Business context and reporting period
Fennec Pharmaceuticals Inc. (formerly Adherex Technologies Inc.) filed this Form 10-K for the fiscal year ended December 31, 2014; it was signed March 31, 2015. The company is a pre-revenue biopharmaceutical developer focused on cancer therapeutics. Its lead candidate, sodium thiosulfate (STS), was in two Phase III studies to prevent cisplatin-related hearing loss in children. Eniluracil development was halted for lack of funding.
Financial results and liquidity
Unless otherwise noted, amounts are in U.S. dollars; financial statement amounts below are in thousands.
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $2,877 | $1,931 |
| Research and development | $357 | $597 |
| General and administrative | $2,520 | $1,334 |
| Operating loss | $(2,877) | $(1,931) |
| Net income (loss) | $(2,176) | $1,845 |
| Net cash used in operations | $(1,699) | $(2,210) |
| Cash and cash equivalents at year-end | $2,307 | $1,663 |
- FY 2014 net results included $704 of other income, comprising a $355 unrealized derivative gain, a $349 gain on derivative settlement, and a $5 foreign-exchange loss. These derivative gains were non-cash; the 2013 net income likewise reflected a $3,777 derivative gain. Profitability and margins are not meaningful given the absence of revenue.
- Cash provided by financing was $2,343 in 2014, mainly from the December private placement. There was no investing cash flow. The company reported $613 of total stockholders’ equity, versus a $1,455 deficit in 2013; accumulated deficit was $110,874.
- Year-end assets were $2,372 and current liabilities were $1,759, including $1,319 of derivative liabilities; the balance sheet reported no long-term liabilities or debt. Working capital was reported as $1,932 when excluding derivative warrant liabilities.
Changes, outlook, risks and unusual items
- Operating loss increased by $946 year over year as G&A rose $1,186, largely due to non-cash stock compensation and corporate costs associated with the warrant exchange, reverse split and name change. R&D fell $240 as activity declined and Eniluracil work stopped.
- The company raised $2.2 million gross in a December 2014 private placement, issuing 732,000 units at $3.00 each, with each unit including one share and one-half warrant. It also raised $1.6 million gross in November 2013. These financings and option/warrant exercises helped fund operations; further financing is required.
- Management stated that substantial additional capital would be needed and that failure to obtain it could force further delays, reductions, or termination of development, a business combination, or a shutdown. The auditor highlighted substantial doubt about the company’s ability to continue as a going concern. No revenue guidance or specific cash-runway estimate is provided.
- STS Phase III enrollment was complete in both studies. COG ACCL0431 preliminary results showed hearing loss in 28.6% of STS-treated evaluable patients versus 56.4% of controls. Overall survival was 77.0% versus 88.9% (p=0.029); a post hoc disseminated-disease subgroup showed lower survival with STS (55.9% versus 88.1%, p=0.011), raising concern that STS could protect tumors in that setting. The filing expected SIOPEL 6 preliminary results in 2015. In February 2015, after year-end, its monitoring committee recommended continuation following the final safety review; efficacy outcomes remained pending.
- Eniluracil’s Phase II results were described as similar to capecitabine in the main study, with reported clinical benefit in 90% of the 10 capecitabine-refractory crossover patients. The FDA had advised that confirmation would require a much larger study; Fennec lacked resources to advance the program and sought strategic alternatives.
- Controls over financial reporting were deemed ineffective. Management identified material weaknesses involving inadequate segregation of accounting duties and insufficient technical U.S. GAAP expertise. The auditor expressed an unqualified opinion on the financial statements but did not audit internal controls.
- Other key risks include dependence on external collaborators and contract manufacturers, clinical and regulatory uncertainty, limited patent protection (method-of-use patents), potential dilution, low trading liquidity, and concentrated share ownership. The company had one employee at year-end.
Important facts for investors to verify
- Available cash, actual subsequent cash burn, and the timing and terms of any new financing or partnership.
- Final COG ACCL0431 and SIOPEL 6 efficacy and survival findings, especially the disseminated-disease survival signal and its implications for STS use.
- Reconciliation of the filing’s going-concern and working-capital disclosures: the auditor refers to a working-capital deficiency, while the balance sheet shows current assets exceeding current liabilities, and MD&A reports working capital excluding derivative liabilities.
- The status, fair value and expiry of derivative warrant liabilities, along with potential dilution from outstanding warrants and options.
- Remediation of the two reported internal-control material weaknesses and continued reporting quality with limited finance staff.