Fennec Pharma(FENC) - 2023 Q2 - Quarterly Report

PART I: FINANCIAL INFORMATION This part presents the company's unaudited condensed consolidated financial statements, management's discussion, market risk disclosures, and internal controls Item 1. Condensed Consolidated Financial Statements This section presents Fennec Pharmaceuticals Inc.'s unaudited condensed consolidated financial statements, including the balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes explaining the company's business, significant accounting policies, and financial position for the periods ended June 30, 2023, and December 31, 2022 Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and stockholders' deficit at specific dates Condensed Consolidated Balance Sheets (in thousands) | Metric (in thousands) | June 30, 2023 (Unaudited) | December 31, 2022 | | :-------------------- | :------------------------ | :------------------ | | Assets | | | | Cash and cash equivalents | $14,958 | $23,774 | | Accounts receivable, net | $2,445 | $1,545 | | Inventory | $1,439 | $576 | | Total current assets | $19,331 | $26,728 | | Total assets | $19,437 | $26,939 | | Liabilities | | | | Accounts payable | $3,005 | $2,390 | | Accrued liabilities | $773 | $2,219 | | Total current liabilities | $3,778 | $4,609 | | Term loan | $25,000 | $25,000 | | PIK interest | $707 | $260 | | Total liabilities | $29,164 | $29,508 | | Stockholders' Deficit | | | | Total stockholders' deficit | $(9,727) | $(2,569) | - Total assets decreased from $26,939 thousand at December 31, 2022, to $19,437 thousand at June 30, 2023, primarily driven by a decrease in cash and cash equivalents[7] - The company's stockholders' deficit significantly increased from $(2,569) thousand at December 31, 2022, to $(9,727) thousand at June 30, 2023[7] Condensed Consolidated Statements of Operations This section outlines the company's financial performance over specific periods, detailing revenues, expenses, and net loss Three Months Ended June 30, 2023 vs. 2022 (in thousands) | Metric (in thousands) | June 30, 2023 | June 30, 2022 | Change | | :-------------------- | :------------ | :------------ | :----- | | PEDMARK product sales, net | $3,325 | $— | $3,325 | | Gross profit | $3,177 | $— | $3,177 | | Research and development | $8 | $1,131 | $(1,123) | | Selling and marketing | $2,340 | $— | $2,340 | | General and administrative | $5,495 | $3,878 | $1,617 | | Total operating expenses | $7,843 | $5,009 | $2,834 | | Loss from operations | $(4,666) | $(5,009) | $343 | | Interest expense | $(825) | $(57) | $(768) | | Net loss | $(5,444) | $(5,072) | $(372) | | Basic net loss per common share | $(0.21) | $(0.19) | $(0.02) | Six Months Ended June 30, 2023 vs. 2022 (in thousands) | Metric (in thousands) | June 30, 2023 | June 30, 2022 | Change | | :-------------------- | :------------ | :------------ | :----- | | PEDMARK product sales, net | $5,002 | $— | $5,002 | | Gross profit | $4,759 | $— | $4,759 | | Research and development | $12 | $2,568 | $(2,556) | | Selling and marketing | $4,871 | $— | $4,871 | | General and administrative | $9,812 | $5,987 | $3,825 | | Total operating expenses | $14,695 | $8,555 | $6,140 | | Loss from operations | $(9,936) | $(8,555) | $(1,381) | | Interest expense | $(1,623) | $(115) | $(1,508) | | Net loss | $(11,496) | $(8,768) | $(2,728) | | Basic net loss per common share | $(0.43) | $(0.34) | $(0.09) | - Net product sales for PEDMARK® were $3,325 thousand and $5,002 thousand for the three and six months ended June 30, 2023, respectively, as the product became commercially available in October 2022[8][128][133] - Research and development expenses decreased significantly by $1,123 thousand (3 months) and $2,556 thousand (6 months) year-over-year, primarily because manufacturing costs for PEDMARK® are now capitalized as inventory post-approval, rather than expensed to R&D[128][133] - Selling and marketing expenses were $2,340 thousand (3 months) and $4,871 thousand (6 months) in 2023, reflecting new commercialization efforts for PEDMARK®[128][133] - Interest expense increased substantially by $768 thousand (3 months) and $1,508 thousand (6 months) due to higher interest rates and an additional $20 million in funded debt