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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. As used throughout this filing, (including in the risk factors described in Item 1A), the words “we”, “us” and “our” may refer to Fortress Biotech, Inc. individually, to one or more of its subsidiaries and/or partner companies, or to all such entities as a group, as dictated by context.

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated 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

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 through Fortress itself and through partner companies and subsidiaries. Fortress has a talented and experienced business development team, comprising scientists, doctors and finance professionals, who work in concert with our extensive network of key opinion leaders to identify and evaluate promising products and product candidates for potential acquisition by new or existing partner companies. We have executed arrangements with some of the world’s foremost universities, research institutes and pharmaceutical companies, including City of Hope National Medical Center, Fred Hutchinson Cancer Center, St. Jude Children’s Research Hospital (“St. Jude”), Dana-Farber Cancer Institute, Nationwide Children’s Hospital, Cincinnati Children’s Hospital Medical Center, Columbia University, the University of Pennsylvania, Mayo Foundation for Medical Education and Research (“Mayo Clinic”), AstraZeneca plc and Dr. Reddy’s Laboratories, Ltd.

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 financial 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, sales transactions, and public and private financings. To date, four partner companies are publicly-traded, and two have consummated strategic partnerships with industry leaders AstraZeneca plc as successor-in-interest to Alexion Pharmaceuticals, Inc. (“AstraZeneca”) and Sentynl Therapeutics, Inc. (“Sentynl”), respectively. On October 5, 2021, AstraZeneca purchased 100% of our partner Caelum for approximately $150 million upfront and up to $350 million in contingent regulatory and sales milestone payments.

Our subsidiary and partner companies that are pursuing development and/or commercialization of biopharmaceutical products and product candidates are Aevitas Therapeutics, Inc. (“Aevitas”), Avenue Therapeutics, Inc. (Nasdaq: ATXI, “Avenue”), Baergic Bio, Inc. (“Baergic”, a subsidiary of Avenue), Cellvation, Inc. (“Cellvation”), Checkpoint Therapeutics, Inc. (Nasdaq: CKPT, “Checkpoint”), Cyprium Therapeutics, Inc. (“Cyprium”), Helocyte, Inc. (“Helocyte”), Journey Medical Corporation (Nasdaq: DERM, “Journey” or “JMC”), Mustang Bio, Inc. (Nasdaq: MBIO, “Mustang”), Oncogenuity, Inc. (“Oncogenuity”) and Urica Therapeutics, Inc. (“Urica”, formerly UR-1 Therapeutics, Inc.).

Recent Events

Marketed Dermatology Products

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Late Stage Product Candidates

DFD-29 (modified early release oral minocycline for the treatment of rosacea)

CUTX-101 (Copper Histidinate injection for Menkes Disease)

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CAEL-101 (Light Chain Fibril-reactive Monoclonal Antibody for AL Amyloidosis)

Cosibelimab (Anti-PD-L1 mAb for CSCC and NSCLC)

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MB-107 and MB-207 (Ex vivo Lentiviral Therapies for X-linked Severe Combined Immunodeficiency (“XSCID”))

Triplex (Cytomegalovirus (“CMV”) vaccine)

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IV Tramadol

● IV Tramadol was sourced by Fortress and is currently in development at Avenue.

Early Stage Product Candidates

Dotinurad (Urate Transporter (URAT1) Inhibitor)

MB-101 (IL13Rα2-targeted CAR T cell therapy)

● MB-101 was sourced by Fortress and is currently in development at Mustang.

MB-105 (PSCA-targeted CAR T cell therapy)

● MB-105 was sourced by Fortress and is currently in development at Mustang.

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MB-102 (CD123 CAR T Cell Program for BPDCN, AML and high-risk MDS)

MB-106 (CD20-targeted CAR T cell therapy)

● MB-106 was sourced by Fortress and is currently in development at Mustang.

