Athenex, Inc. - Quarter Report: 2022 September (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2022

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

For the transition period from to

Commission File Number: 001-38112

ATHENEX, INC.

(Exact Name of Registrant as Specified in its Charter)


Delaware	43-1985966
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1001 Main Street, Suite 600 Buffalo, NY	14203
(Address of principal executive offices)	(Zip Code)

(716) 427-2950

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	ATNX	The Nasdaq Global Select Market

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 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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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 Exchange Act). Yes ☐ No ☒

As of October 31, 2022, the registrant had 157,410,098 shares of common stock, $0.001 par value per share, outstanding.

Table of Contents


		Page
PART I.	FINANCIAL INFORMATION	1
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets (Unaudited)	1
	Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)	2
	Condensed Consolidated Statements of Stockholders’ Deficit (Unaudited)	3
	Condensed Consolidated Statements of Cash Flows (Unaudited)	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52
Item 4.	Controls and Procedures	53
PART II.	OTHER INFORMATION	54
Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 3.	Defaults Upon Senior Securities	56
Item 4.	Mine Safety Disclosures	57
Item 5.	Other Information	57
Item 6.	Exhibits	57
Signatures		59

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements.

ATHENEX, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(unaudited)

(In thousands, except share and per share data)


	September 30,			December 31,
	2022			2021
Assets
Current assets:
Cash and cash equivalents	$	35,187		$	35,202
Restricted cash		5,225			16,500
Short-term investments		1,034			10,207
Accounts receivable, net of chargebacks and other deductions of $28,331 and $22,868, respectively, and provision for credit losses of $9,678 and $9,196, respectively		32,912			26,286
Inventories		42,039			27,049
Prepaid expenses and other current assets		4,125			5,321
Discontinued operations, current portion		6,184			12,831
Total current assets		126,706			133,396
Property and equipment, net		3,912			5,181
Intangible assets, net		72,168			71,896
Operating lease right-of-use assets, net		4,439			5,509
Other assets		952			1,087
Discontinued operations, non-current portion		20,173			50,379
Total assets	$	228,350		$	267,448
Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	25,071		$	14,519
Accrued expenses		40,083			23,892
Current portion of operating lease liabilities		2,026			2,393
Current portion of long-term debt and finance lease obligations		14,927			46,096
Discontinued operations, current portion		2,796			9,147
Total current liabilities		84,903			96,047
Long-term liabilities:
Long-term operating lease liabilities		3,427			4,411
Long-term debt and finance lease obligations		22,251			95,607
Royalty financing liability		80,103			—
Deferred tax liabilities		1,751			1,751
Contingent consideration		18,937			24,076
Other long-term liabilities		2,709			3,046
Discontinued operations, non-current portion		7,033			8,058
Total liabilities		221,114			232,996
Commitments and contingencies (See Note 18)
Stockholders' equity:
Common stock, par value $0.001 per share, 250,000,000 shares authorized at September 30, 2022 and December 31, 2021; 159,108,639 and 111,802,968 shares issued at September 30, 2022 and December 31, 2021, respectively; 157,410,098 and 110,130,048 shares outstanding at September 30, 2022 and December 31, 2021, respectively		159			111
Additional paid-in capital		1,012,114			972,404
Accumulated other comprehensive income (loss)		2,987			(487	)
Accumulated deficit		(982,658	)		(913,412	)
Less: treasury stock, at cost; 1,698,541 and 1,672,920 shares at September 30, 2022 and December 31, 2021, respectively		(7,757	)		(7,485	)
Total Athenex, Inc. stockholders' equity		24,845			51,131
Non-controlling interests		(17,609	)		(16,679	)
Total stockholders' equity		7,236			34,452
Total liabilities and stockholders' equity	$	228,350		$	267,448

The accompanying notes are an integral part of these condensed consolidated financial statements.

ATHENEX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Loss

(unaudited)

(In thousands, except share and per share data)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Revenue:
Product sales, net	$	31,349		$	26,303		$	85,503		$	65,184
License and other revenue		2,181			5,122			8,685			26,091
Total revenue		33,530			31,425			94,188			91,275
Cost of sales		27,736			25,098			73,657			59,255
Gross Profit		5,794			6,327			20,531			32,020
Operating expenses:
Research and development expenses		9,214			17,739			36,393			60,128
Selling, general, and administrative expenses		9,438			18,094			40,417			54,936
Total operating expenses		18,652			35,833			76,810			115,064
Operating loss		(12,858	)		(29,506	)		(56,279	)		(83,044	)
Interest income		109			38			231			99
Interest expense		6,271			5,100			15,089			15,619
Loss on partial extinguishment of debt		—			—			1,450			—
Loss before income tax expense		(19,020	)		(34,568	)		(72,587	)		(98,564	)
Income tax expense (benefit)		596			262			606			(10,619	)
Net loss from continuing operations		(19,616	)		(34,830	)		(73,193	)		(87,945	)
Loss (gain) from discontinued operations (Note 4)		254			1,906			(3,018	)		9,009
Net loss		(19,870	)		(36,736	)		(70,175	)		(96,954	)
Less: net loss attributable to non-controlling interests		(201	)		(679	)		(929	)		(1,573	)
Net loss attributable to Athenex, Inc.	$	(19,669	)	$	(36,057	)	$	(69,246	)	$	(95,381	)
Unrealized gain (loss) on investment, net of income taxes		(94	)		5			376			2
Foreign currency translation adjustment, net of income taxes		1,610			81			3,098			95
Comprehensive loss	$	(18,153	)	$	(35,971	)	$	(65,772	)	$	(95,284	)
Basic and diluted loss per Athenex, Inc. common share (Note 15):
Net loss from continuing operations	$	(0.14	)	$	(0.31	)	$	(0.60	)	$	(0.85	)
Net (loss) gain from discontinued operations		(0.00	)		(0.02	)		0.02			(0.09	)
Net loss per share attributable to Athenex, Inc. common stockholders, basic and diluted (See Note 15)	$	(0.14	)	$	(0.33	)	$	(0.57	)	$	(0.93	)
Weighted-average shares used in computing net loss per share attributable to Athenex, Inc. common stockholders, basic and diluted (See Note 15)		139,473,393			109,292,740			121,115,575			102,111,218

The accompanying notes are an integral part of these condensed consolidated financial statements.

ATHENEX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Deficit

(unaudited)

(In thousands, except share data)


	Common Stock				Additional					Accumulated other			Treasury Stock						Total Athenex, Inc.			Non-			Total
	Shares		Amount		paid-in capital		Accumulated deficit			comprehensive loss			Shares			Amount			stockholders' equity			controlling interests			stockholders' equity
Balance at January 1, 2021		95,066,195	$	95	$	901,864	$	(713,644	)	$	(1,134	)		(1,672,920	)	$	(7,406	)	$	179,775		$	(14,427	)	$	165,348
Stock-based compensation cost		—		—		2,205		—			—			—			—			2,205			—			2,205
Restricted stock expense		—		—		29		—			—			—			—			29			—			29
Stock options exercised		119,425		—		852		—			—			—			—			852			—			852
Net loss		—		—		—		(25,050	)		—			—			—			(25,050	)		(553	)		(25,603	)
Other comprehensive income, net of tax		—		—		—		—			293			—			—			293			—			293
Balance at March 31, 2021 (unaudited)		95,185,620		95		904,950		(738,694	)		(841	)		(1,672,920	)		(7,406	)		158,104			(14,980	)		143,124
Sale of common stock		33,373		—		133		—			—			—			—			133			—			133
Issuance of common stock in connection with acquisition of Kuur and settlement of transaction incentive liability assumed		15,601,667		16		58,412		—			—			—			—			58,428			—			58,428
Stock-based compensation cost		—		—		2,387		—			—			—			—			2,387			—			2,387
Restricted stock expense		—		—		57		—			—			—			—			57			—			57
Stock options exercised		160,000		—		727		—			—			—			—			727			—			727
Treasury stock repurchase		—		—		—		—			—			—			(79	)		(79	)		—			(79	)
Net loss		—		—		—		(34,274	)		—			—			—			(34,274	)		(341	)		(34,615	)
Other comprehensive loss, net of tax		—		—		—		—			(282	)		—			—			(282	)		—			(282	)
Balance at June 30, 2021 (unaudited)		110,980,660		111		966,666		(772,968	)		(1,123	)		(1,672,920	)		(7,485	)		185,201			(15,321	)		169,880
Issuance of common stock in connection with Cidal acquisition		11,299		—		—		—			—			—			—			—			—			—
Stock-based compensation cost		—		—		2,450		—			—			—			—			2,450			—			2,450
Restricted stock expense		—		—		199		—			—			—			—			199			—			199
Net loss		—		—		—		(36,057	)		—			—			—			(36,057	)		(679	)		(36,736	)
Other comprehensive income, net of tax		—		—		—		—			86			—			—			86			—			86
Balance at September 30, 2021 (unaudited)		110,991,959	$	111	$	969,315	$	(809,025	)	$	(1,037	)		(1,672,920	)	$	(7,485	)	$	151,879		$	(16,000	)	$	135,879


	Common Stock				Additional					Accumulated other			Treasury Stock						Total Athenex, Inc.			Non-			Total
	Shares		Amount		paid-in capital		Accumulated deficit			comprehensive (loss) income			Shares			Amount			stockholders' equity			controlling interests			stockholders' equity (deficit)
Balance at January 1, 2022		111,802,968	$	111	$	972,404	$	(913,412	)	$	(487	)		(1,672,920	)	$	(7,485	)	$	51,131		$	(16,679	)	$	34,452
Sale of common stock through ATM, net of costs of $52		1,646,026		2		1,693		—			—			—			—			1,695			—			1,695
Stock-based compensation cost		—		—		1,623		—			—			—			—			1,623			—			1,623
Restricted stock expense		—		—		251		—			—			—			—			251			—			251
Issuance of warrant		—		—		148		—			—			—			—			148			—			148
Net loss		—		—		—		(17,420	)		—			—			—			(17,420	)		(512	)		(17,932	)
Other comprehensive income, net of tax		—		—		—		—			562			—			—			562			—			562
Balance at March 31, 2022 (unaudited)		113,448,994		113		976,119		(930,832	)		75			(1,672,920	)		(7,485	)		37,990			(17,191	)		20,799
Sale of common stock through ATM, net of costs of $86		5,501,866		5		2,775		—			—			—			—			2,780			—			2,780
Sale of common stock through ESPP		372,963		1		187		—			—			—			—			188			—			188
Stock-based compensation cost		—		—		1,358		—			—			—			—			1,358			—			1,358
Restricted stock expense		—		—		245		—			—			—			—			245			—			245
Issuance of warrant		—		—		135		—			—			—			—			135			—			135
Net loss		—		—		—		(32,157	)		—			—			—			(32,157	)		(217	)		(32,374	)
Other comprehensive income, net of tax		—		—		—		—			1,396			—			—			1,396			—			1,396
Balance at June 30, 2022 (unaudited)		119,323,823		119		980,819		(962,989	)		1,471			(1,672,920	)		(7,485	)		11,935			(17,408	)		(5,473	)
Sale of common stock through ATM, net of costs of $49		3,957,485		4		1,595		—			—			—			—			1,599			—			1,599
Sale of common stock through ESPP		359,097		1		187		—			—			—			—			188			—			188
Sale of common stock through public offering, net of costs of $1,173		35,333,334		35		17,738		—			—			—			—			17,773			—			17,773
Issuance of warrants, net of costs of $529		—		—		8,023		—			—			—			—			8,023			—			8,023
Issuance of pre-funded warrants, net of costs of $155		—		—		2,343		—			—			—			—			2,343			—			2,343
Stock-based compensation cost		—		—		1,268		—			—			—			—			1,268			—			1,268
Vesting of restricted stock units		134,900		—		141		—			—			—			—			141			—			141
Treasury stock repurchase		—		—		—		—			—			(25,621	)		(272	)		(272	)		—			(272	)
Net loss		—		—		—		(19,669	)		—			—			—			(19,669	)		(201	)		(19,870	)
Other comprehensive income, net of tax		—		—		—		—			1,516			—			—			1,516			—			1,516
Balance at September 30, 2022 (unaudited)		159,108,639	$	159	$	1,012,114	$	(982,658	)	$	2,987			(1,698,541	)	$	(7,757	)	$	24,845		$	(17,609	)	$	7,236

The accompanying notes are an integral part of these condensed consolidated financial statements.

ATHENEX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited)

(In thousands)


	Nine Months Ended September 30,
	2022			2021
Cash flows from operating activities:
Net loss from continuing operations	$	(73,193	)	$	(87,945	)
Net gain (loss) from discontinued operations		3,018			(9,009	)
Adjustments to reconcile net loss to net cash used in operating activities of continuing operations:
Depreciation and amortization		2,216			2,905
Stock-based compensation expense		4,886			7,328
Amortization of debt discount and royalty interest financing		6,210			2,253
Change in fair value of contingent consideration		(5,139	)		3,647
Loss on disposal of assets and impairment charges		78			112
Loss on extinguishment of debt and write off of deferred issuance costs		1,450			648
Deferred income taxes		—			(10,781	)
Changes in operating assets and liabilities:
Receivables, net		(6,626	)		(11,019	)
Prepaid expenses and other assets		1,331			54
Inventories		(14,990	)		(1,107	)
Accounts payable and accrued expenses		31,235			(3,069	)
Net cash used in operating activities of continuing operations		(52,542	)		(96,974	)
Cash flows from investing activities of continuing operations:
Purchase of property and equipment		(473	)		(819	)
Payments for licenses		(1,643	)		(1,588	)
Cash acquired from Kuur acquisition		—			1,425
Purchases of short-term investments		(9,087	)		(68,672	)
Sales and maturities of short-term investments		18,633			192,393
Net cash provided by investing activities of continuing operations		7,430			122,739
Cash flows from financing activities of continuing operations:
Proceeds from sale of stock		25,582			133
Proceeds from issuance of royalty financing liability		81,500			—
Proceeds from issuance of warrants and pre-funded warrants		11,050			—
Proceeds from exercise of stock options		—			1,579
Repurchase of treasury stock		(272	)		(79	)
Costs incurred related to the sale of stock		(1,360	)		—
Costs incurred related to the issuance of warrants and pre-funded warrants		(684	)		—
Costs incurred related to the issuance of royalty financing liability		(4,982	)		—
Costs incurred related to the prepayment of debt		(5,969	)		—
Repayment of finance lease obligations and long-term debt and royalty financing liability		(102,613	)		(225	)
Net cash provided by financing activities of continuing operations		2,252			1,408
Net (decrease) increase in cash, cash equivalents, and restricted cash from continuing operations		(42,860	)		27,173
Net cash used in operating activities of discontinued operations		(8,078	)		(6,992	)
Net cash provided by (used in) investing activities of discontinued operations		37,967			(16,377	)
Net cash used in financing activities of discontinued operations		(791	)		(56	)
Net increase (decrease) in cash and cash equivalents from discontinued operations		29,098			(23,425	)
Cash, cash equivalents, and restricted cash, beginning of period		51,702			86,087
Effect of exchange rate changes on cash, cash equivalents, and restricted cash		2,472			259
Cash, cash equivalents, and restricted cash, end of period (See Note 5)	$	40,412		$	90,094
Supplemental cash flow disclosures
Interest paid	$	9,767		$	11,878
Interest paid by discontinued operations	$	15		$	16
Non-cash investing and financing activities:
Accrued purchases of property and equipment from continuing operations	$	—		$	28
Accrued purchases of property and equipment from discontinued operations	$	911		$	3,072
Accrued purchases of licenses	$	850		$	1,600
ROU assets derecognized from modification of operating lease obligations	$	(128	)	$	(113	)
ROU assets recognized in exchange for operating lease obligations	$	78		$	86

The accompanying notes are an integral part of these condensed consolidated financial statements.

Athenex, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Company and Nature of Business

Organization and Description of Business

Athenex, Inc. and subsidiaries (the “Company” or “Athenex”), originally under the name Kinex Pharmaceuticals LLC (“Kinex”), formed in November 2003, commenced operations on February 5, 2004, and operated as a limited liability company until it was incorporated in the State of Delaware under the name Kinex Pharmaceuticals, Inc. on December 31, 2012. The Company changed its name to Athenex, Inc. on August 26, 2015.

Athenex is a biopharmaceutical company dedicated to becoming a leader in the discovery, development, and commercialization of next generation drugs for the treatment of cancer. The Company’s mission is to improve the lives of cancer patients by creating more effective, safer, and accessible treatments. The Company has assembled a strong and experienced leadership team and has established operations across the pharmaceutical value chain to execute our goal of becoming a leader in bringing innovative cancer treatments to the market and improving health outcomes.

The Company is organized around three operating segments: (1) its Oncology Innovation Platform, dedicated to the research and development of our proprietary drugs; (2) its Commercial Platform, focused on the sales and marketing of our specialty drugs and the market development of our proprietary drugs; and (3) its Global Supply Chain Platform, providing sterile injectable drugs to hospital pharmacies across the U.S. The Company’s current clinical pipeline in the Oncology Innovation Platform is derived mainly from the following core technologies: (1) Cell Therapy, based on natural killer T ("NKT") cells, and (2) Orascovery, based on a P-glycoprotein (“P-gp”) pump inhibitor.

The Company is primarily engaged in conducting research and development activities through corporate collaborators, in-licensing and out-licensing pharmaceutical compounds and technology, conducting preclinical and clinical testing, identifying and evaluating additional drug candidates for potential in-licensing or acquisition, and raising capital to support development and commercialization activities. The Company also conducts commercial sales of specialty products through its wholly owned subsidiary, Athenex Pharmaceutical Division (“APD”), and 503B products through its wholly owned subsidiary, Athenex Pharma Solutions (“APS”).

Going Concern

These condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

The Company has incurred operating losses since its inception and, as a result, as of September 30, 2022 and December 31, 2021 had an accumulated deficit of $982.7 million and $913.4 million, respectively. As of September 30, 2022, the Company had cash and cash equivalents of $35.2 million, restricted cash of $5.2 million, and short-term investments of $1.0 million. The Company projects insufficient liquidity to fund its operations through the next twelve months beyond the date of the issuance of these condensed consolidated financial statements. This condition raises substantial doubt about the Company’s ability to continue as a going concern.

Additionally, the Company has financial covenants associated with its Senior Credit Agreement with Oaktree that are measured each quarter. The Company is in compliance with such financial covenants as of September 30, 2022. However, the Company is forecasting that it will be in violation of the minimum liquidity covenant included within the Senior Credit Agreement during the twelve month period subsequent to the date of this filing. Pursuant to ASC 205-40-50, the Company’s forecast does not reflect management’s plans that are outside of the Company’s control as described below. Violation of any covenant under the Credit Agreement provides the lenders with the option to accelerate the maturity of the Credit Facility, which carried an outstanding principal balance of $47.5 million as of September 30, 2022. Should the lenders accelerate the maturity of the Credit Facility, the Company would not have sufficient cash on hand or available liquidity to repay the outstanding debt in the event of default. These conditions and events raise substantial doubt about the Company’s ability to continue as a going concern.

In response to these conditions, management’s plans include seeking additional funding through planned product launches, raising capital, including leveraging the existing sales agreement with SVB Securities LLC (described below), asset monetization and/or seeking funding through alternative means. There can be no assurances, however, that additional funding will be available on favorable terms, or at all. Because management’s plans have not yet been finalized and are not within the Company’s control, such plans cannot be considered probable of being achieved. As a result, the Company has concluded that management’s plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern.

These condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

Other Significant Risks and Uncertainties

In February 2021, the Company received a Complete Response Letter (“CRL”) from the U.S. Food and Drug Administration (“FDA”) regarding the Company’s New Drug Application (“NDA”) for oral paclitaxel and encequidar (“Oral Paclitaxel”) for the treatment of metastatic breast cancer (“mBC”). The FDA issues a CRL to indicate that the review cycle for an application is complete and that the application is not ready for approval in its present form. In the CRL, the FDA indicated its concern of safety risk to patients in terms of an increase in neutropenia-related sequelae on the Oral Paclitaxel arm compared with the IV paclitaxel arm in the Phase III study. The FDA also expressed concerns regarding the uncertainty over the results of the primary endpoint of objective response rate (ORR) at week 19 conducted by blinded independent central review (“BICR”). The FDA stated that the BICR reconciliation and re-read process may have introduced unmeasured bias and influence on the BICR. The FDA recommended that Athenex conduct a new adequate and well-conducted clinical trial in a patient population with mBC representative of the population in the U.S. The FDA determined that adequate risk mitigation strategies to improve toxicity, which may involve dose optimization as well as, or in addition to, exclusion of patients deemed to be at higher risk of toxicity, would be required in any new clinical trial of Oral Paclitaxel. During the second quarter of 2021, the Company held a Type A meeting with the FDA. At the meeting, the Company provided additional analyses, including overall survival (OS) data on patient subgroups, to provide a more comprehensive summary of the risk/benefit assessment. The Company also proposed to collect additional OS data that could inform the design of a new clinical study. In October 2021, the Company held another Type A meeting with the FDA, and the purpose of the meeting was to review with the FDA a proposed design for a new clinical trial intended to address the deficiencies raised in the CRL and discuss the potential regulatory path forward for Oral Paclitaxel in mBC in the U.S. After careful consideration of the feedback provided by the FDA, the Company decided that it will not currently be pursuing regulatory approval for Oral Paclitaxel monotherapy for the treatment of mBC in the U.S. and determined to redeploy its resources to focus on its cell therapy platform and other ongoing studies of Oral Paclitaxel.

The Company is subject to a number of risks, including, but not limited to, the lack of available capital; the possible delisting of our common stock from Nasdaq; possible failure of preclinical testing or clinical trials; inability to obtain regulatory approval of product candidates; competitors developing new technological innovations; potential interruptions in the manufacturing and commercial supply operations; unsuccessful commercialization strategy and launch plans for its proprietary drug candidates; risks inherent in litigation, including purported class actions; market acceptance of the Company’s products; and protection of proprietary technology. If the Company or its partners do not successfully commercialize any of the Company’s product candidates, it will be unable to generate sufficient revenue and might not, if ever, achieve profitability and positive cash flow.