from the Petrichor facility[129][134] Condensed Consolidated Statements of Stockholders' Equity This section tracks changes in the company's equity, including common stock, additional paid-in capital, and accumulated deficit over time Condensed Consolidated Statements of Stockholders' Equity (in thousands) | Metric (in thousands) | Dec 31, 2022 | Mar 31, 2023 | Jun 30, 2023 | | :-------------------- | :----------- | :----------- | :----------- | | Common Stock Amount | $142,591 | $142,804 | $143,345 | | Additional Paid-in Capital | $56,797 | $57,866 | $60,381 | | Accumulated Deficit | $(203,200) | $(209,252) | $(214,696) | | Total Stockholders' Equity | $(2,569) | $(7,339) | $(9,727) | - The accumulated deficit increased from $(203,200) thousand at December 31, 2022, to $(214,696) thousand at June 30, 2023, reflecting net losses incurred during the period[10] - Stock-based compensation for employees contributed $1,089 thousand (Q1 2023) and $2,543 thousand (Q2 2023) to additional paid-in capital[10] Condensed Consolidated Statements of Cash Flows This section presents the company's cash inflows and outflows from operating, investing, and financing activities over specific periods Condensed Consolidated Statements of Cash Flows (in thousands) | Metric (in thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------- | :----------------------------- | :----------------------------- | | Net loss | $(11,496) | $(8,768) | | Net cash used in operating activities | $(9,523) | $(6,246) | | Net cash provided by financing activities | $707 | $61 | | Decrease in cash and cash equivalents | $(8,816) | $(6,185) | | Cash and cash equivalents - End of period | $14,958 | $14,915 | - Net cash used in operating activities increased to $(9,523) thousand for the six months ended June 30, 2023, from $(6,246) thousand in the prior year, primarily due to a higher net loss and changes in operating assets and liabilities[12][137] - Cash and cash equivalents decreased by $8,816 thousand during the six months ended June 30, 2023, ending at $14,958 thousand[12][135] - Financing activities provided $707 thousand in cash, mainly from the issuance of shares and option exercises[12][137] Notes to the Condensed Consolidated Financial Statements This section provides detailed explanations and additional information supporting the condensed consolidated financial statements 1. Nature of Business and Going Concern Fennec Pharmaceuticals Inc. is a commercial-stage specialty pharmaceutical company focused on PEDMARK®, approved by the FDA and European Commission to reduce ototoxicity in pediatric cancer patients. Despite incurring significant losses and negative operating cash flows, the company believes its current funds, including convertible notes, are sufficient to support commercialization efforts for at least the next twelve months - Fennec Pharmaceuticals Inc. is a commercial-stage specialty pharmaceutical company with one U.S. FDA and European Commission approved product, PEDMARK®, for reducing the risk of ototoxicity associated with cisplatin in pediatric patients[14] - For the six months ended June 30, 2023, the Company incurred a loss from operations of $9,936 thousand and experienced negative cash flows from operating activities of $9,523 thousand, with an accumulated deficit of $214,696 thousand[16] - The Company secured $25,000 thousand through senior secured floating rate convertible notes (First Closing Note: $5,000 thousand, Second Closing Note: $20,000 thousand) and may draw up to an additional $20,000 thousand[17][18][19] - Management believes current funds, including the convertible notes, provide sufficient funding for planned activities, including PEDMARK® commercialization, for at least the next twelve months[21] 2. Significant Accounting Policies This section details the significant accounting policies used in preparing the interim condensed consolidated financial statements, including the basis of presentation, use of estimates, segment information, stock-based compensation, inventory valuation, revenue recognition for PEDMARK® sales, and policies for trade receivables, cash, financial instruments, R&D costs, credit risk, income taxes, and foreign currency transactions. The