Year Ended
December 31,
2017(2)

—

462

1,748

167
2,085
15
(4,491)

—

1,103

302

2,296

321
9,479
—
(13,510)

$ —

—

Note 1:

Includes 2019 PIK dividend accrued for the year ended December 31, 2018, as Type 1 subsequent
event

Note 2:

Includes 2018 PIK dividend accrued for the year ended December 31, 2017, as Type 1 subsequent
event

Note 3: Pursuant to the terms of the agreement between Avenue and InvaGen Pharmaceuticals, Inc.

during the option period PIK dividends will not be paid nor accrued.

Management Services Agreements

The Company has entered into Management Services Agreements (the “MSAs”) with certain of partner
companies. Pursuant to each MSA, the Company’s management and personnel provide advisory, consulting
and strategic services to each partner company that has entered into an MSA with Fortress for a period of
five (5) years. Such services may include, without limitation, (i) advice and assistance concerning any and all
aspects of each such partner company’s operations, clinical trials, financial planning and strategic
transactions and financings and (ii) conducting relations on behalf of each such partner company with
accountants, attorneys, financial advisors and other professionals (collectively, the “Services”). Each such
partner company is obligated to utilize clinical research services, medical education, communication and
marketing services and investor relations/public relation services of companies or individuals designated by
Fortress, provided those services are offered at market prices. However, such partner companies are not
obligated to take or act upon any advice rendered from Fortress, and the Company shall not be liable to any
such partner company for its actions or inactions based upon the Company’s advice. The Company and its
affiliates, including all members of Fortress’ Board of Directors, have been contractually exempted from
fiduciary duties to each such partner company relating to corporate opportunities.

F-70

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

The following table summarizes, by partner company, the effective date of the MSA and the annual
consulting fee payable by the subsidiary to the Company in quarterly installments ($ in thousands):

Fortress partner

Effective Date

Annual MSA Fee
(Income)/Expense

Helocyte . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 20, 2015
Avenue(2)
[Mustang . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 13, 2015

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 17, 2015

Checkpoint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 17, 2015

Cellvation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 31, 2016

Caelum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

January 1, 2017

Cyprium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 13, 2017

Aevitas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tamid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 30, 2017(1)
Fortress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

July 28, 2017

Consolidated (Income)/Expense . . . . . . . . . . . . . . . . . .

500
500

500

500
500

(4,500)

$ —

Note 1: Trigger Date

Note 2: Pursuant to the terms of the agreement between Avenue and InvaGen Pharmaceuticals, Inc.

during the option period fees under the MSA will not be due nor will they be accrued.

Fees and Stock Grants Received by Fortress

Fees recorded in connection with the Company’s agreements with its subsidiaries are eliminated in
consolidation. These include management services fees, issuance of common shares of partner companies
in connection with third party raises and annual stock dividend or issuances on the anniversary date of
respective Founders Agreements.

Chord Advisors, LLC

In May 2015, the Company entered into a full-service consulting agreement with Chord Advisors, LLC
(“Chord”) to provide advisory accounting services. Under the terms of the agreement, the Company pays
Chord $10,000 per month to provide technical accounting and financial reporting support. Either party
upon 30-days written notice can terminate the agreement. Mustang, Checkpoint and Avenue are billed at a
blended hourly rate, for services incurred. For the years ended December 31, 2018, and 2017, Mustang
incurred approximately $82,000 and $90,000, respectively, Checkpoint incurred approximately $50,000 and
$65,000, respectively, and Avenue incurred approximately $9,000 and $64,700, respectively, in hourly fees.

17. Income Taxes

Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and
(b) operating losses and tax credit carryforwards.

