Filing Summary
Entity note: The filing is for Adherex Technologies Inc., a development-stage biopharmaceutical company—not Fennec Pharmaceuticals Inc. The reporting period is the quarter ended June 30, 2012; the 10-Q was filed August 10, 2012. Figures below are in thousands of U.S. dollars unless stated otherwise.
Business context and reporting period
Adherex focused on cancer therapeutics, principally eniluracil and sodium thiosulfate (STS). It had no product revenue and relied on equity and debt financings and potential collaborations to fund operations.
Financial results and liquidity
| Metric | Q2 2012 | Six months ended June 30, 2012 | Comparable 2011 period |
|---|---|---|---|
| Revenue | $0 | $0 | $0 |
| Operating expenses | $1,250 | $1,867 | $572 / $1,593 |
| Net income (loss) | $(602) | $2,112 | $(348) / $4,321 |
| Operating cash flow | $(1,133) | $(1,711) | $1,772 / $(1,823) |
Six-month net income was driven by a $3,971 non-cash gain from remeasurement of derivative liabilities; it did not reflect operating profitability. Q2 research and development expense was $860, versus $234 a year earlier, largely due to increased eniluracil trial enrollment. For the first half, R&D rose to $1,157 from $549, while general and administrative expense fell to $710 from $1,044, partly because prior-year costs included a rights offering.
At June 30, cash and cash equivalents were $3,586, down from $5,297 at December 31, 2011. Total assets were $3,600; total liabilities were $1,555, including $1,106 of derivative liabilities. Stockholders’ equity was $2,045, compared with a $120 deficiency at year-end. Working capital excluding derivative liabilities was $3,151. No material long-term debt is reported. With no revenue, meaningful operating margins are not applicable.
Changes, outlook and risks
- Cash used in operations in the first half was $1,711. The company reported no financing cash inflow during that period.
- Management said the company needed additional funding to pursue its business strategy and warned that failure to raise sufficient capital could require it to curtail or cease activities. The filing states that these conditions raise substantial doubt about its ability to continue as a going concern.
- The eniluracil Phase II trial had enrolled 134 patients as of August 10, 2012; management expected full enrollment in Q4 2012. The COG STS Phase III study completed enrollment in Q2, while SIOPEL had enrolled 55 patients as of August 10. STS trials were conducted by the collaborating groups, which were responsible for trial costs.
- Adherex reported two material weaknesses in internal control over financial reporting: insufficient segregation of accounting duties and inadequate technical accounting staffing. Management said additional accounting resources had helped but had not eliminated the deficiencies; remediation depended on securing more funding.
- Derivative warrant liabilities were valued using the Black-Scholes model and produced substantial non-cash earnings volatility. Contractual obligations totaled $936, including $436 due within one year and a potential $500 OHSU payment tied to trial completion.
- Key risks included lack of resources to conduct future Phase III trials independently, dependence on collaborators and prospective funding partners, clinical and regulatory uncertainty, and possible difficulty meeting Toronto Stock Exchange listing standards.
Important facts to verify
- Confirm the filing’s registrant identity: Adherex Technologies Inc., rather than Fennec Pharmaceuticals Inc.
- Review cash runway and the timing, amount, and terms of any required financing, given operating cash use and the going-concern warning.
- Check the assumptions and sensitivity underlying the $3,971 derivative gain and $1,106 ending derivative liability.
- Verify trial enrollment and milestones, particularly eniluracil’s expected enrollment completion and progress of the STS studies.
- Assess progress toward remediating the two disclosed material weaknesses and the conditions attached to the $500 OHSU commitment.