adoption of ASU 2016-13 for credit losses had no material impact - The financial statements are prepared in accordance with US GAAP, with all amounts in thousands of U.S. dollars, except per share amounts[23] - The Company operates and manages its business as one operating segment, principally in the United States, with no assets located outside the U.S. as of June 30, 2023[25] - Revenue from PEDMARK® product sales, commercially available since October 17, 2022, is recognized net of estimated variable consideration (discounts, chargebacks, rebates, co-pay assistance, returns) upon delivery to the customer[32][34] - Inventory costs for PEDMARK® are capitalized post-FDA approval (September 2022); prior manufacturing costs were expensed as R&D. As of June 30, 2023, $1.4 million of costs were capitalized as inventory[29][44] Net Product Revenues for PEDMARK® (in thousands) | Period | Gross Product Revenues | Discounts and Allowances | Net Product Revenues | | :----- | :--------------------- | :----------------------- | :------------------- | | 3 Months Ended June 30, 2023 | $3,711 | $(386) | $3,325 | | 6 Months Ended June 30, 2023 | $5,606 | $(604) | $5,002 | PEDMARK® Product Revenue by Customer Type (Percentage of Total) | Customer Type | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2023 | | :------------ | :--------------------------- | :--------------------------- | | ASD | 34% | 43% | | McKesson | 12% | 11% | | Subtotal-Specialty Distributors | 46% | 54% | | Direct Customers and those less than 10% | 54% | 46% | 3. Loss Per Share Basic and diluted net loss per share are calculated by dividing net loss by the weighted average number of common shares outstanding. Certain outstanding options and warrants were excluded from diluted EPS calculations as their inclusion would have been anti-dilutive - Basic and diluted net loss per common share were $(0.21) for the three months ended June 30, 2023, and $(0.43) for the six months ended June 30, 2023[8] Anti-Dilutive Options and Warrants Excluded from EPS (in thousands) | Instrument | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--------- | :----------------------------- | :----------------------------- | | Options to purchase common shares | 4,887 | 4,337 | | Warrants to purchase common shares | 150 | 39 | 4. Stockholders' Equity This section details changes in stockholders' equity, including authorized capital, warrants, and activity under the equity incentive plan. Stock-based compensation expense for employees increased significantly, and summaries of stock option and restricted share unit activity are provided - The Company's authorized capital stock consists of an unlimited number of common shares, no par value[61] - Total stock option expense recognized for employees increased to $3,632 thousand for the six months ended June 30, 2023, from $1,407 thousand in the prior year[65] Stock Option Activity (in thousands) | Metric | Outstanding at Dec 31, 2022 | Granted | Exercised | Forfeited | Outstanding at Jun 30, 2023 | | :----- | :-------------------------- | :------ | :-------- | :-------- | :-------------------------- | | Number of Options | 4,539 | 705 | (144) | (213) | 4,887 | | Weighted-Average Exercise Price ($USD) | $5.13 | $8.12 / $8.80 | $4.36 / $5.60 | $6.98 / $7.51 | $5.77 | Restricted Share Units (RSUs) Activity (in thousands) | Metric | Outstanding at Dec 31, 2022 | Awarded | Released | Forfeited | Outstanding at Jun 30, 2023 | | :----- | :-------------------------- | :------ | :------- | :-------- | :-------------------------- | | Number of RSUs | 35 | 362 | (4) | (17) | 376 | 5. Fair Value Measurements The Company adopted ASC 820 for fair value measurements, classifying financial assets and liabilities into Level 1, 2, or 3 based on input observability. Cash and cash equivalents are primarily Level 1 and Level 2, while Processa common shares are Level 1 - The Company classifies fair value measurements into Level 1 (quoted market prices), Level 2 (observable market-based inputs), or Level 3 (unobservable inputs)[72][73] Fair Value Measurement at June 30, 2023 (in thousands) | Asset | Level 1 | Level 2 | Level 3 | Total | | :---- | :------ | :------ | :------ | :---- | | Cash and cash equivalents | $3,501 | $11,457 | $— | $14,958 | | Processa common shares | $56 | $— | $— | $56 | - As of June 30, 2023, cash and cash equivalents included $3,501 thousand in cash (Level 1) and $11,457 thousand in money market investments (Level 2)[74][75] 6. Commitments and Contingencies This section outlines the Company's commitments and contingencies, including an exclusive license agreement with OHSU for PEDMARK® intellectual property, the resolution of two securities class action lawsuits (Chapman v. Fennec and Fisher v. Fennec) in favor of the defendants, ongoing inter partes review (IPR) challenges against PEDMARK® patents by Hope Medical Enterprises, and active ANDA litigation against CIPLA for alleged infringement of PEDMARK® patents - Fennec has an exclusive worldwide license agreement with Oregon Health & Science University (OHSU) for intellectual property related to PEDMARK®, expiring in 2038 in the U.S. for methods of use patents[76][78] - Two federal securities class action lawsuits, Chapman v. Fennec Pharmaceuticals Inc., et al. and Fisher v. Fennec Pharmaceuticals Inc., et al., were dismissed with prejudice, and the cases are now closed[83][86] - Hope Medical Enterprises, Inc. filed Inter Partes Review (IPR) challenges against U.S. Patent No. 10,596,190 (invalidated in April 2023) and U.S. Patent No. 10,792,363 (decision extended to November 2023)[87][89] - The Company is engaged in ANDA litigation against CIPLA Ltd. and CIPLA USA for alleged infringement of PEDMARK® patents (U.S. Patent No. 11,291,728, U.S. Patent No. 11,510,984, and U.S. Patent No. 11,617,793). The suit is ongoing and provides a 30-month stay on FDA approval for CIPLA's generic[91][92][93] - PEDMARQSI (EU brand name for PEDMARK) received European Commission approval in June 2023, granting 10 years of market exclusivity in Europe under Pediatric Use Marketing Authorization (PUMA)[94] 7. Term Loans The Company entered into a Securities Purchase Agreement (SPA) for up to $45,000 thousand in senior secured floating rate convertible notes, with $25,000 thousand funded to date. These notes accrue cash interest at prime plus 4.5% (12.75% at June 30, 2023) and PIK interest at 3.5% per annum, maturing in August 2027. The facility is secured by all Company assets - The Company entered into a SPA for up to $45,000 thousand in senior secured floating rate convertible notes, with $5,000 thousand from the First Closing Note and $20,000 thousand from the Second Closing Note already funded[99][100] - An additional $20,000 thousand may be drawn under the SPA before December 31, 2023, upon mutual agreement[101] - Cash interest accrues at prime plus 4.5% per annum (12.75% at June 30, 2023), and Payment-in-Kind (PIK) interest accrues at 3.5% per annum, with $707 thousand accrued as of June 30, 2023[103] - The notes are convertible into common shares and mature on August 19, 2027. The SPA facility is secured by all of the Company's and its subsidiaries' assets[104][106][107] 8. Subsequent Events Subsequent to the reporting period, Adrian Haigh was appointed Chief Operating Officer of Fennec on August 3, 2023, and stepped down from the board - On August 3, 2023, Adrian Haigh was appointed Chief Operating Officer of Fennec and stepped down from the Company's board of directors[109] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations, highlighting the commercial launch of PEDMARK® in the U.S. and its European marketing authorization. It details the financial performance for the three and six months ended June 30, 2023, compared to 2022, emphasizing increased revenue from product sales, shifts in operating expenses due to commercialization, and the impact of new debt on interest expense. The discussion also covers liquidity, capital resources, and outstanding share information - Fennec is a commercial-stage biopharmaceutical company focused on PEDMARK®, which received FDA approval on September 20, 2022, and European Commission Marketing Authorization in June 2023[112][113] - PEDMARK® is the first and only FDA-approved treatment to reduce the risk of ototoxicity associated with cisplatin in pediatric patients, and it is commercially available in the U.S. since October 17, 2022[112][119] - The Company received