Fennec Pharma(FENC) - 2022 Q3 - Quarterly Report

PART I: FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements The company's unaudited financial statements show no revenue, significant net losses, and increased long-term debt Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (U.S. Dollars in thousands) | Item | September 30, 2022 (Unaudited) | December 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $29,752 | $21,100 | | Total current assets | $30,153 | $22,387 | | Total assets | $30,417 | $22,414 | | Total current liabilities | $2,927 | $1,654 | | Long-term debt (net of discount) | $24,688 | $4,988 | | Total liabilities | $27,615 | $6,642 | | Total stockholders' equity | $2,802 | $15,772 | Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (U.S. Dollars in thousands) | Item | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $— | $— | $— | $— | | Research and development | $846 | $1,242 | $3,414 | $4,458 | | General and administrative | $7,053 | $2,931 | $13,040 | $8,558 | | Loss from operations | $(7,899) | $(4,173) | $(16,454) | $(13,016) | | Net loss | $(8,089) | $(4,185) | $(16,857) | $(12,919) | | Basic net loss per common share | $(0.31) | $(0.16) | $(0.65) | $(0.50) | | Diluted net loss per common share | $(0.31) | $(0.16) | $(0.65) | $(0.50) | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (U.S. Dollars in thousands) | Item | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net loss | $(16,857) | $(12,919) | | Net cash used in operating activities | $(11,256) | $(10,977) | | Net cash provided by financing activities | $19,908 | $4,968 | | Increase/(decrease) in cash and cash equivalents | $8,652 | $(6,009) | | Cash and cash equivalents - End of period | $29,752 | $24,335 | | Warrants issued for long-term debt (non-cash) | $441 | $— | Condensed Consolidated Statements of Stockholders' Equity Condensed Consolidated Statements of Stockholders' Equity (U.S. Dollars in thousands) | Item | December 31, 2021 | September 30, 2022 | | :--- | :--- | :--- | | Common Shares Outstanding | 26,014 | 26,238 | | Common Stock Amount | $140,801 | $141,309 | | Additional Paid-in Capital | $53,214 | $56,593 | | Accumulated Deficit | $(179,486) | $(196,343) | | Accumulated Other Comprehensive Income | $1,243 | $1,243 | | Total Stockholders' Equity | $15,772 | $2,802 | Notes to the Unaudited Interim Condensed Consolidated Financial Statements 1. Nature of Business and Going Concern - Fennec Pharmaceuticals Inc. is a commercial-stage biopharmaceutical company focused on PEDMARK® (sodium thiosulfate injection) for the prevention of platinum-induced ototoxicity in pediatric cancer patients[23] Financial Performance (U.S. Dollars in thousands) | Metric | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Loss from operations | $7,899 | $16,454 | | Accumulated deficit (as of Sep 30, 2022) | N/A | $196,343 | | Negative cash flows from operating activities (9 months ended Sep 30, 2022) | N/A | $11,256 | - The Company entered into a Securities Purchase Agreement (SPA) for up to $45,000 in senior secured floating rate convertible notes, with an initial tranche of $5,000 closed on August 19, 2022, and a second tranche of $20,000 closed on September 23, 2022, following FDA approval of PEDMARK®[26][27] - The Company believes current funds, along with the funds from the Note Financing, provide sufficient funding for planned activities, including the commencement of commercialization efforts for PEDMARK®, for at least the next twelve months[30] 2. Significant Accounting Policies - The unaudited interim condensed consolidated financial statements are prepared in accordance with U.S. GAAP and rely on management estimates, particularly for valuing equity instruments and warrants[33][35] - No new accounting pronouncements were adopted during the quarter ended September 30, 2022[36] Cash and Cash Equivalents (U.S. Dollars in thousands) | Date | Amount | | :--- | :--- | | September 30, 2022 | $29,752 | | December 31, 2021 | $21,100 | - The Company will begin capitalizing inventory costs associated with PEDMARK® during the fourth quarter of 2022, following FDA approval on September 20, 2022, and will begin recognizing product revenues after the initial product launch in October 2022[39][43] 3. Loss Per Share Net Loss Per Share (Basic and Diluted, U.S. Dollars) | Period | 2022 | 2021 | | :--- | :--- | :--- | | Three Months Ended September 30 | $(0.31) | $(0.16) | | Nine Months Ended September 30 | $(0.65) | $(0.50) | Anti-Dilutive Securities Excluded from EPS Calculation (thousands) | Item | Three Months Ended 2022 | September 30, 2021 | Nine Months Ended 2022 | September 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Options to purchase common shares | 4,466 | 3,653 | 4,466 | 3,653 | | Warrants to purchase common shares | 150 | 39 | 150 | 39 | 4. Stockholders' Equity - The