F-71

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

The components of the income tax provision (benefit) are as follows:

($ in thousands)

Current

Federal

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deferred

Federal

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

For the years ended
December 31,

2018

2017

$—

—

$—

$1,074

439

—

$1,513

The Company has incurred net operating losses since inception. The Company has not reflected any benefit
of such net operating loss carryforwards (“NOL”) in the accompanying consolidated financial statements
and has established a valuation allowance of $130.1 million against its net deferred tax assets. Deferred
income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income tax purposes, and
(b) operating losses and tax credit carryforwards.

The significant components of the Company’s deferred taxes consist of the following:

($ in thousands)

As of December 31,

2018

2017

Deferred tax assets:
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 93,823
12,552
Amortization of license fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
420
Amortization of in-process R&D . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,404
Stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,267
Accruals and reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,207
Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55
Startup costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
805
Unrealized gain/loss on investments . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,535
Startup costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 71,616
13,648
557
10,682
5,166
7,376
75
—
—

Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

133,068

109,120

Less: valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(132,114)

(101,645)

Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

954

7,475

Deferred tax liabilities:

Unrealized gain/loss on investment
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basis in subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . $

— $
—
(954)

(685
(3,321)
(3,469)

Total deferred tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

— $

—

F-72

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

A reconciliation of the statutory tax rates and the effective tax rates is as follows:

Percentage of pre-tax income:

U.S. federal statutory income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . .

State taxes, net of federal benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Non-deductible items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Provision to return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Stock based compensation shortfall . . . . . . . . . . . . . . . . . . . . . . . . . . .

Change in federal rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Change in state rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Intercompany elimination adjustments . . . . . . . . . . . . . . . . . . . . . . . . .
National Disposal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in subsidiary basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

For the Year Ended
December 31,

2018

2017

21%

—%

(1)%

—%

(3)%

—%
—%
—%
(25)%
1%
—%

—%

35%

(2)%

(1)%

(43)%

(3)%
—%
3%
(7)%
4%
—%

(2)%

The Company files a consolidated income tax return with subsidiaries for which the Company has an 80%
or greater ownership interest. subsidiaries for which the Company does not have an 80% or more ownership
are not included in the Company’s consolidated income tax group and file their own separate income tax
return. As a result, certain corporate entities included in these financial statements are not able to combine
or offset their taxable income or losses with other entities’ tax attributes.

On December 22, 2017, “H.R.1”, formerly known as the “Tax Cuts and Jobs Act”, was signed into law.
Among other items, H.R.1 reduces the federal corporate tax rate to 21% from the existing maximum rate of
35%, effective January 1, 2018. The Company performed an initial assessment and recorded a decrease to its
deferred tax assets and valuation allowance of $42.2 million, with a corresponding net adjustment to
deferred income tax expense of zero for the year ended December 31, 2017 in accordance with SEC Staff
Accounting Bulletin 118 (“SAB 118”). As required by SAB 118, the Company continued to reassess and
refine the effects of the Tax Act on its deferred tax amounts during 2018 as new information concerning
those deferred tax amounts that existed at December 31, 2017 becomes available to the Company. As of
December 31, 2018, the Company has completed the accounting for the income tax effects of the Tax Act
and recorded zero deferred income tax expense.

ASC 740 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of
all positive and negative evidence, it is more likely than not that some portion, or all, of the deferred tax
assets will not be realized. Realization of the deferred tax assets is substantially dependent on the
Company’s ability to generate sufficient taxable income within certain future periods. Management has
considered the Company’s history of cumulative tax and book losses incurred since inception, and the other
positive and negative evidence, and has concluded that it is more likely than not that the Company will not
realize the benefits of the net deferred tax assets as of December 31, 2017 and 2018. Accordingly, a full
valuation allowance has been established against the net deferred tax assets as of December 31, 2017 and
2018. The valuation allowance increased by a net $30.5 million during the current year.