Orphan Drug Exclusivity for PEDMARK® in January 2023, providing seven years of market exclusivity until September 20, 2029, and holds three patents listed in the FDA's Orange Book expiring in 2039[116][118] - Net loss for the six months ended June 30, 2023, was approximately $11.3 million, increasing from $8.8 million in the same period of 2022, with an accumulated deficit of $214.5 million[124] - Cash and cash equivalents totaled $15.0 million as of June 30, 2023. The Company believes current funds, including potential additional financing of $20 million from Petrichor, are sufficient for at least the next twelve months[124] Outstanding Share Information (in thousands) | Outstanding Share Type | June 30, 2023 | December 31, 2022 | Change | | :--------------------- | :------------ | :---------------- | :----- | | Common shares | 26,509 | 26,361 | 148 | | Warrants | 150 | 150 | — | | Stock options | 4,887 | 4,539 | 348 | | Total | 31,546 | 31,050 | 496 | Item 3. Quantitative and Qualitative Disclosures About Market Risk This item is not applicable for the Company, indicating no material quantitative or qualitative disclosures about market risk are required - The Company states that Item 3, Quantitative and Qualitative Disclosures About Market Risk, is not applicable[148] Item 4. Controls and Procedures The Company's management, including the CEO and CFO, concluded that its disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2023. There have been no material changes in internal control over financial reporting during the period - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2023[149] - There have been no material changes in internal control over financial reporting during the period covered by this Quarterly Report[150] PART II: OTHER INFORMATION This part includes disclosures on legal proceedings, risk factors, equity sales, defaults, mine safety, other information, and exhibits Item 1. Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 6, 'Commitments and Contingencies,' in Part I of this Quarterly Report - Information about legal proceedings is detailed in the Commitments and Contingencies footnote (Note 6) to the unaudited interim condensed consolidated financial statements[151] Item 1A. Risk Factors The Company refers readers to the detailed discussion of risk factors in its Annual Report on Form 10-K for the year ended December 31, 2022, and states that no material changes to these risk factors have occurred - Readers should consider the risk factors discussed in the Annual Report on Form 10-K, as no material changes from previously disclosed risk factors are known[152] 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 during the period - There were no unregistered sales of equity securities and use of proceeds to report[153] Item 3. Defaults Upon Senior Securities The Company reported no defaults upon senior securities during the period - There were no defaults upon senior securities[155] Item 4. Mine Safety Disclosures This item is not applicable to the Company - The Company states that Item 4, Mine Safety Disclosures, is not applicable[156] Item 5. Other Information On August 3, 2023, the Company issued a press release announcing its financial results for the quarter ended June 30, 2023, which is furnished as Exhibit 99.1 - On August 3, 2023, the Company issued a press release announcing financial results for the quarter ended June 30, 2023, furnished as Exhibit 99.1[157] Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report, including certifications from the CEO and CFO (Sections 302 and 906 of Sarbanes-Oxley Act), the press release for Q2 2023 financial results, and Inline XBRL documents - Exhibits include certifications from the CEO and CFO (31.1, 31.2, 32.1), the press release for Q2 2023 financial results (99.1), and various Inline XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[158] Signatures The Quarterly Report was duly signed on August 7, 2023, by Rostislav Raykov, Chief Executive Officer, and Robert Andrade, Chief Financial Officer, in accordance with the Securities Exchange Act of 1934 - The report was signed on August 7, 2023, by Rostislav Raykov, Chief Executive Officer, and Robert Andrade, Chief Financial Officer[162]