Adherex Technologies Inc. — Q2 2011 Form 10-Q
Company identity: The supplied filing is for Adherex Technologies Inc., not Fennec Pharmaceuticals Inc. It covers the quarter and six months ended June 30, 2011. Amounts below are U.S. dollars in thousands unless stated otherwise; the company describes itself as a development-stage biopharmaceutical company focused on cancer therapeutics.
Financial performance and liquidity
| Metric | Q2 2011 / June 30, 2011 | Comparable period / prior year-end |
|---|---|---|
| Revenue | $0 | $0 in Q2 2010 and first half 2010 |
| Operating expenses | $572 for Q2; $1,593 for six months | $2,505 for Q2 2010; $2,872 for six months 2010 |
| Net income (loss) | $(348) for Q2; $4,321 for six months | $(2,569) for Q2 2010; $(2,936) for six months 2010 |
| Operating cash flow | $(1,823) for six months | $(723) for six months 2010 |
| Cash and cash equivalents | $6,810 | $5,947 at December 31, 2010 |
| Total assets / total liabilities | $6,830 / $7,514 | $5,993 / $10,917 at December 31, 2010 |
| Derivative liability | $7,244 | $10,450 at December 31, 2010 |
| Stockholders’ equity | $(684) | $(4,924) at December 31, 2010 |
The first-half profit was primarily attributable to $5,905 of realized and unrealized derivative gains, not product revenue; the warrant revaluation was noncash. Q2 operating expenses fell year over year largely because stock-based compensation was much lower, while R&D costs rose with the start of the eniluracil Phase II trial. No product sales, gross margin, or operating margin were reported. The filing reports no long-term liabilities or conventional debt balance at June 30; the material liability was the derivative warrant balance. Working capital, excluding derivative warrant liabilities, was $6,560.
Cash increased by $863 from year-end. First-half financing provided $2,566, principally from the March rights offering, while operating activities used $1,823. The company reported an accumulated development-stage deficit of $105,742 and cumulative operating cash outflows of $80,640.
Material changes and business developments
- The company completed a March 2011 rights offering, issuing 84.6 million units and receiving approximately $2.5 million net. Common shares outstanding increased from 368.3 million at year-end to 452.9 million at June 30.
- Eniluracil Phase II recruitment opened in Russia and the United States; the first patient was enrolled April 27, 2011. Management estimated approximately 12–14 months to complete enrollment from trial commencement, targeting about 140 patients.
- STS Phase III trials continued under SIOPEL and the Children’s Oncology Group. The groups manage and fund the trials; Adherex supplies drug and provides distribution and safety monitoring. The filing notes prior delays in trial activation and patient accrual.
- Q2 R&D expense was $234 versus $146 a year earlier. First-half R&D expense was $549 versus $309. First-half G&A declined to $1,044 from $2,563, principally due to lower stock compensation, partly offset by rights-offering and trial-launch costs.
Outlook, risks, contingencies, and unusual items
- Going concern: Management states that substantial doubt exists about the company’s ability to meet obligations as they come due. Additional funding is needed beyond current trials; failure to raise capital could force delays, reductions, or termination of programs, business-combination alternatives, or cessation of operations.
- Management expected the April 2010 private-placement and March 2011 rights-offering proceeds to fund the eniluracil Phase II trial, but stated that further capital or partners would be needed for subsequent development. The filing gives no precise cash-runway estimate.
- The company has no approved products or product revenue and cannot reliably estimate the timing or cost of development, regulatory approval, or potential future cash inflows. It warns that clinical candidates may fail, prove unsafe or ineffective, or lack commercial viability.
- Derivative liabilities are valued using a Black-Scholes model and fluctuate with assumptions including volatility and expected life. Their gains or losses can materially affect reported earnings without corresponding cash flows.
- Contractual obligations and commitments totaled $887: $281 due in under one year and $606 in one to three years, principally clinical-service agreements and drug-purchase commitments.
- Disclosure controls were deemed ineffective. Management identified material weaknesses related to inadequate segregation of accounting duties and insufficient technical U.S. GAAP staffing; it said remediation depended on obtaining additional resources.
- Subsequent events: the board approved a 1-for-18 reverse split effective August 25, 2011, expected to reduce shares from about 452.8 million to about 25.2 million. The company also announced a planned continuance under British Columbia corporate law and board changes.
Important facts for investors to verify
- Confirm the issuer: this filing names Adherex Technologies Inc., not Fennec Pharmaceuticals Inc.
- Assess financing needs and the going-concern warning against cash, operating cash burn, and the company’s ability to secure additional capital or collaborators.
- Separate operating performance from the noncash derivative gain when evaluating the reported first-half net income.
- Check progress, enrollment, timing, and funding responsibility for eniluracil Phase II and STS Phase III trials.
- Review the derivative warrant valuation, dilution from outstanding shares, warrants and options, and the subsequent reverse split.
- Consider the disclosed material weaknesses in internal controls and whether they were later remediated.