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MB-108 (HSV-1 Oncolytic Virus C134)

MB-109 (MB-101 (IL13Rα2-targeted CAR T Cell Therapy) + MB-108 oncolytic virus)

In vivo CAR T Platform Technology

MB-110 Ex Vivo Lentiviral Gene Therapy for RAG1 Severe Combined Immunodeficiency (“RAG1-SCID”)

BAER-101 (novel α2/3–subtype-selective GABA A positive allosteric modulator (“PAM”))

● BAER-101 was sourced by Fortress and is currently in development at Baergic.

General Corporate

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Subsequent Events

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Critical Accounting Policies and Use of Estimates

Our consolidated financial statements include certain amounts that are based on management’s best estimates and judgments. Our significant estimates include, but are not limited to, provisions for product returns, coupons, rebates, chargebacks, discounts, allowances and distribution fees paid by Journey to certain wholesalers, inventory realization, useful lives assigned to long-lived assets and amortizable intangible 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. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

While our significant accounting policies are described in the notes to our consolidated financial statements included elsewhere in this Report, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results.

Revenue Recognition

Our gross product revenues are subject to a variety of deductions, which generally are estimated and recorded in the same period that the revenues are recognized. Such variable consideration represents chargebacks, coupons, discounts, other sales allowances, governmental rebate programs and sales returns. These deductions represent estimates of the related obligations and, as such, knowledge and judgment are required when estimating the impact of these revenue deductions on gross sales for a reporting period. Historically, adjustments to these estimates to reflect actual results or updated expectations have not been material to our overall business. Coupons, however, can have a significant impact on year-over-year individual product revenue growth trends. If any of our ratios, factors, assessments, experiences, or judgments are not indicative or accurate estimates of our future experience, our results could be materially affected. The potential of our estimates to vary differs by program, product, type of customer and geographic location. In addition, estimates associated with U.S. Medicare and Medicaid governmental rebate programs are at risk for material adjustment because of the extensive time delay.

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.

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.

Level3: 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.

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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. Our 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 our 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.

Issuance of Debt and Equity

Fortress and its partner companies and subsidiaries issue complex financial instruments which include equity and/or debt features. We analyze 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.

We accounted for the Oaktree Note with detachable warrants in accordance with ASC 470, Debt. We assessed the classification of the common stock purchase warrants issued in connection with such transaction and determined that such instruments met the criteria for equity classification. The note proceeds were allocated between the Oaktree Note and the warrants on a relative fair value basis.

We recorded the related issue costs and value ascribed to the warrants as a debt discount of the Oaktree Note. The discount is being amortized utilizing the effective interest method over the term of the Oaktree Note, which is approximately 16.08% at December 31, 2022.

Accrued Research and Development Expense

We record accruals for estimated costs of research, preclinical, clinical and manufacturing development within accrued expenses which are significant components of research and development expenses. A substantial portion of our ongoing research and development activities is conducted by third-party service providers. We accrue the costs incurred under agreements with these third parties based on estimates of actual work completed in accordance with the respective agreements. We determine the estimated costs through discussions with internal personnel and external service providers as to the progress, or stage of completion or actual timeline (start-date and end-date) of the services and the agreed-upon fees to be paid for such services. Payments made to third parties under these arrangements in advance of the performance of the related services are recorded as prepaid expenses until the services are rendered.

If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust accrued expenses or prepaid expenses accordingly, which impact research and development expenses. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period.

Stock-Based Compensation

We expense stock-based compensation to employees and non-employees over the requisite service period based on the estimated grant-date fair value of the awards and forfeitures, which are recorded upon occurrence. We estimate the fair value of stock option grants using the Black-Scholes option pricing model. 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.

We will continue to use judgment in evaluating the expected volatility, expected terms and interest rates utilized for our stock-based compensation expense calculations on a prospective basis. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation expense could be materially different. We expect to continue to grant options and other stock-based awards in the future, and to the extent that we do, our stock-based compensation expense recognized in future periods will likely increase.