The Company has incurred net operating losses (“NOLs”) since inception. At December 31, 2018, the
Company had federal NOLs of $348.0 million, which will begin to expire in the year 2020, state NOLs of

F-73

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

$308.0 million, which will begin to expire in 2022, and federal income tax credits of $10.2 million, which
will begin to expire in 2028. The utilization of the Company’s NOLs and tax credit carryovers are subject to
annual Internal Revenue Code Section 382 limitations (“382 Limitations”). Based on the analysis of the
NOLs and tax credit carryovers subject to the 382 Limitations, the Company has concluded that the 382
Limitations would not prevent the Company from utilizing all of its NOLs and tax credit carryovers before
expiration.

On November 14, 2018, the Company entered into a stock purchase agreement with B. Riley Financial, Inc.
(“B. Riley”) to sell approximately 7.0 million shares of the common stock of National, representing
approximately 56.1% of National’s outstanding common stock and the Company’s entire economic interest
in National. The first closing occurred on November 14, 2018 in which the Company sold approximately
3.0 million of its shares in NHLD and received $9.8 million in proceeds. The second closing occurred on
February 11, 2019 upon the receipt of FINRA approval of the sale in which the Company received
$13.1 million in proceeds for the sale of its remaining 4.0 million shares of NHLD to NHC and two other
minority holders and received. The Company has written off National’s deferred tax assets and the
corresponding allowance as of December 31, 2018.

As of December 31, 2018, the Company had no unrecognized tax benefits and does not anticipate any
significant change to the unrecognized tax benefit balance. The Company would classify interest and
penalties related to uncertain tax positions as income tax expense, if applicable. There was no interest
expense or penalties related to unrecognized tax benefits recorded through December 31, 2018. The NOLs
from tax years 2006 through 2018 remain open to examination (and adjustment) by the Internal Revenue
Service and state taxing authorities. In addition, federal tax years ending December 31, 2015, 2016, and
2017 are open for assessment of federal taxes. The expiration of the statute of limitations related to the
various state income and franchise tax returns varies by state.

18. Segment Information

The Company operates in two reportable segments, Dermatology Product Sales and Pharmaceutical and
Biotechnology Product Development. The accounting policies of the Company’s segments are the same as
those described in Note 2. Prior to the sale of National the Company operated in three segments, one which
included National, see Note 3. The following tables summarize, for the periods indicated, operating results,
from continued operations by reportable segment ($ in thousands):

Year Ended December 31, 2018

Net Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Direct cost of goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and marketing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Dermatology
Products
Sales

$ 23,376
(6,125)
(11,639)
—
(1,778)
—

Pharmaceutical
and
Biotechnology
Product
Development

3,506
—
—
(87,383)
(39,954)
(10,803)

Consolidated

$ 26,882
(6,125)
(11,639)
(87,383)
(41,732)
(10,803)

Segment gain (loss) from continuing operations . . . . . . . . . . . . .

$ 3,734

$(134,534)

$(130,800)

Segment assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 10,401

$ 130,592

$ 140,993

F-74

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

Year Ended December 31, 2017

Dermatology
Products
Sales

Pharmaceutical
and
Biotechnology
Product
Development

Consolidated

Net Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 15,520

1,725

$ 17,245

Direct cost of goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3,658)

Sales and marketing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(10,410)

Research and development

. . . . . . . . . . . . . . . . . . . . . . . . . . .

—

General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1,140)

Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Segment gain (loss) from operations . . . . . . . . . . . . . . . . . . . . .

—

312

—

(52,486)

(39,347)

(7,717)

(3,658)

(10,410)

(52,486)

(40,487)

(7,717)

$ (97,825)

$ (97,513)

Segment assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 9,644

$161,242

$170,886

Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

75,064

$245,950

19. Revenues from Contracts and Significant Customers

On January 1, 2018, the Company adopted Topic 606 applying the modified retrospective method to all
contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after
January 1, 2018 were presented under Topic 606, while prior period amounts were not adjusted and
reported under the accounting standards in effect for the prior periods.