Recent Financing Activity

Public Offering of Common Stock and Warrants

In August 2022, the Company completed an underwritten public offering in which it sold 35,333,334 shares of common stock, common warrants to purchase up to 40,000,000 shares of common stock at a price of $1.00 per share, and pre-funded warrants to purchase up to 4,666,666 shares of common stock at a price of $0.001 per share. The shares of common stock, together with the common warrants, were sold at $0.75 per share and accompanying common warrant, and the pre-funded warrants, together with the common warrants, were sold at $0.749 per pre-funded warrant and accompanying common warrant. The common and pre-funded warrants were exercisable immediately and will expire five years from the date of issuance. The Company received net proceeds of $28.1 million, after deducting discounts, commissions, and offering expenses.

Sale of U.S. and European tirbanibulin royalty and milestone interests

On June 21, 2022, the Company and ATNX SPV, LLC, its newly-formed subsidiary (the "SPV"), entered into a Revenue Interest Purchase Agreement (the “RIPA”) with affiliates of Sagard Healthcare Partners (“Sagard”) and funds managed by Oaktree Capital Management, L.P. (“Oaktree” and together with Sagard, the “Purchasers”), for the sale of revenues from U.S. and European royalty and milestone interests in Klisyri® (tirbanibulin) for an aggregate purchase price of $85.0 million (“Purchase Price”). On June 29, 2022, the Purchasers paid the Company the Purchase Price. Of the total Purchase Price, $5.0 million was placed into escrow to be paid to the Company upon the satisfaction of certain manufacture and supply milestones for Klisyri prior to December 31, 2025, $5.0 million was used to pay for transaction expenses, $56.6 million was used to pay down principal, interest, and fees on the Company's Senior Credit Agreement with Oaktree, and $7.5 million was deposited and held in a segregated account of the Company (the “Segregated Funds”). The Segregated Funds were released to the Company upon the underwritten public offering in August 2022 and $1.5 million of the amount placed in escrow was released to the Company upon completion of an escrow release trigger milestone in September 2022. The $7.5 million of Segregated Funds and the remaining proceeds of $10.9 million were available for the Company's operations. Refer to Note 11 - Debt and Lease Obligations for additional information.

In connection with this transaction, the Company formed the Subsidiary and contributed its interest in the License and Development Agreement with Almirall S.A. relating to Klisyri (the “License Agreement”) and certain related assets to the Subsidiary. Oaktree and Sagard each own a 10% equity interest in the Subsidiary. Pursuant to the RIPA, the Subsidiary will sell its right to the cash received in respect of certain royalties and certain milestone interests under the License Agreement to the Purchasers. The Subsidiary will retain the right to receive 50% of certain of the milestone interests under the License Agreement, equal to $155.0

million in the aggregate if those milestones are achieved, and 50% of the royalties paid under the License Agreement for sales of Klisyri once net sales of Klisyri exceed a certain dollar amount. Under its operating agreement, the Subsidiary will be governed by a five-member board of directors to which the Company will appoint three directors, Oaktree will appoint one director, and Sagard will appoint one director.

At-the-market offering

On August 20, 2021, the Company entered into a sales agreement (the “Sales Agreement”) with SVB Securities LLC, in connection with the offer and sale of up to $100,000,000 of shares of the Company’s common stock, par value $0.001 per share (“ATM Shares”). The ATM Shares to be offered and sold under the Sales Agreement will be issued and sold pursuant to a registration statement on Form S-3 (File No. 333-258185) that became effective on August 12, 2021. During the year ended December 31, 2021, the Company sold 762,825 shares of its common stock for an average price of $1.49 per share under the Sales Agreement. During the nine months ended September 30, 2022, the Company sold 11,105,377 shares of its common stock for an average price of $0.55 per share under the Sales Agreement.

Senior Secured Loan Agreement and Detachable Warrants

On June 19, 2020, the Company entered into a senior secured loan agreement and related security agreements (the “Senior Credit Agreement”) with Oaktree to borrow up to $225.0 million in five tranches with a maturity date of June 19, 2026, bearing interest at a fixed annual rate of 11.0%. The first tranche of $100.0 million was drawn by the Company prior to June 30, 2020, with the proceeds used in part to repay in full the outstanding loan and fees under the credit agreement with Perceptive Advisors LLC and its affiliates (“Perceptive”). The second and third tranches of $25.0 million each were drawn by the Company prior to December 31, 2020. The additional debt tranches amounting to an aggregate of $75.0 million were subject to the approval Oral Paclitaxel in the treatment of mBC, and therefore, became unavailable to the Company when it decided to no longer pursue regulatory approval in the U.S. The Company was required to make quarterly interest-only payments until June 19, 2022, after which the Company is required to make quarterly amortizing payments, with the remaining balance of the principal plus accrued and unpaid interest due at maturity. The loan agreement contains specified financial maintenance covenants. The Company was in compliance with such covenants as of September 30, 2022.

In connection with the Senior Credit Agreement, the Company granted warrants to Oaktree to purchase an aggregate of up to 908,393 shares of the Company’s common stock at an initial purchase price of $12.63 per share. This transaction was accounted for as a detachable warrant at its fair value, using the relative fair value method, which is based on a number of unobservable inputs, and is recorded as an increase to additional paid-in-capital on the consolidated statement of stockholders’ equity. The fair value of the warrants was reflected as a discount to the term loan and amortized over the life of the term loan.

On January 19, 2022, the Company entered into an amendment to the Senior Credit Agreement with Oaktree (the “Third Amendment”). The Third Amendment also amended the warrants held by Oaktree and Sagard that were issued on June 19, 2020 and August 4, 2020. The Third Amendment became effective on February 14, 2022, upon the closing of the Company’s sale of its leasehold interest in the manufacturing facility in Dunkirk, New York and certain other related assets (the “Dunkirk Transaction,” see Note 4 - Discontinued Operations). The Third Amendment required the Company to make a mandatory prepayment of principal to Oaktree equal to 62.5% of the cash proceeds of the Dunkirk Transaction. The Company was also required to pay (i) accrued and unpaid interest and (ii) a 7.0% fee, allocated as a 2.0% Exit Fee and a 5.0% Prepayment Fee (each as defined in the Senior Credit Agreement), on the principal amount being repaid. The Company was required to pay Oaktree an amendment fee of $0.3 million and certain related expenses upon the closing of the Dunkirk Transaction. The Third Amendment required the Company to make an additional mandatory prepayment of $12.5 million in principal plus the costs and fees described above by June 14, 2022, within 120 days of the closing of the Dunkirk Transaction. Consistent with the Company’s decision to not pursue regulatory approval for Oral Paclitaxel monotherapy for the treatment of mBC in the United States, the Third Amendment reduced to zero the amount of the last two tranches of borrowing that had been available under the Senior Credit Agreement upon the achievement of commercial milestones. The warrants were amended to change the exercise price to be paid per share upon exercise of the warrants. The original exercise price of the warrants was $12.63 per share; 50% of the shares underlying the warrants were repriced to $1.10 per share under the Third Amendment. The Dunkirk Transaction closed on February 14, 2022. The Company received proceeds of $40.0 million and used these proceeds to repay $27.4 million, inclusive of principal, fees, and accrued interest, of the Senior Credit Agreement with Oaktree according to the terms of the Third Amendment. The Company recorded a $3.5 million loss on the partial extinguishment of debt as the result of this prepayment. During June 2022, the Company made the additional prepayment under the Third Amendment in the aggregate amount of $13.7 million, inclusive of principal, fees, and accrued interest, as provided in the Fourth Amendment, described below.

In June 2022, the Company entered into additional amendments to the Senior Credit Agreement with Oaktree (the "Fourth Amendment" and the "Fifth Amendment" or the "Amendments"), in connection with the execution of the RIPA with Sagard and Oaktree. Under the Fourth Amendment, Oaktree permitted the Company to pay $7.5 million in principal amount due pursuant to the Third Amendment on the closing date of the RIPA. Under the Fifth Amendment, the Company agreed to make an additional prepayment of principal to Oaktree of $10.0 million on or before July 1, 2022. The Company was also required to pay (i) accrued and

unpaid interest and (ii) a 5.0% fee, allocated as a 2.0% Exit Fee and a 3.0% Prepayment Fee (each as defined in the Senior Credit Agreement), on the principal amount being repaid pursuant to the Amendments.

The Fourth Amendment also amended the warrants held by Oaktree and Sagard that were issued on June 19, 2020 and August 4, 2020, as previously amended on January 19, 2022. The warrants were amended to change the exercise price to be paid per share upon exercise of the warrants. The original exercise price of the warrants was $12.63 per share. The Third Amendment had reduced the exercise price of 50% of the shares underlying the Warrants to $1.10 per share, with the remaining 50% exercisable at $12.63 per share. The Fourth Amendment reduced the exercise price of all of the warrants to $0.50 per share.

In August 2022, the Company entered into the Sixth Amendment to the Senior Credit Agreement with Oaktree. This amendment released the $7.5 million of Segregated Funds to the Company and required the Company to prepay an additional $6.9 million of the Senior Credit Agreement. The Company was also required to pay (i) accrued and unpaid interest and (ii) a 5.0% fee, allocated as a 2.0% Exit Fee and a 3.0% Prepayment Fee (each as defined in the Senior Credit Agreement), on the principal amount being repaid.

As of September 30, 2022 and December 31, 2021, the Company's outstanding principal on the Senior Credit Agreement with Oaktree amounted to $47.5 million, and $150.0 million, respectively. Refer to Note 11 - Debt and Lease Obligations for additional information.

2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information (Accounting Standards Codification (“ASC”) 270, Interim Reporting) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all of the information necessary for a full presentation of financial position, results of operations, and cash flows in conformity with GAAP. In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of the Company for the periods presented. These condensed consolidated financial statements reflect the accounts and operations of Athenex, Inc. and those of its subsidiaries in which Athenex, Inc. has a controlling financial interest. Intercompany transactions and balances have been fully eliminated in consolidation.

Results of the Company’s operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results expected for the year ending December 31, 2022, or for any other future annual or interim period. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (“SEC”) on March 16, 2022.

The Company has consolidated its newly-formed subsidiary, ATNX SPV, LLC into the accompanying unaudited condensed consolidated financial statements under the variable interest model.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of revenue and expenses during the reporting period. Such management estimates include those relating to assumptions used in clinical research accruals, chargebacks, measurement of acquired assets and assumed liabilities in business combinations, provision for credit losses, inventory reserves, deferred income taxes, the estimated useful life and recoverability of long-lived assets, contingent consideration, accounting for debt extinguishment and the royalty financing liability, and the valuation of stock-based awards and other items as appropriate. Actual results could differ from those estimates.

Contingent Consideration

Contingent consideration arising from a business acquisition is included as part of the purchase price and is recorded at fair value as of the acquisition date. Subsequent to the acquisition date, the Company remeasures contingent consideration arrangements at fair value at each reporting period until the contingency is resolved. The changes in fair value are recognized within selling, general, and administrative expenses in the Company’s consolidated statement of operations and comprehensive loss. Changes in fair values reflect new information about the likelihood of the payment of the contingent consideration and the passage of time.

Liability related to the sale of future royalties

The Company treats the liability related to the sale of future royalties, as discussed further in Note 11 - Debt and Lease Obligations, as a debt instrument, amortized under the effective interest rate method over the estimated life of the revenue streams. The Company recognizes interest expense thereon using the effective rate, which is based on its current estimates of future revenues over the life of the arrangement. The Company periodically assesses its expected revenues using internal projections, imputes interest on the carrying value of the deferred royalty obligation, and records interest expense using the imputed effective interest rate. To the extent its estimates of future revenues are greater or less than previous estimates or the estimated timing of such payments is materially different than previous estimates, the Company will account for any such changes by adjusting the effective interest rate on a prospective basis, with a corresponding impact to the reclassification of the royalty financing liability. The assumptions used in determining the expected repayment term of the royalty financing liability and amortization period of the issuance costs require that the Company makes significant estimates that could impact the short-term and long-term classification of the royalty financing liability, interest recorded on such liability, as well as the period over which such costs will be amortized.

Concentration of Credit Risk, Other Risks and Uncertainties

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, and short-term investments. The Company deposits its cash equivalents in interest-bearing money market accounts and certificates of deposit, invests in highly liquid U.S. treasury notes, commercial paper, and corporate bonds. The Company deposits its cash with multiple financial institutions. Cash balances exceed federally insured limits. The primary focus of the Company’s investment strategy is to preserve capital and meet liquidity requirements. The Company’s investment policy addresses the level of credit exposure by limiting the concentration in any one corporate issuer and establishing a minimum allowable credit rating. The Company also has significant assets and liabilities held in its overseas manufacturing facility, and research and development facility in China, and therefore is subject to foreign currency fluctuation and regulatory uncertainties.

3. Business Combination

On May 4, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Kuur Therapeutics, Inc., a Delaware corporation (“Kuur”) whereby it acquired 100% of the outstanding shares of Kuur (the “Merger”). Under the terms of the Merger Agreement, the Company’s wholly owned subsidiary, Athenex Pharmaceuticals LLC, a Delaware limited liability company, merged with and into Kuur, with Kuur surviving as a wholly owned subsidiary of the Company. Kuur is a leading developer of off-the-shelf CAR-NKT cell immunotherapies for the treatment of solid and hematological malignancies. The Company believes the acquisition strategically combines its TCR technology with the groundbreaking NKT cell platform to provide a solution that may address some of the known limitations associated with the first generation of cell therapy treatments focused on autologous CAR-T.

Pursuant to the Merger Agreement, an upfront fee of $70.0 million was paid to Kuur shareholders and its former employees and directors, comprised primarily of equity in the Company’s common stock. Additionally, Kuur shareholders and its former employees and directors are eligible to receive up to $115.0 million of milestone payments, which may be paid, at the Company’s sole discretion, in either cash or additional common stock of the Company (or a combination of both). On June 10, 2022, the Company's shareholders approved the issuance of shares of common stock as milestone payments under the Merger Agreement.

The Company identified the Merger as a business combination pursuant to ASC 805 and used the acquisition method of accounting to account for the transaction. The purchase price, after adjusted for closing conditions, consisted of 14,228,066 shares of the Company’s common stock issued at $3.71 per share with a fair value of $52.8 million, plus the fair value of the future milestone payments amounting to $19.8 million, recorded as contingent consideration. The Company recorded the fair value of this contingent consideration as a liability based on the probabilities of Kuur achieving the milestones and the present value of such payments. These inputs are not observable in the market and therefore are considered Level 3 inputs.

The Company estimated fair values on May 4, 2021 for the allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed in connection with the Merger. During the measurement period, the Company continued to obtain information to assist in finalizing the fair value of assets acquired and liabilities assumed. Measurement period adjustments were applied in the reporting period in which the adjustments were determined. During the year ended December 31, 2021, the Company recorded a measurement period adjustment to reflect the estimated fair value of in-process research and development ("IPR&D"), as a result of changes in the underlying assumptions, including projected expenses and the estimated discount rate. This measurement period adjustment resulted in the increase of IPR&D of $1.4 million, a decrease in the deferred tax liability assumed of $0.2 million, and a decrease in goodwill of $1.6 million from the initial measurement reported as of June 30, 2021. To estimate the fair value of the identifiable intangible assets acquired, the Company used projected discounted cash flow method, which requires assumptions of projected revenues and expenses and an estimated discount rate, among other inputs, each of which is not observable in the market and thus are considered Level 3 inputs. The Company assumed $8.9 million of transaction incentive liability to Kuur’s key employees and independent company directors, of which $3.3 million was paid in cash and $5.6 million was paid in 1,373,601 shares of the

Company’s common stock at $4.11 per share. The following table summarizes the final purchase price allocation to the fair value of assets and liabilities acquired at the date of acquisition (in thousands):


Allocation of Consideration:
Stock issued (14,228,066 shares at $3.71)	$	52,786
Contingent consideration		19,839
Purchase price:	$	72,625
Net assets acquired:
Cash and cash equivalents	$	1,425
Prepaid expenses and other current assets		133
In-process research & development		64,900
Accounts payable		(39	)
Accrued expenses		(1,037	)
Deferred income tax liability		(12,543	)
Transaction incentive liability		(8,925	)
Total identifiable net assets		43,914
Goodwill		28,711
Total purchase price allocation	$	72,625

Goodwill in the amount of $28.7 million was recorded for the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. The goodwill recorded in connection with this acquisition is not deductible for income tax purposes. A deferred tax liability in the amount of $12.5 million was recorded related to the future taxable income as a result of the book to tax basis difference arising from the IPR&D.

The fair value of the acquired IPR&D relates to two products, including (a) an allogenic product in which NKT cells are engineered with a CAR targeting CD19, and (b) an allogenic product in which NKT cells are engineered with a CAR targeting GPC3. These IPR&D projects were valued using an income approach, specifically a projected discounted cash flow method, adjusted for the probability of technical success (PTS). The projected discounted cash flow models used to estimate the Company’s IPR&D reflect significant assumptions regarding the estimates a market participant would make in order to evaluate a drug development asset including the following:

•

Estimates of potential cash flows to be generated by the project and resulting asset, which was developed utilizing estimates of total patient population, market penetration rates, demand risk adjustment factors, and product pricing;

•

Estimates regarding the timing of and the expected cost of goods sold, research and development expenses, selling, general, and administrative expenses to advance the clinical programs to commercialization;

•

Estimates of profit sharing and cash flow adjustments;

•

The projected cash flows were then adjusted using PTS factors that were selected considering both the current state of development and the nature of the proposed indication; and

•

Finally, the resulting probability-adjusted cash flows were discounted to present value using a risk-adjusted discount rate, developed considering the market risk present in the forecast and the size of the asset.

This acquisition was made to benefit the Company’s R&D efforts, providing synergies with other assets in the Company’s pipeline and therefore, is included in the Oncology Innovation Platform. The operating results of Kuur have been included within the Company’s Oncology Innovation Platform operating segment from the date of acquisition. Kuur added revenue of $0 and $0.1 million for the three and nine months ended September 30, 2022 and contributed a net loss of $3.1 million and $9.2 million for the three and nine months ended September 30, 2022, respectively. Kuur added revenue of $0 for both the three and nine months ended September 30, 2021 and contributed a net loss of $2.5 million and $3.0 million for the three and nine months ended September 30, 2021.

No acquisition-related costs were incurred during the nine months ended September 30, 2022. Acquisition-related costs, including legal, regulatory, and consulting costs, amounted to $3.5 million for the nine months ended September 30, 2021, and are included within selling, general, and administrative expenses in the Company’s consolidated statement of operations and comprehensive loss.

Unaudited Pro Forma Financial Results

The following table presents supplemental unaudited pro forma information for the acquisition as if it had occurred on January 1, 2021. The unaudited pro forma financial results for the nine months ended September 30, 2022 do not include proforma adjustments, as the results of Kuur have been consolidated within the Company's financial statements for that period. The unaudited

pro forma financial results for the three and nine months ended September 30, 2021 include the following adjustments: (1) removal of direct acquisition-related costs which would not have been incurred had the businesses been owned on the beginning of the prior reporting period, (2) the deferred tax effect if the intangible assets and purchase accounting were recorded as of the beginning of the prior reporting period, and (3) the removal of the change in fair value of Kuur convertible debt which was converted prior to the consummation of the acquisition. The pro forma results do not include any anticipated synergies or other expected benefits of the acquisitions. The unaudited pro forma financial information is for informational purposes only and is not necessarily indicative of either future results of operations of the combined entity or results that might have been achieved had the acquisitions been consummated as of the beginning of the prior reporting period. The following table presents the unaudited pro forma consolidated financial information for the three and nine months ended September 30, 2022 (in thousands):


Unaudited pro forma financial information	Three Months Ended September 30,						Nine Months Ended September 30,
(Athenex and Kuur Consolidated)	2022			2021			2022			2021
Consolidated revenue	$	33,530		$	31,425		$	94,188		$	91,275
Consolidated net loss	$	(19,669	)	$	(36,057	)	$	(69,246	)	$	(94,254	)

4. Discontinued Operations

On January 7, 2022, the Company entered into a definitive agreement (the “Dunkirk Agreement”) with ImmunityBio, Inc. (the "Dunkirk Buyer") whereby the Company agreed to sell to the Dunkirk Buyer its leasehold interest in a manufacturing facility in Dunkirk, New York (the “Dunkirk Facility”) and certain other related assets, as described below, in exchange for reimbursement of certain expenditures that the Company made in the Dunkirk Facility totaling $40.0 million. The transaction closed on February 14, 2022 and was subject to approval from the Company's lender, Oaktree. The provisions of this approval included prepayment of the senior secured loans, as described in Note 11 - Debt and Lease Obligations. The Dunkirk Buyer has agreed to manufacture 503B products for the Company on mutually agreed upon commercial terms.

In addition to the leasehold interest in the Dunkirk Facility, the Dunkirk Buyer purchased the Company’s interests in certain leased manufacturing equipment and personal property, and owned personal property and inventory at the Dunkirk Facility, along with the Company’s rights in and obligations under its agreements relating to the Dunkirk Facility with Empire State Development ("ESD"), Fort Schuyler Management Corporation ("FSMC"), and County of Chautauqua Industrial Development Agency ("CCIDA") and other parties (collectively, the "Dunkirk Operations"). The Dunkirk Buyer assumed all capital expenditure and hiring obligations of the Company related to the Dunkirk Operations pursuant to the Company’s existing agreements with ESD and FSMC. The Company did not assign any of its rights to its corporate headquarters in Buffalo, New York, under the Dunkirk Agreement and retained all of its rights and obligations with respect to its corporate headquarters.

The Dunkirk Operations have met all conditions required to be classified as discontinued operations. Therefore, the operating results of the Dunkirk Operations are reported as loss (gain) from discontinued operations in the accompanying consolidated statements of operations and comprehensive loss. The assets and liabilities related to the Dunkirk Operations are reported as assets and liabilities of discontinued operations in the accompanying balance sheets as of September 30, 2022 and December 31, 2021. These assets are recorded at the lesser of cost or fair value less cost to sell. The Dunkirk Operations have historically been included within the Global Supply Chain Platform on the Company's consolidated financial statements.

Additionally, on July 7, 2022, the Company entered into an Equity Purchase Agreement with TiHe Capital (Beijing) Co. Ltd. (the "API Buyer") pursuant to which the Company agreed to sell 100% of the equity interests in Chongqing Taihao Pharmaceutical Co., Ltd. and Athenex Pharmaceuticals (Chongqing) Limited (the “Equity Interests”) for RMB129.4 million, or approximately $18 million (“EPA Purchase Price”). The Equity Interests primarily represent the Company’s ownership of its active pharmaceutical ingredient (“API”) manufacturing business in China, including the right to operate the Taihao API facility in Chongqing, China, and its lease for the Sintaho API facility in Chongqing, China, with Chongqing Maliu Riverside Development and Investment Co., LTD (“CQ”), (collectively "China API Operations"). At the closing of this transaction (“Closing Date”) the Buyer will pay at least 70% of the EPA Purchase Price to the Company in cash. The remainder of the EPA Purchase Price will be paid in cash, with 20% of the EPA Purchase Price to be paid within three months after the Closing Date and the remaining balance of the EPA Purchase Price to be paid within six months after the Closing Date. On the Closing Date, the Company and the Buyer are expected to enter into a supply agreement and an agreement granting the Buyer the right of first negotiation for certain of the Company’s products in China. The deal is subject to customary closing conditions, including obtaining certain regulatory approvals in China and is expected to close in the fourth quarter of 2022.