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Recent Accounting Pronouncements

See Note 2 to the Consolidated Financial Statements.

Smaller Reporting Company Status

We are a “smaller reporting company,” meaning that either (i) the market value of our shares held by non-affiliates is less than $250 million or (ii) the market value of our shares held by non-affiliates is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our shares held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our shares held by non-affiliates is less than $700 million. As a smaller reporting company, we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K , have reduced disclosure obligations regarding executive compensation, and smaller reporting companies are permitted to delay adoption of certain recent accounting pronouncements discussed in Note 2 to our consolidated financial statements located in “Part IV, Item 15., Exhibits and Financial Statement Schedules” in this Annual Report on Form 10-K.

Results of Operations

General

For the year ended December 31, 2022 we generated $75.7 million of net revenue, of which $71.0 million relates to the sale of Journey branded and generic products, $2.7 million relates to Journey’s milestone payment and royalties from Maruho Co., Ltd. (“Maruho”) related to the manufacturing and marketing approval and sales of Rapifort® Wipes 2.5% in Japan, $1.9 million relates to Cyprium’s collaboration revenue with Sentynl, and $0.2 million of revenue relates to Checkpoint’s collaborative agreements with TGTX, a related party. For the year ended December 31, 2021 we generated $68.8 million of net revenue, of which $63.1 million relates to the sale of Journey branded and generic products, $5.4 million relates to Cyprium’s collaboration revenue with Sentynl and $0.3 million relates to Checkpoint’s collaborative agreements with TGTX. At December 31, 2022, we had an accumulated deficit of $625.9 million primarily as a result of research and development expenses, purchases of in-process research and development and selling, 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 non-marketed product candidates are at various stages 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 $30.8 million and $32.1 million of costs of goods sold in connection with the sale of JMC branded and generic products for the years ended December 31, 2022 and 2021, respectively.

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 years ended December 31, 2022 and 2021, research and development expenses were approximately $134.2 million and $113.2 million, respectively. Additionally, during the years ended December 31, 2022 and 2021, we incurred approximately $0.7 million and $15.6 million, respectively, in costs related to the acquisition of licenses.

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The table below provides a summary of research and development costs associated with the development of our licenses by entity, for the years ended December 31, 2022 and 2021:

Year Ended

December 31, % of total

Research & Development

Partner Companies:

Note 1: Includes the following subsidiaries: Aevitas, Baergic (through November 7, 2022), Cellvation, Cyprium, Helocyte, Oncogenuity and Urica.

Noncash, stock-based compensation expense included in research and development for the years ended December 31, 2022 and 2021, was $4.4 million and $4.3 million, respectively.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist principally of personnel related costs, costs required to support the marketing and sales of our commercialized products, 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, 2022 and 2021, selling, general and administrative expenses were $113.7 million and $86.8 million, respectively. Stock based compensation expense included in selling, general and administrative expenses in 2022 and 2021 was $18.5 million and $15.2 million, respectively.

The table below provides a summary by entity of selling, general and administrative expenses for the years ended December 31, 2022 and 2021, respectively:

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Year Ended

December 31, % of Total

Selling, General & Administrative

Partner Companies:

Note 1: Includes field sales force costs for the year ended December 31, 2022 and 2021 of $23.5 million and $16.0 million, respectively. During the course of 2022, JMC expanded their field sales force to support their increased product portfolio.

Note 2: Includes the following subsidiaries: Aevitas, Baergic (through November 7, 2022), Cellvation, Cyprium, Helocyte, Oncogenuity and Urica.