Impact to Journey Medical Product Sales

Topic 606 does not generally change the practice under which the Company recognizes product revenue
from sales of Targadox®, Exelderm®, Luxamend® and Ceracade®. The Company’s performance obligation
to deliver products is satisfied at the point in time that the goods are delivered to the customer, which is
when the customer obtains title to and has the risks and rewards of ownership of the products.

The Company’s contracts include variable consideration in the form of refunds for rights of return, price
protection, and consideration payable to the customer. As such, accounts receivable are net of an allowance
for estimated product returns of $3.1 million and $1.3 million, at December 31, 2018 and December 31,
2017, respectively, and the Company recorded expense related to the returns reserve of $2.4 million and
$1.2 million for the years ended December 31, 2018 and 2017, respectively. The Company estimates variable
consideration using a percentage of sales approach. Under this method, the transaction price is constrained
for the potential future returns and consideration payable to the customer because it is not probable that a
significant reversal in the amount of cumulative revenue recognized will not occur.

Because the Company’s agreements for sales of product to its distributors can be cancelled early, prior to
the termination date, they are deemed to have an expected duration of one year or less, and as such, the
Company has elected the practical expedient in ASC 606-10-50-14(a) to not disclose information about its
remaining performance obligations.

Checkpoint

Impact to Checkpoint’s Collaboration and License Agreement Revenues

Collaboration Agreement with TGTX related to Dana-Farber License

In connection with Checkpoint’s license agreement with Dana-Farber, Checkpoint entered into a
collaboration agreement with TGTX, a related party, to develop and commercialize the anti-PD-Ll and
anti-GITR antibody research programs in the field of hematological malignancies, while the Company
retains the right to develop and commercialize these antibodies in the field of solid tumors. Michael Weiss,

F-75

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

Chairman of the Board of Directors of Checkpoint and Fortress’ Executive Vice Chairman, Strategic
Development, is also the Executive Chairman, President and Chief Executive Officer and a stockholder of
TGTX. Under the terms of the collaboration agreement, TGTX paid Checkpoint $0.5 million, representing
an upfront licensing fee, and the Checkpoint is eligible to receive substantive potential milestone payments
up to an aggregate of approximately $21.5 million for each product upon TGTX’s successful achievement of
certain clinical development, regulatory and first commercial sale milestones. This is comprised of up to
approximately $7.0 million upon TGTX’s successful completion of clinical development milestones, and up
to approximately $14.5 million upon first commercial sales in specified territories. In addition, Checkpoint
is eligible to receive up to an aggregate of $60.0 million upon TGTX’s successful achievement of certain
sales milestones based on aggregate net sales, in addition to royalty payments based on a tiered high single
digit percentage of net sales. Following the second anniversary of the effective date of the agreement,
Checkpoint receives an annual license maintenance fee, which is creditable against milestone payments or
royalties due to Checkpoint. TGTX also pays Checkpoint for its out-of-pocket costs of material used by
TGTX for their development activities. For the year ended December 31, 2018 and 2017, the Company
recognized approximately $3.0 million and $0.1 million, respectively,
in revenue from Checkpoint’s
collaboration agreement with TGTX in the Consolidated Statements of Operations.