Company's authorized capital stock consists of an unlimited number of common shares, no par value[47] - During the three and nine months ended September 30, 2022, the Company issued 111 warrants at a strike price of $8.11, capitalizing $441 in non-cash expense and $175 in cash expense associated with the Securities Purchase Agreement (SPA)[48] Total Option Expense Recognized (U.S. Dollars in thousands) | Period | 2022 | 2021 | | :--- | :--- | :--- | | Three Months Ended September 30 | $1,887 | $917 | | Nine Months Ended September 30 | $3,363 | $2,839 | - As of September 30, 2022, 4,466 U.S. denominated options were outstanding, with 3,448 fully vested and exercisable[53] - As of September 30, 2022, 103 Restricted Share Units (RSUs) were outstanding[57][58] 5. Fair Value Measurements - The Company classifies financial assets and liabilities into a three-level hierarchy based on the observability of inputs used in valuation[59] Fair Value Measurements (U.S. Dollars in thousands) as of September 30, 2022 | Asset | Level 1 | Level 2 | Level 3 | Total | | :--- | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $438 | $29,314 | $— | $29,752 | | Processa common shares | $— | $114 | $— | $114 | - Valuation of Processa Pharmaceuticals, Inc. common shares at September 30, 2022, included liquidity discounts of 0%, 0%, and 15% applied to different share tranches[63] 6. Commitments and Contingencies - Fennec has an exclusive license agreement with Oregon Health & Science University (OHSU) for intellectual property related to PEDMARK®, including milestone payments and royalties on net sales[64][65] - The Company is vigorously defending two federal securities class action lawsuits, both of which had amended complaints dismissed with prejudice, and has not recorded a liability as of September 30, 2022[72][77][150][156] - Hope Medical Enterprises, Inc. filed two inter partes review (IPR) petitions challenging Fennec's patents for PEDMARK®, with decisions expected in May 2023[79][80] - The USPTO issued U.S. Patent No. 11,291,728 covering the PEDMARK® pharmaceutical formulation on April 5, 2022, and two additional formulation patent applications received Notices of Allowance on September 14, 2022, all expiring in 2039[81] - PEDMARK® has U.S. Orphan Drug Designation, and the Company plans to pursue a Pediatric Use Marketing Authorization (PUMA) in Europe for 10 years of market exclusivity[82] 7. Term Loans - On August 1, 2022, the Company entered into a Securities Purchase Agreement (SPA) for up to $45,000 in senior secured floating rate convertible notes[89] - The Company closed on an initial tranche of $5,000 on August 19, 2022, and a second tranche of $20,000 on September 23, 2022, with an additional $20,000 available for draw before December 31, 2023[89][90][91] - The notes bear cash interest at prime plus 4.5% per annum (10.75% as of September 30, 2022) and Payment-in-Kind (PIK) interest at prime plus 3.5% per annum (9.75% as of September 30, 2022), and are convertible into common shares[94][95] Aggregate Annual Payments Due on SPA (U.S. Dollars in thousands) as of September 30, 2022 | Years Ending December 31, | Amount | | :--- | :--- | | 2022 | $— | | 2023 | $— | | 2024 | $— | | 2025 | $— | | 2026 | $— | | 2027 | $25,000 | | Total future payments | $25,000 | | Less: unamortized debt discount | $(312) | | Total term loan, net of debt discount | $24,688 | 8. Subsequent Events - On October 17, 2022, the Company announced the U.S. commercial launch and availability of PEDMARK® for pediatric patients[98] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the commercial launch of PEDMARK®, financial results showing net losses, and the strategic shift to commercialization Overview - Fennec Pharmaceuticals Inc. is a commercial-stage biopharmaceutical company focused on PEDMARK®, which received FDA approval on September 20, 2022[102] - PEDMARK® became commercially available in the United States on October 17, 2022, supported by a field force and the Fennec HEARS™ patient access program[102][103][104] - The Company holds two patents listed for PEDMARK® in the FDA's Orange Book expiring in 2038 and 2039, with two additional patents expected to issue soon, also expiring in 2039[105] - In Europe, the company's product is eligible for a Pediatric Use Marketing Authorization (PUMA) with up to 10 years of data and market protection[109] Capital Funding - As of September 30, 2022, the Company had not received revenues from PEDMARK® sales and reported a net loss of approximately $16.9 million for the nine months ended, with an accumulated deficit of approximately $196.3 million[110][111] - The Company's cash and cash equivalents totaled $29.8 million as of September 30, 2022, and with an additional $20 million available from Petrichor Financing, it believes it has sufficient funding for at least the