Fennec Pharmaceuticals Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. The company, formerly Adherex Technologies Inc., changed its name on September 3, 2014. Unless stated otherwise, financial amounts below are in U.S. dollars in thousands. The company describes itself as a development-stage biopharmaceutical company.
Business context and key financial metrics
Fennec is developing cancer-treatment candidates, principally sodium thiosulfate (STS), intended to reduce cisplatin-related hearing loss in children. It has no product revenue and relies on financing and potential collaborations.
| Metric | Q3 2014 / September 30, 2014 | Comparable period / prior balance |
|---|---|---|
| Revenue | $0 | $0 in Q3 2013 |
| Operating expenses | $619 | $51 in Q3 2013 |
| Operating loss | $619 | $51 in Q3 2013 |
| Net income (loss) | $380; $0.04 basic and $0.03 diluted per share | $(1,766); $(0.21) per share in Q3 2013 |
| Nine-month net income (loss) | $(3,564) | $734 in 2013 |
| Nine-month operating cash flow | $(1,231) | $(1,765) in 2013 |
| Cash and cash equivalents | $593 | $1,663 at December 31, 2013 |
| Total assets / liabilities | $673 / $3,901 | $1,752 / $3,207 at December 31, 2013 |
| Derivative liabilities | $3,499 | $2,863 at December 31, 2013 |
| Stockholders’ deficit | $(3,228) | $(1,455) at December 31, 2013 |
Fennec reported no long-term liabilities or conventional debt at September 30. Its current liabilities include a substantial derivative warrant liability. Working capital, calculated by the company excluding derivative warrant liabilities, was $271, down from $1,408 at year-end. No meaningful revenue-based margin is available because revenue was zero.
Changes versus comparable periods
- Q3 net income improved from a loss of $1,766 in 2013, largely due to a $619 unrealized derivative gain and a $379 gain associated with derivative settlement and related valuation changes. These gains are non-cash and do not reflect operating profitability.
- Q3 operating expenses rose to $619 from $51; general and administrative expense increased to $531 from $275, which management attributed to professional costs for capital-structure restructuring and the name change, as well as share-based compensation.
- Nine-month operating expenses increased to $2,086 from $1,515. R&D declined to $192 from $507, while G&A rose to $1,894 from $1,008. Nine-month results also swung from net income of $734 to a net loss of $3,564, in part reflecting a $1,855 unrealized derivative loss versus a $2,254 gain in 2013.
- Cash declined by $1,070 during the first nine months. Operating cash use was partly offset by $161 of proceeds from exercises of options and warrants.
Outlook, clinical developments, risks and unusual items
- Funding and going concern: Management states that substantial doubt exists about the company’s ability to continue as a going concern. It expects to need additional capital through equity, debt, collaborations, licensing, or other sources; failure to secure funding could force delays, reductions, or cessation of programs or operations. No specific runway or quantified financing target is provided.
- STS—COG Phase III: The completed trial reported hearing loss in 28.6% of STS-treated subjects versus 56.4% of controls (p=0.004). Overall survival was 77.0% versus 88.9% (p=0.029). In a post hoc disseminated-disease subgroup, overall survival was 55.9% versus 88.1% (p=0.011); management said this raised concern about a possible tumor-protective effect. In localized disease, the filing reported no lower event-free or overall survival with STS.
- STS—SIOPEL 6: The Phase III trial in standard-risk hepatoblastoma had enrolled 112 patients. The independent monitoring committee recommended continuation after reviewing interim data on 80 patients; the study was expected to conclude by the end of 2014.
- Eniluracil: Following FDA feedback that it consider larger trial alternatives, Fennec said it would focus on seeking a partner and might evaluate indications other than metastatic breast cancer. The company reported that financial constraints had led it to postpone or terminate programs, including Eniluracil.
- Derivative and equity items: Derivative warrant liabilities are remeasured using a Black-Scholes model and can cause substantial non-cash earnings volatility. A warrant exchange concluded July 29, 2014, and the company completed a 1-for-3 reverse stock split effective September 3, 2014. Shares, options, and warrants were presented retroactively for the split.
- Controls: Management concluded disclosure controls were not effective, citing two material weaknesses: inadequate segregation of accounting duties and insufficient technical U.S. GAAP expertise among personnel. It said limited financial resources constrained remediation.
- The filing reports no legal proceedings and no material off-balance-sheet arrangements. It also discloses a potential CEO severance payment of $160 if terminated other than for cause.
Important facts for investors to verify
- Cash needs, financing progress, and the company’s ability to continue as a going concern.
- Full COG trial survival findings, particularly the disseminated-disease subgroup signal, and subsequent SIOPEL 6 results.
- The composition, valuation assumptions, and potential future impact of the $3,499 derivative liability.
- Whether the company secures a development partner or funding for STS and Eniluracil, and the implications of any proposed terms.
- Remediation of the two disclosed material weaknesses and the reliability of future financial reporting.
- Potential dilution from outstanding shares, warrants, and options; the filing lists 9,861 shares, 3,835 warrants, and 2,261 options outstanding, in thousands.