Sublicense Agreement with TGTX related to Jubilant License

In connection with Checkpoint’s license agreement with Jubilant, Checkpoint entered into a sublicense
agreement with TGTX, a related party, to develop and commercialize the compounds licensed in the field of
hematological malignancies, while the Company retains the right to develop and commercialize these
compounds in the field of solid tumors. Michael Weiss, Chairman of the Board of Directors of Checkpoint
and Fortress’ Executive Vice Chairman, Strategic Development, is also the Executive Chairman, President
and Chief Executive Officer and a stockholder of TGTX. Under the terms of the Sublicense Agreement,
TGTX paid Checkpoint $1.0 million, representing an upfront licensing fee, and Checkpoint is eligible to
receive substantive potential milestone payments up to an aggregate of approximately $87.2 million upon
TGTX’s successful achievement of clinical development and regulatory milestones. This is comprised of up
three clinical development
to approximately $25.5 million upon TGTX’s successful completion of
milestones for two licensed products, and up to approximately $61.7 million upon the achievement of five
regulatory approvals and first commercial sales in specified territories for two licensed products. In
addition, Checkpoint is eligible to receive potential milestone payments up to an aggregate of $89.0 million
upon TGTX’s successful achievement of certain sales milestones based on aggregate net sales by TGTX, for
two licensed products, in addition to royalty payments based on a mid-single digit percentage of net sales by
TGTX. TGTX also pays Checkpoint 50% of IND enabling costs and patent expenses. For the year ended
December 31, 2018 and 2017, Checkpoint recognized approximately $0.4 million and $1.0 million,
respectively, in revenue related to the sublicense agreement in the consolidated statements of operations.

Sponsored Research Collaboration with NeuPharma, Inc. and TGTX

In connection with Checkpoint’s license agreement with NeuPharma, Inc. (“NeuPharma”) Checkpoint
entered into a Sponsored Research Agreement with NeuPharma for certain research and development
activities. Effective January 11, 2016, TGTX agreed to assume all costs associated with this Sponsored
Research Agreement and paid Checkpoint for all amounts previously paid. This assumption of costs by
TGTX survives any termination or expiration of the option agreement. For the year ended December 31,
2018 and 2017, the Company recognized approximately $35,000 and $0.6 million, respectively, in revenue in
connection with the Sponsored Research Agreement in the consolidated statements of operations.

The collaborations described above with TGTX each contain single material performance obligations under
intellectual property. Checkpoint’s
Topic 606, which is the granting of a license that is functional
performance obligation was satisfied at the point in time when the customer had the ability to use and
benefit from the right to use the intellectual property.

F-76

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

The milestone payments are based on successful achievement of clinical development, regulatory, and sales
milestones. Because these payments are contingent on the occurrence of a future event, they represent
variable consideration and are constrained and included in the transaction price only when it is probable
that a significant reversal in the amount of cumulative revenue recognized will not occur. The sales-based
royalty payments are recognized as revenue when the subsequent sales occur. Checkpoint also receives
variable consideration for certain research and development, out-of-pocket material costs and patent
maintenance related activities that are dependent upon Checkpoint’s actual expenditures under the
collaborations and are constrained and included in the transaction price only when it is probable that a
significant reversal in the amount of cumulative revenue recognized will not occur. Revenue is recognized
approximately when the amounts become due because it relates to an already satisfied performance
obligation. For the year ended December 31, 2018, Checkpoint did not receive any milestone or royalty
payments.

Disaggregation of Total Revenues

The Company has four marketed products, Targadox®, Exelderm®, Luxamend® and Ceracade®.
Substantially all of the Company’s product revenues are recorded in the U.S. Substantially all of the
Company’s collaboration revenues are from its collaboration with TGTX. Revenues by product and
collaborator are summarized as follows ($ in thousands):

Targadox® . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other branded revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total product revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TGTX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year ended December 31,

2018

$21,225
2,151

23,376
3,506

2017

$13,752
1,768

15,520
1,725

Total Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$26,882

$17,245

Contract Balances and Performance Obligations

The Company recognized collaboration and license agreement revenues of $3.6 million during the year
ended December 31, 2018, respectively.

Significant Customers

For the year ended December 31, 2018, two of the Company’s Dermatology Products customers each
accounted for more than 10.0% of its total gross product revenue, accounting for approximately 48.5% and
10.6%, respectively. The revenue from these customers is captured in the product revenue, net line item
within the Consolidated Statements of Operations.

For the year ended December 31, 2017, three of the Company’s Dermatology Products customers each
accounted for more than 10.0% of its total gross product revenue, accounting for approximately 26.0%,
18.5% and 13.1% respectively. The revenue from these customers is captured in the product revenue, net line
item within the Consolidated Statements of Operations.