As of September 30, 2022, the China API Operations met all conditions required to be classified as discontinued operations. Therefore, the operating results of the China API Operations are reported within loss (gain) from discontinued operations in the accompanying consolidated statements of operations and comprehensive loss. The assets and liabilities related to the China API Operations are reported as assets and liabilities of discontinued operations in the accompanying balance sheets as of December 31,

2021. These assets are recorded at the lesser of cost or fair value less cost to sell. The China API Operations have historically been included within the Global Supply Chain Platform on the Company's consolidated financial statements.

The following table presents the financial results of the discontinued operations (in thousands):


	Three Months Ended September 30,						Nine months ended September 30,
	2022			2021			2022			2021
Discontinued Dunkirk operations:
Selling, general, and administrative expenses	$	—		$	(3,156	)	$	(1,927	)	$	(6,965	)
Gain on sale of discontinued operations		—			—			14,464			—
Income from government grant		—			2,459			—			2,459
Interest expense		—			(7	)		(2	)		(25	)
(Loss) gain from discontinued Dunkirk operations		—			(704	)		12,535			(4,531	)
Discontinued China API operations:
Revenue	$	910		$	872		$	1,916		$	3,970
Cost of sales		—			(546	)		(7,809	)		(2,457	)
Research and development expenses		(620	)		(111	)		(1,233	)		(1,918	)
Selling, general, and administrative expenses		(1,327	)		(1,543	)		(3,996	)		(4,245	)
Other income		784			125			1,616			220
Interest expense		(1	)		—			(11	)		(47	)
Loss from discontinued China API operations	$	(254	)	$	(1,202	)	$	(9,517	)	$	(4,477	)
(Loss) gain from discontinued operations	$	(254	)	$	(1,906	)	$	3,018		$	(9,009	)

The Dunkirk operations selling, general, and administrative costs during the periods presented was comprised primarily of compensation and consultant expenses, as well as operating expenses needed to prepare the facility.

The gain on sale of the Dunkirk discontinued operation was the result of the $40.0 million cash proceeds from the sale, less the net book value of assets and liabilities transferred to the Dunkirk Buyer, including property and equipment of $27.1 million, accounts payable and accrued expenses of $1.3 million and current and long-term finance lease obligations of $0.2 million.

The revenue and cost of sales of the China API discontinued operation arose from the sales of API. Cost of sales of the China API discontinued operation includes a write-off of excess and obsolete inventory of $7.1 million for the nine months ended September 30, 2022. Research and development costs of the China API discontinued operation represent development of API manufacturing methods and API product development for the Company's Orascovery platform. Other income of the China API discontinued operation includes the sale of pilot product which was previously developed at the facility and included within research and development expense.

The consolidated statements of cash flows include cash flows related to the discontinued operations due to the Company's centralized treasury and cash management processes. The following table presents additional cash flow information for the discontinued operations (in thousands):


	Nine months ended September 30,
	2022			2021
Supplemental information for discontinued Dunkirk operations:
Depreciation expense	$	185		$	43
Cash paid for capital expenditures		(1,949	)		(11,910	)
Repayment of finance lease obligations		(7	)		(56	)
Supplemental information for discontinued China API operations:
Depreciation expense	$	1,371		$	720
Impairment of PPE		226			—
Write-off of inventory		7,120			—
Cash paid for capital expenditures		(107	)		(4,467	)
Proceeds from issuance of debt		—			783
Repayment of long-term debt		(785	)		(783	)

The following table presents the aggregate carrying amounts of the classes of assets and liabilities of discontinued operations (in thousands):


	September 30,		December 31,
	2022		2021
Discontinued Dunkirk operations:
Prepaid expenses and other current assets	$	—	$	1,280
Property and equipment, net		—		26,848
Discontinued China API operations:
Accounts receivable		544		351
Inventories		3,333		7,636
Prepaid expenses and other current assets		2,307		3,564
Property and equipment, net		19,943		22,797
Operating lease right-of-use assets, net		230		734
Total assets attributable to discontinued operations	$	26,357	$	63,210
Discontinued Dunkirk operations:
Accounts payable	$	—	$	3,763
Accrued expenses		—		1,198
Current portion of finance lease obligation		—		101
Long-term finance lease obligation		—		126
Discontinued China API operations:
Accounts payable	$	2,397	$	2,223
Accrued expenses		302		561
Current portion of operating lease liabilities		97		516
Current portion of long-term debt		—		785
Long-term debt and lease obligations		7,033		7,932
Total liabilities attributable to discontinued operations	$	9,829	$	17,205

5. Restricted Cash

The Company had a restricted cash balance of $5.2 million and $16.5 million as of September 30, 2022 and December 31, 2021, respectively, held in a controlled bank account in connection with the Senior Credit Agreement with Oaktree and the RIPA. The Senior Credit Agreement requires the Company to maintain, in a debt service reserve account, a minimum cash balance equal to twelve months of interest on the outstanding loans under the Senior Credit Agreement.

6. Inventories

Inventories consist of the following (in thousands):


	September 30, 2022		December 31, 2021
Raw materials and purchased parts	$	8,614	$	5,490
Work in progress		63		66
Finished goods		33,362		21,493
Total inventories	$	42,039	$	27,049

7. Intangible Assets, net

The Company’s identifiable intangible assets, net, consist of the following (in thousands):


	September 30, 2022
	Cost/Fair Value			Accumulated Amortization		Impairments		Net
Amortizable intangible assets:
Licenses	$	13,946		$	7,286	$	—	$	6,660
Indefinite-lived intangible assets:
CDE in-process research and development (IPR&D)		728			—		78		650
Kuur IPR&D		64,900			—		—		64,900
Effect of currency translation adjustment		(42	)		—		—		(42	)
Total intangible assets, net	$	79,532		$	7,286	$	78	$	72,168


	December 31, 2021
	Cost/Fair Value			Accumulated Amortization		Impairments		Net
Amortizable intangible assets
Licenses	$	12,654		$	6,376	$	—	$	6,278
Indefinite-lived intangible assets:
CDE in-process research and development (IPR&D)		728			—		—		728
Kuur IPR&D		64,900			—		—		64,900
Effect of currency translation adjustment		(10	)		—		—		(10	)
Total intangibles, net	$	78,272		$	6,376	$	—	$	71,896

In connection with the acquisition of Kuur, the Company identified three drug candidate projects and two were classified as IPR&D and recorded at their fair value on the acquisition date. Included in the IPR&D is the historical know-how, cell treatment protocols, and procedures expected to be needed to complete the related phase of testing. The fair value of IPR&D was determined for each project, or unit of account, using unobservable, level 3 inputs (see Note 3—Business Combination). IPR&D intangible assets are not amortized, but rather are reviewed for impairment on an annual basis or more frequently if indicators of impairment are present, until the project is completed, abandoned, or transferred to a third party.

As of September 30, 2022, licenses at cost include an Orascovery license of $0.4 million, licenses purchased from Gland Pharma Limited (“Gland”) of $3.8 million, a license purchased from MAIA Pharmaceuticals, Inc. (“MAIA”) for $4.0 million, licenses purchased from Ingenus Pharmaceuticals, LLC (“Ingenus”) for $3.0 million, and licenses of other specialty products with various licensors of $2.8 million. The Orascovery license with Hanmi Pharmaceuticals Co. Ltd. (“Hanmi”) was purchased directly from Hanmi and is being amortized on a straight-line basis over a period of 12.75 years, the remaining life of the license agreement at the time of purchase. The licenses purchased from Gland are being amortized on a straight-line basis over a period of 5 years, the remaining life of the license agreement at the time of purchase. The license purchased from MAIA is being amortized over a period of 7 years, the remaining life of the license agreement at the time of purchase. Of the $3.0 million licenses purchased from Ingenus, a $2.0 million license is being amortized over a period of 5 years, the estimated useful life of the license agreement and a $1.0 million license purchased from Ingenus is being amortized over a period of 3 years, the remaining life of the license agreement at the time of purchase.

The remaining intangible asset was acquired in connection with the acquisitions of Comprehensive Drug Enterprises (“CDE”). The CDE IPR&D will not be amortized until the related projects are completed. IPR&D is tested annually for impairment, unless conditions exist causing an earlier impairment test (e.g., abandonment of project). The Company recorded impairment of a project within CDE IPR&D during the nine months ended September 30, 2022, amounting to $0.1 million, which is included within research and development expenses on the Company's condensed consolidated statements of operations and comprehensive loss. The weighted-average useful life for all intangible assets was 6.0 years as of September 30, 2022.

The Company recorded $0.3 million and $0.4 million of amortization expense for the three months ended September 30, 2022 and 2021, respectively and recorded $0.9 million and $1.5 million of amortization expense for the nine months ended September 30, 2022 and 2021, respectively.

The Company’s previous goodwill balance is the result of prior period acquisitions and is allocated to the Global Supply Chain Platform reporting unit and the Oncology Innovation Platform reporting unit. During the fourth quarter of 2021, the Company performed a goodwill impairment test and, based on the results, determined that the carrying value of each of our reporting units exceeded their fair value and the goodwill was determined to be impaired. As a result, $26.6 million, representing the full amount of goodwill allocated to the Global Supply Chain Platform, and $41.1 million, representing the full amount of goodwill allocated to the Oncology Innovation Platform was recorded as impairment expense during the fourth quarter of 2021. No such impairments were recorded during the nine months ended September 30, 2022.

8. Fair Value Measurements

Financial instruments consist of cash and cash equivalents, restricted cash, short-term investments, an available-for-sale equity investment, accounts receivable, accounts payable, accrued liabilities, contingent consideration, and debt. Short-term investments, the equity investment, and contingent consideration are stated at fair value. Cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities, and debt, are stated at their carrying value, which approximates fair value due to the short time to the expected receipt or payment date of such amounts. The Company believes that the carrying value of its long-term debt approximates fair value based on current interest rates.

ASC 820, Fair Value Measurements, establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under the ASC 820 are described as follows:

Level 1—Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.

Level 2—Inputs to the valuation methodology include:

•

Quoted prices for similar assets or liabilities in active markets;

•

Quoted prices for identical or similar assets or liabilities in inactive markets;

•

Inputs other than quoted prices that are observable for the asset or liability;

•

Inputs that are derived principally from or corroborated by observable market data by correlation or other means; and

•

If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.

Level 3—Inputs to the valuation methodology are unobservable, supported by little or no market activity, and are significant to the fair value measurement.

Transfers between levels, if any, are recorded as of the beginning of the reporting period in which the transfer occurs. There were no transfers between Levels 1, 2 or 3 for any of the periods presented.

The following tables represent the fair value hierarchy for those assets and liabilities that the Company measures at fair value on a recurring basis (in thousands):


	Fair Value Measurements at September 30, 2022 Using:
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Financial assets included within cash and cash equivalents
Short-term investments - money market funds	$	22,398	$	22,398	$	—	$	—
Short-term investments - certificates of deposit		403		—		403
Available-for-sale investment		1,034		1,034		—		—
Total assets	$	23,835	$	23,432	$	403	$	—
Liabilities:
Contingent consideration - Kuur	$	18,937	$	—	$	—	$	18,937
Total liabilities	$	18,937	$	—	$	—	$	18,937


	Fair Value Measurements at December 31, 2021 Using:
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Financial assets included within cash and cash equivalents
Money market funds	$	7,937	$	7,937	$	—	$	—
Short-term investments - certificates of deposit		2,000		—		2,000		—
Short-term investments - commercial paper		10,446		—		10,446		—
Financial assets included within short-term investments
Short-term investments - certificates of deposit		9,488		—		9,488		—
Available-for-sale investment		719		719		—		—
Total assets	$	30,590	$	8,656	$	21,934	$	—

Liabilities:
Contingent Consideration - Kuur	$	24,076	$	—	$	—	$	24,076
Total assets	$	24,076	$	—	$	—	$	24,076

The Company classifies its money market funds within Level 1 because it uses quoted market prices to determine their fair value. The Company classifies its commercial paper, corporate notes, certificates of deposit, and U.S. government bonds within Level 2 because it uses quoted prices for similar assets or liabilities in active markets and each has a specified term and all Level 2 inputs are observable for substantially the full term of each instrument.

The Company owns 68,000 shares of PharmaEssentia, a company publicly traded on the Taiwan OTC Exchange. As of September 30, 2022 and December 31, 2021, the Company’s investment in PharmaEssentia was valued at the reported closing price on such dates. This investment is classified as a Level 1 investment and is recorded as an available-for-sale investment within short-term investments on the Company’s condensed consolidated balance sheets.

The Company accounted for the acquisition of Kuur as business combinations under the acquisition method of accounting. All assets and liabilities were measured at fair value as of the acquisition date. As a result of the purchases, the Company became liable for contingent consideration payable to certain previous owners of Kuur. This contingent consideration is measured at fair value using unobservable level 3 inputs, including (a) the estimated amount and timing of projected cash flows; (b) the probability of the achievement of the regulatory events on which the contingency is based; and (c) the risk-adjusted discount rate used to present value the probability-weighted cash flows. Significant increases (decreases) in any of those inputs could result in a lower or higher fair value measurement, and such changes in fair value measurement could have an impact on future earnings. The total undiscounted amount of the milestone payments underlying this liability is $115.0 million. These payments are contingent on the achievement of various regulatory milestones which are expected to occur between 2023 and 2027, and may be paid, at the Company’s sole discretion, in either cash or common stock (or a combination of both). The milestone payments have been adjusted based on a weighted average probability of occurrence of 34.8%, and the discount rates used to calculate the present value of future payments were based on risk-free rates plus risk-adjusted spreads based on the Company’s estimated incremental borrowing rate and was between 21.9% and 22.7% for the valuation of the contingent consideration as of September 30, 2022. The acquisition of Kuur is described in Note 3—Business Combination and the fair value of the contingent consideration is discussed further in Note 12 – Contingent Consideration.

9. Accrued Expenses

Accrued expenses consist of the following (in thousands):


	September 30,		December 31,
	2022		2021
Accrued selling fees, rebates, and royalties		15,801		6,890
Accrued clinical expenses		6,750		3,116
Accrued wages and benefits		6,299		2,034
Accrued inventory purchases		4,955		4,217
Deferred revenue		2,790		2,799
Accrued operating expenses		1,782		2,654
Accrued tax withholdings		1,678		1,800
Accrued R&D licensing fees		28		116
Accrued interest		—		266
Total accrued expenses	$	40,083	$	23,892

10. Income Taxes

The Company did not record a provision for U.S. federal income taxes for the nine months ended September 30, 2022 because it expects to generate a loss for the year ending December 31, 2022 and the Company’s net deferred tax assets continue to be fully offset by a valuation allowance. Income tax expense for the nine months ended September 30, 2022 is primarily the result of the taxes payable in foreign jurisdictions.

On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022 (IRA), which, among other things, implements a 15% minimum tax on book income of certain large corporations and a 1% excise tax on net stock repurchases. The alternative minimum tax and excise tax are effective in taxable years beginning after December 31, 2022. The alternative minimum tax would not be applicable in our next fiscal year since it is based on a three-year average annual adjusted financial statement income in excess of $1 billion. Historically, the Company has made discretionary share repurchases to cover payroll withholding taxes in connection with the vesting of restricted stock unit awards. Beginning in 2023, these purchases could be subject to the excise tax if the value of the shares repurchased exceeded certain levels. Based on the historical net repurchase activity the excise tax and the other provisions of the IRA are not expected to have a material impact on the Company's results of operations or financial position. The Company will evaluate any impact related to the excise tax on net stock repurchases based on its relative activity.

11. Debt and Lease Obligations

Debt

The Company’s debt as of September 30, 2022 and December 31, 2021, consists of the following (in thousands):


	September 30,		December 31,
	2022		2021
Current portion of senior secured loan	$	14,789	$	45,938
Current portion of finance lease obligations		138		158
Current portion of operating lease obligations		2,026		2,393
Long-term portion of finance lease obligations		123		207
Long-term portion of operating lease obligations		3,427		4,411
Senior secured loan, net of debt discount and financing fees of $10,583 and $8,663, respectively		22,128		95,400
Royalty financing liability, long-term, net of financing fees of $4,982		80,103		—
Total	$	122,734	$	148,507

Senior Credit Agreement

On June 19, 2020, the Company entered into the Senior Credit Agreement with Oaktree to borrow up to $225.0 million in five tranches, with a maturity date of June 19, 2026. Three tranches (“Tranche A”, “Tranche B”, and “Tranche D”) of the term loans with an aggregate principal amount of $150.0 million were drawn by the Company in 2020. The last two tranches ("Tranche C" and "Tranche E"), amounting to an aggregate of $75.0 million, were dependent on the approval of oral paclitaxel for the treatment of mBC. Under the Third Amendment on January 19, 2022, the amount of these tranches was reduced to $0 and are no longer available to the Company. The loan bears interest at a fixed annual rate of 11.0%. The Company allocated the proceeds of the drawn tranches between liability and equity components and the fair value of such equity components, along with the direct costs related to the issuance of the debt were recorded as an offset to long-term debt on the consolidated balance sheets. The debt discount and financing fees are amortized on a straight-line basis, which approximates the effective interest method, over the remaining maturity of the Senior Credit Agreement. The effective interest rate of Tranches A, B and D, including the amortization of debt discount and financing fees amounts to 13.3% annually. The Company is required to make quarterly interest-only payments until June 19, 2022, after which the Company is required to make quarterly amortizing payments of $2.8 million, with the remaining balance of the principal plus accrued and unpaid interest due at maturity. Beginning on September 17, 2020, the Company was required to pay a commitment fee on any undrawn commitments equal to 0.6% per annum, payable on each subsequent funding date or the commitment termination date. These commitments were terminated pursuant to the Third Amendment.

Under the Third Amendment, the Company was required to make a mandatory prepayment of principal to Oaktree equal to 62.5% of the cash proceeds of the Dunkirk Transaction. The Company was also required to pay (i) accrued and unpaid interest and (ii) a 7.0% fee, allocated as a 2.0% Exit Fee and a 5.0% Prepayment Fee, on the principal amount being repaid. The Company was required to pay Oaktree an amendment fee of $0.3 million and certain related expenses upon the closing of the Dunkirk Transaction. The Third Amendment required the Company to make an additional mandatory prepayment of $12.5 million in principal plus the costs and fees described above by June 14, 2022, of which $5.0 million in principal was paid on June 14, 2022 and $7.5 million was paid on the closing date of the RIPA pursuant to the terms of the Fourth Amendment. Using proceeds from the RIPA, the Company made additional prepayments of principal to Oaktree of $42.5 million. The Company was also required to pay (i) accrued and unpaid interest and (ii) a 5.0% fee, allocated as a 2.0% Exit Fee and a 3.0% Prepayment Fee, on the principal amounts being repaid. The Company made payments, inclusive of principal, interest, and fees, to Oaktree in the aggregate amount of $108.3 million pursuant to the Third Amendment, Fourth Amendment, Fifth Amendment, and Sixth Amendment during the nine months ended September 30, 2022. Additional prepayments of the loan, in whole or in part, will be subject to early prepayment fee which declines each year until June 2024, after which no prepayment fee is required. Upon the final payment, the Company must also pay an exit fee calculated based on a percentage of the aggregate principal amount of all tranches advanced to the Company, and as of September 30, 2022, the Company has reflected an exit fee liability of $1.0 million. As of September 30, 2022, the Company has classified $16.2 million of the senior secured loan as current portion of long-term debt, comprised of four quarterly payments of $2.8 million each, due within 12 months of September 30, 2022, and $4.9 million expected to be due from funds received in connection with the sale of the China API operations (see Note 4 - Discontinued Operations). The Company has classified $20.7 million of the senior secured loan as long-term debt on the consolidated balance sheet, comprised of the remaining principal due, less debt discount and financing fees of $10.6 million.

The Senior Credit Agreement contains certain representations and warranties, affirmative covenants, negative covenants and conditions that were customarily required for similar financings. The Company is subject to certain financial covenants under the Senior Credit Agreement, including (1) a minimum liquidity amount in cash or permitted cash equivalent investments, which initially was $20.0 million from the closing date until the date on which the aggregate principal amount of loans outstanding is greater than or equal to $150.0 million (the “First Step-Up Date”), $25.0 million from the First Step-Up Date until the date on which the aggregate principal amount of loans outstanding balance is equal to $225.0 million (the “Second Step-Up Date”), and $30.0 million from the Second Step-up Date until the maturity date; (2) minimum revenue no less than 50% of target revenue beginning with the fiscal quarter ended on December 31, 2020 and with respect to each such subsequent fiscal quarter prior to the revenue covenant termination date; (3) leverage ratio covenant not to exceed 4.50 to 1.00 as of the last day of any fiscal quarter beginning with the first fiscal quarter following the revenue covenant termination date. The minimum liquidity amount was decreased to $10.0 million under the Fifth Amendment. The minimum revenue targets were modified in the Fourth Amendment to reflect the Company's current business, and the minimum revenue covenant was similarly modified to require the Company to have minimum revenue of no less than 70% of target revenue at the end of any fiscal quarter in which the leverage ratio exceeds 4.50 to 1.00. As of September 30, 2022, the Company was in compliance with all applicable debt covenants.

Royalty Financing Liability

On June 21, 2022, the Company and the SPV entered into the RIPA with the Purchasers for the sale of revenues from U.S. and European royalty and milestone interests in Klisyri® (tirbanibulin) for an aggregate Purchase Price of $85.0 million. Of the total Purchase Price $5.0 million was placed into escrow to be paid to the Company upon the satisfaction of certain manufacture and supply milestones for Klisyri prior to December 31, 2025, $5.0 million was used to pay for transaction expenses, $52.5 million was used to pay down the Company's Senior Credit Agreement with Oaktree, and $7.5 million in Segregated Funds was deposited and held in a segregated account of the Company. The Purchasers released the $7.5 million of Segregated Funds to the Company in August 2022, in connection with the Sixth Amendment to the Senior Credit Agreement, and $1.5 million of the amount placed in escrow was released to the Company upon completion of an escrow release trigger milestone in September 2022. The remaining proceeds were available for the Company's operations.

