Fennec Pharmaceuticals Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Unaudited U.S. GAAP financial statements; amounts below are U.S. dollars in thousands unless noted. Fennec is a development-stage biopharmaceutical company focused on cancer therapies, principally sodium thiosulfate (STS). It reported no revenue.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development expense | $54 | $72 | $97 | $104 |
| General and administrative expense | $495 | $858 | $904 | $1,363 |
| Operating loss | $(549) | $(930) | $(1,001) | $(1,467) |
| Net income (loss) | $(173) | $(750) | $4 | $(3,944) |
| Cash used in operating activities | $(511) | $(410) | $(929) | $(788) |
The six-month 2015 net income was driven by a $1,010 noncash gain on derivative liabilities, not operating profitability. The company’s six-month operating loss was $1,001. Profit margins are not meaningful given zero revenue.
At June 30, 2015, cash and cash equivalents were $1,854, down from $2,307 at year-end 2014. Total assets were $1,871; current and total liabilities were $759, including $309 of derivative liabilities, $401 of accounts payable and $49 of accrued liabilities. The filing reports working capital of $1,421 when excluding derivative liabilities; including all current liabilities, current assets less current liabilities were $1,112. No conventional interest-bearing debt is reported. Stockholders’ equity was $1,112.
Financing activities provided $476 in the first half, mainly from warrant and option exercises; approximately $449 came from warrant exercises in Q2, issuing 299 thousand shares. The six-month cash decrease was $453. Common shares outstanding increased to 10.919 million at June 30, 2015, with 2.594 million warrants and 2.387 million options also outstanding.
Changes versus comparable periods
- Q2 operating expenses fell $381 year over year, primarily reflecting lower G&A and reduced equity-based compensation; R&D fell by $18.
- Six-month operating expenses declined $466 year over year, chiefly because G&A decreased by $459 as 2014 stock-option expense was lower in 2015.
- Six-month net results improved by $3,948, largely because derivative accounting shifted from a $2,474 noncash loss in 2014 to a $1,010 noncash gain in 2015.
- Derivative liabilities declined from $1,319 at December 31, 2014 to $309 at June 30, 2015. The filing cites fair-value remeasurement and the expiration of 1.307 million Canadian-dollar warrants; the changes in fair value do not affect cash unless instruments are exercised.
- Operating cash use increased to $929 from $788 for the first half, despite lower operating expenses.
Business developments, outlook and risks
- STS: Enrollment was complete in two Phase III studies for prevention of cisplatin-related hearing loss in children. The SIOPEL 6 independent monitoring committee recommended continuation after its final safety review. Preliminary end-of-treatment results showed similar or higher tumor response rates with STS, but primary hearing outcomes are to be assessed as children reach the specified evaluation age.
- COG ACCL0431: Preliminary results showed hearing loss in 28.6% of STS-treated patients versus 56.4% of controls. However, overall survival was lower in the STS arm in the full study population, and the post hoc disseminated-disease subgroup showed a statistically significant overall-survival difference. The filing says this raises concern about a possible tumor-protective effect; the localized-disease subgroup did not show lower event-free or overall survival. These preliminary findings warrant careful review.
- Eniluracil: The company had completed a Phase II metastatic breast cancer trial. The FDA had recommended consideration of larger trial alternatives to the company’s proposed small pivotal study. Fennec said it was seeking a partner and may consider indications beyond metastatic breast cancer; development had been postponed amid limited resources.
- Funding and going concern: Management states that substantial doubt exists about the company’s ability to continue as a going concern. It had an accumulated deficit of $110.870 million and first-half operating cash outflow of $929. Additional equity, debt, collaboration, licensing or other funding is required. Failure to obtain adequate capital could require further delays, reductions or termination of programs, business combinations, or cessation of some or all operations. No specific financial guidance is provided.
- Other risks: Fennec said it lacks the financial and human resources to independently complete further Phase III trials and depends on partners or collaborators. It also cited clinical, regulatory, commercialization, financing, dilution and TSX-listing risks. The CEO’s termination without cause would trigger severance equal to 12 months’ salary, currently $180.
- Controls: Management concluded disclosure controls were not effective because of two material weaknesses: insufficient segregation of accounting duties and insufficient personnel with appropriate U.S. GAAP technical accounting expertise. No material change in internal control was reported during the quarter.
Investor verification priorities
- Check subsequent SIOPEL 6 hearing outcomes and the full clinical interpretation of COG ACCL0431, particularly survival findings by disease status.
- Assess financing runway against cash of $1.854 million and first-half operating cash use of $929, and monitor whether new funding or a development partner is secured.
- Separate recurring operating performance from noncash derivative remeasurement when evaluating the reported six-month $4 net income.
- Review potential dilution from outstanding warrants and options, and monitor the company’s TSX continued-listing status.
- Track remediation of the two disclosed material weaknesses and any subsequent changes in disclosure controls.