At December 31, 2018, one of the Company’s Dermatology Products customers accounted for 79.1% of its
total accounts receivable balance.

At December 31, 2017, two of the Company’s Dermatology Products customers each accounted for more
than 10.0% of its total accounts receivable balance, at 20.8% and 16.5%, respectively.

Net Revenue from Pharmaceutical and Biotechnology Product Development represents collaboration
revenue from TGTX in connection with Checkpoint, which is classified as related party revenue.

F-77

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

20. Selected Quarterly Financial Data (Unaudited)

The following table contains quarterly financial information for fiscal years 2018 and 2017. The Company
believes that the following information reflects all normal recurring adjustments necessary for a fair
statement of the information for the periods presented.

($ in thousands, except per share data)

2018

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Total Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 5,903

$ 6,815

$ 5,173

$ 8,991

Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(40,075) $(32,213) $(33,378) $(41,213)

Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (1,969) $ (3,394) $ (3,030) $ (2,410)

Gain from disposal of National

. . . . . . . . . . . . . . . . . . . . .

— $

— $ 2,333

Gain (loss) from discontinued operations . . . . . . . . . . . . . . .

$ (2,077) $ (6,924) $ 2,648

$ (7,116)

Non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 17,200

$ 14,105

$ 11,949

$ 14,535

Net loss attributable to common stockholders . . . . . . . . . . .
Basic and diluted net loss per common share . . . . . . . . . . . .

2017
Total Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain (loss) from discontinued operations . . . . . . . . . . . . . . .
Non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss attributable to common stockholders . . . . . . . . . . .
Basic and diluted net loss per common share . . . . . . . . . . . .

21. Subsequent Events

Caelum

$(21,018) $(21,611) $(16,638) $(24,880)
(0.55)
$

(0.37) $

(0.49) $

(0.50) $

$ 2,520

$ 4,404

$ 2,778
$ 7,543
$(19,125) $(25,495) $(31,799) $(30,622)
$ (1,248) $ (1,674) $ (3,067) $ (1,728)
(184) $ (3,961) $ (1,212)
$ 3,034
$ 2,580
$ 15,605
$(11,982) $(17,365) $(27,116) $(10,413)
(0.25)
$

$
$ 5,584

(0.43) $

(0.67) $

(0.30) $

$ 9,191

On January 30, 2019, Caelum entered into a Development, Option and Stock Purchase Agreement (the
“DOSPA”) and related documents by and among Caelum, Alexion Therapeutics, Inc. (“Alexion”), Fortress
and the Caelum security holders’ parties thereto (including Fortress, the “Sellers”). As of the date hereof
and following the First Stage Purchase (as defined below), the Company owns approximately 40% of the
issued and outstanding capital stock of Caelum and effective the first quarter of 2019 pursuant to Fortress’
disposition of its preferred A shares common shares, the Company will cease to consolidate Caelum’s
results.

Development, Option and Stock Purchase Agreement

The DOSPA broadly comprises four transactional components: (i) an initial purchase by Alexion of a
number of shares of Caelum preferred stock equal to 19.9% of Caelum’s total capitalization, for
consideration of $30.0 million (the “First-Stage Purchase”), received by Caelum upon the execution of the
DOSPA; (ii) subsequent potential development funding payments due upon the satisfaction of certain
development milestones related to Caelum’s phase 2 clinical trial achieved by CAEL-101, Caelum’s lead
product candidate, that in the aggregate comprise $30.0 million; (iii) an Alexion option to purchase all of
the equity of the Sellers for $150M or $200M, depending on BLA (as defined below) approval timing (the
“Second-Stage Acquisition”); and (iv) in the event of exercise of the Option (as defined below), certain
contingent earn-out payments made to the Sellers upon the achievement of certain regulatory and
commercial milestones of up to $325 million.

