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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 March 31, 2022

OR

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.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

 

As of May 5, 2022, the registrant had 111,830,484 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’ Equity (Unaudited)

 

3

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

4

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

5

Item 2.

 

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

 

27

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

42

Item 4.

 

Controls and Procedures

 

43

PART II.

 

OTHER INFORMATION

 

44

Item 1.

 

Legal Proceedings

 

44

Item 1A.

 

Risk Factors

 

44

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

45

Item 3.

 

Defaults Upon Senior Securities

 

45

Item 4.

 

Mine Safety Disclosures

 

46

Item 5.

 

Other Information

 

46

Item 6.

 

Exhibits

 

46

Signatures

 

47

 

 

i


 

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)

 

 

 

March 31,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

27,224

 

 

$

35,202

 

Restricted cash

 

 

13,750

 

 

 

16,500

 

Short-term investments

 

 

10,235

 

 

 

10,207

 

Accounts receivable, net of chargebacks and other deductions of $20,546 and
   $
22,868, respectively, and provision for credit losses of $9,244 and $9,306,
   respectively

 

 

29,605

 

 

 

26,637

 

Inventories

 

 

41,253

 

 

 

34,685

 

Prepaid expenses and other current assets

 

 

9,521

 

 

 

8,885

 

Discontinued operations, current portion

 

 

 

 

 

1,280

 

Total current assets

 

 

131,588

 

 

 

133,396

 

Property and equipment, net

 

 

26,863

 

 

 

27,978

 

Intangible assets, net

 

 

71,567

 

 

 

71,896

 

Operating lease right-of-use assets, net

 

 

5,796

 

 

 

6,243

 

Other assets

 

 

1,048

 

 

 

1,087

 

Discontinued operations, non-current portion

 

 

 

 

 

26,848

 

Total assets

 

$

236,862

 

 

$

267,448

 

Liabilities and stockholders' equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

16,605

 

 

$

16,742

 

Accrued expenses

 

 

36,958

 

 

 

24,453

 

Current portion of operating lease liabilities

 

 

2,541

 

 

 

2,909

 

Current portion of long-term debt and finance lease obligations

 

 

24,680

 

 

 

46,881

 

Discontinued operations, current portion

 

 

 

 

 

5,062

 

Total current liabilities

 

 

80,784

 

 

 

96,047

 

Long-term liabilities:

 

 

 

 

 

 

Long-term operating lease liabilities

 

 

4,283

 

 

 

4,494

 

Long-term debt and finance lease obligations

 

 

102,231

 

 

 

103,456

 

Deferred tax liabilities

 

 

1,751

 

 

 

1,751

 

Contingent consideration

 

 

24,147

 

 

 

24,076

 

Other long-term liabilities

 

 

2,867

 

 

 

3,046

 

Discontinued operations, non-current portion

 

 

 

 

 

126

 

Total liabilities

 

 

216,063

 

 

 

232,996

 

Commitments and contingencies (See Note 18)

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

Common stock, par value $0.001 per share, 250,000,000 shares authorized at March 31,
   2022 and December 31, 2021;
113,448,994 and 111,802,968 shares issued at March 31,
   2022 and December 31, 2021, respectively;
111,776,074 and 110,130,048 shares
   outstanding at March 31, 2022 and December 31, 2021, respectively

 

 

113

 

 

 

111

 

Additional paid-in capital

 

 

976,119

 

 

 

972,404

 

Accumulated other comprehensive income (loss)

 

 

75

 

 

 

(487

)

Accumulated deficit

 

 

(930,832

)

 

 

(913,412

)

Less: treasury stock, at cost; 1,672,920 shares at March 31, 2022 and
   December 31, 2021

 

 

(7,485

)

 

 

(7,485

)

Total Athenex, Inc. stockholders' equity

 

 

37,990

 

 

 

51,131

 

Non-controlling interests

 

 

(17,191

)

 

 

(16,679

)

Total stockholders' equity

 

 

20,799

 

 

 

34,452

 

Total liabilities and stockholders' equity

 

$

236,862

 

