Fennec Pharma(FENC) - 2021 Q4 - Annual Report

PART I Business Fennec Pharmaceuticals develops PEDMARK™ to prevent cisplatin-induced hearing loss in children, with FDA approval pending due to manufacturing issues and patent challenges - PEDMARK™ is the company's sole clinical-stage product, focused on preventing cisplatin-induced hearing loss in children, with all resources dedicated to its development[10][11] - PEDMARK™ holds Breakthrough Therapy, Fast Track, and Orphan Drug designations from the FDA, underscoring its potential for unmet medical needs[15] - The FDA issued two Complete Response Letters (CRLs) in August 2020 and November 2021, citing deficiencies at a third-party manufacturing facility, with NDA resubmission planned for Q1 2022[16][17][19] - A Marketing Authorization Application (MAA) was submitted in Europe in February 2020, with PEDMARK™ eligible for a Pediatric Use Marketing Authorization (PUMA) offering up to 10 years of market protection[20] Key Phase 3 Clinical Trial Results | Trial | Patient Population | Key Finding | Relative Risk Reduction | | :--- | :--- | :--- | :--- | | SIOPEL 6 | Standard Risk Hepatoblastoma | Hearing loss occurred in 32.7% of the PEDMARK™ group vs. 63.0% in the cisplatin-only group. | 48% (Relative Risk of 0.52) | | COG ACCL0431 | Various Childhood Cancers | Hearing loss occurred in 28.6% of the PEDMARK™ group vs. 56.4% in the control group. | 50% | - The company's intellectual property is under challenge, with Hope Medical Enterprises, Inc. filing two petitions in October 2021 to invalidate key U.S. patents US '190 and US '363 related to PEDMARK™[46] Research and Development Expenses | Fiscal Year | R&D Expense (USD Million) | | :--- | :--- | | 2021 | $5.0 | | 2020 | $5.1 | Risk Factors Significant risks include historical losses, sole product dependence, regulatory approval uncertainty from manufacturing issues, patent invalidation, and financial needs - Business Risks: The company has a history of significant operating losses, with an accumulated deficit of approximately $179.5 million as of December 31, 2021, and no product sales revenue[117][142] - Regulatory & Manufacturing Risks: PEDMARK™ NDA received CRLs in August 2020 and November 2021 due to third-party manufacturing facility deficiencies, highlighting critical reliance on external parties[123][130][190] - Intellectual Property Risks: The company is defending key PEDMARK™ patents against invalidation petitions, where an adverse outcome could significantly harm its competitive position beyond Orphan Drug Designation exclusivity[134][298][301] - Financial Risks: Additional financing may be required for PEDMARK™ commercialization, with Bridge Bank debt facility covenants tied to NDA resubmission and approval deadlines posing default risks[118][404] - Litigation Risks: The company faces two putative securities class action lawsuits following FDA CRL announcements, potentially incurring significant defense costs and time[119][192][193] - Shareholder Risks: Principal shareholders own approximately 40.28% of common shares, exerting significant influence, while stock price volatility and potential PFIC classification pose adverse U.S. tax consequences for investors[139][140][384] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments[405] Properties The company leases small office spaces in Research Triangle Park, NC, and Hoboken, NJ, under operating leases with modest monthly payments - The company leases a small office space in Research Triangle Park, NC for $400 per month, terminable with 30 days' notice[406][407] - An Office Service Agreement for Hoboken, NJ office space has a monthly rent of $1,150, renewing for successive six-month periods[408] Legal Proceedings Fennec is involved in securities class action lawsuits following FDA CRLs and patent invalidation petitions from Hope Medical Enterprises, Inc., which the company intends to vigorously defend - Chapman et al.: A securities class action lawsuit filed in September 2020 after the first CRL, with a Magistrate Judge recommending the company's motion to dismiss be granted[409] - Jeffrey D. Fisher: A securities class action lawsuit filed in February 2022 following the second CRL, with allegations similar to the Chapman suit[411] - Hope Medical Enterprises, Inc.: Filed two IPR petitions in October 2021 to invalidate