In connection with this transaction, the Company formed the SPV and contributed its interest in the License Agreement with Almirall S.A. relating to Klisyri and certain related assets to the SPV. Oaktree and Sagard each own a 10% equity interest in the SPV. Pursuant to the RIPA, the SPV sold its right to the cash received in respect of certain royalties and certain milestone interests under the License Agreement to the Purchasers. The SPV retained the right to receive 50% of certain of the milestone interests under the License Agreement, equal to $155.0 million in the aggregate if those milestones are achieved, and 50% of the royalties paid under the License Agreement for sales of Klisyri once net sales of Klisyri exceed a certain dollar amount.

The Company has evaluated the terms of the RIPA and concluded that the features of the transaction, namely the Company's significant involvement in the cash flows due to the Purchasers, are similar to those of a debt instrument. The Company received funds of $75.0 million, net of transaction costs of $5.0 million, during June 2022, and the Company recorded such amount as long-term debt as of September 30, 2022. This purchase price of this transaction reflected its fair value. The $3.5 million which is held in escrow represents a loan commitment which the Company may be entitled to in the event that certain manufacturing and supply milestones are met.

The Company amortizes the royalty financing liability using the effective interest rate method over the estimated life of the revenue streams. The Company recognizes interest expense thereon using the effective rate, which is based on its current estimates of future revenues over the life of the arrangement. The Company periodically assesses its expected revenues using internal projections, imputes interest on the carrying value of the deferred royalty obligation, and records interest expense using the imputed effective interest rate. To the extent its estimates of future revenues are greater or less than previous estimates or the estimated timing of such payments is materially different than previous estimates, the Company will account for any such changes by adjusting the effective interest rate on a prospective basis, with a corresponding impact to the reclassification of the deferred royalty obligation. The assumptions used in determining the expected repayment term of the royalty financing liability and amortization period of the issuance costs require that the Company makes significant estimates that could impact the short-term and long-term classification of the royalty financing liability, interest recorded on such liability, as well as the period over which such costs will be amortized. The Company's estimated royalty cash flows extend through 2035 and imply an effective annual interest rate of 28.1%. Changes to these estimates may have a material effect on the Company's financial statements. During the nine months ended September 30, 2022, the Company received Klisyri royalties of $0.9 million, which were remitted to the Purchasers.

Gain/Loss on Extinguishment of Debt

The Company considered the combined effect of the RIPA and the Fourth and Fifth Amendment to the Senior Credit Agreement, both of which are held with Sagard and Oaktree under ASC 470. The Company performed a cash flow test on a lender-by-lender basis and concluded that these transactions represented an extinguishment of debt. The Company extinguished the previous balance of its Senior Credit Agreement commensurate with the prepayments under the Fourth and Fifth Amendments and recorded the surviving debt at its fair value. To determine the fair value of the remaining debt, the Company utilized an estimate of its incremental borrowing rate. At the time of debt modification, the Company's incremental borrowing rate was 20.1%, which was utilized as the effective interest rate of the balance outstanding on the Senior Credit Agreement. Accordingly, the Company recorded a liability of $45.7 million, net of debt discount of $11.8 million. The extinguishment of debt and recording the surviving debt at its fair value resulted in a gain on extinguishment of debt of $2.1 million. This, together with a $3.5 million loss on partial extinguishment of debt recorded in connection with the Third Amendment in February 2022, resulted in a loss on partial extinguishment of debt of $1.4 million during the nine months ended September 30, 2022.

Credit Agreements, Bank Loan and Mortgage

During the second quarter of 2019, the Company entered into a credit agreement which amended the existing partnership agreement with Chongqing Maliu Riverside Development and Investment Co., LTD (“CQ”), for a Renminbi ¥50.0 million (USD $7.0 million at September 30, 2022) line of credit to be used for the construction of the new API plant in China. The Company is required to repay the principal amount with accrued interest within three years after the plant receives the cGMP certification, with 20% of the total loan with accrued interest due within the first twelve months following receiving the certification, 30% of the total loan with accrued interest due within twenty-four months, and the remaining balance with accrued interest due within thirty-six months. Interest accrues at the three-year loan interest rate by the People’s Bank of China for the same period on the date of the deposit of the full loan amount, which is expected to approximate 4.75% annually. If the Company fails to obtain the cGMP certification within three years upon the acceptance of the plant, it shall return all renovation costs with the accrued interest to CQ in a single transaction within the first ten business days. As of September 30, 2022, the balance due to CQ was $7.0 million, which was included within long-term liabilities attributable to discontinued operations on the Company's condensed consolidated balance sheet.

On May 15, 2020, the Company entered into a credit agreement with China Merchants Bank, enabling the Company to draw up to Renminbi ¥5.0 million (USD $0.7 million at September 30, 2022) through May 14, 2021. The Company drew the entire available credit in July 2020 and repaid the credit agreement in full on May 14, 2021. On May 28, 2021, the Company entered into a credit agreement on the same terms as that which was repaid, and withdrew the full Renminbi ¥5.0 million (USD $0.7 million at September 30, 2022) on that date. This loan had a maturity date of May 28, 2022 and was paid in full during the nine months ended September 30, 2022. This repayment is included within net cash used in financing activities of discontinued operations on the Company's condensed consolidated statement of cash flows.

Lease Obligations

The Company has operating leases for office and manufacturing facilities in several locations in the U.S., Asia, and Latin America and has a finance lease for equipment used in its facility in Buffalo, NY. The components of lease expense are as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Operating lease cost	$	531	$	608	$	1,630	$	1,820
Finance lease cost:
Amortization of assets		41		55		125		168
Interest on lease liabilities		8		12		27		43
Total net lease cost	$	580	$	675	$	1,782	$	2,031

The Company has elected to exclude short-term leases from its operating lease right-of-use (“ROU”) assets and lease liabilities. Lease costs for short-term leases were not material to the financial statements for the three and nine months ended September 30, 2022 and 2021. Variable lease costs for the three and nine months ended September 30, 2022 were not material to the financial statements.

Supplemental balance sheet information related to leases is as follows (in thousands, except lease term and discount rate):


	September 30, 2022			December 31, 2021
Finance leases:
Property and equipment, at cost	$	1,203		$	1,203
Accumulated amortization, net		(913	)		(585	)
Property and equipment, net	$	290		$	618

Current obligations of finance leases	$	138		$	158
Long-term portion of finance leases		123			207
Total finance lease obligations	$	261		$	365

Weighted average remaining lease term (in years):
Operating leases		3.17			3.53
Finance leases		1.58			2.25

Weighted average discount rate:
Operating leases		13.1	%		12.9	%
Finance leases		9.0	%		9.8	%

Supplemental cash flow information related to leases is as follows (in thousands):


	Nine Months Ended September 30, 2022			Nine Months Ended September 30, 2021
Cash paid for amount included in the measurements of lease liabilities:
Operating cash flows from operating leases	$	(1,938	)	$	(2,064	)
Operating cash flows from finance leases		(27	)		(31	)
Financing cash flows from finance leases		(95	)		(229	)

ROU assets derecognized from modification of operating lease obligations	$	(128	)		(113	)
ROU assets recognized in exchange for operating lease obligations	$	129		$	86

Future minimum payments and maturities of leases is as follows (in thousands):


Year ending December 31:	Operating Leases			Finance Leases
2022 (remaining three months)	$	582		$	37
2023		2,221			147
2024		2,034			109
2025		1,472			—
2026		347			—
Thereafter		132			—
Total lease payments		6,788			293
Less: Imputed interest		(1,335	)		(32	)
Total lease obligations		5,453			261
Less: Current obligations		(2,026	)		(138	)
Long-term lease obligations	$	3,427		$	123

On January 5, 2021, Chongqing Sintaho Pharmaceuticals Co., Ltd. (“CQ Sintaho”), a subsidiary of the Company in China, entered into a lease agreement with Chongqing International Biological City Development & Investment Co., Ltd (“CQ D&I”). Under the lease agreement, the provisions of which are consistent with those agreed upon in the 2015 Agreement, CQ Sintaho leased the newly constructed API facility, or Sintaho API Facility, of 34,517 square meters rent-free, for the first 10-year term, with an option to extend the lease for an additional 10-year term, during which, if CQ Sintaho is profitable, it will pay a monthly rent of 5 RMB per square meter of space occupied. The Company determined the lease commenced in the first quarter of 2021, as it was operational and CQ Sintaho could direct the use of the facility. The Company also evaluated the probability of exercising the renewal and purchase options, and determined that it is not reasonably certain whether it will exercise those options. Therefore, the lease term is comprised only of the rent-free period and the recognition of the right-of-use asset and liability did not have a significant effect on the Company’s consolidated financial statements. This lease is expected to be assumed by the China API Buyer, refer to Note 4 - Discontinued Operations for additional information.

The Company exercises judgment in determining the discount rate used to measure the lease liabilities. When rates are not implicit within an operating lease, the Company uses its incremental borrowing rate as its discount rate, which is based on yield trends in the biotechnology and healthcare industry and debt instruments held by the Company with stated interest rates. The Company re-assesses its incremental borrowing rate when new leases arise, or existing leases are modified.

12. Contingent Consideration

The fair value measurements of contingent consideration liabilities are determined using unobservable Level 3 inputs. These inputs include (a) the estimated amount and timing of projected cash flows; (b) the probability of the achievement of the factors on which the contingency is based; and (c) the risk-adjusted discount rate used to present value the probability-weighted cash flows. Significant increases (decreases) in any of those inputs could result in a lower or higher fair value measurement. The Company expects that these milestones will be achieved at varying times between 2023 and 2027.

The following table represents a reconciliation of the contingent consideration liability related to the acquisition of Kuur measured on a recurring basis using level 3 inputs as of September 30, 2022 (in thousands):


Balance as of May 4, 2021	$	19,839
Adjustment to fair value		4,237
Balance as of December 31, 2021		24,076
Adjustment to fair value		(5,139	)
Balance as of September 30, 2022	$	18,937

The decrease of the contingent consideration was due to a decrease in the probability in achieving the milestones for the TCRT-ESO-A2 therapy, as that clinical program was discontinued, as well as the time value of money from the initial measurement date (Kuur acquisition date) to September 30, 2022, for the remaining R&D milestones. The discount rate used in measuring the fair value of this liability is the Company's incremental borrowing rate, which is updated on a quarterly basis. The probabilities of the R&D milestones represent the probability of technical success for each therapy to which the milestones are related, and these probabilities are updated on a quarterly basis, based on the clinical stage of the therapy, along with consideration of any additional clinical data obtained during each quarter. The adjustment to the contingent consideration liability is included within selling, general, and administrative expenses in the Company’s condensed consolidated statements of operations and comprehensive loss. Refer to Note 8 - Fair Value Measurements for additional information on the inputs used in the measurement of contingent consideration.

13. Related Party Transactions

During the nine months ended September 30, 2022 and 2021, the Company entered into transactions with individuals and companies that have financial interests in the Company. Related party transactions included the following:

In June 2018, the Company entered into two in-licensing agreements with Avalon BioMedical (Management) Limited and its affiliates (“Avalon”) wherein the Company obtained certain IP from Avalon to develop and commercialize the underlying products. Under these agreements the Company is required to pay upfront fees and future milestone payments and sales-based royalties. During the nine months ended September 30, 2022 and 2021, no fees were paid to Avalon in connection with the license agreements. Certain members of the Company’s board and management collectively have a controlling interest in Avalon. The Company does not hold any interest in Avalon and does not have any obligations to absorb losses or any rights to receive benefits from Avalon. As of September 30, 2022, and December 31, 2021, Avalon held 786,061 shares of the Company’s common stock, which represented less than 1% of the Company’s total issued shares for both periods. Balances due from Avalon recorded on the condensed consolidated balance sheets were not significant. In July 2021, the Company made $2.0 million milestone payment to Avalon pursuant to its license agreement. No such payments were made during the nine months ended September 30, 2022.

In June 2019, the Company entered into an agreement whereby Avalon would hold a 90% ownership interest and the Company would hold a 10% ownership interest of the newly formed entity under the name Nuwagen Limited (“Nuwagen”), incorporated under the laws of Hong Kong. Nuwagen is principally engaged in the development and commercialization of herbal medicine products for metabolic, endocrine, and other related indications. The Company contributed nonmonetary assets in exchange for the 10% ownership interest. In July 2020, the transaction closed. The activities of Nuwagen were not material to the financial statements for the three and nine months ended September 30, 2022 or 2021.

The Company earns licensing revenue from PharmaEssentia, an entity in which the Company has an investment classified as available-for-sale (see Note 8—Fair Value Measurements). During the nine months ended September 30, 2022 and 2021, respectively, the Company recorded $1.6 and a $0.5 million milestone fee earned from PharmaEssentia under a license agreement. The Company received less than $0.1 million under the cost-sharing agreements during the nine months ended September 30, 2022. Funds paid to PharmaEssentia under the cost-sharing agreements amounted to $0 and $0.1 million for the nine months ended September 30, 2022 and 2021, respectively.

In September 2020, Axis Therapeutics Limited (“Axis”), a majority-owned subsidiary of the Company, entered into a collaboration agreement with PharmaEssentia, pursuant to which Axis granted to PharmaEssentia an exclusive, non-transferrable and revocable sublicense of TCR-engineered T-Cell therapy for the development of the technology in Taiwan. Axis received license fees of $1.0 million, net of $0.3 million withholding tax, in each of the fourth quarter of 2020 and the third quarter of 2021. These fees, amounting to $2.0 million, were recorded as deferred revenue as of September 30, 2022.

Certain directors and family members of executives perform consulting services for the Company. Such services were not significant to the condensed consolidated financial statements.

14. Stock-Based Compensation

Common Stock Option Plans

The Company has four equity compensation plans, adopted in 2017, 2013, 2007 and 2004 (the “Plans”) which, taken together, authorize the grant of up to 16,000,000 shares of common stock to employees, directors, and consultants. On May 23, 2019, the board of directors approved the amendment and restatement of the 2017 Omnibus Incentive Plan (the “2017 Plan”), which increases the number of shares available for issuance under the 2017 Plan by up to 3,500,000 shares, which was approved by the Company’s stockholders at the Company’s 2020 annual meeting of stockholders. On April 26, 2021, the board of directors approved an amendment to the 2017 Plan, which increases the number of shares available for issuance under the 2017 Plan by 5,000,000 shares, which was approved by the Company’s stockholders at the Company’s 2021 annual meeting of stockholders. The Company also has an employee stock purchase plan, the 2017 Employee Stock Purchase Plan (the “ESPP”), adopted on June 14, 2017, which authorizes the issuance of up to 1,000,000 shares of common stock for future issuances to eligible employees.

During 2022, the Company entered into Salary Deduction and Stock Purchase Agreements (the "Purchase Agreements") with certain of its directors and executive officers. Under the Purchase Agreements, on each payroll date, the Company is authorized by the director or executive officer, in advance, to deduct a certain amount of the individual's after-tax base salary. This deducted amount is used to purchase a number of shares of the Company’s common stock determined using the Nasdaq Official Closing Price per share on the applicable payroll date. During the nine months ended September 30, 2022, directors and executive officers purchased a total of 604,065 shares of common stock at an average price of $0.53 per share.

Stock Options

The total fair value of stock options vested and recorded as compensation expense during the three months ended September 30, 2022 and 2021 was $1.3 million and $2.4 million, respectively, and was $4.2 million and $6.9 million during the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, $6.6 million of unrecognized cost related to non-vested stock options was expected to be recognized over a weighted-average period of approximately 1.52 years. The total intrinsic value of options exercised was $0 and $0.2 million for the nine months ended September 30, 2022 and 2021, respectively.

The following table summarizes the status of the Company’s stock option activity granted under the Plans to employees, directors, and consultants (aggregate intrinsic value in thousands):


	Stock Options			Weighted- Average Exercise price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at December 31, 2021		12,662,070		$	8.96		4.88	$	—
Granted		2,127,889			0.65		—		—
Forfeited and expired		(1,303,974	)		8.67		—		—
Outstanding at September 30, 2022		13,485,985		$	7.68		4.78	$	—
Vested and exercisable at September 30, 2022		10,040,486		$	8.98		5.14	$	—

The Company determines the fair value of stock-based awards on the grant date using the Black-Scholes option pricing model, which is impacted by assumptions regarding several highly subjective variables. The following table summarizes the weighted-average assumptions used as inputs to the Black-Scholes model during the periods indicated:


	Nine Months Ended September 30,
	2022			2021
Weighted average grant date fair value	$	0.65		$	3.87
Expected dividend yield		—	%		—	%
Expected stock price volatility		68	%		68	%
Risk-free interest rate		3.00	%		1.27	%
Expected life of options (in years)		6.2			6.2

Restricted Stock Awards

The total fair value of restricted stock awards vested and recorded as compensation expense during the three months ended September 30, 2022 and 2021 was $0.1 million and $0.2 million, respectively. The total fair value of restricted awards vested and recorded as compensation expense during the nine months ended September 30, 2022 and 2021 was $0.6 million and $0.3 million, respectively. Restricted stock awards cliff vest on the anniversaries of their grant date. As of September 30, 2022, $1.6 million of unrecognized cost related to non-vested restricted stock awards were expected to be recognized over a weighted-average period of approximately 2.9 years.

The following table summarizes the status of the Company's restricted stock awards.


	Shares of Restricted Stock			Weighted Average Fair Value
Nonvested at December 31, 2021		924,595		$	3.86
Granted		50,000			0.83
Vested		(206,150	)		3.73
Forfeited		(299,211	)		3.80
Nonvested at September 30, 2022		469,234		$	3.30

Employee Stock Purchase Plan

The ESPP is available to eligible employees (as defined in the plan document). Under the ESPP, shares of the Company’s common stock may be purchased at a discount (15%) of the lesser of the closing price of the Company’s common stock on the first trading or the last trading day of the offering period. The current offering period extends from June 1, 2022 to November 30, 2022. The Company expects to offer six-month offering periods after the current period. The ESPP reserved 1,000,000 shares of common stock for issuance under the ESPP. Stock-based compensation related to the ESPP amounted to less than $0.1 million for each of the three months ended September 30, 2022 and 2021 and amounted to less than $0.1 million and $0.1 million for each of the nine months ended September 30, 2022 and 2021.

Stock-Based Compensation Cost

The components of stock-based compensation and the amounts recorded within cost of sales, research and development expenses and selling, general, and administrative expenses in the Company’s consolidated statements of operations and comprehensive loss consisted of the following for the three and nine months ended September 30, 2022 and 2021 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Stock options	$	1,268	$	2,426	$	4,211	$	6,926
Restricted stock expense		141		199		637		285
Employee stock purchase plan		12		24		38		116
Total stock-based compensation expense	$	1,421	$	2,649	$	4,886	$	7,327
Cost of sales	$	27	$	47	$	79	$	161
Research and development expenses		243		795		1,208		2,067
Selling, general, and administrative expenses		1,151		1,807		3,599		5,099
Total stock-based compensation expense	$	1,421	$	2,649	$	4,886	$	7,327

15. Net Loss per Share Attributable to Athenex, Inc. Common Stockholders

Basic net loss per share is calculated by dividing net loss attributable to Athenex, Inc. common stockholders by the weighted-average number of common shares issued, outstanding, and vested during the period. Diluted net loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common stock and common stock equivalents for the period using the treasury-stock method. For the purposes of this calculation, warrants to purchase common stock and stock options are considered common stock equivalents but are only included in the calculation of diluted net loss per share when their effect is dilutive.

The following outstanding shares of common stock equivalents were excluded from the calculation of diluted net loss per share attributable to common stockholders for the periods presented because including them would have been antidilutive:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Stock options and other common stock equivalents		36,864,568		13,839,655		21,017,775		13,609,426
Unvested restricted shares		800,555		362,275		832,202		147,025
Total potential dilutive shares		37,665,123		14,201,930		21,849,977		13,756,451

16. Business Segment, Geographic, and Concentration Risk Information

The Company has three operating segments, which are organized based mainly on the nature of the business activities performed and regulatory environments in which they operate. The Company also considers the types of products from which the reportable segments derive their revenue (only applicable to two reportable segments). Each operating segment has a segment manager who is held accountable for operations and has discrete financial information that is regularly reviewed by the Company’s chief operating decision-maker. Consequently, the Company has concluded each operating segment to be a reportable segment. The Company’s operating segments are as follows:

Oncology Innovation Platform— This operating segment performs research and development on certain of the Company’s proprietary drugs, from the preclinical development of its chemical compounds, to the execution and analysis of its several clinical trials. It focuses specifically on cell therapy programs and the Orascovery research platform.

Global Supply Chain Platform— This operating segment includes APS, a manufacturing company that supplies sterile injectable drugs to hospital pharmacies across the U.S. APS manufactures products under Section 503B of the Compounding Quality Act within the Federal Food, Drug & Cosmetic Act (“FDCA”). Additionally, APS provides tirbanibulin product to our partners and provides products for the development and manufacturing of the Company’s proprietary drug candidates as well as providing the Company with a cGMP analytical services function.

Commercial Platform— This operating segment includes APD, which focuses on the manufacturing, distribution, and sales of specialty pharmaceuticals. This segment provides services and products to external customers based mainly in the U.S.

The Company’s Oncology Innovation Platform segment operates and holds long-lived assets located in the U.S., Hong Kong, mainland China, the United Kingdom, and Latin America. The Global Supply Chain Platform segment operates and holds long-lived assets located in the U.S. The Commercial Platform segment operates and holds long-lived assets located in the U.S. For geographic segment reporting, product sales have been attributed to countries based on the location of the customer.