 

$

267,448

 

 

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

1


 

ATHENEX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Loss

(unaudited)

(In thousands, except share and per share data)

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Revenue:

 

 

 

 

 

 

Product sales, net

 

$

28,950

 

 

$

20,360

 

License and other revenue

 

 

774

 

 

 

20,665

 

Total revenue

 

 

29,724

 

 

 

41,025

 

Cost of sales

 

 

23,295

 

 

 

16,405

 

Gross Profit

 

 

6,429

 

 

 

24,620

 

Operating expenses:

 

 

 

 

 

 

Research and development expenses

 

 

13,990

 

 

 

23,070

 

Selling, general, and administrative expenses

 

 

14,935

 

 

 

20,736

 

Total operating expenses

 

 

28,925

 

 

 

43,806

 

Operating loss

 

 

(22,496

)

 

 

(19,186

)

Interest income

 

 

77

 

 

 

29

 

Interest expense

 

 

4,521

 

 

 

4,908

 

Loss on partial extinguishment of debt

 

 

3,501

 

 

 

 

Loss before income tax expense

 

 

(30,441

)

 

 

(24,065

)

Income tax expense

 

 

28

 

 

 

154

 

Net loss from continuing operations

 

 

(30,469

)

 

 

(24,219

)

(Gain) loss from discontinued operations (Note 4)

 

 

(12,537

)

 

 

1,384

 

Net loss

 

 

(17,932

)

 

 

(25,603

)

Less: net loss attributable to non-controlling interests

 

 

(512

)

 

 

(553

)

Net loss attributable to Athenex, Inc.

 

$

(17,420

)

 

$

(25,050

)

Unrealized gain on investment, net of income taxes

 

 

27

 

 

 

16

 

Foreign currency translation adjustment, net of income taxes

 

 

535

 

 

 

277

 

Comprehensive loss

 

$

(16,858

)

 

$

(24,757

)

Basic and diluted loss per Athenex, Inc. common share (Note 15):

 

 

 

 

 

 

Net loss from continuing operations

 

$

(0.27

)

 

$

(0.25

)

Net loss from discontinued operations

 

 

0.11

 

 

 

(0.02

)

Net loss per share attributable to Athenex, Inc. common
   stockholders, basic and diluted (See Note 15)

 

$

(0.16

)

 

$

(0.27

)

Weighted-average shares used in computing net loss per share
   attributable to Athenex, Inc. common stockholders, basic
   and diluted (See Note 15)

 

 

110,504,076

 

 

 

93,429,935

 

 

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

2


 

ATHENEX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity

(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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

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

 

 

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

3


 

ATHENEX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss from continuing operations

 

$

(30,469

)

 

$

(24,219

)

Net gain (loss) from discontinued operations

 

 

12,537

 

 

 

(1,384

)

Adjustments to reconcile net loss to net cash used in operating activities of continuing operations:

 

 

 

 

 

 

Depreciation and amortization

 

 

872

 

 

 

1,259

 

Stock-based compensation expense

 

 

1,874

 

 

 

2,234

 

Amortization of debt discount

 

 

643

 

 

 

779

 

Change in fair value of contingent consideration

 

 

71

 

 

 

 

Loss on disposal of assets and impairment charges

 

 

78

 

 

 

 

Loss on partial extinguishment of debt

 

 

3,501

 

 

 

 

Deferred income taxes

 

 

 

 

 

2

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Receivables, net

 

 

(2,968

)

 

 

3,414

 

Prepaid expenses and other assets

 

 

(596

)

 

 

(2,234

)

Inventories

 

 

(6,568

)

 

 

2,523

 

Accounts payable and accrued expenses

 

 

15,096

 

 

 

(13,446

)

Net cash used in operating activities of continuing operations

 

 

(18,466

)

 

 

(29,688

)

Cash flows from investing activities of continuing operations:

 

 

 

 

 

 

Purchase of property and equipment

 

 

(190

)

 

 

(1,732

)

Payments for licenses

 

 

 

 

 

(1,088

)

Proceeds from the sale of property and equipment

 