F-78

FORTRESS BIOTECH, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

Avenue

On November 12, 2018, Avenue entered into a Stock Purchase and Merger Agreement (the “SPMA”) by
and among Avenue, InvaGen Pharmaceuticals Inc. (the “InvaGen”) and Madison Pharmaceuticals Inc., a
wholly-owned subsidiary of the Buyer, pursuant to which the Buyer intended to purchase, for $35.0 million,
common stock representing 33.3% of the fully diluted capitalization of Avenue (the “First Stage Closing”),
and subsequently acquire the remaining issued and outstanding capital stock of Avenue in a reverse
subsidiary merger transaction (the “Merger Transaction” and “Second Stage Closing”, respectively), for
aggregate consideration of $180.0 million (payable to all non-Buyer shareholders of Avenue), subject to
certain reductions. In the Merger Transaction, stockholders would also receive certain contingent value
rights which represent the right to receive certain contingent cash payments upon the achievement of
certain milestones relating to annual net sales and gross profit targets of IV Tramadol, pursuant to a
contingent value rights agreement to be entered into between Avenue and a rights agent upon the Second
Stage Closing. Pursuant to the terms and subject to the conditions set forth in the SPMA, the Buyer will, at
the Second Stage Closing, hold 100% of the issued and outstanding equity interests of Avenue.

On February 8, 2019, Avenue and InvaGen completed the First Stage Closing under the SPMA. In
connection with the First Stage Closing, Avenue received $35.0 million from the Buyer and the Buyer
received 5,833,333 shares of Avenue’s common stock, resulting in an ownership interest in Avenue by the
Buyer of 33.3% on a fully diluted basis.

National

On February 11, 2019, FBIO Acquisition a wholly-owned subsidiary of Fortress, completed the
previously-announced sale of its remaining holdings of National shares of common stock to NHC, a
wholly-owned subsidiary of B. Riley FBR, Inc., for $3.25 per share, pursuant to the terms of the stock
purchase agreement dated November 14, 2018 (the “Purchase Agreement”). Pursuant to the terms of the
NHC Agreement, NHC, along with two other minority purchaser designees, collectively purchased the
remaining National shares held by FBIO Acquisition for an aggregate price of approximately $13.1 million.

The Purchase Agreement contains normal and customary representations and warranties. As of this filing,
FBIO Acquisition and its parent, the Company, own no shares of National common stock.

F-79

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SIGNATURES

March 18, 2019

Fortress Biotech, Inc.

By:

/s/ Lindsay A. Rosenwald, M.D.
Lindsay A. Rosenwald, M.D.
Chairman, President and Chief Executive
Officer (Principal Executive Officer)

POWER OF ATTORNEY

We, the undersigned directors and/or executive officers of Fortress Biotech, Inc., hereby severally constitute
and appoint Lindsay A. Rosenwald, M.D., acting singly, his or her true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him or her in any and all capacities, to sign any
and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent full power and authority to do and perform each and every act and thing
necessary or appropriate to be done in connection therewith, as fully for all intents and purposes as he or
she might or could do in person, hereby approving, ratifying and confirming all that said attorney-in-fact
and agent, or his substitute, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature

Title

Date

/s/ Lindsay A. Rosenwald, M.D.
Lindsay A. Rosenwald, M.D.

Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)

March 18, 2019

/s/ Robyn M. Hunter
Robyn M. Hunter

/s/ Eric K. Rowinsky, M.D.
Eric K. Rowinsky, M.D.

/s/ Michael S. Weiss
Michael S. Weiss

/s/ Jimmie Harvey, Jr., M.D.
Jimmie Harvey, Jr., M.D.