next twelve months[112] - Projections of capital requirements are subject to substantial uncertainty, and the Company may need to raise additional funds[112] Results of Operations Three months ended September 30, 2022 versus three months ended September 30, 2021 Operating Expenses (U.S. Dollars in thousands) | Expense Category | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | Change | | :--- | :--- | :--- | :--- | | Research and development | $846 | $1,242 | $(396) | | General and administrative | $7,053 | $2,931 | $4,122 | | Total operating expense | $7,899 | $4,173 | $3,726 | | Net loss | $(8,089) | $(4,185) | $(3,904) | - The increase in General and Administrative expenses was driven by a $970 thousand increase in non-cash equity compensation, a $1,212 thousand increase in salaries due to increased headcount, and a $620 thousand increase in sales and marketing activities[116] - Interest expense increased by $64 thousand due to new debt facilities, while interest income increased by $11 thousand due to higher cash balances and interest rates[117] Nine months ended September 30, 2022 versus nine months ended September 30, 2021 Operating Expenses (U.S. Dollars in thousands) | Expense Category | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change | | :--- | :--- | :--- | :--- | | Research and development | $3,414 | $4,458 | $(1,044) | | General and administrative | $13,040 | $8,558 | $4,482 | | Total operating expenses | $16,454 | $13,016 | $3,438 | | Net loss | $(16,857) | $(12,919) | $(3,938) | - The decrease in Research and Development expenses was mainly due to a decline in manufacturing activities and regulatory expenses[120] - The increase in General and Administrative expenses was primarily related to legal expenses, non-cash equity compensation, and higher wages from increased headcount[120] - Unrealized loss on securities was $126 thousand in 2022, contrasting with a $137 thousand gain in 2021[120] Liquidity and Capital Resources Selected Asset and Liability Data (U.S. Dollars in thousands) | Item | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Cash and equivalents | $29,752 | $21,100 | | Other current assets | $401 | $1,287 | | Current liabilities | $2,927 | $1,654 | | Working capital | $27,226 | $20,733 | - Working capital increased by $6,493 thousand between December 31, 2021, and September 30, 2022, primarily due to a net cash inflow from Petrichor notes and option exercises, offset by operating expenditures[124] Selected Cash Flow Data (U.S. Dollars in thousands) | Item | Nine Months Ended 2022 | September 30, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(11,256) | $(10,977) | | Net cash provided by investing activities | $— | $— | | Net cash provided by financing activities | $19,908 | $4,968 | | Net cash flow | $8,652 | $(6,009) | - The Company expects increases in cash outflows related to commercialization activities and continues to pursue strategic alternatives for additional funding[124][126] Financial Instruments - The Company invests excess cash in high credit quality investments, primarily money market accounts ($29,314 thousand as of September 30, 2022), to protect principal[127][129] - The investment policy requires securities to have a minimum Dun & Bradstreet rating of A for bonds or R1 low for commercial paper and a maximum-weighted average time to maturity of twelve months[129][130][131] - The Company has not had any material off-balance sheet arrangements and does not engage in trading activities involving non-exchange traded contracts[132] Research and Development - Research and development efforts have been focused on PEDMARK® since 2013[133] Research and Development Expenses (U.S. Dollars in thousands) | Period | 2022 | 2021 | | :--- | :--- | :--- | | Three Months Ended September 30 | $846 | $1,242 | | Nine Months Ended September 30 | $3,414 | $4,458 | - R&D expenses decreased as the Company's efforts shifted to commercial readiness activities for PEDMARK®[135] - The development of PEDMARK® is subject to inherent risks of failure, and the Company is unable to accurately estimate future costs or timing[136] Critical Accounting Policies and Use of Estimates - There have been no material changes to the Company's critical accounting policies and use of estimates during the nine months ended September 30, 2022[137] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks from money market investments, variable interest rates, and foreign currency fluctuations Money Market Investments - The Company maintains an investment portfolio of U.S. or Canadian obligations and bank securities, with $29,314 thousand in money market investments as of September 30, 2022[138][141] - The investment policy requires securities to have a minimum Dun & Bradstreet rating of A for bonds or R1 low for commercial paper and a maximum-weighted