Segment information is as follows (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Total revenue:
Oncology Innovation Platform	$	2,181		$	5,122		$	8,685		$	26,093
Global Supply Chain Platform		6,829			5,612			19,884			16,834
Commercial Platform		24,867			21,030			67,520			50,080
Total revenue for reportable segments		33,877			31,764			96,089			93,007
Intersegment revenue		(347	)		(339	)		(1,901	)		(1,732	)
Total consolidated revenue	$	33,530		$	31,425		$	94,188		$	91,275

Intersegment revenue eliminated in the above table for the three and nine months ended September 30, 2022 reflects $0.3 million and $1.9 million in sales from the Global Supply Chain Platform to the Oncology Innovation Platform.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Total revenue by product group:
License fees	$	2,174	$	5,114	$	8,664	$	26,068
Commercial product sales		30,679		25,890		83,950		63,923
Contract manufacturing revenue		670		418		1,553		1,275
Other revenue		7		3		21		9
Total consolidated revenue	$	33,530	$	31,425	$	94,188	$	91,275

Intersegment revenue is recognized by the selling segment when its customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods or services. Upon consolidation, all intersegment revenue and related cost of sales are eliminated from the selling segment’s ledger.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Net loss attributable to Athenex, Inc.:
Oncology Innovation Platform	$	(18,987	)	$	(25,524	)	$	(66,935	)	$	(51,087	)
Global Supply Chain Platform		(1,937	)		(4,195	)		(6,340	)		(4,718	)
Commercial Platform		1,509			(4,432	)		1,011			(30,567	)
Segment total		(19,415	)		(34,151	)		(72,264	)		(86,372	)
Discontinued operations		(254	)		(1,906	)		3,018			(9,009	)
Total consolidated net loss attributable to Athenex, Inc.	$	(19,669	)	$	(36,057	)	$	(69,246	)	$	(95,381	)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Total depreciation and amortization:
Oncology Innovation Platform	$	198	$	221	$	534	$	658
Global Supply Chain Platform		250		266		749		809
Commercial Platform		299		432		933		1,438
Segment total		747		919		2,216		2,905
Discontinued operations		56		282		1,556		763
Total consolidated depreciation and amortization	$	803	$	1,201	$	3,772	$	3,668


	September 30,		December 31,
	2022		2021
Total assets:
Oncology Innovation Platform	$	111,437	$	131,432
Global Supply Chain Platform		18,699		19,693
Commercial Platform		71,857		53,113
Segment total		201,993		204,238
Discontinued operations		26,357		63,210
Total consolidated assets	$	228,350	$	267,448


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Total revenue:
United States	$	33,523	$	31,394	$	94,167	$	90,717
Other foreign countries		7		31		21		558
Total consolidated revenue	$	33,530	$	31,425	$	94,188	$	91,275


	September 30,		December 31,
	2022		2021
Total property and equipment, net:
United States	$	3,536	$	4,196
China		376		985
Total consolidated property and equipment, net	$	3,912	$	5,181

Customer revenue and accounts receivable concentration amounted to the following for the identified periods. These customers relate to the Commercial Platform segment and the Global Supply Chain Platform segment.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Percentage of total revenue by customer:
Customer A		36	%		21	%		21	%		16	%
Customer B		16	%		18	%		15	%		15	%
Customer C		16	%		15	%		16	%		15	%
Customer D		1	%		15	%		7	%		27	%


	September 30,			December 31,
	2022			2021
Percentage of total accounts receivable by customer:
Customer A		49	%		35	%
Customer B		23	%		29	%
Customer C		7	%		15	%

17. Revenue Recognition

The Company records revenue in accordance with ASC, Topic 606 “Revenue from Contracts with Customers.” Under Topic 606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of Topic 606, the entity performs the following five steps: (i) identifies the contract(s) with a customer; (ii) identifies the performance obligations in the contract; (iii) determines the transaction price; (iv) allocates the transaction price to the performance obligations in the contract; and (v) recognizes revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. Below is a description of principal activities – separated by reportable segments – from which the Company generates its revenue.

Oncology Innovation Platform

The Company out-licenses certain of its IP to other pharmaceutical companies in specific territories that allow the customer to use, develop, commercialize, or otherwise exploit the licensed IP. In accordance with Topic 606, the Company analyzes the contracts to identify its performance obligations within the contract. Most of the Company’s out-license arrangements contain multiple performance obligations and variable pricing. After the performance obligations are identified, the Company determines the transaction price, which generally includes upfront fees, milestone payments related to the achievement of developmental, regulatory, or commercial goals, and royalty payments on net sales of licensed products. The Company considers whether the transaction price is fixed or variable, and whether such consideration is subject to return. Variable consideration is only included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. If any portion of the transaction price is constrained, it is excluded from the transaction price until the constraint no longer exists. The Company then allocates the transaction price to the performance obligation to which the consideration is related. Where a portion of the transaction price is received and allocated to continuing performance obligations under the terms of the arrangement, it is recorded as deferred revenue and recognized as revenue when (or as) the underlying performance obligation is satisfied.

The Company’s contracts may contain one or multiple promises, including the license of IP and development services. The licensed IP is capable of being distinct from the other performance obligations identified in the contract and is distinct within the context of the contract, as upon transfer of the IP, the customer is able to use and benefit from it, and the customer could obtain the development services from other parties. The Company also considers the economic and regulatory characteristics of the licensed IP and other promises in the contract to determine if it is a distinct performance obligation. The Company considers if the IP is modified or enhanced by other performance obligations through the life of the agreement and whether the customer is contractually or practically required to use updated IP. The IP licensed by the Company has been determined to be functional IP. The IP is not modified during the license period and therefore, the Company recognizes revenues from any portion of the transaction price allocated to the licensed IP when the license is transferred to the customer and they can benefit from the right to use the IP. For the three and nine months ended September 30, 2021, the Company recognized license revenue of $5.1 million and $26.1 million, of which $20.0 million was recognized upon the achievement of the first commercial milestone pursuant to the 2017 Almirall out-license arrangement upon the launch of Klisyri in the U.S., $5.0 million was recognized upon the launch of Klisyri® (tirbanibulin) in Europe pursuant to the 2017 Almirall out-license arrangement, and $0.5 million was recognized for an upfront fee upon transferring IP to the customer upon execution of the second amendment to the 2011 PharmaEssentia license agreement. No such revenue was recorded for the nine months ended September 30, 2022. Under the collaboration agreement between Axis Therapeutics and PharmaEssentia, the Company received $2.0 million of upfront fees allocated to its performance obligation to deliver functional IP to the Customer. As of September 30, 2022, the Company had not satisfied this performance obligation by delivering the license with the data necessary for the customer to benefit from the right to use the IP and, therefore, the amount was recorded as deferred revenue.

Other performance obligations included in most of the Company’s out-licensing agreements include performing development services to reach clinical and regulatory milestone events. The Company satisfies these performance obligations at a point-in-time, because the customer does not simultaneously receive and consume the benefits as the development occurs, the development does not create or enhance an asset controlled by the customer, and the development does not create an asset with no alternative use. The Company considers milestone payments to be variable consideration measured using the most likely amount method, as the entitlement to the consideration is contingent on the occurrence or nonoccurrence of future events. The Company allocates each variable milestone payment to the associated milestone performance obligation, as the variable payment relates directly to the Company’s efforts to satisfy the performance obligation and such allocation depicts the amount of consideration to which the Company expects to be entitled for satisfying the corresponding performance obligation. The Company re-evaluates the probability of achievement of such performance obligations and any related constraint and adjusts its estimate of the transaction price as appropriate. To date, no amounts have been constrained in the initial or subsequent assessments of the transaction price. For the three and nine months ended September 30, 2022, the Company recognized license revenue of $1.6 million and $6.7 million, of which $5.0 million was recognized upon the achievement of a development milestone pursuant to the 2017 Almirall out-license arrangement, and $1.6 million was recognized for the achievement of a regulatory milestone under the 2011 PharmaEssentia license agreement. The Company did not recognize revenue from other performance obligations included in the Company’s out-licensing agreements during the three and nine months ended September 30, 2021.

Certain out-license agreements include performance obligations to manufacture and provide drug product in the future for commercial sale when the licensed product is approved. For the commercial, sales-based royalties, the consideration is predominantly related to the licensed IP and is contingent on the customer’s subsequent sales to another commercial customer. Consequently, the sales- or usage-based royalty exception would apply. Revenue will be recognized for the commercial, sales-based milestones as the underlying sales occur. The Company recorded $0.4 million and $1.6 million of royalty revenue related to sales of Tirbanibulin during the three and nine months ended September 30, 2022, respectively. The Company recorded $0.1 million and $0.3 million of royalty revenue related to sales of Tirbanibulin during the three and nine months ended September 30, 2021, respectively.

The Company exercises significant judgment when identifying distinct performance obligations within its out-license arrangements, determining the transaction price, which often includes both fixed and variable considerations, and allocating the transaction price to the proper performance obligation. The Company did not use any other significant judgments related to out-licensing revenue during the nine months ended September 30, 2022 and 2021.

Global Supply Chain Platform

The Company’s Global Supply Chain Platform generates revenue by providing small to mid-scale cGMP manufacturing of clinical and commercial products for pharmaceutical and biotech companies and selling pharmaceutical products under 503B regulations set forth by the U.S. FDA.

Revenue earned by the Global Supply Platform is recognized when the Company has satisfied its performance obligation, which is the shipment or the delivery of drug products. The underlying contracts for these sales are generally purchase orders and the Company recognizes revenue at a point-in-time. Any remaining performance obligations related to product sales are the result of customer deposits and are reflected in the deferred revenue contract liability balance.

Commercial Platform

The Company’s Commercial Platform generates revenue by distributing specialty products through independent pharmaceutical wholesalers. The wholesalers then sell to an end-user, normally a hospital, alternative healthcare facility, or an independent pharmacy, at a lower price previously established by the end-user and the Company. Upon the sale by the wholesaler to the end-user, the wholesaler will chargeback the difference, if any, between the original list price and price at which the product was sold to the end-user. The Company also offers cash discounts, which approximate 2.3% of the gross sales price, as an incentive for prompt customer payment, and, consistent with industry practice, the Company’s return policy permits customers to return products within a window of time before and after the expiration of product dating. Further, the Company offers contractual allowances, generally in the form of rebates or administrative fees, to certain wholesale customers, group purchasing organizations (“GPOs”), and end-user customers, consistent with pharmaceutical industry practices. Revenues are recorded net of provisions for variable consideration, including discounts, rebates, GPO allowances, price adjustments, returns, chargebacks, promotional programs and other sales allowances. Accruals for these provisions are presented in the consolidated financial statements as reductions in determining net sales and as a contra asset in accounts receivable, net (if settled via credit) and other current liabilities (if paid in cash). As of September 30, 2022, and December 31, 2021, the Company’s total provision for chargebacks and other deductions included as a reduction of accounts receivable totaled $28.3 million and $22.9 million, respectively. The Company’s total provision for chargebacks and other revenue deductions was $52.4 million, and $38.8 million for the three months ended September 30, 2022, and 2021, respectively and was $133.3 million and $91.3 million for the nine months ended September 30, 2022 and 2021, respectively.

The Company exercises significant judgment in its estimates of the variable transaction price at the time of the sale and recognizes revenue when the performance obligation is satisfied. Factors that determine the final net transaction price include chargebacks, fees for service, cash discounts, rebates, returns, warranties, and other factors. The Company estimates all of these variables based on historical data obtained from previous sales finalized with the end-user customer on a product-by-product basis. At the time of sale, revenue is recorded net of each of these deductions. Through the normal course of business, the wholesaler will sell the product to the end-user, determining the actual chargeback, return products, and take advantage of cash discounts, charge fees for services, and claim warranties on products. The final transaction price per product is compared to the initial estimated net sale price and reviewed for accuracy. The final prices and other factors are immediately included in the Company’s historical data from which it will estimate the transaction price for future sales. The underlying contracts for these sales are generally purchase orders including a single performance obligation, generally the shipment or delivery of products and the Company recognizes this revenue at a point-in-time.

Disaggregation of revenue

The following represents the Company’s revenue for its reportable segment by country, based on the locations of the customer.


	For the Three Months Ended September 30, 2022
	(In Thousands)
	Oncology Innovation Platform		Global Supply Chain Platform		Commercial Platform		Consolidated Total
United States	$	2,174	$	6,482	$	24,867	$	33,523
Other foreign countries		7		—		—		7
Total revenue	$	2,181	$	6,482	$	24,867	$	33,530


	For the Three Months Ended September 30, 2021
	(In Thousands)
	Oncology Innovation Platform		Global Supply Chain Platform		Commercial Platform		Consolidated Total
United States	$	5,091	$	5,273	$	21,030	$	31,394
China		8		—		—		8
Other foreign countries		23		—		—		23
Total revenue	$	5,122	$	5,273	$	21,030	$	31,425

The Company also disaggregates its revenue by product group which can be found in Note 16 – Business Segment, Geographic, and Concentration Risk Information.

Contract balances

The following table provides information about receivables and contract liabilities from contracts with customers by reportable segments. The Company has not recorded any contract assets from contracts with customers.


	September 30, 2022
	(In Thousands)
	Oncology Innovation Platform			Global Supply Chain Platform			Commercial Platform			Consolidated Total
Accounts receivable, gross	$	9,565		$	5,307		$	56,049		$	70,921
Chargebacks and other deductions		—			—			(28,331	)		(28,331	)
Provision for credit losses		(8,919	)		(591	)		(168	)		(9,678	)
Accounts receivable, net	$	646		$	4,716		$	27,550		$	32,912
Deferred revenue		2,748			42			—			2,790
Total contract liabilities	$	2,748		$	42		$	—		$	2,790


	December 31, 2021
	(In Thousands)
	Oncology Innovation Platform			Global Supply Chain Platform			Commercial Platform			Consolidated Total
Accounts receivable, gross	$	10,069		$	3,983		$	44,298		$	58,350
Chargebacks and other deductions		—			—			(22,868	)		(22,868	)
Provision for credit losses		(8,919	)		(180	)		(97	)		(9,196	)
Accounts receivable, net	$	1,150		$	3,803		$	21,333		$	26,286
Deferred revenue		2,739			60			—			2,799
Total contract liabilities	$	2,739		$	60		$	—		$	2,799

As of September 30, 2022 and December 31, 2021, the deferred revenue balances relate to customer deposits made by customers of the Oncology Innovation Platform and are included within accrued expenses on the condensed consolidated balance sheets.

There were no other material changes to contract balances during the nine months ended September 30, 2022.

18. Commitments and Contingencies

Future minimum payments under the non-cancelable operating leases consists of the following as of September 30, 2022 (in thousands):


Year ending December 31:	Minimum payments
2022 (remaining three months)	$	582
2023		2,221
2024		2,034
2025		1,472
2026		347
Thereafter		132
	$	6,788

Legal Proceedings

The Company is subject to litigation arising from time to time in the ordinary course of its business. The Company does not expect that the ultimate resolution of any pending legal actions will have a material effect on its consolidated operating results, cash flows or financial condition. However, litigation is subject to inherent uncertainties. As such, there can be no assurance that any pending legal action, which the Company currently believes to be immaterial, will not become material in the future.

Following our receipt of the CRL in February 2021 and the subsequent decline of the market price of the Company’s common stock, two purported securities class action lawsuits were filed in the U.S. District Court for the Western District of New York on March 3, 2021 and March 22, 2021, respectively, against the Company and certain members of its management team seeking to recover damages for alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.

The complaints generally allege that between August 7, 2019 and February 26, 2021 (the purported class period), the Company and the individual defendants made materially false and misleading statements regarding the Company's business in connection with the Company’s development of Oral Paclitaxel for the treatment of metastatic breast cancer and the likelihood of FDA approval, and that the plaintiffs suffered losses when the Company’s stock price dropped after its announcement on February 26, 2021 regarding receipt of the CRL. The complaints seek class certification, damages, fees, costs, and expenses. On August 5, 2021, the Court consolidated the two actions and appointed a lead plaintiff and lead counsel. Pursuant to a stipulated scheduling order, the lead plaintiff filed an amended complaint on November 19, 2021. Defendants filed their motion to dismiss on January 25, 2022. Plaintiffs filed their opposition to that motion on March 28, 2022 and the defendants filed their reply brief on May 20, 2022. The motion to dismiss is now fully briefed and awaits the Court’s decision. The Company and the individual defendants believe that the claims in the consolidated lawsuits are without merit, and the Company has not recorded a liability related to these shareholder class actions as the risk of loss is remote. The Company and the individual defendants intend to vigorously defend against these claims but there can be no assurances as to the outcome.

Shareholder Derivative Lawsuit

On June 3, 2021, a shareholder derivative lawsuit was filed in the United States District Court for the District of Delaware by Timothy J. Wonnell, allegedly on behalf of the Company, that piggy-backs on the securities class actions referenced above. The complaint names Johnson Lau, Rudolf Kwan, Timothy Cook, and members of the Board as defendants, and generally alleges that they caused or failed to prevent the securities law violations asserted in the securities class actions. On September 13, 2021, the Court (i) granted the defendants’ motion to stay the derivative action until after resolution of the motion to dismiss the consolidated securities class actions, and (ii) administratively closed the derivative litigation, directing the parties to promptly notify the Court when the related securities class action has been resolved so the derivative action can be reopened. The Company and the individual defendants believe the claims in the shareholder derivative action are without merit, and the Company has not recorded a liability related to this lawsuit as the risk of loss is remote. The Company and the individual defendants intend to vigorously defend against these claims should the case be reopened, but there can be no assurances as to the outcome.

19. Subsequent Events

On October 31, 2022, the Nasdaq Hearing Panel granted the Company's request for the continued listing of its common stock on the Nasdaq Global Select Market, subject to the Company's satisfaction of the minimum $1.00 bid price requirement by March 14, 2023.

On October 5, 2022, Exyte U.S., Inc. filed a complaint in the Supreme Court of the State of New York in Erie County against the Company and ImmunityBio, Inc., alleging breach of contract and related claims in connection with the design and build of a manufacturing facility in Dunkirk, New York, by Exyte for the Company. On February 14, 2022, ImmunityBio closed on the purchase of the Company’s interest in the Dunkirk facility. The complaint alleges that the Company and/or ImmunityBio breached the agreement between the Company and Exyte by not paying amounts allegedly owed to Exyte under the agreement. The complaint seeks damages in excess of approximately $8.5 million. The Company intends to vigorously defend itself against Exyte’s claims in the complaint and believes it has potential counterclaims against Exyte in the action. The Company has not recorded a liability related to these claims as the risk of loss is remote, but there can be no assurance as to the outcome.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion contains management’s discussion and analysis of our financial condition and results of operations and should be read together with the unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes thereto for the year ended December 31, 2021 included in our Annual Report on Form 10-K for the year ended December 31, 2021. Unless the context indicates otherwise, as used in this Quarterly Report, the terms “Athenex,” the “Company,” “we,” “us,” and “our” refer to Athenex, Inc., a Delaware corporation, and its subsidiaries taken as a whole, unless otherwise noted. This discussion and other parts of this Quarterly Report contain forward-looking statements that involve risks and uncertainties, such as our plans, objectives, expectations, intentions and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2021 and in Part II—Item 1A—Risk Factors below.

NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and section 27A of the Securities Act of 1933, as amended (the “Securities Act”). All statements other than statements of historical fact are “forward-looking statements” for purposes of this Quarterly Report. These forward-looking statements may include, but are not limited to, statements regarding our future results of operations and financial position, ability to continue as a going concern, business strategy, the timing and results of clinical trials, our ability to maintain the listing of our common stock on Nasdaq, the impact of macroeconomic factors, such as the Russian invasion of Ukraine and the COVID-19 pandemic on our business, and potential regulatory approval of product candidates. In some cases, forward-looking statements may be identified by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “might,” “mission,” “outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “strategy,” “will,” “would,” and similar expressions and variations thereof. These words are intended to identify forward-looking statements.

We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the “Risk Factors” section included in our Annual Report on Form 10-K for the year ended December 31, 2021 and the additional risk factors described herein. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business. In light of these risks, uncertainties and assumptions, actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date hereof to conform these statements to actual results or to changes in our expectations, except as required by law.

Overview and Recent Developments

We are a biopharmaceutical company dedicated to becoming a leader in the discovery, development, and commercialization of next generation drugs for the treatment of cancer. Our mission is to improve the lives of cancer patients by creating more effective, safer, and accessible treatments. We have assembled a strong and experienced leadership team and have established operations across the pharmaceutical value chain to execute our goal of becoming a global leader in bringing innovative cancer treatments to the market and improving health outcomes.

We are organized around three operating segments: (1) our Oncology Innovation Platform, dedicated to the research and development of our proprietary drugs; (2) our Commercial Platform, focused on the sales and marketing of our specialty drugs and the market development of our proprietary drugs; and (3) our Global Supply Chain Platform, providing sterile injectable drugs to hospital pharmacies across the U.S. Our current clinical pipeline in the Oncology Innovation Platform is derived mainly from the following core technologies: (1) Cell Therapy, based on natural killer T ("NKT") cells, and (2) Orascovery, based on a P-glycoprotein (“P-gp”) pump inhibitor.

Oncology Innovation Platform Developments

Through our acquisition of Kuur Therapeutics, Inc. (formerly known as Cell Medica, “Kuur”) in 2021, we acquired rights to intellectual property to further the development of autologous and allogeneic, or “off-the-shelf”, NKT cell immunotherapies for the

treatment of solid and hematological malignancies. We are advancing the following product candidates: KUR-501, KUR-502, and KUR-503.

KUR-501 is an autologous product in which NKT cells are engineered with a chimeric antigen receptor (“CAR”) targeting GD2 (“GINAKIT” cells). GD2 is expressed on almost all neuroblastoma tumors and certain other malignancies. KUR-501 is currently being evaluated in a phase 1 clinical trial (GINAKIT2) treating children with relapsed-refractory (“R/R”) high risk neuroblastoma. The Company presented updated clinical data from this trial at the American Society of Gene & Cell Therapy (ASGCT) 2022 Annual Meeting in May 2022. The data demonstrated expansion of CAR-NKT cells post-transfer in all patients and objective responses in patients with relapsed/refractory neuroblastoma. Overall Response Rate (“ORR”) was 25%, or three out of twelve responses, and Disease Control Rate (“DCR”) was 58% with four stable disease (“SD”), two partial responses (“PR”) and one complete response (“CR”). There were two out of three responses at a dose of 100 million cells/m2. We also observed one durable complete response persisting 12 months. During this evaluation, KUR-501 was well-tolerated with no dose limiting toxicity (“DLT”). There was no evidence of immune effector cell-associated neurotoxicity syndrome (“ICANS”) in any of the patients at the first four dose levels and one case of grade 2 cytokine release syndrome (“CRS”). GINATKIT2 will continue enrolling patients at higher dose level cohorts with a goal to identify an optimal dose that we may take into a pivotal study.