Comparison of Years Ended December 31, 2022 and 2021

Year Ended December 31, Change

Revenue

Revenue – related party 192 268 (76) (28) %

Operating expenses

Research and development – licenses acquired 677 15,625 (14,948) (96) %

Wire transfer fraud loss — 9,540 (9,540) (100) %

Other income (expense)

Foreign exchange loss (89) — (89) 100 %

Change in fair value of investments — 39,294 (39,294) (100) %

Change in fair value of warrant liabilities 1,129 (447) 1,576 (353) %

Income tax expense 449 473 (24) (5) %

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For the year ended December 31, 2022, the net increase in revenue of $7.0 million or 10% is due to Journey’s expanded product portfolio, which resulted in a net product revenue increase of $7.9 million, and the increase in other revenue of $2.7 million resulting from the $2.5 million milestone payment from Maruho triggered by Maruho’s receipt of manufacturing and marketing approval in Japan of Rapifort® Wipes 2.5% and $0.2 million in royalties, also from Maruho. Collaboration revenue related to Cyprium’s agreement with Sentynl decreased $3.5 million due to the extension of Cyprium’s NDA submission timeline, offset by a decrease in revenue from a related party of $0.1 million related to Checkpoint’s collaboration agreement with TG Therapeutics for patent cost reimbursement. Journey’s increased net product revenues are a result of the growth of Journey’s marketed products acquired in 2021, Qbrexza and Accutane, as well as incremental growth from Amzeeq and Zilxi, acquired in January 2022, offset by a decrease in net sales of Journey’s legacy products primarily as a result of generic competition and also contract manufacturer product shortages in 2022 that were resolved by the third quarter of 2022.

Cost of goods sold decreased by $1.3 million or 4% in 2022 due to decreased inventory step-up charges of approximately $5.9 million resulting from reduced costs related to the Amzeeq and Zilxi product acquisitions in January 2022 as compared to the charges related to the Qbrexza acquisition in the second quarter of 2021. In addition, royalty expenses decreased by $1.7 million, or 12%, mainly due to the decrease in Targadox sales from period-to-period. These reductions were offset in part by higher product costs of $1.8 million, driven by: increased product sales volume from period-to-period, increased license amortization and Prescription Drug User Fee Act fees of $1.86 million and $0.6 million respectively, related to our acquired intangible assets from the acquisition of Amzeeq and Zilxi, and increased costs of approximately $1.7 million related to freight, destruction, product validation and stability testing costs. Additionally, incremental costs of $0.4 million related to the establishment of expired product and other inventory reserves were charged against operations through cost of goods sold for the year ended December 31, 2022.

Research and development expenses increased $21.0 million, or 19%, from the year ended December 31, 2021 to the year ended December 31, 2022. The following table shows research and development spending for Fortress and each partner company:

Year Ended December 31, Change

Research & Development

Stock-based compensation

Partner Companies:

Other Research & Development

Partner Companies:

Note 1: Includes the following subsidiaries: Aevitas, Baergic (through November 7, 2022), Cellvation, Cyprium, Helocyte, Oncogenuity and Urica.

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The increase in stock-based compensation at Fortress, Avenue and Checkpoint is due to new equity grants to key employees and consultants in 2022, while the decrease in Mustang’s stock-based compensation is due to the effect of fully vested equity grants to key employees and consultants.

The increase in research and development spending is due in part to Mustang’s increase in employee compensation costs of $4.3 million as research and development headcount supporting clinical program development, increased laboratory supply costs of $2.7 million, increased lentiviral vector manufacturing costs of $1.7 million to support Mustang-sponsored clinical trials, and $2.6 million in increased sponsored research and clinical trial costs. Journey’s increased research and development costs are due to clinical trial expenses to develop DFD-29, for which their Phase 3 clinical trials are 100% enrolled as of January 2023. Checkpoint’s increase in research and development spending is attributable to an $8.3 million increase in manufacturing costs of product candidates, $3.0 million increase in headcount costs, and $1.7 million increased regulatory costs, offset by a decrease in milestone payments of $6.4 million related to the 2021 non-refundable milestone payment that was triggered by the first patient dosed in a Phase 3 clinical study of cosibelimab, and a $1.8 million decrease in clinical costs due to the closing of the CONTERNO study, initiated in December 2021, due to the ongoing conflict in Ukraine and the disruption of clinical trial sites in the region. Avenue’s increase in research and development spend in 2022 is primarily attributable to costs related to the FDA Advisory Committee Meeting for IV Tramadol in early 2022. The decrease in “Other” is attributable to a decrease of $3.2 million in costs incurred by Cyprium for its rolling NDA submission for CUTX-101, a decrease of $1.2 million of costs incurred by Urica for the dotinurad clinical program, and reduced costs at Oncogenuity and Aevitas related to sponsored reseach.