/s/ Malcolm Hoenlein
Malcolm Hoenlein

/s/ Dov Klein
Dov Klein

/s/ J. Jay Lobell
J. Jay Lobell

Chief Financial Officer
(Principal Financial Officer)

March 18, 2019

Vice Chairman of the Board of Directors

March 18, 2019

Executive Vice Chairman, Strategic
Development and Director

March 18, 2019

Director

March 18, 2019

EXHIBIT 31.1

CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Lindsay A. Rosenwald, M.D. certify that:

(1)

I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2018 of
Fortress Biotech, Inc. (the “Registrant”);

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;

(3) Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects, the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this report;

(4) The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the Registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the Registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;

(c)

evaluated the effectiveness of
the Registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in the report any change in the Registrant’s internal control over financial reporting
that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the Registrant’s internal control over financial reporting; and

(5) The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit
committee of Registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the Registrant’s
ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a

significant role in the Registrant’s internal control over financial reporting.

Dated: March 18, 2019

By:

/s/ Lindsay A. Rosenwald, M.D.
Lindsay A. Rosenwald, M.D.
Chairman, President and Chief Executive Officer
(Principal Executive Officer)

CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Robyn M. Hunter certify that:

EXHIBIT 31.2

(1)

I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2018 of
Fortress Biotech, Inc. (the “Registrant”);

(c)

(b) any fraud, whether or not material, that involves management or other employees who have a

significant role in the Registrant’s internal control over financial reporting.

Dated: March 18, 2019

By:

/s/ Robyn M. Hunter
Robyn M. Hunter
Chief Financial Officer
(Principal Financial Officer)

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Fortress Biotech, Inc. (the “Company”) for the
period ended December 31, 2018, as filed with the Securities and Exchange Commission on the date hereof
(the “Report”), I, Lindsay A. Rosenwald, M.D., Chairman, President and Chief Executive Officer of the
Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities

Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company as of, and for, the periods presented in the
Report.

Dated: March 18, 2019

By:

/s/ Lindsay A. Rosenwald, M.D.
Lindsay A. Rosenwald, M.D.
Chairman, President and Chief Executive Officer
(Principal Executive Officer)

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Fortress Biotech, Inc. (the “Company”) for the
period ended December 31, 2018, as filed with the Securities and Exchange Commission on the date hereof
(the “Report”), I, Robyn M. Hunter, Chief Financial Officer of the Company, hereby certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my
knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities

Exchange Act of 1934; and

Dated: March 18, 2019

By:

/s/ Robyn M. Hunter
Robyn M. Hunter
Chief Financial Officer
(Principal Financial Officer)

Board of Directors

Lindsay A. Rosenwald, M.D., Chairman and Director
Chairman of the Board, President and Chief Executive Officer, Fortress Biotech, Inc.
Co-Portfolio Manager and Partner, Opus Point Partners Management, LLC

Michael S. Weiss, Vice Chairman and Director
Executive Vice Chairman, Strategic Development, Fortress Biotech, Inc.
Executive Chairman, President and Chief Executive Officer, TG Therapeutics, Inc.
Co-Portfolio Manager and Partner, Opus Point Partners Management, LLC

Eric K. Rowinsky, M.D., Director
Co-Vice Chairman of the Board, Fortress Biotech, Inc.
Executive Chairman and President, Rgenix, Inc.

Jimmie Harvey, Jr., M.D., Director
Founder, Alabama Oncology, L.L.C.

Malcolm Hoenlein, Director
Chief Executive Officer and Executive Vice Chairman, Conference of Presidents of Major American
Jewish Organizations

Dov Klein, CPA, Director
Partner, Marks Paneth LLP

J. Jay Lobell, Director
CEO and Co-Founder, GMF Capital LLC
Senior Consultant, Meridian Capital Group, LLC

Financial Reports

Copies of the Company’s Annual Report on Form 10-K as filed with the Securities and
Exchange Commission are available at www.fortressbiotech.com or on request, free of
charge, by calling (781) 652-4500 or emailing ir@fortressbiotech.com.

2 Gansevoort Street, 9th Floor
New York, New York 10014

Phone: (781) 652-4500
Fax: (781) 459-7788
www.fortressbiotech.com