KUR-502 is an allogeneic (“off-the-shelf”) product in which NKT cells are engineered with a CAR targeting CD19. KUR-502 is currently being evaluated in a phase 1 clinical trial (ANCHOR) treating adults with R/R CD19 positive malignancies, including B cell lymphoma, acute lymphoblastic leukemia (“ALL”), and chronic lymphocytic leukemia (“CLL”). The Company presented an interim data update on seven evaluable patients at the Tandem Meetings of the American Society of Transplantation and Cellular Therapy (ASTCT), and the Center for International Blood & Marrow Transplant Research (CIBMTR) in April 2022. In the lymphoma cohort, there were five patients and the data showed 2 CR and 1 PR for an ORR of 60%. Both complete responses were durable and persisted for more than 6 months, with one still ongoing at 34 weeks. The leukemia cohort consisted of two patients, and 1 CR and 1 PD for a 50% ORR was observed. Responses at the lowest doses in these heavily pre-treated patients were observed, and two responses (1 CR and 1 PR) were observed in patients who failed previous autologous CAR-T therapy. Allogeneic CD19 CAR-NKT cells were well tolerated with three cases of grade 1 CRS, all observed in the ALL patients. There were also no ICANS and no graft versus host disease (GvHD) attributable to CAR-NKT cells. In March 2022, the Company’s Investigational New Drug (“IND”) application to expand the ANCHOR study to a multi-center study was allowed to proceed by the FDA.

KUR-503 is an allogeneic (“off-the-shelf”) product in which NKT cells are engineered with a CAR targeting glypican-3 (“GPC3”). GPC3 is a molecule that is highly expressed on most hepatocellular carcinomas (“HCC”) but not normal liver or other non-neoplastic tissue. KUR-503 is currently in preclinical development, and we are planning to submit an IND application in 2023.

With respect to TCRT-ESO-A2, an autologous T cell receptor (“TCR”)-T cell therapy targeting solid tumors that are NY-ESO-1 positive in HLA-A*02:01 positive patients, we have made the strategic decision to de-prioritize the development and have closed the U.S. Phase 1 clinical trial.

On February 26, 2021, we received a Complete Response Letter ("CRL") from the U.S. Food and Drug Administration (“FDA”) regarding our New Drug Application (“NDA”) for oral paclitaxel and encequidar (“Oral Paclitaxel”) for the treatment of metastatic breast cancer (“mBC”). Following the CRL, we held two Type A meetings with the FDA to discuss the deficiencies raised in the CRL, review a proposed design for a new clinical trial intended to address the deficiencies raised in the CRL, and discuss the potential regulatory path forward for Oral Paclitaxel in mBC in the U.S. In October 2021, after careful consideration of the FDA feedback, we determined to redeploy our resources to focus on our Cell Therapy platform and other ongoing studies of Oral Paclitaxel. On November 29, 2021, we announced the U.K. Medicines and Healthcare products Regulatory Agency (“MHRA”) validation of the Marketing Authorization Application (“MAA”) for Oral Paclitaxel, for review. The Phase 3 study of Oral Paclitaxel in mBC (KX-ORAX-001) served as the basis of the MAA.

We are continuing to evaluate Oral Paclitaxel in combination with check point inhibitors. In May 2022, we announced a clinical trial collaboration and supply agreement with Merck (known as MSD outside the US and Canada). The agreement applies to the expansion phase of the Phase 1 clinical trial evaluating Oral Paclitaxel in combination with Merck’s anti-PD-1 therapy KEYTRUDA® (pembrolizumab) for certain non-small cell lung cancer (“NSCLC”) patients. Oral Paclitaxel is also being evaluated in combination with dostarlimab +/- carboplatin in neoadjuvant breast cancer, as part of the I-SPY2 TRIAL (Investigation of Serial studies to Predict Your Therapeutic Response with Imaging And moLecular analysis 2).

Global Supply Chain Platform Developments

We suspended production activities at our Taihao API facility in Chongqing, China, in May 2019, based on concerns raised by the Department of Emergency Management of Chongqing (“DEMC”) related to the location of our plant. We subsequently resumed producing API at the Taihao API facility primarily for our ongoing clinical studies and commercial launches of proprietary drugs in

accordance with local regulatory guidance, while we started building out Sintaho, a new API facility in Chongqing. In July 2021, we received verbal notice from the DEMC that we will be required to terminate the production activities at its Taihao API facility. We are continuing to engage in dialogue with the DEMC. While we are able to continue producing certain API at the Taihao API facility in limited quantities and a certain extent of our operations are now being conducted at Sintaho, we are in the process of moving the remainder of the operations and production activities to Sintaho and exploring other sources of API, in the event we are unable to reach an agreement with the DEMC for the continued production activities of the Taihao API facility. The Sintaho facility continues to conduct and complete product qualification activities. On July 7, 2022, we entered into an agreement to sell all of our equity interests in our China subsidiaries, which are primarily engaged in API manufacturing operations (the "China API Operations"), to TiHe Capital (Beijing) Co. Ltd. ("China API Buyer") for RMB 129.5 million, or approximately $18 million in cash. The transactions is subject to customary closing conditions, including obtaining certain regulatory approvals in China. Athenex and the China API Buyer also plan to enter into a long-term supply agreement for the manufacture and supply of certain API products at or before the closing of the transaction. See Part I, Item 1. Note 4 - Discontinued Operations for additional information.

On February 14, 2022, we completed the sale of our leasehold interest in the 409,000 square feet, newly constructed cGMP ISO Class 5 high potency pharmaceutical manufacturing facility located in Dunkirk, NY (the "Dunkirk Transaction"). We sold our interest in the Dunkirk facility and certain other assets to ImmunityBio, Inc. for approximately $40.0 million. Of these proceeds, we used approximately $27.4 million to make a mandatory prepayment of $25.0 million in principal, accrued and unpaid interest, and associated fees to the lenders under our Senior Credit Agreement with Oaktree. See “Liquidity and Capital Resources” below for more information about the Senior Credit Agreement.

The sale of the Dunkirk facility and the planned sale of our China API Operations are part of our strategy to dispose of non-core assets intended to extend our cash runway in 2022 and 2023 as we pivot to focusing on our Cell Therapy platform.

Other Corporate Developments

On June 21, 2022, the Company and ATNX SPV, LLC, its newly-formed subsidiary (the "SPV"), entered into a Revenue Interest Purchase Agreement (the “RIPA”) with affiliates of Sagard Healthcare Partners (“Sagard”) and funds managed by Oaktree Capital Management, L.P. (“Oaktree” and together with Sagard, the “Purchasers”), for the sale of revenues from U.S. and European royalty and milestone interests in Klisyri® (tirbanibulin) for an aggregate purchase price of $85.0 million (“Purchase Price”). On June 29, 2022, the Purchasers paid the Company the Purchase Price. Of the total Purchase Price, $5.0 million was placed into escrow to be paid to the Company upon the satisfaction of certain manufacture and supply milestones for Klisyri prior to December 31, 2025, $5.0 million was used to pay for transaction expenses, $42.5 million was used to pay down the Company's senior secured loan agreement and related security agreements (the "Senior Credit Agreement") with Oaktree, and $7.5 million was deposited and held in a segregated account of the Company (the “Segregated Funds”). The $7.5 million of Segregated Funds and $1.5 million of the amount placed into escrow was released to the Company in September 2022. These amounts, plus the remaining proceeds were available for the Company's operations. Refer to Part I, Item 1. Note 1 - Company and Nature of Business and Note 11 - Debt and Lease Obligations for additional information.

COVID-19 related measures

Since early 2020, after monitoring developments related to the spread of COVID-19, we have undertaken a number of measures in response to the COVID-19 pandemic, with a goal to prioritize the health and safety of our employees and ensure continuity in our business. We adhere to all state, federal and local requirements as the same may be in force from time to time.

With respect to our clinical development program, we have experienced and may continue to experience slowed enrollment for our clinical trials as well as suspensions in our clinical trials as healthcare resources are diverted to address the COVID-19 pandemic. We remain committed to advancing our pipeline in line with our Mission as described below while ensuring the safety of all participants as well as the integrity of the data. We will continue to monitor developments with respect to the COVID-19 pandemic as well as industry and regulatory best practices for continuing clinical development programs during the pandemic, including, if and where appropriate, the use of virtual communications, interviews, and visits as well as self-administration and remote monitoring techniques to address health and safety concerns while minimizing disruptions and delays to our clinical development timelines.

There is still uncertainty regarding the pandemic's overall duration and the severity of any future outbreaks, including any potential impact on our operations in China. If our partners experience significant or extended disruptions to their business due to COVID-19, it could result in supply shortages and harm our specialty drug business, as well as our overall financial condition. We are actively monitoring our operations and supply chain across the globe and are making adjustments to respond to challenges that arise due to the pandemic where appropriate.

Going Concern Considerations

We have three operating segments: our Oncology Innovation Platform, Global Supply Chain Platform, and Commercial Platform. Since inception, we have devoted a substantial amount of our resources to research and development of our lead product candidates under our Orascovery and Cell Therapy platforms, while building up our commercial infrastructure. We have incurred significant net losses since inception.

We have incurred operating losses since inception and, as a result, as of September 30, 2022 and December 31, 2021, we had an accumulated deficit of $982.7 million and $913.4 million, respectively. We expect to incur significant expenses and operating losses for the foreseeable future. We project insufficient liquidity to fund our operations through the next twelve months beyond the date of this report and project that we will be in violation of a financial covenant included within the Senior Credit Agreement during the twelve-month period subsequent to the date of this filing. This projection does not reflect management's plans that are outside of the Company's control, pursuant to ASC 205. These conditions raise substantial doubt about our ability to continue as a going concern. See Part I, Item 1. Note 1—Company and Nature of Business for further information regarding our ability to continue as a going concern.

We have funded our operations to date primarily from the issuance and sale of our common stock through public offerings, senior secured loans, private placements, and to a lesser extent, from convertible bond financing, revenue, and grant funding. As of September 30, 2022, we had cash and cash equivalents of $35.2 million, restricted cash of $5.2 million, and short-term investments of $1.0 million.

On August 20, 2021, we entered into a sales agreement (the “Sales Agreement”) with SVB Securities LLC, in connection with the offer and sale of up to $100,000,000 of shares of our common stock, par value $0.001 per share (“ATM Shares”). The ATM Shares to be offered and sold under the Sales Agreement will be issued and sold pursuant to a registration statement on Form S-3 (File No. 333-258185) that became effective on August 12, 2021. During the year ended December 31, 2021, we sold 762,825 shares of our common stock for an average price of $1.49 per share under the Sales Agreement. During the nine months ended September 30, 2022, we sold 11,105,377 shares of our common stock for an average price of $0.55 per share under the Sales Agreement.

Nasdaq Deficiency Notice

On March 18, 2022, we received a letter from the Listing Qualifications Staff of The Nasdaq Stock Market LLC indicating that, based upon the closing bid price of our common stock, we no longer met the Nasdaq listing standard requiring listed companies to maintain a minimum bid price of at least $1.00 per share. We were unable to regain compliance with the minimum bid price requirement by the end of a compliance period of 180 days, or by September 14, 2022.

Following our receipt of written notification from Nasdaq stating that we had not regained compliance with the listing standards on September 15, 2022, we appealed by requesting a hearing before the Nasdaq Hearings Panel (the “Panel”). On October 31, 2022, the Panel granted our request for the continued listing of our common stock on Nasdaq, subject to our satisfaction of the minimum $1.00 bid price requirement by March 14, 2023. To evidence compliance with the minimum bid price requirement, our common stock must close at or above $1.00 per share for a minimum of 10 (but generally not more than 20) consecutive business days by March 14, 2023. During this additional compliance period, our common stock will continue to be listed on Nasdaq. We may not be able to regain compliance with the minimum bid price requirement or maintain compliance with other Nasdaq listing requirements. If our appeal is denied or if we fail to regain compliance with Nasdaq’s continued listing standards by March 14, 2023, our common stock will be subject to delisting from Nasdaq.

We are seeking stockholder approval to effect a reverse stock split (the “Reverse Stock Split”) that, if approved and implemented, is intended to increase the per share price of our common stock for a period sufficient to regain compliance with the Nasdaq listing requirements. We filed a definitive proxy statement on October 11, 2022 that describes the proposals up for a stockholder vote at our special meeting on November 22, 2022, including the proposal to approve the Reverse Stock Split. We cannot

assure you that the Reverse Stock Split will be approved or implemented, and even if approved and implemented, that the Reverse Stock Split will result in our stock price increasing to meet the bid price requirement for a period sufficient to regain compliance with the Nasdaq listing requirements.

Outlook

Our Company’s mission is to become a leader in bringing innovative cancer treatments to the market and to improve patient health outcomes. We are focused on our innovative cell therapy platform, which is based on NKT cells. NKT cells have unique biology that has potential advantages over current T cell and NK cell-based technologies. We believe these advantages include the following:

(1)

There is still a major unmet need in hematological and solid tumors in that even in those indications where autologous CAR-T cells have been previously approved, up to 60% of patients receiving CAR-T therapy do not achieve long term durable responses.

(2)

Cellular therapies have generally not been effective in the treatment of solid tumors. NKT cells are an ideal platform for treatment of solid tumors because NKT cells home to tumors, and we have data demonstrating that CAR-NKT cells are superior in tumor homing compared to CAR-T cells.

(3)

Our allogeneic (“off-the-shelf”) CAR-NKT cell therapy products may be produced at larger scale than autologous products, potentially at lower cost.

(4)

Our allogeneic CAR-NKT cells are manufactured starting with the lymphocytes of healthy donors. Use of healthy donors, rather than patients (who are the source of autologous cell therapy starting materials), results in a more robust and consistent product, because patient lymphocytes are usually dysfunctional due to previous cancer therapy.

NKT cells demonstrate anti-tumor activity, even without a CAR. This is because NKT cells can kill immune suppressive cells in the local tumor microenvironment. Thus, when we add a CAR to NKT cells they are now equipped with two different anti-tumor mechanisms, which may lead to more potent anti-tumor activity and reduce the potential for relapse.

Advancing KUR-501 CAR-NKT Targeting GD2 – KUR-501 is an autologous product in which NKT cells are engineered with a CAR targeting GD2 and is currently being evaluated in a phase 1 clinical trial (GINAKIT2) treating children with R/R high risk neuroblastoma. Neuroblastoma is a rare pediatric cancer and patients with R/R high risk neuroblastoma have very poor outcomes. Therefore, we believe there is a significant unmet need for better treatment options. Interim data to be presented at the ASGCT 2022 Annual Meeting showed 25% overall response rate and 58% disease control rate, two out of three responses at dose level 4 (100 million cells/m2), and one durable complete response persisting 12 months. Previous data updates also demonstrated long-term persistence of CAR-NKT cells and CAR-NKT cell localization at the tumor site. The safety profile of KUR-501 was shown to be well-tolerated and the product is being administered in the outpatient setting. GINATKIT2 will continue enrolling patients at higher dose level cohorts with a goal to identify an optimal dose that we may take into a pivotal study.

Advancing KUR-502 CAR-NKT Targeting CD19 – Interim data, as presented at the ASTCT and CIBMTR Tandem Meetings in April of 2022, indicated that, of the first seven evaluable patients, there was a promising overall response rate of 57% and disease control rate of 71%, with two responses (1 CR and 1 PR) observed in patients who failed previous autologous CAR-T therapy. KUR-502 is an allogeneic, “off-the-shelf” product in which NKT cells are engineered with a CAR targeting CD19. Today, autologous CAR-T cell treatments are available to patients, but the patient-to-patient variability and long manufacturing lead times limit patient care options. As an allogeneic “off-the-shelf” product, KUR-502 leverages economies of scale and has the potential to significantly increase patient access to innovative CAR-NKT treatments. Our aim is to expand the phase 1 (ANCHOR) clinical trial treating adults with R/R CD19 positive malignancies currently being conducted at BCM to a phase 1 multicenter clinical trial (ANCHOR2). Our IND application to expand the ANCHOR study to a multi-center study was allowed to proceed by the FDA in March 2022.

Focusing on Specific Programs of Oral Paclitaxel – For Oral Paclitaxel, while our MAA submission is currently under review by the U.K. MHRA, we have focused our efforts on our ongoing combination clinical trials with checkpoint inhibitors where we believe there is an opportunity. Oral Paclitaxel is currently being evaluated in combination with pembrolizumab in NSCLC; and dostarlimab +/- carboplatin in neoadjuvant breast cancer, as part of I-SPY 2 TRIAL.

Licensing and Partnership Opportunities – We continue to increase the global reach of tirbanibulin 1% ointment by maintaining strong global partnerships with existing partners such as Almirall, Seqirus, and AVIR and by evaluating other strategic territories to launch the product. We monetized our royalty stream from the sale of Klisyri in the U.S. and Europe by entering into the RIPA in June 2022. See Other Corporate Developments above. Our team will continue to work closely with our partners to explore additional treatment regimens and indications for tirbanibulin 1% ointment. We will pursue strategic licensing and partnership opportunities that will create potential value for stockholders and support our business strategy and mission.

As we pursue these strategic priorities, we expect to incur significant expenses and increasing operating losses for the foreseeable future. We anticipate that our expenses will increase as we seek to:

•

Advance the preclinical and clinical research program and development activities of our Cell Therapy technology platform;

•

Continue our preclinical and clinical research program and development activities related to our Mission;

•

Seek to identify additional research programs and product candidates within existing Cell Therapy platform; and

•

Maintain, expand, and protect our IP portfolio.

Key Components of Results of Operations

Revenue

We derive our consolidated revenue primarily from (i) the sales of generic injectable products by our Commercial Platform; (ii) licensing and collaboration projects conducted by our Oncology Innovation Platform, which generates revenue in the form of upfront payments, milestone payments, and payments received for providing research and development services for our collaboration projects and for other third parties; (iii) the sales of 503B and API products by our Global Supply Chain Platform; and (iv) grant awards from government agencies and universities for our continuing research and development efforts.

We do not anticipate revenue being generated from sales of our product candidates under development in our Oncology Innovation Platform until we have obtained regulatory approval. We cannot assure you that we will succeed in achieving regulatory approval for our drug candidates as planned, or at all.

Cost of Sales

Along with sourcing from third-party manufacturers, we manufacture clinical products in our cGMP facility in New York. Cost of sales primarily includes the cost of finished products, raw materials, labor costs, manufacturing overhead expenses and reserves for expected scrap, as well as transportation costs. Cost of sales also includes depreciation expense for production equipment, changes to our excess and obsolete inventory reserves, certain direct costs such as shipping costs, net of costs charged to customers, and royalty costs related to in-license agreements.

Research and Development Expenses

Research and development (“R&D”) expenses consist of the costs associated with in-licensing of product candidates, milestone payments, conducting preclinical studies and clinical trials, activities related to regulatory filings and correspondences, and other R&D activities. Our current R&D activities mainly relate to the regulatory and clinical development activities of our Oncology Innovation Platform.

We expense R&D costs as incurred. We record costs for certain development activities, such as clinical trials, based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment or clinical site activations. We do not allocate employee-related costs, depreciation, rental and other indirect costs to specific R&D programs because these costs are deployed across multiple product programs under R&D.

We cannot determine with certainty the duration, costs and timing of the current or future preclinical or clinical studies of our drug candidates. The duration, costs, and timing of clinical studies and development of our drug candidates will depend on a variety of factors, including:

•

The scope, rate of progress, and costs of our ongoing, as well as any additional, clinical studies and other R&D activities;

•

Future clinical study results;

•

Uncertainties in clinical study enrollment rates;

•

Significant and changing government regulation; and

•

The timing and receipt of any regulatory approvals.

A change in the outcome of any of these variables with respect to the development of a drug candidate, could mean a significant change in the costs and timing associated with the development of that drug candidate.

R&D activities are central to our business model. We expect our R&D expenses to remain at a decreased level from prior periods, as the development of most non-Cell Therapy technologies has been suspended. R&D expenses related to our Cell Therapy platform are expected to increase as we prepare for additional clinical and preclinical studies for our Cell Therapy programs. There are numerous factors associated with the successful commercialization of any of our drug candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial, regulatory, and public health factors beyond our control will likely impact our clinical development programs and plans.

Selling, General and Administrative Expenses

Selling, general and administrative, (“SG&A”), expenses primarily consist of compensation, including salary, employee benefits and stock-based compensation expenses for sales and marketing personnel, and for administrative personnel that support our general operations such as executive management, legal counsel, financial accounting, information technology, and human resources personnel. SG&A expenses also include professional fees for legal, patent, consulting, auditing and tax services, as well as other direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies used in the selling, marketing, general and administrative activities. SG&A expenses also include costs associated with our commercialization efforts for our proprietary drugs, such as market research, brand strategy and development work on market access, scientific publication, product distribution, and patient support as well as the change in fair value of contingent consideration.

We anticipate that our SG&A costs will decrease in future periods, without the commercialization of the Orascovery platform, the development of the facility in Dunkirk, NY, and the management of the China API Operations, if the sale of the China API Operations is completed. We expect that certain costs, including share compensation costs, insurance costs, and other administrative costs, will decrease as a result of the sale of our interest in the pharmaceutical manufacturing facility located in Dunkirk, NY and anticipated sale of the China API Operations. Meanwhile, we anticipate that cost related to legal, compliance, accounting and investor and public relations expenses associated with being a public company will remain consistent.

Results of Operations

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

The following table sets forth a summary of our condensed consolidated results of operations for the three months ended September 30, 2022 and 2021, together with the changes in those items in dollars and as a percentage. This information should be read together with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. Our operating results in any period are not necessarily indicative of the results that may be expected for any future period.


	Three Months Ended September 30,
	2022			2021			Change
	(in thousands)			(in thousands)			(in thousands)			%
Revenue
Product sales, net	$	31,349		$	26,303		$	5,046			19	%
License fees and other revenue		2,181			5,122			(2,941	)		-57	%
Total revenue		33,530			31,425			2,105
Cost of sales		(27,736	)		(25,098	)		(2,638	)		11	%
Gross profit		5,794			6,327			(533	)
Research and development expenses		(9,214	)		(17,739	)		8,525			-48	%
Selling, general, and administrative expenses		(9,438	)		(18,094	)		8,656			-48	%
Interest income		109			38			71			187	%
Interest expense		(6,271	)		(5,100	)		(1,171	)		23	%
Income tax expense		(596	)		(262	)		(334	)		127	%
Net loss from continuing operations		(19,616	)		(34,830	)		15,214			-44	%
Loss from discontinued operations		(254	)		(1,906	)		1,652			-87	%
Net loss		(19,870	)		(36,736	)		16,866
Less: net loss attributable to non-controlling interests		(201	)		(679	)		478			-70	%
Net loss attributable to Athenex, Inc.	$	(19,669	)	$	(36,057	)	$	16,388

Revenue

Revenue from product sales increased to $31.3 million for the three months ended September 30, 2022, from $26.3 million for the three months ended September 30, 2021, an increase of $5.0 million or 19%. This increase was primarily attributable to an increase in APD specialty product sales, which increased by $3.8 million as the result of increases in shortage product sales and product launches during 2022. 503B product sales increased by $1.0 million from additional product launches. Fluctuations in the demand for shortage products and market demand may continue to significantly affect our product sales in the future.