We expect research and development costs to remain flat or decrease modestly in 2023.

The decrease in research and development – licenses acquired of $14.9 million, or 96%, from the year ended December 31, 2021 as compared to the year ended December 31, 2022 is due primarily to $13.8 million expense recorded in 2021 for Journey’s license, collaboration, and assignment agreement with Dr. Reddy’s Laboratories, Ltd. for a potential rosacea treatment, referred to as the DFD-29 Agreement, as well as a related derivative warrant liability, and Mustang’s $1.6 million of expense recorded in 2021 related to milestone payments on existing licenses and a $0.4 million upfront payment required by the Leiden University Medical Centre license, as compared to current research and development – licenses acquired expense of $0.7 million for the year ended December 31, 2022, comprised of $0.4 million in milestone payments on existing licenses at Mustang and a $0.3 million payment by Urica to expand the geographic regions covered by the existing license with Fuji for the development of dotinurad.

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Selling, general and administrative expenses increased $26.8 million, or 31%, from the year ended December 31, 2021 to the year ended December 31, 2022. The following table shows selling, general and administrative spending for Fortress and by each partner company:

Year Ended December 31, Change

Selling, General & Administrative

Stock-based compensation

Partner Companies:

Other Selling, General & Administrative

Partner Companies:

Note 2: Includes the following subsidiaries: Aevitas, Baergic (though November 7, 2022), Cellvation, Cyprium, Helocyte, Oncogenuity and Urica.

The increase in stock-based compensation at Fortress, Avenue and Journey is due to new equity grants to key employees and consultants in 2022.

For the year ended December 31, 2022, the increase in selling, general and administrative expenses of $26.8 million or 31% is primarily attributable to increased expenses at Journey related to their increased salesforce as well as increased marketing expense related to Journey’s expanded product portfolio, increased headcount and other supporting services related to being a public company, and increased legal costs associated with patent litigation. Mustang’s increase is due to increased headcount costs, increased corporate and patent-related legal costs, as well as an increase in professional and consulting fees. The increase in selling, general and administrative costs at Checkpoint are attributable to increased legal and accounting fees.

We expect selling, general and administrative expenses to remain flat or decrease modestly in 2023.

For the year ended December 31, 2021, wire fraud related costs totaled approximately $9.5 million. These costs were attributable to funds erroneously wired to fraudulent accounts as a result of a sophisticated business email compromise fraud scheme. Any recovered proceeds will be recorded when considered probable.

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Total other income (expense) changed $34.1 million, or 141%, from income of $24.2 million for the year ended December 31, 2021 to expense of $9.9 million for the year ended December 31, 2022, primarily due to the $39.3 million gain on the fair value of Caelum recognized in 2021, offset by the increase in change in fair value of warrant liabilities associated with warrants related to financings at Avenue and Checkpoint of $1.6 million, a decrease of $1.7 million in interest expense and financing fees due to non-recurring costs in 2021 related to Journey’s convertible preferred share offering, and lower interest expense for the year ended December 31, 2022 associated with the Company’s credit facility with Oaktree, as well as $1.3 million in grant income recognized by Mustang in the year ended December 31, 2022.

Net loss attributable to non-controlling interests increased $27.2 million, or 27% from the year ended December 31, 2021 to the year ended December 31, 2022. This increase reflects the partner companies’ share of net loss. Net loss attributable to common stockholders increased $21.9 million or 27%, from a net loss of $64.7 million for the year ended December 31, 2021 to a net loss of $86.6 million for the year ended December 31, 2022.

