Fennec Pharmaceuticals Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited consolidated financial statements are in U.S. dollars; amounts below are in thousands unless otherwise stated. Fennec is a clinical-stage biopharmaceutical company focused on sodium thiosulfate (STS) to prevent cisplatin-related hearing loss in children.
Financial performance and position
| Metric | Three months ended Sept. 30, 2016 | Nine months ended Sept. 30, 2016 | Comparable 2015 period |
|---|---|---|---|
| Revenue | $0 | $0 | $0 |
| Research and development expense | $112 | $298 | $88 and $185 |
| General and administrative expense | $452 | $1,427 | $250 and $1,154 |
| Operating loss | $(564) | $(1,725) | $(338) and $(1,339) |
| Net loss | $(502) | $(1,646) | $(123) and $(119) |
| Basic and diluted loss per share | $(0.04) | $(0.13) | $(0.01) in both periods |
| Net cash used in operating activities | $(544) | $(1,513) | $(509) and $(1,438) |
Cash and cash equivalents were $4,537 at September 30, 2016, versus $942 at December 31, 2015. The increase principally reflects $5,000 raised in a May rights offering/private placement and $108 from warrant and option exercises, partly offset by operating cash use. Total assets were $4,580; total liabilities were $360, including $37 of derivative liabilities. The filing reports working capital of $4,257 using a calculation that excludes derivative liabilities; current assets less all current liabilities equal $4,220. No debt is reported. Stockholders’ equity was $4,220, and accumulated deficit was $113,179. No meaningful operating margin is presented because the company had no revenue.
Changes versus the prior comparable periods
- Third-quarter net loss increased to $502 from $123; nine-month net loss rose to $1,646 from $119. Operating expenses increased by $226 for the quarter and $386 for the nine-month period.
- Higher R&D spending reflected STS manufacturing and development, including preparation for a compassionate-use program. Higher G&A included compensation, equity-based compensation, travel, and regulatory consulting.
- Prior-period results included substantially larger noncash derivative gains: $216 versus $19 for the quarter and $1,226 versus $45 for the nine months. Management said most derivative liabilities had expired and expected future valuation swings to be substantially reduced.
- In the quarter, Fennec sold certain Eniluracil and Adh-1 assets for $40 gross proceeds and retained rights to 5% of gross revenues from those assets through expiration of the relevant patents.
- Common shares outstanding increased from 10.940 million at year-end 2015 to 13.643 million at September 30, 2016, primarily due to the $5,000 financing.
Outlook, risks and other material matters
- Funding and going concern: The company had no product revenue and disclosed substantial doubt about its ability to continue as a going concern. It expects to need additional capital and may have to delay, reduce, or stop development, pursue a business combination, or cease operations if funding is unavailable. No specific forecast or formal financial guidance is provided.
- STS trials: Enrollment was complete in two Phase III studies. SIOPEL 6 enrolled 109 evaluable patients; the filing describes interim results as encouraging and says final audiology endpoint data were expected in 2017. COG ACCL0431 results showed less hearing loss with STS, but a post hoc analysis found lower survival among patients with disseminated disease, raising concern about possible tumor protection. The filing reports no lower survival for localized-disease patients in that study.
- Development and regulatory risks: STS still requires further review before commercialization. Fennec states it lacks the financial and human resources to conduct additional Phase III trials independently and is seeking a licensing or funding partner; acceptable terms or a partner are not assured.
- Internal controls: Management concluded disclosure controls were not effective because of two material weaknesses: inadequate segregation of accounting duties and insufficient staff with appropriate U.S. GAAP expertise. The company cited limited financial resources as a constraint on remediation.
- Other matters: The filing reports no legal proceedings, defaults on senior securities, or material off-balance-sheet arrangements. It discloses potential severance payments of $250 to the CEO and $95 to the CFO if terminated other than for cause.
Important facts for investors to verify
- Whether Fennec secures additional financing or a development partner, and how long available cash can support operations.
- Final SIOPEL 6 audiology and survival results, and any regulatory implications of the COG ACCL0431 survival signal in disseminated disease.
- Whether STS can obtain required regulatory approvals and be manufactured and commercialized successfully.
- Progress in remediating the two material weaknesses in internal control and the potential effects of continued control deficiencies.
- Potential dilution from outstanding options and warrants; the filing reports 1.700 million warrants and 2.422 million options outstanding at September 30, 2016.