U.S. Patent Nos. 10,596,190 and 10,792,363, central to PEDMARK™[413][414][417] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[419] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer's Purchases of Equity Securities The company's common shares are dual-listed on Nasdaq and TSX, with no dividends paid, and significant discussion on U.S. and Canadian tax implications, including PFIC risk - The company's common shares are dual-listed on the Nasdaq Capital Market (FENC) and the Toronto Stock Exchange (FRX)[420] 2021 Stock Price Range (Nasdaq - USD) | Quarter Ended | High ($) | Low ($) | | :--- | :--- | :--- | | Dec 31, 2021 | 10.01 | 3.89 | | Sep 30, 2021 | 9.62 | 6.21 | | Jun 30, 2021 | 7.85 | 5.96 | | Mar 31, 2021 | 8.68 | 6.21 | - The company has never declared or paid cash dividends and does not plan to in the foreseeable future[424] - There is a risk of the company being classified as a Passive Foreign Investment Company (PFIC), potentially leading to adverse U.S. federal income tax consequences for U.S. investors[395][456] Selected Financial Data This item is not applicable as the company is a smaller reporting company - Not applicable[468] Management's Discussion and Analysis of Financial Condition and Results of Operations Fennec reported a net loss of $17.3 million in FY2021, an improvement from $18.1 million in FY2020, driven by lower G&A expenses, with cash and equivalents at $21.1 million deemed sufficient for the next 12 months Fiscal Year 2021 vs. 2020 Results of Operations (in thousands USD) | Metric | FY 2021 | FY 2020 | Change | | :--- | :--- | :--- | :--- | | Revenue | $0 | $170 | ($170) | | Research & Development | $4,981 | $5,105 | ($124) | | General & Administration | $12,242 | $12,950 | ($708) | | Net Loss | ($17,346) | ($18,109) | $763 | - The decrease in G&A expenses in FY2021 was due to the completion of pre-commercialization activities in FY2020, partially offset by increased legal, payroll, and non-cash equity compensation expenses in 2021[492] Selected Cash Flow Data (in thousands USD) | Metric | Year Ended Dec 31, 2021 | Year Ended Dec 31, 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | ($14,222) | ($15,595) | | Net cash provided by financing activities | $4,978 | $32,289 | | Net cash flow | ($9,244) | $16,694 | - Cash and cash equivalents were $21.1 million as of December 31, 2021, down from $30.3 million in 2020, deemed sufficient for at least the next 12 months[501][509] - In June 2021, the company amended its debt facility with Bridge Bank, accessing $5 million of a $20 million facility across three term loans[486] Quantitative and Qualitative Disclosures About Market Risk The company's market risk primarily relates to cash and cash equivalents and foreign currency exposure, with a conservative investment policy and no current hedging for Canadian dollar transactions - The company held $21.0 million in money market and savings accounts as of December 31, 2021, significantly exceeding the $250,000 FDIC insurance limit[524] - The investment policy is conservative, prioritizing principal preservation, liquidity, and return, while avoiding speculative investments[525] - The company faces foreign currency risk from Canadian dollar transactions but does not currently use hedging instruments[526] Financial Statements and Supplementary Data This section includes the company's audited consolidated financial statements for FY2021 and FY2020, with the auditor identifying the fair value of stock options as a critical audit matter - The financial statements for FY2021 and FY2020 are included, along with the independent auditor's report from Haskell & White LLP[527][603] - The auditor's report identifies the Fair Value of Stock Options as a Critical Audit Matter, emphasizing subjective judgments for estimates like expected volatility and award life in the Black-Scholes model[607][609] Consolidated Balance Sheet Highlights (in thousands USD) | Account | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $21,100 | $30,344 | | Total Assets | $22,414 | $31,417 | | Total Liabilities | $6,642 | $2,347 | | Total Shareholders' Equity | $15,772 | $29,070 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None reported[528] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021, with no material changes - Management concluded that disclosure controls