Liquidity and Capital Resources

Components of cash flows from publicly-traded partner companies are comprised of:

For the Year Ended December 31, 2022

($ in thousands) Fortress1 Avenue Checkpoint JMC Mustang Total

Statement of cash flows data:

Total cash (used in)/provided by:

For the Year Ended December 31, 2021

($ in thousands) Fortress1 Avenue Checkpoint JMC Mustang Total

Statement of cash flows data:

Total cash (used in)/provided by:

Note 1: Includes Fortress and non-public subsidiaries.

Year Ended December 31,

Statement of cash flows data:

Total cash (used in)/provided by:

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Operating Activities

Net cash used in operating activities increased $62.9 million from the year ended December 31, 2021 to the year ended December 31, 2022. The increase is primarily due to the increase in net loss of $49.1 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021, with the increases in cash used by accounts payable and accrued expenses of $34.2 million, accounts receivable of $6.1 million, deferred revenue of $4.5 million as compared to the year ended December 31, 2021 offset by the decrease in the fair value of the investment in Caelum for the year ended December 31, 2021 of $39.3 million.

Investing Activities

Net cash provided by investing activities for the year ended December 31, 2021 of $40.5 million decreased $63.4 million to net cash used by investing activities of $22.9 million for the year ended December 31, 2022. The change is primarily due to cash provided by the proceeds from the sale of Caelum of $56.9 million received in 2021 related to AstraZeneca’s exercise of their purchase option, offset by Journey’s purchase of the Vyne product licenses of $20.0 million and Mustang’s property and equipment purchases of $2.7 million for the year ended December 31, 2022.

Financing Activities

Net cash provided by financing activities was $75.3 million for the year ended December 31, 2022, compared to $149.0 million of net cash provided by financing activities for the year ended December 31, 2021, a decrease of $73.7 million. The decrease is primarily due to the decrease of $94.4 million in proceeds from partner companies’ at-the-market offerings, and the decrease of $17.0 million in proceeds from a partner company’s sale of convertible preferred stock. Offsetting these decreases was the increase in proceeds from partner companies’ long-term debt of $47.1 million, as well as the $10.5 million repayment of Fortress’ Oaktree Note.

Sources of Liquidity

Stock Offerings and At-The-Market Share Issuances

We fund our operations through cash on hand, the sale of debt, third-party financings, and the sale of partner companies. At December 31, 2022, we had cash and cash equivalents of $178.3 million of which $51.8 million relates to Fortress and the private partner companies, primarily funded by Fortress, $12.1 million relates to Checkpoint, $75.7 million relates to Mustang, $32.0 million relates to JMC and $6.7 million relates to Avenue. Restricted cash related to an undertaking posted by Cyprium to secure potential damages in an injunctive proceeding and our office leases is $2.7 million.

In July 2021, the Company filed a shelf registration statement on Form S-3 (File No. 333-258145), which was declared effective in July 2021 (the “2021 S-3”). As of December 31, 2022, no securities had been drawn down under the 2021 S-3.

In May 2020, the Company a filed shelf registration statement on Form S-3 (File No. 333-238327), which was declared effective in May 2020 (the “2020 S-3”). For the year ended December 31, 2022, the Company issued approximately 4.1 million shares of common stock at an average price of $1.50 per share for gross proceeds of $6.2 million. In connection with these sales, the Company paid aggregate fees of $0.2 million. Approximately $11.1 million of securities remain available for sale under the 2020 S-3 at December 31, 2022.

Subsequent to 2022, in February 2023, the Company completed a registered direct offering of common stock priced At-the-Market under Nasdaq rules pursuant to which it issued and sold 16,642,894 shares of its common stock at a purchase price of $0.835 per share and secured approximately $13.3 million in net proceeds after deducting estimated offering expenses. This included a concurrent private placement with investors in the registered direct offering for the pro rata rights to acquire securities exercisable into common stock in certain future operating subsidiaries that consummate a specified corporate development transaction within the next five years.