 

23

 

 

 

 

Purchases of short-term investments

 

 

(9,488

)

 

 

(55,784

)

Sales and maturities of short-term investments

 

 

9,488

 

 

 

71,250

 

Net cash (used in) provided by investing activities of continuing operations

 

 

(167

)

 

 

12,646

 

Cash flows from financing activities of continuing operations:

 

 

 

 

 

 

Proceeds from sale of stock

 

 

1,695

 

 

 

 

Proceeds from exercise of stock options

 

 

 

 

 

852

 

Costs incurred related to the prepayment of debt

 

 

(2,025

)

 

 

 

Repayment of finance lease obligations and long-term debt

 

 

(25,039

)

 

 

(56

)

Net cash (used in) provided by financing activities of continuing operations

 

 

(25,369

)

 

 

796

 

Net decrease in cash, cash equivalents, and restricted cash from continuing operations

 

 

(44,002

)

 

 

(16,246

)

Net cash used in operating activities of discontinued operations

 

 

(5,423

)

 

 

(188

)

Net cash provided by (used in) investing activities of discontinued operations

 

 

38,050

 

 

 

(5,609

)

Net cash used in financing activities of discontinued operations

 

 

(7

)

 

 

(42

)

Net increase (decrease) in cash and cash equivalents from discontinued operations

 

 

32,620

 

 

 

(5,839

)

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

 

 

654

 

 

 

478

 

Cash, cash equivalents, and restricted cash, end of period (See Note 5)

 

$

40,974

 

 

$

64,480

 

Supplemental cash flow disclosures

 

 

 

 

 

 

Interest paid

 

$

3,790

 

 

$

7,708

 

Non-cash investing and financing activities:

 

 

 

 

 

 

Accrued purchases of property and equipment from continuing operations

 

$

922

 

 

$

1,191

 

Accrued purchases of property and equipment from discontinued operations

 

$

 

 

$

27

 

Accrued purchases of licenses

 

$

1,418

 

 

$

1,800

 

ROU assets derecognized from modification of operating lease obligations

 

$

(128

)

 

$

 

ROU assets recognized in exchange for operating lease obligations

 

$

78

 

 

$

 

 

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

4


 

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 tolerable 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, dedicated to providing a stable and efficient supply of APIs for our clinical and commercial efforts. The Company’s current clinical pipeline in the Oncology Innovation Platform is derived from three different technologies: (1) Cell Therapy, (2) Orascovery, based on a P-glycoprotein (“P-gp”) pump inhibitor, and (3) Src Kinase Inhibition.

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 March 31, 2022 and December 31, 2021 had an accumulated deficit of $930.8 million and $913.4 million, respectively. As of March 31, 2022, the Company had cash and cash equivalents of $27.2 million, restricted cash of $13.8 million, and short-term investments of $10.2 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 March 31, 2022. However, the Company is forecasting that it will be in violation of both the minimum liquidity and revenue 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 $125.0 million as of March 31, 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 Leerink (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.

5


 

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

At-the-market offering

On August 20, 2021, the Company entered into a sales agreement (the “Sales Agreement”) with SVB Leerink 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, we sold 762,825 shares of our common stock for an average price of $1.49 per share under the Sales Agreement. During the three months ended March 31, 2022, we sold 1,646,026 shares of our common stock for an average price of $1.03 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 Fund Administration, LLC as administrative agent, and the lenders party thereto (collectively “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”), which resulted in a loss on extinguishment of debt of $7.2 million. 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 is 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 March 31, 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 a 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.

6


 

On January 19, 2022, the Company entered into an amendment to the Senior Credit Agreement with Oaktree (the “Amendment”). The Amendment also amended the warrants held by Oaktree that were issued on June 19, 2020 and August 4, 2020. The 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 Amendment provides that the Company make 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 Amendment requires 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 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. 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 Amendment. The Company recorded a $3.5 million loss on the partial extinguishment of debt as the result of this prepayment.

 

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 months ended March 31, 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.

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, 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.

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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).

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

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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):

 

Preliminary 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

)