License fees and other revenue decreased by $2.9 million, to $2.2 million for the three months ended September 30, 2022. This decrease was primarily due to the recognition of $5.0 million of license revenue pursuant to the 2017 Almirall License Agreement upon the launch of Klisyri in Europe in 2021. We recognized $1.6 million of license revenue pursuant to the 2011 PharmaEssentia License Agreement and $0.4 million of royalty revenue under the Almirall License Agreement during the three months ended September 30, 2022. Substantially all of the revenue earned under the Almirall License Agreement in the near future will be remitted to the Purchasers under the RIPA.

Cost of Sales

Cost of sales for the three months ended September 30, 2022 totaled $27.7 million, an increase of $2.6 million, or 11%, as compared to $25.1 million for the three months ended September 30, 2021. The increase was primarily due to an increase of $1.5 million in cost of APD product sales related to the increase in sales volume and an increase of $1.1 million in cost of 503B product sales related to the increase in sales volume, product costs, and overhead, including labor, supply chain, and quality control department costs.

Research and Development Expenses

R&D expenses for the three months ended September 30, 2022 totaled $9.2 million, a decrease of $8.5 million, or 48%, as compared to $17.7 million for the three months ended September 30, 2021. This was primarily due to decreases in cost of clinical and regulatory operations, compensation costs, cell therapy costs, and costs of preclinical operations and included the following:

•

$2.5 million decrease in costs of clinical operations and regulatory affairs after the completion of the Phase 3 study and FDA submission of Oral Paclitaxel;

•

$2.3 million decrease in R&D related compensation expenses;

•

$1.9 million decrease in drug licensing costs related to licenses for specialty drug products;

•

$1.0 million decrease in expenses associated with the slowdown of the TCR-T therapy program;

•

$0.5 million decrease in costs of preclinical operations, primarily related to the Orascovery platform; and

•

$0.3 million decrease in 503B and other product development.

Selling, General, and Administrative Expenses

SG&A expenses for the three months ended September 30, 2022 totaled $9.4 million, a decrease of $8.7 million, or 48%, as compared to $18.1 million for the three months ended September 30, 2021. This was primarily due to a $5.2 million gain on change in earnout liability related to the Kuur contingent consideration, with the discontinuation of the TCR-T therapy, while 2021 had a $3.2 million loss on change in earnout liability. Additionally, there was a $1.4 million decrease in costs for preparing to commercialize Oral Paclitaxel as the significant pre-launch activities slowed upon receipt of the Complete Response Letter in February 2021. These decreases were partially offset by an increase in compensation related costs of $1.0 million and an increase in operating costs of $0.2 million.

Interest Income and Interest Expense

Interest income consisted of interest earned on our short-term investments and totaled $0.1 million and less than $0.1 million for the three months ended September 30, 2022 and 2021, respectively. Interest expense totaled $6.3 million and $5.1 million for the three months ended September 30, 2022 and 2021, respectively. Interest expense in 2022 was related to the Senior Credit Agreement with Oaktree and the Royalty financing liability, while interest expense in 2021 was related to the Senior Credit Agreement only. The increase in interest expense during the three months ended September 30, 2022 was due to the Royalty financing carrying a higher effective interest rate.

Income Tax Expense

For the three months ended September 30, 2022, income tax expense amounted to $0.6 million, compared to $0.3 million for the three months ended September 30, 2021. We did not record a provision for U.S. federal income taxes for the three months ended September 30, 2022 or 2021 because we expect to generate a loss for the years ended December 31, 2022 and 2021. The income tax expense in the current year is primarily attributable to foreign income tax withholdings on our revenue earned under our out-license arrangements.

Loss from discontinued operations

Loss from discontinued operations for the three months ended September 30, 2022 totaled $0.3 million, as compared to $1.9 million for the three months ended September 30, 2021. This was primarily due to an increase in other income of $0.7 million due to the sale of pilot products in 2022 at our discontinued China API operations and a decrease of general and administrative expenses of $3.2 million at our discontinued Dunkirk operations, partially offset by $2.5 million of income from a one-time government grant earned in the prior year related to our discontinued Dunkirk operations.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

The following table sets forth a summary of our condensed consolidated results of operations for the nine months ended September 30, 2022 and 2021, together with the changes in those items in dollars and as a percentage. This information should be read together with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. Our operating results in any period are not necessarily indicative of the results that may be expected for any future period.


	Nine Months Ended September 30,
	2022			2021			Change
	(in thousands)			(in thousands)			(in thousands)			%
Revenue
Product sales, net	$	85,503		$	65,184		$	20,319			31	%
License fees and other revenue		8,685			26,091			(17,406	)		-67	%
Total revenue		94,188			91,275			2,913
Cost of sales		(73,657	)		(59,255	)		(14,402	)		24	%
Gross profit		20,531			32,020			(11,489	)
Research and development expenses		(36,393	)		(60,128	)		23,735			-39	%
Selling, general, and administrative expenses		(40,417	)		(54,936	)		14,519			-26	%
Interest income		231			99			132			133	%
Interest expense		(15,089	)		(15,619	)		530			-3	%
Loss on extinguishment of debt		(1,450	)		—			(1,450	)		100	%
Income tax (expense) benefit		(606	)		10,619			(11,225	)		-106	%
Net loss from continuing operations		(73,193	)		(87,945	)		14,752			-17	%
Gain (loss) from discontinued operations		3,018			(9,009	)		12,027			-133	%
Net loss		(70,175	)		(96,954	)		26,779
Less: net loss attributable to non-controlling interests		(929	)		(1,573	)		644			-41	%
Net loss attributable to Athenex, Inc.	$	(69,246	)	$	(95,381	)	$	26,135

Revenue

Revenue from product sales increased to $85.5 million for the nine months ended September 30, 2022, from $65.2 million for the nine months ended September 30, 2021, an increase of $20.3 million or 31%. This increase was primarily attributable to an increase in APD specialty product sales, which increased by $17.4 million as the result of increases in shortage product sales and product launches during 2022. 503B product sales increased by $2.6 million from additional product launches. Fluctuations in the demand for shortage products and market demand may continue to significantly affect our product sales in the future.

License fees and other revenue decreased by $17.4 million, to $8.7 million for the nine months ended September 30, 2022. This decrease was primarily due to the recognition of $25.0 million of license revenue in 2021 pursuant to the 2017 Almirall License Agreement upon the achievement of two regulatory and commercial milestone events, partially offset by the recognition of $5.0 million of license revenue upon the commencement of a line extension trial for Klisyri in the U.S. and the recognition of a $1.6 million milestone under the 2011 PharmaEssentia Agreement during the nine months ended September 30, 2022. Substantially all of the revenue earned under the Almirall License Agreement in the near future will be remitted to the Purchasers under the RIPA.

Cost of Sales

Cost of sales for the nine months ended September 30, 2022 totaled $73.7 million, an increase of $14.4 million, or 24%, as compared to $59.3 million for the nine months ended September 30, 2021. The increase was primarily due to an increase of $8.5 million in cost of APD product sales related to the increase in sales volume and an increase of $6.1 million in cost of 503B product sales related to the increase in sales volume, product costs, and overhead, including labor, supply chain, and quality control department costs.

Research and Development Expenses

R&D expenses for the nine months ended September 30, 2022 totaled $36.4 million, a decrease of $23.7 million, or 39%, as compared to $60.1 million for the nine months ended September 30, 2021. This was primarily due to a decrease in Oral Paclitaxel

product development and medical affairs costs, costs of clinical and regulatory operations, and compensation costs and included the following:

•

$9.6 million decrease in Oral Paclitaxel product development and medical affairs costs incurred in connection with the potential product launch of Oral Paclitaxel;

•

$6.2 million decrease in costs of clinical operations and regulatory affairs after the completion of the Phase 3 study and FDA submission of Oral Paclitaxel;

•

$4.8 million decrease in R&D related compensation expenses;

•

$3.9 million decrease in drug licensing costs related to licenses for specialty drug products and a license milestone payment associated with Arginine deprivation therapy in 2021; and

•

$1.7 million decrease in costs of preclinical operations, primarily related to the Orascovery platform.

The decrease in these R&D expenses was partially offset by a $2.5 million increase in cell therapy development costs with the development of the NKT cell therapies.

Selling, General, and Administrative Expenses

SG&A expenses for the nine months ended September 30, 2022 totaled $40.4 million, a decrease of $14.5 million, or 26%, as compared to $54.9 million for the nine months ended September 30, 2021. This was primarily due to a $10.6 million decrease in costs for preparing to commercialize Oral Paclitaxel as the significant pre-launch activities slowed upon receipt of the Complete Response Letter in February 2021 and a $5.1 million gain on change in earnout liability related to the Kuur contingent consideration, with the discontinuation of the TCR-T therapy, while 2021 had a $3.6 million loss on change in earnout liability. Additionally, there was a $0.2 million decrease in general operating costs. These decreases were partially offset by the effects of the devaluation of foreign currencies of $4.3 million during 2022, and an increase in compensation related costs of $0.7 million.

Interest Income and Interest Expense

Interest income consisted of interest earned on our short-term investments and totaled $0.2 million and $0.1 million for the nine months ended September 30, 2022 and 2021, respectively. Interest expense totaled $15.1 million and $15.6 million for the nine months ended September 30, 2022 and 2021, respectively. Interest expense in 2022 was related to the Senior Credit Agreement with Oaktree and the Royalty financing liability, while interest expense in 2021 was related to the Senior Credit Agreement only. Interest expense decreased due to principal repayments made to the Senior Credit Agreement, which was offset by an increase in expense related to the Royalty financing liability, which carries a higher effective interest rate.

Loss on extinguishment of debt

During the nine months ended September 30, 2022, we recognized a $1.5 million net loss on the extinguishment of debt. This was comprised of a loss of $3.5 million related to the prepayment we made to Oaktree upon the closing of the sale of our leasehold interest in the manufacturing facility in Dunkirk, New York. This was partially offset by a $2.1 million gain on the extinguishment of debt due to the partial repayment we made to Oaktree upon the closing of the RIPA with Sagard and Oaktree.

Income tax (expense) benefit

For the nine months ended September 30, 2022, income tax expense amounted to $0.6 million, compared to income tax benefit of $10.6 million for the nine months ended September 30, 2021. We did not record a provision for U.S. federal income taxes for the nine months ended September 30, 2022 or 2021 because we expect to generate a loss for the years ended December 31, 2022 and 2021. The income tax expense in the current year is primarily attributable to foreign income tax withholdings on our revenue earned under our out-license arrangements. The income tax benefit in the prior period is primarily the result of a taxable temporary difference due to the deferred tax liability recognized for the indefinite lived intangible assets acquired in connection with the acquisition of Kuur’s IPR&D. This taxable temporary difference is considered a source of taxable income to support the realization of deferred tax assets from the acquirer which resulted in a reversal of our valuation allowance.

Gain (loss) from discontinued operations

Gain from discontinued operations for the nine months ended September 30, 2022 totaled $3.0 million, as compared to a loss of $9.0 million for the nine months ended September 30, 2021. This change was primarily due to the gain on the sale of the Dunkirk facility of $14.5 million, and a decrease in general and administrative expenses related to the discontinued Dunkirk operations of $5.0 million during the nine months ended September 30, 2022. These were partially offset by a decrease in API product sales of $2.1 million at the discontinued China API operations and the reserve of excess inventory held at our discontinued China API operations of

$7.1 million. Further, research and development costs at our discontinued China API operations decreased by $0.7 million and other income increased by $1.4 million due to the sale of pilot products in 2022.

Liquidity and Capital Resources

Capital Resources

Since our inception, we have incurred net losses and negative cash flows from our operations. Substantially all of our losses have resulted from funding our R&D programs, SG&A costs associated with our operations, and the development of our specialty drug operations in our Commercial Platform and 503B operations and the investment we made in our pre-launch activities in anticipation of commercializing our proprietary drugs. We incurred net losses of $70.2 million and $97.0 million for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, we had an accumulated deficit of $982.7 million. Our operating activities from continuing operations used $52.5 million and $97.0 million of cash during the nine months ended September 30, 2022 and 2021, respectively. We intend to continue to advance certain of our various clinical and pre-clinical programs which could lead to increased cash outflow of R&D costs. While we expect our R&D expenses to remain at a decreased level from prior periods, as the development of most non-Cell Therapy technologies has been suspended, R&D expenses related to our Cell Therapy platform are expected to increase as we prepare for additional clinical and preclinical studies for our Cell Therapy programs. We intend to continue to diversify the product portfolio for specialty drug products in the Commercial Platform and 503B operations, which may require relatively more funding than we have previously dedicated to this portfolio. Our principal sources of liquidity as of September 30, 2022 were cash and cash equivalents totaling $35.2 million, restricted cash of $5.2 million, held in a controlled bank account in connection with the Senior Credit Agreement with Oaktree, and short-term investments totaling $1.0 million, which is our available-for-sale equity investments.

Indebtedness

We had $122.7 million and $148.5 million of debt as of September 30, 2022 and December 31, 2021, respectively. As of September 30, 2022 and 2021, this primarily consisted of the royalty financing liability under the RIPA (as described in Part I, Item 1. Note 11 - Debt and Lease Obligations), Senior Credit Agreement with Oaktree, a credit agreement with Chongqing Maliu Riverside Development and Investment Co., LTD, and finance and operating lease obligations.

The sale of the interest in U.S. and European royalties and milestones to Sagard and Oaktree in connection with the Revenue Interest Purchase Agreement was recorded as a royalty financing liability due to our significant continued involvement in the cash flows due to the Purchasers. The RIPA contains various representations and warranties, information rights, non-financial covenants, and indemnification obligations, however, this liability is not guaranteed by the Company. During the nine months ended September 30, 2022, the Company received Klisyri royalties of $0.9 million, which were remitted to the Purchasers.

During the nine months ended September 30, 2022, we made payments, inclusive of principal, interest, and fees, to Oaktree in the aggregate amount of $108.3 million pursuant to the Third Amendment, Fourth Amendment, Fifth Amendment, and Sixth Amendment. See Part I, Item 1. Note 11—Debt and Lease Obligations for additional information regarding our Senior Credit Agreement with Oaktree.

As of September 30, 2022, we owe $47.5 million under the Senior Credit Agreement. We do not have access to additional tranches of funding available under the Senior Credit Agreement. Our obligations under the Senior Credit Agreement are guaranteed by us and certain of our existing domestic subsidiaries and subsequently acquired or organized subsidiaries subject to certain exceptions. Our obligations under the Senior Credit Agreement and the related guarantees thereunder are secured, subject to customary permitted liens and other agreed upon exceptions, by (i) a pledge of all of the equity interests of our direct subsidiaries, and (ii) a perfected security interest in all of our tangible and intangible assets.

The Senior Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness, and dividends and other distributions, subject to certain exceptions, including specific exceptions with respect to product commercialization and development activities. In addition, the Senior Credit Agreement contains certain financial covenants, including, among other things, maintenance of minimum liquidity and a minimum revenue test, measured quarterly until the last day of the second consecutive fiscal quarter where the consolidated leverage ratio does not exceed 4.5 to 1, provided that thereafter we cannot allow our consolidated leverage ratio to exceed 4.5 to 1, measured quarterly. Failure of the Company to comply with the financial covenants will result in an event of default, subject to certain cure rights of the Company. At September 30, 2022, we were in compliance with all applicable covenants.

As of September 30, 2022, we owe $7.0 million under the line of credit with Chongqing Maliu Riverside Development and Investment Co., LTD (“CQ”), which is expected to be assumed by the China API Buyer if the sale of the China API Operations closes, and is included within non-current portion of liabilities of discontinued operations on our condensed consolidated balance sheet.

ATM Offering

On August 20, 2021, we entered into a sales agreement with SVB Securities LLC, in connection with the offer and sale of up to $100,000,000 of shares of our common stock, par value $0.001 per share, in an at-the-market offering (“ATM Offering”). During the nine months ended September 30, 2022, we sold 11,105,377 shares of our common stock for an average price of $0.55 per share under the sales agreement, raising approximately $6.1 million in net proceeds. Since the inception of the ATM, we sold 11,868,202 shares of our common stock for an average price of $0.61 per share under the sales agreement, raising approximately $7.2 million in net proceeds. While we intend to continue selling shares of common stock in the ATM Offering, there can be no assurance that we will be able to sell shares of common stock at a price that is acceptable to our Board of Directors or that will be successful in raising significant capital in the offering.

Outlook

We expect to continue to opportunistically seek access to the equity capital markets to support our development efforts and operations. To the extent that we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution. To the extent that we raise additional funds through collaboration or partnering arrangements or by monetizing non-core assets, we may be required to relinquish some of our rights to our technologies or rights to market and sell our products in certain geographies, grant licenses on terms that are not favorable to us, or issue equity that may be substantially dilutive to our stockholders. In addition, we have borrowed and, in the future, may borrow additional capital from institutional and commercial banking sources to fund future growth. We may borrow additional funds on terms that may include restrictive covenants, including covenants that further restrict the operation of our business, liens on assets, high effective interest rates, financial performance covenants and repayment provisions that reduce cash resources and limit future access to capital markets.

As of September 30, 2022, we had cash and cash equivalents of $35.2 million, restricted cash of $5.2 million, and short-term investments of $1.0 million. We are implementing cost savings programs and plan to monetize non-core assets and raise capital in order to extend our cash runway in 2022 and 2023. If we are unable to raise additional capital or monetize assets, we believe that the existing cash and cash equivalents, restricted cash, and short-term investments will not be sufficient to fund our operations through the next twelve months beyond the date of the issuance of our unaudited condensed consolidated financial statements. We have concluded that this raises substantial doubt about our ability to continue as a going concern. See Part I, Item 1. Note 1—Company and Nature of Business for further information regarding our ability to continue as a going concern. We have based these estimates on assumptions that may prove to be wrong, and we could spend the available financial resources much faster than expected and need to raise additional funds sooner than anticipated. Although we plan to raise additional funds though the sale of non-core assets and selling equity securities, these plans are subject to market conditions which are outside of our control, and therefore cannot be deemed to be probable. There can be no assurance that additional financing, if available, can be obtained on terms acceptable to us. If we are unable to obtain such additional financing, we would need to reevaluate our future operating plans.

We anticipate that our expenses will cover the following activities as we:

•

Advance the preclinical and clinical research program and development activities of our Cell Therapy technology platform;

•

Continue our preclinical and clinical research program and development activities related to our Mission;

•

Seek to identify additional research programs and product candidates within existing Cell Therapy platform; and

•

Maintain, expand and protect our intellectual property (“IP”) portfolio.

We have made certain changes to our budgeted expenses in light of the CRL for Oral Paclitaxel we received in February 2021 and the Type A meetings with the FDA, including curtailing commercialization expenses and investing in additional products for our specialty drug product business. However, our expenses could increase as we continue to fund clinical and preclinical development of our research programs by advancing our Cell Therapy programs, certain candidates in our pipeline, our specialty drug products, working capital and other general corporate purposes. We have based our estimates on assumptions that might prove to be wrong and we might use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our drug candidates, we are unable to accurately estimate the amounts of increased capital outlays and operating expenditures necessary to complete the development and commercialization of our drug candidates.

Our future capital requirements will depend on many factors, some or all of which may be impacted by the COVID-19 pandemic, including:

•

Our ability to generate revenue and profits from our Commercial Platform or otherwise;

•

The costs, timing and outcome of regulatory reviews and approvals;

•

Progress of our drug candidates to progress through clinical development successfully;

•

The initiation, progress, timing, costs and results of nonclinical studies and clinical trials for our other programs and potential drug candidates;

•

The costs of construction and fit-out of planned drug manufacture at our API manufacturing facility;

•

The number and characteristics of the drug candidates we pursue;

•

The costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our IP rights and defending IP related claims;

•

The extent to which we acquire or in-license other products and technologies; and

•

Our ability to maintain and establish collaboration arrangements on favorable terms, if at all.

We expect to finance our cash needs through a combination of equity offerings, debt financings, sales of non-core assets, collaborations, strategic alliances, licensing arrangements, and government grants. We believe that the existing cash and cash equivalents, restricted cash, and short-term investments will not be sufficient to fund our operations through the next twelve months beyond the date of the issuance of our consolidated financial statements. Our estimates are based on relevant conditions that are known and reasonably knowable at the date of these consolidated financial statements being available for issuance and are subject to change due to changes in business, industry or macroeconomic conditions. We have based these estimates on assumptions that may prove to be wrong, and we could spend the available financial resources much faster than expected and need to raise additional funds sooner than anticipated. To the extent that we raise additional capital by issuing equity securities or convertible debt securities, our stockholders may experience substantial dilution, and the terms of these securities may include liquidation or other preferences that adversely affect rights of holders of common stock. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends and might require the issuance of warrants, which could potentially dilute the ownership interest of holders of common stock. If we are able to sell non-core assets, we may not realize in full the anticipated benefits, savings, and improvements in our strategic pivot efforts, we may not realize the cost savings we anticipate, the cost of disposing of the assets may exceed the cost savings generated, and the process of disposing of the assets may be disruptive to our daily operating activities and our execution of short- and long-term strategies. To the extent that we raise additional funds through collaboration or partnering arrangements, we may be required to relinquish some of our rights to our technologies or rights to market and sell our products in certain geographies and grant licenses on terms that are not favorable to us. If we are unable to raise additional funds when needed, we might be required to delay, limit, reduce, or terminate our product development efforts, reevaluate our future operating plans or cease operations.

Cash Flows

The following table provides information regarding our cash flows for the nine months ended September 30, 2022 and 2021:


	Nine Months Ended September 30,
	2022			2021
	(in thousands)
Net cash used in operating activities from continuing operations	$	(52,542	)	$	(96,974	)
Net cash provided by investing activities from continuing operations		7,430			122,739
Net cash provided by financing activities from continuing operations		2,252			1,408
Net cash provided by (used in) discontinued operations		29,098			(23,425	)
Net effect of foreign exchange rate changes		2,472			259
Net (decrease) increase in cash, cash equivalents, and restricted cash	$	(11,290	)	$	4,007

Net Cash Used in Operating Activities from Continuing Operations

The use of cash in our operating activities resulted primarily from our net loss adjusted for non-cash charges and changes in components of working capital. The primary use of our cash in the periods presented was to fund our R&D, regulatory and other clinical trial costs, drug licensing costs, inventory purchases, pre-launch commercialization activities, and other expenditures related to sales, marketing and administration.