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The amount of securities we are able to sell pursuant to the registration statement on Form S-3 is limited. See “Risk Factors.”

In December 2022, Journey filed a shelf registration statement on Form S-3 (File No. 333-269079), which was declared effective in January 2023 (the “Journey 2022 S-3”). This shelf registration statement covers the offering, issuance and sale by Journey of up to an aggregate of $150.0 million of Journey’s common stock, preferred stock, debt securities, warrants, and units. At December 31, 2022, $150.0 million remains available under the Journey 2022 S-3.

In November 2020, Checkpoint filed a shelf registration statement on Form S-3 (File No. 333-251005) which was declared effective in December 2020 (the “Checkpoint 2020 S-3”). During the year ended December 31, 2022, Checkpoint issued a total of 532,816 shares of common stock under the Checkpoint 2020 S-3 for aggregate total gross proceeds of approximately $10.1 million at an average selling price of $18.99 per share.

In December 2022, Checkpoint closed on a registered direct offering with a single institutional investor for the issuance and sale of 950,000 shares of its common stock and 784,105 pre-funded warrants. Each pre-funded warrant was exercisable for one share of Checkpoint’s common stock. The common stock and the pre-funded warrants were sold together with Series A warrants to purchase up to 1,734,105 shares of common stock and Series B warrants to purchase up to 1,734,105 shares of common stock, at a purchase price of $4.325 per share of common stock and associated common stock warrants, and $4.33249 per pre-funded warrant and associated common stock warrants. The pre-funded warrants were funded in full at closing except for a nominal exercise price of $0.0001 and became exercisable on the closing date of the offering and will terminate when such pre-funded warrants are exercised in full. The Series A warrants became exercisable immediately upon issuance and will expire five years following the issuance date and have an exercise price of $4.075 per share and the Series B warrants became exercisable immediately upon issuance and will expire eighteen months following the issuance date and have an exercise price of $4.075 per share. Checkpoint also issued placement agent warrants to purchase up to 104,046 shares of Checkpoint common stock with an exercise price of $5.406 per share. Net proceeds from the registered direct offering were $6.7 million after deducting commissions and other transaction costs. The shares and warrants were sold under the Checkpoint 2020 S-3.

In February 2023, Checkpoint closed on a registered direct offering (“February 2023 Direct Offering”) with a single institutional investor for the issuance and sale of 1,180,000 shares of its common stock and 248,572 pre-funded warrants. Each pre-funded warrant is exercisable for one share of common stock. The common stock and the pre-funded warrants were sold together with Series A warrants to purchase up to 1,428,572 shares of common stock and Series B warrants to purchase up to 1,428,572 shares of common stock, at a purchase price of $5.25 per share of common stock and associated common stock warrants, and $4.2499 per pre-funded warrant and associated common stock warrants. Net proceeds from the February 2023 Direct Offering were $6.7 million after deducting commissions and other transaction costs.

In April 2021, Mustang filed a shelf registration statement on Form S-3 (File No. 333-255476) which was declared effective in May 2021 (the “Mustang 2021 S-3”). Under the Mustang 2021 S-3, Mustang may sell up to a total of $200.0 million of its securities. As of December 31, 2022, there have been no sales of securities under the Mustang 2021 S-3. In October 2020, Mustang filed a shelf registration statement on Form S-3 (File No. 333-249657) which was declared effective in December 2020 (the “Mustang 2020 S-3”). Under the Mustang 2020 S-3, Mustang may sell up to a total of $100.0 million of its securities. During the year ended December 31, 2022, Mustang issued approximately 7.9 million shares of common stock at an average selling price of $0.84 per share under the Mustang 2020 S-3 for aggregate total gross proceeds of approximately $6.6 million. At December 31, 2022, approximately $8.0 million of the Mustang 2020 S-3 remains available for sales of securities.