average time to maturity of twelve months[138][139] - Amounts held in money market accounts are substantially above the $250,000 amount insured by the FDIC and may lose value[141] Variable Interest Rate Risk - The Company is subject to interest rate fluctuation exposure through its borrowings under the SPA (prime plus 4.5% cash interest, prime plus 3.5% PIK interest) and its investment in money market accounts[142] - Increases in interest rates may adversely affect the Company's ability to meet its obligations[142] Foreign Currency Exposure - The Company is subject to foreign currency risks from purchasing goods and services denominated in Euro, Great British Pounds, and Canadian dollars[143] - To date, the Company has not employed derivative instruments but holds Canadian dollars for vendor payments and other corporate obligations[143] Item 4. Controls and Procedures Management confirms the effectiveness of disclosure controls and reports no material changes in internal financial reporting controls Evaluation of Disclosure Controls and Procedures - As of September 30, 2022, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level[144] Changes in Internal Control over Financial Reporting - There have been no changes in internal control over financial reporting during the period that materially affected, or are reasonably likely to materially affect, the Company's internal control[145] PART II: OTHER INFORMATION Item 1. Legal Proceedings The company details ongoing legal challenges, including two dismissed securities class action lawsuits and two patent review petitions Chapman v. Fennec Pharmaceuticals Inc. et al. - A federal securities class action lawsuit alleging false or misleading statements regarding PEDMARK® was dismissed with prejudice on March 2, 2022[147][149][150] - The lead plaintiff filed a motion for post-judgment relief to file a second amended complaint, which the defendants are opposing[151] - The Company believes this lawsuit is without merit and intends to defend it vigorously; no liability has been recorded[152] Fisher v. Fennec Pharmaceuticals Inc. et al. - A federal securities class action lawsuit, similar to Chapman, was dismissed with prejudice on October 12, 2022[153][156] - The lead plaintiff has until November 14, 2022, to file a notice of appeal[157] - The Company believes this lawsuit is without merit and intends to defend it vigorously; no liability has been recorded[158] Hope Medical Enterprises, Inc. - Hope Medical Enterprises filed two inter partes review (IPR) petitions challenging Fennec's patents for PEDMARK®, with decisions expected in May 2023[159][160] - The USPTO issued U.S. Patent No. 11,291,728 covering the PEDMARK® pharmaceutical formulation on April 5, 2022, and two additional formulation patent applications received Notices of Allowance, all expiring in 2039[161] - The Company plans to vigorously defend its intellectual property rights, but an invalidation of its patents could materially affect its ability to protect PEDMARK®[163] Item 1A. Risk Factors The company reports no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K - The Company's detailed risk factors are discussed in Part I, Item 1A of its Annual Report on Form 10-K for the fiscal year ended December 31, 2021[164] - The Company is not aware of any material changes from the risk factors previously disclosed[165] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report for the period - None[168] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities to report for the period - None[169] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[171] Item 5. Other Information A press release announcing Q3 2022 financial results was issued on November 11, 2022 - On November 11, 2022, the Company issued a press release announcing its financial results for the quarter ended September 30, 2022, furnished as Exhibit 99.1[173] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including certifications and XBRL documents List of Exhibits | Exhibit No. | Description | | :--- | :--- | | 31.1 | Certification of Chief Executive Officer (Section 302) | | 31.2 | Certification of Chief Financial Officer (Section 302) | | 32.1 | Certification of CEO and CFO (Section 906) | | 99.1 | Press Release for Quarter Ended September 30, 2022 | | 101.INS* | Inline XBRL Instance Document | | 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | | 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | | 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | | 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | 104 | Cover Page Interactive Data File | Signatures The report is duly signed by the company's Chief Executive Officer and Chief Financial Officer - The report was signed by Rostislav Raykov, Chief Executive Officer, and Robert Andrade, Chief Financial Officer, on November 14, 2022[178]