and procedures were effective as of December 31, 2021[529] - Management assessed and concluded internal control over financial reporting was effective as of December 31, 2021, based on the COSO framework[533] - No material changes to internal control over financial reporting occurred during the last fiscal quarter[534] Other Information The company reports no other information for this item - None[537] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[540] PART III Directors, Executive Officers and Corporate Governance This section details the company's executive officers and board of directors, including their independence, committee memberships, and the adopted Code of Business Conduct and Ethics - Executive leadership includes Rostislav Raykov as CEO and Robert Andrade as CFO[541][543][544] - The Board of Directors includes an Audit, Compensation, and Governance Committee, with detailed memberships for each director[541] - A majority of the Board's directors are independent under Nasdaq and Canadian securities standards[586] - The company has adopted a Code of Business Conduct and Ethics applicable to all officers, directors, and employees[557] Executive Compensation This section details compensation for Named Executive Officers and directors for FY2021 and FY2020, including salaries, option awards, and severance provisions 2021 Named Executive Officer Compensation | Name and Principal Position | Salary ($) | Option Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | | Rostislav Raykov, CEO | 468,452 | 2,951,923 | 3,420,375 | | Robert Andrade, CFO | 339,409 | 1,006,364 | 1,498,773 | | Shubh Goel, CCO | 376,505 | 1,006,364 | 1,535,869 | - Executive employment agreements include severance provisions: 12 months of salary for the CEO and 6 months for the CFO if terminated without cause[562][563] - An incentive plan allocates 1% of a change in control transaction value (up to $2 million) to key personnel, with 50% designated for the CEO[571] - Non-executive director compensation for 2021 totaled $993,974, comprising $242,500 in cash fees and $751,474 in option awards[575][576] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section discloses beneficial ownership as of February 25, 2022, with three entities owning over 5% (collectively 40.28%) and officers/directors owning 9.40% Security Ownership of >5% Beneficial Owners (as of Feb 25, 2022) | Shareholder | % Ownership | | :--- | :--- | | Southpoint Capital Advisors, LP | 15.67% | | Essetifin SpA | 15.35% | | Sonic Fund II, LP | 9.25% | - All officers and directors as a group beneficially owned 9.40% of the company's common shares as of February 25, 2022[580] - As of December 31, 2021, approximately 4.3 million securities were issuable upon option exercise, with an additional 2.2 million available for future issuance under equity compensation plans[583] Certain Relationships and Related Transactions, and Director Independence The company reported no related party transactions in FY2021, maintains indemnification agreements and D&O insurance, and confirms a majority of independent directors - There were no reportable related party transactions in fiscal year 2021[584] - The Board of Directors comprises a majority of independent directors, with CEO Rostislav Raykov as the sole non-independent member[586] Principal Accounting Fees and Services This section details fees paid to the independent auditor, Haskell & White LLP, for FY2021 and FY2020, with all services pre-approved by the Audit Committee Principal Accountant Fees (in USD) | Fee Category | Fiscal Year 2021 | Fiscal Year 2020 | | :--- | :--- | :--- | | Audit Fees | $73,100 | $51,600 | | Audit-Related Fees | $15,500 | $40,000 | | Tax Fees | $0 | $0 | | All Other Fees | $0 | $0 | | Total | $88,600 | $91,600 | - All services performed by the independent auditor were pre-approved by the Audit Committee[589] PART IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including key employment and loan agreements - This item lists all financial statements, schedules, and exhibits filed with the Form 10-K[591] - Key exhibits include executive officer employment agreements, the stock option plan, and amendments to the Loan and Security Agreement with Western Alliance Bank[592] Form 10-K Summary The company indicates that no Form 10-K summary is provided - None provided[594]