Fennec Pharmaceuticals Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Amounts are in U.S. dollars, in thousands, unless noted. Fennec is a development-stage biopharmaceutical company focused on sodium thiosulfate (STS) to prevent cisplatin-related hearing loss in children.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development expense | $333 | $139 | $558 | $186 |
| General and administrative expense | $1,146 | $568 | $1,692 | $975 |
| Operating loss | $(1,479) | $(707) | $(2,250) | $(1,161) |
| Net loss | $(1,598) | $(724) | $(2,404) | $(1,144) |
| Basic and diluted loss per share | $(0.11) | $(0.06) | $(0.17) | $(0.10) |
| Cash used in operating activities | $(688) | $(470) | $(1,363) | $(969) |
- Cash and cash equivalents were $10.232 million at June 30, 2017, versus $3.926 million at December 31, 2016. The company reported $10.105 million in money-market investments.
- Working capital was $9.869 million under the company’s stated definition, which excludes derivative liabilities. Total current liabilities were $580, including $190 of derivative liabilities.
- Total liabilities were $580; the filing reports no borrowings or other debt. Total assets were $10.259 million and stockholders’ equity was $9.679 million.
- No revenue was recorded, so revenue margins are not applicable. Operating expenses rose substantially; stock-based compensation was $747 in Q2 and $844 for the first half.
Changes versus prior periods
- Q2 operating expenses increased $772 year over year; first-half expenses increased $1.089 million. R&D increases reflected STS manufacturing and preparation for potential registration batches; G&A growth was primarily attributed to higher equity-based compensation.
- First-half net loss more than doubled to $2.404 million from $1.144 million. The 2017 loss included a $157 noncash derivative remeasurement loss, compared with a $26 gain in first-half 2016.
- Financing provided $7.669 million in the first half, chiefly $7.571 million net proceeds from a 1.9 million-share rights offering/private placement at $4.00 per share, plus $98 from option and warrant exercises. Shares outstanding increased from 13.643 million at year-end to 15.629 million at June 30.
Outlook, risks and notable items
- Management said the $10.232 million cash balance was expected to fund requirements through and beyond the current fiscal year. However, the filing says substantial doubt exists about the company’s ability to continue as a going concern and that additional funding will be needed. Failure to obtain financing could require further delays, reductions, a business combination, or cessation of operations.
- No formal financial guidance was provided. The company is pursuing strategic alternatives, including collaborations, and expects no significant product revenue before regulatory approval or a revenue-generating collaboration.
- SIOPEL 6 completed enrollment of 109 evaluable patients. Final audiology endpoint results were expected in Q4 2017. The filing reported encouraging interim findings and similar provisional two-year survival estimates between treatment arms, but final efficacy results remained pending.
- COG ACCL0431 results showed hearing loss in 28.6% of STS-treated patients versus 56.4% of controls. The filing also reported lower observed event-free and overall survival estimates for STS in patients with disseminated disease in a post-hoc subgroup analysis; it cautioned that further research was needed.
- Management concluded disclosure controls were not effective because of two material weaknesses: insufficient segregation and monitoring of controls, and insufficient technical accounting expertise for unusual transactions. The company said these weaknesses had not caused a material misstatement of the reported financial statements.
- Shareholders approved a rights plan intended to address acquisitions of 20% or more of outstanding shares. On August 11, 2017, the company filed an S-1 to register 8.243 million common shares, including 1.383 million shares underlying warrants.
- The filing reports no legal proceedings and no material change to previously disclosed risk factors. It identifies commitments under its OHSU license and executive severance arrangements; the Research Triangle Park lease is terminable on 30 days’ notice.
Important facts for investors to verify
- Whether the final SIOPEL 6 results support hearing protection without compromising cancer outcomes, and whether results arrive on the stated timeline.
- Cash runway assumptions and the timing, amount, and terms of any additional financing or collaboration; reconcile management’s cash-runway statement with the disclosed going-concern doubt.
- Potential clinical significance of the disseminated-disease survival findings from COG ACCL0431 and the limitations of that post-hoc analysis.
- Progress in remediating the two material weaknesses and whether future filings report effective controls.
- Potential dilution from outstanding warrants and options, as well as the implications of the registered shares and rights plan.