Net cash used in operating activities from continuing operations was $52.5 million for the nine months ended September 30, 2022. This resulted primarily from our net loss from continuing operations of $73.2 million, adjusted for non-cash charges of $9.7 million and by cash provided by our operating assets and liabilities of $10.9 million. Our operating assets increased $6.6 million for accounts receivable mainly related to the increase in APD sales, decreased $1.3 million in prepaid expenses and other assets, and

increased $15.0 million for inventory of all drug products, primarily inventory of specialty drugs and Tirbanibulin. Our operating liabilities increased by $31.2 million mainly due to an increase in accounts payable, accrued selling fees and rebates related to our specialty product sales, accrued wages and benefits, accrued clinical expenses, and accrued inventory purchases. Our net non-cash charges during the nine months ended September 30, 2022 primarily consisted of $6.2 million amortization of debt discount, $4.9 million of stock-based compensation expense, $2.2 million depreciation and amortization expense, and $1.5 million loss on extinguishment of debt, partially offset by a $5.1 million gain on the change in fair value of contingent consideration.

Net cash used in operating activities from continuing operations was $97.0 million for the nine months ended September 30, 2021. This resulted primarily from our net loss from continuing operations of $87.9 million, adjusted for non-cash charges of $16.9 million, non-cash income tax benefit of $10.8 million related to the reversal of our valuation allowance on our deferred tax assets to offset the deferred tax liability assumed in connection with the acquisition of Kuur’s IPR&D, and by cash used by our operating assets and liabilities of $15.1 million. Our operating assets increased $11.0 million for accounts receivable mainly related to the timing of license revenues and increase in 503B sales, increased $1.1 million for inventory of all drug product, and remained consistent for prepaid expenses and other assets. Our operating liabilities decreased by $3.1 million mainly due to a decrease in accrued costs for potential product launch, partially offset by an increase in deferred revenue and accrued clinical expenses. Our net non-cash charges during the nine months ended September 30, 2021 consisted of $7.3 million of stock-based compensation expense, $3.6 million change in fair value of contingent consideration, $2.9 million depreciation and amortization expense, $2.3 million amortization of debt discount, and $0.6 million write-off of deferred debt issuance costs related to the revenue interest financing.

Net Cash Provided by Investing Activities from Continuing Operations

Net cash provided by investing activities from continuing operations was $7.4 million for the nine months ended September 30, 2022, compared to $122.7 million provided in the nine months ended September 30, 2021. The difference was primarily due to less cash being provided by the net sales and maturities of short-term investments, partially offset by a decrease in cash acquired from the acquisition of Kuur in 2021.

Net Cash Provided by Financing Activities from Continuing Operations

Net cash provided by financing activities from continuing operations was $2.3 million for the nine months ended September 30, 2022, which consisted of $76.5 million in net proceeds from the issuance of the royalty financing liability, $24.2 million in proceeds from the sale of common stock under the ATM Offering, public stock offering, and 2017 Employee Stock Purchase Plan, and $10.4 million from the issuance of pre-funded and common warrants, partially offset by the $102.5 million repayment of long-term debt and $6.0 million in costs related to the repayment of such debt.

Net cash provided by financing activities from continuing operations was $1.4 million for the nine months ended September 30, 2021, which consisted of $1.7 million from the exercise of stock options and sale of common stock, partially offset by $0.3 million repayment finance lease obligations and repurchase of treasury stock.

Net Cash Provided by (Used in) Discontinued Operations

Net cash provided by discontinued operations was $29.1 million for the nine months ended September 30, 2022 and was primarily comprised of proceeds of the Dunkirk Transaction of $40.0 million, partially offset by purchases of property and equipment of $2.1 million and cash used in operating activities of discontinued operations of $8.1 million.

Net cash used in discontinued operations was $23.4 million for the nine months ended September 30, 2021 and was primarily attributable to purchases of property and equipment of $16.4 million and cash used in operating activities of discontinued operations of $7.0 million.

Contractual Obligations

A summary of our contractual obligations as of September 30, 2022 is as follows:


	Payments Due by Period
	Within 1 Year		1 to 3 years		3 to 5 years		More than 5 years		Total Amounts Committed
	(in thousands)
Operating leases	$	2,256		3,872	$	660	$	—	$	6,788
Long-term debt		16,302		35,855		14,911		—		67,068
Finance lease obligations		138		123		—		—		261
Licensing fees		628		—		—		—		628
	$	19,324	$	39,850	$	15,571	$	—	$	74,745

Our operating and finance leases are principally for facilities and equipment. We currently lease office space in the U.S. and foreign countries to support our operations as a global organization. The operating leases in the above table include our several locations with the amounts committed by each location: (1) the rental of our global headquarters in the Conventus Center for Collaborative Medicine in Buffalo, NY; (2) the rental of our research and development facility in the IC Development Centre in Hong Kong; (3) the rental of the Commercial Platform headquarters in Chicago, IL; (4) the rental of our clinical research headquarters in Cranford, NJ; (5) the rental of our contract research organization throughout Latin America; (6) the rental of our Global Supply Chain distribution office in Houston, TX; and (7) the rental of other facilities and equipment located mainly in Buffalo, NY. These locations represent $3.7 million, less than $0.1 million, $1.4 million, $0.2 million, $0.1 million, $0.1 million, and $1.4 million, respectively, of the total amounts committed. In addition to the minimum rental commitments on our operating leases we may also be required to pay amounts for taxes, insurance, maintenance and other operating expenses.

The long-term debt includes our senior secured loan and the credit agreement with CQ. The finance lease obligations represent leases of equipment in our office in Buffalo, NY. The license fees in the above table represent the amount committed and accrued under in-license agreements for specialty drug products by the Commercial platform.

The Company is obligated to remit funds collected from certain Klisyri royalties and milestones under the License Agreement with Almirall to the Purchasers under the RIPA. The Company will retain the right to receive 50% of certain of the milestone interests under the License Agreement, equal to $155.0 million in the aggregate if those milestones are achieved, and 50% of the royalties paid under the License Agreement for sales of Klisyri once net sales of Klisyri exceed a certain dollar amount. The estimates of these cash flows are excluded from the above table.

Critical Accounting Policies and Significant Judgments and Estimates

Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenue and expenses during the periods. We evaluate our estimates and judgments on an ongoing basis, including but not limited to, estimating the useful lives of long-lived assets, assessing the impairment of long-lived assets, stock-based compensation expenses, and the realizability of deferred income tax assets. We base our estimates on historical experience, known trends and events, contractual milestones and other various factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Changes in the accounting estimates are likely to occur from period to period. Actual results could be significantly different from these estimates. 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 judgment and estimates.

Revenue Recognition

Oncology Innovation Platform

Global Supply Chain Platform

Commercial Platform

Research and Development Expenses

Research and development expenses represent costs associated with developing our proprietary drug candidates, our collaboration agreements for such drugs, and our ongoing clinical studies.

Clinical trial costs are a significant component of our research and development expenses. We have a history of contracting with third parties that perform various clinical trial activities on our behalf in the ongoing development of our drug candidates. Expenses related to clinical trials are accrued based on our estimates of the actual services performed by the third parties for the respective period. If the contracted amounts are revised or the scope of a contract is revised, we will modify the accruals accordingly on a prospective basis and will do so in the period in which the facts that give rise to the revision become reasonably certain.

Intangible Assets, net

Intangible assets arising from a business acquisition are recognized at fair value as of the acquisition date. The Company amortizes intangible assets using the straight-line method. When the straight-line method of amortization is utilized, the estimated useful life of the intangible asset is shortened to assure the recognition of amortization expense corresponds with the expected cash flows. Other purchased intangibles, including certain licenses, are capitalized at cost and amortized on a straight-line basis over the license life, when a future economic benefit is probable and measurable. If a future economic benefit is not probable or measurable, the license costs are expensed as incurred within research and development expenses. In-process research and development ("IPR&D") intangible assets are not amortized, but rather are reviewed for impairment on an annual basis or more frequently if indicators of impairment are present, until the project is completed, abandoned, or transferred to a third party.

Impairment of Long-Lived Assets

The Company reviews the recoverability of its long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on the ability to recover the carrying value of the assets from the expected future cash flows (undiscounted and without interest expense) of the related operations. If these cash flows are less than the carrying value of such assets, an impairment loss for the difference between the estimated fair value and carrying value is recorded.

Business Acquisitions

The Company accounts for acquired businesses using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date. Identifiable amortizing intangible assets are recorded on the consolidated balance sheet at fair value and amortized over their estimated useful lives. Acquisition-related costs are expensed as incurred. Any excess of the consideration transferred over the estimated fair values of the net assets acquired is recorded as goodwill.

Contingent Consideration

Liability related to the sale of future royalties

The Company treats the liability related to the sale of future royalties, as discussed further in Part I, Item 1. Note 11 - Debt and Lease Obligations, as a debt instrument, amortized under the effective interest rate method over the estimated life of the revenue streams. The Company recognizes interest expense thereon using the effective rate, which is based on its current estimates of future revenues over the life of the arrangement. The Company periodically assesses its expected revenues using internal projections, imputes interest on the carrying value of the deferred royalty obligation, and records interest expense using the imputed effective interest rate. To the extent its estimates of future revenues are greater or less than previous estimates or the estimated timing of such payments is materially different than previous estimates, the Company will account for any such changes by adjusting the effective interest rate on a prospective basis, with a corresponding impact to the reclassification of the deferred royalty obligation. The assumptions used in determining the expected repayment term of the royalty financing liability and amortization period of the issuance costs require that the Company makes significant estimates that could impact the short-term and long-term classification of the royalty financing liability, interest recorded on such liability, as well as the period over which such costs will be amortized.

Recent Accounting Pronouncements

In the normal course of business, we evaluate all new accounting pronouncements issued by the FASB, the SEC, or other authoritative accounting bodies to determine the potential impact they may have on our condensed consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Foreign Currency Exchange Risk

A significant portion of our business is located outside the United States and, as a result, we generate revenue and incur expenses denominated in currencies other than the U.S. dollar, a majority of which is denominated in Chinese Renminbi (“RMB”). In the nine months ended September 30, 2022 and 2021, respectively, approximately 1% and 0% of our sales, respectively, excluding intercompany sales and including sales from discontinued operations, were denominated in foreign currencies. As a result, our revenue can be significantly impacted by fluctuations in foreign currency exchange rates. As of September 30, 2022, we had cash and cash equivalents of approximately $1.0 million at our Chinese subsidiaries. We expect that foreign currencies will represent a lower percentage of our sales in the future due to the anticipated growth of our U.S. business. Our international selling, marketing, and administrative costs related to these sales are largely denominated in the same foreign currencies, which somewhat mitigates our foreign currency exchange risk rate exposure.

Currency Convertibility Risk

A portion of our revenues and expenses, and a portion of our assets and liabilities are denominated in RMB. On January 1, 1994, the Chinese government abolished the dual rate system and introduced a single rate of exchange as quoted daily by the People’s Bank of China, (“PBOC”). However, the unification of exchange rates does not imply that the RMB may be readily convertible into U.S. dollars or other foreign currencies. All foreign exchange transactions continue to take place either through the PBOC or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the PBOC. Approvals of foreign currency payments by the PBOC or other institutions require submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts.

Additionally, the value of the RMB is subject to changes in central government policies and international economic and political developments affecting supply and demand in the PRC foreign exchange trading system market.

Interest Rate Sensitivity

We had cash and cash equivalents of $35.2 million, restricted cash of $5.2 million, and short-term investments of $1.0 million as of September 30, 2022, which consisted primarily of certificates of deposit with financial institutions. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. However, because of the short-term nature of the instruments in our portfolio, a sudden change in U.S. market interest rates is not expected to have a material impact on our condensed consolidated financial condition or results of operations. We do not believe that our cash or cash equivalents have significant risk of default or illiquidity.

Credit Risk

We had cash, cash equivalents, and restricted cash of $40.4 million and marketable securities of $1.0 million at September 30, 2022. Substantially all of our bank deposits are in major financial institutions, which we believe are of high credit quality. The primary objectives of our investment activities are to preserve principal, provide liquidity and maximize income without significantly increasing risk.

We make periodic assessments of the recoverability of trade and other receivables and amounts due from related parties. Our historical experience in collection of receivables falls within the recorded allowances, and we believe that we have made adequate provision for uncollectible receivables.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Board Chairman (Principal Executive Officer) and our Chief Financial Officer (Principal Financial and Accounting Officer), evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2022. The term “disclosure controls and procedures,” as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well-designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2022, our Chief Executive Officer and our Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Remediation

As disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, our Chief Executive Officer and Chief Financial Officer identified a material weakness in internal control related to our control over the review of the annual goodwill impairment analysis. The Company’s goodwill was fully impaired in fiscal 2021 and therefore, no longer requires an impairment analysis under ASC 350. Given the Company’s disclosure controls and procedures over the accounting for and measurement of goodwill impairment associated with the material weakness are no longer relevant to the Company’s determination of the effectiveness of internal controls over financial reporting, no remediation was necessary.

Changes in Internal Control over Financial Reporting

Except as noted above, there were no changes in the Company's internal controls over financial reporting during the fiscal quarter ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. Regardless of the outcome, litigation can have an adverse impact on us because of prosecution, defense and settlement costs, unfavorable awards, diversion of management resources and other factors.

Securities Litigation

Shareholder Derivative Lawsuit

From time to time, the Company may become subject to other legal proceedings, claims and litigation arising in the ordinary course of business. In addition, the Company may receive letters alleging infringement of patent or other intellectual property rights. The Company is not currently a party to any other material legal proceedings, nor is it aware of any pending or threatened litigation that, in the Company’s opinion, would have a material adverse effect on the business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.

Item 1A. Risk Factors.

For a discussion of the Company’s potential risks or uncertainties, please see: (i) “Part I—Item 1A—Risk Factors” and “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC and the additional risks described below.

We are currently not in compliance with the continued listing standards of the Nasdaq Global Market, and if we are unable to regain compliance, our common stock will be delisted from the exchange.

Our common stock is listed on Nasdaq under the symbol “ATNX”. On March 18, 2022, we received a letter from the Listing Qualifications Staff of The Nasdaq Stock Market LLC indicating that, based upon the closing bid price of our common stock, we no longer met the Nasdaq listing standard requiring listed companies to maintain a minimum bid price of at least $1.00 per share. We were unable to regain compliance with the minimum bid price requirement by the end of a compliance period of 180 days, or by September 14, 2022.

Following our receipt of written notification from Nasdaq stating that we had not regained compliance with the listing standards on September 15, 2022, we appealed by requesting a hearing before the Panel. On October 31, 2022, the Panel granted our request for the continued listing of our common stock on Nasdaq, subject to our satisfaction of the minimum $1.00 bid price requirement by March 14, 2023. During this additional compliance period, our common stock will continue to be listed on Nasdaq. If we are unable to regain compliance with the bid price requirement by the end of this additional compliance period, or we are unable to maintain compliance with other Nasdaq listing requirements, our common stock will be subject to delisting from Nasdaq.

While we are seeking stockholder approval to effect the Reverse Stock Split that, if approved and implemented, is intended to increase the per share price of our common stock, we cannot assure you that the Reverse Stock Split will be approved or implemented, and even if approved and implemented, that the Reverse Stock Split will result in our stock price increasing to meet the bid price requirement for a period sufficient to regain compliance with the Nasdaq listing requirements.

We and our stockholders could be materially adversely impacted if our common stock is delisted from Nasdaq. In particular:

•

we may be unable to raise equity capital on acceptable terms or at all;

•

we may lose the confidence of our current or prospective third-party providers and collaboration partners, which could jeopardize our ability to enter into licensing and collaboration agreements and continue our business as currently conducted;

•

the price of our common stock will likely decrease;

•

stockholders may be unable to sell or purchase our common stock when they wish to do so;

•

we may lose the interest of institutional investors in our common stock;

•

we may lose media and analyst coverage;

•

our common stock could be considered a “penny stock,” which would likely limit the level of trading activity in the secondary market for our common stock; and

•

we would likely lose the active trading market for our common stock, as it may only be traded on one of the over-the-counter markets, if at all.

We cannot assure you that the proposed Reverse Stock Split, if approved and implemented, will increase the price of our common stock.

We expect that the Reverse Stock Split, if approved by our stockholders and implemented by our Board, will increase the market price of our common stock. However, the effect of the Reverse Stock Split on the market price of our common stock cannot be predicted with any certainty, and the history of reverse stock splits for other companies in our industry is varied, particularly since some investors may view a reverse stock split negatively. It is possible that the per share price of our common stock after the Reverse Stock Split will not increase in the same proportion as the reduction in the number of outstanding shares of common stock following the Reverse Stock Split, and the Reverse Stock Split may not result in a per share price that would attract investors who do not trade in lower priced stocks. In addition, we cannot assure you that our common stock will be more attractive to investors. Even if we implement the Reverse Stock Split, the market price of our common stock may decrease due to factors unrelated to the Reverse Stock Split, including our future performance. If the Reverse Stock Split is consummated and the trading price of our common stock declines, the percentage decline as an absolute number and as a percentage of our overall market capitalization may be greater than would occur in the absence of the Reverse Stock Split.

We may not satisfy the Nasdaq continued listing requirements following the Reverse Stock Split, even if it is approved and implemented.

Even if the Reverse Stock Split is approved and implemented, we may not be able to regain compliance with the bid price requirement of the Nasdaq listing standards. If our common stock ultimately were to be delisted from Nasdaq for any reason, it could negatively impact us because it would reduce the liquidity and market price of our common stock; reduce the number of investors willing to hold or acquire our common stock; negatively impact our ability to access equity markets, issue additional securities and obtain additional financing in the future; affect our ability to provide equity incentives to our employees; and negatively impact our reputation and, as a consequence, our business.

The proposed Reverse Stock Split, if approved and implemented, may decrease the liquidity of our common stock and result in higher transaction costs.

The liquidity of our common stock may be negatively impacted if the Reverse Stock Split is implemented, given the reduced number of shares that would be outstanding after the Reverse Stock Split, particularly if the stock price does not increase as a result of the Reverse Stock Split. In addition, if the Reverse Stock Split is implemented, it may increase the number of our stockholders who

own “odd lots” of fewer than 100 shares of common stock, which may be more difficult to sell. Brokerage commissions and other costs of transactions in odd lots are generally higher than the costs of transactions of more than 100 shares or of even multiples of 100 shares of common stock. Accordingly, the Reverse Stock Split may not achieve the desired results of increasing marketability of our common stock.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Under Salary Deduction and Stock Purchase Agreements with certain of our executive officers and directors, we issued an aggregate of 359,097 shares to those executive officers and directors during the quarter ended September 30, 2022. We issued these shares in reliance upon Section 4(a)(2) of the Securities Act of 1933, as amended, and Nasdaq Listing Rule 5635(c)(2). These shares were issued in exchange for after-tax payroll deductions of approximately $0.2 million from the executive officers and directors, using the Nasdaq Official Closing Price on the applicable payroll date. Any proceeds from the issuance of these shares were used for our working capital and general corporate purposes.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

The exhibits filed or furnished as part of this Quarterly Report on Form 10-Q are set forth below.


		Incorporated by Reference (Unless Otherwise Indicated)
Exhibit Number	Exhibit Title	Form	File	Exhibit	Filing Date

4.1	Form of Common Warrant of Athenex, Inc.	—	—	—	Filed herewith

4.2#	Warrant Agency Agreement, by and among Athenex, Inc., Computershare Inc., and Computershare Trust Company, N.A., dated as of August 15, 2022	—	—	—	Filed herewith

4.3	Form of Pre-Funded Warrant (SVB Investors)	Form 8-K	001-38112	10.2	August 12, 2022

10.1#	Equity Purchase Agreement, by and among TiHe Capital (Beijing) Co. Ltd., Athenex API Limited, Athenex Pharmaceuticals (China) Limited, Polymed Therapeutics, Inc., and Athenex, Inc., dated as of July 7, 2022.	Form 10-Q	001-38112	10.4	July 29, 2022

10.2	Underwriting Agreement, dated August 10, 2022, by and between Athenex, Inc. and SVB Securities LLC.	Form 8-K	001-38112	10.1	August 12, 2022

10.3	Limited Waiver under Revenue Interest Purchase Agreement, by and among ATNX SPV, LLC, Athenex, Inc., and the Purchaser parties thereto, dated as of August 14, 2022.	Form 8-K	001-38112	10.1	August 18, 2022

10.4	Sixth Amendment to Credit and Guaranty Agreement, by and among Athenex, Inc., the Lenders party thereto, and Oaktree Fund Administration, LLC, as administrative agent for the Lenders, dated as of August 14, 2022.	Form 8-K	001-38112	10.2	August 18, 2022

10.5	Letter Agreement, by and among TiHe Capital (Beijing) Co. Ltd., Athenex API Limited, Athenex Pharmaceuticals (China) Limited, Polymed Therapeutics, Inc., and Athenex, Inc., dated as of September 30, 2022.	—	—	—	Filed herewith

31.1	Certification of the Chief Executive Officer and Board Chairman (Principal Executive Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	—	—	—	Filed herewith

31.2	Certification of the Chief Financial Officer (Principal Financial and Accounting Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	—	—	—	Filed herewith

32.1	Certification of the Chief Executive Officer and Board Chairman (Principal Executive Officer) and the Chief Financial Officer (Principal Financial and Accounting Officer) pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	—	—	—	Filed herewith

101.INS	Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.	—	—	—	Filed herewith

101.SCH	Inline XBRL Taxonomy Extension Schema Document.	—	—	—	Filed herewith

101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document.	—	—	—	Filed herewith

101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document.	—	—	—	Filed herewith



101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document.	—	—	—	Filed herewith

101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document.	—	—	—	Filed herewith

104	Cover Page Interactive Data File (embedded within the Inline XBRL document)	—	—	—	Filed herewith

# Schedules and similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company will furnish a copy of any omitted schedule or similar attachment to the Securities and Exchange Commission upon request.

SIGNATURES

Pursuant to the requirements 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.


	Athenex, Inc.

Date: November 3, 2022	By:	/s/ Johnson Y.N. Lau
		Chief Executive Officer and Board Chairman (Principal Executive Officer)

Date: November 3, 2022	By:	/s/ Joe Annoni
		Chief Financial Officer (Principal Financial and Accounting Officer)