In October 2022, Avenue announced the closing of an underwritten public offering of 3,636,365 common and pre-funded units. Each common unit consists of one share of common stock and one warrant to purchase one share of common stock, and each pre-funded unit consists of one pre-funded warrant to purchase one share of common stock and one warrant to purchase one share of common stock. Each share of common stock (or pre-funded warrant) was sold together with one warrant at a combined purchase price of $3.30 per common unit (or $3.2999 per pre-funded unit after reducing $0.0001 attributable to the exercise price of the pre-funded warrants). Avenue also simultaneously closed on the sale of an additional 545,454 warrants to purchase common stock, which were sold pursuant to a partial exercise of the underwriter’s over-allotment option. Avenue received net proceeds of approximately $10.3 million at closing after deducting underwriting discounts and commissions and other expenses of the offering.

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In January 2023, Avenue entered into an agreement with a single institutional investor for the sale of 1,940,299 shares of common stock and pre-funded warrants. In a concurrent private placement, Avenue also agreed to issue to the same investor a total of 1,940,299 warrants to purchase up to one share of common stock each at an exercise price of $1.55 per share and a purchase price of $0.125. The purchase price of each share is $1.55. The purchase price of each pre-funded warrant is $1.549 with an exercise price of $0.001. Avenue received approximately $2.6 million in net proceeds.

Debt

In December 2022, Urica commenced an offering of 8% Cumulative Convertible Class B Preferred Stock (“Urica Preferred Offering”) in an aggregate maximum amount of $5.0 million. Urica issued an aggregate of 101,334 Class B Preferred shares at a price of $25.00 per share, for gross proceeds of $2.5 million. Following the payment of placement agent fees and other expenses of $0.3 million, Urica received $2.2 million in net proceeds.

In March 2022, Mustang announced completion of a $75 million long-term debt facility with Runway. Of the $75 million, $30 million was funded upon closing, and the additional $45 million available through the facility may be funded upon Mustang’s achieving certain predetermined milestones. Proceeds from the facility will be used to support the ongoing clinical development of key investigational product candidates within Mustang’s pipeline and for general working capital purposes.

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, joint venture or similar development collaborations, the sale of partner companies, royalty financings, or through other sources of financing.

In addition to the foregoing, based on the Company’s current assessment, the Company does not expect any material impact on its long-term development timeline and its liquidity due to the worldwide spread of the COVID-19 virus. However, the Company is continuing to assess the effect on its operations by monitoring the spread of COVID-19 and the actions implemented to combat the virus throughout the world.

Contractual Obligations

We enter into contracts in the normal course of business with licensors, CROs, contract manufacturing organizations (CMOs) and other third parties for the procurement of various products and services, including without limitation biopharmaceutical development, biologic assay development, commercialization, clinical and preclinical development, clinical trials management, pharmacovigilance and manufacturing and supply. These contracts typically do not contain minimum purchase commitments (although they may) and are generally terminable by us upon written notice. Payments due upon termination or cancelation/delay consist of payments for services provided or expenses incurred, including non-cancelable obligations of our service providers, up to the date of cancellation; in certain cases, our contractual arrangements with CROs and CMOs include cancelation and/or delay fees and penalties.

During the year ended December 31, 2022, Mustang entered into a new lease for office space commencing on July 1, 2022. The lease has a term of 7 years and 7 months, with rent obligations beginning on November 1, 2022. Base rent is $49,000 per month and increases to $56,000 per month during the term of the lease. The first 24 months of rent payments are abated, and the lease includes a $0.3 million tenant improvement allowance.

Recently Issued Accounting Pronouncements

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

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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, 2022, 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:

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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, 2022. In making the assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). 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, 2022, our internal control over financial reporting was effective.

Changes in Internal Controls over Financial Reporting

Except for the remediation efforts described above taken to address the material weakness, 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.